Wednesday, March 02, 2016

NS: Three’s a crowd, two makes for a better company

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NS: Three’s a crowd, two makes for a better company

Norfolk Southern’s 22-state eastern U.S. network consists of 10 operating divisions spread across three larger operating regions—Eastern, Western, and Northern. Effective March 15, 2016, the three regions will transform into two, Northern and Southern. This is one strategy that NS is employing in an attempt to end the increasingly uncivil war in which it’s engaged with Canadian Pacific and its activist shareholder, Bill Ackman, and their efforts to force a merger.

Meanwhile, CP reiterated its threat to undertake legal action in response to what it claims are “recent actions by a number of major U.S. railroads [that] have stated publicly they are working collectively to block … a combination with Norfolk Southern.” And it also filed a petition with the STB seeking an expedited declaratory order for its proposed voting trust.

Under NS’s revised structure, the Northern Region will include the Harrisburg, Pittsburgh, Dearborn, Lake, and Illinois divisions. Greg Comstock, a 41-year veteran of NS operations, will be the region’s general manager. The region’s chief engineers will be Eddie Otey, Maintenance of Way and Structures, and Mick Ireton, Communications and Signals. The Southern Region will include the Piedmont, Alabama, Georgia, Central, and Pocahontas divisions. Todd Reynolds, a 22-year NS veteran, will be the region’s general manager. The region’s chief engineers will be Lucious Bobbitt, Maintenance of Way and Structures, and Randall Smith, Communications and Signals. Each of the two consolidated regions will support approximately 1,000 daily crew starts for long-haul train operations.

On Feb. 1, NS streamlined division operations by combining the former Virginia and Pocahontas divisions into a larger Pocahontas Division. “This followed other key strategic initiatives including the reduction from three corporate office locations to two, restructuring of the Triple Crown Services subsidiary, integration of the D&H South Line to increase options for shippers, and idling of certain parts of the West Virginia Secondary line,” NS said.

“The decision to further streamline railroad operations is part of the company’s ongoing execution of its five-year strategic plan, announced in December 2015, to enhance operating efficiencies, reduce costs, drive profitability, and accelerate growth,” said Executive Vice president and Chief Operating Officer Mike Wheeler. “As previously announced, NS is targeting annual expense savings of $650 million by 2020. We are committed to aggressively controlling costs while delivering the high levels of superior service that our customers value. Consolidating our operating regions will generate productivity savings, not only through right-sizing, but also by leveraging advancements in train dispatching technologies that support more fluid and efficient movement of freight across the network. As we continue to execute on our five-year strategic plan, we are confident that these steps will make Norfolk Southern a faster, lower-cost, and more profitable railroad.”

In the ongoing saga of CP’s attempt to acquire NS, CP announced once again that it is “considering all of its legal options in response to recent actions by a number of major U.S. railroads [that] have stated publicly they are working collectively to block CP’s efforts to pursue a pro-customer, competition-enhancing combination with Norfolk Southern Corp. It is unfortunate that CP must consider the use of litigation to ensure a level playing field and protect its rights, but the company has concluded that the actions of those competitors should not be allowed to block the creation of a railroad that offers unparalleled customer service and competitive rates that will support the success of the shippers, the industries it serves and the broader economy.”

But as Railway Age Contributing Editor Frank N. Wilner points out in his blog, “CP-NS: Government advocacy is protected speech,” CP’s threatened litigation has little or no basis: A 1961 U.S. Supreme Court decision (Eastern Railroad Presidents’ Conference v. Noerr Motor Freight, 365 U.S. 127), “established that bona fide joint activities of competitors to influence public officials do not violate antitrust laws, and that the Sherman Act was not intended to embrace political action, the right of free association, or the right to petition government for redress of grievances. This decision was expanded in a second Supreme Court case in 1965 (United Mine Workers v. Pennington, 381 U.S. 657) to embrace bona fide joint activity aimed at public officials and intended to eliminate competition. Ruled the Court once again: ‘Joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition.’ These judicial edicts have come to be known as the Noerr-Pennington doctrine. CP says the Noerr-Pennington doctrine does not apply to this situation. The Supreme Court did subsequently hold in 1972 that antitrust liability may attach, but only if a group’s activities prove to be a sham whose intent is to bar competitors from meaningful access to administrative agencies (California Motor Transport v. Trucking Unlimited, 404 U.S. 508).”

If in fact other railroads, as CP states, are working collectively to block a merger, their activities have not prevented CP from “gaining meaningful access to administrative agencies.” CP on March 2 filed with the Surface Transportation Board a petition seeking an expedited declaratory order “confirming the viability of the voting trust structure that CP has suggested as part of its proposed merger with Norfolk Southern.” A PDF of the petition can be downloaded from the link below.

Yet even that may go nowhere, as Wilner points out: “There is no time limit on the STB having to rule on the request for a declaratory order or provide one. While there is a requirement for public comment and replies to actual merger applications, there is no such requirement for a request seeking a declaratory order.” There are other factors in play, as Wilner details in his commentary on the declaratory order:

“The thinking from outside the STB is that the STB likely will respond with the general principles that have been stated in STB letters to members of Congress that are posted on the STB website. If the STB does not provide a definitive answer as to whether the voting trust is independent and can be imposed, should CP manage to convince NS stockholders to tender their shares, then CP is back where it started before seeking the declaratory order.

“What CP must overcome are allegations that the voting trust it envisions is a sham to put CP in control of NS pending a merger application and decision, which is contrary to the purpose of an independent voting trust. How the CP request is worded and how the STB views it are, of course, all that matter.

“If the STB rules against the voting trust framework as proposed by CP, there is not much CP can do, as it is most rare that a federal court overturns an expert regulatory agency decision—especially where, as in this case, the STB has discretion in the matter rather than a clear mandate in the statute. Numerous Supreme Court decisions have solidified the sanctity of expert regulatory agency decisions, which generally can be overturned only for arbitrary and capricious intent on the part of the regulators.

“With regard to the timing of an STB decision on a voting trust declaratory order, it can be expected that U.S.-based railroads will wish to have a say re: the downstream effects; and certainly shippers and other stakeholders (DOJ, DOT, DOA) will wish to have a say. So, the process of considering CP’s request for a declaratory could morph into two rounds of comment and analysis and even an oral argument. That becomes time-consuming.

“If the Board chooses to entertain the request rather than deny it outright, there is the matter of who votes and when. Republican Begeman is said to wish to return to the Senate, and she currently is in her holdover year. She could depart at any time. With two new seats created by S. 808, and a strong likelihood that nominations and confirmations will not occur until at least mid-2017, there could be three empty seats on the board and just two board members eligible to vote until then. Do they choose to slow things down as there is no time clock on their decisionmaking here? Would only two choose to vote given that there would be three empty seats? Congress, which controls the STB budget, surely has not telegraphed any interest in this merger and most likely wouldn’t complain were there to be no movement on the petition.

“And if the STB waits for the three new board members, expect all 4 major U.S.-based railroads (and maybe even Kansas City Southern) to be lobbying with all their PACs, political IOUs and abilities to influence nominations of individuals they are confident will oppose a CP-NS combination—and, by extension, approval of a voting trust. And there likely will not be any congressional opposition to such a result.”

Further, says Wilner, “STB rules permit replies to petitions for declaratory order within 20 days, unless the STB sets another date. A party can ask for more time, but that requires asking the petitioner (CP in this case) to consent to an extension (which I doubt CP would agree to). However, the STB can, on its own, order an extension of time beyond 20 days. How much beyond is conjecture. If no extension is granted, replies to the CP petition would be due March 22 (20 days from March 2). Thus the STB could, in theory, rule by May 6 as requested by CP—agreeing to a voting trust or denying a voting trust. Another option for the STB is to decline to institute a declaratory proceeding, which would require an explanation by the STB as to why it declined. The STB’s discretion is broad (click HERE for a related article), meaning judicial review of whatever it does is limited and most unlikely.

“Another option for the STB is to decline to institute a proceeding, but provide comments such as, for example, that the law is clear and no declaratory order is needed; or that the law does not permit what CP proposes. The ICC and the STB have never approved such a voting trust arrangement whereby the acquiring railroad is placed in trust (as opposed to the railroad to be acquired) and the CEO of the acquiring railroad departs to become CEO of the railroad to be acquired. Expect NS attorneys to call this a contrivance intended to circumvent the statute. CP may cite the CN-IC example, but it is not the same, as Hunter Harrison left IC to go to CN, and CN was the acquiring railroad.”

 

 

William C. Vantuono, Editor-in-Chief

With Railway Age since 1992, William C. Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age’s leadership position in industry affairs with the conferences he conducts, among them Next-Generation Train Control, Light Rail, and Rail Insights. He is the author or co-author or editor of several books, among them All About Railroading; John Armstrong’s The Railroad: What It Is, What It Does; Railway Age’s Comprehensive Railroad Dictionary; and Planning, Engineering, and Operating Light Rail, With Applications in New Jersey.

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