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Rating Action:

Moody's downgrades CSX, sr. unsecured to Baa3

15 May 2007
Moody's downgrades CSX, sr. unsecured to Baa3

Approximately $8.1 billion of debt affected

New York, May 15, 2007 -- Moody's Investors Service downgraded all the debt ratings of CSX Corporation and its subsidiaries -- senior unsecured rating to Baa3 and the short-term rating to Prime-3. In a related action, Moody's downgraded the debt ratings of Consolidated Rail Corporation ("Consolidated Rail") -- Equipment Trust Certificates rating to A2. The outlook is stable. These rating downgrades are because of CSX's plan to increase its share repurchases by an additional $1 billion, to a total of $ 3 billion (about 15% of total shares), before the end of 2008. These rating actions close the review for possible downgrade Moody's opened on May 8, 2007.

"CSX's shareholder enhancement program marks a reversal of financial policy to be the most aggressive among the major railroads, and comes at a time when demand for railroad services is weakening", noted Bob Jankowitz of Moody's Investors Service. Taken together, the expectation of weakened financial metrics, the more aggressive financial policy and the challenging operating environment which is developing, are consistent with the revised Baa3 senior unsecured rating.

The ratings were downgraded because CSX is expected to increase debt to fund a meaningful portion of the share purchases. Over the period planned for the share purchases, credit metrics of retained cash flow to debt, EBIT to interest and debt to EBITDA are likely to weaken to levels outside the ranges Moody's cited to preserve CSX's previous Baa2 senior unsecured rating in its February 14, 2007 release. As well, the stepped-up program of shareholder enhancements would be a significant departure from CSX's historic financial practices. These practices included financial leverage consistent with the high fixed costs and the especially high level of capital investment characteristic of the railroad industry, while maintaining sufficient liquidity and debt capacity to cushion the industry's cash flow volatility.

During the growth phase of the transportation sector (since 2004), CSX has considerably more than doubled its operating profit and sharply improved its credit metrics, as EBIT to interest expense more than doubled and debt to EBITDA was cut in half. Near-term profits are likely to be consistent with management guidance because CSX's railroad operations are fluid and the pricing environment remains favorable. Sustaining profit and cash flow at the current level would position CSX's credit metrics of retained cash to debt and EBIT to interest expense within the range of other Baa3 issuers.

However, CSX's rail operations and profits have been among the more volatile in the sector. Only recently have railroad operations been sufficiently fluid for the company to take full advantage of the high demand for rail service. Moreover, Moody's believes that a substantial portion of the improved profits is because of sharply increased yields. If CSX is unable to preserve the high pricing levels, because of reduced demand or if service falls off, it would be particularly difficult for CSX to sustain the profit and cash flow consistent with the recent record results. Year to date, carloadings and intermodal volume for CSX and the rest of the railroad industry are down considerably from the same period during 2006, and a similar weakness in volume is evident across other modes of freight transport.

The Consolidated Rail ratings were also downgraded because the debt ratings are partly based on the obligations of CSX to make lease payments to Consolidated Rail for the ETC's and to also support the small amount of senior unsecured debt still outstanding.

The stable rating outlook considers CSX's higher debt level, and reflects the company's greater reliance on achieving a plan to sustain higher profits and cash flow to preserve credit metrics consistent with its Baa3 rating level.

Downgrades:

..Issuer: CSX Capital Trust I

....Preferred Stock Shelf, Downgraded to (P)Ba1 from (P)Baa3

..Issuer: CSX Corporation

....Commercial Paper, Downgraded to P-3 from P-2

....Issuer Rating, Downgraded to Baa3 from Baa2

....Multiple Seniority Shelf, Downgraded to a range of (P)Ba2 to (P)Baa3 from a range of (P)Ba1 to (P)Baa2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Baa3 from Baa2

....Senior Unsecured Medium-Term Note Program, Downgraded to Baa3 from Baa2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

....Senior Unsecured Shelf, Downgraded to (P)Baa3 from (P)Baa2

..Issuer: CSX Transportation, Inc.

....Senior Secured Equipment Trust, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

..Issuer: Consolidated Rail Corporation

....Senior Secured Equipment Trust, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

..Issuer: Peninsula Ports Authority of Virginia

....Senior Unsecured Revenue Bonds, Downgraded to Baa3 from Baa2

..Issuer: Sea-Land Services. Incorporated

....Senior Secured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

..Issuer: Toledo-Lucas County Port Authority, OH

....Senior Unsecured Revenue Bonds, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: CSX Capital Trust I

....Outlook, Changed To Stable From Rating Under Review

..Issuer: CSX Corporation

....Outlook, Changed To Stable From Rating Under Review

..Issuer: CSX Transportation, Inc.

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Consolidated Rail Corporation

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Sea-Land Services. Incorporated

....Outlook, Changed To Stable From Rating Under Review

CSX Corporation, based in Jacksonville Florida, operates a Class I railroad in the eastern United States.

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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