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of two Class I railroads which are components of Guilford Transportation Industries the same company which was "approved" by the DOT as a buyer of NS/Conrail properties to enhance competition. The other Class I railroad component of Guilford Industries is the Boston & Maine Railroad, which posted a small net income in 1983 of $1.6 million on revenues of nearly $118.3 million, The B&M's liabilities of $69.8 million equal nearly 65 percent of its assets.
Similarly, other regional railroads, identified as possible operators of the yet-to-be spun-off portions of a merged NS/Conrail system, operated in the red in 1983. The Pittsburgh & Lake Erie falls into that category. In 1983, P&LE reported a net loss of almost $23.5 million on revenue of $43.2 million. Its overall liabilities equalled 88 percent of its total assets.
In brief, Norfolk Southern and DOT propose to divest lines whose acquisition, rehabilitation, and maintenance will require tens of millions of dollars. The divested lines are to be acquired by two carriers Guilford and P&LE who between them lost $75 million over the last three years. Traffic density on the lines in many cases is less than one-twentieth the traffic volume carried by competing lines rotained by Conrail and ns. As Mr. Wilson pointed out to the Judiciary Committee, "The proposed divestitures are wholly inadequate as substitutes for the competition that will be lost."
Kevin T. Dowd, who testified on behalf of the Eastern Coal Conference at Pennsylvania Senator Arlen Specter's recent hearing to examine the anticompetitive aspects of a Norfolk Southern takeover of Conrail, observed objectively:
"The competitive influence that is exerted by Conrail is made possible by its size, independence, and the location of its lines as the main source of rail deliveries to the Northeast. One could not make up for the loss of a single, consolidated major competitor simply by granting trackage rights and gateway access to a number of small, regional carriers that lack the physical capacity even under the best of circumstances to go toeto-toe with the csx and Norfolk Southern Systems." A great many Conrail shippers have communicated similar views both to the DOT and to us in support of a public offering.
Finally, I need not remind you that Conrail is a leading advocate for competition in the railroad industry. while other railroads have only begun to adapt to a deregulated environment, Conrail immediately seized the opportunities presented by deregulation to become more competitive and responsive to shipper needs. We were the first railroad to withdraw from the rate bureaus where all rail rates had been set collusively for more
than a century. We're still the only railroad to have done so. It seems incredible to us now that with all the railroads and the different places served by each, there was no competition between them, Those days are gone now, because Conrail sets its prices the way they are set in other businesses
competitively. We still lead the industry in fighting for another right that most businesses take for granted the right of rail carriers to set their own prices on their portion of multi-carrier movements.
These initiatives have been controversial, and have been resisted by those railroads who like the old ways of doing business, but they meet the needs of our customers, and therefore, they have been successful in the marketplace.
Conrail's net income tween 1980 and 1984 improved by approximately $745 million, even in the face of the serious recession that occurred in the middle of those years, The NortheastMidwest rail system works because Conrail has made it work. Many have sacrificed to make it happen and to restore a company others perceived as lost, financially and as an entity. To subject the nation again to the high degree of uncertainty and trauma that would surely result from an NS takeover of Conrail would undo all the progress we have made.
Another aspect of the Norfolk Southern takeover plan for Conrail ought to bear careful scrutiny by the taxpayers.
The Department of Transportation, in making its selection of the NS to acquire Conrail, stated that it was "based solely on who would best serve the interests of the public...and give the taxpayers the best rate of return possible" consistent with other criteria.
On close examination, there are a number of financial benefits and tax breaks which the Norfolk Southern would receive as a result of an acquisition of Conrail. Thanks to those financial benefits and tax breaks, it is conceivable that when all is said and done, a Norfolk Southern takeover of Conrail will have a net cash benefit to Norfolk Southern, perhaps in as little as five years, of hundreds of millions of dollars more than the $1.2 billion Norfolk Southern will pay for Conrail! Is that in the best interests of the taxpayers? The Department of Transportation says it is, because it advocates an NS takeover of Conrail.
That is not the main issue here, of course. The main issue is what is best for the transportation infrastructure of the country and competition and jobs.
But it is amazing to me that a formerly broken-down railroad system, for which the government paid some $1.8 billion (to the predecessor railroads), is being sold for some $1,2 billion, and the buyer stands to not only recover all of the price he will pay for it, but make money on the deali If you desire, we can provide specific data on this matter.
Simply put, a public offering will bring the Treasury a greater return in future taxes, paid by separate Conrail and Norfolk Southern Companies, than will a sale of Conrail to Norfolk Southern. And the same will be true at State levels.
Mr. Chairman, stripping everything away, I believe the basics of this argument over how to sell Conrail roally come down to the future of the company.
when you look at the arguments being raised against the public offering, the only one that would prompt you to reject it and support Norfolk Southern is the one that Conrail has no long-term future, All the other arguments fall by the wayside and are no more than weak attempts to discredit a strong plan.
I believe the debate on the sale of Conrail is at the same time a referendum on whether or not Conrail does have a long-term future, If it has a long-term future as I so firmly believe it does the reasons for the private sale disappear completely as does the rationale for all of the covenants.
Parenthetically, I've always believed there were only two possible reasons for the covenants : either you didn't trust the buyer; or you didn't have confidence in Conrail's future.
Over the last few years we have finally achieved a truly consolidated company with all of the effects of combining six railroads into one wrung out of the system, the development of a true feeling of teamwork between management and labor, and a real senge of pride in the record and accomplishments.
Four years ago, the same Department of Transportation that has proposed the Norfolk Southern takeover of Conrail decided that Conrail couldn't make it, would be a drain on the U.S. taxpayers and should be split up and sold off in pieces.
That prescription was wrong then. The prescription DOT offers four years later is wrong, too.
There's an old saying - "If it ain't broke, don't fix it." Conrail's not broke. It's doing just fine. What DOT has suggested is unneeded major surgery that carries with it large costs in terms of reduced employment, service and competition. We at Conrail, Mr. Chairman, do not believe those costs should be imposed on communities, shippers and employees when there is another answer.
DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY
BURNLEY, DEPUTY SECRETARY
STATEMENT OF JIM
ACCOMPANIED BY DONALD A. DERMAN, ASSISTANT SECRETARY FOR
BUDGET AND PROGRAMS
LONG-TERM VIABILITY OF CONRAIL
Senator ANDREWS. Mr. Burnley.
When Secretary Dole got to the point last year where there were bids on the table for Conrail and it was time to begin the negotiated competitive bidding process, the criteria she had in mind all revolved around the remarks that you made, Mr. Chairman, and, Senator Lautenberg, that you made at the beginning of the hearing.
The long-term viability of Conrail is very much at issue, and that concern underscored the Department's consideration of this and ultimately led to the Secretary's decision to recommend that it be sold to Norfolk Southern.
Clearly, she said, Mr. Chairman, no one wants to see another multimillion-dollar bailout of this railroad. The USRA report that was put out by the USRA staff just this week underlines those concerns, and those concerns again drove her to the decision that she made February 8.
But clearly it is the case that Conrail, which has now experienced almost 6 months of economic downturn, does have a severe risk as to its long-term viability.
In fact, if I might call your attention to the USRA report itself, there is a very good table on page 43 which, as Mr. Berger recently testified, shows the cash flow of the company, and cash flow is, we think, the ultimate test of viability.
If you look at the numbers, using Conrail's own projections last May and then updated in December, which again have turned out in recent months to have been far more optimistic than has been the actual result, you will find that Conrail by the USRA study's own numbers would have to go borrow $260 million at a minimum over the next 4 years just to pay the dividends under the plan that they have proposed.
COMMENTS AGAINST CONRAIL MANAGEMENT PROPOSALS Let me refresh everyone's recollection about that plan and why the Secretary's investment advisor, Goldman Sachs, said it was a threat to the viability of the company.
The Conrail management proposal would involve $600 million in preferred stock, the largest such issuance in American history, and also would result in the issuances of half a billion dollars in common stock, which but for one would be the largest common stock initial offering in American history.
That gets you to the $1.1 billion. On top of that, the Conrail management proposal would take $300 million out of the company on the day of closing, so if that proposal works perfectly, the company is weakened to the tune of $300 million on the day of closing, and in addition has assumed a dividend burden which on the face of the proposal is $126 million a year.
There are only two ways you can finance those dividends. Again, looking at the very numbers that USRA gave us this week, you either have to further deplete the cash of the company well below the levels that we believe are safe for the company or you have to go borrow it, and again, it would require new borrowings of a minimum of $260 million.
I do not think upon even the slightest reflection that one can be sanguine about a proposal that on its face, if it works perfectly, has that kind of effect on the company's performance.
COMMENTS FAVORING NORFOLK SOUTHERN PROPOSAL
Now, the Norfolk Southern proposal, as I think everyone is aware, is constrained by quite a list of covenants and by a stiff set of competitive requirements set by the Justice Department.
I will not take the time now to review those one by one, but suffice it to say that the Secretary and the Department believe that the longterm viability of Conrail, the interest of the region it serves in seeing those basic service patterns preserved, and the jobs of its employees will be best served by a sale to Norfolk Southern.
I might add Mr. Crane mentioned a moment ago the activities of BRAC. The largest union on the Conrail system, the united transportation union has spoken out repeatedly and quite strongly against the public offering scenario because of their concerns about the long-term viability of that approach.
Mr. Chairman, with respect to the issue that was on the table when the hearing was announced, and that is the future of USRA, the administration position, I think, has been spelled out in the budget.
It is our hope and expectation that Congress will pass the necessary enabling legislation this year, and it will be possible to complete the transaction this year, thus eliminating the need to continue USRA.
I might add that USRA in our judgment has done a very professional job, and I think that the study they have just put out, which indicates, as I say, the reason for our concerns and underscores those concerns, is a pretty good example of that quality and professionalism.
(CLERK'S NOTE.—The prepared statement of Mr. Burnley appears with questions related to the Office of the Secretary budget.