Rail giant offers $1.6 billion to buy Cincinnati’s ‘greatest money maker’

Watch the full media briefing here.

CINCINNATI (WXIX) - Cincinnati could sell one of its most prized assets, the Cincinnati Southern Railway, for more than $1.6 billion to the freight company that currently leases it.

Norfolk Southern and Cincinnati Mayor Aftab Pureval gathered with the CSR Board of Trustees at Union Terminal Monday afternoon to announce the execution of a purchase agreement, which the Board approved earlier the same day.

The 337-mile track from Cincinnati to Chattanooga is the only municipally owned trunk railway in the United States. The route was funded with a $10 million bond issue approved by Cincinnati voters in June 1869, just as the steamboat era that put Cincinnati on the map was winding down. 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.

A 1977 legal note detailing the history of the railway found the CSR “has proven to be the City’s greatest money maker. Its return on investment, dollar for dollar, is unmatched.”

The route, in turn, has become one of Norfolk Southern’s highest density segments, with as many as 30 trains traversing it every day. Norfolk Southern 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.

The City currently receives around $25 million in annual lease payments vaguely earmarked for infrastructure projects. The lease, which was last renegotiated in 1987, is set to expire on Dec. 31, 2026 with a 25-year renewal option.

Norfolk Southern first offered to buy the route for some amount in July 2021 during lease renewal negotiations. The initial offer amount is unknown, but officials say it was lower than the final $1.6 billion. Those lease negotiations subsequently fell apart, and Norfolk Southern and the CSR Board went into arbitration.

In April 2022, Norfolk Southern offered $1.6 billion for the route. The Board contracted with third-party accounting firm BMO to analyze the offer, and the analysis deemed it a fair value. Norfolk Southern and the Board came to a nonbinding agreement on the proposed sale terms in June.

City Administration has vetted the deal, according to Pureval.

The proposed sale could more than double the City’s income from the railway. 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.

The windfall, which Norfolk Southern would pay in the form of cash considerations, would be placed in an infrastructure trust managed by the CSR Board called the “Building Our Future Trust Fund.”

The CSR Board comprises five members on five-year terms, all appointed by the Mayor of Cincinnati, according to the City Charter.

The principal would not be touched, but annual interest returns would be transferred to the City in perpetuity. The funds would be restricted to projects rehabilitating, modernizing or replacing existing Cincinnati infrastructure such as streets, bridges, municipal buildings, parks, green space and other things “necessary for delivering core public services.”

The City would be prohibited from using the funds for debt service payments or building new infrastructure.

The exact amount of the annual returns remains unclear, though Pureval said they could total $60 million. The CSR Board would be compelled to send the city $25 million and could also send additional returns on top of that, though it would gave discretion to withhold some money to ensure the principal remains intact.

The Board would retain money management firms to oversee investment of the trust funds.

The City claims the proposed sale would not change any day-to-day rail operations or lead to a significant change in rail traffic.

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 is an historic opportunity to deliver great value to citizens of Cincinnati and realize a substantial return on the investment and foresight of our predecessors,” Pureval said. “We are fortunate that a number of events have brought us to this point and will provide for the transportation needs of our city for decades to come. This transaction marks a seminal moment for the City of Cincinnati, and I look forward to submitting it to voters for their approval.”

It also makes sense for Norfolk Southern, according to Shaw.

“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,” he said.

Any sale would be subject to a public referendum, possibly on the November 2023 ballot.

“So, the public has an entire year to better understand the deal, to vet the deal, to ask their questions and, ultimately, to pass or fail the deal,” Pureval said.

It would also require regulatory clearance from the U.S. Surface Transportation Board as well as Ohio General Assembly passage of proposed changes to state law.

If the lease is not approved by voters or the law does not change, the sale agreement lapses and the City is free to bid out the route.

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