FILED BY: CSX CORPORATION, NORFOLK SOUTHERN CORPORATION
AND CONSOLIDATED RAIL CORPORATION
PURSUANT TO RULE 425
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
Subject Company: Consolidated Rail Corporation
Commission File Nos: 1-8022 and 1-8339
*****
ADDITIONAL INFORMATION AND WHERE TO FIND IT
Registration statements on Form S-4 will be filed with the U.S.
Securities and Exchange Commission (SEC) in connection with the proposed
exchange offer by certain affiliates of CSX Corporation ("CSX"), Norfolk
Southern Corporation ("NS") and Consolidated Rail Corporation ("CRC").
Prospectuses and related exchange offer materials will be mailed to holders of
CRC's unsecured debentures in connection with the proposed exchange offer. These
documents will contain important information about the proposed transaction and
the proposed exchange offer. INVESTORS AND HOLDERS OF CRC'S UNSECURED DEBENTURES
ARE URGED TO READ THESE DOCUMENTS CAREFULLY WHEN THEY BECOME AVAILABLE. Upon the
filing of these documents with the SEC, investors and holders of CRC's unsecured
debentures will be able to obtain free copies of these documents through the
website maintained by the SEC at http://www.sec.gov. In addition, free copies of
these documents, once filed with the SEC, may be obtained from CRC by directing
a request to: Consolidated Rail Corporation, 2001 Market Street, Philadelphia,
PA 19103, Attention: Corporate Secretary, (215) 209-4054.
In addition to the registration statements and prospectuses, CSX and NS
file annual, quarterly and special reports, proxy statements and other
information with the SEC. These SEC filings are available to the public through
the website maintained by the SEC at http://www.sec.gov.
FORWARD-LOOKING STATEMENTS
THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE FEDERAL SECURITIES LAWS. YOU SHOULD EXERCISE CAUTION IN INTERPRETING AND
RELYING ON FORWARD-LOOKING STATEMENTS BECAUSE THEY INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH ARE, IN SOME CASES, BEYOND THE
CONTROL OF CSX CORPORATION, NORFOLK SOUTHERN CORPORATION AND CONSOLIDATED RAIL
CORPORATION AND COULD MATERIALLY AFFECT ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THAT COMPLETION OF THE
AFOREMENTIONED OFFERING IS SUBJECT TO, AMONG OTHER THINGS, REGULATORY APPROVALS
AND MARKET CONDITIONS, THAT NO ASSURANCE CAN BE GIVEN THAT THE OFFERING CAN BE
COMPLETED UNDER ACCEPTABLE TERMS OR ON THE ANTICIPATED TIMETABLE, AND OTHER
RISKS AND UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE FILINGS OF CSX
CORPORATION AND NORFOLK SOUTHERN CORPORATION WITH THE SEC.
*****
The following cover letter and STB Decision were mailed today to all
known holders of CRC's unsecured debentures:
[Sidley Austin Brown & Wood LLP Letterhead]
July 22, 2003
BY FIRST CLASS MAIL
Re: Surface Transportation Board 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)
-----------------------------------------------------
Dear Holder of Conrail Debt or Equipment Lease:
We are counsel to Petitioners CSX Corporation, CSX Transportation Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc.,
and Consolidated Rail Corporation (the "Petitioners") in the above-captioned
proceeding. On July 9, 2003, the Surface Transportation Board issued a Decision
in that proceeding, which, among other things, directed Petitioners to serve a
copy of the Decision "on all known holders of Conrail's relevant debt and
equipment lease obligations." See Decision No. 1, STB F.D. No. 33388 (Sub-No.
94) at 2, 17.
We are mailing the enclosed copy of Decision No. 1 to you, because
Conrail's records reflect that you are a holder or beneficial owner of
Conrail debt (e.g., a debenture or equipment lease), or a custodian of Conrail
debt instruments.
If you have any questions, please contact one of the undersigned.
Very truly yours,
/s/ G. Paul Moates
G. Paul Moates
Paul A. Hemmersbaugh
Enclosure
33684 SERVICE DATE - LATE RELEASE JULY 9, 2003
EB
SURFACE TRANSPORTATION BOARD
DECISION
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)
Decision No. 1
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.
SUMMARY: On June 4, 2003, CSX Corporation (CSXC), CSX 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.
_________________________
[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.
STB Finance Docket No. 33388 (Sub-No. 94)
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 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, N.W., 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, N.W., Washington, D.C. 20005; (2) Peter J.
Shudtz, CSX Corporation, Suite 560, 1331 Pennsylvania Ave., N.W., Washington,
D.C. 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, N.W., Washington, DC 20423-0001. Replies should also be
served (one copy each) on each commenting party.[3]
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.]
_________________________
[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.
2
STB Finance Docket No. 33388 (Sub-No. 94)
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.
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
_________________________
[4] CSX Corp. et al.-- Control-- Conrail Inc. et al., 3 S.T.B. 196 (1998)
(Decision No. 89).
3
STB Finance Docket No. 33388 (Sub-No. 94)
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]
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.
_________________________
[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.
4
STB Finance Docket No. 33388 (Sub-No. 94)
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]
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]
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
_________________________
[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.
[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.
5
STB Finance Docket No. 33388 (Sub-No. 94)
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]
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 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
_________________________
[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.
6
STB Finance Docket No. 33388 (Sub-No. 94)
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
7
STB Finance Docket No. 33388 (Sub-No. 94)
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
_________________________
[10] Petitioners indicate, however, that eight non-contract employees of
NYC that now (continued...)
8
STB Finance Docket No. 33388 (Sub-No. 94)
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 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, ss. 4 implementing agreement
requirements or other provisions of New York Dock.
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
_________________________
[10...continued]
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).
9
STB Finance Docket No. 33388 (Sub-No. 94)
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.
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
_________________________
[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).
10
STB Finance Docket No. 33388 (Sub-No. 94)
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 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
11
STB Finance Docket No. 33388 (Sub-No. 94)
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 ss. 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 ss. 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 ss. 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.
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
_________________________
[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.
12
STB Finance Docket No. 33388 (Sub-No. 94)
of ss. 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.
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
_________________________
[15] ss. 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." ss. 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).
13
STB Finance Docket No. 33388 (Sub-No. 94)
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
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.
(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]
(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 ss. 11321(a) from contractual consent
requirements related to Conrail's outstanding debt obligations is necessary to
permit petitioners to carry out the proposed transaction.
_________________________
[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.
[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.
14
STB Finance Docket No. 33388 (Sub-No. 94)
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,
N.W., 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.
Petition Available To Interested Persons. Interested persons may view the
petition and/or the requested clarification on the Board's website at
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 website 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, N.W.,
Washington, D.C. 20005. Mr. Moates' telephone number is:
_________________________
[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.
15
STB Finance Docket No. 33388 (Sub-No. 94)
202-736-8000. (2) Mr. Shudtz's mailing address is: Peter J. Shudtz, CSX
Corporation, Suite 560, 1331 Pennsylvania Ave., N.W., Washington, D.C. 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, N.W.,
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]
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, N.W.,
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 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
_________________________
[20] Parties unable to comply with the electronic submission requirement
can seek a waiver from the Board.
16
STB Finance Docket No. 33388 (Sub-No. 94)
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
17