Hello bsherkhane,
The escape sequences \1, \2, \3, etc., are backreferences to captures in the current regex. The special variables $1, $2, $3, etc., are likewise backreferences to the captures in the most recent regex. $1 refers to the first capture, $2 to the second capture, and so on. Captures are numbered by counting left parentheses from the left. See perlre#Capture-groups.
The module YAPE::Regex::Explain is a useful tool for understanding regular expressions. Here is the explanation it gives for the left-hand side (i.e., the regex part) of the substitution in question:
Hope that helps,
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