Passenger Trains > Amtrak management = worthless Amtrak stock

http://news.enquirer.com/apps/pbcs.dll/article?AID=/20080523/BIZ01/305230076
"Last Updated: 10:58 pm | Friday, May 23, 2008
AFG sues Amtrak
BY JAMES PILCHER | JPILCHER@ENQUIRER.COM
American Financial Group has sued national passenger rail company Amtrak, seeking compensation for its 5.2 million shares in the financially troubled railroad.
The suit, filed in U.S. District Court in Cincinnati Monday, states that Amtrak broke off negotiations over a sale price in January and that AFG was given no choice but to sue.
Congress, which has heavily subsidized the nation’s only passenger rail service for decades, ordered Amtrak in 1997 to buy back all common shares by 2002, but did not say what should be done if a deal could not be reached.
The last known offer was for three cents per share in 2000, which AFG and others turned down.
The suit seeks appropriate damages, or $52 million plus interest, which could run into hundreds of millions of dollars.
“We are taking an action to maximize an asset to our company and to protect our shareholders,” said AFG vice president of investor relations Anne Watson, declining further comment.
Amtrak spokesman Marc Magliari declined comment today, saying the company had not had a chance to review the lawsuit.
The downtown-based insurance company came to own the shares as part of its takeover of then-transportation firm Penn Central Transportation Co. – that company went bankrupt with AFG chairman Carl Lindner as a major Penn Central bond holder.
Penn Central held 5.2 million shares in what eventually became Amtrak, and Penn Central eventually became AFG subsidiary American Premiere Underwriters, shedding all its industrial and transportation businesses.
The suit says that Amtrak is in essence now a governmental agency and that Amtrak management has rendered the stock worthless through bad decision making. It claims the situation is a violation of the Fifth Amendment, which protects against unfair taking of property by the government."

Amtrak is for all intents and purposes a government agency, and the stock has no value.

The stock is about as worthless as Imperial Chinese or Russian Railway Bonds. I doubt that they are as ornate, so as to have a Scripophily market. There were holders hoping that Gorbachev or Yelstin would offer redemption.

A great example of downstream consequences resulting from a political deal that categorized Amtrak as something that it clearly was not. I would venture to say that everyone involved in forming Amtrak in 1970-71 - the railroads, ICC, Congress, etc. - understood that the passenger business was not a viable one, and that railroad stock ownership in NRPC was in effect a fee paid to the government to take the passenger problem off the hands of the railroads. There may have been a good reason for it at the time, but by not calling this fee exactly what it was we have the corporate successors to a bankrupt enterprise, several generations removed, now claiming that entering Amtrak was an investment rather than simply a way to stop the financial bleeding.

Dave

Lurch_in_ABQ Wrote:
-------------------------------------------------------
> American Financial Group has sued national
> passenger rail company Amtrak, seeking
> compensation for its 5.2 million shares in the
> financially troubled railroad.

Thank you for that post, it is like Saturday morning cartoons, sortof.

The Cincinnati Enquirer finally put me on a do not call list for asking me to subscribe to their stupid newspaper. The Cincinnati Enquirer is about as anti-Amtrak, anti-rail, anti-public transit as can be. My favorite line from a Cincinnati Enquire article was several years ago when an NS local hit a vehicle at a grade crossing in Newtown. "The train travels the area regularly." The car had went around the gates but the article clearly blamed the railroad and did not seem to acknowledge that the dummy that got struck should feel lucky to be alive.

It is also unsurprising that Carl Linder is going to sue a Government Organisation and that tax money will again help ease his problem. At least we got the Cardinal to look forward to here in Cincinnati three times a week if we want to stay up all night.

DavidP Wrote:
-------------------------------------------------------
> A great example of downstream consequences
> resulting from a political deal that categorized
> Amtrak as something that it clearly was not. I
> would venture to say that everyone involved in
> forming Amtrak in 1970-71 - the railroads, ICC,
> Congress, etc. - understood that the passenger
> business was not a viable one, and that railroad
> stock ownership in NRPC was in effect a fee paid
> to the government to take the passenger problem
> off the hands of the railroads. There may have
> been a good reason for it at the time, but by not
> calling this fee exactly what it was we have the
> corporate successors to a bankrupt enterprise,
> several generations removed, now claiming that
> entering Amtrak was an investment rather than
> simply a way to stop the financial bleeding.
>
> Dave

Correct. The railroads were issued Amtrak common stock in exchange for the "entry fee" they paid in the form of cash and equipment. The stock issue was a "ruse" intended for legal, accounting and tax purposes and was never intended to represent long-term equity as an investment. The NRPC stock issue, corporate charter, board of directors, "for profit" objective, etc., were also political contrivances to make the Amtrak concept more palatable to the "free enterprise" cronies in the Republican Nixon Administration.

I would have taken the 3 cents a share deal. I guess they were hoping for the same good fortune ("bail out") that they got when they unloaded their equally-worthless PC stock.

Bob

Don't be so fast to dismiss this one!

Amtrak (technically, National Rail Passenger Corp) remains a private stock corporation, not a direct entity of the gov't. The fact that the gov't owns all the preferred stock of Amtrak -- entitling the gov't to control -- doesn't automatically nullify the rights of the common shareholders at law. AFG owns a majority of Amtrak's common stock, and BNSF owns most of the rest.

Along comes the Amtrak Reform and Accountability Act of 1997. What most people don't know is that the 1997 act required NRPC to redeem the shares of common stock at fair market value before the end of FY 2002. In 2000 the gov't made the common shareholders an offer, but the common shareholders rejected it because of the very low price. And that's where things have stood ever since.

NRPC argues that because of accumulated deficits and the rights of the preferred shareholder, the FMV of the common stock is zero. (This is different from NARP's argument, by the way.) But the counter-argument is that NRPC has $10 billion of assets on its balance sheet and the common shares do have a non-trivial fair market value, if appraised by a neutral party. One could also argue that the rights of the common shareholders have systematically been violated since 1971. The outcome will hinge on technical issues of law, but I suspect the real purpose of the litigation is to force the redemption that the 1997 act requires.

We had a similar situation in North Carolina where the state owned a majority of common stock of the North Carolina RR, which has title to the Charlotte-Greensboro-Raleigh-Morehead City line (leased to NS for operations). Eventually the state bought out the minority owners.

ctillnc Wrote:
-------------------------------------------------------
> NRPC argues that because of accumulated deficits
> and the rights of the preferred shareholder, the
> FMV of the common stock is zero. (This is
> different from NARP's argument, by the way.) But
> the counter-argument is that NRPC has $10 billion
> of assets on its balance sheet and the common
> shares do have a non-trivial fair market value, if
> appraised by a neutral party. One could also argue
> that the rights of the common shareholders have
> systematically been violated since 1971.

The stock is worthless. Amtrak is a superlative example of an insolvent enterprise. Amtrak's assets could be sold in a liquidation, but any proceeds would have to offset Amtrak's significant liabilities (preferred claims, labor, debt, shut-down costs, etc). The common shareholders would be left with zero.

I disagree with your comment that shareholders' rights have been systematically violated since 1971. What rights? Railroads had the option of not joining Amtrak and continuing huge passenger losses and capital outlays. Railroads also had the right of transferring their shares over the years at a fair price (in this case, a fair price is pennies a share). When you think that a worthless stock represents billions of dollars in avoided costs for continued operation of the 1970 level of passenger service, the initial Amtrak "entry fee" has to have a phenomenal return on investment.

The shares are symbolic, suitable for framing, wrapping birthday gifts, creative wallpaper, etc. None of the original owners ever had any illusions to the contrary.

Bob

I'm not taking sides... I'm just reporting what the litigation is. It's likely to play out this way: the judge grants a defendant motion to dismiss or grants summary judgment in favor of NRPC; or the judge won't, in which case the gov't will throw a few million at AFG to settle before it goes to trial.

Sure, we all know why NRPC was formed and what the context was. The devil is in the details. Some railroads were in a position to take advantage of the liberal tax credits that were included in the legislation that created NRPC. Those tax credits were the primary up-front financial incentive for the railroads to hand over their assets for no cash in return. It was not just about avoidance of future operating losses.

Some railroads, however, were not in a position to use tax credits -- either they were not profitable at the time, or they already had more tax loss carry-forwards than they could use. So the Nixon administration and Congress appeased them by granting common stock in NRPC. In other words, the concept that railroads would own common stock in NRPC was not the original plan; it was to fix a specific problem that some railroads had. Yes, those railroads did have an expectation that their common stock would eventually be monetized, and that's why they lobbied for the 1997 Act to include the redemption requirement. What would matter most at trial are events subsequent to May 1, 1971.

ctillnc Wrote:
-------------------------------------------------------

> Sure, we all know why NRPC was formed and what the
> context was. The devil is in the details. Some
> railroads were in a position to take advantage of
> the liberal tax credits that were included in the
> legislation that created NRPC. Those tax credits
> were the primary up-front financial incentive for
> the railroads to hand over their assets for no
> cash in return. It was not just about avoidance of
> future operating losses.

It WAS about avoiding current and future operating losses and capital outlays. What else was to be gained by entering into Amtrak (certainly not the tax advantages by themselves)? The non-cash assets that the railroads handed over were hardly worth more than scrap on the balance sheet. Amtrak even allowed certain railroads to include equipment the deal that had been stored for years.

Yes,
> those railroads did have an expectation that their
> common stock would eventually be monetized, and
> that's why they lobbied for the 1997 Act to
> include the redemption requirement. What would
> matter most at trial are events subsequent to May
> 1, 1971.

The railroads expected Amtrak to fail!!! And, most would have been happy to see Amtrak fail!!!

As I have said in several posts over the years, Amtrak was formed mainly as an attempt to relieve bankrupt Penn Central of massive passenger losses. The big business constituency of the Nixon administration was a thousand times more worried about the effect of a Penn Central collapse than about saving the passenger train.

I don't know why the 1997 Act contained the buy-back offer. I think it was attempt to clean up Amtrak's balance sheet. I doubt that the few railroads that own Amtrak stock would have lobbied for the measure specifically.

Bob

For the railroads that could go on as viable entities, the avoidance of future operating losses was part of the consideration. But not for PC, which was already bankrupt. Insiders knew that divestiture of all the PC railroad business to creatures of government was inevitable. Assets were useful in working out the PC bankruptcy. NRPC common was one such asset, given its book value (no mark-to-market in those days).

Did railroads expect NRPC to fail? Yes, some railroads didn't expect that Congress would keep throwing money into NRPC. They anticipated that NRPC common shares would be monetized in liquidation. Didn't happen, and meanwhile USRA/Conrail fixed the PC problem.

Cleaning up the NRPC balance sheet could have been accomplished many ways, the simplest of which is a pre-packaged Chapter 11 to cancel the common stock (still a possibility if AFG wins in court). The requirement in the 1997 Act for redemption at FMV was no accident.

Don't kid yourself -- as the second-largest NRPC shareholder, BNSF has an interest in how the lawsuit works out, but they're happy for AFG to bear the litigation expense. AFG didn't file the suit until NRPC broke off FMV negotiations earlier this year.

ctillnc Wrote:
>
> Don't kid yourself -- as the second-largest NRPC
> shareholder, BNSF has an interest in how the
> lawsuit works out, but they're happy for AFG to
> bear the litigation expense. AFG didn't file the
> suit until NRPC broke off FMV negotiations earlier
> this year.


It IS interesting to see how BNSF, as the other shareholder of NRPC, has a very impressive on-time record of running the latter's trains.......

Maybe we can figure out a way to have UP and CSX as shareholders as well?? :))

>Amtrak (technically, National Rail Passenger Corp) remains a private stock corporation, not a direct entity of the gov't.

According to the US Supreme Court: regardless of what Congress wrote in the enabling legislation the NRPC /is/ part of the Government because Congress supplies the money--appropriations--which are not loans, and the Executive branch appoints a majority of the Board of directors (something like 80-90% of them).

Amtrak is a Goverment corporation which follows closely along the lines of the First Bank of the United States (1791), the New Panama Canal Company of France (1902), War Finance Corporation (WWI), Reconstruction Finance Corporation (1932), Petroleum Reserves Corporation (WWII), Saint Lawrence Seaway Development Corporation (c1955). These are only a few examples, and the Government held a controlling interest in all of them (appointed the majority of the directors, provided funding [appropriations], etc.).

On the other hand, with Government corporations like Comsat, the Corporation for Public Broadcasting, and Conrail, the private sector participants hold the controlling interest, and these are thus not part of the Government.

All of the above analysis is fascinating. Thanks to all. I suppose Amtrak supporters could make the matter moot by tendering attractive offers for Amtrak stock, driving the FMV waaaaay up, making Amtrak solvent.

> According to the US Supreme Court: regardless of
> what Congress wrote in the enabling legislation
> the NRPC /is/ part of the Government

Sounds like the Lebron case, where the Supreme Court ruled that NRPC is governmental "for the purpose of individual rights guaranteed against the Government by the Constitution". Those extra words are important. The context of Lebron v. NRPC was a First Amendment right, and most people wouldn't interpret the Scalia opinion as broadly as you.

I still have an Imperial Russian Railway Bond never redeemed thanks to the Bolshevik revolution. It is quite attractive even though I can't read anything on it! I would be happy to sell it if anyone is interested - just not for Amtrak stock!

Tim

I have some Kolchak rubles in the basement.

Cadillac Wrote:
-------------------------------------------------------
> For the railroads that could go on as viable
> entities, the avoidance of future operating losses
> was part of the consideration. But not for PC,
> which was already bankrupt. Insiders knew that
> divestiture of all the PC railroad business to
> creatures of government was inevitable. Assets
> were useful in working out the PC bankruptcy. NRPC
> common was one such asset, given its book value
> (no mark-to-market in those days).

In 1970-1971, PC was in reorganization. Under such a plan, any measure to relieve PC of passenger train losses was essential to the survival of the company. The fact that PC had "symbolic" Amtrak stock holdings were of absolutely no value in the PC reorganization. You seem to think that a company's net asset value equates to shareholder equity. Before 1976, Amtraks assets consisted mainly of a fleet of worn out intercity passenger equipment which was worth little than scrap.

At the time of the first PC bankruptcy, the prevailing notion was that the company could survive if relieved of some burdens, i.e, passenger and commuter losses, taxation, full-crew laws, restrictions on reducing redundant trackage, etc. Of course, PC got very little such relief and it took the formation of Conrail five years later for most of the needed relief measures to be enacted. It was only at the time of the second PC bankruptcy as well as the insolvency of several other northeastern railroads that it became clear that a capital infusion from the federal government would be needed.

> Did railroads expect NRPC to fail? Yes, some
> railroads didn't expect that Congress would keep
> throwing money into NRPC. They anticipated that
> NRPC common shares would be monetized in
> liquidation.

As I explained in an earlier post, any monetary distribution to Amtrak common stockholders in a liquidation would be the net of proceeds from sale of assets, less shutdown costs, payment of debt, claims, expenses, labor protection, preferred class payouts, etc. With this scenario, the three cents a share looks pretty good.

Bob

I think you'll find that what mattered in administration of the first PC bankruptcy was the basis of valuation for NRPC common shares on PC's books -- not NRPC NAV or shareholder equity, which are NRPC financials that didn't automatically transfer onto PC books. (Basis and valuation of investments are a typical issue at bankruptcy; watch how the current CMO crisis plays out.) The asset was almost certainly carried on PC books at $52 million, however ridiculous that may seem in light of your perspective on liquidation. PC creditors, who wanted easily monetizable assets, wouldn't take the NRPC shares, so they were left in the restructured PC shell... lipstick on the pig. Voila, a second bankruptcy when the assets were finally impaired and eventually flowed through to AFG.

> the three cents a share looks pretty good.

I tend to agree, but apparently AFG sees it differently or they wouldn't be spending money on the litigation... which will cost six figures, I'm sure. By the way, AFG's predecessor APU sued the Chicago Union Station Company (an Amtrak subsidiary) in the 1990s over advances made to CUSCO by Penn Central. AFG won and was awarded cash. They've been through this before.

>Sounds like the Lebron case, where the Supreme Court ruled that NRPC is governmental "for the purpose of individual rights guaranteed against the Government by the Constitution". Those extra words are important. The context of Lebron v. NRPC was a First Amendment right, and most people wouldn't interpret the Scalia opinion as broadly as you.

This is the entire sentence: "Facing the question of Amtrak's status for the first time, we conclude that it is an agency or instrumentality of the United States for the purpose of individual rights guaranteed against the Government by the Constitution."

Do you see any specificality regarding just the first amendement here? I don't. You are correct about the context of the case, but the Court deliberately reamined silent on the specfic context issue and remanded the decision on it back to the lower court. Essentially, the Court said "lower court, you were wrong about the underlying Consitutionality principle, think again."

This is typically the way the system has always functioned because by deciding the underlying issue, that of Amtrak's Constitutional obligations in general, it forestalls the possibility of the court system getting clogged with a flood of what would be similar cases: a separate suit aganist Amtrak for each and every rite enshrined in the Consitution, and how many of those are there? Besides to uphold one right but not another for the same situation would fly in the face of legal precedence, which for us is also influenced by Britsh and Canadian legal precedent, in some instances going back several hundred years, even before the Colonies were founded..