you believe they have "guaranteed" the future by imposing restrictive five year covenants. No one can "covenant" traffic and revenue levels. And while the public offering proposal could be structured to comply with the spirit of the relevant DOT covenants, it would be a serious mistake to rely on those covenants as providing any security for Conrail over the longer term. They do not, nor can any set of covenants ever do it. The future is best secured by maintaining the kind of management/labor cooperation and determination to succeed that has been developed over the last few years. - We believe that because the nation's taxpayers financed the rebuilding of Conrail, it is only fair and equitable that the taxpayers now be permitted to participate in - and benefit from Conrail's future success, by investing in Conrail stock, just as they now invest in thousands of other industrial corporations, including every other large railroad in the country. 10 We also believe that Conrail employees should be recognized in a concrete manner for their significant contributions to Conrail's success. Our public offering proposal does exactly that, by keeping 30 percent of Conrail's stock in employees' hands. That stock and the dividends it could earn represent a direct financial interest which employees would have in helping to keep the company financially successful for the long term. The DOT's financial adviser, Goldman Sachs, has questioned the feasibility of a public stock offering, but they don't state that it cannot be done. And there is no secret why they don't it can be done. Our financial adviser, Morgan Stanley, stated in a January 28 letter to Conrail's Chairman and Chief Executive Officer, L. Stanley Crane, that: "....the high level of unsolicited inquiries which we have received from a number of large financial institutions demonstrates the soundness of our conclusion that there is an enormous investor appetite for Conrail equity securities." The DOT and other critics of our proposal have said that the dollar amount of stock in the public offering is too much for the market to absorb. They use as an example Ford Motor Company's 1956 public offering. Unfortunately, but not surprisingly, those who try to make the argument don't put it in context. All of us would agree the world has changed since 1956. The $658 million public offering for Ford represented 0.3% of the total value of the common stock listed on the New York Stock Exchange in 1956. A public offering representing 0.3% of that same value in 1985 would be $4 billion. Arguments that there isn't enough capacity in the stock market for a Conrail public stock offering simply cannot be supported by the facts. Because there have been concerns that someone, now unknown, might try to gain control of Conrail through a public offering, a 10% limitation on ownership for any one company, concern, or individual was suggested. It is nearly identical to the Comsat limitation. Much to our amazement, we now hear that this limitation is "weakness" in the public offering proposal because it would insulate management from the discipline of the marketplace. Mr. Chairman, all I can say is that if you accept that statement you are stating that every major railroad has the same insulation. There isn't a stock concentration of over 10% in any major railroad today. Yes, Next, I find the public proposal under attack because it would use up to $300 million of Conrail cash to accomplish. it's true the proposal we made would use $300 million of Conrail's cash, but the NS proposal provides for $375 million to go to Conrail employees, all of which can be Conrail's cash, except for the amount used for the ESOP buy-out. In other words, Norfolk Southern can use Conrail's cash for anything it wants except the ESOP buyout. Recent testimony by the Department of Transportation would have you believe that the public offering plan would violate the DOT covenants because over a five-year period there would be over $400 million in borrowings. These borrowings have absolutely nothing to do with the sale of Conrail, no matter who the purchaser is. These borrowings are for equipment acquisitions which Conrail will need regardless of the identity of its owner. If the Department of Transportation is suggesting that the Norfolk Southern would not be doing this kind of equipment financing, it seems to me that the one's worst fears about continued investment in plant and equipment would be confirmed. To sum up, we strongly believe that a public offering of stock is in the best interests of our constituencies and the nation. As evidence of Conrail's restored financial vigor, Conrail has reached a significant agreement with 16 of its labor unions. We would hope that the remaining union will become a signatory in the very near future. The agreement returns Conrail's union employees to rail industry wage levels, retroactive to July 1, 1984. Because of the company's strong financial condition, we could afford to take this important step in recognition of employees' past contributions. Now, let me turn to Conrail's shippers, and why they are so supportive of an independent Conrail. In my view, it is because such a company would preserve the Northeast-Midwest rail system. Shippers in the Northeast and Midwest have been patient for a long time. They were the ones who suffered most directly from the collapse of the Penn Central and the early years of Conrail. They had to put up with deteriorating service and noncompetitive rates. Today, for the first time in many years, they have a system that works; in fact, in a Distribution magazine survey, shippers voted Conrail the best railroad in the country in 1984. Conrail knows how to compete for their business, and Conrail has made a long-term commitment to helping them stay in business. Scores of Conrail shippers have communicated to us and to government officials their satisfaction with the excellent service provided by Conrail and their opposition to Conrail's acquisition by Norfolk Southern. Most recently, in testimony before Senator Frank Lautenberg (D-N.J.) in New York City on February 25, four of our customers United Parcel Service, Union Camp, American Cyanamid, and Witco Chemical all testified to the high quality of Conrail service and the highly competitive transportation company Conrail has become. Not one of them expressed anything but the greatest concerns over an NS takeover of Conrail. - - An NS takeover means starting the process all over again: dismantling the system; setting new marketing strategies; reducing the commitment to industry in Conrail's service territory; and most of all, eliminating the competition that is fundamentally responsible for the high quality of service and competitive rates that Conrail shippers have come to count on. I'd like to discuss the anticompetitive aspects of the DOT proposal, and the antitrust implications of a Norfolk Southern acquisition of Conrail. From an economic, antitrust, and regulatory perspective, the DOT proposal is an extraordinary transaction. Economically, it is extraordinary because it would create the largest transportation company in the world, with combined revenue of nearly $7 billion. This company would control a mega-railroad that will possess 50 percent or more of the Northeast/Midw st rail market for chemicals, grain, automobiles, metals, scrap, and auto parts. It is of extraordinary antitrust concern because DOT has asked the Congress to exempt the transaction from every municipal, state, and Federal law, including the antitrust laws, and to immunize it and its future implementation from judicial review permanently. DOT makes this request despite the fact that no independent administrative agency or court has scrutinized the transaction, and no opportunity has been accorded the public to assess and comment on its impact. Finally, the transaction is extraordinary because it undermines the important pro-competitive regulatory reforms of the Staggers Rail Act of 1980, by requiring the reestablishment of joint route and rate arrangements that existed prior to railroad deregulation, which severely restricted competition between railroads. This too, would be accomplished without public hearings. Let me describe how substantial the head-to-head competition currently is between Conrail and NS. Conrail traffic competing with the NS at origin, destination, or both, is worth more than $500 million a year in rail revenue. Conrail and NS compete vigorously for that traffic. As a result, shippers, receivers, and consumers benefit. A takeover of Conrail by NS means a total loss of that type of competition, and a real loss to our shippers in dollars and cents. There is another aspect of competition between Conrail and NS, called geographic competition, where the railroads are not running side by side, but rather compete because their customers compete. Let me give you some examples of how Conrail's very existence stimulates geographic competition. The Norfolk Southern and Conrail serve competing coal fields in West Virginia and Pennsylvania respectively, which are desirable sources for coal-fired utilities in New England. When Conrail offered a more attractive rate for coal, the utility pressured NS to reduce rates also. NS adamantly refused to change its rate initially, but then the forces of the marketplace took over. utility used public forums to suggest that it would buy the more-competitive coal from the Conrail-served mines. The NSserved mine announced that if it lost the coal contract, hundreds of jobs would be lost and the mine might have to close. State officials and others who viewed the NS actions as anticompetitive exerted pressure on NS, forcing Norfolk Southern to establish a more-competitive rate. In fact, by being an aggressive competitor, Conrail continued to participate in a portion of the coal traffic, to the benefit of mines in both West Virginia and Pennslyvania, and to the ultimate benefit of consumers. In another instance, one of our major shippers wanted to open a new coal mine to serve a major Midwestern utility a power company. That company was receiving most of its low-sulfur coal from mines in Kentucky and West Virginia located on other railroads. Conrail wanted to compete for the company's business and we wanted our shipper's new low-sulfur coal mine in West Virginia to succeed. The result is that a new railroad connection is being built to serve the mine. Conrail cut its rates to make coal from the new mine competitive. The utility will buy coal from this mine. Conrail will transport it. If Conrail were owned by NS, which serves the mines in Kentucky and West Virginia, this might never have happened. Why would NS cut rates without Conrail's competition? Why would NS spend money to build track to a new mine when it already served others? Without Conrail's competition, the ultimate consumers of electric power would have suffered. There are many examples of Conrail acting as an advocate for the industries located in its territory, and making special efforts to allow those industries to compete with their rivals located on the lines of other railroads. There are examples in the coal market, the chemicals market, and the steel market. In fact, for almost every commodity we move, Conrail rate initiatives enable our shippers to expand their marketing opportunities, their operations, and their profits. The Department of Justice report did not even attempt to address this kind of competition. In fact, it apparently ignored real movements of traffic, such as the ones I have just described, and it ignored offers by such affected parties as CSX for data related to actual point-to-point movements. Justice looked, instead, at competition within counties. Our Vice President of Law, Bruce B. Wilson, a former Deputy Assistant Attorney General in the Justice Department's Antitrust Division, told the Senate Judiciary Committee last week that the DOT analysis was questionable exercise, since traffic does not move in such patterns." But Mr. Wilson also noted that even the effects on "county competition" were enough to lead Justice to conclude that, standing alone, the merger would violate every existing merger standard. - To remedy these violations, the Department proposed a "quick fix" spinning off part of the merged system to smaller railroads. This would do nothing to remedy the loss of geographic competition. Moreover, the Justice Department scheme to remedy the loss of head-to-head competition will not work. I can say that with some knowledge because it's not a new idea. tried before and it failed. It was a With the creation of Conrail in 1976, the United States Railway Association granted the Delaware & Hudson Railway extensive trackage rights over the Conrail system to enable it to connect with the Norfolk and Western Railway at Buffalo, NY and the Southern Railway, Chessie System and Richmond, Fredericksburg and Potomac Railroad at Washington, D.C. The objective was to provide for added rail competition in the Northeast. Instead, what was created was an uneconomical rail operation that in 1983 required the Delaware & Hudson to spend $1.05 in operating expenses for each $1.00 in revenues generated, and a company the D&H whose liabilities were almost one-and-ahalf times its assets at the end of 1983. The D&H reported a net loss of $16.3 million for 1983. I might note that the D&H is one - - |