Fitch Rates CSX Corp.'s New Unsecured Notes 'BBB'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to CSX Corp.'s (CSX) new $350 million 4.25% senior unsecured notes and $250 million 5.50% senior unsecured notes due June 2021 and April 2041, respectively. Proceeds from the offering are expected to be used for general corporate purposes. CSX's Issuer Default Rating (IDR) is 'BBB'. The Rating Outlook is Stable.

Fitch recently upgraded CSX's ratings to reflect the company's fundamentally improved financial profile as it has leveraged efficiencies gained over the past several years to consistently grow margins and generate strong free cash flow. As a result, CSX reported record operating and financial metrics in 2010 despite volumes remaining slightly below pre-recession levels. The upgrade also considered the likelihood that CSX will continue to divert a material portion of its operating cash flows to shareholders through the recently announced dividend increase and new share repurchases program, and recognizes the possibility that the company could engage in some modest incremental borrowing to support its shareholder return initiatives.

More generally, CSX's ratings and Outlook reflect the Class I railroad operator's strong competitive position as one of the two largest eastern freight operators and the fuel-efficiency advantage compared to freight alternatives such as trucking. The company's credit profile is further supported by financial flexibility created through a conservative cash deployment approach during the downturn that has solidified the company's liquidity position. Propelled by double-digit volume improvement and a resilient pricing environment, CSX produced record free cash flow and managed to report the lowest full-year operating ratio (OR) in the company's history in 2010. First quarter 2011 results showed additional year-over-year progress and Fitch expects continued improvement throughout 2011 as the U.S. economy expands and demand overseas drives strong export coal volumes. Combined with increased operational efficiency, pricing gains are expected to translate to strong free cash flow over the next several years, providing necessary support to cash deployment programs.

CSX ended the first quarter of 2011 with cash, cash equivalents, and marketable securities of $590 million. In addition, the company has access to a $1.25 billion unsecured revolving credit facility that matures in May 2012 and a $250 million 364-day receivables securitization program that expires in December of this year, both of which were undrawn at March 31, 2011. Lease-adjusted leverage (lease-adjusted debt/EBITDAR) stood at 2.45 times (x) at year-end, below the 2.65x level recorded at year-end 2010 due primarily to the repayment of $524 million of long-term debt in the first quarter. The consistency in lease-adjusted leverage reduction over the past several quarters has been supported by steadily rising EBITDA margins and declining lease expenses. Balance sheet debt at the end of the first quarter was $8.1 billion, including $503 million of current maturities, $400 million of which matures on March 15, 2012.

With its strong liquidity position and in light of its positive operating trends, the company restarted its share repurchase program in the first quarter of 2010. In the first quarter of 2011, CSX repurchased $300 million of common shares, following nearly $1.5 billion of buybacks in 2010. Along with a newly announced dividend policy, Fitch expects the company's share repurchase program will continue to be the primary channel for returning cash to shareholders over the intermediate term. With over $1 billion of free cash flow generated in 2010, CSX is projected to produce similarly strong free cash flow in 2011 as operating cash flow growth is offset by increased capital expenditures. As a result, free cash flow generation should be strong enough to fund a significant portion of share repurchase activity this year. As previously mentioned, Fitch recognizes that CSX could engage in some incremental borrowing to augment the number of shares that could be repurchased. An increase in leverage would not necessarily result in a reversion back to 'BBB-', however, as the company's credit profile can support some modest additional borrowing and remain consistent with a 'BBB' profile.

The most significant risk facing CSX at this time is the potential for an unexpected slowing or reversal of the economic improvement experienced over the past several quarters. Under such a scenario, Fitch would expect volumes to decline and pricing to weaken, pressuring CSX's near-term credit profile. Additional risk factors include an increase in regulatory oversight of the rail industry's pricing practices that could pose some marginal risk over the long term as it would potentially slow the rate of margin and free cash flow growth. In general, Fitch does not expect any increased regulation, at least as currently envisioned, to put material pressure on the company's credit profile in the near term.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Evaluating Corporate Governance' (Dec. 16, 2010);

--'Analysis of U.S. Corporate Pensions' (Dec. 1, 2010);

--'Corporate Rating Methodology' (Aug. 16, 2010);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

Applicable Criteria and Related Research:

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

Analysis of U.S. Corporate Pensions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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