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Louisville & J. B. & R. Co. Merger, 290 I.C.C. 725 (1955) and 295 I.C.C. 11 (1955), aff'd on other grounds Allegheny v. Breswick 353 U.S. 151 (1957), the Commission interpreted the statute as not conferring jurisdiction over the acquisition by a non carrier of control of the New York Central Railroad Company and its numerous carrier subsidiaries because they comprised a single established system. This case was the first statement of the "single carrier exclusion" to which you refer.
Since its announcement in the Louisville case the Commission has followed the doctrine in a number of cases involving the formation of rail holding companies. See Kansas City Southern Industries, Inc., Control, 317 I.C.c. 1 (1962); Katy Industries Inc.-Control-Missouri-K.T. R. Co., 331 I.c.c. 405 (1967); and Southern Pacific Transportation Co.-Merger, 334 I.C.C. 866 (1969). Motor carrier subsidiaries were involved in each of these proceedings. In the Southern Pacific case the Commission, Division 3, expressly found that the creation of a holding company to control a railroad which in turn controlled a motor carrier constituted a change in form, rather then substance, of the motor carrier control, 334 I.C.C. at 867, footnote 2.
3. Has the Commission assembled any information on the prospect that formation of the holding company might contravene the provisions of the Northern Pacific land grant bonds of 1977 and 2047? If so, please supply copies of the information and any determinations made concerning them.
The Commission in not empowered to enforce the provisions of the Northern Pacific bonds, and has not conducted a detailed study to determine whether the terms of the bonds would be violated by the creation of a holding company. The Commission conducted a general study of the structure of the railroad industry: Railroad Conglomerates & Other Corporate Structures, A Report to Congress As Directed By Section 903 of the Railroad Revitalization and Regulatory Reform Act of 1976, February 5, 1977. At page 52 of the report, the Commission stated its perception that the outstanding Northern Pacific bonds precluded the formation of a holding company for BN. A copy of the material in the report specifically related to BN is set forth in Attachment III.
BN's position in its Reply to Petition for Investigation filed May 7, 1981, is that the bonds may affect potential transfers of assets by the railroad, but do not obstruct the proposed formation of a holding company. The reply is Attachment IV.
4. Has the Commission prepared any analyses depicting the extent to which Burlington Northern's non-rail development activities have supported the capital and cash needs of the railroad portion of the corporation in the past? If so, please supply copies. If not, I would appreciate the Commission staff preparing a brief analysis of the issue.
The Commission has not conducted a specific study in this area, although, again, the Conglomerate report excerpted in Attachment III highlights the contributions of BN's natural resources assets.
Pursuant to your request our staff has reviewed the the impact of non-rail activities on Burlington Northern's financial posture. Non-rail income, primarily from natural resources, is extremely important to BN because it has enabled BN to maintain an A credit rating on its bonds by Moody's Investor Service. Any lower rating would have made it extremely difficult for the
company to have done any non-equipment financing. For example, during the five years 1976 through 1980 the combined earnings available to cover fixed charges totaled $1,059 million. Fixed charges over the same five year period totaled $365 million, for a fixed charge coverage ratio of 2.9. Coverage of this magnitude is satisfactory to maintain an A rating. However, if non-railroad income is deducted from earnings available for fixed charges the $1,059 million figure would be reduced by $774 million to $2869 million, or less than the total fixed charges of $365 million. Rail operations performed better in 1980, generating a fixed charge coverage ratio of 1.30, but that ratio would not have supported an A rating. Additionally, the improved rail earnings might not have been possible without the large investments in rail facilities financed in part by funds from natural resources and from outside financing permitted by the A rating partly attributable to natural resource income. A summary of BN's financial performance of the period 1971 through 1980 is set forth in Attachment V.
I hope you will find these responses helpful and that you will call on me whenever I may be of assistance.
On January 26 the Board of Directors authorized the management of Burlington Northern Inc. to proceed with the formation of a holding company. The matter will be presented to our stockholders for their approval at their next annual meeting on May 14, 1981. Assuming the stockholders approve the recommendation of our Board of Directors, it is our intention to promptly create a holding company.
The Board of Directors also approved a new organizational structure for the Company providing for seven separate profit centers. The principal profit center will be the railroad. In addition, we will have trucking, air freight forwarding, and four separate nontransportation business profit centers.
During the last five years we have invested in excess of $2.1 billion in capital expenditures to expand and improve our rail service. Approximately $1 billion of this amount was spent to expand and improve our capacity to transport coal. We want to assure you that the formation of such a holding company will not in any way detract from our efforts to provide the necessary personnel and facilities to meet the needs of all of our rail shippers. However, we believe it important that each of our separate lines of business "stand on its own feet." We are confident that the formation of a holding company will ensure this result and that it will allow our nontransportation businesses to grow along with the railroad and thereby make an even larger contribution to the overall corporate enterprise and to the public interest.
Because Burlington Northern operates a single, integrated transportation system, the formation of such a holding company, under existing law, does not require Commission approval. However, because this is an important step in strengthening our management structure and providing better service, I wanted to personally inform each member of the Commission of our plans.
If you want any additional information, either Mr. Grayson, our Vice Chairman and President of our Transportation Division, or I would be happy to meet with you and discuss our plans in greater detail. If you have any questions, please feel free to call or write me.
OFFICE OF THE CHAIRMAN
Interstate Commerce Commission
June 18, 1982
Honorable Max Baucus
Dear Senator Baucus:
Thank you for your letter requesting additional information in several areas relating to the March 26 hearing you chaired on rail merger policy and the Burlington Northern's formation of a holding company. I am enclosing the Commission's responses to your questions in order to supplement the hearing record.
If I can be of any further assistance, please contact me.
Pune H. Jage. J.
Reese H. Taylor, Jr.
Responses to Questions Regarding Rail Merger Policy
The following responses explain the general policy of the Commission in railroad consolidation proceedings. As we have previously pointed out, however, application of this general policy in specific cases depends greatly on the facts of the particular case.
As I am sure you are aware, this Commission currently has pending a highly contested railroad consolidation, Finance Docket No. 30000 et al., Union Pacific Corporation and Union Pacific Railroad-Control-Missouri Pacific Corporation and Missouri Pacific Railroad (MOP-UP proceeding). For that reason, it has been necessary to respond to several of your questions in very general terms to avoid commenting on issues that are before the Commission in a pending proceeding.
We expect to serve a decision in the MOP-UP case before the end of October 1982; that decision will discuss in depth a number of the issues raised in your questions.
1. Since railroad mergers can reduce competition and can encourage monopolization, do you agree that the effects of mergers must be scrutinized with care to assure that their alleged benefits cannot be secured by means short of merger and that the merger is fully justified in light of the Staggers Act policy favoring competition among railroads? If not, please explain.
Railroad consolidations can be beneficial to the public by enhancing competition and carrier efficiency; they can be potentially harmful by reducing competition and encouraging monopoly. The adverse economic effects that can result from lessening of competition or monopolization are of great concern and cause the Commission to spend considerable time scrutinizing the competitive effects of all consolidation proposals before reaching a decision on whether to approve a particular proposal. In light of the Staggers Act policy of encouraging competition, as well as our own experience that, for certain commodities and in certain markets, intramodal competition is essential, our evidentiary requirements have been structured to ensure that competitive impacts are fully addressed. These requirements include the filing of basic traffic, operating and financial data and the submission of information on competitive impacts in specific markets.1/ On the basis of detailed evidence of this nature, we are able to ensure that any consolidation proposal approved by the Commission, or approved subject to conditions, is consistent with the intent of the Staggers Act. As to whether the benefits can be achieved by other means short of consolidation, generally we believe that the Commission should not usurp the carriers' managerial judgment as to corporate structure or long-term strategies. Nevertheless, as stated in the Commission's consolidation policy statement, 2/ we carefully consider whether the benefits claimed by applicants can be realized by means other than the proposed consolidation.
1/ Ex Parte No. 282 (Sub-No. 3), Railroad Consolidation Procedures, 366 I.C.C. 75. decided February 19. 1982.
2/ Ex Parte No. 282 (Sub-No. 6), Railroad Consolidation Procedures, 363 I.C.C. 785, decided January 12, 1981.