B&E/P&S/GWI: Orange is the New Blue

A THOROUGH ANALYSIS OF HOW BERKSHIRE & EASTERN (GW) WILL SUPPLANT -- BUT NOT REPLACE -- PAN AM SOUTHERN

26.February, Washington DC – Many were surprised at the naming of Genesee & Wyoming’s Pittsburg & Shawmut Railroad, LLC, (a Class III carrier doing business as Berkshire & Eastern Railroad) as the Pan Am Southern operator in the event of CSX’s acquisition of Pan Am Rail Systems.

As described in CSX’s APPLICATION to the Board, the Proposed Transaction will result in (among other things,) CSX holding a 50% ownership interest in PAS, and  full ownership of its operator, Springfield Terminal.

Separately, CSXT, NS, and GWI have entered into two additional agreements between the three companies, regarding PAS operations:

  • Settlement Agreement between CSXT and NS, which includes an Ayer Operations Protocol (to be detailed in an ensuing ANRP article – Ed.), Engineering Planning, and Capacity Roadmap,
  • Term Sheet Agreement among CSXT, NS and GWI.

These two agreements contemplate related transactions that are integrally related to the Proposed Transaction, including:

  • B&E/PAS transaction: B&E will enter into an agreement with PAS to operate the PAS Network on a contract basis as the agent of PAS, replacing Springfield Terminal;
  • NS Trackage transaction: NS will obtain trackage rights over four existing trackage segments (owned respectively by PAS, Boston & Maine, Providence & Worcester, and CSX) providing NS with enhanced intermodal capacity from its rebuilt facility located on PAS at Ayer, MA. (to be detailed in an ensuing ANRP article – Ed.)

CSXT Replacing B&M in Ownership

If approved by the STB, the consummation of the Proposed Transaction and the Related Transactions, CSXT will take over the operations by ST as lessee of the PAR System’s lines, and B&E will take over operations by ST as contract operator of the PAS Network lines.

The agreements with NS and GWI are aimed at eliminating the possibility that the Proposed Transaction could result in CSXT operations and pricing power over two generally parallel lines (PAS and the existing CSXT east-west ‘Boston & Albany’ mainline in Massachusetts).

Additionally, when the Proposed Transaction is consummated, CSXT will wholly own and control Boston & Maine, which owns 50% of PAS. When PAS was created, Boston & Maine and NS were given equal authority to jointly control PAS in 2009.  Since CSXT will acquire Boston & Maine, CSXT seeks the same joint control authority over PAS that was granted to Boston & Maine in the PAS Formation Decision. An accompanying acknowledgement was issued that CSXT’s ownership of Boston & Maine and its one-half interest in PAS and may not result in acquiring “control” of PAS.

To address the independent operator position that has been the PAS operations, CSXT, NS, and GWI have entered into agreements that will strengthen PAS as an independent rail route for access to rail shippers in New England and enhance rail competition in New England.

GWI Fills the Shoes of PAS

In the Term Sheet Agreement named above, CSXT, NS, and GWI have agreed that B&E will take over Springfield Terminal’s operation of the PAS Network once CSXT acquires Springfield Terminal and Boston & Maine (including Boston & Maine’s one-half interest in PAS). B&E has agreed to “step into the shoes” of Springfield Terminal as operator of PAS, providing substantially all the operating services that Springfield Terminal currently provides on behalf of PAS in substantially the same way.

PAS will require B&E to set PAS rates at levels that are competitively neutral toward connecting rail carriers. The operation of PAS by B&E are designed to strengthen PAS as a viable competitive alternative to CSXT for movements of traffic into New England.

It should be made clear that GWI and its P&W or B&E affiliates, will not own the Pan Am Southern, LLC, or any component thereof.  This was the final agreed-upon designated operator by both CSXT and NS to keep an independent presence in the PAS corridor.

CSXT PAS Interest to be Short Lived?

Starting immediately after consummation of the proposed Transaction and continuing for seven years thereafter, NS, or its assignee, may initiate a defined appraisal and sales process for the sale of CSX’s 50% ownership interest of PAS to NS or the assignee of NS (Near-Term Sale).

Should CSX receive an offer for CSX’s 50% share of PAS during the first (redacted number) of years following consummation of the Transaction, and NS chooses not to initiate a Near-Term Sale, then CSX will have the right to sell its interest without restrictions on sale price.

NS Right of First Refusal

At any time, CSX can sell the entirety of its 50% ownership interest in PAS, and no less, to NS, its assignee, or a third party. NS shall additionally and simultaneously receive an assignable and customary right of first refusal in favor of NS. The right of first refusal shall be in addition to the rights of NSR described above and remain in effect for so long as CSX owns its 50% of PAS. After the first seven years following consummation, the above restrictions to the sale price shall not apply.

NS, or the assignee of NS’s assigned right of first refusal shall exercise that right of first refusal no later than 30 days after receiving the material terms of CSX’s sale of its interest to a third (ROFR Period). If NS, or its assignee, does not exercise such right of first refusal within the ROFR Period, CSX may sell the entirety of its ownership interest to the applicable third party on substantially the terms presented to NS, or its assignee; provided that if CSX has not executed with the buyer an agreement to sell within after the expiration of the ROFR Period, such proposed sale shall again be subject to NS’s right of first refusal.

The provisions of this Settlement Agreement shall survive in the event of CSX’s sale of its 50% stake in PAS.

Governance of PAS

Prior to the closing of the Transaction, NS agrees not to pursue the exercise of its change of control rights under the applicable PAS agreements that would otherwise arise in connection with the Transaction. The NS change in control rights contained in the LLC Agreement or any of the Transaction Agreements (as defined in the LLC Agreement), however, shall be amended to apply post-Transaction with regards to CSX’s 50% ownership interest in PAS in the same manner as it currently applies to Pan Am Railway’s 50% ownership interest in PAS. Should NS in the future obtain voting control of the Management Committee through the exercise of its change in control rights, CSX will continue to have a 50% vote on capital contributions, indebtedness or other financial obligations imposed on the members, and on certain out-of-the ordinary-course actions to be determined which at a minimum, include without limitation (a) repealing, modifying, waiving any provision of, or amending the LLC Agreement or any of the Transaction Agreements to which PAS is a party, (b) sale of PAS or substantially all of the assets of PAS, (c) change of PAS operator and admission of any other carrier to the PAS line, and (d) changing the profit and loss allocation of the members.

The “New” PAS Responsibilities

  • PAS will engage and retain B&E to be the designated Railroad Operator of PAS to manage, administer, supervise, perform and provide all freight rail services over PAS on behalf of PAS. B&E’s service obligations will be substantially the same as those established in the current Railroad Operating Agreement.
  • B&E will be required to appoint a general manager who will manage and supervise the operation, maintenance and use of PAS.
  • B&E will be responsible to perform the maintenance, inspection and repair activities as provided in the current operating agreement. With respect to annual capital maintenance work, PAS will develop an annual budget and CSXT or NS will have first priority for performing that work, with B&E or a PAS-approved contractor having responsibility thereafter, subject to the terms of any applicable B&E labor agreements. Such work shall be performed in accordance with an agreed upon capital maintenance schedule.
  • B&E will perform the administrative services, including claims handling, ancillary agreement management, accounting, MBTA and other passenger service interface, and review of PAS trackage and operating rights, as required under the existing operating agreement with ST.
  • B&E will assume any contractual obligations of ST with respect to dispatching services provided for MBTA, on behalf of PAS, and other passenger services, including any required local dispatching presence at Billerica, MA. CSXT, NS and GWI shall reasonably cooperate to address any concerns raised by those passenger services or the Commonwealth of Massachusetts relating to B&E’s role as operator of PAS.
  • B&E will furnish and/or cause to be furnished all labor, materials, supplies, tools and equipment necessary to perform its operating services.
  • B&E will offer employment to ST employees with the goal of filling 159 positions from the following crafts: Transportation, Mechanical, Engineering and Clerical/Dispatch. This number of employees was what G&W estimated it required as of February 22, 2021 and that the number of employees may change before B&E commences its role as PAS’s operator.

The proposed transaction will have an impact on Springfield Terminal employment levels because B&E expects to utilize fewer employees than Springfield Terminal to operate PAS. Adversely affected employees will be eligible for labor protective benefits; moreover, B&E intends to recognize unions currently representing Springfield Terminal’s employees that will be hired by B&E, and to enter into agreements providing substantially similar terms and conditions to those contained in existing agreements.  The caveat to that is all employees being hired into B&E will begin at ground zero, requiring new contracts and a level seniority field as the employees would be reset under the new company, should they leave Springfield Terminal.

Transaction Timing Synergy

The Applicants anticipate consummating the Proposed Transaction and the Related Transactions at the same time, subject to Board approval of each transaction. However, if the Proposed Transaction is consummated prior to the replacement of Springfield Terminal by B&E and the initiation of PAS operations by B&E, CSXT, NSR, and GWI have agreed that Springfield Terminal will continue to operate PAS until Springfield Terminal is replaced by the B&E as the PAS operator.

B&E Operating Authority

B&E is filing a petition for exemption in FD 36472 (Sub-No. 5) to obtain the necessary STB authority to replace Springfield Terminal as operator of PAS.  The Proposed Transaction and the Related Transactions will result in a realignment of the rail network in New England that will be a major step forward in providing transportation options for New England rail shippers.

The move anticipates that the Proposed Transaction will allow CSXT to improve rail service and to provide efficient competitive rail service within New England and between New England and CSXT’s existing service area in the United States east of the Mississippi River. The Proposed Transaction will also enable CSXT to efficiently interchange traffic to and from New England with the western railroads.

CSXT states in the filing that the acquisition of Boston & Maine’s interest in PAS will also have no adverse impact on competition. CSXT has ensured that there will be no anticompetitive effects by entering into an agreement with NS and B&E to have Springfield Terminal replaced by B&E as operator of PAS.

B&E will be responsible for setting rates on PAS in a non-discriminatory fashion as to all rail carriers that have the ability to interchange traffic with PAS or otherwise connect to PAS. In addition, CSXT has entered into a Settlement Agreement with NSR, that will result in enhanced competition in the region.

‘Nothing Changes, Much’…

According to the filing:

  • No shipper will experience a reduction in the number of serving carriers;
  • No existing routes will be closed;
  • No existing interchange options will be eliminated;
  • None of the short lines that connect with the PAR Railroads to be acquired will lose a connecting alternative;
  • No Class I railroad that currently has access to rail customers in New England will lose that access; and
  • CSXT will commit to keeping open existing gateways on commercially reasonable terms and to ensuring access to rate regulation remedies if shippers are dissatisfied with rates for connections to other railroads.

New Customers New Agreements

As the railroad operator, B&E will be PAS’s agent responsible for developing, establishing and quoting the rates that will be charged by PAS for movements on PAS. B&E will also be responsible for establishing the form and content of any new customer transportation agreements involving movements on PAS.  This will include the responsibility for all PAS customer interface, including invoicing PAS customers.

Interline and local traffic moving over PAS that is subject to PAS rates that will be set by B&E will move in the revenue waybill of PAS.

Except to the extent established in the NS Joint Use Agreement, the rates established and charged by PAS, while not necessarily equal, will not discriminate as to any rail carrier connecting to PAS, except based on mileage, density and similar operating characteristics.

For the avoidance of doubt, the NS Joint Use Agreement will be honored and is considered as an exception to this otherwise all-encompassing rule. B&E will not use its rate-setting obligation to create a competitive advantage or disadvantage to any rail carrier or between or among any rail carriers connecting to PAS. B&E will establish and charge rates on behalf of PAS that advance the economic interest of PAS as an independent rail carrier.

B&E will establish and charge rates that are sufficient to cover, but not be limited to, the fully allocated costs of PAS operations in the aggregate, including the total compensation paid to B&E as PAS operator and services that are outsourced and not performed by PAS.

The intent of this provision is to ensure that revenues from PAS operations are at least sufficient to cover PAS operating costs and capital without a subsidy from PAS’ equity holders.

The next installment will address the traffic changes and commitments being proposed.