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Rating Action:

MOODY'S AFFIRMS CSX'S RATINGS (SR UNSECURED AT Baa2); OUTLOOK TO STABLE

23 May 2006
MOODY'S AFFIRMS CSX'S RATINGS (SR UNSECURED AT Baa2); OUTLOOK TO STABLE

New York, May 23, 2006 -- Moody's Investors Service affirmed the ratings of CSX Corporation (CSX) and its subsidiaries--senior unsecured at Baa2--and changed the outlook to stable from negative.

Moody's believes that CSX operations have hit an inflection point in the turnaround, and Moody's expects progressively more fluidity throughout the system and sustained operating improvement at current volume levels. Recent positive trends in key service metrics of on-time arrivals/departures and terminal dwell, although recorded under the normally low volume winter months along with the benefits of a season unusually free from severe weather, have been consistent enough to indicate the broad operating programs the company put in place over the last 18 months have taken hold. While CSX has not attained all of the operating goals that Moody's established as the basis for stabilizing the outlook, notably still below target on system velocity and higher than target recrew rate (of less than 45/day) - Moody's believes these results are affected by a different mix of business as CSX is moving more coal which travel at slower speeds than intermodal volumes, and the current trends in operating metrics sufficiently support our expectation that current financial results are sustainable.

Financial results, however, have improved meaningfully driven by debt reduction with proceeds of asset sales and a yield environment that was much more favorable than expected. Debt to EBITDA (LTM of 3.0x) and EBIT to Interest Expense (LTM of 3.2x), using Moody's Standard Adjustments, are now within the range of the broad group of issuers at the Baa2 rating level, albeit somewhat lower than median levels. Greater fluidity in CSX's railroad operations provides the basis to expect stability in financial results, although CSX's results are likely to be comparatively weaker than the leading railroad operators. During this cycle, CSX has not participated fully in the growth of the intermodal segment; CSX intermodal carloads were down while volume at the other Class I railroads was up sharply. In Moody's view, for CSX to avoid the risk of falling behind its railroad competitors the railroad will need to become more active in the long-term growth of the intermodal market. Profitably growing its intermodal segment will be a good test of the progress of CSX's recovery. CSX expects to step up capital spending in 2006 and 2007 by about 40% over the run rate of the last several years, principally for significant investment in its core corridor from Chicago to the Southeast. The projects envision better throughput and should enable CSX to participate in the growing, and increasingly profitable, intermodal segment.

The stable outlook expects measurable progress in improving railroad operations and continued yield increases in the strong rail transportation environment, which should produce at least $300 million of free cash flow for the full year even with the increased capital investment. The expectation of conservative financial practices and maintaining high quality liquidity also support the stable outlook. The ratings could be pressured downward if on-time departures fall below 60%, if CSX does not continue towards improving the system velocity to a stabilized rate of at least 20 mph and reduction in the recrew rates to closer to 50 per day, or if EBIT to Interest is less than 3x (using Moody's standard adjustments). The outlook for the ratings could be viewed favorably once CSX completes its increased capital investment program, and the company is able to sustain debt to EBITDA in the range of 3x or below, with retained cash flow to debt greater than 25%, and an Operating Ratio of less than 80%.

CSX, based in Jacksonville Florida, operates a Class I railroad.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Jankowitz
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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