Locomotive repair and overhaul work performed by Great

Northern Paci

Northern before merger at St. Paul shifted to the former Northern Pacific shop at Livingston, Montana and to the former CB&Q shop at West Burlington, Iowa. fic's car shop at Brainerd was closed, and the work shifted to our Havelock shop near Lincoln, Nebraska (on the former CB&Q) and to the former Great Northern shop at St. Cloud, Minnesota. An automated wheel shop at Havelock permitted elimination of similar facilities at five other locations. These are just a few examples of a massive systemwide shift toward greater efficiency.

Such consolidations have been accompanied by our enormous investments in coal lines and equipment, and in coal support facilities; expansion systemwide of the former Northern Pacific microwave communications system; installation of a sophisticated, computerized locomotive and car information system; replacement of obsolescent bridges; and steady progress in other programs such as expanded use of continuous welded rail and centralized traffic control.

These advances, most of them contemplated by the Commission in the Northern Lines case, and the concentration of traffic on a single railroad, have yielded substantial

improvements in efficiencies, as shown by the following

table:

It is impossible to put a price tag on net savings resulting from the Northern Lines merger. BN undertook to measure savings after merger but the task proved so difficult it was abandoned after a year or two.

Obviously the unit improvements cited above resulted in part from increased traffic volume. A number of external economic factors contributed to this increase, including sharply rising demand for western coal, accentuated by energy crises of the past decade; growing world markets for grain; and increasing imports of autos and other manufactured goods from Japan. The decline and ultimate demise of the Milwaukee Road in the latter 1970's in the Pacific Northwest left some traffic open to diversion, but BN was and is subject to intensive competition from other carriers, including Union Pacific, the two transcontinental Canadian rail lines and highway operators. Increased traffic volume has contributed to BN's greater efficiency, but this was

achievable only because BM, following the Northern Lines case, built a productive system consistent with stated merger objectives and capable of responding to shipping

needs.

Burlington Northern firmly believes that it fully

executed the Milwaukee protective conditions prescribed in the Northern Lines case. We are aware of no evidence to the Prescribed trackage rights were granted, including access to Portland and Billings, the 11 western gateways were opened, and all other requirements complied with.

contrary.

Mr. BRESSLER. We hope to try to clarify some of the misconceptions and misunderstandings with respect to the formation of our holding company. There are two basic reasons why we formed the holding company. First of all, we wanted to give all of our businesses a chance to develop to their fullest potential. In order to do that, the management of each of our companies, including the railroad, needed to devote full attention to its own business. Our natural resources and land holdings have always been managed separately from the railroad. But we lacked a clearly defined corporate structure for each of our businesses. Because of that, some of our managers had to divert their attention from their primary business into other areas where their level of expertise was not as great.

Our new structure makes our managers more effective. The creation of separate operating companies also makes it easier to attract the best executives in specialized fields such as oil exploration and timber management.

There is another good reason for the formation of our holding company. It allows Burlington Northern access to the capital markets in order to support the growth of all of our operations. Formerly, as a railroad corporation, we were only permitted by law to issue securities for transportation purposes. This meant that, if we wanted to develop other parts of our business, we had to use internally generated funds of the company, most of which came from railroad operations. And we believe that is the case, despite some of the testimony so far this morning.

So, instead of threatening to divert funds from railroad operations, the new structure allows us to raise money independently of the railroad for development of our other properties.

Fortunately, we are not faced with an either/or situation in the development of our railroad and our natural resource properties. We intend to develop both vigorously, and the holding company structure is the best means to reach this goal.

Some have expressed the fear that the formation of a holding company will mean a downgrading of the importance and financial resources of the Burlington Northern Railroad. Nothing could be further from the truth. Last year, the railroad provided nearly 75

percent of Burlington Northern's operating income, up from 66 percent the year before. The Burlington Northern Railroad is the crown jewel-I will repeat that-is the crown jewel of our corporate family, and we are very proud of it.

Because we believe that the Burlington Northern Railroad has a good future, we continue to invest heavily in it. Over the past 3 years, we have spent over $1.4 billion on maintaining and improving the railroad's track structure. Our 1981 expenses in this category were up 18 percent over 1980. Economic conditions permitting, we plan to increase spending on our track structure significantly again in 1982. At this time, we are not investing heavily in additional freight cars and locomotives because we currently have over 27,000 cars and over 460 locomotives stored and standing idle.

I would like to share with you our strategy for the future of our railroad. While we are pleased with the accomplishments to date, we are still not satisfied. We intend to make the Burlington Northern Railroad one of the most efficient carriers in the industry. To achieve this goal and to insure our financial health and stability, we will continue our efforts to improve productivity and to increase operating efficiency.

Part of this strategy involves increasing our investment in highly efficient track maintenance machines. Our expenditure for this type of equipment will more than triple in 1982 compared with 1981.

Other productivity improvements may require a further trimming of our labor force. No one likes to lay off people. We are all familiar with basic industries such as steel and automobiles that have not been very successful in improving their productivity over the years. There is no security in holding a job with a declining company in a declining industry. All of our management efforts are directed toward the goal of keeping the Burlington Northern Railroad a company which is growing in traffic volume and profitability. This, we believe, is the best way to preserve jobs in the long

run.

Mr. Grayson gave me some statistics this morning on railroad employment in the State of Montana over the years, and I thought it might be interesting. In 1977 we employed 6,181 people. In 1981 it was 6,563. There is somewhat of an increase over that period of time.

Before I leave the subject of our plans for the railroad, I would like to quote from a newsletter that you sent to your constituents last December:

We must all be prepared to acknowledge that Burlington Northern is entitled to make a reasonable profit. But we must be just as ready to assert that BN has a substantial obligation to serve the public as well.

Senator Baucus, I agree with you. Fortunately, these two goals are compatible. There are some who would say that service to the public means maintaining every branchline that was constructed in the 1800's to serve the transportation needs of that era. I disagree with that. I think the public is not well served if the railroad is forced to maintain money-losing operations for a small handful of shippers at the expense of the vast majority of our customers.

Last summer, the railroad announced plans to ask the Interstate Commerce Commission for permission to cease operations on 347 miles of branchlines in Montana. Some of these lines have not seen any traffic at all for over 5 years. One of the lines, over 77 miles in length, has been generating only about 3 cars per week of traffic. In total, all of these lines account for only about 3 percent of the grain traffic we originate for shippers in Montana. Why should our losses in serving this 3 percent be allowed to drain the resources of the company away from serving the other 97 percent of our customers? That would amount to a disservice to the public.

The railroad also announced plans to study the future of an additional 150 miles of trackage in Montana. Last November, the decision was made to definitely retain over half of those miles. Our railroad people are continuing to work with State officials and interested shippers concerning the future of the remaining trackage. In your letter inviting me to appear at this hearing, you asked a number of very detailed historical questions. Those which I am not covering in this statement you will find answered in the attached appendix. I do want to say just a few words about the Northern Pacific mortgage bonds. These bonds are secured by mortgages which encumber all of the former Northern Pacific land-grant properties still owned by the Burlington Northern Railroad. While the mortgages do permit sale of these properties, the proceeds from any such sale must be deposited with the mortgage trustee and cannot be withdrawn by the railroad until it has shown that physical improvements of equal value have been made to the former Northern Pacific rail lines now owned by Burlington Northern.

Over the years, the value of improvements to these rail properties has greatly exceeded our resource earnings. It is not expected that the cumulative value of the resource earnings will catch up to the value of railroad improvements for many years, speculation notwithstanding. Burlington Northern is not attempting to retire these bonds or alter the indentures in any way.

The questions you have raised, Senator, concerning transfer of assets from the railroad to the other operating companies are discussed in the appendix to this testimony. Briefly, the vast majority of the assets will remain with the railroad. The railroad has entered into management agreements with the holding company and with the four resource companies within the BN corporate family: BN Timberlands, Inc., Glacier Park Co., Meridian Land & Mineral Co., and Milestone Petroleum, Inc. Under these agreements, those companies will manage the railroad's oil and gas, coal, and other minerals, timberland, agricultural, and real estate development properties.

It would be wrong for anyone to attach any great significance to whether the assets are actually transferred from the railroad to the other companies or simply managed by those companies. Our natural resource and land holdings have always been managed separately from the railroad.

Also, there never was a direct flow of cash from the resource properties to the railroad operations. All of the earnings from all of our businesses always flowed to the corporate level prior to the formation of the holding company. At that point, decisions were made