CSX Board Sends Letter to TCI

Reviews Track Record of Strong Performance, Value Creation and Commitment

to Corporate Governance

Nov 16, 2007, 00:00 ET from CSX Corporation

    JACKSONVILLE, Fla., Nov. 16 /PRNewswire-FirstCall/ -- The Board of
 Directors of CSX Corporation (NYSE:   CSX) today sent a letter to The
 Children's Investment Fund (TCI) detailing CSX's strong record of financial
 performance, shareholder returns and corporate governance, and providing
 facts to set the record straight. The facts are:
     - CSX Surface Transportation comparable operating income has nearly
       doubled since the current management team took charge in 2004, while
       productivity and revenue initiatives during that period have improved
       the operating ratio to its best level in a decade.
     - In the same period, shareholders have benefited from a stock price that
       has risen nearly 150 percent.  CSX shares have significantly
       outperformed all major North American railroads and the broader market.
     - Also in this period, safety and customer service levels have improved
       dramatically, as indicated by 25 percent to 50 percent improvements in
       most key safety and service measurements.
     - CSX and its advisors have held numerous discussions with TCI and
       corresponded with them on their ideas.  The Board has frequently,
       actively and independently assessed TCI's proposals.
     After giving thorough consideration to TCI's claims and proposals, the
 Board in its letter to TCI said it supports the CEO and management team in
 their "effective efforts to deliver shareholder value" and that the strong
 performance of the company's stock reflects the improvement CSX has
 achieved in every relevant area. "The Board believes this performance
 record demonstrates unequivocally that CSX is a well run company with
 continuously improving results," the letter states.
     The Board also reiterated that it remains committed to acting in the
 best interests of all shareholders.
     "Be assured that the Board constantly challenges the CSX management
 team to improve the company's performance. As part of that process, the
 Board is always receptive to ideas from shareholders. The Board respects
 TCI's right as a shareholder to express its opinions regarding CSX and will
 continue to keep an open mind. However, the Board believes that the
 approaches TCI has offered are not in the best interest of CSX shareholders
 and, in some cases, have damaged the industry," the letter concluded.
     Over the past ten months, TCI has approached CSX with a variety of
 suggestions and demands. Among these were a recommendation that current
 management seek a leveraged buy out, a recommendation to leverage the
 company to "junk" credit status to fund massive share repurchases, a
 recommendation that CSX publicly commit to effectively doubling prices to
 customers over 10 years, and a recommendation to freeze capital spending
 for growth until Congress determines the outcome of an issue that has been
 the subject of its policy debate for more than 20 years.
     The full text of the CSX Board's letter in response to TCI is below.
     Chris Hohn, Managing Partner
     Snehal Amin, Partner
     The Children's Investment Master Fund
     7 Clifford Street
     London, England
     Dear Mr. Hohn and Mr. Amin:
     We are pleased to provide the response of the CSX Corporation Board of
 Directors to the correspondence from The Children's Investment Master Fund
 dated October 16 and October 22, 2007.
     Board Engagement: As background, this Board is very familiar with TCI's
 views of the U.S. rail industry and of CSX. CSX and its representatives
 have been in regular communication with TCI throughout this year, and TCI's
 proposals have been shared with and thoroughly analyzed by the Board.
     Throughout the year, CSX and its representatives have repeatedly made
 TCI aware that the Board has spent a great deal of time considering its
 views. In fact, those views have been considered during more than a dozen
 full Board and committee meetings to date in 2007. In July, the CSX Board
 formally invited TCI to submit its proposals for consideration and
     Furthermore, there have also been dozens of telephone calls, e-mail
 exchanges and face-to-face meetings between CSX, and its advisors, and TCI
 since late 2006, and Mr. Amin had a private meeting with two members of the
 company's senior management team in March.
     CSX Quality: In any event, TCI's recent letters and public statements
 express the view that there is a fundamental lack of quality in CSX's
 business results, management and Board. The Board respectfully disagrees.
     The measures of quality for a public company are well understood. For
 an operating company such as CSX, those measures generally are shareholder
 return, financial performance, balance sheet, safety, customer service and
 governance. By any of those measures, the Board believes that CSX is an
 excellent company, and the Board unanimously supports the company's
 strategy and management.
     Since the current management team undertook major restructuring
 initiatives in 2004, CSX shares have significantly outperformed all major
 North American railroads and the broader market. That performance reflects
 the improvement CSX has achieved over that period in every relevant area.
 Simply put, the Board believes this performance record demonstrates
 unequivocally that CSX is a well run company with continuously improving
     Exceptional Earnings and Shareholder Value Creation: Since 2004, CSX
 operating income has risen steadily as the management team implemented key
 restructuring initiatives. From 2004 through today, CSX operating income
 nearly doubled. At the same time, productivity and revenue improvement
 initiatives have lowered the CSX operating ratio to its best level in a
     [To view chart or graph visit www.csx.com in the Investor Section]
     As reflected in the company's projections for EPS, operating income,
 operating ratio, and cash flow, which is among the most extensive guidance
 in the industry, CSX expects these positive trends to continue as it
 executes on its proven operating plan. Supporting these targets are plans
 for continued pricing above inflation, volume growth and productivity
     Furthermore, the Board is confident that CSX shareholders appreciate
 the value that CSX has created on the strength of its steadily increasing
 earnings. The value of CSX stock has increased nearly 150 percent in the
 past three years, providing shareholders with a return better than the rest
 of the North American rail industry and 89 percent of all S&P 500
     [To view chart or graph visit www.csx.com in the Investor Section]
     CSX also continues to generate value for shareholders through a $3
 billion share repurchase program. The program was announced early this year
 and is already more than halfway complete. Additionally, the quarterly
 dividend has tripled over the past two years. It is curious that TCI would
 reduce these important components of CSX shareholder value creation to a
 footnote in its letter, when the share buyback program is consistent with a
 position that TCI previously advanced.
     In light of recent developments in the credit markets, the Board
 understands TCI's apparent abandonment of its suggestion that CSX take on
 extraordinary debt to repurchase more shares and reduce the CSX credit
 rating to "junk" - a suggestion the Board prudently rejected at the time it
 was made.
     In addition to this strong financial performance, safety and service
 levels at CSX are consistently improving. In 2004 CSX began implementing
 significant operational changes and publicly stated that the company would
 focus on improving two things: safety and on-time train originations. The
 record demonstrates that CSX has achieved precisely what it set out to do
 three years ago - dramatically improve both the safety of the railroad and
 the on-time performance for its customers.
     Committed to Improving Safety: Although TCI did not discuss CSX safety
 advances in its letter, safety is and will continue to be a core value of
 the company, and CSX will continue to make the important investments in the
 network to support and maintain safety improvements.
     Since 2004, CSX has achieved a decrease in personal injuries of more
 than 50 percent, an industry leading improvement.
     [To view chart or graph visit www.csx.com in the Investor Section]
     CSX has also reduced train accidents by 45 percent over the past three
 years and by 23 percent year-to-date, both industry leading improvements.
     [To view chart or graph visit www.csx.com in the Investor Section]
     The safety of CSX employees, customers and communities is a top
 priority of the Board, and the company's actions will continue to
 demonstrate the strength of that commitment.
     Disciplined Operational and Customer Service Improvements: The Board
 believes that CSX operational and service performance has been outstanding
 under Michael Ward and the senior management team. In the past three years
 CSX has achieved substantial improvements in important operating metrics
 and is committed to making its operations even better.(1)
     In addition to achieving industry-leading safety improvements, the
 company has improved its rate of both on-time originations and arrivals by
 nearly 30 percent since 2004. From the third quarter of 2004 through the
 third quarter of 2007, CSX improved its velocity more than any other U.S.
     [To view chart or graph visit www.csx.com in the Investor Section]
     Similarly, CSX has shortened dwell time, another key operating metric,
 by 24 percent over the same period.
     [To view chart or graph visit www.csx.com in the Investor Section]
     The company's operational improvement over the past three years shows
 that the existing operating plan is effective and will continue to advance
 the interests of CSX shareholders. The Board expects that the operating
 performance of CSX will continue to improve with the benefit of ongoing
 investments in capacity and productivity initiatives, and, in the Board's
 view, it would be imprudent and counterproductive to reduce planned capital
 investment at this time.
     Strong Corporate Governance: TCI's statements that CSX does not
 practice good corporate governance are simply incorrect. CSX has an ISS
 ranking in the top 3 percent of transportation companies. This high
 governance ranking reflects the quality of corporate governance practices
 currently in place at CSX. These include, but are not limited to:
     - Election of the entire board annually;
     - Majority vote election of the board in uncontested elections;
     - Majority vote (rather than supermajority as allowed by Virginia law) on
       major events impacting the shareholders such as charter amendments and
     - No poison pill; and
     - Cap for senior executive severance payments.
     Highly Experienced, Engaged and Independent Board: TCI stated in its
 letter to CSX that "over half of the independent directors have been on the
 Board for over a decade." In fact, as the most recent CSX proxy statement
 clearly shows, the majority of independent directors have been on the Board
 for less than six years. Moreover, the eleven independent directors of CSX
 have considerable public company experience and a wide range of views and
 backgrounds, encompassing, among other fields, the financial sector,
 railroad customers, insurance, manufacturing, government, transportation
 regulation, higher education and health care.
     TCI also calls for CSX to split the roles of Chairperson of the Board
 and CEO. That proposition was put to a vote of CSX shareholders at the 2006
 annual meeting, where it was rejected by a margin of roughly 109 million
 votes (nearly 5 votes against for every 1 vote in favor). Almost two-thirds
 of companies in the S&P 500 combine the two positions. CSX believes that an
 independent board and a presiding independent director, the prevailing
 practice in the United States, provides more meaningful oversight of
 management when combined with the strong counterbalancing governance
 structures in place at CSX. These governance structures include:
 established governance guidelines, independent presiding director with
 delineated duties, 11 out of 12 directors independent, and key Board
 committees comprised solely of independent directors.
     Executive Compensation Directly Linked to Performance: At CSX, like
 every major American railroad, the independent members of the Board
 annually determine the compensation of management based on the
 recommendation of the Compensation Committee. The Board relies on advice
 from an independent consultant who reports directly to the
 fully-independent Compensation Committee. Contrary to TCI's suggestion, 100
 percent of CSX's short and long term incentive compensation for CSX
 executives is tied to company performance that drives shareholder value. We
 believe CSX is in a minority of companies that can make that statement.
     The Compensation Committee and the Board selected operating ratio as
 the performance metric for the current long-term incentive compensation
 program based on an analysis of nearly 15 years of CSX stock performance.
 The analysis showed that operating ratio had a strong correlation to
 creation of shareholder value. Also, the Board believes that operating
 ratio provides a readily identifiable and understandable goal to focus
 performance for the company's management employees with diverse
     Focused and Strategic Capital Investment: Two important points must be
 made to correct TCI's characterizations of CSX's capital spending plan.
 First, the industry typically measures capital expenditures as a percentage
 of revenue, and CSX's current capital expenditures are equivalent to those
 of other Class I railroads, which over the past five years have averaged
 from 15 to 17 percent of revenue. Second, CSX has consistently stated that
 important strategic decisions about investing in the rail network are
 dependent on the ability of railroads to earn adequate returns on
 investment. As Michael Ward stated in a hearing before the Surface
 Transportation Board (STB) in April of this year,
         It's not a coincidence that our company's record-setting
         infrastructure investments in 2006 and 2007 come at a time when we're
         just beginning to approach revenue adequacy ... That investment of
         course requires strong earnings, earnings that must remain strong both
         to make the necessary money and to justify reinvestment in the
         railroad business ... Ill-considered calls to re-regulate the rail
         industry by whatever name are the greatest threat to the railroad
         industry's ability to reach sustained revenue adequacy and to continue
         to reinvest into the future.
     CSX makes decisions about capital spending today that will have
 profound implications for the company and the nation's critical
 transportation infrastructure for decades to come. In doing so, CSX
 carefully evaluates the return on investment that can be achieved from
 capital spending and the necessity of replacing long-lived railroad assets.
 Like the rest of the industry, the company's investments in new equipment
 and technology to improve asset utilization, train handling and fuel
 efficiency are critical to providing sustainable profits and enhanced
 customer service.
     The important investment decisions that CSX has made in the past
 several years have been integral to the safety and operational improvements
 that help drive shareholder returns. CSX will not compromise safety,
 service and efficiency by arbitrarily restricting investment as TCI
 suggests. The Board fully supports the disciplined infrastructure
 investment decisions that have allowed CSX to achieve the substantial
 safety, operational and financial advances of the past three years.
     In addition to being a key measure of performance for CSX, return on
 invested capital is an important component of regulatory determinations by
 the STB. CSX fully appreciates the significance of pending proceedings
 before the STB on this subject. As CSX stated in its September submission
 to the STB,
         The [STB's] proposal to change the regulatory cost of capital
         methodology without considering the true requirements that the rail
         industry is facing will lead to constrained capital spending at a time
         when the U.S. is facing a transportation capacity crisis.
     The fact is that replacement cost methodology should be considered in
 determining revenue adequacy for the purpose of railroad rate regulation,
 and, along with the entire railroad industry, CSX has repeatedly advanced
 that position. Having said that, CSX will not "threaten" to arbitrarily
 restrict capital spending on critical national infrastructure assets in a
 misguided and counterproductive effort to pressure legislative and
 regulatory authorities, as TCI has urged.
     TCI's Various Suggestions: As discussed earlier in this letter, CSX is
 committed to maintaining open communications with all of its shareholders.
 To that end, there have been dozens of exchanges between CSX and its
 advisors and TCI, starting in late 2006.
     Each of TCI's several different suggestions to CSX management has been
 conveyed to the Board and reviewed thoroughly and with the benefit of
 outside expert advice. For background, it is useful to walk through the
 major proposals that TCI has offered to CSX so far in 2007.
     LBO Led by Current Management. Early this year, TCI suggested that CSX
 would make an attractive candidate for a leveraged buyout, and TCI urged
 the company to enter into discussions with private equity firms. Given that
 TCI's proposal contemplated that the CEO and management team would continue
 to run the company following a leveraged buyout and, in fact, proffered
 substantial incentives to keep the management team in place, TCI's
 suggestions were fairly viewed as a strong endorsement of the CSX
 management team. Nonetheless, the Board determined that the interests of
 CSX shareholders are best served by the company remaining publicly traded.
     Junk Recapitalization. TCI next advocated that CSX dramatically
 increase leverage to fund additional share repurchases. Specifically, TCI
 suggested that the company repurchase 20 percent of outstanding shares each
 year until leverage reached five times EBITDA, more than doubling the
 company's debt and reducing its credit rating to "junk" status. Although
 CSX has an aggressive share repurchase program in place, the company has
 repeatedly stressed the importance of maintaining an investment grade
 credit rating and the financial flexibility required for the capital
 intensive nature of the railroad business. The Board believes that
 developments in the credit markets since CSX rejected TCI's "junk
 recapitalization" suggestion amply demonstrate that the company's
 commitment to maintaining a strong balance sheet and an investment grade
 rating is the more prudent strategy for a company of this kind.
     Rate Increases. TCI then publicly called for CSX, and the industry
 generally, to increase rates by 7 percent each year for the next 10 years.
 Putting aside the competitive dimensions of this announcement, the
 suggestion aroused the ire of customers and policymakers. In fact, customer
 advocates and members of the U.S. House of Representatives and the U.S.
 Senate pointed to TCI's statements in calling for new regulation of the
 railroad industry.
     Freezing Growth to Affect Legislation. In recent months, TCI has urged
 that CSX and the other railroads respond to re-regulation concerns in
 Washington by "freezing" expansion capital. Putting aside the competitive
 dimensions of such an announcement, the CSX Board believes that there are
 far more appropriate and effective ways to reach balanced legislative and
 regulatory solutions than abandoning core elements of long-term business
     Now, in public letters, TCI criticizes corporate governance, operations
 and investment levels, notwithstanding CSX's strong performance on the well
 understood measures of organizational quality. The Board believes that the
 suggestions outlined in these recent letters are not in the best interests
 of the company and its shareholders.
     In conclusion, the Board is committed to acting in the best interest of
 all of the company's shareholders. The Board supports the CEO and the
 management team in their effective efforts to deliver shareholder value,
 which also serves the company's other stakeholders.
     Be assured that this Board constantly challenges the CSX management
 team to improve the company's performance. As part of that process, the
 Board is always receptive to ideas from shareholders. The Board respects
 TCI's right as a shareholder to express its opinions regarding CSX and will
 continue to keep an open mind. However, the Board believes that the
 approaches TCI has offered are not in the best interests of CSX
 shareholders and, in some cases, have damaged the industry.
     Very truly yours,
     The CSX Corporation Board of Directors
     (1) According to the Association of American Railroads, operating metrics
         cannot readily be compared between different railroads. As AAR notes
         on its website, "One railroad's performance metrics cannot
         meaningfully be compared to another railroad's, due to differences in
         the carriers' calculation methodologies, operational strategies,
         network characteristics, terrain, traffic mix and volume, length of
         haul, extent of passenger operations, and other factors such as
         weather." Accordingly, CSX and the industry primarily use operating
         metrics to gauge changes in a railroad's performance over time.
     About CSX
     CSX Corporation, based in Jacksonville, Fla., is one of the nation's
 leading transportation companies, providing rail, intermodal and
 rail-to-truck trainload services. The company's transportation network
 spans approximately 21,000 miles, with service to 23 eastern states and the
 District of Columbia, and connects to more than 70 ocean, river and lake
 ports. More information about CSX Corporation and its subsidiaries is
 available at the company's web site, www.csx.com.
     For more information regarding surface transportation operating income
 and other measurements, please see Exhibit 99.1 to the Current Report
 furnished simultaneously with this release under Item 7.01 of Form 8-K.
     Forward-looking statements
     This information and other statements by the company contain forward-
 looking statements within the meaning of the Private Securities Litigation
 Reform Act with respect to, among other items: projections and estimates of
 earnings, revenues, cost-savings, expenses, or other financial items;
 statements of management's plans, strategies and objectives for future
 operation, and management's expectations as to future performance and
 operations and the time by which objectives will be achieved; statements
 concerning proposed new products and services; and statements regarding
 future economic, industry or market conditions or performance.
 Forward-looking statements are typically identified by words or phrases
 such as "believe," "expect," "anticipate," "project," "estimate" and
 similar expressions. Forward-looking statements speak only as of the date
 they are made, and 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.
     Forward-looking statements are subject to a number of risks and
 uncertainties, and actual performance or results could differ materially
 from that anticipated by these forward-looking statements. Factors that may
 cause actual results to differ materially from those contemplated by these
 forward- looking statements include, among others: (i) the company's
 success in implementing its financial and operational initiatives, (ii)
 changes in domestic or international economic or business conditions,
 including those affecting the rail industry (such as the impact of industry
 competition, conditions, performance and consolidation); (iii) legislative
 or regulatory changes; (iv) the inherent business risks associated with
 safety and security; and (v) the outcome of claims and litigation involving
 or affecting the company.
     Other important assumptions and factors that could cause actual results
 to differ materially from those in the forward-looking statements are
 specified in the company's SEC reports, accessible on the SEC's website at
 www.sec.gov and the company's website at www.csx.com.
     Analysts & Investors
     David Baggs
     CSX Investor Relations
     Garrick Francis
     CSX Corporate Communications
     Joele Frank / Andrew Siegel
     Joele Frank, Wilkinson Brimmer Katcher

SOURCE CSX Corporation