(The following story by John D. Boyd appeared on the Traffic World website on May 12.)
A tenacious group of dissident CSX investors launched a new assault, CSX’s home state of Florida said no to a commuter line deal over railroad liability risks, and two CSX trains ran off the tracks in Pennsylvania.
Yet that was only the latest adverse news for the carrier, coming a week after federal safety regulators said CSX in recent years had created a “chilling” atmosphere that intimidated workers for reporting on-the-job injuries.
The strongest long-term challenge, though, comes from dissident hedge funds. The Children’s Investment Fund and 3G Capital Partners said in a lengthy critique of CSX’s operating performance that the railroad’s managers could be doing a lot better.
The “white paper” arguments are finding some support among Wall Street analysts who advise other shareholders.
The thrust of the paper – filed April 30 with the Securities and Exchange Commission – is that CSX performs in the middle or bottom range of major North American carriers in most operating categories. Except one: The funds said CSX compensates management and board members more than other railroads.
TCI and 3G are trying to elect a minority slate of five directors to the CSX board at a June 25 annual meeting. They have also targeted five sitting directors for removal, including three of four on the board’s compensation committee.
The dissidents also said, in a letter to shareholders, “The directors we seek to replace have an average board tenure of 13 years, no railroad operating experience” and little of the company’s total stock. In contrast, they want to elect “new directors with substantial industry experience and a significant investment in CSX.”
That shot came soon after CSX reported strong first-quarter earnings. The company responded to the funds last week with its own detailed investor presentation. In it, CSX cites its leading rank in financial measures and in operating improvements.
Michael Ward, CSX chairman, president and CEO, told shareholders, “You will decide whether CSX continues on this proven path of shareholder value creation or is diverted by the potentially damaging agenda” of the dissidents.
The hedge funds, however, say CSX gains have come mainly from industrywide price hikes “and shareholder pressure for management to change its conduct.”
In a separate statement, Ward also said “the block of TCI group nominees, if elected, may seek to implement an agenda that would damage CSX’s future success and returns to shareholders.”
Yet John Larkin, analyst with Stifel Nicolaus, told clients after studying both sides’ presentations, “We believe the key for CSX to achieve meaningful upside potential to our existing (earnings per share) forecast will be to find a way to implement the type of dramatic operational improvement TCI envisions for the company.”
He also said “management’s current guidance does not give us much confidence that it will make significant headway in this area over the 2008-2010 forecast period.”
In the Pennsylvania mishap involving two mixed-freight trains, a westbound train reportedly came off its track near West Newton – about 24 miles southeast of Pittsburgh – and 10 freight cars derailed. Soon after, an eastbound train on adjacent track came along and hit one of those cars, and another 12 derailed from the second train.
No injuries were reported and a company spokesman said the trains did not carry any high-risk toxic materials.
In Florida, CSX saw a deal coming off the tracks. The state planned to buy 61 miles of mainline CSX track in central Florida for $150 million, and pay $300 million more for improvements on other track where CSX would shift much of its freight.
However, CSX would still run freight trains overnight on the commuter track and wanted “no-fault” liability protection from any accidents on the commuter line, such as it already has in South Florida and with some other commuter operations. The state Senate rejected that liability protection, and now both sides are searching for a way to revive the deal.
Meanwhile, CSX said it plans a $700 million National Gateway intermodal corridor between Atlantic Ocean ports and the Midwest, to be mostly built with federal and state funds.
CSX said it has committed $300 million to build or expand intermodal terminals, but is looking for $400 million to upgrade its track route to double-stack container clearances under public underpasses, which now often permit only single-stack trains.
If CSX can sell the concept and line up the money, the project would improve three of CSX’s existing rail corridors in North Carolina, Virginia, West Virginia, Maryland, Pennsylvania and Ohio.