CSX CORPORATION TERMS USED BY CSX
When used in this report, unless otherwise indicated by the context, these terms are used to mean the following:
Car hire - A charge paid by one railroad for its use of cars belonging to another railroad or car owner.
Class I freight railroad - One of the largest line haul freight railroads as determined based on operating revenue; the exact revenue required to be in each class is periodically adjusted for inflation by theSurface Transportation Board . Smaller railroads are classified as Class II or Class III.
Common carrier mandate - A federal mandate that requires
Demurrage - A charge assessed by railroads for the use of rail cars by shippers or receivers of freight beyond a specified free time.
Depreciation study - Conducted by a third-party specialist and analyzed by management, a periodic statistical analysis of fixed asset service lives, salvage values, accumulated depreciation, and other factors for group assets along with a comparison of similar asset groups at other companies.
Double-stack - Stacking containers two-high on specially equipped cars.
Drayage - The pickup or delivery of intermodal shipments by truck.
Free cash flow - The calculation of a non-GAAP measure by using net cash provided by operating activities and adjusting for property additions and certain other investing activities. Free cash flow is a measure of cash available for paying dividends, share repurchases and principal reduction on outstanding debt.
Group-life depreciation - A type of depreciation in which assets with similar useful lives and characteristics are aggregated into groups. Instead of calculating depreciation for individual assets, depreciation is calculated as a whole for each group.
Incidental revenue - Revenue for switching, demurrage, storage, etc.
Intermodal - A flexible way of transporting freight over highway, rail and water without being removed from the original transportation equipment, namely a container or trailer.
Mainline - The main track thoroughfare, exclusive of terminals, yards, sidings and turnouts.
CSX 2019 Form 10-K p. 22
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CSX CORPORATION
PART II
Pipeline and Hazardous Materials Safety Administration ("PHMSA") - An agency
within the DOT that, together with the FRA, has broad jurisdiction over railroad
operating standards and practices, including hazardous materials requirements.
Positive Train Control ("PTC") - An interoperable train control system designed
to prevent train-to-train collisions, over-speed derailments, incursions into
established work-zone limits, and train diversions onto another set of tracks.
Revenue adequacy - The achievement of a rate of return on investment at least equal to the industry cost of investment capital, as measured by the STB.
Shipper - A customer shipping freight via rail.
Siding - Track adjacent to the mainline used for passing trains.
Staggers Act of 1980 - Congressional law which significantly deregulated the rail industry, replacing the regulatory structure in existence since the 1887 Interstate Commerce Act. Where previously rates were controlled by theInterstate Commerce Commission , the Staggers Act allowed railroads to establish their own rates for shipments, enhancing their ability to compete with other modes of transportation.
Switching - Putting cars in a specific order, placing cars for loading, retrieving empty cars or adding or removing cars from a train at an intermediate point.
Terminal - A facility, typically owned by a railroad, for the handling of freight and for the breaking up, making up, forwarding and servicing of trains.
Transportation Security Administration ("TSA") - A component of theDepartment of Homeland Security with broad authority over railroad operating practices that may have homeland security implications.
Turnout - A track that diverts trains from one track to another.
Yard - A system of tracks, other than main tracks and sidings, used for making up trains, storing cars and other purposes.
CSX 2019 Form 10-K p. 23
--------------------------------------------------------------------------------CSX CORPORATION PART II 2019 HIGHLIGHTS • Revenue of$11.9 billion decreased$313 million or 3% versus the prior year. • Expenses of$7.0 billion decreased$409 million or 6% year over year. • Operating income of$5.0 billion increased$96 million or 2% year over year. • Operating ratio of 58.4% improved 190 basis points from 60.3%. • Earnings per diluted share of$4.17 increased$0.33 or 9% year over year. RESULTS OF OPERATIONS
2019 vs. 2018 Results of Operations
Fiscal Years
$ %
2019 2018 Change Change
(Dollars in Millions)
Revenue $ 11,937 $ 12,250 $ (313 ) (3 )%
Expense
Labor and Fringe 2,616 2,738 122 4Materials, Supplies and Other 1,784 1,967 183 9 Depreciation
1,349 1,331 (18 ) (1 )
Fuel 906 1,046 140 13
Equipment and Other Rents 408 395 (13 ) (3 )
Equity Earnings of Affiliates (91 ) (96 ) (5 ) (5 )
Total Expense 6,972 7,381 409 6
Operating Income 4,965 4,869 96 2
Interest Expense (737 ) (639 ) (98 ) (15 )
Other Income - Net 88 74 14 19
Income Tax Expense (985 ) (995 ) 10 1
Net Earnings $ 3,331 $ 3,309 $ 22 1
Earnings Per Diluted Share:
Net Earnings $ 4.17 $ 3.84 $ 0.33 9 %
Operating Ratio 58.4 % 60.3 % 190 bps
CSX 2019 Form 10-K p. 24
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CSX CORPORATION
PART II2019 vs. 2018 Results of Operations, continued
Volume and Revenue (Unaudited)
Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
Volume Revenue Revenue Per Unit
2019 2018 % Change 2019 2018 % Change 2019 2018 % Change
Chemicals 668 675 (1 )% $ 2,343 $ 2,339 - % $ 3,507 $ 3,465 1 %
Agricultural and
Food Products 469 447 5 % 1,410 1,306 8 % 3,006 2,922 3 %
Automotive 456 463 (2 )% 1,236 1,267 (2 )% 2,711 2,737 (1 )%
Minerals 335 315 6 % 550 518 6 % 1,642 1,644 - %
Forest Products 288 285 1 % 878 850 3 % 3,049 2,982 2 %
Metals and Equipment 248 267 (7 )% 741 769 (4 )% 2,988 2,880 4 %
Fertilizers 243 248 (2 )% 431 442 (2 )% 1,774 1,782 - %
Total Merchandise 2,707 2,700 - % 7,589 7,491 1 % 2,803 2,774 1 %
Coal 843 887 (5 )% 2,070 2,246 (8 )% 2,456 2,532 (3 )%
Intermodal 2,670 2,895 (8 )% 1,760 1,931 (9 )% 659 667 (1 )%
Other - - - % 518 582 (11 )% - - - %
Total 6,220 6,482 (4 )% $ 11,937 $ 12,250 (3 )% $ 1,919 $ 1,890 2 %
CSX 2019 Form 10-K p. 25
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CSX CORPORATION
PART IIRevenue
In 2019, revenue decreased$313 million , or 3%, when compared to the previous year due to volume declines, lower other revenue and decreases in fuel recovery. These decreases were partially offset by merchandise and intermodal pricing gains and favorable mix. Merchandise Volume Chemicals - Declined due to reduced natural gas liquids and fly ash shipments, partially offset by growth in crude oil as well as industrial and municipal waste.
Agricultural and Food Products - Increased due to gains in feed grain and ingredients, ethanol, as well as sweeteners and oils.
Automotive - Declined due to lower passenger car shipments, partially offset by higher shipments of trucks and SUVs.
Minerals - Increased due to higher shipments for highway construction and paving projects.
Forest Products - Increased due to higher demand for wood pulp and other fiber products as well as lumber, partially offset by reduced pulpboard shipments.
Metals and Equipment - Declined due to reduced metals shipments, primarily in the steel, construction and scrap markets.
Fertilizers - Declined due to unfavorable weather conditions throughout the year that impacted fertilizer applications.
Coal Volume Domestic coal declined primarily due to lower shipments of utility coal as a result of continued competition from natural gas, partially offset by stronger shipments for coke, iron ore and other coal. Export coal declined due to lower international shipments of both thermal and metallurgical coal as global benchmark prices declined. Intermodal Volume Domestic and international intermodal declined primarily due to rationalization of low-density lanes.
Other
Other revenue decreased$64 million versus prior year primarily due to lower revenue for storage at intermodal facilities and a decrease in settlements from customers that did not meet volume commitments. These decreases were partially offset by a favorable contract settlement with a customer. CSX 2019 Form 10-K p. 26 --------------------------------------------------------------------------------CSX CORPORATION PART II
Expense
In 2019, total expenses decreased
Labor and Fringe expenses include employee wages and related payroll taxes, health and welfare costs, pension, other post-retirement benefits and incentive compensation. These expenses decreased$122 million due to the following items: • Efficiency and volume savings of$157 million primarily resulted from lower headcount and reduced crew starts. • Incentive compensation decreased$12 million primarily due to lower expected annual incentive payouts, partially offset by the acceleration of stock compensation expense for certain retirement-eligible employees. • Other costs increased$47 million primarily due to inflation that was partially offset by several non-significant items. Materials, Supplies and Other expenses consist primarily of contracted services to maintain infrastructure and equipment, terminal and pier services and professional services. This category also includes costs related to materials, travel, casualty claims, environmental remediation, train accidents, property and sales tax, utilities and other items including gains on property dispositions. Total materials, supplies and other expenses decreased$183 million driven by the following: • Efficiency and volume savings of$201 million primarily resulted from lower operating support costs, reduced equipment maintenance expenses and lower terminal and trucking costs. • Gains from real estate and line sales were$151 million in 2019 compared to$154 million in 2018. • All other costs increased$15 million primarily due to
inflation and
favorable adjustments to casualty reserves in 2018, partially offset
by other items.
Depreciation expense primarily relates to recognizing the costs of a capital
asset, such as locomotives, railcars and track structure, over its useful life.
This expense is impacted primarily by the capital expenditures made each year.
Depreciation expense increased $18 million due to a larger asset base and a 2019
equipment depreciation study that resulted in $10 million of additional expense,
partially offset by other non-significant items.
Fuel expense includes locomotive diesel fuel as well as non-locomotive fuel.
This expense is largely driven by the market price and locomotive consumption of
diesel fuel. Fuel expense decreased $140 million primarily due to an 8% price
decrease that drove savings of $74 million , a 4% improvement in fuel efficiency
and volume savings.
Equipment and Other expenses include rent paid for freight cars owned by other
railroads or private companies, net of rents received by CSXT for use of its
equipment. This category of expenses also includes expenses for short-term and
long-term leases of locomotives, railcars, containers and trailers, offices and
other rentals. These expenses increased $13 million primarily due to inflation
as well as several non-significant items, partially offset by volume and
efficiency savings.
Equity Earnings of Affiliates includes earnings from operating equity method
investments. Equity earnings of affiliates decreased $5 million primarily due to
lower net earnings at TTX.
CSX 2019 Form 10-K p. 27
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CSX CORPORATION
PART II
Interest Expense
Interest Expense includes interest on long-term debt, equipment obligations and
finance leases. Interest expense increased $98 million to $737 million primarily
due to higher average debt balances, partially offset by lower average rates.
Other Income - Net
Other Income - Net includes investment gains, losses and interest income, as
well as components of net periodic pension and post-retirement benefit cost and
other non-operating activities. Other income increased $14 million to $88
million primarily due to increased interest income as a result of higher average
investment balances.
Income Tax Expense
Income Tax Expense decreased $10 million primarily due to tax benefits from the
impacts of stock option exercises and the vesting of other equity awards as well
as the resolution of certain state tax matters, partially offset by benefits in
2018 related to state legislative changes and a federal deferred tax adjustment.
Net Earnings and Earnings per Diluted Share
Net Earnings increased $22 million to $3.3 billion , and earnings per diluted
share increased $0.33 to $4.17 , due to the factors mentioned above. Average
shares outstanding was lower as a result of share repurchase activity during the
year and had a favorable impact on earnings per diluted share.
2018 vs. 2017 Results of Operations
See discussion of 2018 results of operations compared to 2017 results of
operations in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2018 .
CSX 2019 Form 10-K p. 28
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CSX CORPORATION
PART II
Non-GAAP Measures - Unaudited
CSX reports its financial results in accordance with United States generally
accepted accounting principles ("GAAP"). CSX also uses certain non-GAAP measures
that fall within the meaning of Securities and Exchange Commission Regulation G
and Regulation S-K Item 10(e), which may provide users of the financial
information with additional meaningful comparison to prior reported results.
Non-GAAP measures do not have standardized definitions and are not defined by
GAAP. Therefore, CSX's non-GAAP measures are unlikely to be comparable to
similar measures presented by other companies. The presentation of these
non-GAAP measures should not be considered in isolation from, as a substitute
for, or as superior to the financial information presented in accordance with
GAAP. Reconciliations of non-GAAP measures to corresponding GAAP measures are
below.
2017 Adjusted Operating Results
Management believes that adjusted operating income, adjusted operating ratio,
adjusted net earnings and adjusted net earnings per share, assuming dilution are
important in evaluating the Company's operating performance and for planning and
forecasting future business operations and future profitability. These non-GAAP
measures provide meaningful supplemental information regarding operating results
because they exclude certain significant items that are not considered
indicative of future financial trends.
The impact of tax reform and the restructuring charge on 2017 operating results
are shown in the following table. There were no adjustments to operating results
in 2018 or 2019.
For the Year ended December 31, 2017
(in millions, except operating Net Earnings Per
ratio and net earnings per share, Share, Assuming
assuming dilution) Operating Income Operating Ratio Net Earnings Dilution
GAAP Operating Results 3,720 67.4 5,471 5.99
Restructuring Charge (a)(b) 240 (2.1 ) 203 0.22
Tax Reform Benefit (net) (142 ) 1.2 (3,577 ) (3.91 )
Adjusted Operating Results
(non-GAAP) $ 3,818 66.5 % $ 2,097 $ 2.30
(a) The restructuring charge was tax effected using rates reflective of the
applicable tax amounts for each component of the restructuring charge.
(b) The total restructuring charge was
CSX 2019 Form 10-K p. 29
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CSX CORPORATION
PART II
Free Cash Flow and Adjusted Free Cash Flow
Management believes that free cash flow is useful to investors as it is
important in evaluating the Company's financial performance. More specifically,
free cash flow measures cash generated by the business after reinvestment. This
measure represents cash available for both equity and bond investors to be used
for dividends, share repurchases or principal reduction on outstanding debt.
Free cash flow is calculated by using net cash from operations and adjusting for
property additions and certain other investing activities, which includes
proceeds from property dispositions. Adjusted free cash flow excludes the impact
of cash payments for restructuring charge. Free cash flow and adjusted free cash
flow should be considered in addition to, rather than a substitute for, cash
provided by operating activities. Adjusted free cash flow before dividends
increased $279 million year-over-year to $3.5 billion primarily due to an
increase in cash provided by operating activities and a decrease in property
additions.
The following table reconciles cash provided by operating activities (GAAP
measure) to free cash flow and adjusted free cash flow (both non-GAAP
measures).
Fiscal Years
2019 2018 2017
(Dollars in Millions)
Net cash provided by operating activities $ 4,850 $ 4,641 $ 3,472
Property additions (1,657 ) (1,745 ) (2,040 )
Other investing activities 285 292 134
Free Cash Flow, before dividends (non-GAAP)
$ 1,566 Add back: Cash Payments for Restructuring Charge (after-tax) (a) $ -$ 11 $ 135 Adjusted Free Cash Flow, before dividends (non-GAAP)$ 3,478 $ 3,199
(a) The restructuring charge impact to free cash flow was tax effected using the applicable tax rate of the charge. During 2018 and 2017, the Company made cash payments of$15 million and$187 million , respectively, related to the restructuring charge. Also in 2017, the Company made$30 million in payments to a former CEO and a former President for previously accrued non-qualified pension benefits that are not included in the restructuring charge. CSX 2019 Form 10-K p. 30 --------------------------------------------------------------------------------CSX CORPORATION PART II
Operating Statistics (Estimated)
Fiscal Years
Improvement/
2019 2018 (Deterioration)
Operations Performance
Train Velocity (Miles per hour)(a) 20.5 18.0 14 %
Dwell (Hours)(a) 8.6 9.5 9 %
Revenue Ton- Miles (Billions)
Merchandise 128.0 128.1 - %
Coal 41.1 45.5 (10 )%
Intermodal 26.9 29.3 (8 )%
Total Revenue Ton-Miles 196.0 202.9 (3 )%
Total Gross Ton-Miles (Billions) 388.3 402.7 (4 )%
On-Time Originations 89 % 82 % 9 %
On-Time Arrivals(b) 79 % 75 % 5 %
Safety
FRA Personal Injury Frequency Index 0.88 1.03 15 % FRA Train Accident Rate 2.14 3.64 41 % (a) The methodology for calculating train velocity and dwell differ from that prescribed by the STB as the Company believes these numbers more accurately reflect railroad performance. CSXT will continue to report train velocity and dwell, using the prescribed methodology, to the STB on a weekly basis. See additional discussion on the Company's website. (b) During 2019, the calculation of on-time arrivals has changed to consider a train "on time" if it is delivered within two hours of scheduled arrival. Prior year periods have been restated to conform to this change.
Certain operating statistics are estimated and can continue to be updated as actuals settle.
Key Performance Measures Definitions
Train Velocity - Average train speed between origin and destination in miles per
hour (does not include locals, yard jobs, work trains or passenger trains).
Train velocity measures the profiled schedule of trains (from departure to
arrival and all interim time), and train profiles are periodically updated to
align with a changing operation.
Dwell - Average amount of time in hours between car arrival to and departure
from the yard.
Revenue Ton-Miles (RTM's) - The movement of one revenue-producing ton of freight
over a distance of one mile.
Gross Ton-Miles (GTM's) - The movement of one ton of train weight over one mile.
GTM's are calculated by multiplying total train weight by distance the train
moved. Total train weight is comprised of the weight of the freight cars and
their contents.
On-Time Originations - Percent of scheduled road trains that depart the origin
yard on-time or ahead of schedule.
On-Time Arrivals - Percent of scheduled road trains that arrive at the
destination yard on-time to within two hours of scheduled arrival.
FRA Personal Injury Frequency Index - Number of FRA-reportable injuries per
200,000 man-hours.
FRA Train Accident Rate - Number of FRA-reportable train accidents per million
train-miles.
The Company strives for continuous improvement in safety and service performance
through training, innovation and investment. Investment in training and
technology also is designed to allow the Company's employees to have an
additional layer of protection that can detect and avoid many types of human
factor incidents. Safety programs are designed to prevent incidents that can
adversely impact employees, customers and communities. Continued capital
investment in the Company's assets, including track, bridges, signals, equipment
and detection technology also supports safety performance.
Operating performance continued to improve in 2019, as train velocity and car
dwell achieved all-time record levels for the second consecutive year. The
operational plan remains focused on delivering further service gains, improving
transit times and driving asset utilization while controlling costs.
From a safety perspective, FRA personal injury index and train-accident rate
improved 15% and 41% from the prior year, respectively. In 2019, the number of
FRA reportable injuries and the number of train accidents were both all-time
record lows. The Company is committed to continuous safety improvement and
remains focused on reducing risk and enhancing the overall safety of its
employees, customers and the communities in which the Company operates.
CSX 2019 Form 10-K p. 31
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CSX CORPORATION
PART II
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a company's ability to generate adequate amounts of cash to meet
both current and future needs for obligations as they mature and to provide for
planned capital expenditures, including those to address regulatory and
legislative requirements. To have a complete picture of a company's liquidity,
its sources and uses of cash, balance sheet and external factors should be
reviewed.
Significant Cash Flows
The following charts highlight the components of the change in cash and cash
equivalents for operating, investing and financing activities for full years
2019, 2018 and 2017.
[[Image Removed: chart-d92c43127e3251988fb.jpg]][[Image Removed: chart-acc9a4aa183650bca84.jpg]][[Image Removed: chart-2cdc4549d11150489d7.jpg]]
In 2019, the Company generated $4.9 billion of cash provided by operating
activities, which was $209 million higher than prior year primarily driven by
favorable working capital activities and higher cash-generating income. In 2018,
the Company generated $4.6 billion of cash provided by operating activities,
which was $1.2 billion higher than the prior year primarily driven by higher
cash-generating income which included the impact of a lower income tax rate,
partially offset by lower working capital and other activities.
In 2019, net cash used in investing activities was $2.1 billion , an increase in
net spend of $418 million from the prior year primarily driven by an increase in
net purchases of short-term investments. In 2018, net cash used in investing
activities was $1.7 billion , an increase of $189 million from the prior year
primarily driven by an increase in net short-term investment purchases,
partially offset by lower property additions and higher proceeds from property
dispositions.
In 2019, net cash used in financing activities was $2.6 billion , which
represents an increase in net spend of $148 million from the prior year
primarily due to lower proceeds from debt issuances and higher debt repayments,
partially offset by lower share repurchases. In 2018, net cash used in financing
activities was $2.5 billion , which represents an increase of $321 million from
the prior year primarily driven by higher share repurchases, partially offset by
higher net debt issued.
CSX 2019 Form 10-K p. 32
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CSX CORPORATION
PART II
Sources of Cash and Liquidity
The Company has multiple sources of liquidity, including cash generated from
operations and financing sources. The Company filed a shelf registration
statement with the SEC in February 2019 which is unlimited as to amount and may
be used to issue debt or equity securities at CSX's discretion, subject to
market conditions and CSX Board authorization. While CSX seeks to give itself
flexibility with respect to cash requirements, 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. In 2019, CSX issued a total of $2.0 billion of new
long-term debt.
CSX has access to a $1.2 billion five-year unsecured revolving credit facility
backed by a diverse syndicate of banks that expires in March 2024 . As of
December 31, 2019 , the Company had no outstanding balances under this
facility. See Note 10, Debt and Credit Agreements for more information. The
Company also has a commercial paper program, backed by the revolving credit
facility, under which the Company may issue unsecured commercial paper notes up
to a maximum aggregate principal amount of $1.0 billion outstanding at any one
time. At December 31, 2019 , the Company had no outstanding debt under the
commercial paper program.
Uses of Cash
CSX uses current cash balances for general corporate purposes, which may include
working capital requirements, repayment of additional indebtedness outstanding
from time to time, repurchases of CSX's common stock, capital investments,
improvements in productivity and other cost reduction initiatives.
In 2019, CSX continued to invest in its business to create long-term value for
shareholders. The Company is committed to maintaining and improving its existing
infrastructure and to positioning itself for long-term, profitable growth
through optimizing network and terminal capacity. Funds used for property
additions are further described below.
Fiscal Years
Capital Expenditures (Dollars in Millions) 2019 2018 2017 Track
$ 860 $ 771 $ 733 Bridges, Signals and Other 493 491 570 Total Infrastructure 1,353 1,262 1,303 Capacity and Commercial Facilities 141 246 417 Regulatory (including PTC) 91 225 284 Freight Cars 17 9 20 Locomotives 55 3 16 Total Capital Expenditures$ 1,657 1,745 2,040 Planned capital investments for 2020 are expected to be between$1.6 billion and$1.7 billion . Of the 2020 investment, the majority will be used to sustain the core infrastructure. The remaining amounts will be allocated to projects supporting service enhancements, productivity initiatives and profitable growth. CSX intends to fund capital investments through cash generated from operations. The Company expects to continue incurring capital costs in connection with the implementation of PTC. CSX estimates that the total multi-year cost of PTC implementation will be approximately$2.4 billion . This estimate includes costs for installing the new system along tracks, upgrading locomotives, adding communication equipment and developing new technologies. Total PTC spending through 2019 was$2.3 billion . CSX 2019 Form 10-K p. 33 -------------------------------------------------------------------------------- CSX CORPORATION PART II CSX is continually evaluating market and regulatory conditions that could affect the Company's ability to generate sufficient returns on capital investments. CSX may revise its future estimates for capital spending as a result of changes in business conditions, tax legislation or the enactment of new laws or regulations, which could have a material adverse effect on the Company's operations and financial performance in the future (see Risk Factors under Item 1A of this Form 10-K).
The Company also uses cash for scheduled payments of debt and leases, share
repurchases and to pay dividends to shareholders. On
Material Changes in theConsolidated Balance Sheets and Working Capital CSX's balance sheet reflects its strong capital base and the impact of CSX's balanced approach in deploying capital for the benefit of its shareholders, which includes investments in infrastructure, dividend payments and share repurchases. Further, CSX is well positioned from a liquidity standpoint. The Company ended the year with$2.0 billion of cash, cash equivalents and short-term investments. Total assets as well as total liabilities and shareholders' equity increased$1.5 billion from prior year. The increase in assets was primarily due to the net increase in short-term investments of$743 million , the right-of-use lease asset of$532 million resulting from the adoption of the new lease accounting standard, and property additions net of retirements of$295 million . The increase in total liabilities and shareholders' equity combined was driven by net earnings of$3.3 billion , the issuance of$2.0 billion in long-term debt and the total lease liability of$550 million resulting from the adoption of the new lease accounting standard. These increases were partially offset by share repurchases of$3.4 billion and dividends paid of$763 million . Working capital is considered a measure of a company's ability to meet its short-term needs. CSX had a working capital surplus of$1.1 billion atDecember 2019 and$650 million atDecember 2018 . The increase in current assets was primarily driven by cash proceeds from the$2.0 billion issuance of long-term debt, partially offset by dividend payments of$763 million and the early redemption of long-term debt originally dueOctober 2020 of$500 million . The increase in current assets was offset by an increase in current liabilities primarily due to the reclassification of$245 million from long-term debt to current maturities of long-term debt. The Company's working capital balance varies due to factors such as the timing of scheduled debt payments and changes in cash and cash equivalent balances as discussed above. Although the Company currently has a surplus, a working capital deficit is not unusual for CSX or other companies in the industry 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. Furthermore, CSX has sufficient financial capacity, including its revolving credit facility, commercial paper program and shelf registration statement to manage its day-to-day cash requirements and any anticipated obligations. The Company from time to time accesses the credit markets for additional liquidity. Credit Ratings Credit ratings reflect an independent agency's judgment on the likelihood that a borrower will repay a debt obligation at maturity. The ratings reflect many considerations, such as the nature of the borrower's industry and its competitive position, the size of the company, its liquidity and access to capital and the sensitivity of a company's cash flows to changes in the economy. The two largest rating agencies,Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service ("Moody's"), use alphanumeric codes to designate their ratings. The highest quality rating for long-term credit obligations isAAA and Aaa for S&P and Moody's, respectively. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. CSX 2019 Form 10-K p. 34 --------------------------------------------------------------------------------CSX CORPORATION PART II The cost and availability of unsecured financing are materially affected by CSX's long-term credit ratings. CSX's credit ratings remained stable during 2019. As ofDecember 2019 andDecember 2018 , S&P's long-term rating on CSX was BBB+ (Stable), and Moody's was Baa1 (Stable). Ratings of BBB- and Baa3 or better by S&P and Moody's, respectively, reflect ratings on debt obligations that fall within a band of credit quality considered to be investment grade. If CSX's credit ratings were to decline to below investment grade levels, the Company could experience significant increases in its interest cost for new debt. In addition, a decline in CSX's credit ratings to below investment grade levels could adversely affect the market's demand, and thus the Company's ability to readily issue new debt. CSX is committed to returning cash to shareholders and maintaining an investment grade credit profile. Capital structure, capital investments and cash distributions, including dividends and share repurchases, are reviewed at least annually by the Board of Directors. SCHEDULE OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables set forth maturities of the Company's contractual obligations and other significant commitments:
Type of Obligation 2020 2021 2022 2023 2024 Thereafter Total
(Dollars in Millions) (Unaudited)
Contractual Obligations
Total Debt (See Note 10) $ 245 $ 401 $ 162 $ 639 $ 551 $ 14,240 $ 16,238
Interest on Debt 720 700 686 672 649 10,629 14,056
Purchase Obligations (See Note 8) 292 197 229 254 290 2,448 3,710
Other Post-Employment Benefits (See
Note 9) (a) 37 29 26 25 25 108 250
Operating Leases - Net (See Note 7) 58 54 48 39
37 1,208 1,444
Agreements with Conrail (b) 29 29 29 29 22 - 138
Total Contractual Obligations
$ 1,574 $ 28,633 $ 35,836 Other Commitments (c)$ 78 $ 2 $ 2 $ - $ - $ -$ 82 (a) Other post-employment benefits include estimated other post-retirement medical and life insurance payments and payments under non-qualified pension plans which are unfunded. No amounts are included for funded pension obligations as no contributions are currently required. (b) Agreements with Conrail represent minimum future payments of$138 million under the shared asset area agreements (see Note 15,Related Party Transactions). (c) Other commitments of$82 million consisted of surety bonds, letters of credit, uncertain tax positions and public private partnerships. Surety bonds of$36 million and letters of credit of$27 million arise from assurances issued by a third-party that CSX will fulfill certain obligations and are typically a contract, state, federal or court requirement. Uncertain tax positions of$13 million , which include interest and penalties, are all included in year 2020 as the year of settlement cannot be reasonably estimated. Contractual commitments related to public-private partnerships are$6 million . CSX 2019 Form 10-K p. 35 --------------------------------------------------------------------------------
CSX CORPORATION PART II OFF-BALANCE SHEET ARRANGEMENTS For detailed information about the Company's guarantees, operating leases and purchase obligations, see Note 8, Commitments and Contingencies. 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. LABOR AGREEMENTS Approximately 17,000 of the Company's nearly 21,000 employees are members of a labor union. InNovember 2019 , notices were served to the 13 rail unions that participate in national bargaining to begin negotiations for benefits, wages and work rules for the next labor bargaining round for 2020. Current agreements remain in place until modified by these negotiations. Typically, such negotiations take several years before agreements are reached. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 certain revenues and expenses during the reporting period. Actual results may differ from those estimates. These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis. Significant estimates using management judgment are made for the following areas: • personal injury, environmental and legal reserves;
• pension and post-retirement medical plan accounting; and
• depreciation policies for assets under the group-life method.
Personal Injury, Environmental and Legal Reserves
Personal Injury Personal Injury reserves of$129 million and$143 million for 2019 and 2018, respectively, represent liabilities for employee work-related and third-party injuries. CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT's historical claims and settlement experience. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. For additional details, including a description of our related accounting policies, see Note 5, Casualty, Environmental and Other Reserves in the consolidated financial statements. CSX 2019 Form 10-K p. 36 --------------------------------------------------------------------------------CSX CORPORATION PART II
Critical Accounting Estimates, continued
Environmental
Environmental reserves were$74 million and$80 million in 2019 and 2018, respectively. The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 220 environmentally impaired sites. The Company reviews its potential liability with respect to each site identified, giving consideration to a number of factors such as: • type of clean-up required; • nature of the Company's alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site);
• extent of the Company's alleged connection (e.g., volume of waste sent
to the location and other relevant factors); and
• number, connection and financial viability of other named and unnamed
potentially responsible parties at the location.
Conditions that are currently unknown could, at any given location, result in
additional exposure, the amount and materiality of which cannot presently be
reasonably estimated. For additional details, including a description of our
related accounting policies, see Note 5, Casualty, Environmental and Other
Reserves in the consolidated financial statements.
Legal
The Company is involved in litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits. The Company evaluates all exposures relating to legal liabilities at least quarterly and adjusts reserves when appropriate. 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. An unexpected adverse resolution of one or more of these items could have a material adverse effect on the Company's financial condition, results of operations or liquidity in that particular period. For additional details, including a description of our related accounting policies, see Note 5, Casualty, Environmental and Other Reserves in the consolidated financial statements. Additionally, see Item 3. Legal Proceedings for further discussion of these items. Pension and Post-retirement Medical Plan AccountingThe Company sponsors defined benefit pension plans principally for salaried, management personnel. For employees hired prior to 2003, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. For employees hired in 2003 or thereafter, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation. Beginning in 2020, the CSX Pension Plan is closed to new participants. As ofDecember 2019 , the projected benefit obligation for the Company's pension plans was$3.1 billion . In addition to these plans, the Company sponsors a post-retirement medical plan and a non-contributory life insurance plan that provide certain benefits to full-time, salaried, management employees, hired prior to 2003, upon their retirement if certain eligibility requirements are met. Beginning in 2019, both the life insurance benefit for eligible active employees and health savings account contributions made by the Company to eligible retirees younger than 65 were eliminated. Beginning in 2020, the employer-funded health reimbursement arrangements for eligible retirees 65 years or older were eliminated. As a result of these plan amendments, the Company recognized a decrease in 2018 of$102 million in the post-retirement benefit liability. As ofDecember 2019 , the projected benefit obligation for the Company's other post-retirement benefit plans was$117 million . CSX 2019 Form 10-K p. 37 --------------------------------------------------------------------------------CSX CORPORATION PART II
Critical Accounting Estimates, continued
For information related to the funded status of the Company's pension and other post-retirement benefit plans, see Note 9, Employee Benefit Plans.
The accounting for these plans is subject to the guidance provided in the Compensation-Retirement Benefits Topic in the ASC. This rule requires that management make certain assumptions relating to the following:
• discount rates used to measure future obligations and interest expense;
• long-term rate of return on plan assets;
• salary scale inflation rates; and
• other assumptions. The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management. Discount Rates Discount rates affect the amount of liability recorded and the service and interest cost components of pension and post-retirement expense. Discount rates reflect the rates at which pension and other post-retirement benefits could be effectively settled, or in other words, how much it would cost the Company to buy enough high quality bonds to generate cash flow equal to the Company's expected future benefit payments. The Company determines the discount rate based on the market yield as of year-end for high quality corporate bonds whose maturities match the plans' expected benefit payments. The Company measures the service and interest cost components of the net pension and post-retirement benefits expense by using individual spot rates matched with separate cash flows for each future year. Under the spot rate approach, individual spot discount rates along the same high quality corporate bonds yield curve used to measure the pension and post-retirement benefit liabilities are applied to the relevant projected cash flows at the relevant maturity. The weighted average discount rates used by the Company to value its 2019 pension and post-retirement obligations are 3.13 percent and 2.87 percent, respectively. For 2018, the weighted average discount rates used by the Company to value its pension and post-retirement obligations were 4.24 percent and 3.98 percent, respectively. Discount rates may differ for pension and post-retirement benefits due to varying duration of the liabilities for projected payments for each plan. As ofDecember 2019 , the estimated duration of pensions and post-retirement benefits is approximately 12 years and 7 years, respectively.
Each year, these discount rates are reevaluated and adjusted using the current market interest rates for high quality corporate bonds to reflect the best estimate of the current effective settlement rates. In general, if interest rates decline or rise, the assumed discount rates will change.
CSX 2019 Form 10-K p. 38
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CSX CORPORATION
PART IICritical Accounting Estimates, continued
Long-term Rate of Return on Plan Assets The expected long-term average 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 as well as 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, the annual review may result in less frequent adjustment than other assumptions used in pension accounting. The long-term rate of return on plan assets used by the Company to value its benefit cost for the subsequent plan year was 6.75 percent in both 2019 and 2018. Salary Scale Inflation Rates Salary scale inflation rates are based on current trends and historical data accumulated by the Company. The Company reviews recent wage increases and management incentive compensation payments over the past five years in its assessment of salary scale inflation rates. The Company used a salary scale rate of 4.60 percent in both 2019 and 2018 to value its pension obligations. Other Assumptions The calculations made by the actuaries also include assumptions relating to health care cost trend rates, mortality rates, turnover and retirement age. These assumptions are based upon historical data, recent plan experience and industry trends and are determined by management. 2020 Estimated Pension and Post-retirement Expense Net periodic pension and post-retirement benefits expenses for 2020 are expected to be a$5 million expense and a$2 million credit, respectively. Net periodic pension and post-retirement benefits expenses for 2020 are expected to include service cost expense of$40 million and$1 million , respectively. Service cost expense is included in labor and fringe on the consolidated income statement and all other components of net pension expense and post-retirement benefits expense are included in other income - net. Net periodic pension expense and post-retirement benefits expense in 2019 were credits of$7 million and$4 million , respectively. The net increase in the expected expense is primarily due to impacts from the decline in discount rates, partially offset by favorable pension asset experience. The following sensitivity analysis illustrates the effects of a one percent change in certain assumptions like discount rates, long-term rate of return and salaries on the 2020 estimated pension and post-retirement expense: (Dollars in Millions) Pension Expense Post-Retirement Expense Discount Rate $ 13 $ - Long-term Rate of Return $ 26 N/A Salary Inflation $ 6 N/A CSX 2019 Form 10-K p. 39
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CSX CORPORATION
PART IICritical Accounting Estimates, continued
Depreciation Policies for Assets Utilizing the Group-Life Method The depreciable assets of the Company are depreciated using either the group-life or straight-line method of accounting, which are both acceptable depreciation methods in accordance with GAAP. The Company depreciates its railroad assets, including main-line track, locomotives and freight cars, using the group-life method of accounting. Assets depreciated under the group-life method comprise 87% of total fixed assets of$45 billion on a gross basis atDecember 31, 2019 . The remaining depreciable assets of the Company, including non-railroad assets and assets under finance leases, are depreciated using the straight-line method on a per asset basis. Land is not depreciated. Management performs a review of depreciation expense and useful lives on a regular basis. Under the group-life method, the service lives and salvage values for each group of assets are determined by completing periodic depreciation studies and applying management's methods to determine the service lives of its properties. There are several factors taken into account during the depreciation study and they include:
• statistical analysis of historical life and salvage data for each group
of property;
• 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;
• management's outlook on the future use of certain asset groups;
• expected net salvage to be received upon retirement; and
• comparison of assets to the same asset groups with other companies.
In 2019, the Company completed a depreciation study for its equipment assets which resulted in changes to accumulated depreciation, service lives, salvage values, and other related factors for certain assets. The effect of this change in estimate was not material to depreciation expense in 2019. The continued impacts of the study are expected to result in additional depreciation expense of approximately$30 million in 2020. There were no depreciation studies in 2018 or 2017. A one percent change in the average estimated useful life of all group-life assets would result in an approximate$12 million change to the Company's annual depreciation expense. For additional details, including a more detailed description of our related accounting policies, see Note 6, Properties in the consolidated financial statements.
New Accounting Pronouncements and Changes in Accounting Policy See Note 1, Nature of Operations and Significant Accounting Policies under the caption, "New Accounting Pronouncements and Changes in Accounting Policy."
CSX 2019 Form 10-K p. 40
--------------------------------------------------------------------------------CSX CORPORATION PART II FORWARD-LOOKING STATEMENTS Certain statements in this report and in other materials filed with theSecurities and Exchange Commission , as well as information included in oral statements or other written statements made by the Company, are forward-looking statements. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements within the meaning of the Private Securities Litigation Reform Act may contain, among others, statements regarding: • projections and estimates of earnings, revenues, margins, volumes, rates, cost-savings, expenses, taxes or other financial items;
• expectations as to results of operations and operational initiatives;
• expectations as to the effect of claims, lawsuits, environmental
costs, commitments, contingent liabilities, labor negotiations or
agreements on the Company's financial condition, results ofoperations
or liquidity;
• management's plans, strategies and objectives for future operations,
capital expenditures, workforce levels, dividends, share repurchases,
safety and service performance, proposed new services and other
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 and
their effect on the Company's financial condition, results of
operations or liquidity.
Forward-looking statements are typically identified by words or phrases such as
"will," "should," "believe," "expect," "anticipate," "project," "estimate,"
"preliminary" 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
timing when, 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 any 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.
CSX 2019 Form 10-K p. 41
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CSX CORPORATION
PART IIThe following important factors, in addition to those discussed in Part II, Item 1A. Risk Factors and elsewhere in this report, may cause actual results to differ materially from those contemplated by any forward-looking statements:
• legislative, regulatory or legal developments involving
transportation, including rail or intermodal transportation, the
environment, hazardous materials, taxation, international trade and
initiatives to further regulate the rail industry;
• the outcome of litigation, claims and other contingent liabilities,
including, but not limited to, those related to fuel surcharge,
environmental matters, taxes, shipper and rate claims subject to
adjudication, personal injuries and occupational illnesses;
• changes in domestic or international economic, political or business
conditions, including those affecting the transportation industry
(such as the impact of industry competition, conditions,performance
and consolidation, as well as the impact of international trade
agreements and tariffs) and the level of demand for products carried
by CSXT;
• natural events such as severe weather conditions, including floods,
fire, hurricanes and earthquakes, a pandemic crisis affecting the
health of the Company's employees, its shippers or the consumers of
goods, or other unforeseen disruptions of the Company'soperations,
systems, property, equipment or supply chain;
• competition from other modes of freight transportation, such as
trucking, and competition and consolidation or financial distress
within the transportation industry generally;
• the cost of compliance with laws and regulations that differ from
expectations (including those associated with PTCimplementation) as
well as costs, penalties and operational and liquidity impacts
associated with noncompliance with applicable laws or regulations;
• the impact of increased passenger activities in capacity-constrained
areas, including potential effects of high speed rail initiatives, or
regulatory changes affecting when CSXT can transport freight or
service routes;
• unanticipated conditions in the financial markets that may affect
timely access to capital markets and the cost of capital, as well as
management's decisions regarding share repurchases;
• changes in fuel prices, surcharges for fuel and the availability of fuel;
• the impact of natural gas prices on coal-fired electricity generation;
• the impact of global supply and price of seaborne coal on CSX's export
coal market;
• availability of insurance coverage at commercially reasonable rates or
insufficient insurance coverage to cover claims or damages;
• the inherent business risks associated with safety and security,
including the transportation of hazardous materials or acybersecurity
attack which would threaten the availability and vulnerability of
information technology;
• adverse economic or operational effects from actual or threatened war
or terrorist activities and any governmental response;
CSX 2019 Form 10-K p. 42
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CSX CORPORATION
PART II• loss of key personnel or the inability to hire and retain qualified employees;
• labor and benefit costs and labor difficulties, including stoppages
affecting either the Company's operations or customers' ability to
deliver goods to the Company for shipment;
• the Company's success in implementing its strategic, financial and
operational initiatives;
• the impact of conditions in the real estate market on the Company's
ability to sell assets;
• changes in operating conditions and costs or commodity concentrations; and
• the inherent uncertainty associated with projecting economic and
business conditions.
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 CSX's other SEC reports, which are accessible on
the SEC's website at www.sec.gov and the Company's website at www.csx.com. The
information on the CSX website is not part of this annual report on Form 10-K.
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