Decision No. 34-R-1989

January 20, 1989

File No. 50395

---

BACKGROUND

Algoma Central Railway (hereinafter ACR) gave notice dated July 4, 1988 to the National Transportation Agency (hereinafter the Agency) of an agreement to transfer its Rail Division to Algoma Central Railway Inc. (hereinafter ACR Inc.).

The termini and lines of the railway proposed to be transferred are:

1. the line between Sault Ste. Marie, Ontario and Hearst, Ontario over the Soo and Northern Subdivisions; and
2. the line between Hawk Junction, Ontario and Michipicoten, Ontario over the Michipicoten Subdivision.

The subject notice was published on October 26, 1988 in the newspapers of the areas concerned and copies of the notice were sent to others believed to be interested. The time for the filing of objections closed on November 27, 1988. As November 27th fell on a Sunday, by virtue of the operation of subsection 10(3) of the National Transportation Agency General Rules objections could be filed with the Agency on Monday November 28, 1988. Objections were filed by the Transportation Communications International Union; the United Transportation Union; the Brotherhood of Locomotive Engineers; the International Brotherhood of Boilermakers, Iron Ship Builders, Forgers and Helpers; the International Association of Machinists and Aerospace Workers; the Brotherhood of Maintenance of Way Employees; the International Brotherhood of Firemen and Oilers; the Brotherhood Railway Carmen of Canada (on behalf of itself and on behalf of the preceding seven unions); the law firm of Nelligan Power on behalf of the preceding 8 unions; the Corporation of the Town of Hearst; the Council of the Corporation of the City of Sault Ste. Marie; the Sault Ste. Marie and District Labour Council; the Minister of Transportation for the Government of Ontario; Dr. Maurice Foster, M.P., Algoma; Stephen Butland, M.P., Sault Ste. Marie; Karl Morin-Strom, M.P.P., Sault Ste. Marie and Bud Wildman, M.P.P., Algoma (Messrs. Morin-Strom and Wildman submitted joint objections); Corporation of Mattice-Val Côté; Nord-Aski Frontier Development Inc.; Lecours Lumber Co. Limited; Hearst Lumbermen's Association; Woods Cabins; Sonny-Bob Lodge and 131 individuals.

It was not disclosed on a number of objections that they had been properly copied to ACR and in these cases the Agency itself ensured that ACR received the required copy. In addition, a number of objections were filed with the Agency within a few days after November 28, 1988. These objections were copied to ACR and had ACR wished to reply to them it could have done so within ten days of receipt. The Agency has included these late filings in the record of this notice as it is satisfied that ACR was given a full opportunity to comment on all of the submissions before the Agency. ACR's only reply to the objections was received by the Agency on November 30, 1988.

PRELIMINARY MATTERS

In the course of considering the notice, the Agency has dealt with several interim issues. The Agency received a request for disclosure of certain financial and statistical statements found in the confidential Annual Reports which ACR filed with the former Railway Transport Committee of the Canadian Transport Commission (hereinafter the CTC) and projections relating to these statements, also provided to the CTC by ACR. Requests for an extension of time were made to enable objectors to comment on this requested information. The Agency was also asked to incorporate into the subject notice certain other submissions made to the CTC. More specifically, the Agency was asked to incorporate a substantial number of submissions received in response to ACR's January, 1987 application filed with the CTC, which was subsequently withdrawn on January 11, 1988, for the issuance of a Certificate of Public Convenience and Necessity in respect of the proposed incorporation of ACR Inc.

The Agency considered all of the representations made concerning the interim issues, and, by letter dated January 3, 1989, the Agency ordered that the requested financial and statistical statements filed by ACR with the CTC not be placed on the public record since it was of the opinion that specific direct harm would likely result from public disclosure of the documents. As the request for public disclosure was denied, so too were the requests for extensions of time. The Agency also decided that all communications and submissions filed by objectors with the CTC in response to ACR's 1987 application be incorporated by reference into the record on the subject notice. Included in these submissions are: the ACR presentation to Deputy Ministers of the Government of Ontario on May 6, 1986; remarks made by S.A. Black (Vice-President for rail operations for ACR) to all railway employees in the latter part of 1986 and ACR statements to unions on November 12, 1986 at the outset of collection bargaining negotiations.

In December of 1988, the Agency requested from ACR copies of financial assistance agreements that had been entered into between ACR and the Government of Canada and the Government of the Province of Ontario, the transfer agreement whereby ACR agreed to transfer its Rail Division to ACR Inc. and the incorporation documents of ACR Inc. The Agency also advised ACR that it intended to use the previously filed ACR financial and statistical projections in its review of the subject notice. The Agency received the requested information on December 8, 1988. The two financial assistance agreements were filed by ACR as privileged and confidential documents for the exclusive use by the Agency. ACR stated that the projections had been filed on a confidential basis and that it had no objection to the use of these data on the same basis.

By covering letter dated December 15, 1988, the Agency released to the objectors and other interested parties those documents received from ACR on December 8, 1988 for which a claim for confidentiality had not been made. The Agency invited further submissions pertaining to the documents which were released. ACR was also given the opportunity to reply to the further submissions. Further objections to the transfer of ACR's Rail Division were filed by the Corporation of the Town of Hearst, the Corporation of the City of Sault Ste. Marie and Nord-Aski Frontier Development Inc. By letter dated December 23, 1988, Nelligan Power, on behalf of the interested unions, requested the release of the financial assistance agreements along with disclosure of additional information. By letter dated December 29, 1988, ACR opposed the release of the agreements. On December 30, 1988, the Agency advised Nelligan Power that its request for additional documents and information had been denied on the basis that public disclosure would likely result in specific direct harm.

Numerous objectors requested a public hearing on the proposal. As stated previously, objectors also requested extensions of time to make further representations on the proposed transfer. In addition, the Minister of Transportation for the Government of Ontario requested that ACR be required to provide full transfer particulars. ACR, in its answer to objections argued that the Agency is in possession of all the facts and that there is no real requirement for a public hearing.

The Agency has carefully reviewed all of the information that it has in its possession concerning the proposed transfer of the Rail Division. This includes the information which was submitted in 1987 by objectors pursuant to a previous ACR application which was withdrawn. It also includes ACR's publicly available 1987 Annual Report. The Agency is of the opinion that there is sufficient information on file to render a decision. Therefore, the Agency declines to hold public hearings on the notice. The Agency also finds that the particulars on the proposed transfer submitted by ACR are adequate, and that interested parties have been allowed sufficient time to make representations. Accordingly, the Agency hereby confirms its previous decision not to grant extensions of time for further representations.

NOTICE AND AGENCY CONSIDERATIONS

Subsection 158(3) of the NTA, 1987 requires the Agency to approve the agreement for conveyance unless it determines that the conveyance would not be in the public interest or that the company to whom the line or segment is to be conveyed is not authorized to operate it.

The only matter the Agency must now address is the question of the public interest. This term is defined in section 4 of the NTA, 1987 as:

"public interest" means the public interest that is consistent with

(a) the national transportation policy set out in subsection 3(1),

(b) policy directions, if any, issued under section 23, and

(c) in respect of Part II, directions, if any, issued by the Minister under section 86;

In this matter there are no relevant directions under either section 23 or section 86. Therefore, the Agency in considering the notice was directed by subsection 3(1) of the NTA, 1987 which provides:

3.(1) It is hereby declared that a safe, economic, efficient and adequate network of viable and effective transportation services making the best use of all available modes of transportation at the lowest total cost is essential to serve the transportation needs of shippers and travellers and to maintain the economic well-being and growth of Canada and its regions and that those objectives are most likely to be achieved when all carriers are able to compete, both within and among the various modes of transportation, under conditions ensuring that, having due regard to national policy and to legal and constitutional requirements,

(a) the national transportation system meets the highest practicable safety standards,

(b) competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services,

(c) economic regulation of carriers and modes of transportation occurs only in respect of those services and regions where regulation is necessary to serve the transportation needs of shippers and travellers and such regulation will not unfairly limit the ability of any carrier or mode of transportation to compete freely with any other carrier or mode of transportation,

(d) transportation is recognized as a key to regional economic development and commercial viability of transportation links is balanced with regional economic development objectives in order that the potential economic strengths of each region may be realized,

(e) each carrier or mode of transportation, so far as practicable, bears a fair proportion of the real costs of the resources, facilities and services provided to that carrier or mode of transportation at public expense,

(f) each carrier or mode of transportation, so far as practicable, receives fair and reasonable compensation for the resources, facilities and services that it is required to provide as an imposed public duty, and

(g) each carrier or mode of transportation, so far as practicable, carries traffic to or from any point in Canada under fares, rates and conditions that do not constitute

(i) an unfair disadvantage in respect of any such traffic beyond that disadvantage inherent in the location or volume of the traffic, the scale of operation connected therewith or the type of traffic or service involved,

(ii) an undue obstacle to the mobility of persons including those persons who are disabled,

(iii) an undue obstacle to the interchange of commodities between points in Canada, or

(iv) an unreasonable discouragement to the development of primary or secondary industries or to export trade in or from any region of Canada or to the movement of commodities through Canadian ports,

and this Act is enacted in accordance with and for the attainment of so much of those objectives as fall within the purview of subject-matters under the legislative authority of the Parliament of Canada relating to transportation.

The Agency recognizes that ACR, in deciding on the transfer of the Rail Division to a separate and wholly-owned company, is acting as a public corporation whose primary responsibility is to its shareholders. The Agency, however, must examine this decision beyond the interests of a corporation as the decision affects the people, economy and overall well-being of a region. The self-interest of a corporation and the public good are entwined and Parliament has recognized this by entrusting the Agency with a duty to examine the public interest in specific circumstances outlined in the NTA, 1987.

Subsection 3(1) indicates that the concept of public interest encompasses a far wider range of consideration than those related solely to the management and shareholders of ACR. The adequacy of the transportation network, the transportation needs of shippers and travellers, and the critical role played by transportation in regional economic development are important considerations of public interest. Transportation, in many areas of Canada, is the key which determines how markets become accessible to our industries. This is particularly true with Northern Ontario. Section 3 is therefore designed to strengthen the role which transportation plays in the development of our industrial base. In this context, the Agency must weigh the impact of ACR's proposed transfer agreement in light of the following:

1. the impact of the railway operations on individuals, businesses and the economic development of the Algoma region;
2. the financial and economic prospects of the railway operations; and
3. the ability of ACR Inc. to operate as part of an economic, efficient and adequate transportation network consistent with subsection 3(1) of the NTA, 1987.

I. Regional Impact of Railway Operations

It is apparent from the submissions of the objectors, as well as ACR's presentations to Deputy Ministers of Ontario, its railway employees and its unions, that ACR's railway operations are important and in some cases essential to the communities, businesses and individuals which rely on its services.

Numerous objectors, including elected officials representing the areas concerned and lumber and tourist operations, assert that the railway operated by ACR is of fundamental importance to the industries served. This is particularly true for mining, forestry and tourist operations which are all essential components to the economic viability of the region. The railway's passenger train services are very important, not only to serve the approximate 12,000 point to point passengers which use it each year but also to support the tourism industry of Sault Ste. Marie and surrounding area. Approximately 115,000 tourists utilize the railway annually. In its May 1986 presentation to the Deputy Ministers of the Government of Ontario, ACR indicated that its two largest excursions constitute the largest tourist attraction in Northern Ontario. In the same presentation, ACR estimated that passenger expenditures support approximately 1,553 jobs, including 87 full-time, part-time and seasonal jobs directly associated with the passenger trains. Moreover, the railway has substantial impact on other communities. The operation of the Algoma Ore Division of The Algoma Steel Corporation, Limited near Wawa, Ontario is dependent upon ACR for transportation. In the May, 1986 presentation, ACR indicated that a shutdown of the Algoma Ore Division would be destructive to the Town of Wawa and would impair the community of Hawk Junction. The Agency is also fully aware of the direct and substantial importance of the railway to the well-being of Rail Division employees which numbered close to 400 in May of 1986.

Based on the foregoing, the Agency shares the views of ACR and all concerned that railway operations are of fundamental social and economic importance to the affected region.

II. Financial and Economic Prospects of Railway Operations

The Rail Division operates freight services, passenger services and tourist services. It is confronted with substantial challenges which ACR itself has acknowledged. One central challenge facing the Rail Division is that sintered ore produced by Algoma Ore Division near Wawa needs to be delivered to the steelworks at a cost that is competitive with alternative U.S. or Canadian iron ore sources. If this cannot be accomplished, a real possibility exists that the Algoma Ore Division at Wawa may need to terminate its operations. A substantial component of the ore costs is the freight transportation of the ore to Sault Ste. Marie. Freight charges need to be low enough for the ore mined near Wawa to remain competitive with alternative sources and, at the same time, high enough for ACR to cover its costs and to make a reasonable profit. In its various presentations, ACR has expressed grave concerns about its ability to charge competitive freight rates and have the ore remain competitive. ACR has indicated that without sintered iron ore traffic, all of its railway operations would likely have to be terminated. ACR's 1987 Annual Report indicates that the prospects for its Rail Division, " ... beyond the next two or three years continue to be clouded. Over that period, a high probability exists that lower-cost iron ore will replace that produced along our line. The loss of revenue from this traffic, if not replaced, would have serious implications for the future of our rail operations.".

The other challenge facing the Rail Division relates to its passenger services. ACR acknowledges that its Agawa Canyon tourist train service which operates from the beginning of June to the middle of October each year achieves an approximate break-even result financially. ACR stated at the presentation to the Deputy Ministers of the Government of Ontario in May, 1986 that the regular passenger train service between Sault Ste. Marie and Hearst has lost approximately $3,000,000 per annum for the last several years. ACR has previously applied to the CTC on October 1, 1976 for discontinuance of the Sault Ste. Marie-Hearst passenger train service. The service was ordered continued by the CTC on December 13, 1977 and also in subsequent statutory five year reconsiderations on December 13, 1982 and December 11, 1987. The requirement for continuance has resulted in ACR being subsidized by the Government of Canada for 80% of its losses on the service in question, with the remaining 20% being absorbed by ACR.

The fact that the above operations are not profitable and do not generate enough cash flow presents a challenge to ACR as it negatively impacts on its ability to institute a satisfactory capital cost replacement program to allow for effective and timely replacement of track, structures and equipment. ACR's passenger cars are fast approaching the end of their serviceable life. They are now very expensive and difficult to operate and maintain.

The Agency has given careful consideration to the issue of viability of the railway operations. While it recognizes the serious challenges facing the Rail Division, it also is aware that the immediate prospects for the railway operations are not entirely bleak and that opportunities exist for the diversification of railway operations.

The Agency notes that ACR itself, in addressing objections concerning the issue of viability, pointed to a five-year confidential contract with its principal customer for the carriage of iron ore sinter from Wawa to Sault Ste. Marie at rate levels which it has stated are compensatory in keeping with the NTA, 1987. It is also now receiving tourist development grants from the Province of Ontario and the Government of Canada.

Regarding the potential opportunities for the railway operations, the Agency is of the view that these have been minimized in the submissions. ACR is geographically well located in terms of access to resource developments and connections to major railways in the United States. It is strategically positioned to take advantage of major markets and to maximize its traffic potential through the intra-modal competitive access provisions in the NTA, 1987.

In particular, the new intra-modal competitive line rate provisions of the legislation are designed to bring both competitive rail rates and service to resource-base shippers who are captive to the line of a single railway and who market their products in distant markets. Northern Ontario has many captive resource-based shippers particularly in the forest products and mining sectors. Most of these captive shippers are located many miles from connections with alternate competitive rail service. Prior to the passage of the new legislation, there existed few, if any, opportunities for competitive rail service for captive shippers in Northern Ontario. However, the competitive line rate provisions of the new legislation now afford these shippers the option of competitive rail rates and service. Routings from these shippers to major destinations in the Mid-Western U.S. are several hundred miles shorter employing ACR routing. Accordingly, ACR is in a favourable position to attract this traffic.

Based on the foregoing, the Agency concludes that the railway operations are faced with problems and opportunities similar to other business operations in any dynamic environment. Its viability is contingent upon its ability to address the challenges and take advantage of available opportunities.

III. Ability of ACR Inc. to Operate as Part of an Economic, Efficient and Adequate Transportation Network Consistent with Subsection 3(1) of the NTA, 1987

ACR proposes to transfer its rail operations and rail assets to its subsidiary, ACR Inc. A Transfer Agreement has been submitted to effect this arrangement. In view of the importance of the railway to the Algoma region, and the significant challenges that it is facing, the Agency is very sensitive to the impact that the proposed transfer of the Rail Division could have on the future of rail operations. The ability to adequately address the substantial challenges ahead will in large part depend on the financial position and strength of the entity which controls and operates the railway.

A. Present Structure of ACR

ACR was incorporated in 1899 and operated for many years primarily as a wilderness railroad to transport iron ore and forest products out of Northern Ontario. As of December 31, 1987 ACR owned the following subsidiary companies:

• Algoma Steamships Limited -owns one ship operated by ACR
• Herb Fraser and Associates Limited -performs ship repair and maintenance
• Algowest Shipping Ltd. -negociates with shippers for grain transportation
• Algocen Mines Limited -holds mining lease north of Hearst
• Algocen Realty Holdings Limited -owns real estate in Sault Ste. Marie and Elliot Lake
• ACR Delaware, Inc. -holding company for U.S. investments
• Algocen, Florida, Inc. -developer of Florida real estate

ACR and its subsidiary companies operate several divisions. Having disposed of its Trucking Division, the company operates Marine, Real Estate and Rail Divisions. The following is a brief summary of its Marine and Real Estate Divisions and a more detailed summary of its Rail Division.

Marine Division

The Marine Division is principally operated by ACR in conjunction with Algoma Steamships Limited, Herb Fraser and Associates Limited and Algowest Shipping Ltd.

As of December 31, 1987, ACR operated a fleet of eighteen dry-bulk cargo vessels principally on the Great Lakes and the St. Lawrence Seaway. In 1987, the Marine Division carried 19,631,000 net tons of produce which included such items as ore, coal and coke, grain, salt and stone. In terms of assets and revenues, it is by far the largest Division of ACR.

Real Estate Division

As of December 31, 1987, ACR conducted most of its real estate operations through its subsidiaries, Algocen Realty Holdings Limited, ACR Delaware, Inc. and Algocen, Florida, Inc.

These companies had developed commercial and real estate complexes in Sault Ste. Marie and Elliot Lake, Ontario. More specifically, the companies own a shopping centre, hotel, office tower and apartment building in Sault Ste. Marie. A shopping centre-hotel complex with office space is owned in Elliot Lake. The companies also owned and had developed condominium units in Florida, which were sold in 1987. The Real Estate Division earned $9,072,000 in revenues in 1987. Net assets totalled $32,808,000 at the end of the year.

Rail Division

Rail operations are principally operated by ACR itself. The 1987 Annual Report also discloses that ACR supervises the use and development of 850,000 acres of land it owns in the Algoma region.

ACR conducts an Agawa Canyon tour service which operates every day from the beginning of June to the middle of October each year. The Agawa Canyon is approximately 114 miles north of Sault Ste. Marie on ACR's main line of track to Hearst. The Agawa Canyon tour was used by 102,000 people in 1987. Financially this operation achieves approximately a break-even result.

ACR operates a regular passenger train service between Sault Ste. Marie and Hearst, Ontario. The passengers travel for such activities as camping, fishing, hunting, work and skiing. The service also transports tourists taking the Snow Train and Tour of the Line excursions and it accommodates overflows from the Algoma Canyon tour service.

ACR operates a large rail freight service. Algoma Ore Division, of The Algoma Steel Corporation, Limited is ACR's largest user of freight services. Algoma Ore Division has iron ore mining and sintering operations near Wawa, Ontario. ACR operates a 26 miles branch line from Hawk Junction (on its main line) via Wawa to Michipicoten Harbour. This branch line is essentially dedicated to Algoma Ore Division operations.

Sintered iron ore represents the majority of traffic. Limestone, coke, ore fines and millscale make up the balance. The sinter moves from Wawa via Hawk Junction to Sault Ste. Marie. Coke, limestone, millscale and some ore fines move from Sault Ste. Marie to Wawa. Most limestone and ore fines, as well as some coke and millscale, is brought to Michipicoten Harbour by self-unloading bulk cargo vessels and then loaded into rail cars for movement to Algoma Ore Division.

B. Financial Position of ACR

The consolidated balance sheet discloses that ACR is in a strong and healthy financial position. On a consolidated basis it had a working capital surplus of $26,785,000 as of December 31, 1987. The Company has a favourable debt: equity ratio. It should also be noted that ACR's disclosed financial position would be dramatically enhanced if the forest lands that it owns (approximately 850,000 acres granted to the company in conjunction with the construction of the railroad) were recorded at market as opposed to nominal value. Their intrinsic and potential value are substantial.

C. Proposed Structure - ACR Inc.

ACR proposed to transfer its rail operations and rail assets to its subsidiary ACR Inc. The Marine and Real Estate Divisions would be retained by ACR and its other subsidiary companies. The Transfer Agreement specifically excludes the transfer of lands declared by the Board of Directors of ACR to be surplus to railway requirements. ACR acknowledges that it would retain the majority of the approximately 850,000 acres of land, most of which was granted to it by governments for the construction, development and operation of the railway.

A primary concern of many objectors is that ACR proposes to retain the majority of lands that were granted to it which would leave ACR Inc. in a weakened financial position with minimal land holdings. It is argued by the objectors that the lands were granted by governments to ACR to ensure the long-term viability of the railway and since the lands are held in trust for the public it would be a breach in trust to allow ACR to keep the lands for the benefit of its shareholders.

ACR submits that the retention of lands not required for railway purposes would likely be a positive factor. It states that the lands, if retained by ACR, would be better administered and developed with consequential benefits to the economy and employment level of the region. Additional traffic for the railway would, hopefully, also be generated. ACR argues that in the cases of other railway companies, which have removed land from railway administrative control, economic development accelerated. While the Agency can find no statutory prohibition against the segregation of the granted lands from the railway assets, it finds that such a segregation would not provide a benefit to the rail operations.

The granted lands are recorded on ACR's financial statements at nominal value. Their intrinsic and potential value, however, are undoubtedly substantial. The Agency agrees with the objectors' view that the retention of the majority of these lands by ACR would significantly weaken ACR Inc. financially. ACR Inc. would earn no revenues from the lands as future developments occur, which could help to sustain railway operations. Without the lands, ACR Inc. would have an insufficient asset base which would impair it financially. This would be a negative factor should it decide to raise additional capital independently of ACR for such purposes as the replacement of depreciating assets. It is apparent from ACR's own statements that major capital expenditures could be imminent. It is highly unlikely that these expenditures could be financed by ACR Inc., on its own.

The Agency has carefully analysed ACR's statements concerning ACR Inc.'s proposed capital and debt structure. It is stated that ACR Inc. would have a 60% equity and 40% debt structure. The new company would have no outside debt with all monies owed to its parent ACR. Irrespective of the foregoing, the Agency is of the view that ACR Inc. would lack the size and diversity of operations which presently exists in ACR, making it susceptible to failure.

Given the challenges facing the railway operations, the Agency is of the view that the proposed structure of ACR Inc. should be built on a solid base, so that it can address its challenges from a position of strength. The Agency, however, finds the opposite and shares the views of objectors that ACR Inc. would result in the creation of an economically weak subsidiary. With a weaker asset and financial base, it would be facing the very same liabilities that ACR considers to have arisen from the railway operation.

Employee Benefits

Some objectors, especially the unions, are concerned about the status of employee benefits if the transfer of the Rail Division was to occur. The unions state that ACR has indicated that railway employees would have to rely on ACR Inc., with its limited revenues and assets, to satisfy earned employee benefits. At the same time, ACR has stated, " ...that all employee benefits will continue to be protected and that there is absolutely no risk whatsoever in regard to pension requirements, past, present, or future.".

These seemingly conflicting statements create a serious element of doubt about the security of employee benefits. This inconsistency troubles the Agency and it considers this to be a legitimate concern within the ambit of the public interest.

SUMMARY

ACR seeks Agency approval of the Agreement for the conveyance of the Rail Division from ACR to ACR Inc. The objective of the proposed transfer is to enhance the viability of rail operations. ACR states that the " ... future viability of the Rail Division will be enhanced by being managed and operated by a corporation dedicated to efficient railway operations, the solidification of existing railway operations and diversification under the new railway environment in Canada so that ACR Inc. in the future will not be as dependent on a single shipper as current operations are." ACR also submits that it hopes, " ... that the overall reorganization will benefit railway operations in the long run so as to create a healthier operating environment in the region and thereby helping the overall economy of Sault Ste. Marie/Algoma.". The Agency considers these objectives to be noteworthy and legitimate. The Agency contends, however, that ACR's proposed means of achieving these objectives - the creation of a separate legal entity, ACR Inc., is more likely to seriously reduce the viability of the rail operations.

The Agency concludes that ACR Inc. is structured on a weaker financial foundation than the Rail Division as presently constituted within ACR, in face of the same economic difficulties and opportunities. ACR Inc.'s lack of diversity and size and the exclusion of a majority of granted lands, as proposed in the transfer agreement, diminishes its capacity to raise capital for its depreciating assets and current and future operations. This impaired financial base may produce a chain effect: ACR Inc. would be less able to address the challenges facing railway operations and less able to take advantage of the opportunities afforded by the new competitive environment. Therefore, ACR Inc. would be more susceptible to failure if faced with economic or financial adversity. Such failure would directly jeopardize the railway services presently being provided by ACR. The termination of railway services would have a negative impact, not only on railway employees and their benefits, but on regional economic development. Consequently, the Agency finds that the conveyance of the Rail Division from ACR to ACR Inc. under the proposed agreement would not be in the public interest and accordingly, the proposed agreement of conveyance is not approved.