PAR: THE OTHER SHOE DROPS

NS ALERTS STB THAT PROPOSED CSX/PAR VOTING TRUST ACQUISITION INSTRUMENT MAY VIOLATE 2008 PAS (NS/PAR) AGREEMENT AND MERITS BOARD SCRUTINY.

RELATED POST: Will CSX’s MA Mainline Become East-West Passenger Corridor?

06.November – Attorneys for Norfolk Southern Railways filed a letter with the Surface Transportation Board, arguing that a CSX acquisition of the PAS Patriot Corridor would fundamentally alter the region’s competitive dynamic, that the Board should involve itself from the very beginning of a transaction. Specifically, the Board should consider the formation of a voting trust to control PAR during the transaction period. The letter was posted on the STB website on Monday.09.November.

The NS filing is significant in many ways, but in conjunction with other going-on, it presents solid ground for these region-altering presumptions:

  1. It indicates that an agreement between CSX and PAR very likely exists at an advanced-enough stage that the other PAS member (NS) has been informed of key details of the transaction’s prospective structure, and
  2. That the PAS Patriot Corridor will become the primary freight corridor across southern New England, shared by NS and CSX, and likely operated by Conrail, and
  3. That the CSX B&A (former Boston & Albany RR) line west of Worcester MA will take on alternative duty, comprising a primary traffic of publicly-operated passenger service (East – West Commuter and Amtrak service), and a secondary freight traffic operated locally.

NS’s objection

In its letter to the STB, NS expresses its concerns to be “… CSXT’s potential acquisition of Pan Am, specifically its interest in PAS, and … CSXT’s potential use of a voting trust to acquire Pan Am.” To the first matter, the letter posits that, “[any] CSXT effort to acquire Pan Am would threaten to materially undermine … competition,” by virtue of owning half of PAS while also maintaining their dominant regional service on the B&A. But that proposition on its face would be enough for the STB to veto a PAR sale to CSX before it even assigned a docket number. And NS knows that; the letter’s very next sentence reads, “We recognize that the Board would address these competitive harms in a proceeding to authorize CSXT to control Pan Am.”

As reported here in ANRP last month, NS and CSX have good reasons to share the Patriot Corridor as the primary cross-region route, and they have in Conrail a successful mechanism for doing so. Well-placed sources have indicated that the two came together quickly over the idea. So why is NS raising a stink so soon?

Small print

NS and PAR’s parting will hardly be sweet sorrow. The partnership has often been a grudging one, and the Hoosac Tunnel’s collapse in February may have brought it to rock-bottom. While NS brought in the fix, PAR made a good-for-me common cause detour via VRS, while NS traffic was bottled-up west of the Hudson due to CSX’s need to protect its rickety Alfred Smith Bridge. NS may well be looking forward with relief to sharing the line with its fiercest competitor, but can’t be sure in the meantime that PAR is going to look out for its erstwhile partner’s interests.

PAR operates PAS through its Springfield Terminal (ST) subsidiary. Among the levers at ST hand are dispatching along the line, per the 2008 Agreement:

SECTION 5. MANAGEMENT AND OPERATIONS 

(a) Dispatching 

(i) Pan Am Southern, through its Railroad Operator (ST), shall have exclusive control over the management and dispatching of the Subject Trackage. Dispatching of the Subject Trackage shall be conducted in a manner as to afford each of Pan Am Southern and Springfield Terminal, and any other present or future user of the Subject Trackage (or any portion thereof) the most economical and efficient movement of its traffic […].

Based on NS’s protest, it seems that PAR and CSX are planning to manage PAR through a voting trust to protect both parties’ (PAR and CSX) interests during the transaction period before approval and final sale, which could take a year or more. Thus, in that time, numerous vital functions such as dispatching will be controlled by PAR, which conceivably could be influenced by CSX and the shared desire to advance the transaction.

Anticipating that an ownership change of one of the PAS partners could pose such dilemmas, the Agreement specified a few places where derails should be set if needed, and that’s what NS is doing in its letter:

“In the agreements governing the joint ownership and control of PAS, NSR was given certain rights in the event of a “change of control” of Pan Am. NSR and Pan Am acknowledged the potential need for further approval from the Board if a change of control occurs. One of the change of control events specifically includes the establishment of a voting trust.”

This refers to the Agreement Section 9.2: Permitted Transfers:

Subject to the conditions and restrictions set forth in Section 9.3. a Member may at any time Transfer all or any portion of its Membership Interest to […] any Person that […] acquires all or substantially all of the assets of the Pan Am Parent […] shall constitute a Pan Am Change in Control and shall effect a modification of the rights or obligations of the Members as further set forth herein [,]

And is more substantially defined in Appendix 2C of the Agreement:

Pan Am Change in Control” shall mean (1) the establishment of a voting trust as described in 49 C F R Part 1013-Guidelines for the Proper Use of Voting Trusts, or any subsequent regulation, with  regard to the acquisition of a controlling block of voting securities of the Pan Am Member [… or …] the submission to the STB [… regarding exemption …] to effect a change in control of the Pan Am Member, Pan Am, B&M or Springfield Terminal or any entity having direct or indirect control over any of the same, [… or …] any Permitted Transfer as described in [Agreement] Section 9.2 [appropriate] clauses [… or …] not taking into account the Pan Am Member’s membership interest in Pan Am Southern.” 

Thus, in its letter to the STB, NS is doing little more than pointing out the several obvious elements of the 2008 Agreement that preclude PAR and CSX from conducting this transaction without NS in the room.

There is no reason to think that PAR and CSX are undermining NS’s rights or competitive position in PAS, or that CSX is interested in doing so. But NS wants everybody to know that they’re not going to just let CSX walk into PAS on its own terms, or let PAR walk out on theirs. As ANRP opined in the August.2020 monthly newsletter, NS is the elephant on the rails in the PAR sale, and with this letter, has notified everyone that it will decide when it moves. We are the beneficiaries of NS’s decision to run according to their own schedule.

RELATED POST: Will CSX’s MA Mainline Become East-West Passenger Corridor?