[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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \20\ Parties unable to comply with the electronic submission 
requirement can seek a waiver from the Board.
---------------------------------------------------------------------------

    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