[Federal Register Volume 68, Number 136 (Wednesday, July 16, 2003)]
[Notices]
[Pages 42159-42166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17841]
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DEPARTMENT OF TRANSPORTATION
Surface Transportation Board
[STB Finance Docket No. 33388 (Sub-No. 94)]
CSX Corporation and CSX Transportation, Inc., Norfolk Southern
Corporation and Norfolk Southern Railway Company--Control and Operating
Leases/Agreements--Conrail Inc. and Consolidated Rail Corporation
(Petition for Supplemental Order)
AGENCY: Surface Transportation Board, DOT.
ACTION: Decision No. 1 in STB Finance Docket No. 33388 (Sub-No. 94);
Notice of Filing of Petition for Supplemental Order; Issuance of
Procedural Schedule.
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SUMMARY: On June 4, 2003, CSX Corporation (CSXC), CSX
[[Page 42160]]
Transportation, Inc. (CSXT), Norfolk Southern Corporation (NSC),
Norfolk Southern Railway Company (NSR), Conrail, Inc. (CRR), and
Consolidated Rail Corporation (CRC) \1\ filed with the Surface
Transportation Board (the Board) a petition for a supplemental order
authorizing the consolidation of New York Central Lines LLC (NYC) with
CSX and the consolidation of Pennsylvania Lines LLC (PRR) with NS, for
the stated purpose of effectuating the acquisition of full ownership
and control of the assets and business of NYC by CSX and of PRR by
NS.\2\ The transaction that petitioners have proposed will extend the
existing rights of CSX and NS to control and operate NYC and PRR,
respectively, to include full legal ownership of the properties and
businesses of NYC and PRR, respectively. The transaction that
petitioners have proposed also involves a restructuring of certain
Conrail debt obligations.
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\1\ CSXC and CSXT, and all other entities wholly owned (directly
or indirectly) by CSXC, are referred to collectively as CSX. NSC and
NSR, and all other entities wholly owned (directly or indirectly) by
NSC, are referred to collectively as NS. CRR and CRC, and all other
entities wholly owned (directly or indirectly) by CRR, are referred
to collectively as Conrail. CSX, NS, and Conrail are referred to
collectively as petitioners.
\2\ CRC currently owns 100% of the membership interests in NYC
and PRR.
DATES: The effective date of this decision is July 9, 2003. Petitioners
have until July 17, 2003, to clarify exactly which category of debt
obligations will be affected by the proposed debt restructuring.
Petitioners have until July 29, 2003, to serve copies of this decision,
and to certify in writing that such service has been accomplished, on
all parties of record in STB Finance Docket No. 33388 and on all known
holders of Conrail's relevant debt and equipment lease obligations (as
those terms are used in this decision). Any person (including, but not
limited to, persons served with copies of this decision) who wishes to
file comments respecting the petition must file such comments by August
28, 2003. Petitioners will have until September 25, 2003, to reply to
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any such comments.
ADDRESSES: All pleadings should refer to STB Finance Docket No. 33388
(Sub-No. 94). Comments (an original and 10 copies) should be sent to:
Surface Transportation Board, 1925 K Street, NW., Washington, DC 20423-
0001. Comments should also be served (one copy each) on: (1) G. Paul
Moates, Sidley Austin Brown & Wood LLP, 1501 K Street, NW., Washington,
DC 20005; (2) Peter J. Shudtz, CSX Corporation, Suite 560, 1331
Pennsylvania Ave., NW., Washington, DC 20004; (3) Henry D. Light,
Norfolk Southern Corporation, Three Commercial Place, Norfolk, VA
23510-9241; and (4) Jonathan M. Broder, Consolidated Rail Corporation,
Two Commerce Square, 2001 Market Street, Philadelphia, PA 19103.
Replies (an original and 10 copies) should be sent to: Surface
Transportation Board, 1925 K Street, NW., Washington, DC 20423-0001.
Replies should also be served (one copy each) on each commenting
party.\3\
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\3\ For a document to be considered a formal filing, the Board
must receive an original and 10 copies of the document, along with a
certification that it has been properly served. Documents
transmitted by facsimile (FAX) will not be considered formal filings
and are not encouraged because they will result in unnecessarily
burdensome, duplicative processing. In addition, each formal filing
must be accompanied by an electronic submission per the Board's
requirements as discussed in this decision.
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In addition to submitting an original and 10 copies of all
documents filed with the Board, petitioners and any commenters must
also submit, on 3.5-inch IBM-compatible floppy diskettes (disks) or
compact discs (CDs), electronic copies of all textual materials
included in their pleadings. Such textual materials must be in, or
compatible with, WordPerfect 10.0.
FOR FURTHER INFORMATION CONTACT: Julia M. Farr, (202) 565-1655.
[Assistance for the hearing impaired is available through the Federal
Information Relay Service (FIRS) at 1-800-877-8339.]
SUPPLEMENTARY INFORMATION: In a decision served July 23, 1998,\4\ the
Board approved, subject to various conditions, a CSX/NS/Conrail
``control'' application that had been filed with the Board on June 23,
1997, by CSX, NS, and Conrail. The application that CSX, NS, and
Conrail filed, and that the Board (with certain exceptions) approved,
contemplated the acquisition by CSX and NS of control of Conrail, and
the division of the assets of Conrail by and between CSX and NS, to the
extent and in the manner provided for in a ``Transaction Agreement''
that had been entered into by CSX, NS, and Conrail on June 10, 1997.
Pursuant to Decision No. 89, acquisition of control of Conrail was
effected by CSX and NS on August 22, 1998 (the Control Date), and the
division of the assets of Conrail by and between CSX and NS was
effected on June 1, 1999 (the Split Date). The transaction that the
Board approved in Decision No. 89 is referred to as the Conrail
Transaction.
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\4\ CSX Corp. et al.--Control--Conrail Inc. et al., 3 S.T.B. 196
(1998) (Decision No. 89).
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Since the Control Date, CRC has been controlled by CSX and NS
through a chain of holding companies. CRC has been and is a direct
wholly owned subsidiary of CRR; CRR has been and is a direct wholly
owned subsidiary of Green Acquisition Corp. (Green Acquisition); Green
Acquisition has been and is a direct wholly owned subsidiary of CRR
Holdings LLC (CRR Holdings); and CRR Holdings has been jointly owned by
CSXC and NSC (CSXC holds a 50% voting interest and a 42% equity
interest in CRR Holdings; NSC holds a 50% voting interest and a 58%
equity interest in CRR Holdings). In accordance with the Transaction
Agreement, each of CRR and CRC has been managed (since the Control
Date) by a board of directors consisting of six directors divided into
two classes, each class having three directors. On each board, CSXC has
had the right to designate three directors and NSC has likewise had the
right to designate three directors; and actions that require the
approval of either board have required approval both by a majority of
the directors on that board designated by CSX and by a majority of the
directors on that board designated by NS. See Decision No. 89, 3 S.T.B.
at 220.
On the Split Date, CRC's rail operating properties were divided
into two categories: Allocated Assets (which were allocated either to
NYC for operation by CSX or to PRR for operation by NS) and Retained
Assets (which were retained by CRC for operation for the benefit of
both CSX and NS). The properties in the Allocated Assets category were
further divided into two additional categories: The ``NYC Allocated
Assets'' (i.e., such of the Allocated Assets as were allocated to NYC
for operation by CSX) and the ``PRR Allocated Assets'' (i.e., such of
the Allocated Assets as were allocated to PRR for operation by NS). The
``NYC Allocated Assets'' consist principally of former New York Central
rail lines, including lines running from New York/New Jersey through
Albany and Buffalo to St. Louis, and from Albany to Boston, and certain
owned and unencumbered rolling stock of Conrail. The ``PRR Allocated
Assets'' consist principally of former Pennsylvania Railroad lines,
including lines running from New York/New Jersey and Philadelphia
through Pittsburgh and Cleveland to Chicago, and certain owned and
unencumbered rolling stock of Conrail. The Retained Assets consist
primarily of the three Shared Assets Areas (SAAs): the North Jersey
SAA; the South Jersey/Philadelphia SAA; and the Detroit SAA.\5\
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\5\ CRC also retained certain equipment encumbered by financing
arrangements. The operation and control of this equipment were
allocated to CSXT or NSR pursuant to equipment subleases and other
operating agreements.
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[[Page 42161]]
Although the Conrail Transaction contemplated that the vast
majority of Conrail's assets (i.e., all assets included in the
Allocated Assets category) would become part either of the CSX rail
system or of the NS rail system, these assets were not transferred
outright to CSX and NS. Rather, these assets were transferred to NYC
and PRR for operation by CSX and NS, respectively; and each of NYC and
PRR was a wholly owned subsidiary of CRC. On the Split Date: (1) CRC
transferred to NYC ownership of the CRC railroad assets designated for
CSX's exclusive use and operation (i.e., the NYC Allocated Assets), and
CRC transferred to PRR ownership of the CRC railroad assets designated
for NS's exclusive use and operation (i.e., the PRR Allocated Assets);
and (2) NYC entered into an Allocated Assets Operating Agreement with
CSXT, granting CSXT the exclusive right to operate and use the assets
of NYC, and PRR entered into an Allocated Assets Operating Agreement
with NSR, granting NSR the exclusive right to operate and use the
assets of PRR. Ownership of the NYC and PRR Allocated Assets remains
within the corporate structure of Conrail, but the operation and
general day-to-day management of these assets is now conducted
separately by CSXT and NSR, respectively.
Under the terms of the Transaction Agreement and the LLC agreements
establishing NYC and PRR, CSX has the right to manage NYC and to
designate its officers and directors, and NS has the right to manage
PRR and to designate its officers and directors. Certain major
decisions of NYC and PRR, however, have been reserved to CRC, which can
act in that respect only with the indirect approval of both CSXC and
NSC pursuant to their respective 50% voting interests in CRC's ultimate
parent (CRR Holdings).
The NYC and PRR Allocated Assets Operating Agreements have fixed
terms of 25 years (with options for two subsequent renewal periods),
and require return of the subject rail assets by CSXT to NYC and by NSR
to PRR upon termination or expiration of the agreements. The agreements
also provide that an Operating Fee (analogous to rent) is to be paid by
each operating railroad (CSXT and NSR) to its respective counterparty
(NYC and PRR) quarterly. The agreements further provide that, every 6
years after the Split Date, the Operating Fee is to be revalued and
reset to the then-current ``Fair Market Rental Value,'' defined as the
rent that would be negotiated at arm's length between parties under no
compulsion to lease.
The Proposed Transaction
Petitioners now propose to transfer ownership of NYC and PRR,
through a series of intermediate steps, from CRC to CSXT and NSR,
respectively. Petitioners indicate that they will carry out the
proposed transaction pursuant to a ``Distribution Agreement'' (the form
of which is attached to the petition as Exhibit 4). Subject to the
receipt of an appropriate ruling from the Internal Revenue Service
(IRS) that the proposed transaction will qualify for tax-free
treatment, petitioners anticipate completing the proposed transaction
in a series of five consecutive steps, occurring at approximately the
same point in time.\6\
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\6\ The form of the Distribution Agreement attached to the
petition as Exhibit 4 provides for, among other things, revisions
(in the nature of conforming changes) to the Transaction Agreement,
and termination of the NYC and PRR Allocated Assets Operating
Agreements. Petitioners advise that certain of the exhibits and
schedules to the Distribution Agreement, including those identifying
Conrail's existing debt obligations, will not be completed until
shortly before the consummation of the proposed transaction, and
therefore have been omitted from the form Distribution Agreement
that is attached to the petition as Exhibit 4.
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First Step: CSXT will create a new wholly owned subsidiary
corporation (referred to as NYC Newco), and NSR will create a new
wholly owned subsidiary corporation (referred to as PRR Newco).\7\
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\7\ Petitioners advise that these new subsidiary corporations
will be created before the consummation of the proposed transaction.
Petitioners add that the names ``NYC Newco'' and ``PRR Newco'' are
illustrative; the newly created corporations may have different
names.
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Second Step: CRC will transfer 100% of its membership interests in
NYC to NYC Newco, which will issue to CRC common stock sufficient to
provide CRC 99.9% of the then-outstanding common stock of NYC Newco;
and CRC will transfer 100% of its membership interests in PRR to PRR
Newco, which will issue to CRC common stock sufficient to provide CRC
99.9% of the then-outstanding common stock of PRR Newco. As a result of
this step in the proposed transaction, CRC will own 99.9% of the common
stock of and will control NYC Newco (which will wholly own and control
NYC), and CRC will also own 99.9% of the common stock of and will
control PRR Newco (which will wholly own and control PRR). As a further
result of this step in the proposed transaction, CSXT will own 0.1% of
the common stock of NYC Newco, and NSR will own 0.1% of the common
stock of PRR Newco.
Third Step: The 99.9% of the stock of NYC Newco owned by CRC will
be transferred successively up the Conrail corporate family ladder from
CRC to CRR, from CRR to Green Acquisition, and from Green Acquisition
to CRR Holdings. CRR Holdings will transfer the NYC Newco stock to CSX
Rail Holding Corporation (CSX Rail) and CSX Northeast Holding
Corporation (CSX Northeast), each of which is a wholly owned subsidiary
of CSXC. CSX Rail and CSX Northeast will transfer the NYC Newco stock
to CSXC; and CSXC will transfer the NYC Newco stock to CSXT. Similarly,
the 99.9% of the stock of PRR Newco owned by CRC will be transferred
successively up the Conrail corporate family ladder from CRC to CRR,
from CRR to Green Acquisition, and from Green Acquisition to CRR
Holdings; CRR Holdings will transfer the PRR Newco stock to NSC; and
NSC will transfer the PRR Newco stock to NSR.\8\ As a result of this
step in the proposed transaction, CSXT will wholly own and control NYC
Newco (which will wholly own and control NYC) and NSR will wholly own
and control PRR Newco (which will wholly own and control PRR).\9\
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\8\ There appear to be, on the NS/PRR side of the third step in
the proposed transaction, no intermediate entities comparable to CSX
Rail and CSX Northeast.
\9\ Shortly before closing, CSX and NS will obtain an
independent valuation of NYC and PRR by an investment banking firm.
If the respective fair market values of NYC and PRR are not equal to
42%/58% of their combined value at the time of closing, CSX and NS
will seek to agree on steps to resolve this disparity. Unlike the
periodic revaluation required under the current corporate structure,
this valuation will be conducted only once, and any resulting
adjustment (referred to as the ``True Up'') will be consummated on
the closing date of the proposed transaction.
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Fourth Step: NYC will be merged with and into NYC Newco, with NYC
Newco as the surviving company; and PRR will be merged with and into
PRR Newco, with PRR Newco as the surviving company. As a result of this
step in the proposed transaction, the business, assets, and operations
of NYC will reside in a wholly owned subsidiary of CSXT (NYC Newco),
and the business, assets, and operations of PRR will reside in a wholly
owned subsidiary of NSR (PRR Newco).
Fifth Step: NYC Newco will be merged with and into CSXT, and PRR
Newco will be merged with and into NSR, thereby completing the
consolidation of NYC's business, assets, and operations within CSXT and
the consolidation of PRR's business, assets, and operations within NSR.
As a result of this step in the proposed transaction, the assets of NYC
and PRR will be
[[Page 42162]]
owned directly by CSXT and NSR, respectively.
Effects on CSX, NS, and Conrail
Petitioners contend that the proposed transaction, by effectuating
a permanent legal division of the Allocated Assets between CSX and NS,
will end certain undesirable features of the current corporate
structure. Petitioners explain: That the present structure of the
Conrail Transaction requires quarterly payments of an Operating Fee,
analogous to rent, by CSXT to NYC and by NSR to PRR; that, because NYC
and PRR are owned entirely by CRC, which in turn is owned by CSX and NS
on a fixed 42%-58% basis, CSX and NS share (on a fixed percentage
basis) the rental payments received by NYC and PRR; that the rents
payable to NYC and PRR are to be redetermined every 6 years, the first
redetermination to be made in respect of the 6-year period commencing
June 1, 2005, on the basis of the then respective Fair Market Rental
Values involved (which values are to be determined as if the lessor and
the lessee were under no compulsion to rent to or from the other);
that, although successful management of the NYC and/or PRR Allocated
Assets is likely to increase their value, resulting in increased rental
payments by CSXT and/or NSR, in differing amounts (to the extent one
carrier system is more successful than the other in enhancing the value
of its respective Allocated Assets), the benefit of the increased
rental payments would not go entirely to the party responsible for the
successful management, but would be divided on a fixed percentage basis
between CSX and NS; and that, although both CSX and NS have attempted
to manage and operate their respective Allocated Assets efficiently, it
would be preferable to alter the current corporate structure to
establish more appropriate incentives for efficient management, as well
as to avoid the costly and time-consuming process of establishing,
every 6 years, the Fair Market Rental Values.
Petitioners further contend that the current corporate structure
also causes financial inefficiency and presents a now unnecessary
degree of entanglement between CSX and NS. Petitioners add that such
entanglement and inefficiencies include the need for involvement by
both CSX and NS in certain management activities such as the
disposition of property. Petitioners explain that, although all of the
day-to-day activities of the two railroads in the operations of the two
sets of Allocated Assets, and a number of other activities, including
most disposals of property, can be performed by the operating railroad
(CSXT or NSR) itself, the Fair Market Value even of property that the
operating railroad itself can properly dispose of must be placed in an
account that ultimately is for the respective benefit of CSX and NS in
accordance with their 42%-58% ownership interests. It would be
preferable, petitioners believe, to avoid this unnecessary
entanglement.
The proposed transaction, petitioners contend, will eliminate these
concerns. Petitioners maintain: that there will be no adverse effect on
the public interest; that, in fact, the removal of the concerns noted
above, and the additional management freedom provided to the two
railroads, will have a positive effect on their operations and on the
public interest; and that, all things considered, the proposed
transaction, by disentangling CSX and NS from unnecessary involvement
in the operations and management of each other's Allocated Assets, will
promote the procompetitive outcome of the Conrail Transaction. The
proposed transaction, petitioners continue, will simply permit CSX and
NS to acquire direct ownership and exclusive control of Conrail
properties that they already own indirectly (through their joint
ownership of Conrail) and that they are already authorized (pursuant to
Decision No. 89) to operate and manage separately as part of their
respective rail systems. The proposed transaction, petitioners argue,
will do no more than extend and make more effective the division of the
Conrail ``Allocated Assets'' between CSX and NS previously approved in
Decision No. 89. Petitioners observe that, as a result of becoming the
direct owners of NYC and PRR, CSX and NS will enjoy greater management
control and independence over the assets of NYC and PRR, respectively
(and, similarly, the proposed transaction will eliminate CSX's indirect
involvement in major corporate actions affecting the PRR Allocated
Assets and NS's equivalent role in major corporate actions affecting
the NYC Allocated Assets).
Effects on Shippers and Other Railroads
Petitioners contend that the proposed transaction will not affect
rail operations or rail service, whether involving the NYC and PRR
Allocated Assets or otherwise, and thus will have no adverse impact on
shippers. Petitioners further contend that the proposed transaction
will preserve the current competitive balance between CSX and NS, and
enhance the efficiency and competitive independence of their rail
operations; and, petitioners add, although the proposed transaction
will enhance rail competition generally, it will not affect the current
competitive balance between or among CSX, NS, or any other rail
carrier. The proposed transaction, petitioners explain, will merely
bring petitioners' corporate structures more directly in line with the
operational integration achieved under the authority conferred in
Decision No. 89.
Effects on Shared Assets Areas
Petitioners advise that the proposed transaction will not affect
the ownership structure of or rail operations within the Shared Assets
Areas in North Jersey, South Jersey/Philadelphia, and Detroit, and
therefore will have no effect on the competitive rail service provided
by CSXT and NSR in those areas. Petitioners advise that the involvement
of both CSX and NS in the management of the SAAs, through their joint
ownership and governance of Conrail and through the Shared Assets Areas
Operating Agreements and other governing agreements, is an intrinsic
and necessary element of the Shared Assets Areas. Petitioners add,
however, that, although the proposed transaction will not impact the
SAAs, the dynamic nature of the rail marketplace and the varying needs
and demands of rail customers may require future adjustments in SAA
rail operations and service. Petitioners observe that, as CSX and NS
continue their efforts to provide competitive rail service more
efficiently and effectively in the SAAs, opportunities to improve
operational and managerial efficiency are likely to arise in a variety
of contexts.
Effects on Employees
Petitioners contend that the proposed transaction will have no
adverse impact on their employees. None of their employees, petitioners
explain, will be dismissed or displaced as a result of the proposed
transaction, and no changes will be required to be made to existing
labor agreements or to the compensation, benefits, or working
conditions of their employees. Employees now working on the railroad
assets owned by NYC and PRR, petitioners advise, will continue to work
for the same employers,\10\ and the labor agreements that now apply to
these employees, and that will continue to apply, are and will be the
CSXT and NSR labor agreements. Petitioners note that, pursuant to the
New York Dock
[[Page 42163]]
conditions \11\ imposed in Decision No. 89, CSX and NS already are
subject to implementing agreements governing their operational
integration of the NYC Allocated Assets and the PRR Allocated Assets,
respectively; and petitioners state that no changes will be required in
those agreements or in any other agreements between petitioners and
their employees. Petitioners add that, although they expect that the
New York Dock conditions will be imposed on all aspects of the proposed
transaction, the proposed transaction will not produce any employee
impacts triggering the Article I, Sec. 4 implementing agreement
requirements or other provisions of New York Dock.
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\10\ Petitioners indicate, however, that eight non-contract
employees of NYC that now work on the NYC rail assets will become,
after the proposed transaction, non-contract employees of a non-
railroad affiliate of CSX.
\11\ See New York Dock Ry.--Control--Brooklyn Eastern Dist., 360
I.C.C. 60, 84-90 (1979), aff'd sub nom. New York Dock Ry. v. United
States, 609 F.2d 83 (2d Cir. 1979).
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Environmental and/or Historic Review
Petitioners contend that, because the proposed transaction does not
involve any changes in rail operations or service to shippers, no
environmental documentation is required, see 49 CFR 1105.6(c)(2)(ii),
and no historic report is required, see 49 CFR 1105.8(b)(2).
The Proposed Restructuring of Conrail Debt
Petitioners acknowledge that the proposed transaction will have an
effect on Conrail's ``preexisting'' debt and equipment lease
obligations (i.e., Conrail's debt and equipment lease obligations that
were in existence as of the Split Date). The holders of the relevant
obligations will not, petitioners claim, be adversely impacted by the
proposed transaction, but petitioners concede that, because the
proposed transaction will require a restructuring of Conrail's current
debt, the accomplishment of the proposed transaction will require
either the consent of the holders of such debt or an order of the Board
pursuant to 49 U.S.C. 11321(a).
Petitioners explain that, although CSX and NS are individually
responsible for payment of ``new'' liabilities attributable to their
operation of the NYC and PRR Allocated Assets accruing from the Split
Date forward, most of Conrail's ``preexisting'' debt and equipment
lease obligations remained with Conrail. See Decision No. 89, 3 S.T.B.
at 230. These preexisting obligations include: Certain unsecured
debentures issued by Conrail; a number of obligations that are secured,
in various forms, by a first-priority lien on certain items of
equipment owned by or leased to Conrail; and certain long-term finance
leases of equipment. Petitioners describe these preexisting obligations
as follows: All of Conrail's preexisting equipment obligations,
including secured debt and long-term finance leases, are referred to as
``secured debt'' or ``secured debt obligations'; such secured debt and
Conrail's preexisting unsecured debentures are referred to as its
``debt obligations'; and participants in long-term equipment leases,
whether as equity or debt, are included in the terms ``holders'' and
``debtholders.''
Petitioners advise that some of the agreements underlying Conrail's
preexisting debt obligations contain provisions requiring the consents
of various parties (or of a majority of certain classes of debtholders)
for certain corporate transactions. Most of these agreements,
petitioners indicate, require such consents in connection with the
proposed transfer of NYC and PRR to CSX and NS, respectively.
Petitioners advise that, because the proposed transaction will transfer
the major portion of Conrail's assets (its membership interests in NYC
and PRR) out of Conrail's ownership, petitioners considered a number of
alternative approaches, including the use of keepwell agreements, to
assure that holders of Conrail's existing debt obligations (and the
credit ratings of such debt obligations) will not be adversely affected
by the proposed transaction.\12\ Petitioners further advise that they
concluded that guarantees and/or assumptions by CSXT and NSR would be
the most desirable alternative for the holders of Conrail's existing
debt obligations, and, accordingly, they have included such guarantees
and/or assumptions in the proposed transaction. Petitioners refer to
this aspect of the proposed transaction as the ``debt restructuring,''
and it is the accomplishment of this ``debt restructuring'' that
petitioners have acknowledged will require either the consent of the
Conrail debtholders or an order of the Board pursuant to 49 U.S.C.
11321(a).\13\
Petitioners advise that the proposed debt restructuring provides
differing treatment as respects unsecured debt, on the one hand, and
secured equipment financing agreements, on the other hand.
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\12\ Petitioners appear to be using the terms ``existing debt
obligations'' and ``preexisting debt obligations'' interchangeably.
\13\ It is not entirely clear that the proposed debt
restructuring applies only to Conrail's preexisting debt obligations
(i.e., the obligations that existed on the Split Date and that
continue to exist today). It may be that the proposed debt
restructuring applies to Conrail's current debt obligations (i.e.,
the obligations that existed on the Split Date and that continue to
exist today, and, in addition, any post-Split Date obligations
incurred by Conrail).
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Unsecured Debt. Petitioners advise that, with respect to Conrail's
preexisting unsecured debt, CSX and NS will cause NYC Newco and PRR
Newco, respectively, to issue their own debt securities that will be
offered in a tax-free exchange, through a series of consecutive steps
occurring at approximately the same point in time, for the existing
unsecured debt of CRC. Petitioners further advise that the new debt
securities offered by NYC Newco and PRR Newco will have the same
maturity dates, principal and interest payment dates, and interest
rates as those of the respective issues of CRC unsecured debentures.
And, petitioners add: NYC Newco and PRR Newco will issue debt
securities in a combined aggregate principal amount equal to the
aggregate principal amount of CRC's unsecured debentures to be tendered
(by the holders of CRC's debentures) in the proposed exchange offer;
the new debt securities offered by NYC Newco will be fully and
unconditionally guaranteed by CSXT, and the new debt securities offered
by PRR Newco will be fully and unconditionally guaranteed by NSR; and
these NYC Newco and PRR Newco debt securities will be issued (in a
series of consecutive steps occurring at approximately the same time)
to the holders of CRC's unsecured debentures who elect to exchange
their existing CRC debentures for the newly issued NYC Newco and PRR
Newco debt securities (with NYC Newco becoming the new obligor for
securities equal to 42% of each CRC unsecured debenture tendered in the
exchange offer, and with PRR Newco becoming the new obligor for
securities equal to 58% of each CRC unsecured debenture tendered in the
exchange offer).
Petitioners note that a condition of acceptance (by NYC Newco and
PRR Newco) of the exchange described in the preceding paragraph will be
the grant by the exchanging bondholder of a consent that allows the
proposed transaction (including the issuance of the securities
contemplated by the proposed transaction) to go forward, and the
termination of most of the restrictive covenants contained in the
indenture under which Conrail issued its unsecured debentures (the
``Unsecured Indenture''). Petitioners further note that the exchanged
Conrail debentures will be canceled, and that the exchange offer will
include a customary ``exit'' consent solicitation that will permit the
transfer of ownership of NYC and PRR and the other elements of the
proposed transaction as previously described. Petitioners point out
that, given the
[[Page 42164]]
voluntary nature of the exchange offer, some debtholders may choose not
to exchange their existing unsecured CRC debentures for the new NYC
Newco and PRR Newco debentures. Petitioners explain that these
debtholders would continue to hold their existing unsecured CRC
debentures, without most of the original covenants.
Secured Equipment Financing Agreements. Petitioners advise that all
of Conrail's secured equipment financing agreements will remain
obligations of Conrail, and that CRC will sublease approximately 42% of
its encumbered equipment to NYC Newco and approximately 58% of its
encumbered equipment to PRR Newco. Petitioners add that the sublease
obligations of NYC Newco and PRR Newco will be assumed by CSXT and NSR,
respectively, upon the merger of NYC Newco and PRR Newco into CSXT and
NSR, respectively.
Petitioners advise that NYC Newco and PRR Newco will utilize a
grantor trust structure for certain equipment secured by financing
agreements entered into prior to October 1994 (to preserve for the
secured parties to such financing agreements the benefits of section
1168 of the Bankruptcy Code, 11 U.S.C. 1168, as in effect prior to
October 1994). Petitioners explain: that, under this structure, Conrail
will sublease the relevant equipment to NYC Newco and PRR Newco under
capital leases for tax purposes; that NYC Newco and PRR Newco will
create bankruptcy-remote grantor trusts and transfer their rights and
obligations under the capital leases to their respective grantor
trusts; that the trusts then will sublease the relevant equipment to
CSXT and NSR under true leases for tax purposes, and assign payments
under those subleases to Conrail; and that, after NYC Newco and PRR
Newco are distributed to CSXT and NSR, but before being merged into
CSXT and NSR, NYC Newco and PRR Newco each will transfer the beneficial
interest in its grantor trust to a corporation (other than CSXT and
NSR, respectively) that is a subsidiary of CSX and NS, respectively.
Petitioners explain that, in all of Conrail's secured equipment
financings, holders of Conrail's secured debt instruments are entitled
to the benefits of Bankruptcy Code Sec. 1168, which (petitioners
advise) provides certain protections to creditors under railroad
equipment leasing and financing arrangements. Petitioners add that, to
preserve the existing protections that Conrail's secured debtholders
enjoy under Sec. 1168, all of the subleases described above will
provide, among other things, that: (1) Any such sublease will be junior
and subordinate to the controlling agreement and the holders of CRC's
secured debt; (2) the sublessee, upon default by CRC under the
controlling agreement, will surrender possession of the equipment in
accordance with the terms of the controlling agreement; and (3) each
sublessee in possession of equipment will be a railroad against which
Sec. 1168 protection would be available.
Analysis of the Debt Restructuring. Petitioners state that the debt
ratings of the new NYC Newco and PRR Newco unsecured debentures, and
the Conrail secured debt obligations, will be at least equal to that of
the present corresponding CRC debt obligations. Petitioners indicate
that two corporate debt rating services (Moody's Investors Service and
Standard & Poor's) have advised: (a) That the debt ratings assigned to
the debt obligations to be offered by NYC Newco and PRR Newco (in
exchange for Conrail's current unsecured debt obligations) will be at
least equal to Conrail's current debt ratings for those unsecured
obligations;\14\ and (b) that the debt ratings of Conrail's current
public secured debt obligations will not be reduced as a result of the
proposed transaction.
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\14\ Petitioners add that, post-exchange, unsecured debtholders
will own a package of securities, 42% of which will continue to be
rated at the CSX rating (which, petitioners advise, was the Conrail
rating prior to the Split Date) and 58% of which will be rated at
the NS rating.
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Petitioners assert that the proposed debt restructuring follows the
pattern approved by the Board in Decision No. 89. Petitioners explain
that, in that decision, the Board authorized CSX and NS to bear the
economic burden of the CRC debt in the ratio of 42% to 58%,
respectively. Petitioners further explain: that, in practice, Conrail's
debt obligations remained in place after the Split Date, but, in the
case of any failure of Conrail's income to service them, the provisions
of Sec. 4.3 of the Transaction Agreement stood behind them;\15\ that
the proposed debt restructuring will follow the original model by
exchanging, in the same 42%-58% ratio, NYC Newco debentures guaranteed
by CSXT and PRR Newco debentures guaranteed by NSR, for the Conrail
unsecured debt securities, and by providing, in addition to their
existing security, assumptions by CSXT and NSR in that same ratio with
respect to the subleases supporting the Conrail secured debt; that the
Conrail debtholders will either keep their existing securities (in the
case of the secured debt obligations) or have an option to acquire new
securities guaranteed by CSXT and NSR respectively, with the same
maturity dates, principal and interest payment dates, and interest
rates that they previously had; and that, in addition, NYC Newco's and
PRR Newco's unsecured debentures will have covenant packages
substantially similar to those of the publicly traded unsecured
debentures of CSX and NS, respectively. Petitioners therefore conclude
that the proposed debt restructuring follows the existing pattern
approved by the Board and is consistent with the public interest.
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\15\ 4.3(a) of the Transaction Agreement provides that, from and
after the Split Date, ``CSX [in the Transaction Agreement, CSXC is
referred to as CSX] and NSC shall ensure that CRR, CRC and their
Affiliates have sufficient cash to satisfy the Retained Liabilities
as they become due and any operating and other expenses incurred by
CRR, CRC and their Affiliates in the conduct of their business.''
4.3(b) of the Transaction Agreement provides: ``It is the intent of
the parties that the economic burden of the Corporate Level
Liabilities [of Conrail] will be borne, directly or indirectly, by
CSX or NSC in accordance with their respective Percentage [i.e.,
42%-58%].'' CSX/NS-25, Volume 8B at 49 (filed June 23, 1997, in STB
Finance Docket No. 33388).
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Negotiations Contemplated. Petitioners indicate that they intend to
approach the holders of Conrail's outstanding debt obligations to
secure their consents to the proposed transaction. Petitioners advise
that, because any issues involving the Conrail debtholders' consents
may be resolved consensually, petitioners are not asking the Board to
undertake, at this time, a detailed review of issues related to the
consents. Petitioners are asking, rather, that the Board defer
consideration of these issues while reviewing and approving the
underlying aspects of the proposed transaction.
Relief Sought by Petitioners
(1) Petitioners ask that the Board provide for Federal Register
publication of notice of their petition, and adopt a procedural
schedule providing for an opportunity for comments by interested
parties and a reply by petitioners. Petitioners ask, in particular,
that the due date for the submission of comments by interested parties
be set as the 30th day after the date of Federal Register publication,
and that the due date for the submission of a reply by petitioners be
set as the 60th day after the date of Federal Register publication.
Petitioners also ask that the Board issue its decision on the merits
within 45 days after completion of the procedural schedule, if
possible, or as expeditiously as circumstances may permit.
(2) Petitioners ask that the Board issue, following the receipt of
written
[[Page 42165]]
comments, a 49 U.S.C. 11327 \16\ ``supplemental order'' finding the
proposed transaction to be consistent with the public interest, and
authorizing it pursuant to 49 U.S.C. 11321-27, subject to a condition
requiring petitioners to resolve through negotiations any issues
pertaining to the Conrail debtholders' required consents, or, in the
alternative, to propose further proceedings before the Board to
determine whether the treatment of the Conrail debtholders under the
terms of the proposed transaction is fair, just, and reasonable.
Petitioners add that the requested order is appropriate to ensure
compliance with Decision No. 89's Ordering Paragraph 6 \17\ and to
confirm that CSX and NS are fully authorized to carry out the proposed
transaction under 49 U.S.C. 11323-24.
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\16\ 49 U.S.C. 11327 provides: ``When cause exists, the Board
may make appropriate orders supplemental to an order made in a
proceeding under sections 11322 through 11326 of this title.''
\17\ Decision No. 89's Ordering Paragraph 6 provides: ``No
change or modification shall be made in the terms and conditions
approved in the authorized application without the prior approval of
the Board.'' Decision No. 89, 3 S.T.B. at 385.
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(3) Petitioners ask that the Board find that CRC will continue to
be a rail common carrier under 49 U.S.C. 10102(5) following the
consummation of the proposed transaction. See Decision No. 89, 3 S.T.B.
at 374 (``We further find that, after the Closing Date, CRC will remain
a `rail carrier' as defined at 49 U.S.C. 10102(5).'').\18\
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\18\ The date referred to in this decision as the Split Date
(June 1, 1999) has previously been referred to as the Closing Date
and Day One. See Decision No. 89, 3 S.T.B. at 213 n.27.
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(4) Petitioners advise that, if potential issues regarding the
debtholders' consents cannot be resolved through negotiations: (a)
Petitioners will propose further proceedings to resolve any such issues
before the Board on the basis that (in petitioners' view) the treatment
of the Conrail debtholders under the terms of the proposed transaction
is fair, just, and reasonable, see Schwabacher v. United States, 334
U.S. 192 (1948); and (b) petitioners will seek a ruling from the Board
confirming that the 49 U.S.C. 11321(a) exemption ``from all other law''
(including contractual restrictions) will permit consummation of the
proposed transaction without the consent of the holders of Conrail's
outstanding debt obligations, and that immunity under 11321(a) from
contractual consent requirements related to Conrail's outstanding debt
obligations is necessary to permit petitioners to carry out the
proposed transaction.
Procedural Schedule Adopted by the Board
The Board has arranged to publish this decision in the Federal
Register on July 16, 2003, to provide notice to interested persons that
petitioners seek the relief contemplated in their petition. The Board,
however, is adopting a procedural schedule somewhat different from the
schedule suggested by petitioners.
Clarification Required. Petitioners will have until July 17, 2003,
to clarify whether the proposed debt restructuring applies to Conrail's
preexisting debt obligations (i.e., the obligations that existed on the
Split Date and that continue to exist today) or to Conrail's current
debt obligations (i.e., the obligations that existed on the Split Date
and that continue to exist today, and, in addition, any post-Split Date
obligations incurred by Conrail). It may be that the two sets of
obligations are the same, and, even if the two sets of obligations are
not precisely the same, it is quite likely that preexisting obligations
comprise the vast majority of current obligations. Nevertheless, given
certain ambiguities in the petition respecting this matter, it seems
appropriate to require petitioners to submit clarification.
Service on Various Persons Required. To ensure that the petition is
brought to the attention of those persons most likely to be affected by
the proposed transaction, petitioners will have until July 29, 2003, to
serve copies of this decision, and to certify in writing that such
service has been accomplished, on all parties of record in STB Finance
Docket No. 33388 and on all known holders of Conrail's relevant (i.e.,
either preexisting or current) debt and equipment lease obligations (as
those terms are used in this decision).\19\ Petitioners' certification
should be sent to: Surface Transportation Board, 1925 K Street, NW.,
Washington, DC 20423-0001. Petitioners should also submit, on a 3.5-
inch IBM-compatible floppy disk or a CD, an electronic copy (in, or
compatible with, WordPerfect 10.0) of all textual materials included in
their certification.
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\19\ For purposes of this decision, a ``known'' holder of a
Conrail debt obligation is a holder whose identify and mailing
address are known to, or readily ascertainable by, petitioners.
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Petition Available to Interested Persons. Interested persons may
view the petition and/or the requested clarification on the Board's Web
site at http://www.stb.dot.gov, at the ``Filings'' button. The petition
was filed on June 4, 2003 (``06/04/2003''), and may be viewed with the
filings for that date. The clarification will be posted to the Board's
Web site shortly after it is filed.
Any person wishing to obtain a paper copy of the petition and/or
the clarification may request a copy in writing or by phone from any of
petitioners' representatives (who, as previously noted, are Mr. G. Paul
Moates, Mr. Peter J. Shudtz, Mr. Henry D. Light, and Mr. Jonathan M.
Broder). (1) Mr. Moates' mailing address is: G. Paul Moates, Sidley
Austin Brown & Wood LLP, 1501 K Street, NW., Washington, DC 20005. Mr.
Moates' telephone number is: 202-736-8000. (2) Mr. Shudtz's mailing
address is: Peter J. Shudtz, CSX Corporation, Suite 560, 1331
Pennsylvania Ave., NW., Washington, DC 20004. Mr. Shudtz's telephone
number is: 202-783-8124. (3) Mr. Light's mailing address is: Henry D.
Light, Norfolk Southern Corporation, Three Commercial Place, Norfolk,
VA 23510-9241. Mr. Light's telephone number is: 757-629-2600. (4) Mr.
Broder's mailing address is: Jonathan M. Broder, Consolidated Rail
Corporation, Two Commerce Square, 2001 Market Street, Philadelphia, PA
19103. Mr. Broder's telephone number is: 215-209-5020.
Comments of Interested Persons. Any person (including, but not
limited to, persons served with copies of this decision) who wishes to
file comments respecting the petition must file such comments by August
28, 2003. Comments (an original and 10 copies), referencing STB Finance
Docket No. 33388 (Sub-No. 94), should be sent to: Surface
Transportation Board, 1925 K Street, NW., Washington, DC 20423-0001.
Comments should also be served (one copy each) on all of petitioners'
representatives (at the addresses given in the preceding paragraph).
Any person submitting comments must also submit, on a 3.5-inch IBM-
compatible floppy disk or a CD, an electronic copy (in, or compatible
with, WordPerfect 10.0) of all textual materials included in the
comments.\20\
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\20\ Parties unable to comply with the electronic submission
requirement can seek a waiver from the Board.
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Reply by Petitioners. Petitioners will have until September 25,
2003, to reply to any comments filed by interested persons. Replies (an
original and 10 copies) should be sent to: Surface Transportation
Board, 1925 K Street, NW., Washington, DC 20423-0001. Replies should
also be served (one copy each) on each commenting party. Petitioners
must also submit, on a 3.5-inch IBM-compatible floppy disk or a CD, an
electronic copy (in, or compatible with, WordPerfect 10.0) of
[[Page 42166]]
all textual materials included in the reply.
Decision by the Board. The Board will endeavor to issue its
decision on the merits of the petition as soon as possible after the
filing of petitioners' reply.
This action will not significantly affect either the quality of the
human environment or the conservation of energy resources.
It Is Ordered
1. By July 17, 2003, petitioners must clarify whether the proposed
debt restructuring applies to Conrail's preexisting debt obligations
(i.e., the obligations that existed on the Split Date and that continue
to exist today) or to Conrail's current debt obligations (i.e., the
obligations that existed on the Split Date and that continue to exist
today, and, in addition, any post-Split Date obligations incurred by
Conrail).
2. By July 29, 2003, petitioners must serve copies of this
decision, and must certify in writing that such service has been
accomplished, on all parties of record in STB Finance Docket No. 33388
and on all known holders of Conrail's relevant (i.e., either
preexisting or current) debt and equipment lease obligations (as those
terms are used in this decision).
3. Comments of interested persons are due by August 28, 2003.
4. Petitioners' reply is due by September 25, 2003
5. This decision is effective on July 9, 2003.
Decided: July 9, 2003.
By the Board, Chairman Nober.
Vernon A. Williams,
Secretary.
[FR Doc. 03-17841 Filed 7-15-03; 8:45 am]
BILLING CODE 4915-00-P