Now Final: Cincinnati Rail Line Sale to NS (UPDATED)

(NS Photograph)

Norfolk Southern’s (NS) proposed purchase of the approximately 337-mile, city of Cincinnati-owned Cincinnati Southern Railway (CSR) was approved by city voters on Nov. 7, 2023, and finalized March 15, 2024.

In 2022, NS reported executing a purchase agreement for the Class II, which it and its predecessor railroads have been operating under a lease agreement with the city of Cincinnati, Ohio, since 1881. The $1.62 billion offer for the line that connects Cincinnati and Chattanooga, Tenn., was approved by the CSR Board and city, but the deal required changes in state law approved by voters through a public referendum, as well as Surface Transportation Board (STB) approval. STB authorized the acquisition, subject to employee protective conditions, on Sept. 19, 2023, saying it “would not likely cause a substantial lessening of competition or create a monopoly or restraint of trade.”

Included in the transaction is the approximately 9,500 acres of land that sits under the CSR infrastructure that is maintained NS. As part of the agreement, NS said it would also donate to the state of Ohio approximately 20 miles of the east end of its Peavine Line, an out-of-service segment that runs from Rardon to Vera Junction.

NS’s wholly owned subsidiary, The Cincinnati, New Orleans & Texas Pacific Railway Company, has been operating the CSR under a lease agreement that was set to expire Dec. 31, 2026, with a 25-year renewal option. Funds from the $25 million-per-year lease have been dedicated to city of Cincinnati infrastructure projects.

“This is a victory for the citizens of Cincinnati,” NS spokesperson Tom Crosson said in a statement to Railway Age last November when voters approved the sale. “Current and future generations will reap the benefits of new infrastructure investments, helping to create a better future for the city. We appreciate all of the community leaders and groups who endorsed Issue 22–especially Mayor Aftab Pureval, the City Council, and the Board of Trustees of the Cincinnati Southern Railway. We also thank the staff and volunteers who made this a successful campaign. Now, we will work with the city to finalize the sale, which we expect to close in Q1 of 2024.”

The sale officially closed on March 15, according to a report by 91.7 WVXU News, a NPR network.

Paul Muething, President of the CSR Board of Trustees, “said in a statement they received the $1.6 billion payment, plus $20 million in deferred transaction fees. The money will immediately be invested through a contract with UBS Financial Services,” according to the media outlet.

“The Board-approved Investment Policy Statement indicates a goal to receive an average annual return of at least 5.5%, projected to generate about $55 million a year,” 91.7 WVXU News reported. “The city will use the investment returns to pay for existing infrastructure maintenance, like health centers and street conditions.“

“‘We want to thank the citizens of Cincinnati for their vote in support of the sale,’ Muething said in a statement. ‘This transaction gives us the ability to deliver transformative and perpetual value to the city and its citizens,’“ 91.7 WVXU News reported.

BACKGROUND

CSR was the only municipally owned main line railroad in the U.S. Established through a $10 million bond issue approved by Cincinnati voters in June 1869, it “became a dependable cash cow for the city after its operations were leased out in 1881 to the company that would eventually become Norfolk Southern,” FOX19 reported Dec. 20, 2022. “The route, in turn, has become one of Norfolk Southern’s highest density segments, with as many as 30 trains traversing it every day. NS President and CEO Alan Shaw called it ‘a critical artery linking the Midwest and the Southeast[…]’ and a ‘core line’ in the company’s network.”

NS first offered to buy the CSR for an undisclosed (but lower than $1.62 billion) sum in July 2021 during lease renewal negotiations that fell apart, prompting NS and the CSR Board to enter arbitration, according to the Dec. 20, 2022, FOX19 report.

NS came back with the $1.62 billion offer In April 2022. CSR’s Board contracted with third-party accounting firm BMO to analyze the bid, “and the analysis deemed it a fair value,” FOX19 reported. The parties came to a nonbinding agreement on the proposed sale terms in June 2022. NS, Cincinnati Mayor Aftab Pureval and the CSR Board of Trustees announced on Dec. 19, 2022, execution of a Board-approved, City-administration-vetted purchase agreement.

“The proposed sale could more than double the city’s income from the railway,” FOX19 reported Dec. 20, 2022. “It would come at a convenient time, as the city looks forward to annual deficits of around $35 million from deferred and unfunded infrastructure maintenance projects (as well as falling earnings tax revenue due to remote work.) Pureval cited $350 million in capital infrastructure projects that will require funding in the next five years.”

Sale proceeds would be placed in an infrastructure trust managed by the CSR Board called the “Building Our Future Trust Fund.” Board-retained money management firms would oversee trust fund investments. Annual interest of 5.5% would bring in $88 million per year (well above what NS was paying), $56 million of which would go to the city, with the remainder reinvested. The perpetual trust would be devoted to funding improvements to streets, bridges, municipal buildings, parks and green space.

“The city claims the proposed sale would not change any day-to-day rail operations or lead to a significant change in rail traffic,” FOX19 reported Dec. 20, 2022. “The mayor argued the sale would unload from the city’s books an asset that’s extremely valuable but nonetheless susceptible to the whims of ever-changing global and regional supply chains.”

“This agreement sets the framework for Norfolk Southern to own a core line in our network in perpetuity, allowing us to advance our strategic objectives of improving service, enhancing productivity, and creating an even stronger platform for accelerated growth, all while eliminating uncertainty around future control of the line and lease costs,” Shaw said in 2022 when announcing the proposed sale, which required STB approval, as well as Ohio General Assembly passage of proposed changes to a state law that governs how the city can use the lease payments. If voters did not approve those law changes in a public referendum, the sale agreement would have lapsed and the city would have been free to go to public bid on an operator.

NS “can avoid an inflation adjustment that would increase the sale price by around $24 million if Cincinnati voters approve the sale in November [2023] and the STB gives the greenlight by Dec. 31, 2023,” FOX19 reported July 13, 2023. “The CSR Board has set the minimum annual amount it will send the city if the sale goes through in 2024 at $26.5 million. The minimum is indexed to an inflation metric. Conservative estimates place the city’s real estimated annual windfall at around $60 million, more than double what it currently receives.”

The CSR Board on Nov. 14, 2023, was slated “to pick a money manager for the trust,” according to FOX19’s Nov. 7, 2023 report. “Sixteen companies submitted bids to run the fund.”