PAS: Clash of the Titans

NORFOLK SOUTHERN HAS PUT A LOT INTO PAN AM SOUTHERN, AND EVERYONE ELSE HAS BENEFITED. PAR SALE WILL QUALIFY AS CHANGE OF CONTROL, AND PUT NS IN THE PATRIOT CORRIDOR DRIVER'S SEAT.

Pan Am Southern (PAS) is often lumped in as part of, or the same as, Pan Am Railways (PAR); the two are commonly interchanged in conversation. In fact, PAS is an independent, incorporated railroad entity, that owns and operates several hundred miles of former PAR property, transferred to PAS in 2008. In consideration for that property, PAR acquired a one-half ownership in PAS.

The other half-owner is Class I behemoth Norfolk Southern Railway (NS), and despite the common appearance of black stallions as far east as Ayer MA, no one ever mistakenly calls PAS “Norfolk Southern.” That paradox characterizes PAS more than you might think — and suddenly more than NS would like, now that CSX is going to become its corridor-mate. Out of the sale of PAR to CSX, NS will maintain its 50% ownership of the PAS lines, but overcoming its operating “invisibility” on the PAS is now crucial to protecting its New England franchise.

Map of Pan Am Southern routes
The entire PAS system comprises 436.7 track miles. Of the total, 238.3 miles are PAS-owned, and 198.4 are entitled by rights retained or granted. Main lines are:
West-East, comprising the NS Patriot Corridor (139.7 miles between Mechanicville NY and CPF 312 in Ayer MA), plus the 30.5-mile Rotterdam Branch extension between Mechanicville, splitting to Rotterdam Jct. and Mohawk Yard (See Rotterdam Cluster map, below). Four Ayer-area branches add 10.6 miles to the PAS network (See Ayer Cluster map, below). The Adams Industrial Branch adds 4.6 track miles. Yard facilities on the Patriot Corridor include Mechanicville, North Adams, East Deerfield, Gardner, and East Fitchburg (all in MA).
North-South, comprising 184.5 track miles between White River Jct. VT and New Haven CT, is owned by three railroads. NECR owns 72.8 miles of the Conn River Line between WRJ and Northfield MA; PAS retains shared rights at all facilities. MBTA owns 49.7 miles of the Conn River Line between Northfield and Springfield MA; PAS retains exclusive freight rights. Amtrak owns the 62-mile Springfield Line between Springfield and New Haven CT; PAS retains overhead rights. The southern tip of the line is limited access to to Cedar Hill Yard via CSX, and the 42.9-mile Berlin-Waterbury-Derby Branch, and captive 4.5-mile Plainville-Southington Branch interchange at Berlin (See Connecticut Cluster map, below). Yards on the North-South line are East Deerfield, Springfield (CSX), Cedar Hill CT (CSX), and Plainfield CT.

Come together

On 15.May.2008, four entities, Norfolk Southern, Inc, Pan Am Railways, Inc., and two wholly-owned subsidiaries of PAR, Boston & Maine Railroad (B&M) and Springfield Terminal Railway Company (ST), entered as signatories into an agreement to form Pan Am Southern, LLC, the owner (or licensee) of 436 miles of New England track, and related assets.

The primary purpose of the new railroad was creation of a 155-mile, high-capacity class 3 Freight Main Line between Albany NY and Ayer MA, branded as the “Patriot Corridor.” The Corridor was to serve as a key Chicago – New England route for NS single-line intermodal and automotive traffic, as well as for CSX-originated grain, PAR local merchandise, and overhead traffic.

PAS contracted with ST to manage daily PAS rail operations, including asset maintenance, pricing, personnel, etc. ST also operates train movement for all PAS traffic, including NS’s intermodal and automotive traffic.

 

Rotterdam Cluster Map: The PAS western terminus is Rotterdam Jct., in the hamlet of Pattersonville NY. PAS Mainline is RED; CP-owned (ex-D&H) lines are GREEN. PAS Patriot Corridor terminates at CPF 468, and #1. Rotterdam branch continues on CP track to CPF 477, where it splits: traffic south to Mohawk Yard (CP) interchanges traffic with NS Southern Tier line; traffic west on PAS to Rotterdam Jct., exchanges traffic with CSX.

 

Ayer Cluster Map: The PAS eastern terminus is at CPF 312 on the Ayer – Littleton border. PAS Patriot Corridor Mainline is RED; PAS branch lines are GREEN; MBTA-owned lines are PURPLE. The line is double-track between CPF 312 and CPF 335 (Westminster). ROW ownership is divided between PAS and MBTA from Willows (BF 33.72/CPF 313.77) to Fitchburg (BF 49.12/CPF 329.12), along which MBTA owns Track 1 (north track), and PAS owns Track 2 (south track). Freight and passenger trains use both tracks as needed, and each serves facilities on both sides of the ROW. Track 1 is not cleared for double-stack/multilevel cars between CPF 335 and Fitchburg Station (BF 49.12/ CPF 329.12). PAS Branch lines are: #6. CPF WL – Ayer; #5. Groton Ind’l track; #4. Ayer – Harvard Stn.; #3. Heyward Industrial track.
Connecticut Cluster Map: The PAS Connecticut cluster reaches CSX Cedar Hill Yard, and serves PAR customers between Berlin and Derby. PAS Mainline is RED running over Amtrak Springfield Subdivision (BLUE). Branches are GREEN: #7. PAS Berlin – Derby (Waterbury – Derby running on CTDOT DARK GREEN), #8 Plainville – Southington; #9 North Haven – Cedar Hill yard (running over CSX YELLOW).

PAS key attributes:

  • Intermodal trains are operated by NS between Chicago and Mechanicville, where ST crews take control of the NS locomotives to Ayer. This traffic moves on trains 22K/23K (east/west) on NS to Mechanicville and PAS to Ayer. Per agreement, NS has exclusive Intermodal access to Ayer from points west of Albany via haulage on PAS.
  • Key route for NS automotive traffic between Midwest manufacturers and New England auto ramps in Mechanicville, Ayer and Davisville RI (which is accessed through haulage on the P&W between Gardner and Davisville). This traffic had moved exclusively on dedicated 28N/287 (east/west) trains, but, as often as not, is added to intermodal and/or general merchandise freights originating and terminating on NS.
  • The primary route for general merchandise from various NS terminals to New England through a daily Binghamton, NY to East Deerfield, MA pair of trains, 16R/11R (east/west).
  • The primary route for frequently as-needed, western-originated unit grain trains, that move via CSX-Rotterdam Jct. NY (RJ) to Ayer MA. These are CSXT trains that provide a competitive option for the customer located on the Patriot Corridor. They are (like NS trains) operated and waybill by ST, per the previously mentioned contract.
  • A key route for CSXT northern New England merchandise traffic that enters the region at RJ, after Selkirk, on a scheduled daily pair of PAS trains, RJED/EDRJ (east/west) Like the grain trains these are competitive rate trains that are operated and waybill by ST.
  • The Patriot Corridor is the only competitive rail option to the single line reach of CSX into the Boston area.

Who’s who

Per a Transaction Agreement, for its 50% share in the new entity, NS transferred $87.5 million in cash, and $52.5 million in equivalents, including a small fleet of SD40-2 locomotives, and development of new facilities at Mech and AY. For their 50% share, PAR (including B&M and ST) transferred to PAS its ownership and rights to the physical assets, which reached into New York, Massachusetts, Connecticut, Vermont, and New Hampshire. NS and PAR each hold three PAS board seats. The transaction gained STB approval on 09.April.2009.

On that same day, NS and B&M (acting as the “Pan Am Member”) signed a Limited Liability Company Agreement, specifying PAS LLC members’ rights and responsibilities, and establishing an organizational structure: a six-seat Management Committee, overseeing a four-seat Joint Operating Committee. The JOC is mandated to only make decisions by unanimous vote of its members. Both committee memberships are evenly divided between NS Member appointees and PAR Member appointees.

Shortlines have benefited from PAS

The 2008 PAS formation was largely feared by shortlines along the corridor, and they demanded numerous conditions, which were mostly not granted. Ultimately, shortlines connecting with the PAS have benefitted from multi-railroad competitive rates through the neutral ST operations. Providence & Worcester (P&W), Vermont Railway (VTR), Pioneer Valley (PVR), Batten Kill Rail Road (BKRR) and New England Central (NECR) all gained new direct haulage interchange with NS and CSXT via PAS.

That benefit appears unaffected by a CSX acquisition. However, the possibility exists that CSX could box NS out of the haulage agreements that have been maintained under the PAS partnership.

NS’s Achilles heel

The caveat in the agreement that makes the prospective CSXT acquisition especially problematic is that, under the Agreement, NS has only haulage rights along PAS, and is proscribed from directly serving customers. That includes the intermodal, automotive, and merchandise trains that run with NS power (and are often mistakenly referred to as NS trains on PAS). On the other hand, PAR has unfettered access to customers throughout the PAS network. A CSX acquisition of PAR would include those customers along the route, the right to serve them locally, and to develop others.

In addition, Under the original agreement, ST’s operating responsibilities include 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 […] {PSA, Section 5(a)}.

PAR’s poison pill

Per the Company Agreement, the PAS Management Committee and Joint Operating Committee are evenly split. However, the agreement specifies that, in the event of a “Change in Control” of the PAR Member or any of its signatory subsidies (in the event of a sale, for instance), the structure of the Committees automatically changes in favor of the the remaining NS Member.

Regarding the Management Committee, the Agreement states: “… upon and after a Pan Am Change in Control, immediately and without the need for any action of any Member or any other Person, [the Management Committee membership will change from six to] five (5) committee representatives, two (2) of whom shall be designated by the Pan Am Member and three (3) of whom shall be designated by the NS Member ...”

The Agreement similarly adjusts the Joint Operating Committee, “Upon and after a Pan Am Change in Control, the NS Member shall have the right to appoint one additional member to the Joint Operating Committee (for a new membership of five), and … shall make decisions based upon a majority vote (whereas it had previously been bound to unanimity).”

{www.sec.gov}

NS’s silver bullet: Change in Control

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.”

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 [,] …

What’s it going to take?

Under the original agreement, ST’s operating responsibilities include operational and waybill responsibility along PAS routes. In a sale of PAR, those responsibilities would fall to the buyer, and it’s unlikely that NS would tolerate its trains being dispatched, operated, and priced by CSX.

STB approval of CSXT acquiring PAR would likely hinge on disposition of CSX’s B&A line (Framingham MA – Selkirk NY, and appointment of a neutral third-party “shared assets” operator, to maintain impartial operation on the ex-PAS. As reported by ANRP in OCTOBER?, Conrail executives joined CSX and NS executives aboard the PAR Office Car Special. That doesn’t necessarily anoint Conrail as the operator, but strongly points to the installation of some sort of shared assets entity to operate the ex-PAS routes.

Why has there been no filing yet?  CSX is working with various entities, and an official, knowledgable source confirms that MADOT and CSX are feeling-out a potential sale of the duplicate southern tier route in Massachusetts for passenger service. CSX has approached the customers, states and shortlines along the affected routes in hopes of mustering support and eliminating any unforeseen blockades along the way. Several customers and shortlines insist that they will not only object to the sale, but seek meaningful conditions through the STB as part of any approval outcome.

NS’s Gettysburg

Pan Am Southern is about to become the battlefield that has the potential to reshape the northeast railroad map. It is a telling coincidence that the date CSX announced its PAS acquisition was the five-year anniversary of NS’s narrow victory against CP and E. Hunter Harrison’s hostile takeover effort. NS’s successful defense then may be the only reason that PAS still exists in this day (and CSX’s desire for it must be derailing Hunter’s coffin! – Ed.), but is NS’s apparent inability to keep CSX from moving into PAS the lingering price of independence?

This past year has been the most dramatic year in northeast railroading since the Conrail breakup. The coming year promises to be the most consequential. CSX, NS, and MBTA will battle for the main lines; CP and CN will claw for Saint John container traffic; G&W will leverage its north-south dominance.

Who’d a’thunk that our quaint little corner of the continent would be the arena for a Clash of Titans?