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It is our conclusion, based on the results
of the investigations and studies conducted
for the purpose of preparing this report,
as well as our many years of regulating the
surface transportation industry, that the
services of this country's major railroads
are too important--and that the potentials
for abuse are too great--to permit the

transfer of control over any one major rail-
road to be accomplished without appropriate
regulatory agency approval. (p. 73)

Among the other findings reached by the Commission in its report were the following:

Few holding companies have provided rail-
roads with any tangible benefits. (p. 69)

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...the railroad as an instrument of public
service has been deprived of wealth
accumulated over many years, including
resources such as land grants provided
at public expense. (p. 70)

It is no understatement to say that the Commission's Rail-
road Conglomerates Study is a ringing indictment of the very
kind of financial transaction now proposed by BN. For this
reason, the Commission concluded in 1977 and represented to
the Congress that it would "take action" to monitor the
future creation of railroad conglomerates especially in
proposed transactions governing land grant properties.
(Report, p. 75)

The BN proposal calls upon the Commission to make good its promise to the public and to the Congress. The BN seeks to elude any Commission scrutiny of its proposed transaction on the basis of its self-serving representatica that as a "single, integrated transportation system, the formation of such a holding company, under existing law, does not require Commission approval" (See Attachment I).

.

Whether BN's legal analysis is correct in light of the Commission's conclusions. in its Railroad Conglomerates Study is open to question (See p. 75). Clearly, however, the BN is dead wrong on its assertion that BN is a "single integrated transportation system." The Fort Worth & Denver Railway Company and the Colorado & Southern Railway Company are independent and distinct transportation companies with separate managements, headquarters, etc., and, indeed, they are so treated by the Commission for purposes of revenue adequacy. As such, the proposed new holding company will control, at least, three (3) separate railroad companies (i.e. BN, FW&D and C&S).

Because the Commission has announced in its Railroad Conglomerates Study that it would take action. in connection with future holding company proposals, especially where land grant properties are involved and because the BN's proposal will violate Section 11343 of the Act, if consummated without prior I.C.C. approval, please accept this letter as our request that the Commission take immediate and decisive action to protect the tremendous public interest at stake in this proposed multi-billion dollar transaction.

Very truly yours,

Joseph H. Shefer, je

Joseph H. Shafer, Jr.
President

JHS:ke

CC: Vice Chairman Robert C. Gresham (4136)

Commissioner Charles L. Clapp (3229).

Commissioner Thomas A. Trantum (5124)

Commissioner Reginald E. Gilliam, Jr. (4211)

Mr. Richard M. Bressler

President and Chief Executive Officer

Burlington Northern

176 East Fifth Street

St. Paul, Minnesota 55101

General Counsel Richard A. Allen, Esq.. (5211)

The Honorable Bob Packwood, Chairman

Senate Commerce, Science & Transportation. Committee 5205 Dirksen Senate Office Building

Washington, D. C. 20510

The Honorable John D. Dingell, Chairman

House Energy & Commerce Committee
2125 Rayburn House Office Building
Washington, D. C. 20515

[From Business Week, Mar. 8, 1982]

EXHIBIT D

BURLINGTON Northern's CasH COW-COST-CUTTING AND TAX BREAKS WILL
GENERATE FUNDS FOR RESOURCE DEVELOPMENT

Richard M. Bressler, a former Atlantic Richfield Co. executive vice-president who became chairman of Burlington Northern Inc. in mid-1980, has made no secret of his intention to build up the company's nontransportation businesses. By naming Walter A. Drexel, a former tax accountant at ARCO, to the presidency of the Burlington Northern RR (BN) in mid-February, Bressler underscored his determination to double the railroad's profitability and at the same time to double by 1990 the share of earnings from BNI's other operations. Last year the railroad accounted for 75 percent of BÑI's $478.1 million in operating income.

Drexel, 51, was recruited in 1981 by Bressler, also 51, as BNI's senior vice-president for strategic planning. As Bressler's man, he can be expected to continue BN's aggressive cost-cutting and to give Bressler the cash flow he needs to grow the holding company's resource ventures.

Tough to balance, Bressler's objectives are ambitious for a company that struggled through the 1970s. BNI's railroad subsidiary barely ran in the black. The oil, minerals, and timber on the 8.6 million acres it either owns or has mineral rights on made it theoretically rich, but the railroad did not have the cash to develop these resources. That is now changing, however, Last year, BNI netted $272.2 million on revenues of $4.9 billion, up from $229.9 million on $4 billion in 1980.

Still, with expected "very rapid increases in railroad earnings, it will be difficult to achieve [a 50-50] balance between transportation and other businesses any time soon," says Bressler. Acquisition is thus BNI's only route to rapid balance of the company. With the BN becoming a massive cash machine, and with increasing unused borrowing power at the holding company, BNI by yearend could have a $1 billion head of steam built up for a major buy. "If U.S. Steel can do it," quips one former BN executive, referring to that company's acquisition of Marathon Oil Co., "why not BN?”

The most likely target is an oil company with enough cash flow to speed the transition of BNI's Milestone Petroleum Co. unit from a collector of royalties to a full exploration and production company. Bressler is also scouting lumber mills in the Northwest with the goal of processing logs from BNI's vast timberlands.

Although weak rail traffic in the current recession could delay the cash buildup Bressler needs for his drive to build BNI's other assets, massive tax breaks from the Economic Recovery Tax Act of 1981 will help it considerably. Savings effected by a new set of cost-conscious bosses at the throttle since BN merged with St. Louis-San Francisco Ry. Co. (the Frisco) in November, 1980, also boost profitability-especially welcome because BN's return on its $2.5 billion investment to haul coal out of Wyo ming's Powder River Basin is disappointing.

Major surgery on BN's bloated cost structure was begun by Richard C. Grayson, who ran the Frisco before becoming BN's chief executive in 1980. Grayson had planned to retire later this year at age 62, but will stay on as CEO of a new BNI transportation group (rail, truck, and air-freight operations). This will enable Drexel to learn the business from one of the industry's most highly respected operators. Drexel will probably return to BNI's holding company headquartaers in Seattle in a few years. He is expected to have a major say in naming his successor at the rail

road.

Grayson and the team of managers he has installed at the BN from the Frisco, a smaller but more profitable road prior to the merger, have made major changes at the St. Paul-based railroad. BN's work force has been cut by 8,000, or 14%, reducing it to less than the size of the BN alone before the two railroads merged. Grayson says $70 million in payroll saving was not realized in 1981, because many of the cuts came late in the year. A new reputation. Another key move was to reorganize marketing efforts along commodity lines. And BN is trying hard to live down its reputation for high-handedness. The effort appears to be working. Says Robert L. Kessler, executive director of the Western Coal Transportion Assn: "Their attitude is to get closer to their shippers. In the past, they just said: 'Nuts, we'll litigate,'

Despite payroll cuts and the streamlining or operating and maintenance procedures, BN's operating ratio, or total expenses as a percentage of revenue, is still among the highest in the industry BN's goal on the cost side is ambtious-to reduce its operating ratio by 8.5 percentage points this year, to 87.7%. "We wouldn't budget it if we weren't sure we'd make it," states Grayson. Analysts are more skeptical, Says Graeme A. Lidgerwood, research analyst at Kidder, Peabody & Co. "I doubt

they can achieve those improvements in the face of declining traffic and continued pressure on rates," Adds another analysis "If traffic stays weak, forget it."

The leverage from a 8.5-point improvement in the operating ratio is enormous. With it, even a modest 10% increase in revenue would boost the railroad's pretax profit by more than 50%. Provision in the new tax law would have the effect of allowing that improvement to flow right through to the profit line. In addition to faster depreciation overall, railroads also benefit from a change in how they depreciate their trackage and rights of way. Railroad accounting has carried these at historical cost until they are retired. Now they can be depreciated over a period of 5 to 50 years. That will give BN $1.1 billion in tax writeoffs, which should free it from current tax liabilities for several years.

No neglect BN's cash flow is expected to run roughtly $100 million more than its needs in coming years. Nonetheless, union leaders, shippers, and even some veteran railroad managers at BN fear that the commitment to diversification at the corporate level will make management greedy for even more, that the railroad will become a cash cow to be milked for resource development. BNI officials insist they will not neglect the railroad citing plans for stepped-up programs to replace ties and repair branch lines, Says Drexel: "I have no intention of letting the railroad run downhill. We're not going to defer maintenance just to increase cash flow. Someday you'll have to pay the piper."

One thing is sure: BN's 29,000-mi. system-the longest in the nation-will be cut back. Last June, BN went public with its intention to abandon 2,500 mi. of lightly used branch lines in Montana, North Dakota, and Nebraska. The announcement brought down on BN the wrath of just about every farmer, grain elevator operator, and local politician in all three states. It has since dropped plans to cut 600 mi. and, it claims, ceased studying later abandonment of an additional 200 mi. of branch lines.

Continuing layoffs and the prospect of further cuts as BN shrinks its system make for uneasy relations between BN's management and its 45,000 unionized workers. Admits Drexel: "I'm sure we've burned up a lot of goodwill with our unions, but I'm not looking for confrontation." Still says one union leader, grievance loads are "rising by leaps and bounds." And BN's continued pressure for smaller train crews and other workrule changes could lead to local strikes at any time. "There is discontent in the ranks, and morale is low," says Gordon K. Williams, general chairman of the Brotherhood of Railway & Airline Clerks. "We wouldn't have any trouble takings the people out [on strike]."

Coal traffic. BN's biggest problem is still coal. Since the early 1970s, it has spent $2.5 billion to buy equipment and to build and strengthen its track out of the Powder River Basin, which contains an estimated 35 billion tons, of the low-sulfur western coal that BN once figured was the fuel of the future. BN's coal traffic has cannonballed from almost nothing to 113 million tons annually.

The investment now appears unlikely ever to earn the profits once projected. For starters, eased air pollution standards, energy conservation, and the increased availability of natural gas have dampened the demand for low-sulfur coal. And although Powder River coal accounts for more than half BN's tonnage, it provides only 30% of its freight revenues, BN claims that because it cannot sufficiently raise rates under long-term agreements, signed in the 1970s, with 15 of its untility customers, nearly half the coal moves at little or no profit. Unsuccessful efforts by the railroad's former management to have the agreements declared void have been costly. And attempts at voluntary renegotiation have been futile. Says a former BN offical: "The effort to improve coal pricing has been a major disappointment."

Stiff competition. BN made its investment on the assumption that its century-old monopoly on traffic out of the Powder River Basin would continue, but now it faces stiff competition there. Chicage & North Western Transportation Co. backed by the Union Pacific RR, has lined up $460 million in bank loans to build and upgrade track south from the basin to the UP main line. Expected to be done by 1984, the new C&NW line could be hauling 45 million tons a year of Powder River coal by 1990.

A merger of the UP with the Missouri Pacific RR, if it is completed, could further hurt BN's coal traffic. The company maintains that the single-line rate the UP would be able to offer to many BN utility customers situated along MoPac line could price BN out of the market. "If the BN is vulnerable," says the president of a competing railroad, "it is in their coast traffic." It is Drexel's job to end that vulnerability.

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I am writing to discuss a matter of mutual interest which could provide significant long term benefits to both of our companies. Recent actions taken by the Congress and the Interstate. Commerce Commission have recognized that railroads must be allowed to improve earnings if they are going to be able to attract the capital necessary to construct and maintain a physical plant adequate to meet shippers' demands. The actions taken establish new thresholds for ICC jurisdiction over rates and are designed to encourage long term contracts.

Burlington Northern Railroad's (BN) 1980 return-on-assets was only 6.7 percent on a pre-tax basis. The ICC has determined that for a railroad to be competitive in the capital markets, it must earn an 11.7 return on an after tax basis. BN's estimates are 12.6 percent. Because coal constitutes over 50 percent of . the transportation service performed by BN and is but about 30 percent of the revenues derived from transportation service, BN's overall financial viability is contingent upon achieving an adequate return on existing coal traffic. We simply cannot and will not continue to invest in coal related facilities with a return at the present level. To do otherwise would clearly violate our long term responsibilities to you as our customer and to our stockholders. It is clear that if BN is going to earn a return which will justify continuing investment in coal traffic, certain of our present rates are going to have to change significantly.

We believe that we now have the right to raise all of our rates to the present statutory minimum for ICC jurisdiction, which currently is a rate equal to a revenue to variable cost ratio of 160 percent. If we were to do this, it would result in significant rate increases to many of our customers, and undoubtedly, in protracted legal challenges. In an effort to improve our customer relations while increasing our return on investment, we are adopting a plan in which rates will be gradually brought up to a level that insures revenue adequacy within the next two or three years.

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