At this point in time, the BN does not appear to qualify as a weak railroad that could be threatened in the near future by inclusion into a holding company arrangement. However, this situation could change in the future if some of the optimism for the railroad that has been expressed by holding company officials is misplaced and if the intended expansion of the natural resource divisions is very profitable. The earnings gap that was noted earlier could increase with potential detrimental impacts for the railroad. Even without a holding company structure, the BN increased the share of the natural resource activities from 7% of operating revenues and sales in 1975 to 9% in 1978 and in 1981 it fell to 8.4%. Meanwhile, during that same time period the railroad's share of operating revenues and sales fell from 88% in 1975 to 84% in 1978 ad to 83% in 1981. The stated goal of the holding company management is to increase the natural resource divisions to attain a better "balance". 16 In spite of the relatively low revenue contributions of the natural resource businesses, they contributed 39% of the net operating income in 1975, 50% in 1978, and 23% in 1981. The percentage of contribution to net operating income was lower in 1981 because railroad earnings increased significantly in that year. However, the natural resource divisions, which contributed an 8.4% of the operating revenues in 1981 contributed almost three times as much, in terms of percentage, of the net operating income. The motivation for the holding company to expand the natural understandable. resource activities is expenditures to $398 million from $387 million in 1980. However, capital expenditures for the railroad fell from $335 million in 1980 to $298 million in 1981. The railroad accounted for 87% of the total capital expenditures in 1980 and only 75% in 1981. Meanwhile, the share increased from 10% of capital 17 expenditures in 1980 to 21% in 1981. This development, although not threatening to the railroad now, could potentially harm it in the future if it becomes a long-term trend. over a Recent changes in tax laws allow for faster depreciation shorter time period generating significant gains in cash flows for the railroad. Whether these excess cash flows are used for the benefit of the railroad or to finance further development of natural resource divisions in part depends on the previously mentioned earnings gap and cannot be answered now. Recommendations Consistent with my prior conclusions about railroad holding companies in general, I believe that the Interstate Commerce Commission should monitor the activities of the holding companies, particularly those holding companies that have a weak railroad subsidiary. The Burlington Northern Railroad does not appear to be threatened by Burlington Northern Inc. in the short run, but in the long run the potential for a detrimental impact on the railroad clearly exists. FOOTNOTES 'Burlington Northern Inc., Annual Report 1980, (Seattle, Washing ton, 1981), p. 2. 2Ibid, p. 2. 3Ibid, p. 2. "Ibid, p. 1. 5Burlington Northern Inc., Annual Report 1981, (Seattle, Washing ton, 1982), p. 3. "Colin Barrett, "Conglomerates and Public Responsibility," in Penn Central and Other Railroads (Washington, D.C.: U.S. 7Ibid, p. 567. 8 Samuel Reid, Mergers, Managers, and the Economy, (New York: McGraw Hill, 1968), p. 195. 9George Eads, "Railroad Diversification: Where Lies the Public Interest?" Bell Journal, 1974, p. 600. 10 Joel Dean, Some Causes and Consequences of Conglomerate Mergers, An Investigation of Conglomerate Corporations (Washington, D.C.: U.S. Committee on the Judiciary), p. 323. 11U.S. Interstate Commerce Commission Conglomerate Merger Studies (Washington, D.C.: Government Printing Office, 1977), pp. 9 45. 12U.S. Interstate Commerce Commission Conglomerate Merger Studies (Washington, D.C.: Government Printing Office, 1970), p. 123. 13Task Force on Railroad Productivity, Improving Railroad Productivity (Washington, D.C.: U.S. Government Printing Office, 1977), p. 85. 14Edward L. Sattler, "Diversified Holding Companies and Their 15 16 17 Impact on the Railroad Industry," The Transportation Journal, Association of American Railroads, Property Investment and Condensed Income Statement in Class I Railroads, 1975-1980. Burlington Northern Inc., Annual Report 1981, (Seattle, Wash ington, 1982), p. 3. Ibid, p. 22. In 1960, the Bangor and Aroostook, a small Class I railroad (Class I railroads are now defined as those with operating revenues of $50,000,000 or more) successfully diversified by forming a holding company, the Bangor Punta Corporation. The railroad could have diversified into non-railroad businesses only by receiving Interstate Commerce Commission (ICC) authori = zation for issuing railroad stock or issuing or guaranteeing debt securities. railroads. Until the 1960's, the ICC approved only very limited diversification by the The ICC was wary about railroads diversifying and probably would 1 have denied authorization. However, the ICC ruled that because the parent company, the Bangor Punta Corporation, was not a railroad, the commission 2 had no jurisdiction." Once the ICC ruled a lack of jurisdiction over holding companies, most of the Class I railroads followed the lead of the Bangor and Aroostook creating a parent holding company and then asking shareholders to voluntarily change their shares to those of the newly created corporation. 1974, nearly 70 percent (in terms of assets) of the Class I railroads were 3 By controlled by holding companies. Several formed their holding companies in 1962 and most of the railroads went into holding companies in 1968. The railroads that formed holding companies include railroads from all sections of the country and companies in poor as well as good financial condition. The holding company became generic to the railroad industry because it provided the vehicle for achieving diversification without ICC approvali The basic motivation that drove the majority of the railroad industry into diversification had its origin in the regulated nature of the industry and the low rates of return. The purpose of this study was to identify characteristics of holding companies created by railroads and determine the impact of those characteristics on the extent of diversification as well as the impact on the railroad subsidiary. |