|SURFACE TRANSPORTATION BOARD DECISION DOCUMENT|
|KANSAS CITY SOUTHERN INDUSTRIES, INC., KCS TRANSPORTATION COMPANY, AND THE KANSAS CITY SOUTHERN RAILWAY COMPANY--CONTROL--GATEWAY WESTERN RAILWAY COMPANY AND GATEWAY EASTERN RAILWAY COMPANY|
|APPROVES THE APPLICATION UNDER 49 U.S.C. 11323-25 FOR KCSI, TO ACQUIRE CONTROL OF GWWR AND GWER, SUBJECT TO EMPLOYEE PROTECTION.|
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|Full Text of Decision|
STB Finance Docket No. 33311
KANSAS CITY SOUTHERN INDUSTRIES, INC., KCS TRANSPORTATION COMPANY,
AND THE KANSAS CITY SOUTHERN RAILWAY COMPANY--CONTROL--GATEWAY
WESTERN RAILWAY COMPANY AND GATEWAY EASTERN RAILWAY COMPANY
Decided: April 28, 1997
By application filed January 14, 1997, Kansas City Southern Industries, Inc. (KCSI),
KCS Transportation Company (KCSTC), The Kansas City Southern Railway Company (KCSR),
Gateway Western Railway Company (GWWR), and Gateway Eastern Railway Company
(GWER) seek authority under 49 U.S.C. 11323-25 for KCSI to acquire control of GWWR and
GWER.(1) On December 12, 1996, KCSI's wholly owned noncarrier subsidiary, KCSTC,
acquired the stock of Gateway and placed the shares into an independent voting trust. Upon
approval of this application, the voting trust will be dissolved, and the shares will be transferred
to KCSTC. Applicants indicate that, after the transaction is effected, KCSI will control KCSR
In a notice served and published on February 13, 1997 (62 FR 6832), we accepted the
application and determined that this is a minor transaction as defined in 49 CFR part 1180. We
invited comments from interested parties, including the Secretary of Transportation and the
Attorney General of the United States, by March 17, 1997. We gave the applicants until April
1, 1997, to reply.
The application includes supporting statements from the following shippers: Alliance
Shippers Inc.; Alma Farmers Cooperative Association; Ameripol Synpol Corporation; Archer
Daniels Midland Company; Bethlehem Steel Corporation; Boise Cascade Corporation; C-E
Minerals; Consolidated Grain and Barge Company; Darling International Inc.; The Dow
Chemical Company; Fletcher Grain Company, Inc.; Forest City Trading Group, Inc.; GST
Corporation; GST Steel Company; The Heritage Group; Hub Group, Inc.; International Paper
Company; Inland Paperboard and Packaging, Inc.; Jefferson Smurfit Corporation; Laclede Steel
Corporation; Longview Fibre Company; The Lubrizol Corporation; Mark VII Transportation
Co. Inc.; McCann's Piggyback Consolidation, Inc.; MFA Incorporated; Pan Pacific Forest
Products, Inc.; Procter & Gamble Manufacturing Company; Quality Intermodal Corp.; Rail Van,
Inc.; Schneider National, Inc.; Stone Container Corporation; WECO Trading, Inc.; Westvaco
Corporation; and Weyerhauser Company. Supporting statements also have been filed by
Conoco Inc.; SFE Shippers Association; and Willamette Industries, Inc. The Allied Rail Unions
(ARU),(2) Brotherhood of Maintenance of Way Employes (BWME) and the United
Transportation Union-Illinois Legislative Board (UTU-IL) (jointly, Rail Labor) request
imposition of labor protective conditions.(3) None of the comments raise issues of adverse
competitive impact. Applicants have replied.
KCSI is a noncarrier holding company that directly controls KCSR and KCSTC.(4)
KCSTC is a noncarrier subsidiary of KCSI that was organized to acquire Gateway's stock.
KCSR is a Class I railroad that operates approximately 4,104 route miles of rail lines in nine
Midwestern and Southern states.
KCSR's principal routes extend from Kansas City, MO/KS, via Shreveport, LA, to
Beaumont/Port Arthur, TX, Lake Charles, LA, and New Orleans, LA. Another route extends
between Dallas, TX, and Shreveport, and a branch line extends north out of Alexandria, LA, to
Hope, AR. In 1993, KCSR acquired the MidSouth Rail system(5) and added the following routes:
between Shreveport and Meridian, MS; between Jackson and Gulfport, MS; between Meridian
and Birmingham, AL; and between Corinth, MS, and Middleton, TN, and Meridian. KCSR
also provides service, via limited haulage rights, over Union Pacific Railroad Company (UP)
lines between Omaha/Council Bluffs, Lincoln, NE, Topeka and Atchison, KS, and Kansas City,
MO; and between Beaumont and Houston/Galveston, TX.
KCSR carries grain from the Omaha/Council Bluffs area, Lincoln, NE, and Atchison and
Topeka, KS, to animal feed processors located in Arkansas, Texas, Louisiana, and Mississippi,
grain export facilities at Beaumont, Port Arthur, Houston, and Galveston, TX, and Baton Rouge,
Reserve, and New Orleans, LA. KCSR also is a significant competitor for general freight and
intermodal traffic moving into the Southeast. KCSR interchanges with Norfolk Southern
Railway at Meridan, MS, and with CSX Transportation, Inc. (CSXT) at Birmingham, AL.
KCSR participates in movements of significant amounts of coal from the Powder River Basin to
various electric utilities situated on its lines and hauls chemicals from the Gulf Coast region.
GWWR is a Class II rail common carrier operating approximately 461 miles of rail line
between East St. Louis, IL, and Kansas City, KS, and branch lines to Springfield, IL,
Jacksonville, IL, and Fulton, MO. GWWR also has haulage rights over UP between Springfield
and Chicago, IL. GWWR operates a switching yard and various industrial tracks in Kansas City,
KS, and provides service to owners of the Kansas City Terminal Railroad Company (KCT).
GWWR's mainline between Godfrey and Church, IL, is jointly owned with SPCSL Corporation
(SPCSL), a subsidiary of Union Pacific Corporation. In addition, in 1995, GWWR completed
construction of a track connection in East St. Louis for direct interchange with CSXT and
Consolidated Rail Corporation (Conrail).
Half of GWWR's revenue comes from performing haulage service for other carriers
between Kansas City and East St. Louis. GWWR also provides switching service for other
carriers in Kansas City and East St. Louis, IL.(6)
GWWR operates four scheduled road trains per day between Kansas City and East St.
Louis, IL. GWWR also operates approximately 75 locals movements and 360 yard switch crews
per month, depending on volume and service requirements. About half of the switch crews work
in Kansas City, and the other half work in the East St. Louis yards. Local trains operate between
Kansas City and Mexico, MO; between Mexico, MO, and Roodhouse, IL; between Roodhouse
and Jacksonville, IL; between Roodhouse and Springfield, IL; and between East St. Louis and
GWER is a Class III carrier that is wholly owned by GWWR. GWER, which began
operations in January 1994, owns and operates approximately 17 miles of track between East
Alton, IL, and East St. Louis, IL. GWER is primarily engaged in industrial switching in the
Alton and Wood River, IL areas. GWER now operates one round trip train five days per week
between East Alton and East St. Louis, IL (Conrail's Rose Lake Yard). Extra trains are operated
on an "as needed" basis. GWER's primary business is handling switch traffic to and from
Conrail customers in the Alton area.
The Proposed Transaction
According to the application, KCSI entered into an agreement with Gateway and its
parent, Gateway Management Partners, L.P., on February 28, 1996. Under the agreement, KCSI
would assist Gateway and its parent to obtain a loan to refinance existing debt and additional
operating capital. KCSI would also guarantee the repayment of the loan. The agreement also
provided that, at the closing of the loan, Gateway would issue to KCSI a warrant entitling KCSI
to acquire up to 90 per cent of Gateway's stock. The agreement further provided KCSI an
option to purchase the remaining shares of Gateway's common stock. On November 22, 1996,
KCSI assigned all of its right, title and interest under the agreement to KCSTC.
Applicants indicate that on December 12, 1996, KCSTC exercised the warrant and
option, and acquired all of Gateway's outstanding common stock, depositing the shares into a
voting trust. KCSI indicates that, after it obtains authority to control KCSR and Gateway, the
voting trust will be dissolved and the trust stock will be distributed to KCSTC. Gateway then
will become a wholly owned subsidiary of KCSTC. Through KCSTC, KCSI will obtain indirect
control of Gateway and its wholly owned subsidiary GWER. Applicants indicate that Gateway
will be marketed as part of the KCSR rail system, and that Gateway's operations will be
coordinated with those of KCSR. GWWR and GWER will remain separate legal entities,
however. KCSI says it has no present plans to merge Gateway into KCSR.
Applicants indicate that KCSTC acquired Gateway's stock for $10 million in cash.
Additionally, KCSI has guaranteed a line of credit for Gateway of up to $40 million. Applicants
expect that the transaction will increase KCSI's interest expenses slightly, but that the increase
will not adversely affect KCSI's operations or financial position. Applicants indicate that
KCSI's anticipated interest obligations will be well within the combined KCSR/Gateway
system's income and cash flow, even before the additional earnings expected to be generated by
common control are taken into consideration.
Statutory criteria. Under 49 U.S.C. 11323(a)(2), the purchase by Class I rail carriers of
property of another rail carrier requires prior approval.(7) The criteria for approval are set forth in
section 11324. Because this transaction involves the merger or control of one Class I railroad
but not of two or more Class I railroads, section 11324(d) governs. That section requires
approval of the application unless the Board finds that:
(1) as a result of the transaction, there is likely to be a substantial lessening of
competition, creation of a monopoly, or restraint of trade in freight surface transportation in any
region of the United States; and
(2) the anticompetitive effects of the transaction outweigh the public interest in meeting
significant transportation needs.
In transactions subject to section 11324(d), the primary focus is on the probable competitive effects. We must grant the application unless there will be adverse competitive impacts that are both "likely" and "substantial." Even then we may grant the application if the public interest benefit outweighs any anticompetitive impact that cannot be mitigated through conditions. See Wilmington Terminal RR, Inc.--Pur. & Lease--CSX Transp., Inc., 6 I.C.C.2d 799, 803 (1990), and cases cited therein, 7 I.C.C.2d 60 (1990), aff'd sub nom. Railway Labor Executives Ass'n v. ICC., 930 F.2d 511 (6th Cir. 1991) (Wilmington Terminal).
Competitive analysis. There is nothing in the record showing any anticompetitive effects
from the transaction. Applicants submitted a competitive analysis from Dr. Curtis M. Grimm,
who examined all origin-destination pairs in which KCSR and Gateway participate. He found
that the common control of KCSR and Gateway would not result in a lessening of competition,
the creation of a monopoly, or a restraint of trade in freight surface transportation in any region
of the United States. Dr. Grimm concluded that the proposed common control of KCSR and
Gateway is purely end-to-end and will result in no reduction of independent routing alternatives.
Applicants maintain that the combined KCSR/Gateway system will enable the carriers to
provide more effective service to their customers and will permit them to compete better in the
rail marketplace. They maintain that common control will also provide Gateway with financial
security and afford the combined system significant opportunities to reduce expenses and
rationalize operations. In their view, the proposed transaction will provide shippers and
receivers with enhanced competition, better equipment utilization, improved car supply,
improved plant maintenance, and other operating efficiencies.
In addition, applicants indicate that a combined KCSR/Gateway system will open new
single-line routes for shippers, especially those shippers of traffic between the Southwest and the
Northeast Corridor. They also maintain that the combined KCSR/Gateway system will facilitate
routing of shipments directly through St. Louis to eastern destinations.
Moreover, applicants state that the combined KCSR/Gateway system will improve
shippers' access to the important Mexico market and provide transportation options not currently
being offered by competing rail systems. Finally, common control also will open up new
marketing opportunities for intermodal shippers. The addition of Gateway's routes to KCSR's
intermodal network will provide intermodal shippers with access to additional intermodal lanes.
These claims by applicants are unopposed and unrebutted and, indeed, are supported by
more than 30 shippers. Based on the record before us, we cannot find any likelihood that
common control of these end-to-end systems will result in a reduction in competition in any
market or that any customer will lose rail service or routing alternatives as a result of the
transaction. Further, the transaction appears to offer the prospect of increases in competition,
service, and operating efficiencies. Thus, no anticompetitive effects have been shown.
Public interest. The record also shows that there are substantial public benefits from the
transaction. Applicants maintain that the proposed transaction will strengthen the combined
KCSR/Gateway system and improve its operating and financial performance. Assertedly,
KCSI's commitment to Gateway will provide it with the financial security and stability that it
has not enjoyed in recent years. Applicants further maintain that common control also presents
significant opportunities to reduce expenses and rationalize operations. They contend that the
proposed transaction will improve the adequacy of transportation service to the public by
offering new routing options and improving service to shippers and receivers on KCSR and
Gateway lines. Assertedly, no customer will lose rail service as a result of the transaction.
Allegedly, common control will have no adverse impact on the continuation of essential
transportation services by KCSR, Gateway, or any other carrier, and will assure the preservation
and continued viability of Gateway's lines.
Applicants assert that they expect only minimal operating changes due to common
control of KCSR and Gateway. According to applicants, all road trains and locals currently
operating will continue as they are with no significant changes. They indicate that the small
amount of additional interchange traffic expected to occur between KCSR and Gateway in
Kansas City will be handled with existing capacity on switch engines and road trains.
The transaction is not expected to have any adverse impact on commuter or other
passenger service. The Amtrak trains that operate over Gateway's trackage will not be affected
by this transaction. Only small amounts of additional traffic are expected to be generated
between KCSR and Gateway, and this traffic is not expected to significantly impact the number
of freight trains using joint freight/passenger trackage.
Applicants anticipate that the common control of KCSR and Gateway will result in an
increase of approximately 3,633 carloads diverted to the combined KCSR/Gateway system.
According to a verified statement of Michael H. Rogers, some of the new traffic will be derived
from extensions of haul on existing KCSR and/or Gateway traffic. Other new traffic will be
diverted from other carriers or from markets in which neither KCSR nor Gateway currently
participates. Much of this traffic is estimated to be generated through St. Louis. The increased
traffic is expected to generate additional annual revenues of approximately $5 million.
Applicants expect that the proposed transaction will save them approximately $1.5
million annually in operating expenses. They note that, since 1995, Gateway and KCSR either
have entered into or are in the process of negotiating and putting into place a number of
arrangements for sharing resources, resulting in mutual operating savings. Assertedly, the
parties are negotiating the relocation of Gateway's intermodal operations at Kansas City to
KCSR's facility. In addition, the applicants entered into an agreement on April 1, 1996, in
which KCSR granted Gateway a license to use software developed by KCSR that provides
computerized record maintenance, billing, car tracing, and interline revenue accounting. This
will enable Gateway to report its waybill data to the Association of American Railroads (AAR).
Under that agreement, KCSR will provide Gateway with technical assistance in acquiring and
setting up the hardware necessary to operate the system. This computerized system will be of
significant benefit to Gateway in its future record-keeping, billing, and car tracing processes and
participation in AAR-mandated initiatives.
Additionally, applicants expect to save approximately $1 million a year by eliminating
duplicate facilities and functions, such as office rent, various professional functions, outside
legal and accounting expenses, and property and liability insurance expense. Applicants indicate
that they are also considering the consolidation of dispatching and shop facilities.
Applicants anticipate that consolidating Gateway's car fleet with KCSR's car fleet will
reduce the short-term lease expense for various car types, resulting in estimated annual savings
of $50,000. In addition, use of more reliable, higher horsepower locomotives, and
implementation of improved maintenance-of-way operations on Gateway's lines, is expected to
improve overall transit times. Enhanced transit times are expected to generate approximately
$220,000 in annual operating savings from improved utilization of the combined system's car
fleet and reduction in car hire expenses on foreign line equipment.
KCSR will make its work equipment available under contract to maintain Gateway's
tracks and facilities, enabling Gateway to retire and sell older and less reliable equipment. In
addition, applicants state that by combining the purchasing functions and volume requirements
of both carriers, materials will be available to Gateway at lower costs.
Applicants also expect to realize savings by better use of locomotive fleets. Currently,
KCSR has 18 locomotive units in storage. If KCSR and Gateway come under common control,
some of these stored units will be placed back into service. This would allow 4 units currently
leased by Gateway to be returned to lessors, resulting in rental savings. According to applicants,
returning one of these leased locomotives would result in initial annual savings of approximately
$31,025. Gateway's remaining leased locomotives are leased through the year 2001. When the
leases expire and the units are returned to lessors, applicants expect additional annual savings of
approximately $142,350. Applicants expect to realize one-time savings due to reduced
locomotive and freight car parts inventories, retirement of unused yard and side tracks,
acceleration of scrap recovery, and sale of surplus locomotives.
Based on the evidence before us, we conclude that this transaction not only lacks
anticompetitive effects but also shows prospects of significant public benefits.
Labor protection. Applicants state that they do not expect any existing nonexempt
KCSR or Gateway employees to be adversely affected by the transaction. They indicate that
Gateway's nonmanagement employees and maintenance of way employees are represented by
national unions and covered under existing collective bargaining agreements. These agreements
will remain in force. Applicants state that there are no plans to transfer work currently
performed by Gateway employees to KCSR locations. They also report that management
personnel on Gateway and exempt personnel on GWER are not covered by collective bargaining
Under 49 U.S.C. 11326(a), with exceptions not pertinent here, when approval is sought
for a transaction under sections 11324 and 11325, the imposition of labor protection is
mandatory. In the absence of a need for greater protection, the conditions in New York Dock
Ry.--Control--Brooklyn Eastern Dist., 360 I.C.C. 60 (1979) are appropriate for this type of
transaction. Because no need for greater protection has been shown, these conditions will be
imposed here. This is consistent with requests of applicants and rail labor.
Environmental issues. Applicants state that, under 49 CFR 1105.6(c)(2)(i), the proposed
control transaction is exempt from environmental reporting requirements and that, under 49 CFR
1105.8(b)(1) and (3), it is exempt from historic preservation reporting requirements. The
Board's Section of Environmental Analysis has reviewed the application and agrees with
applicants. Accordingly, we conclude that the proposed transaction will not significantly affect
either the quality of the human environment or the conservation of energy resources and will
have no effect on historic properties.
As noted in the notice served February 13, 1997, applicants requested that the
proceeding be expedited. We will accommodate the request and make the decision effective
May 5, 1997.
Based on the record, we find:
1. The proposed control transaction will not substantially lessen competition, create a
monopoly, or restrain trade in freight surface transportation in any region of the United States.
2. This action will not significantly affect either the quality of the human environment or
the conservation of energy resources.
It is ordered:
1. The application under 49 U.S.C. 11323, et seq., for KCSI to acquire control of
GWWR and GWER is approved, subject to the employee protection conditions described in New
York Dock Ry.--Control--Brooklyn Eastern Dist., 360 I.C.C. 60 (1979).
2. This decision is effective on May 5, 1997.
By the Board, Chairman Morgan and Vice Chairman Owen.
Vernon A. Williams
1. GWWR and GWER will be collectively referred to as Gateway.
2. ARU represents the following unions: The American Train Dispatchers Department of the International Brotherhood of Locomotive Engineers; Brotherhood of Locomotive Engineers; Brotherhood of Railroad Signalmen; International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers & Helpers; International Brotherhood of Electrical Workers; National Council of Firemen and Oilers/SEIU; and Sheet Metal Workers International Association.
3. UTU-IL claims that the application is deficient because the public version omits the
February 28, 1996 agreement between KCSI and Gateway. The applicants consider the
agreement to be confidential and submitted a copy to the Board under seal. UTU-IL contends
that the agreement should be made available to the public. Applicants respond that a protective
order was served December 9, 1996, to protect confidential and proprietary information
produced in response to a discovery request. Applicants note that UTU-IL has not previously
requested a copy of the agreement nor has it offered to sign the undertaking prescribed by the
The criticisms of UTU-IL are without merit. Applicants simply followed our rules in
requesting that the agreement be held in confidence for legitimate business reasons. The
dissemination of the terms and conditions which KCSI was willing to accept in order to acquire
Gateway could operate to KCSI's disadvantage in future business negotiations. Moreover, if
UTU-IL (or any other party) needed information in those agreements to present its case, the
union could have signed the undertaking and received the agreement. The union did not do so
and did not interpose any objection to the merits of the transaction.
UTU asserts further that KCSR's president, Mr. Michael R. Haverty, recently served as a director of Gateway, raising the question whether KCSR and Gateway may
have already been under common control. Applicants respond that UTU-IL's assertions are unsupported. Applicants note that the Board's Secretary issued an informal opinion that KCSI was sufficiently insulated from premature control of Gateway under the voting trust arrangement. We agree with applicants. UTU-IL has not shown how representation by one seat on Gateway's board of directors would have enabled KCSR to control Gateway.
4. 4 KCSI also controls three non-operating motor carrier subsidiaries. In our decision served December 12, 1996, we granted applicants' request that these motor carrier subsidiaries not be considered "applicant carriers" under 49 CFR 1180.3(b) in this proceeding.
5. Kansas City Southern Industries, Inc., The Kansas City Southern Railway Company and K&M Newco, Inc. Inc.--Control--Midsouth Corporation, Midsouth Rail Corporation, Midlouisiana Rail Corporation, Southrail Corporation and Tennrail Corporation, Finance Docket No. 32167 (ICC served June 4, 1993).
6. In 1996, GWWR entered into an agreement with KCSR to lease and operate a KCSR industrial switching line in Kansas City.
7. Class II and Class III rail carriers may purchase rail lines under new 49 U.S.C. 10902.