Appendix — RAILWAY LABOR EXECUTIVES' ASSOCIATION v. UNITED STATES (Nos. 80-1439, 80-1434, 1632)
Supreme Court brief1981
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ta 0 = 1 4 $ 9 Office-Supreme Court,
_ EILED
ee y FEB 23 1981
: STEV
CLERK
IN THE
Supreme Court of the United States
OCTOBER TERM, 1980
RAILWAY LABOR EXECUTIVES’ ASSOCIATION,
Petitioner,
V.
UNITED STATES OF AMERICA, ETAL.,
Respondents.
Se
SUPPLEMENTAL APPENDIX OF THE
PETITIONER
RAILWAY LABOR EXECUTIVES’
ASSOCIATION
JOHN O’BRIEN CLARKE, JR., ESQUIRE
HIGHSAW & MAHONEY, P.C.
Suite 210
1050 - 17th Street, NW
Washington, DC 20036
_ (202) 296-8500
Attorneys for Petitioner Railway
Labor Executives’ Association
Date: February 23, 1981
PRESS OF BYRON S. ADAMS PRINTING, INC., WASHINGTON,
<> »
D.C,
TABLE OF CONTENTS
Page
Finance Docket No. 28583 (Sub-No. 1F), Burlington
Northern, Inc. — Control and Merger — St. Louis-San
= Railway Company, 360 I.C.C. 783 (April 17,
l
AP:
ier
Served April 17, 1980
F-98 51
INTERSTATE COMMERCE COMMISSION
FINANCE DOCKET NO. 28583 (SuUB-NO. IF)
BURLINGTON NORTHERN, INC.—CONTROL AND MERG-
ER—ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY
INDEX TO THE DECISION
The applicants---------------------------------0-cceeenenenneeeeeneneeneneensenenneeees anne
Burlington Northern, Inc------ cccccnccesersecececcecesccccsecococcosccccscce
St. Louis-San Francisco Railway Company ------------------------------------
Transaction -----------------+----0e-nnnnnnnnnnnencnnnnnnnnnnceceenenarenenecenenneneeneenee
Assumption of
Control of the
Alleged benefits of
obligations and liabilities -----------------------------+------
MOLOL CALPiCL ----------------------enwnn nnn nn nnn nnnnnnnnenenene
MEMES -------nnnn-nnnnnnnnennnnnnnnnnnnnnnnwnnnennnennnnnnannnnnne
Applicants’ underlying studies ------------------------------0-0eseeeeereesenenenene
Back ground --------------------+----00e----nenennennnnennncennenenecsseeeenecceesneees
Cost studies (traffic) ---------------------------eennennenveenecnenecnnncennnnnnneee
Operating studies -------------------------------0--ennceeeenneneenenensnennecnennees
Purchasing and
MALCTIAIS ---------------0---0---nnnnneennnenennnnnnennnnnnneneenne
Information systems -----------------ccccececceneeewnnenncecenescccscscscncceneeneee
The public interest benefits claimed by applicants ----------------------
Stock exchange -------------------------------e-eeneeeeneecseenenenennennseneenenenee
Employee impacts --------------------0--s0se-ceeeecencncncncenceceesncececcecesenes
Traffic volume studies---------------0----ce-seeenennenenneeecesescecerenseceees
Common poi
nt consolidation studies -------------------------------+------
Comparison of studies—labor and operational-------------------.------
Overhead study ------------------------+0+eeceennnnnnnnnnnsncnnnnnenneeeeeeenneees
Labor—scheduled ----------------------000e--eeee--nnnnennnnnnnncenennnneeeneeees
Labor—exempt---------------------------0e--enennnnnnnnnnnneeennneneeneenenenees
National defense ----------------------0+---00---eececneennnennneneeeseneneneceenenes
Shipper support sreceensenssooosconessosonossessoeensssooooeooosoosescooonscsosoonses
Financial analysis -----------------------------------0-esseeneeneeeennneennnnnnceeeneees
Positions of parties
Milwaukee Road
Summary of M
SFOS ESSE SESE ESE SE SSE ESSE S SESE SEES ES ESE ESE EE EESESESE CESSES SECSS
tate ee
ilwaukee Road's position ------------------------------------
Scope of operations-----------------------0----0--e--seceeeeencennenncenncenneeenee
Traffic diversion and net impact of merger --------------------------------
Impact on shippers—loss of service --------------------------+0--eeeee-eeenee
Impact on employees ----------------------------000--0ee-enennnennneeneceeneeeeees
Protective CONditiONS -----------------------0e---eeeneeenennneneecenseceecenecenees
Access to COalfields-----------------------0-----eeeeeneenenenennnnceceeneeesenes
Indemnification --------------0---.-ccceceeceveeneoecencecsccccnccccccscceceseccees
Liquidated damages ----------------2-.0---s--e-eeccccccceccsccncecescceceeecesee
Revision of joint facility agreements------------------------------ <a cceceee
Standard traffic conditions -+------------------------cseccseceeceeeeenesecceeee
Page
Rack Island ----cccccccccccenncecccccceccccccccccccccccccccccencccceseccccscoccccocccccee
Summary of Rock Island's position -----------------+---+---------ee--eeeeee-
Traffic diversion ----------- ecco
Common control--------
Additional issues
Employee impact -----------------
Proposed protective conditions--------- -_
Compensatory conditions --------------------------+-s0eeeeseeeeeenneeneeennes
A. Trackage rights -------------------------------0-0eeeesenneeneenennenenennes
B. Reciprocal switching ----------------------- . ; s€
C. Indemnification -------------cccccccerccceccccccccccecccccccscsccnceccccecs
D. Divisions ---
Divestiture --------------------- ° cheatin an
Traffic protective conditions
Applicants’ response to Rock Island ----------------------------00e0-e0e-ee00
Missouri-Kansas-Texas Railroad Company --------------------------------0000-
Summary of Katy's position ------------------0--+-----s-ne-neeeencenenneecenene
Scope of operations---------- cece
Katy's position as a protestant ----------- ran
Traffic diversion eee
Impact on shipper and employees---------------------
Relief sought by Katy ---------------------------s0ce-eeceeneeeeseennnennneenaneees
Indemnification ---------
Modified DT&I conditions --
Applicants’ response to Katy ---- --
Illinois Central Gulf Railroad Company ----------------------------------00-+0
Summary of ICG position--------------------------- on
? Scope of operations---------------------------------s0ceenensneeneeeeecnnenneeeees
Impacts of merger --------------2--------cecencenenceercceccnceccccecccecescncecenes
Protective CONDItIONS --------ccccececccccccccccocencocccenccccccscssccccccccecccces
Trackage rights --------------------s-0ceceeceseeeeneennnneceennececenscsenceseeees
Terminal operations ----------------------------00--0esseeseeneennnnnneennnneeees
Modified DTBI conditions -cccccccccccccccccccccccccccesccccccnccoccecccoccese
Soo Line Railroad Company
Summary of Soo Line's position ---
Scope of operations --
Traffic diversion cece
Net impacts of merger
Impact on shippers and employees -------------------------------0-eeeeeeeeee
i ta
Opening of western gateways-----------------------------0----eeseeeeeeeeneee
Trackage rights Options --------------------------s--eecececencceeceeeceescenees
Termination of pooling agreement--------------------------0--s--00s0-eeee
Tunnel agreement------------------0+-----00-e-neen-neeencenencnececeneencenenees
Modified traffic conditiong---<-cccccccccecccccccccsccoccccccsoceccceccsccceses
Commission jurisdiction------------------0------seceesseeescseecceeccenneenenes
Other railroads-----------------.
Denver and Rio Grande Western Railroad Company -------------------
Missouri Pacific Railroad Company---------------------------0seeeeseeeneee-
360 1.C.C.
Kansas City Southern Railway Company «----+++++-+++---eneeeceenennnennnes
The Atchison, Topeka and Santa Fe Railway Company ----------+-++-
Southern Railway System --++----+-------s0-seeeeeeeenenseeeenecencecenenenennenes
Family Lines ---------++-+---0eeenneneeneeennne
Chicago and North Western Transport
ation Company ------++++e--ee0+
Illinois Terminal Railroad Company---------++++00--sesseecenneeeeeeeenennnee
Southern Pacific Transportation Company -------+-+++++0+-eeeneeneneennenes
Union Pacific Corporation ------------+++-
Public BODIES -----+--eennceenneeenecseeceneenceneces
Department of Defense --------+-+++--««+-
Department (OT | SENRONER cucedececccccnnddcnduncvanesdnanesenstndenkacedebasenenienn
A. The Merger ------+--+-+00neneneneneenens
B. Conditions ----+++++-00-e0eeeceeeenesnes
lowa Department of Transportation -----+-+---0--ss+se-sesseeeeeneneeeeeeeees
Iinois Department of Transportation
Other Protestants ------------0--e0eeneeeennes
Fee CRE ROR Ree eeeee
Kansas City Board of Trade -------------sssccseeeeeseccennesecescnnsesscceeness
Montana Wheat Research and Marketing Committee -----------+++---+-
JohA W. O'Neih---cccccccccccccccccscccceccses
Employee organizations-------------e+----eee00-
Railway Labor Executives’ Association
United Transportation Union-------------
hth ttt
FTE EERE RRR RRR eee eee eee
FERRER RR RRR eRe eee eee
dh tht tt tet LLL Te
Railway Employees’ Department, AFL-CIO -----------+---s0sseeeeeeeenees
Envir OnMent ---------+-------0--eeneneennweeenenees
Merger criteria -----------+-------e0ceeensenesenneee
Discussion ------ Ame ec cccococcccecesescescccccceccesesceccecceccoccecececececececccoceccececs
Adequacy of transportation ------+-+------
The competitive impact of the proposed MEPQOT --+--+--0- enn nnnnnnnnnnne
Inclusion of other Carriers-----------------esessecceccceeenssneeecccccnseeeeesens
Fixed charges ---------++-+---ee-0e--oeneennes
Stock Oxchange ---------------eeeenneneenenes
hhh tthe
Envir onment-----------++0-e-eenn-ncennnnnennenennnnenesecneeansacerenssnscenereseeaes
Employee protection-------------++-+esse0-
ihe ee
CONGILIONS -----+---0-00reeernnnenanernnnnnnssscenenesessnncentenensencenssaccsseseececees
INDEMMIty ----------0+-00e-eeeennnnnnnsernsensnnccnncnnneneneccencnneeesenecsecsenes
SOO Lime ----+---+---eeceeneeeeeceneenenceees
ttt
Conditions imposed -------2---cceeeeseccccnssccescacececeescecescccccscccerecees
Comtsel Of PTC -ccccccecerccccceccccccscccccccnsesccnseccccccsccooccosececessecsscos
Appendix A—Abbreviations used in this decision ----------------0000ceeeeeee-
Appendix B—Siatus of related proceedings
5
Page
Appendix C—Shipper positions ------++++-sssssccssessecsscecsesssnsensennenneeccees 189
Appendix D—Summary of BN traffic, facilities, equipment, safety, and
DALE eocceccccccccccccecesessccccccccccnccscceccecscceccccccccceccecceccececccccceece 198
Appendix E—Summary of Frisco traffic, facilities. equipment, safety,
ANd Financial data------------eeeeeeesnecereerennesseeseeeesnnnnensaceeesesceeeeeeeeeens 223
Appendix F—Pro forma financial statement for merged company -------- 252
Appendix G—Map of BN and Frisco systems-------+++++00-essesscseeneeennenns 285
Appendix H—Analysis of traffic diversion studies ----------.<....+..--eeeenees 286
Appendix I—Cost analyses --------++--cccccecseeeecesseseenenesensececcsecccceecenenes 310
Appendix J—Financial matters ---------+--++-00ssssseseeeseceeeeeenneeceeeneenenenees 328
Appendix K—Protective conditions sought -----+-----++0000cssceccseeeeeenenennne 370
Appendix L—Route density charts and table of PEBIONS ~~ ---n--e enn nennnnnee 393
Appendix M—Protective conditions imposed ---+-+--+-++++000000..e-eeeeeennenee 397
360 LC.C,
6
FINANCE DOCKET No. 28583 (SuB-No. | F)'
BURLINGTON NORTHERN, INC.—CONTROL AND MERG-
ER—ST. LOUIS-SAN FRANCISCO RAILWAY COMPANY
Decided March 25, 1980
1, In Finance Docket No, 28583 (Sub-No. IF), control and merger of the St. Louis-
San Francisco Railway Company into Burlington Northern, Inc. is authorized,
subject to conditions.
2. In Finance Docket No. 28583 (Sub-No. 2F), authority is granted to Burlington
Northern, Inc.: (a) to issue 2,560,791 shares of common capital stock without par
value; (b) to issue 1,347,785 shares of $2.125 no par value preferred stock, $25
redemption value; and (c) to assume all obligations, liabilities, and guarantees
with respect to securities issued, assumed, or guaranteed by the St. Louis-San
Francisco Railway Company and subsidiary or affiliated companies.
‘This decision embraces Finance Docket No. 28583 (Sub-No. 2F), Burlington Northern,
Inc.—Securities; No. MC-F-13500, Burlington Northern, Inc. —Control—Frisco Transportation
Company; Finance Docket No. 28583 (Sub-No. 3F), Soo Line Railroad Company—Trackage
Rights—Over Burlington Northern, Inc., Between McGregor, MN and Superior, WI, a Distance of
69 Miles; Finance Docket No. 28583 (Sub-No. 4F), Soo Line Railroad Company—Trackage
Rights—Over Burlington Northern, Inc., Between Paynesville, MN and Superior, WI, a Distance
of 162 I4iles; Finance Docket No, 28583 (Sub-No. SF), Soo Line Railroad Company—Trackage
Rights—Over surlington Northern, Inc., Between Schley (Soo Junction), MN and Superior, WI, a
Distance of 146.2 Miles; Finance Docket No. 28583 (Sub-No. 6F) Soo Line Railroad
Company—Trackage Rights—Over Burlington Northern, Inc., Between Bald Eagle, MN and
Superior, Wi, a Distance of 126.4 Miles; Finance Docket No. 28583 (Sub-No. 7F), Hlinois Central
Gulf Railroad Company Trackage Rights—Over the St. Louis-San Francisco Railway Company,
Between Memphis, TN and Jasper, AL. a Distance of 210 Miles; Finance Docket No. 28583 (Sub-
No. 8F), Chicago and North Western Transportation Company—Trackage Rights—Over
Burlington Northern, Inc., Between BN M.P. 492.7 at Council Bluffs, [A and BN M.P. 2.16 at BN
Junction, MO, a Distance of 168 Miles, Finance Docket No, 28583 (Sub-No. 9F), Chicago and
North Western Transportation Company—Trackage Rights—Over Burlington Northern, Inc.,
Between East Minneapolis, MN and East Superior, WI, a Distance of 143.8 Miles; Finance Docket
No. 28583 (Sub-No. 10F), William M. Gibbons, Trustee of the Property of the Chicago, Rock
Island and Pacific Railroad Company, Debtor—Trackage Rights—Over Burlington Northern,
Inc., Between Lincoln and Havelock, NE. a Distance of § Miles; Finance Docket No. 28583 (Sub-
No. 1IF), William M. Gibbons, Trustee of the Property of the Chicago, Rock Island and Pacific
Railroad Company, Debtor—Trackage Rights—Over the Colorado and Southern Railroad
Company, Between Denver and Golden, CO, a Distance of 13 Miles; Finance Docket No. 28583
(Sub-No, 12F), William M. Gibbons, Trustee of the Property of the Chicago, Rock Island and
Pacific Railroad Company, Debtor—Trackage Rights—Over Burlington Northern, Inc., Between
Ottawa and Streator, IL, a Distance of 17 Miles; Finance Docket No. 28583 (Sub-No, 13F), Stanley
E. G. Hillman, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pacific Railroad
(footnote continued on next page)
360 L.C.C.
3. In No. MC-F-13500, acquisition of control by Burlington Northern, Inc., of the
Frisco Transportation Company, through the merger with the St. Louis-San
Francisco Railway Company, is authorized.
4. In Finance Docket No, 28583 (Sub-No. 3F), the Soo Line Railroad Company
application for trackage rights over Burlington Northern, Inc. between McGregor,
MN, and Superior, WI, is denied.
5. In Finance Docket No. 28583 (Sub-No. 4F), the Soo Line Railroad Company
application for trackage rights over Burlington Northern, Inc. between
Paynesville, MN, and Superior, WI, is dismissed.
6. In Finance Docket No. 28583 (Sub-No. SF), the Soo Line Railroad Company
application for trackage rights over Burlington Northern, Inc. between Schley
(Soo Junction), MN, and Superior, WI, is denied.
7. In Finance Docket No. 28583 (Sub-No. 6F), the Soo Line Railroad Company
application for trackage rights over Burlington Northern, Inc. between Bald
Eagle, MN, and Superior, WI, is denied.
8. In Finance Docket No. 28583 (Sub-No. 7F), the Iilinois Central Gulf Railroad
Company application for trackage rights over the St. Louis-San Francisco Railway
Company between Memphis, TN, and Jasper, AL, is denied.
. In Finance Docket No. 28583 (Sub-No. 8F), the Chicago and North Western
Transportation Company application for trackage rights over Burlington
Northern, Inc. between Council Bluffs, 1A, and BN Junction, MO, is dismissed.
<<
(footnote | continued)
Company, Debtor—-Trackage Rights—Over Burlington Northern, Inc., Between Terry, MT and
Spokane, WA, a Distance of 1,081.07 Miles; Finance Docket No. 28583 (Sub-No. 14F), Stanley E
G. Hillman, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pacific Railroad
Company, Debtor--Trackage Rights—Over Burlington Northern, Inc, Between Tacoma, and
Chehalis, WA, a Distance of 62.7 Miles; Finance Docket No. 28583 (Sub-No. I SF). Stanley E.G
Hillman, Trustee wf the Property of Chicago, Milwaukee, St. Paul and Pacitic Railroad Company.
Debtor—Trackage Rights—Over Burlington Northern, Inc. Between Miles City, MT. and All
Present and Future Coal Mines Located on the BN in MT; Finance Docket No. 28583 (Sub-No
16F), Stanley E. G. Hillman, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, Debtor—Trackage Rights—Over Burlington Northern, Inc. Between Counc!
Bluffs, 1A and Kansas City, MO, a Distance of 189.69 Miles; Finance Docket No. 28583 (Sub-No
17F), Stantey E. G. Hillman, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, Debtor—Trackage Rights—Over Burlington Northern, Inc. Between
Bellingham and Cherry Point, WA, a Distance of 22 Miles; Finance Docket No. 28583 (Sub-No
18F), Southern Pacific Transportation Company—Trackage Rights—Over Burlington Northern,
Inc., and the Union Pacific Railroad Company, Between the Connection of BN and the Portland
Terminal Railroad Company and (1) Trackage Serving North Rivergate and (2) the Barnes Yard of
Union Pacific Railroad Company, a Distance of 16.3 Miles; Finance Docket No. 28583 (Sub-No
19F), Atchison, Topeka and Santa Fe Railway Company—Trackage Rights—Over the St. Louis-
San Francisco Railway Company, Between Tulsa and Oklahoma C ity, OK, a Distance of 112.8
Miles, Finance Docket No. 28583 (Sub-No. 20F), Application of the Montana Wheat Research
and Marketing Committee for Stanley E. G. Hillman, Trustee of the Property of Chicago.
Milwaukee, St. Paul and Pacific Railroad Company, Debtor—Trackage Rights—Over Burlington
Northern, Inc., Lines in MT; Finance Docket No. 28583 (Sub-No. 21F). Application of Wyo- Ben,
Inc., tor Stanley E. G. Hillman, Trustee of the Property of Chicago. Milwaukee. St. Paul and
Pacific Railroad Company, Debtor—Trackage Rights—Over Burlington Northern, Inc., Between
Billings, MT, and Shobon, WY. a Distance of 227.1 Miles; Finance Docket No. 28583 (Sub-No
22F), Richard B. Ogilvie, Trustee of the Property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, Debtor—Trackage Rights—Over Burlington Northern, Inc. Between Miles
City, MT, and Big Sky and Kuehn, MT. a Distance of 138.9 Miles: and Finance Ducket No. 26583
(Sub-No. 23F), Iilinois Central Gulf Railroad Company—Terminal Operations—Over the
Missouri Pacific Railroad Company in Memphis, TN.
360 1.C.C.
12.
13.
4.
15.
16
17
In Finance Docket No. 28583 (Sub-No. 9F), the Chicago and North Western
Transportation Company application for trackage rights over Burlington
Northern, Inc. between East Minneapolis, MN, and East Superior, WI, is
dismissed
in Finance Docket No. 28583 (Sub-No. 10F), the application of William M.
Gibbons, trustee of the property of the Chicago, Rock Island and Pacific Railroad
Company. debtor, for trackage rights over Burlington Northern, Inc. between
Lincoin and Havelock, NE was dismissed.’
in Finance Docket No. 28583 (Sub-No. 11F), the application of William M.
Gibbons, trustee of the property of the Chicago, Rock Island and Pacific Railroad
Company, debtor, for trackage rights over the Colorado and Southern Railroad
Company between Denver and Golden, CO, is denied.
in Finance Docket No. 28583 (Sub-No. 12F), the application pf William M.
Gibbons, trustee of the property of the Chicago, Rock Island and Pacific Railroad
Company, debtor, for trackage cights over Burlington Northern, Inc., between
Ottawa and Streator, IL. was dismissed.’
in Finance Docket No. 26583 (Sub-No. 13F), the application of Stanley E. G.
Hillman, trustee of the property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, debtor, for trackage rights over Burlington Northern, Inc.
between Terry, MT. and Spokane, WA, was dismissed.’
in Finance Docket No. 26583 (Sub-No. 14F), the application of Stanley E. G.
Hillman, trustee of the property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, debtor, for trackage rights over Burlington Northern, Inc.
between Tacoma and Chehalis. WA, was dismissed.’
in Finance Docket No. 28583 (Sub-No. 15F), the application of Stanley E. G.
Hillman, trustee of the property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company. debtor, for trackage rights over Burlington Northern, Inc.,
between Miles City, MT, and all present and future coal mines located on BN in
Montana was rejected.”
In Finance Docket No. 28583 (Sub-No. 16F), the application of Stanley E. G.
Hiliman, trustee of the property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, debtor, for trackage rights over Burlington Northern, Inc.
between Council Biufls, 1A, and Kansas City, MO, was dismissed.’
in Finance Docket No. 28583 (Sub-No. 17F), the application of Stanley E. G.
Hiliman, trustee of the property of Chicago, Milwaukee, St. Pau! and Pacific
Railroad Company. debtor, for trackage rights over Burlington Northern, Inc.
between Bellingham and Cherry Point, WA, was dismissed.’
in Finance Docket No. 26583 (Sub-No. 1 8F), the Southern Pacific Transportation
Company application for trackage rights over Burlington Northern, Inc., and the
Union Pacific Raiiroad Company. between the connection of BN and the Portland
Terminal Railroad Company and (1) trackage serving North Rivergate and (2) the
Barnes Yard of Union Pacific Railroad Company, as amended, is denied.
"The decison to desmuss this proceeding was made November 29. 1978. and served December 5.
Vd
Vd
‘a
“The decision ww reject this application was made August 16, 1978. and served August 25. 1978
The decision to dasmuss this proceeding was made November 29. 1978. and served December 5.
“ld
160 ICL
20. In Finance Docket No. 28583 (Sub-No. 19F), the Atchison. Topeka and Santa Fe
Railway Company application for trackage rights over the St. Louis-San Francisco
Railway Company between Tulsa and Oklahoma City, OK, is dismissed.
21. In Finance Docket No. 28583 (Sub-No. 20F), the Montana Wheat Research and
Marketing Committee application for Stanley E. G. Hillman, trustee of the
property of Chicago, Milwaukee, St. Paul and Pacific Railroad Company, debtor,
to obtain trackage rights over Burlington Northern, Inc., lines in Montana was
rejected.”
22. In Finance Docket No. 28583 (Sub-No. 21F), the Wyo-Ben, Inc., application for
Stanley E. G. Hillman, trustee of the property of Chicago, Milwaukee, St. Paul
and Pacific Railroad Company, debtor, to obtain trackage rights over Burlington
Northern, Inc., between Billings, MT, and Shobon, WY, was rejected.'”
23. In Finance Docket No. 28583 (Sub-No. 22F), the application of Richard B.
Ogilvie, trustee of the property of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company, debtor, for trackage rights over Burlington Northern, Inc.
between Miles City, MT, and Big Sky and Kuehn, MT, is denied.
24. In Finance Docket No. 28583 (Sub-No. 23F), the Ilinois Central Gulf Railroad
Company application for terminal operations over the Missouri Pacific Railroad
Company in Memphis, TN, is denied.
Christian Campbell, Eric Cunningham, Donald Engle, Frank
Farrell, John Haley, Martin Lucente, G. Paul Moates, Nicholas P.
Moros, and James Walker for applicants Burlington Northern, Inc.
and St. Louis-San Francisco Railway Company.
James Armstrong for the Department of Defense.
Barbara Anthony, Arthur Federman, Joen Grant, and Cristy
Passman for the Department of Justice.
James Baxendale, Robert Heath, and Diane Liff for the
Department of Transportation. ''
Toby Dress for the Interstate Commerce Commission, Section of
Energy and Environment.
Michael Blaszak, Harry DeLung, Milton Nelson, C raig Smetko,
and Dennis Wilson for Atchison, Topeka and Santa Fe Railway
Company.
Louis Duerinck, Stuart Gassner, Christopher Mills, and Anne
Valle for Chicago and North Western Transportation Company.
Sarah Holzsweig, Thomas Ploss, and William Sippel for Richard B.
Ogilvie, trustee of the property of Chicago, Milwaukee, St. Paul and
Pacific Railroad Company, debtor.
Martin Cassell, Nicholas Manos, and Don McDevitt for William
M. Gibbons, trustee of the property of the Chicago, Rock Island and
Pacific Railroad Company, debtor.
"The decision tw reject this application was made August 18, 1978, and served August 25, 1978
"Id
“DOT did nut cross-examine witnesses. present evidence, take « position, or file # brief in these
proceedings |i will mu be mentioned again in this decision
360 ICC
10
Fritz Kahn and Kendall Sanford for Denver and Rio Grande
Western Railroad Company.
John Adams and Howard Koontz for Illinois Central Gulf
Railroad Company.
Philip Brown for Kansas City Southern Railroad Company.
Michael Roper, Harry Silleck, and William Thie for Missouri-
Kansas-Texas Railroad Company.
Leon Leighton for Missouri Pacific Railroad Company.
Emreid Cole and Edward Tannen for Seaboard Coast Line
Railroad Company, Louisville and Nashville Railroad Company,
Clinchfield Railroad Company, Georgia Railroad, Atlanta and West
Point Railroad Company, and Western Railway of Alabama.
F. W. Crouch, Robert Gehrz, and C. Harold Peterson for Soo Line
Railroad Company.
Charles Burkett, Marc Feldman, Carol Harris, and Jane White for
Southern Pacific Transportation Company and St. Louis
Southwestern Railway Company.
R. Allen Wimbish for Southern Railway Company.
Joseph Adams, William Higgins, Peter Hohenhaus, Mark Kalafut,
James Lowe, and John Weisser for Union Pacific Railroad Company.
T. Scott Bannister for the lowa Department of Transportation,
Transportation Regulation Board.
Richard Friedman and Harold Mesirow for the Illinois
Department of Transportation.
John Finnigan for the Nebraska Public Service Commission.
David Tiistola for the North Dakota Public Service Commission.
William Hickey and Thomas Woodley for the Railway Employees’
Department, AFL-CIO.
John Clark, Joseph Guerrieri, and William Mahoney for the
Railway Labor Executives’ Association.
Gordon MacDougall for John W. McGinness, I\linois Legislative
Director of the United Transportation Union and M. S. Stuckey,
general chairman of United Transportation Union on IIlinois
Central Gulf Railroad Company.
M. M. Winter for the United Transportation Union.
James Irlandi for Garvey, Inc.
Jon Hansen for the Kansas City Board of Trade.
Miké Miller for the North Dakota State Wheat Commission.
Griffin Dorschel for the Wisconsin Power and Light Company.
John O'Neil, pro se.
360 LCC.
1]
DECISION
BY THE COMMISSION:
INTRODUCTION
Burlington Northern, Inc. (BN or Burlington) and the St. Louis-
San Francisco Railway Company (SLSF or Frisco), common carriers
by railroad with principal offices at St. Paul, MN, and St. Louis, MO,
respectively, propose to merge Frisco into Burlington. The resulting
entity will be a single railroad operating over more than 29,000
miles of track through the northern tier of States between the
Pacific Northwest and the Great Lakes, and between the Great
Lakes and the Gulf of Mexico.
The merger proposal is contained in: (1) a joint application filed
by BN and Frisco on Decemiber 28, 1977, seeking authority for the
merger under 49 U.S.C. 11343, e¢ seq.; (2) a concurrently filed
application under 49 U.S.C. 11301 in which BN seeks authority to
issue certain securities and to assume certain obligations and
liabilities in connection with the proposed merger; and (3) an
application filed January 16, 1978, under 49 U.S.C. | 1343, et seq. in
which BN seeks authority to acquire control of Frisco’s wholly
owned motor carrier subsidiary, Frisco Transportation Company
(FTC). We accepted these applications for filing on January 27,
1978, and published an appropriate notice in the Federal Register.'’
In that notice we waived an initial decision by the Administrative
Law Judge, and determined that the merits of these applications
would be decided in the first instance by the entire Commission.'’
Public hearings were conducted by Administrative Law Judge
Paul J. Clerman, on a consolidated record, beginning May 16, 1978,
and concluding June 28, 1979. The record was closed and certified
to us on October 24, 1979. On November 14, 1979, we held oral
argument on specific issues in these proceedings. In all, the record
reflects 46 days of hearing, comprising 8,370 pages of transcript and
222 exhibits received in evidence.
Appendix B identifies the related proceedings embraced in this
decision. The position of parties in these proceedings is summarized
later in this decision.
Burlington is the largest railroad system in the United States in
miles of road operated, and the second largest in transportation
revenues.'*
“43 PR. 3799 (197K)
"49 USC. 11MSe)
"For the years 1976-197
360 LCC.
12
In its present form Burlington commenced operations in March
1970, following the merger of its predecessors, The Great Northern
Railway (GN), Northern Pacific Railway (NP), Chicago, Burlington
and Quincy Railroad (CB&Q), and other subsidiary lines, which was
approved by the Commission." As a system, BN and its subsidiaries
operate over almost 25,000 miles of track serving points in 19 States
and two Canadian provinces. Its lines extend generally between
Chicago, IL, and St. Louis, MO, in the east; Houston and Galveston,
TX, in the south; Duluth, MN, Superior, WI, and Winnipeg,
Manitoba, and Vancouver, British Columbia, in the north; and
Seattle, WA, Portland, OR, Bieber, CA, and Denver, CO, in the
west. Its principal routes are between: Denver and Chicago via
Lincoln, NE; Chicago and the Pacific Northwest via Minneapolis
and St. Paul, MN, Omaha, NE, and Billings, MT; Seattle and
Portland and Vancouver, British Columbia and northern California
via Wishram, WA; Lincoln and Laurel, MT via Alliance, NE; and
Spokane and Portland. BN’s facilities, equipment, traffic, and
financial data are described in appendix D.
BN and subsidiaries connect with Frisco primarily at Dallas-Fort
Worth, Kansas City, and St. Louis, MO. Frisco and a subsidiary
operate over some 4,700 miles of track in nine States. Frisco’s lines
generally extend between Kansas City and St. Louis in the north;
Dallas and Fort Worth, TX, Mobile, AL, and Pensacola, FL, in the
south; Quanah, TX, in the west; and Birmingham, AL, in the east. Its
principal routes are between: Kansas City and Birmingham via
Springfield and Memphis; St. Louis and Dallas-Fort Worth via
Springfield and Tulsa; Kansas City and Tulsa, OK; Amory, MS, and
Pensacola, FL, and Mobile, AL; and St. Louis and Memphis, TN.
Frisco’s facilities, equipment, traffic, and financial data are
described in appendix E.
The merger was initially conceived by senior management officials
of BN, in a continuing search for ways to strengthen their system.
They recognized that an end-to-end merger with Frisco would
provide BN access to the “Sunbelt.” the Southeastern and South-
western States in which economic growth and development are
said to be occurring at the highest rate. A merger was suggested
to the chairman and chief executive officer of Frisco on January 27,
1977. A joint study team was established to investigate the potential
benefits to the shareholders, employees, and public from a
unification of the two systems. It reported that the consolidation was
"Great Northern Pac.—Merger—Great Northern, 331 1.C.C. 228 (1967). sometimes referred to
as the Northern Lines Merger
360 LCC.
13
likely to produce significant service and financial benefits. An
agreement in principle was reached, which was approved by the two
boards of directors on September 23, 1977. A final merger
agreement was executed December 5, 1977. The agreement
provides for BN to be the surviving corporation. The merger
agreement was approved by the respective stockholders of BN and
Frisco in May 1978.
THE APPLICANTS
BURLINGTON NORTHERN. INC.
BN is a diversified transportation and natural resources company.
It was incorporated in Delaware as the Great Northern Pacific &
Burlington Lines, Inc. (GNP&B) in 1961. The present name was
adopted in 1970 after consummation of the Northern Lines Merger.
BN and its predecessors have conducted railroad operations
continuously since 1849.
BN’s transportation activities encompass rail, truck and airfreight
forwarding operations. Truck operations conducted by BN
Transport, Inc. (BN Transport) and Hart Motor Express, Inc. (Hart
Motor) provide motor carrier freight service in 15 Midwest and
Western States. Burlington Northern Air Freight (BN Air), a wholly
owned subsidiary, provides airfreight forwarding service. BN also
engages in real estate and land development through subsidiaries.
Scope of operations.—BN and its subsidiaries operate a 24,950-
mile rail system serving the States of California, Colorado, Idaho,
Illinois, lowa, Kansas, Kentucky, Minnesota, Missouri, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Texas, Washington, Wisconsin, and Wyoming, and the Canadian
Provinces of British Columbia and Manitoba. The principal rail
subsidiaries are Colorado and Southern Railway Company (C&S),
Fort Worth and Denver Railway Company (FW&D), Oregon Trunk
Railway (OT), Oregon Electric Railway Company (OE), and Walla
Walla Valley Railroad Company (WWV). Main and branch line
mileages are shown below:
360 L.C.C.
14
TABLE |
BN system main line and branch line mileage (1976)
Carrier Main line Branch line Total
DD ciddadttinintisnantnimnotnanebenadandanteicnaesassiund 12,373 10,297 22,670
ae 593 90 683
PWED ccccccccccccccccccccccccccoccccccccecssseccccessse 1,241 0 1,241
OT ccccmcccceccccccccccccccocccccccossccccocccccccoconcecs 152 0 152
0 ae 142 43 185
A 19 0 19
Total SyStem -------+-----0----enennenneeneennenee 14,520 10,430 24,950
BN operates intercity rail passenger service under contract for
Amtrak between (1) the Twin Cities and Seattle; (2) Duluth, MN and
the Twin Cities; and (3) Portland and Seattle and Vancouver, British
Columbia. In addition, BN provides commuter service between
Chicago and Aurora, IL, under an agreement with the Regional
Transportation Authority.
BN and Frisco interchange at St. Louis and Kansas City, MO. BN’s
subsidiary FW&D interchanges with Frisco at Quanah, Irving, Fort
Worth, and Dallas, TX, and with Frisco’s subsidiary the Quanah,
Acme and Pacific Railroad Company (QAP) at Quanah. Other major
BN interchange points include Chicago; Denver; Portland;
Minneapolis; Grand Island, NE; Bieber; and Peoria, Centralia, and
Eola, IL.
In 1976 BN and its subsidiaries owned or leased a total of 112,810
cars. These were comprised of: 50,652 boxcars; 10,064 gondola cars;
17,716 open hopper cars; 15,825 covered hopper cars; 5,384
refrigerated cars; 2,321 stock cars; 218 tank cars; 8,547 flatcars and
2,083 miscellaneous cars.
The top five commodities handled by BN in 1976 were coal, farm
products, lumber and wood products (except furniture), food and
kindred products, and chemicals and allied products.
In 1976 BN and its subsidiaries handled 2,724,438 carloads. They
carried 171,700,000 revenue tons over 89,780,124,000 revenue ton-
miles, generating $1,628,907,000 in freight revenue.
The five largest origin points of traffic on BN and its subsidiaries
in 1976, in order, were Decker, MT, Chicago, IL, Colstrip, MT,
Belle Ayr, WY, and Kuehn, MT. The five largest termination points
360 L.C.C.
15
on BN and its subsidiaries in 1976, in order, were Alloredoc, WI,
Minneapolis, MN, Seattle, WA, Superior, WI, and Chicago, IL.
BN operates 25 run-through trains, all but 4 of which are unit
coal trains. The run-through trains are listed in appendix D. BN has
no preferential solicitation agreements with any other railroad.
BN owns all of the outstanding stock of the following seven
carriers: Burlington Northern (Manitoba) Limited; Burlington
Northern Dock Corporation; BN Transport, Inc.; Oregon Electric
Railway Company; Oregon Trunk Railway; Spokane, Portland and
Seattle Railway Company; and Walla Walla Valley Railroad
Company.
BN also owns, directly or indirectly, stock in the following 29
carriers: The Belt Railway Company of Chicago (7.69 percent);
Butte Pipe Line Company (10.00 percent); Camas Prairie Railroad
Company (50.00 percent); Chicago Union Station Company (25.00
percent); the Colorado and Southern Railway Company (90.57
percent); Davenport, Rock Island and North Western Railway
Company (DRI&NW) (50.00 percent); Delta Alaska Terminal Ltd.
(66.67 percent); Denver Union Terminal Railway Company (33.34
percent); Fort Worth and Denver Railway Company (99.97 percent);
Galveston Terminal Railway Company (50.00 percent); Houston
Belt and Terminal Railway Company (12.50 percent); Illinois
Terminal Railroad Company (9.09 percent); lowa Transfer Railway
Company (25.00 percent); Kansas City Terminal Railway Company
(8.34 percent); Keokuk Union Depot Company (40.00 percent); The
Labe Superior Terminal and Transfer Railway Company (66.67
percent); Longview Switching Company (33.33 percent); Minnesota
Transfer Railway Company (33.33 percent); National Railroad
Passenger Corporation (36.00 percent); Paducah and Illinois
Railroad Company (33.33 percent); Portal Pipe Line Company
(50.00 percent); Portland Terminal Railroad Company (40.00
percent); Pueblo Union Depot (25.00 percent); the Pullman
Company (2.97 percent); the St. Paul Union Depot Company (40.20
percent); Terminal Railroad Association of St. Louis (6.25 percent);
Trailer Train Company (7.32 percent); Western Fruit Express
Company (97.14 percent); and Winona Bridge Railway Company
(66.67 percent).
BN also owns 18 noncarrier companies, either directly or
indirectly. They are: Arden Lumber Company, Inc. (100.00
percent); BNL Development Corporation (100.00 percent);
Burlington Equipment Company (100.00 percent); Burlington
360 LCC. _
16
Northern Air Freight, Inc. (100.00 percent); Burlington Northern
Air Freight (Australian) PTY. Ltd. (99.99 percent); Dreyer Bros.,
Inc. (100.00 percent); Glacier Park Company (100.00 percent);
Great Midwest Corporation (49.35 percent); Ksanka Lumber Co.,
Inc. (100.00 percent); Lemhi Telephone Company (100.00 percent);
Midwest Precote Company (100.00 percent); Northern Airmotive,
Inc. (100.00 percent); Plum Creek Lumber Company (100.00
percent); Royal Logging Company (100.00 percent); Ruth Realty
Company (100.00 percent); Saxony Corporation (100.00 percent);
Underground Development Company (100.00 percent); and
Universal Pipeline Constructors Inc. (100.00 percent).
These companies comprise BN’s natural resources and corporate
divisions. The natural resources division includes responsibility for
forest products (including timber sales), oil and gas, coal and
minerals, and agricultural land development. The corporate division
overseas commercial land development, local telephone service,
and fixed base aircraft sales and service.
On May 11, 1978, BN shareholders adopted a resolution
approving the merger, subject to Commission approval. Of
10,227,413 shares voting (79.6 percent of total outstanding),
8,883,980 shares (69.1 percent of voting shares) were voted in favor
of the merger.
As of December 31, 1976, BN properties were valued at
$3,451,013,257.
BN is able to utilize several routes through the northern and
central corridors. It is able to penetrate many transportation
markets, originate most of the traffic handled, and serve most of the
important pe in the northern half of the western district. It
possesses a large freight car fleet and enjoys long average hauls in a
territory largely | free of terminal congestion other than at the
carrier's eastern gateways.
Since 1970, the carrier has compiled a good traffic and revenue
growth record. Coal traffic has become increasingly important to
the railroad. Coal accounted for 5.3 percent of freight revenue in
1970, increasing to 17.5 percent in 1976. During the past several
years, BN has continuously increased its market share in terms of
revenue ton-miles.
The financial strength of BN is due in large measure to the
existence and development of its nonrail assets. The carrier owns in
fee nearly 2.4 million acres in the mountain and Northwestern States
and holds mineral rights on an additional 5 million acres. Revenues
derived from the mining of taconite, coal, and other minerals, the
360 1.C.C.
17
production of oil and gas, and the harvesting of forest products have
become important sources of income during recent years.
ST. Louis-‘SAN FRANCISCO RAILWAY COMPANY
Frisco was incorporated in Missouri in 1916 as the successor of
the St. Louis and San Francisco Railroad Co. Frisco operates a rail
system in nine States. The system includes the QAP, a wholly owned
subsidiary, which operates a rail line through the Texas Panhandle
to a connection with the Santa Fe. The Frisco’s wholly owned motor
carrier subsidiary, FTC, operates over routes generally paralleling
the Frisco’s rail lines in Missouri and it holds operating rights over
other routes in Arkansas, Tennessee, Mississippi, Oklahoma and
Texas. Frisco owns two land companies whose primary purpose is to
acquire and develop property for the location of traffic-producing
industries along the lines of the rail system. Frisco also owns
approximately 50.04 percent of the stock of the New Mexico and
Arizona Land Company (New Mex.).
Frisco and QAP operate 4,710 miles of track within the States of
Alabama, Arkansas, Florida, Kansas, Mississippi, Missouri,
Oklahoma, Tennessee, and Texas. The main line mileage totals
3,601 miles, of which 56 are leased. Frisco’s branch line mileage
totals 1,109 miles, of which 73 are operated under trackage right
agreements.
As stated earlier, Frisco interchanges with BN at Kansas City and
St. Louis, and with FW&D at Dallas, Irving, Fort Worth, and
Quanah, TX. QAP connects with FW&D at Quanah. Other major
Frisco interchange points include Birmingham, Memphis, and
Avard.
In 1976 Frisco owned or leased 18,548 cars consisting of: 8,847
boxcars; 1,276 flatcars; 2,620 gondola cars; 2,601 open hopper cars;
3,102 covered hopper car; 100 refrigerator cars; and 2 tank cars.
Frisco and its subsidiary handled 773,437 carloads. This resulted
in 40,544,103 revenue tons traveling 14,563,803,000 revenue ton-
miles and generating $318,625,605 of gross freight revenue.
In 1976, the five major commodities transported on Frisco and its
subsidiaries were: food and kindred products; chemicals and allied
products; transportation equipment; farm products; and pulp, paper
and allied products.
The major revenue carload origin points for Frisco in 1976, in
order were: Memphis, TN; Valley Park, MO; Tulsa, OK; Catale, OK;
and St. Louis, MO. In that same year Frisco’s six major revenue
360 I.C.C,
18
carload termination points in order were: Memphis, TN; Springfield,
MO; Kansas City, MO; Rush Tower, MO; Oklahoma City, OK; and
Dallas, TX. If the Dallas-Fort Worth-Irving, TX area is considered
one termination point, it becomes the second largest on the Frisco
system. Additionally, if Kansas City, KS, and Kansas City, MO, are
considered together they become the third largest termination point
on Frisco.
Frisco participates in 17 run-through train operations. Six of these
involve unit coal trains and two are in one direction only. A list of
these trains is in appendix E.
Frisco has no preferential solicitation agreements with other
railroads.
Frisco has an interest in eight other carriers: The Terminal
Railroad Association of St. Louis (6.25 percent); Illinois Terminal
Railway Company (9.09 percent); Kansas City Terminal Railway
Company (8.33-1/3 percent); the Pullman Company (1.1562
percent); Quanah, Acme and Pacific Railroad Company (100.00
percent); Trailer Train Company (2.44 percent); Wichita Union
Terminal Railway Company (33.33-1/3 percent); and Frisco
Transportation Company (100.00 percent).
Frisco also has an interest in four noncarrier companies:
Clarkland, Inc. (100 percent); Clarkland Realty, Inc. (100 percent);
906 Olive Corporation (100 percent), and New Mexico and Arizona
Land Company (50.04 percent).
Frisco shareholders met on May 9, 1978, to vote on the merger.
There were 2,349,995 shares (89.53 percent of the total shares
Outstanding) represented. Of the total shares, 2,116,735 (80.64
percent of the total and 90.07 of those present) voted for the
merger, while 67,961 (2.58 percent of the total shares outstanding)
voted against the merger.
As of December 31, 1976, Frisco properties were valued at
$673,962,652. This includes 533,770.48 shares of New Mex, which
Frisco valued at $14,211,639 based on the American Stock
Exchange quotation on that date. As of December 31, 1979, New
Mex was selling at over $28 per share, after having split 2-for-! in
July 1978. The valuation of Frisco'’s New Mex stock would now be
nearly $30 million.
TRANSACTION
Terms.—The terms of the agreement provide for all assets and
businesses of Frisco to be absorbed by BN; BN will assume all the
360 1.C.C.
19
debts, liabilities and other obligations of the Frisco. Frisco
nominees will constitute the greater of five or 20 percent of the
surviving company’s board of directors.
Each share of Frisco common stock will be converted into 0.95
share of BN common stock and one-half share of BN $2.125 no par
value preferred stock, $25 redemption value (new preferred stock).
The holders of the new preferred stock will receive fully cumulative
dividends at the rate of $2.125 per share per annum, payable
quarterly. Fractional shares of BN common stock shall not be
issued; holders of fractional shares will receive a cash equivalent. A
mandatory sinking fund commencing in the 6th year from issuance is
designed to retire all the new preferred stock by the end of the 20th
year. The new preferred stock is callable on or after the fifth
anniversary of the issuance.
The merger agreement may be terminated for various reasons. The
agreement provides that if the Commission imposes any conditions
on its approval of the merger, the conditions, if accepted by
resolutions of the boards of directors of BN and Frisco, shall be
deemed to be as binding as if included in the agreement. However,
the boards of directors may not accept (without first obtaining the
approval of the holders of the requisite number of shares of affected
stock) any conditions which would vary or change: the exchange
ratios; the dividend rate of or redemption provisions applicable to
the new preferred stock; or the financial structure of the surviving
corporation.
Securities.—BN currently has 25 million shares of common stock
authorized, of which 12,500,569 are outstanding. This excludes:
1,181,818 shares which have been initially reserved for issuance
pursuant to BN’s 5.25 percent convertible debentures, due 1992:
580,545 shares reserved for issuance pursuant to BN stock option
plans; 287,375 shares initially reserved for issuance on conversion of
BN series A no par value preferred stock; 1,777,800 shares initially
reserved for issuance for BN’s $2.85 no par value convertible
preferred stock; and 540 shares held in BN's treasury.
BN currently has 5 million shares of no par value preferred stock
authorized, of which 2,344,850 shares are outstanding. This is
composed of 2 million shares of $2.85 no par value convertible
preferred stock and 344,850 shares of series A no par value
preferred stock.
BN has reserved and intends to issue up to 2,560,791 shares of
common stock in exchange for the Frisco stock. This is based on the
360 1.C.C, -
20
number of Frisco shares now outstanding, the number of shares
subject to outstanding options, and the number of shares available
for the future grant of options. BN also has reserved and intends to
issue up to 1,347,785 shares of new preferred stock. The amount of
the new preferred stock to be issued is based on the same number of
Frisco shares described above.'*
BN has estimated the commissions, expenses, and discount to be
incurred in issuing the common and preferred stock to total
approximately $300,000.
Assumption of obligations and liabilities.—In addition to issuing
stock, BN will assume the obligations and liabilities of Frisco upon
consummation of the merger. These include: (1) $57,391,000
principal amount of first mortgage bonds, series A, 4 percent, due
January 1, 1997; (2) $13,902,000 principal amount of first mortgage
bonds, series B, 4 percent, due September 1, 1980; (3) $5,400,000
principal amount of refunding and purchase money mortgage notes
dated February |, 1968; (4) 5-percent income debentures, series A,
due after 1977; (5S) remaining indebtedness, if any, on the Frisco
equipment trust, series N (currently $800,037); and (6) the
remaining indebtedness, if any, under Frisco equipment trust, series
O (currently $900,045).
The series A bonds provide for annual sinking fund payments from
available net income equal to: (a) 0.25 percent of the maximum
principal amount of series A bonds theretofore authenticated and
uncanceled (which was $73,385,000 at date of issue); or (b) interest
on bonds acquired by operation of the sinking fund. The series B
bonds provides for annual sinking funds payments from available net
income of | percent of the maximum principal amount of such
bonds heretofore authenticated (which was $19,500,000 on the date
of issue). Both sinking funds’ obligations in practice are satisfied by
the purchase of bonds on the open market.
The series A bonds may be called at any time at premiums from
5.0 percent (prior to 1957) to 0.5 percent (1989-92); there is no
premium after 1992. Series B bonds are callable at premiums from
3.25 percent (in 1955) to 0 percent (in 1979).
Encumbered by the refunding purchase money mortgage
indenture is a 32.67-mile line extending from a connection with the
Salem Branch of Frisco's line (approximately 1.75 miles north of
Keysville, Crawford County, MO), in a southeasterly direction
through Viburnum and Bixby to Buick, Iron County, MO. Under this
“This information was contained in a letter to the Commission dated October 29, 1979 from the
applicants attorney
360 L.C.C.
21
indenture the total issue of notes authorized is limited to an
aggregate principal amount of $6 million. The interest rate is 6.75
percent and the notes are due August |, 1992. Interest on the notes
is payable semiannually. The notes are entitled to the benefit of a
sinking fund designed to retire $150,000 principal amount of notes
during each of the years 1973 through 1991. The notes are
redeemable before maturity at premiums from 5.75 percent (in
1969) to 0.25 percent (in 1991). They are subject to redemption
through operation of the sinking fund.
As of December 31, 1976, Frisco had two equipment trust
agreements, series N and L outstanding. Series N covers 16
locomotives and 183 freight cars, bearing an interest rate of 4.25
percent and matures March 15, 1980. On December 31, 1976, the
outstanding indebtedness under series N was $1,116,000. Series O
covers 321 freight cars, bears an interest rate of 4.38 percent and
matures on May 15, 1980. On December 31, 1976, outstanding
indebtedness under series O was $1,260,000. Under both series,
interest and principal installments are paid semiannually.
In addition, on December 31, 1976, Frisco had outstanding 80
conditional sales agreements covering 281 locomotives, 7,780
freight cars, and 80 enclosed auto racks. The unpaid conditional
sales indebtedness was $1 14,791,000, none of which was in default.
Interest rates vary from 4.45 percent to 10.12 percent with some
interest related to the prime rate. Interest and Principal payments
are due annually or semiannually. With few exceptions, the term is
15 years. Maturity dates extend from November |, 1977 to March 1,
1992.
Control of the motor carrier.—After the merger, BN will own the
FTC. FTC is authorized to provide service over regular routes
carrying general commodities (with the usual exceptions) between
points in Arkansas, Missouri, Kansas, Tennessee, Mississippi, and
Illinois. FTC operations are generally restricted to service which is
auxiliary to or supplemental to Frisco rail service.
ALLEGED BENEFITS OF MERGER
Applicants contend that the proposed merger will result in
improved quality and efficiency of the rail transportation services
offered to shippers, together with increased utilization and
productivity of applicants’ human and physical assets. Further, the
merger will result in an increased financial strength greater than the
two applicants could achieve separately.
360 1.C.C.
22
Efficiencies of the nature claimed are particularly beneficial in
the railroad industry, which earned an average rate of return in 1976
(exctuding Amtrak and AutoTrain) of only 1.97 percent. That of the
western railroads was only 3.37 percent. For the same year, BN
realized a 2.42 percent rate of return and Frisco a 4.6 percent rate of
return. The roads typically identified as being in the strongest
financial condition realized rates of return of oniy 5.92 percent
(Union Pacific Railroad Company), 6.21 percent (Southern Railway
Company), and 7.85 percent (Norfolk and Western Railroad
Company).
APPLICANTS, UNDERLYING STUDIES
Background
Applicants undertook a series of studies of their traffic bases,
operations, and overhead expenses. 1976 was used as the base year
with which to compare anticipated effects of the merger in each of
the 3 years following implementation.
The traffic diversion study, based on a sample of traffic settled
during 1976, depicts volumes of cars or units by routes between
specific origins and destinations, the tonnage involved, and the
expected revenue gains to the merged system. Marketing personnel
from BN and Frisco produced this study. BN personal studied its
traffic that was geographically susceptible to movement over Frisco,
FW&D, and C&S. Frisco and QAP personnel studied their traffic
that was susceptible to movement over BN and its subsidiaries and
also the traffic that was joint between the companies.
The operating study was subdivided into nine separate studies:
Common point consolidation;
Frisco operating divisional organization,
Routes and service;
Operating and train blocking plan;
Freight car equipment utilization:
Condition of roadway property:
Major shops and repair facilities;
Impact on passenger and commuter services, and
Communications.
The loaded freight cars, weights, origins, and destinations
determined by the traffic study group were used by the operations
study group to formulaie computer programs to provide the
360 LCC.
23
information for analyzing complete segment-by-segment operating
requirements. The result indicated the specific amounts and
locations of savings and costs to be incurred on the merged system.
This same information was also used to calculate the additional
gross revenues and the cost of handling added traffic. The costs were
calculated using the Commission’s Rail Form A costing formula. A
concurrent study was undertaken to determine systemwide
standards to be used on the merged system for rolling stock and
fixed facilities and to meet various union, State, and other legal
requirements.
The overhead study was undertaken to determine the changes
necessary in each department of the merged companies for a 3-year
period subsequent to merger. This and the operating study.
developed information for both nonunion and union positions. The
overhead study also determined the estimated savings in insurance
premiums and in data processing equipment rent and maintenance.
A separate study determined a potential for reducing the cost of
purchasing materials and supplies. An environmental impact report
was developed to determine changes in property conditions, traffic
densities, employee counts, and operations.
Traffic studies
The applicants’ traffic studies were developed to determine the
impact that the consolidation would have on applicants’ traffic and
revenue, as well as the impact on other carriers. Frisco prepared a
study of its traffic, and BN prepared studies covering its traffic and
that of FW&D and C&S. A complete analysis of this study is
contained in appendix H. It estimated gross revenue changes
resulting from diversion, summarized in table 2.
TABLE 2
Applicants’ estimates of gains losses) in gross revenue for other railroads'
Carrier’ Total Carrier Total Carrier Total
ACY ----------------- 6.620) EJ&E ------------ $3,900 PLE-------.-... (200)
ATSF ---------------- (6.712.400) FEC-----------.-- 32,100 PW..-...-...-.-. (16,000)
BCE ------------.-.-- 1600 FW&D----------- 1.139.900 QAP-.---------- 3.300
BM ------------------- (42,120) GA--------------- (14,540) RFP------------ (600)
BO ------------------- (643.180) GB&W-.---------- 87.220 RSP------------ 500
BS -------------------- (800) GNA------------- 4.900 SAN ----------- 300
CCO ----------------- (46.100) GTW.--------.---- 365.100 SCL ------------ 1,271,940
See footnotes at end of table.
360 I.C.C.
CC SEEEES'S 3s
24
Applicants’ estimates of gains (losses) in gross revenue for other railroads'—Continued
Carrier’ Total Carrier Total Carrier Total
CHV ---------------.- 400 HPTD.---.-.--.-. 4,600 SN ------........ (53,600)
MILW..--------.-.... (3,054,960) ICG ---.-...--.... (6,592,500) $I--------.-----. 2.900
CN ----------------- - (390.320) ITC -..--....... (80.700) S00 ----.-..--- (243,200)
CNL -----------.----- (3,000) KCS-L&A------ (2,027,420) SOU ----------- (7,925,260)
CNW --------.---.... (1,895,180) L&N ---.......... (6,469,700) SP ---.--..--..-. (2,047,620)
CO ----------------- - . 61.700 LNW............. 800 SS ------........ 2.800
CP. 2.580 MBRR-..--..-..--. (360) SSLV--.--..... 100
CR ------------------- (2,494,000) MCR---------..-. 3.700 SSW-.--......-.. (1,432,320)
CRIP ---------------. (4,504,680) MDW...--..---.. (2,700) TM-----------.- 100
C&S--------------.-.. (1.691.420) MEC----.--..-... (6,880) TOE ----.--..-- (540)
DH ----------------- - 3,000 MKT----.....-... (6,531,180) TP&W---.---.- (4,800)
DM ------------ veesee 1.500 MN&S.--........- (100,300) UP ---.........- . (5,855,660)
DOE ---------------.. (2.760) MP" --.-.......--. (7,748,740) VTR -----.----- (3,000)
D&RGW--------.--- 1.426.200 MTW..--....--... 1600 WA.-.-.--..-.-... (3.680)
DS (13,400) N&W---...------- (2,083,800) WM. ------------ (25,300)
DT&i -----------..... (68,100) NWP .----..-...... (3.300) WP.---.-.--.---- (166,600)
DVS --------------.-. (2,000) OE€.------.......... 14,800 WSS--.-........ 1.500
DW&P.-.-.----.-..-... (82,600) OT-------.---.--.- (8.900)
'No gains or losses were anticipated for carriers by other modes.
‘The carrier abbreviations are identified in appendix A.
“Includes C&EI and T&P.
After estimating the changes in gross revenue resulting from the
diversion of traffic from other carriers and internal rerouting
between applicants and their subsidiaries, applicants determined the
net revenue gains or losses after deducting the “cost of handling”
such traffic. Table 3 displays the estimates of gross revenue gains
(losses), cost of handling, and net revenue gains (losses) for a merged
BN-Frisco and each of its rail subsidiaries.
TABLE 3
Applicants’ estimated net benefits from diverted traffic
BN-Frisco FW&D C&s OE OT QAP Total
Thousands
Gross freight
revenue ---------..---..... $66,644 $1.140 $(1,691) $15 %(9) $3 $66,102
CUBIS ----2--.---2nceees- once 48,545 927 (1,598) 3D cccccccces cccceccese 47,904
Net revenue’ ---------.... 18,099 213 (93) (15) (9) 3 18,198
See footnote at end of table.
25
Applicants’ estimated net benefits from diverted traffic—C ontinued
BN-Frisco FW&D C&s OE OT QAP Total
Thousands
Less: added net cost
of TRRA service at
St. Louis ----------------- $1,342 ccccccasccccs ssccsenesctss scccssseses $1,342
Grand wwtal' ------------ 16,757 $213 $(93) %(15) $(9) $3 16,856
( ) Indicates loss or contra item.
"May not agree due to rounding.
As shown earlier in tabie 1, the $16,856,000 in annual benefits is
estimated to be realized fully for the first time in the third year
following the merger.
Cost studies (traffic)
The unit costs in the analysis were derived from a combined BN-
Frisco-C&S-FW&D 1976 analysis using the ICC Rail Form A cost
formula. There were 2,037 sample movements costed, of which only
23 were not calculated by computer. A detailed analysis of the
costing by all parties appears in appendix I.
Changes in mileage and interchange switching, if any, caused by
rerouting, together with any changes in origin and destination
terminal operations were determined for each movement. Utilizing
the foregoing service change data, changes in equipment turnaround
time were calculated. Per diem/mileage rates were calculated using
average age and average cost per car for each Association of
American Railroads (AAR) car type, based on 1976 rates. Unit costs
and empty return ratios were taken directly from the combined BN-
Frisco-C&S-FW&D Rail Form A analysis.
The principal cost elements studied included expense per gross
ton-mile, expenses related to line hauls, interchange switching
expense, intertrain switching (intermediate on-line switching
between trains or switch moves on one train) expense, terminal
switching and station clerical expenses, loss and damage, car
ownership costs, and “special cost items.” The latter were van-
related costs in trailer-on-flatcar (TOFC) service, mechanical
360 1.C.C.
‘Cas, 26
refrigerator inspection costs, and switching charges by the Terminal
Railroad Association of St. Louis (TRRA).
The cost estimates derived from the foregoing studies are shown
in: table 3, for diverted traffic including added costs for service from
the TRRA at St. Louis; in table 6, (item (h)), for unchanged joint
traffic and certain costs avoided at St. Louis for TRRA services; and
also in table 6 (item (j)), for avoided equipment utilization costs.
Similar procedures were used to determine avoided costs
($418,960 annually) resulting from shorter hauls of (1) new rail to
the rail welding plant at Springfield awd (2) welded rail from the
plant to installation sites. These avoided costs are included in item g
of table 6.
Operating studies
A series of studies were undertaken by applicants to determine
the changes in operations necessary to accommodate the proposed
transaction. The shifts in traffic flow were determined by analyzing
the new routings for diverted traffic, internal reroutings, and
unchanged joint traffic (traffic now interchanged between the Frisco
and BN systems which is not subject to diversion but which will have
the interchange eliminated), referred to collectively as the “through
traffic pool.”
Table 4 shows the estimated number of carloads in this pool. The
“Diversion study” carloads reflect new traffic (traffic diverted from
other carriers to the merged system) and reroutings of diverted
traffic between the merged company and its subsidiaries. For
example, a car which formerly moved by FW&D, Frisco, and a
connecting carrier is diverted from the connecting carrier to a new
route comprised of the (former) Frisco and BN, eliminating both the
connecting carrier and FW&D as participants and adding BN as a
participant.
360 1.C.C.
27
TABLE 4
Components of the through-traffic pool
Carload impact on
Source
BN Frisco Frisco. FW&D Total
Diversion study:
DIN ancocnsnnensrencossscesensccsnsecesscrcscccssocessescooass a ae 99,250
Fri8ci) -------0---+e0nennnnnennnnnnencencnnnnenesnsecsneences 72,360 6,100 78,460
FWD ----00---000-nnnnennnnnnnnnnneeacennnnsencenceenerens 1,050 4,770 5,820
CUS ---00----n0e--nnnnnnnnnnennnnnenneccecenenneneseencenens | 60
Tistll <nscosnreesescsasanscenesecsesccocsssacensscsoeveconss 172,720 10,870 183,590 (77%)
Unchanged joint traffic--------------------00----000--0 38,500 15,600 54,100 (23%)
Total through traffic ----------------------c000ee0see- 211,220 26.470 237,690 (100%)
Pool ---------0-----00-- Percent ------------+--+------- (89% ) (11%)
To select the routes capable of providing the best service,
alternate routes were evaluated on the basis of their physical
characteristics, the desirability of routing via Kansas City or St.
Louis, an appraisal of the approximate transit times, and existing
traffic levels. The following list identifies (1) the principal routes to
be used for the through-traffic pool between Frisco’s major
terminals of Tulsa and Memphis, and BN’s major terminals of
Galesburg, Chicago, Minneapolis, Lincoln, Denver, Laurel, Minot
and Spokane, and (2) the principal routes presently used for unit
coal trains.
(1) Proposed principal routes in the major traffic flow corridors
Traffic corridor Route
Between Memphis and:
Galesburg ----------------------------0-----0-00-eeeneenenes via St. Louis and West Quincy
Chicago ----------------0-00------20nenenenn nnn eseereennenees via St. Louis and Galesburg
Minneapolis ---------------------+---0-0--s00eeeeene-neenee via St. Louis and Galesburg
LiNCOIN ----------------0.00--ee0-nennnnnnnnanenneeneennenee via Kansas City
Denver ------------+---------00ee-nncnnnennncneeneeeneennnene via Kansas City and Lincoln
Laurel -----------------------00---2e-eeneeneneeeneneneennenee via Kansas City and Lincoln
MiNOt-------------0-00-00-- enn cnnnnnnneseeeneneeeceneennenne via Kansas City and Willmar
SPpok ane-------------+--0----ne-nnennennnnennnneeeeeeenerenne via Kansas City and Minot
Between Tulsa and Springfield and:
Galesburg --------------------------0---0-0eseneennsneeneene via Kansas City and West Quincy
Chicago ---------------------00--0enenesnnnnseeneeeeenneennee via Kansas City and Galesburg
Minneapolis ------------------------000e0+-eeeeeneneenneeee via Kansas City and Willmar
LINCOIN ----------+---------2-0-e0eneennnneneneeneee teceenane via Kansas City
28
(1) Proposed principal routes in the major traffic flow coridors—Continued
Traffic corridor Route
Denver ------------+-----------+--- via Kansas City and Lincoln
Laurel -------------------------0------0--0-0-20002 - via Kansas City and Lincola
Minot - via Kansas City and Willmar
Spokane via Kansas City and Minot
(2) BN/FW&D/C&S routes carrying unit coal trains (June 1, 1978)
Traffic corridor Route
Between Huntley, MT and:
Kansas City --- --- via Alliance and Lincoln, NE; Napier, KS;
and St. Joseph, MO
Dallas , via Alliance, NE; Brush and Denver, CO
Twin Cities ----------------------+-------- via Glendive, MT; Casselton, ND; Willmar, MN
Duluth/Superior via Glendive, MT; Casselton, ND; Staples, MN
Gunn, MN -------------------0--0-0eeeeee= via Glendive, MT; Casselton, ND; Fargo, ND;
Grand Fosks, ND; Bemidji, MN
Between Fargo, ND and Fergus Falls,
MN
Between Twin Cities and St. Louis--- via Dubuque, IA; Galesburg, IL; Burlington,
1A
Between Galesburg and Paduach---- via Bushnell and Concord, IL; Shattuc, IL
Between Fargo, ND and Fergus Falls
MN
Between Twin Cities and St. Louis--- via Dubuque, 1A; Galesburg, IL; Burlington,
1A
Between Galesburg and Paduach---- via Bushnell and Concord, IL; Shattuc, IL
Between Galesburg and Chicago---- via Aurora, IL
Between Chicago and Denver-------- via Galesburg, IL; Creston, IA; Lincoln and
Oxford Jct., NE; Brush, CO
Between St. Louis and Shattuc, IL
Between Galesburg and Peoria
The following routes or route segments would remain primarily as
coal routes after merger:
Between Huntley, MT and Casselton, ND---- via Glendive, MT
Between Casselton, ND and Twin Cities ------ via Staples, MN
Between Fargo, ND and Bunn, MN------------- via Grand Forks, ND and Bemidji,
MN
Between Galesburg and Paduach----------------- via Bushnell, Concord, and Shattuc,
IL
Between St. Louis and Shattuc, IL
Between Alliance, NE and Brush, CO --------- via Northport, NE
Between Denver and Dallas --- - via Texline, TX
Between Ashland, NE and Galesburg ---------- via Creston, IA
360 LC.C.
29
It was determined that there will be 12,000 loads and 9,720
corresponding return empties, or 21,720 cars presently interchanged
annually between BN and Frisco that will be handled via shorter
routes on the merged company. This determination was based on
analysis of 31 percent of a total of 385 study movements. Use of the
shorter routes on the consolidated company will result in a net
reduction of 1,130,913 car-miles and savings in transportation costs
of $630,539 annually begining in the first year of merger. (See table
6, item (h).)
The reduction in freight car time/mileage costs resulting from the
elimination of interchange between the merging carriers at St. Louis
and Kansas City will produce an annual saving of $480,332, and the
reduced use of TRAA services at St. Louis will produce an annual
saving of $26,188 in the first year of merger (table 6).
The change in the number of cars (4,525 additional through
Kansas City, with a like reduction through St. Louis) results from
the rerouting to use shorter internal routes. In addition to the cost
savings, considerable savings in transit time will result. Applicants
believe the time saved will result in quicker turnaround of
equipment, thereby improving equipment utilization.
Applicants conclude that the major gateways to realize increased
traffic are Birmingham, Memphis, Tulsa, and Chicago. The
Centralia-Woodlawn gateway will realize decreased traffic, but BN
States that service at these gateways will be at least equal to what it
is presently. However, there will be a reduction of one train daily in
each direction on the Galesburg-Centralia route.
There are 183,590 carloads annually in the diverted traffic base,
including 172,720 between BN-Frisco and 10,870 between FW&D-
Frisco (see table 4). Of this total, 73,290 carloads are “new” to the
BN and 105,130 carloads are “new” to the Frisco. Applying an 81
percent empty return factor, the total annual increase would be
158,445 cars on the BN and 164,495 cars on the Frisco, beginning in
the third year of merger.
On the Frisco, the additional traffic would be concentrated on the
main traffic corridors between Birmingham-Memphis and St. Louis-
Kansas City, and between Tulsa and Kansas City. On the BN, the
new traffic would be concentrated on the St. Louis-Galesburg,
Kansas City-Chicago, and Kansas City-Lincoln corridors. Other
additional traffic is widely dispersed throughout the system.
Applicants, expect no delay or impact upon commuter or
passenger operation. On the BN, passenger commuter service is
operated between Chicago and Aurora, IL, with approximately 68
360 1.C.C.
30
commuter trains operated daily, primarily between the hours of 6
a.m. and 6 p.m. After merger there will be two additional freight
trains operated on this line between Cicero Yard and Aurora,
scheduled between the hours of 6 p.m. and 6 a.m when commuter
operation is minimal.
The following BN line segments carry Amtrak passenger trains
and are segments on which additional freight train operation is
scheduled as result of merger:
Line segment Number of Amtrak
trains daily
Chicago-Galesburg, IL -------.----2-----cccesecesso--coennneeceenscccceeecercees 4
Galesburg, IL-West Quincy, MO -----------..+----------2ecceceseenecneeeee 2
Willmar-Breckenridge, MN -------------c-2-.-.----eeceneeececececcenenncececee 2
Applicants state that the schedules of the added freight trains will
not conflict with Amtrak operations.
No Amtrak, passenger, or commuter service is operated on Frisco.
Applicants believe that the merged company would offer
substantial service improvements to both its on-line customers and
to many of the customers of its connecting railroads. The merged
company would provide singie-line service from such major
southeastern traffic generating points at Birmingham, Memphis, and
Mobile to the northwestern points of Portland, Seattle, and
Vancouver (British Columbia); and from the Chicago gateway to
Tulsa, Oklahoma City, Dallas-Fort Worth, Houston, and Galveston.
Consolidations of traffic flows would enable the movement of trains
over longer distances with no need for interchange and with minimal
en route switching.
Applicants acknowledge that they will exert their best efforts
toward obtaining longer hauls over the merged single-line routes
where possible. Nonetheless, they expect to maintain existing
gateways and joint routes with connecting carriers, and anticipate
that traffic will continue to move via such gateways and routes
where service considerations dictate. For example, applicants
believe that certain traffic moving in connection with UP at Kansas
City between the Pacific Northwest and Memphis and beyond will
continue to be so routed because this route will be shorter and
involve less transit time than the proposed BN-Frisco single-line
route via Minot, ND . However, applicants will not guarantee per-
merger traffic levels.
Applicants anticipate savings both in the resources required to
serve the traftic and the time required to handle the shipments from
360 1.C.C.
31
origin to destination. They believe that service reliability would also
increase. They will route internal traffic over shorter routes without
sacrificing long-haul divisions, but reducing transit time, switching,
and interchanges. The merged system will have significantly greater
control over the movement of individual shipments. Consolidation
of computerized information systems for freight car location and
distribution would give the merged company the ability to inform
shippers of the location and the expected delivery date of shipments
over a wider geographic area. In turn, this would enable the merged
company to match the available supply of empty freight cars to
shipper demands, thereby improving the ability to meet shippers’
needs and the utilization of the combined equipment fleet, with a
potential reduction in the amount of handling of certain shipments.
Applicants believe that there would be an opportunity to reduce the
incidence of loss and damage.
Applicants have concluded that the condition of road, yards, and
terminals is adequate to handle the present and proposed traffic
volumes and thai no rehabilitation or upgrading is required. These
property studies confirmed applicants’ belief that their policies and
Practices are similar and compatible, and will not require any
substantial change. Further, the studies of facilities and maintenance
programs produced no opportunities for savings on the merged
company except for rail welding. Expansion of rail welding facilities
at Springfield is expected to cost $54,000, while annual recurring
savings of $418,960 are expected from shorter hauls of both new rail
and welded rail.
Applicants plan to upgrade 27 miles of Frisco track between
Rosedale Yard in Kansas City and Paola, KS, at a cost of $556,475.
They plan to accomplish two-thirds of the rail relay ($370,983) in
the second year, and the balance ($185,492) in the third year of
merger. (Table 6, item (i).) Applicants believe this will result in an
increase in the allowable freight train speed and in increased line
capacity sufficient to provide for the efficient movement of trains
and the achievement of train schedules without delay.
In determining postmerger equipment requirements, applicants
analyzed the availability of motive power and cabooses, the changed
train services attendant to the changed traffic volumes, the pooling
of the BN and Frisco locomotives and cabooses, and the
requirements of the run-through train between Tulsa and Houston in
connection with the FW&D. Of the routes over which more trains
will be operated, only the Kansas City-Minot route restricts the
locomotive size (to four-axle units because of the limited capacity of
360 1.C.C.
32
the Missouri River Bridge at Sioux City). Anticipated new
equipment acquisitions are shown below.
Equipment Type and horse- Number Cost per Total invest- Annual recurr-
power of units units ment cost ing cost
Locomotives ---- Four-axle 2,000 HP- 14 $464,650 $6.505.100 $1,235,969
Do--------------- Six-axle 3,000 HP--- 14 = $43,395 22,279,195 4,233,047
Cabouses--------- Cupola------------------ 17 43,500 739.500 140,505
Total 29,523,795 ‘5,609,521
‘The annual recurring cost is included in table 6, item j.
Due to increased freight car equipment utilization resulting from
the merger, applicants believe the merged company will be able to
avoid the purchase of 800 freight cars in the future. Based on the
1976 car acquisition program, 3 years would be required to realize
the full acquisition saving. Using the 1976 average cost for new
equipment, an estimated $26,941,000 investment in new equipment
would be avoided. Based on BN's estimated 1976 before-tax cost of
capital (19 percent), investment cost savings $1,706,000 would be
realized in the first year of merger, $3,440,000 in the second, and
$5,118,600 in the third and each year thereafter.
Applicants assert that operation of the combined freight car fleet
will permit greater flexibility in car management and more efficient
use of cars. Specifically, the cross-haul of like equipment types,
which generated approximately 11.9 million car-miles, can be
reduced by minimizing the empty return of cars which are now
under separate ownership and control. The reduced handling of
empty cars would produce an annual car-mile savings of 5.8 million,
which in turn would generate an annual savings in transportation
costs of $887,504.
Applicants contend that the merged rail company would be
enhanced by BN’s nontransportation operations. These operations
include the sale of timber and logs, the manufacture and sales of
forest products, and the exploration, development and/or sale of
petroleum, coal, and other natural resources. In:addition, BN is
engaged in airfreight forwarding, as well as fixed base aircraft
operations and real estate development. Applicants state that such
nontransportation operations ‘(particularly those involving timber
and coal) permit BN to commit internally-generated funds to capital
intensive projects: required by its raif service.
7 360 1.C.C.
33
Applicants estimate the following net benefits from the proposed
merger, based on the underlying studies:
TABLE 5
Merger benefits (costs) by year following consummation'
Year
Study areas
One Two Three
Millions
Traffic (New):
BN-Frisco $10.89 $15.92 $16.76
Rail subsidiaries 0.23 0.33 0.10
Subtotal 11.12 16.25 16.86
Operations’ 7.27 17.09 20.83
Employee protection --------------------0--0+-00eesseeeseneenennseeees (15.96) (7.84) (4.64)
Total ---- 2.43 25.50 33.05
‘1976 dollars.
‘Includes net benefits from changes in internal (to merged system) routings of traffic and from
unchanged joint traffic no longer requiring interchange.
A summary of the economic results of the operating and labor
studies (the latter study is discussed later) for the first 3 years after
merger is shown in table 6.
TABLE 6
Summary of merger economic benefits operating and labor savings (costs)
Year
Operating
One Two Three
(a) Common point consolidation ---------- $3,804,264 $3,804,264 $3,804,264
(b) Operating division organization- (40,487) (40,487) (40,487)
(c) Informations ---------------++-----0---0eenee (1,612,500) (1,015,000) (712,000)
(d) Communications -----------------------+-- (1,298,586) (530,031) (66,031)
(e) Compatibility of equipment ------------ (879,582) (534,405) (519,659)
(f) Standardized locomotive heavy repair
policy ooee (1,240,781) (503,823) 232,816
(g) Consolidated maintenance facilities
and functions sreeeceneenees $23,922 1,048,730 1,048,730
(h) Unchanged joint traffic:
Use of shorter routes ------------------ 630,539 630.539 630,539
Interchange cost savings -------------- 480,332 480.332 580,332
TRRA cust savings -------------------+- 26.188 26,188 26,188
eoonsenecncsase (370,983) (185,492)
(i) Upgrading plans ------------------------+-+-
360 1.C.C.
34
Summary of merger ecanomic benefits operating and labor savings (costs)—Continued
Year
Operating
One Two Three
(j) Equipment:
Acquisition. locomotives and ca-
booses see (5,009,521) (5.609.521) (5,609,521)
Freight car utilization---- --------------- 2.593.504 4,327,504 6,006, 104
(k) Purchasing-material - 1,135,232 1.135.232 1,135,232
(1) Overhead:
Nonlabor - scccccesececcseseccorcneees 2.557.417 4.231.370 4,335,724
Labor -------------+--------00-00--ee-eeeeeee-- 6,759,994 10,417,256 10,659,831
(m) Exempt employee benefits-—----------- (560,836) (408,285) (397,389)
Total! ----------------+--------2--002----20--- 7,269,099 17,088.088 20,829. 181
Employee protection:
(a) Scheduled -----------------------0--.0+00-000- (7,771,180) (6,776,263) (4,546,696)
(b) Exempt -----------------------------0----eeee- (8,187,991) (1.061.614) (91.901)
Total '---------------+--0--0eeeneeneeeecennee ee (15,959,171) (7.837.877) (4,638,597)
‘Totals are shown in table 5.
Applicants note that the proposed merger would be entirely end-
to-end in nature. In their opinion, an end-to-end merger represents
the best approach to extending the systems’ strength because it
serves to buttress existing traffic volume and activities, while
rationalizing the industry's corporate structures. Applicants
maintain that through an end-to-end merger, there is no loss of
competitors in any geographic market; rather, both intra- and
intermodal competition is strengthened. In addition, end-to-end
mergers generate little or no abandonment of rail lines because, by
their nature, few of the facilities are duplicative and therefore made
redundant by the consolidation. Finally, applicants urge that end-to-
end mergers do not drain available capital resources in order to
unite the two companies, but instead allow merger benefits to be
achieved almost immediately after consolidation, with limited, or at
most transitory, impacts on employees.
Purchasing and materials
The applicants estimate a total recurring savings of purchasing
and material of $1,135,232 (table 6, item (k)) with three
components: increased revenue from scrap ($195,232); general
purchases ($840,000); and freight car purchases ($100,000). These
savings will fluctuate with business volumes.
360 L.C.C.
35
Information systems
To develop a single standardized information system for the
merged carrier, a joint BN-Frisco study team concludéd that BN’s
Complete Operating Movement Processing and Service System
(COMPASS) should be expanded to include Frisco data. To
accomplish this, applicants estimate $1,175,000 in nonrecurring
costs in the first year and recurring costs of $437,500 (first year),
$1,015,000 (second year), and $712,000 (third year). (Table 6, item
(c).)
The public interest benefits claimed by applicants
On brief, applicants summarize and discuss the several benefits
they claim will result from their proposed merger. They maintain
that the merger will significantly improve service to shippers in the
form of new single-line service, reduced transit times, more efficient
and frequent service, and improved car utilization. Applicants point
out that the merged company would offer new single-line service in
major market areas extending from the Gulf Coast through the
Midwest to the Northwest and from the Great Lakes region to the
Texas coast. The new company would provide single-line service
from principal southeastern cities such as Birmingham, Memphis,
and Mobile to cities in the northwest such as Portland, Seattle, and
Vancouver; and from Chicago to cities such as Tulsa, Oklahoma
City, and Houston; and a more direct route from Chicago to Dailas-
Fort Worth, Houston, and Galveston than the circuitous Denver
route which BN now operates with its subsidiaries C&S and FW&D.
his new single-line service, according to applicants, would result
in significant service improvements for shippers. One of the
principal claimed benefits resulting from the single-line service
would be reduced transit times. Single-line service would allow
preblocked trains to move over long distances without interchange
and with minimal switching en route, expecially at the congested
common points of Kansas City and St. Louis, thereby saving time
and resources. For example, through-train schedules are proposed
from Portland and Seattle via Minot and between Chicago and
Memphis-Birmingham, Minneapolis and Memphis, Lincoin and
Tulsa, Chicago and Tulsa, and Tulsa and Houston. Applicants claim
that transit time will be reduced from (1) Chicago to Tulsa by 19
hours or 43 percent, (2) Portland to Memphis by 14 hours or 12
percent, and (3) Minneapolis to Memphis by 46 hours or 49 percent.
360 L.C.C.
36
Applicants contend that improved service resulting from single-
line routes opened up by this merger would also create the potential
for shippers to compete in new markets, heretofore not feasible
because of inadequate, costly, or inefficient service. For example,
opening a single-line route froin the northwest to the expanding
markets in the southeast would significantly facilitate development
of important western coal ix. the Powder River Basin of Montana and
Wyoming. In view of the energy crises, applicants urge that the
development of this market as an alternative to petroleum and
natural gas is urgent.
Applicants also state that faster transit times and reduced
intermediate switching would decrease the amount of handling of
shipments, reducing the incidence of loss and damage. Moreover,
reduced transit time would increase freight car and locomotive
utilization, and thus increase car availability to the shipping public.
More efficient utilization of the combined freight car fleets will
help alleviate car shortages, applicants claim. They plan to use a
computerized information system for centralized car location and
distribution which will expeditiously inform shippers of the location
and delivery dates of shipments. This system would also permit a
more efficient match-up of the supply of available empty fre ight cars
with shipper demand.
In applicants’ opinion car utilization would also be improved
dramatically because car service rules which currently impede the
movement of empty freight cars between the two companies would
not apply. It is anticipated that over 5 million BN-Frisco empty car-
miles will be eliminated each year.
In addition to faster and more reliable service to shippers,
applicants claim that their operating plan provides for more
frequent service for shippers in major traffic corridors.
Approximately 12 new trains per day will be operated, and only 4
presently scheduled trains will be eliminated.
Applicants state that the proposed merger would afford greater
rerouting capabilities, improving service by avoiding delays or
interruptions and using shorter line-haul movements over the
consolidated system. Currently, traffic tends to move via the longest
haul within each respective system in order to attain the maximum
revenue division.
The proposed merger in applicants’ judgment would result in a
financially strong new company able to attract necessary capital.
They anticipate that the net financial benefits to the merged system
after the third year of consolidation would be approximately $33
360 LC.C.
37
million. These financial benefits would stem primarily from two
sources—the attraction of new traffic through improved service and
consolidation savings resulting from the end-to-end character of the
merger.
The new traffic is expected from two sources: traffic now carried
on the BN, Frisco, or their subsidiaries which will be carried on a
longer haul in the merged system; and traffic presently carried by
other modes which would be attracted to the merged system due to
superior service. After the third year of merger it is expected that
the gross freight revenue gains from the first source would be
$66,101,900, the associated costs would be $49,245,586 and the net
traffic revenue gains would be $16,856,314.
Applicants’ estimate of the net savings that would result from the
unification of operating functions, including elimination of
independent operations at the common points of Kansas City and St.
Louis, after the third year of operations, would be $20,829,181.
Applicants believe that their management policies are
compatible, with consistent objectives and performance.
Applicants argue that the merger represents an opportunity for
Frisco to reduce its dependence on overhead traffic by
incorporating it into a viable and strengthened BN system. In 1976,
31.5 percent of Frisco’s 796,108 freight carloads were interline
forwarded, 28.4 percent were interline received, 23.6 percent were
intermediate or overhead, and only 16.5 percent were local. Frisco
belives this consolidation is necessary for it to continue to provide
quality transportation services in the future. Applicants also state
that Frisco’s financial base would be expanded, because BN’s
internally generated funds from nontransportation activities would
be available to the merged system. Further, Frisco’s present
marketing strategies for the economically expanding Sunbelt would
be extended throughout BN'’s territory.
Applicants argue that the benefits of the merger would create a
strong new competitor, and that this strength will force competing
carriers to improve service to meet the service and rates offered by
the merged company. Applicants contend that the protective
conditions sought by protestants to shelter themselves from the
increased competition are anticompetitive.
In applicants’ view, the merged company’s improved ability to
compete intermodally is equally important. Applicants note that in
the past 30 years, the railroad industry has lost 50 percent of its
market to other transportation modes, even though railroads are
among the most energy efficient. (They consume the least amount of
360 1.C.C.
38
energy per gross ton-mile of traffic hauled by any form of ground
transportation). Applicants believe that the superior service which
the merged company will offer shippers, together with competitive
ratemaking and improved car supply, should attract business which
has been diverted to trucks and barges, particularly on grain traffic
from the Midwest. Further, new single-line service between the
Northwest and the Su»belt should also attract a substantial portion
of the business which has been lost to motor carriers as a result of
poor rail service.
Applicants believe that the merged company’s improved
intermodal competitive strength will also result in increased traffic
for connecting rail carriers. In turn, this would partially offset the
diversionary impact resulting from the merger. Applicants state that
it is impossible to quantify the amount of business potentially
attracted from otler modes, but they believe the amount would be
significant.
Applicants contend that the concurrence of rivalry and
intecdependence (“Balkanization”) among rail carriers has created
humerous long-run problems. Effective competition is hindered if
other rail competitors are able to retaliate on interline shipments in
their capacity as connecting carriers. Interchanging traffic alone
adds to the total costs of handling traffic, including operational costs
(car switching) and clerical costs (recordkeeping). Interchanging
freight impairs service by significantly adding to delivery transit
time.
Even more important, in applicants’ estimation, are the intangible
factors of loss of control and sense of responsibility for the shipment
by the originating carriers when the freight is transferred to
intermediate or destination carriers. Applicants maintain that this
minimizes the incentive to make service improvements on interline
traffic or to solicit interline traffic on the basis of superior service.
In addition to discouraging marketing and service initiatives on
interline shipments, applicants argue that “Balkanization”
discourages innovative ratesetting. The tendency has been to
continue longstanding practices rather than initiate imaginative or
aggressive pricing, because the reactions of competing and
connecting carriers are too unpredictable and their powers of
retaliation too strong. The reluctance to change pricing more
flexibly in response to changing competitive factors is also
responsible, according to applicants, for the continuing shift of
traffic to other modes.
360 1.C.C.
39
Applicants argue that end-to-end mergers effectively eliminate
the problems described above, and thus their transaction is
consistent with Federal goals of rail rationalization. They cite the
Commission's Rail Services Planning Office in its final report in the
“Rail Merger Study,” issued February 1, 1978, and the November
1973 report of the Task Force on Railroad Productivity made to the
National Commission on Productivity and the Council of Economic
Advisors. Further, applicants state that since the proposed merger is
end-to-end, no abandonments of lines or of service would be made,
and no competitors would be eliminated (as in a “parallel” merger).
Applicants point out that while fixed charges would increase by
$6.04 million in the first year of merged operations, the increase is
minimal compared to the financial benefits to be realized.
Applicants contend that the merged company’s increased business
would in turn create new job opportunities. Although consolidation
of facilities at Kansas City and St. Louis would result in relocation
of forces, applicants state that in most cases any employees
adversely affected would be promptly reabsorbed by the merged
company into new vacancies created increased traffic and by normal
attrition. They also contend that the security of existing jobs would
be enhanced by the increased strength of a merged BN-Frisco.
Stock exchange
Morgan Stanley assisted BN in structuring and negotiating a
security package to accomplish the merger. The package was
designed to:
Maintain the dividend level of Frisco shares;
Provide an equity interest to Frisco shareholders consistent with its past and
expected earnings contributions,
Result in no material dilution in expected earnings of BN shares; and
Avoid any material adverse effects on BN’'s capitalization and fixed charged
coverage.
After a detailed review of both BN and Frisco which included
financial statements, operations, characteristics, and performance,
Morgan Stanley recommended a number of combinations of security
packages to fit the criteria. It recommended that BN offer a security
package of a new BN straight preferred and BN common stock. This
combination was preferred because it best met the objectives of (1)
maintaining the Frisco dividend, and (2) providing a_ stock
360 1.C.C.
40
component consistent with both the past and future expected —
earnings contribution of Frisco. A price range of $50 to $55 was
recommended for each share of Frisco stock.
Salomon Brothers assisted Frisco in its merger discussions with
BN. Financial and operational data of both railroads were reviewed
and analyzed. It was determined that the appropriate combination
should be a nontaxable merger to Frisco shareholders and they
should not receive any diminution in current dividend income.
Since Frisco stockholders could not expect to receive dividend
parity based upon current dividend levels from an acceptable
exchange ratio of common stock, it was determined that some
combination of common and preferred stock should form the
security package.
Salomon Brothers believed that Frisco stockholders should be
offered a premium in market price, not only in current terms, but
one which appeared to be sustainable over a reasonable period of
time.
Salomon Brothers’ approach viewed BN and Frisco as
transportation entities with other interests of which Frisco’s was
small and BN’s was substantial. The merger benefits were shared
equally and were considered in the negotiation. Prior to the final
discussions with BN, Salomon Brothers recommended that Frisco
could reasonably agree to a package valued in the range of $52 to
$56.
After extensive negotiations between BN and Frisco, the parties
agreed to merge based upon a securities package consisting of 0.95
share of BN common and 1/2 share of a new BN $2.125 no par value
preferred with $25 redemption value for each outstanding Frisco
common share.
The total value of the security package, based upon average prices
from February | through August 31, 1977, and on prices current as
of the negotiation, is as follows:
Average February September 20,
to August 1977 1977
Price of BN COMMON ---------ceceeccececcecccncccesececee $47.63 $41.375
Price of Frisco COMMON ---------0+--+-e-eeneeneeenee see 43.23 42.50
Value of $12.50 of new BN -------------eeceesenenceeeee 12.125 12.125
Value of 0.95 of BN common -----------0--ceeeeeneeee 45.249 39.306
Value of package ---------0------0ees-eeeccseeenneseneccnees 57.374 51.431
Premium------ PCTCONL --------0--nnnnnennnrenennnnnnnennsenne 36.7 21.0
360 I.C.C.
4\
Therefore, the dividend for each share of Frisco would meet the
critical element of dividend maintenance at $2.5825 per share
(representing 0.95 of the $1.60'’ per share dividend on the BN
common stock, plus 0.5 of the dividend per preferred share of
$2.125), a slight premium in the Frisco’s current dividend. Frisco
shareholders would hold 16.8 percent of the total equity in the
combined enterprise.
Morgan Stanley believes the merger terms are fair and reasonable
to BN stockholders. Salomon Brothers believes that the offer is in
the interest of Frisco shareholders.
Consideration was given to the spinning-off of Frisco’s interest in
New Mex to Frisco stockholders or placing a separate valuation on
the interests in the merger negotiations. However, a spinoff would
have been taxable to Frisco stockholders. It could have complicated
merger discussions and, if the merger was not consummated, Frisco
would be left without its interest. A separate valuation of
nontransportation holding would not have benefitted Frisco
stockholders, since BN has much larger nontransportation assets;
any valuation placed on New Mex would have been overshadowed
by the valuation of BN’s nontransportation assets. After discussions
with New Mex management, Morgan Stanley recommended that BN
acquire New Mex in the merger. Salomon Brothers agreed.
Employee impacts
Applicants believe that because of increased traffic volumes, a
slight increase in employment over 1976 levels can be expected asa
result of the merger. Nonetheless, there will be some realignment of
work forces. Reductions in force are expected in some work areas as
a consequence of the consolidation of headquarters functions and
activities at St. Louis and Kansas City. With few exceptions,
surplused employees will be absorbed almost immediately by new
positions and vacancies caused by the demand of the increased
traffic, and by the normal process of attrition. Further, a large
percentage of the redundant employees are not represented by labor
organizations, and can be expected to transfer where needed and to
accept a variety of work assignments. Thus, applicants contend that
any adverse impact on employees will be short term only and
confined to a relatively few locations. Because of labor protective
conditions which are required by statute, no employee would face
involuntary unemployment as a direct result of the merger without
ample financial protection.
'"BN's most recent dividend was $2.10 per share.
360 1.C.C.
42
Traffic volume studies.—Employment impacts resulting from
changed traffic volumes were examined by applicants. The work
force was adjusted for each line segment and location which would
experience increased or decreased car and train volume.
These adjustments would occur in the maintenance of way (track,
bridge and building), transportation (train, engine and yard crews,
and clerks) and mechanical (machinists, electricians, boilermakers,
sheetmetal workers, carmen and laborers) functions. The applicants’
study projected the following net changes in the number of these
positions:
euler
Net change in
number of positions’
Department
Year
One Two Total
Maintenance of Way -------------------000-ne ws 243 243
Transportation -----------------------e-ne-eeee- 287 (39) 248
Mechanical (locomotive) -------------------+- 92 23 115
Mechanical (car)------------------------------+- 129 67 196
Material ---------------0---00-----20eeeeneneenenees 2 I 3
510 295 805
'( )Decrease
Common point consolidation studies.—The applicants also
performed studies on those geographic locations where both
railroads conduct operations (common points). While the studies
considered the common points between the Frisco, QAP, and
FW&D at Fort Worth, Irving, Dallas, and Quanah, major
improvements through consolidation were evident only at St. Louis
and Kansas City. Special studies were conducted to determine the
potential for combining facilities and/or forces for improved or
more efficient performance at the latter two terminals.
General guidelines used in these studies were that: (1) no changes
would be considered that could be accomplished without the merger
of the two companies; (2) functions of a similar nature would be
concentrated at fewer work centers; (3) quality of present service
performance could not be reduced as a result of the consolidation;
and (4) the means properly to monitor performances would be
implemented.
360 1.C.C.
43
Applicants’ estimated reductions in work forces are listed below:
Reductions
St. Louis Kansas City
Transportation:
Officers and exempts ----------------------------200-0-00 2 5
Clerical ------------- stenceneneeceecreeececeeceneeses 19 17
Vardmasters ----------------------00-0esereeennnenenennenene 3 5
Yard engineers-------------+-----+-+----e-e-eenene-eenennes 7 4
Yard conductors -- 7 4
Yard helpers -----------------------0--eeeeeeeeseeeesneneeee 14 8
Subtotal -------------0-e--0-neeenenne-nenneecnnneeeanerneeees $2 43
Mechanical:
Supervision ---------------------0+--00-eeseeteneeeeeeenenenee 3 2
Clerical --------------0-00--ne-neenenncenenensseeeeneceseeenes BR iia
Car inspectors ----------------------0000e-eeeseeeeeeeneeene eo en
Machinists -----------------0--00---0c0neeeeneeenecensenenenee nn a
Laborer --------------0+---00--ee00e----nneneennenneeenennenen 0 ail
Carmen -----------ececncnccccccccccncencececenncncecerecceces 14 10
Carmen apprentice --------------------++-e0-ee--eee0ne=ee Bk Co kiki
Subtotal ----------------2-0----000--2--eeeeee eens Lecwccececee 32 12
Maintenance of way:
Officers and CxeMpts ----------------eenenneneeneeeeweree wee |
TOtal --------++---eene-enneceneneneeeenen rene -neneeeesenenes 84 56
Reflected in the work force reductions is a reduction in switch
engine shifts of seven per day at St. Louis and four daily at Kansas
City. There will also be a reduction of one switch engine locomotive
unit assigned at each location.
The overall savings that will accrue at those two points are:
Savings per year
Item
St. Louis Kansas City
Wage and fringe benefits ------------+-+-+ececeee-neeeees $2,100,943 $1,426,250
Expenses other than labor -------------+--+--------0000- 6,000 — 6,000
Switch engine operation and maintenance
CSE ---enerene er eneeennenneeeeeneenenceneneenenerareceeencee 149.621 85,496
Switch engine ownership CoSts -----------+----------+5- 14,976 14,976
Total ------------0eeeeeeeeneneneeennn er eneeneneeneeeeecnneneens 2.271.540 1,.§32,724
For the St. Louis and Kansas City terminals combined, common
point consolidation savings totaled $3,804,264 per year (table 6,
360 L.C.C.
44
item (a)), of which $3,527,193 are Savings in wages and fringe
benefits.
Comparison of studies—labor and operational.—Applicants used
different costing methods for their labor and operating studies. The
differences are de minimus, but are reflected in the subsequent
discussion.
Overhead study.—The overhead study determined savings from
combining the existing BN-Frisco forces engaged in systemwide
functions, which include all supervisory and staff positions above
the operation division level. It is essentially a plan for the
unification of the headquarters and the general staff functions of the
two companies.
Included in the studies were 3,166 BN and 1,335 Frisco jobs, of
which 2,763 were exempt (nonunion) and 1,738 were scheduled
(union). Of the total jobs studied, it has been estimated that there
will be a net reduction of 428 jobs (264 exempt and 164 scheduled),
and the relocation of another 126 exempt and 76 scheduled jobs.
The resulting labor savings, including payroll additives, will amount
to $10,704,915 annually (see table 7 below).
TABLE 7
Overhead study labor savings
Net jobs Wages Payroll Labor saving
abolished saved additives’ (4) =
(1) (2) (3) (2) + (3)
Exempt --------------------- 264 $6,008 898 $1,798,463 7,807,361
Scheduled juobs----------- 164 2.367.863 529.691 2,897,554
Total --------0-----200ee00- 428 8.376.761 2,328,154 10,704,915
‘Payroll additives were calculated as a percentage of the wages saved in the overhead study. The
percentage applied to exempt wages was 29.93 pereent and i the scheduled wages 22.37 percent.
San aon 360 L.C.C.
vi) 2tnem ’
r
7 oe od a vit
45
Table 8 presents the cumulative summary of savings by year.
TABLE 8
Cumulative summary of realized savings
overhead study
Year
Savings
One Two Three
Labor' ----- tee eenneenneennes $6,759,994 $10,417,256 $10,659,831
Other than labor' ------ 2.557.417 4,231,370 4,335,724
Total ----------------.- 9.317.411 14,231,628 14,995,555
‘These amounts are also shown in table 6, item 1.
During the fourth and fifth years of the merged operation, another
$135,084 will be realized, according to applicants, raising total
savings in overhead to $15,130,639.
Savings other than labor have been estimated at $4,425,724.
Approximately three-quarters of these savings represent savings in
insurance premiums ($1,864,810), data processing equipment rent
and maintenance ($794,775), and expense accounts ($626,698).
Labor—scheduled.—No protective or implementing agreements
have been entered into with employee organizations.
Applicants conducted studies of the impact of the merger on
union employees and their wage and employment protection costs.
They assumed that work transfers and consolidation of facilities
would be timed, where reasonably possible, to maximize utilization
of available manpower and to avoid a loss of skilled employees.
Positions were counted as abolished whenever work equivalent toa
5-day per week, full-time position was eliminated at a particular
location, even though it could be possible to reassign the employees
involved to other work without a formal abolishment and rebulletin
of positions, or a new position at the same location. Rates for 1976
wages, payroll taxes, insurance premiums and other benefits were
used in performing the studies. :
Applicants conclude that 704 new scheduled positions would be
created and 452 positions abolished in the first year following the
merger. Reductions in force will occur principally at Springfield, St.
Louis, and Kansas City, where a net 144, 127, and 41 jobs would be
abolished. Total changes in position and wage costs are shown in
table 9.
360 1.C.C.
46
TABLE 9
Scheduled employees:
changes in position and wages
Year
lem
One Two Three
Positions added (excluding transfers) ----------++++eeeeeeeseneeennens 704 355 0
Positions abolished (excluding transfers) ------++-++-eeceseeeeeeenees 452 86 27
Net positions added (saved) -----+--+--+e++eeeeneenneesenweneeneeneenenes 252 269 (27)
Positions (fAnelerred concccccccceccccccccccccccccccecccccccccccccccccceccces 100 0 5
New wages, insurance and taxes added ------- MINIONS. -20n0e on $6.0 $10.6 $10.1
Among the crafts affected, trainmen, carmen, and machinists show
the greatest gains in positions, with net increases of 168, 80, and 68
positions, respectively, in the first. Maintenance-of-way positions
also showed increases, but not until the second year, when a net 243
positions would be added. Among the crafts losing net positions,
clerks are hardest hit, losing a net 157 positions in the first year. Net
changes within other crafts during the first year include: enginemen
(+55 positions); electricians (+27); sheetmetal workers (+17);
boilermakers (+11); dispatchers (+1); yardmasters (-11); and
laborers (-7).
Applicants also determined the number of employees becoming
surplus. In each of the three years following the merger, applicants
estimate that surplus employees will number no more than 358, 285,
and 186, respectively. While applicants expect most of these
employees to be absorbed into new positions or other vacancies or
to receive opportunities for retraining for other crafts, those
employees who are surplussed, displaced, or transferred due to the
transaction will be covered by protective conditions.
In estimating the cost of protective benefits, applicants assumed
that the Commission would impose only the protective conditions
required by statute.'* Applicants further assumed that: (1) job
abolishments, transfers, or creations would occur on the first day of
the year; (2) abolished jobs would be coordinated with created jobs
of a similar nature to the extent possible; (3) no separations would
occur, but that in each craft at each location, costs for surplus
employees would be at least as much as if all surplus employees took
separation pay when eligible; and (4) attrition would occur at an
even rate throughout the year. In Assuming an even rate of attrition,
"49 U.S.C. 11347,
360 1.C.C.
47
applicants charged an average 6-month wage expense for each
surplus employee absorbed through attrition per year and 12-month
wages for remaining surplus employees.
Other assumptions used in determining the cost of protection
included:
(1) For each net job eliminated, in each craft at each location, 1.5 employees, in
addition to those made surplus, would be displaced to lower-rated positions for an
average of 36 months, which would require a displacement allowance payment of 5
percent of the average annual wage, unless a larger allowance was indicated by the
circumstances,
(2) At common points, seniority districts would be consolidated so that a displaced
employee would have the opportunity to exercise seniority in this existing seniority
district and at least all other jobs in the craft in the surrounding terminal area.
Multiple seniority districts, which exist for clerks and certain shop crafts at
Springfield, would be consolidated into a single overall craft district.
(3) The attrition rate for union employees would be 7.5 percent per year at all
locations, and the amount that could be utilized to absorb surplus employees would
be 90 percent for clerical employees and 100 percent in other classifications.’
(4) Ten percent of the union employees asked to transfer their residence out of their
existing seniority district would do so, at an average cost of $10,000 for moving
allowances, relocation expenses, moving time, and real estate protection.
Based on their studies, applicants conclude that costs for
employees’ protective benefits will total $7.8 million in the first year
following the merger, $6.8 million in year two and $4.5 million in
year three. (Table 6, Employee Protection, item (a).) Total costs to
the applicants resulting from impacts on union employees (i.e., net
wages added as a result of increased union positions and protective
conditions for union employees becoming surplus or who are
displaced or transferred) amount to $13.7 million, $17.3 million and
$14.6 million, in each of the three years following the merger.
Labor—exempt.—The impacts on nonunion employees (exempt)
and their attendant wage and protective benefit costs to the
applicants were developed by determining (1) the cost of job
protection and moving expenses for displaced or transferred
employees and (2) the costs of providing a unified program of
employee benefits for exempt employees.
Applicants’ estimated changes in positions and attendant savings
for the first 3 years following merger are shown in table 10.
"The applicants did not use the attrition information contained in the application. They claim
that this information was not useful because the rates are influenced by high turnover of newly
employed persons, a group which creates no vacancies for surplus employees in a merger
situation,
360 I1.C.C.
TABLE 10
Impacts on exempt employees
Year
lrem
One Two Three
Seabee abollghed occcccccccccccccccccccccccccccccccccccncccecescceccecececcccccs 449 i 3
Bee SE cicectiecensntnstesececsenieetbinetesntetatnddnnbbeeeseceneounstbiin 212 5 0
Jobs transferred -------+-+-++0---sneewnnenerennenncennnnencnsensennnenseenees 126 0 !
Net surplus employees «--------+e+seeeeeseneeesenennennneneneesnnsenseenen 237 6 3
Net wages and fringe benefits saved-------- MITIOMB=-- = ene eeees $7.1 $7.3 $7.4
In determining the cost of placing employees into vacant
positions, an attrition rate of 6.2 percent was used to determine
vacancies. This rate was based on past actual attrition of BN exempt
employees. Exempt employees were considered a single class for
attrition purposes and it was assumed that job abolishments and
additions would occur on the first day of the period. Applicants
further assumed that the matching of skills and qualifications would
allow the use of 50 percent of the available vacancies to absorb
unassigned exempt employees. It was also assumed that 5 percent of
their employees required to transfer would not do so and resign.
In calculating its costs, applicants charged a 6-month wage
expense based on the average salary of unassigned exempt
employees for each employee absorbed during the year. A 12-month
salary expense for the remaining unassigned employees was used. By
applying the average salary of unassigned exempt employees and the
average benefit costs of the two applicants, a fringe benefit of 29.93
percent was developed. Total transfer costs, including costs for
employees whose positions are transferred or who transfer to fill a
newly created position, were based on actual BN merger transfer
cost experience, elevated to 1976 price levels. Applicants conclude
that employee protection costs will total $8.2 million in the first
year following merger, $1.1 million in the second year and $91.9
thousand in the third year. (Table 6, Employee protection, item (b).)
The study for providing unified benefits was based on the premise
that no employee would be placed in a worse position as a result of
the merger, and with the object of equalizing benefits for employees
of BN and Frisco. Each railroad's benefit programs were studied.
Cost efficient changes in current administrative procedures and data
commonly used in establishing the rating structure (i.e., age, service,
360 1.C.C.
49
payroll volume and the current number of employees with
applicable dependent ratios) were considered. Initial cost statistics,
based on the actual 1976 cost, and then new costs, were established
by combining all exempt employees under the new program. Pension
costs were determined, based on a preliminary actuarial study, by
adding Frisco employee data into BN’s pension plan. Consideration
was given to the unfunded total and vested liabilities of BN’s plan.
Applicants’ estimate of the cost of providing a unified benefit
program (table 6, item (m)) is detailed in table 11.
TABLe Il
BN-Frisco exempt employee benefit costs
Benefis Premerger plan Year
combined cost One Twe Three
PeEMsion PAN «--<-sseeeeeeeee ee eeeeees $12,104,000 $12,696,825 $12,605,475 $12,598,950
Medical plan ----- ntanaenecneeeenens 4,331,900 4,202,280 4.172.080 4,169,880
Life IMSUPANCE--------ers seer eee eee eee 1,728,600 1,946, 767 1.932.781 1.938. 782
Accidental death and dismem-
DEP MENE «+n s0enneen eet nee eee nereeeees 8,050 48.964 48.611 48.586
Short-term disability «<---> 797,900 653,288 O48 S84 068.248
Long-term disability----------- > 729.000 787.120 751.660 791.270
Dental plan -rrss--s--eeeseeererrne 904, 500 853.654 847 $22 847.084
Travel accident --------eeesceeeee: 19.500 45.388 45,062 45.0”
Total annual Cost «-...s-e8 seen 20,64 1,450 21,204,286 21,051,738 21,080,819
Increased Cust! ------ecseeeeee cee S60.8 408,285 7 wae
‘Table 6. item (Mm).
Note: Reductions in costs tor particular benetits are the result of jobs being abulished during the
‘year period,
Total net costs resulting from impacts on nonunion employees
(i.e., wages saved, protection costs and increased costs for providing
a unified benefit program) amount to $1.6 million in the first year,
followed by saving of $5.9 million and $6.9 million, respectively, in
each of the next two years following merger.
National defense
The applicants believe that no defense-related service presently
provided by either BN or Frisco will be hindered by the proposed
merger, but in fact, will be improved to the same degree as for
shipments by the public.
360 LCC.
50
Shipper support
A dozen shippers testified in support of the merger. Combined
they paid over $1 billion for rail transportation services in 1977.
Their testimony is detailed in appendix C.
The reasons for their support vary; however, the overriding factor
is their belief that the merged company could provide better
service. This service ranges from faster transit times to easier tracing
of shipments. The combined car fleet, and particularly the ability to
have BN equipment available in the South and Southeast and Frisco
equipment available in the Northwest and North Central regions,
are considered particularly important.
FINANCIAL ANALYSIS
Burlington Northern
BN has reported net incomes in each year since the Northern
Lines merger, with the exception of 1971 dve to an extraordinary
item of $67.5 million. While net railway operating income has been
substantial, other income has been greater than $50 million annually
since 1973. The carrier has reported positive working capital each
year since 1968, with a working capital ratio ranging from a high of
1.68 to a low of 1.15. In 1976, the base year, BN earned a net income
of $72.6 million on railway operating revenues of $1.5 billion. The
rate of return averaged 2.24 percent for the period 1968-78, with a
return of 2.40 percent for 1976. The carrier's debt-to-equity ratio
has averaged in the low thirties for the period 1968-77. Fixed
charges have been covered rather well, with an average coverage of
slightly over 2.0 times for the 11-year period and a good 2.3 times
for 1976.
St. Louis-San Francisco Railway Company
Frisco has been profitable in each year since 1968, and reported a
net income of $12.0 million for 1976. The carrier had positive
working capital in each year from 1968-77, with an average working
capital ratio for the 10 years of 1.22. Frisco’s rate of return averaged
4.86 percent for the |1-year study period. In 1976 the carrier
reported a return of 4.51 percent. The debt-to-equity ratio has been
acceptable, ranging from a low of 43.9 percent to a high of 49.6
percent. The average fixed charges coverage for the period 1968-78
was a good 2.33 times. A 2.1 coverage was reported for the base
year, 1976.
360 L.C.C.
5]
Financial benefits to merged company
The applicants’ pro forma income statement indicates that the
third year after the merger, the merged company expects a net
increase in railway operating revenues of $65,328 million, for
combined railway operating revenues of $1,918.2 million. This
projection was made using a base year of 1976, thus taking no
economic considerations into account. The applicants anticipate
that railway operating expenses would increase by a net amount of
$27.113 million, for combined railway operating expenses of
$1,524.5 million. The estimated profit is $112.9 million, of which
$28.4 million is attributable to the merger.
Impact on the exchange offer on income Statement.—Because the
purchase price is less than the net book value, the depreciable assets
of the Frisco will be written down to purchase cost, hence reducing
the depreciation base. In so doing, the depreciation expense to be
recorded in the income statement will have a lesser impact on
earnings, thus adding to net income. As an offset, the long-term debt
will be written down to its present value. Since long-term debt is
retired at par value, the difference between book value and the
restated value will be amortized over the life of the debt. This will
result in an increase in fixed charges that will more than offset the
decrease in depreciation expenses. The additional fixed charges
required ($6.6 million) exceeds the $4.7 million decrease in
depreciation expense, so that the overall effect on the income
statement is to reduce net taxable income by $1.9 million in the first
pro forma year.
This decrease in taxable income should not be looked upon as
detrimental, since it does not require any cash outlay and reduces
the cash outlay required to pay Federal income taxes.
The table below presents fixed charge coverage for the base year
and each of the first three years after the merger.
360 1.C.C.
52
TABLE 12
Fixed charge coverage
Merged company
BN Frisco
1976 1976 Year
One Two Three
Thousands
Income available for fixed
CNALBOS ++ = en nn ennnewnwnen nnn $131,829 $25,367 $168,389 $185,904 $190,311
Fixed charges ----------------- 59,241 12,049 77,328 76,462 76,024
Coverage (times) ---------+++- 2.23 2.11 2.18 2.43 2.50
The net increase in fixed charges resulting from the proposed
merger is estimated to be $6.04 million in the first year of merged
operation. This increase is the result of two factors. The first is the
discounting of the principal amount of debt and capitalized lease
obligations to reflect current interest rates. The increase so
computed does not result in any increase in the cash payments for
existing fixed charges because this is purely a purchase accounting
change in interest rates. Second, to accommodate the projected
increase in traffic volume, it is estimated that the merged company
will acquire 17 new cabooses. The resulting increase in fixed charges
will be offset, at least in part, by the avoidance of certain locomotive
and freight car purchases. In the case of the BN-Frisco merger, the
most important impacts are a reduction in depreciation due to a
writedown of the historical cost of depreciable property to allocated
purchase cost and an offsetting increase in accounting fixed charges
due to the writedown of long-term debt to present values. Since
such long-term debt must be retired at fixed or par value, additional
fixed charges are required to amortize the discount created by the
purchase accounting adjustment. The operating expenses,
equipment rents and fixed charges in the pro forma income
Statement reflect adjustments for the adoption by Frisco of
accounting for leases as provided by Financial Accounting
Standards Board Statement (FASB) No. 13. This accounting already
is reflected in BN statements.
Improved revenues, additional costs, and Savings are expressed in
additional cash receipts and reduced cash expenditures. In
360 1.C.C.
53
preparing the pro forma financial statements, however, it was
necessary to give different treatment to certain of those amounts
which are in the nature of additions and betterments rather than
expenses, as well as the effect of purchase accounting. Thus, pro
forma operating expenses must reflect the reduction in depreciation
expense resulting from purchase accounting as well as the additional
costs of handling increased traffic and the merger savings. Other
portions of the pro forma income statement reflect additional fixed
charges, again resulting from purchase accounting. The increase in
pro forma net income is on an after-tax basis.
» The following table indicates cash flow for each applicant for
1976, the base year, and the merged company for the first 3 years
after the proposed merger. This table demonstrates the ability to
repay debt and make necessary capital investments.
TABLE 13
Cash flow and debt coverage
Merged company
BN Frisco
1976 1976 Year
One Two Three
Thousands
Ordinary income ------------- $72,588 $11,956 $89,699 $108,080 $112,925
Depreciation and retire-
MENL -+---20-eeeeweeennnnnnnne- 66.874 14.450 76,371 76,091 75,812
Deferred income taxes ----- 2,847 1,635 4,482 4,482 4,482
Undistributed earnings ----- (7,621) (143) (7,990) (8,096) (8,113)
TOL --eeeeeeenee nnn eeneeee 134,688 27,898 162,562 183,557 185,106
Long-term debt due within
TYCO wnnrnnenwnnnneennnnnnnne 50.911 13,935 66,438 66,438 66,438
Coverage (times) ------------- 2.65 2.00 2.45 2.76 2.79
Each carrier had adequate cash flow to cover its long-term debt
due within | year for the base year. The coverage of debt maturity
after merger should allow an adequate contribution toward future
capital investments.
Impact of the exchange offer on balance sheet.—The con-
sideration given by BN is the fair value of the common and preferred
shares which it proposes to issue plus the fair value of the liabilities
360 1.C.C, ”
54
to be assumed. The fair value of the liabilities assumed is the
discounted value of debt at current interest rates and the present
value of certain other liabilities, such as that for unfunded pensions.
The fair value of the consideration given must be apportioned to
the assets acquired. Briefly, current assets are reported at book
value and the remaining fair value of consideration given is
apportioned to other assets, including investments and road and
equipment property, in proportion to the fair values of assets.
The pro forma balance sheet illustrates this technique. Using the
valuation figures estimated by Salomon Brothers, the book value was
reduced by $88.6 million.
The pro forma balance sheet reflects the purchase accounting
adjustments as wel! as the pro forma adoption by Frisco of
accounting for leases as provided by FASB No. 13.
The working capital position of the applicants and the merged
company is presented below.
TABLE 14
Working capital
BN Frisco Merged
1976 1976 company
Thousands
Current assets ----------- HAtenanennannneeeeeeneanenateneeananenannenns $388,482 $59,946 $448,428
Current liabilities! -------+---------------seeeees-onecenneeeeeeseoeees 357.934 68,959 423,519
Working capital ----------------------- wtereneeneneeeenseeeennsennns 30,548 (9.013) 24.909
Working capital ratio ---------------------0ee-ss-eeeeneeerenecneee 1.09 0.87 1.06
‘Includes long-term debt due within | year.
It is expected that the anticipated growth in cash flow and earning
power of the merged company would lead to a stronger working
capital position that either road could attain alone.
’ The pro forma balance sheet indicates that the merged company
will have a debt-to-debt plus equity ratio of 38.0. This ratio is
slightly higher than BN’s ratio of 35.6 for 1976 and-below Frisco’s
48.4 for 1976. A ratio of 38.0 should not have an adverse impact on
the merged company’s future financing.
Normally a carrier will have capitalizable assets in excess of total
capitalization, as in the case of the merged company as shown
below.
360 1.C.C.
55
TABLE 15
Capitalizable assets of merged company
Working capital ------------------sssssseeeecsnennesececccnsneccccceseececeeeseececees $91,347,000
Carrier operating property less depreciation ------------------+----------0-- 2,739,251 ,000
Investment in transportation subsidiaries plus undistributed earnings- 363,453,000
Total capitalizable assets -------------------------0-eeec-eeeecceeeencesescenennes 3,194,051 ,000
Total capitalization’ ---------------------00-ceesessenneeccnneneceeeeseceseeccenenes 3,094,218,000
Capitalization assets in excess of capitalization ----------------+------------ 99,833,000
‘See schedule of capitalization of merged company below.
Since the merged company will have Capitalizable assets in excess
of capitalization, the attendant pressures of overcapitalization
Should not be felt and further expansion of Capitalization is possible.
TABLE 16
Capitalization of Burlington Northern, Inc. after merger, December 31, 1976
BN Frisco Adjust- Pro forma
ments
Thousands
Short-term borrowings—notes payable
(1) --e----nwereneneennnennnnennceneeecencenenns $17,343 wneceeenncnneeene eneneeees ones $17,343
Current portion of long-term debt and
capitalized lease obligations (2)------ 55,877 $13,935 $(3,374) 66.438
Long-term debt and capitalized lease
obligations:
Mortgage and collateral trust bonds
i) 471,597 105,608 (40,018) 537,187
Equipment and other obligations (4)- 323,249 104,101 6.471 433,821
Capitalized lease obligations (5)------- 3O,3OS --2 220-22 -nnnweee 12,287 48,592
Due to affiliated cost --------------------- $9,712 278 -nn--nnnnennnnnne 59,987
Convertible debentures (6)-------------- 65,000 --enenerecccecece cenenceeeeeseeees 65,000
Tal ------0--0e seen eneneneenneeneenee 955,863 209,984 ------2-n-nnnnens 1,144,587
Stockholders’ equity (7) and (14):
Preterred stock:
$10 par value; authorized, 2,978,875
Shares; outstanding, 2.899.326
SNALES -----------20-eennennweneneneeeeecenee 7. ke 28,993
No par value, authorized, 5 million
shares (8), outstanding:
Series A, 344,850 shares------------- 10,346 -----n-enceeenene cereneeneneeeeees 10,346
$2.125. $25 redemption value
(10) -reccrcccccrsnsnnsenscccccncsescceccecs sencccrencsernece sescssececseceses 32,642 32,642
360 1.C.C
56
Capitalization of Burlington Northern. Inc. after merger. December 31, 1976—Continued
BN Frisco Adjust- Pro forma
ments
Thousands
. Preferred stock—Continued:
$100 par value; authorized 1,500,000
Shares, issued. MoMe (11 )-------seecee- caccenceeeceeccee ceccenee
$10,000 par value, redeemable pref-
erence shares; authorized 3,000;
shares issued, none (9) see seeeeccenssescoes oe
Common stock, without par value au-
thorized. 25 million shares; out-
standing. 12,457,876 shares (12)------ $544,329 ----------e-neeee $104,370 $648,699
Common stock, without par value;
authorized, 6 million shares; issued
2,611,436 shares: outstanding,
2.611.386 shares (13) ------c--ceeecceeeee seocceecccesecees 113,967 (113,967) -----0--eenennnne
Capital surplus (13) ------------------+--- fo ceennennnaeensane 19,019 (19,019) ------nennnnnne
Retained carnings (13) ----------------++- 1,145,170 90,554 (90,554) 1,145,170
TWA) ------00neennnennecenneneeneneneeenee 1,728,838 223,40 ------2---0000000 1,865,850
Total capitalization -------------..--- 2.757.921 447,489 -------0--enennne 3,094,218
Explanatory notes
(1) BN short-term borrowings (historical) consisted of $16,388 of notes payable and $1,000 ‘
commercial paper. The average interest rates at December 31, 1976 were 4.76 percent and 4.75
percent for notes payable and commercial paper, respectively.
(2) Frisco’s historical current portion of long-term debt and capitalized lease obligations have
been adjusted to reflect the fair value of long-term debt maturities and capitalized lease
obligations in arriving at the pro forma amount.
(3) Interest rates on BN obligations range from 2.625 percent to 8.60 percent and are due from
1978 to 2047. Interest rates on Frisco's obligations have been adjusted to reflect, on a pro forma
basis, fair value at December 31, 1976, resulting in a pro forma reduction of $40,018,000 in
Principal amount; accordingly, such amounts included in the pro forma column have interest rates
ranging from 8.25 percent to 13.16 percent and are due 1978 to 2006.
(4) BN’s equipment and other obligations bear interest ranging from 3 7/8 percent to 9 3/4
percent and are due 1978 to 1993. Interest rates on SLSF's obligations have been adjusted tw
reflect, on a pro forma basis, fair value at December 31, 1976. resulting in a pro forma increase of
$6,471,000; accordingly. such amounts included in the pro forma column have an interest rate of
8.25 percent and are due 1978 to 1992.
(5) BN's long-term capitalized lease obligations are due 1978 to 1991. Frisco’s capitalized lease
obligations (long-term portion of $12,287,000 at December 31, 1976) have been included in the
pro forma column in order to reflect the adoption of FASB No. 13. Such lease obligations are due
1978 to 1993.
(6) BN's covertible debentures bear interest at 5 1/4 percent and are due 1992. The convertible
debentures may be converted into common stock at $55 per share, subject to antidilution
Provisions, at any time on or before January 15, 1992. The debentures are redeemable at the
option of BN at 103.7 percent of principal amount in 1977, at declining percentages through 1988,
360 1.C.C.
&
57
Explanatory notes—Continued
and at par thereafter. Beginning in 1983 and continuing through 1991, BN is required to retire
annually $5 million principal amount of debentures, subject to adjustment for debentures
previously converted, acquired, or redeemed. In addition, during such period BN has the
noncumulative option annually to provide cash for the retirement at 100 percent of the principal
amount, of up to an additional $5 million of outstanding debentures. BN has reserved 1,181,818
shares of its authorized but unissued common stock for issuance upon conversion of the
debentures.
(7) On May 12, 1977, BN stockholders approved an amendment to the restated certificate of
incorporation creating a new class of redeemable preference shares consisting of 10,000 shares
having a par value of $10,000 each. On the same date, the stockholders approved the 1977 stock
option incentive plan, authorizing the granting of nonqualified options to purchase up to 600,000
shares of BN common stock officers and key salaried employees of BN and its subsidiaries.
Pursuant to such authorization, the board of directors on May 12, 1977 granted options to 451
persons, covering 125,850 shares of common stock at a price of $48.50 per share.
(8) On July 7, 1977, BN issued 2 million shares of $2.85 convertible preferred stock at a price of
$50 per share and accrued dividends for $96,932,000 net of issuance costs. The shares are
convertible at any time into common stock of BN, unless previously redeemed, at a conversion
rate of 0.8889 shares of common stock for cach share of preferred stock subject to adjustments in
certain events. BN may, at its option, redeem such preferred stock, in whole or in part, upon at
least W days’ notice at $52.85 per share prior to July |, 1979, at decreasing prices thereafter prior
to July |, 1987, and thereafter at $50 per share.
(9) On May 11, 1976, Frisco stockholders approved an amendment to the articles of association
creating a new class of redeemable preference shares consisting of 3,000 shares having a par value
of $10,000 each.
(10) For pro forma purposes it is assumed that |,305,693 shares of BN $2.125 no par value
preferred stock, $25 redemption value, were issued December 31, 1976, at par at an exchange
ratio of one-half share of preferred stock for each outstanding share of Frisco common stock. The
pro forma share amount assumes no cash payments for fractional shares. Such payments are
provided for in the merger agreement. The ultimate issuance of such stock is subject to approvals
of the merger by BN and Frisco shareholders and the ICC. For *** the ICC, (Ina letter to the
Commission dated October 29, 1979, attorneys for the applicants stated that 1,347,785 shares of
the new preferred stock would be issued or reserved for issuance).
(11) None of the Frisco $100 par value preferred stock ($1,500,000 shares authorized) has been
issued.
(12) For pro forma purposes, it is assumed that an additional 2,480,817 shares of BN’s common
stock were issued December 31, 1976, at an exchange ratio of 0.95 BN share for each outstanding
share of Frisco common stock. The pro forma share amount assumes no cash payments or
fractional shares. Such payments are provided for in the merger agreement and are reflected in
the adjustments and pro forma columns at a price of $41.25 per share. the closing market | ice of
BN common stock on the date the respective boards of directors agreed in principle to the terms
of the proposed merger. In addition, $2,036,000, which represents the assumed conversion of all
outstanding Frisco stock options at the merger conversion rate less the grant price ($23.44) of
such options, has been added to the common stock. For *** common stock, (In a letter to the
Commission dated October 29, 1979, attorneys for the applicant stated that 2,560,791 shares of
BN common stock are anticipated to be issued or reserved for issuance).
(13) The proposed transaction will be accounted for as a purchase and, accordingly, the Frisco
common stock will be retired and Frisco capital surplus and retained earnings of prior to the date
of merger are eliminated.
(14) Does not include: 1.181.818 shares of BN common stock initially reserved for issuance
upon conversion of BN's 5 1/4 percent convertible debentures, due 1992; 580,545 shares of BN
common stock reserved for issuance pursuant to the BN stock option incentive plan, 287,375
shares of BN common stock initially reserved for issuance upon conversion of the series A no par
360 1.C.C,
58
Explanatory notes—C ontinued
value preferred stock; |,777,800 shares of BN common stock initially reserved for issuance upon
conversion of the BN $2.85 convertible preferred stock issued on July 7, 1977 (see (8) above); and
540 shares of BN common stock held in the treasury. Also not included are 79,974 shares of BN
common stock and 42,092 shares of $2.125 no par value preferred stock which may be reserved
for issuance at the exchange rate for the merger transaction, for Frisco common stock. pursuant to
the Frisco stock option plan.
POSITIONS OF PARTIES
Supporting the merger application are the U.S. Department of
Defense (DOD), Boise Cascade Corporation, Care-Nicky
Corporation, International Mineral and Chemical Corporation,
Proctor and Gamble Company, Farmlands Industries, Inc.,
American Cast Iron Pipe Company, Amax Coal Company, Lamb-
Weston, Weyerhaeuser Company, Shell Oil Company, Nabisco, Inc.,
and the Pacific Northwest Traffic League. The U.S. Department of
Justice (DOJ) does not oppose the merger.
If the Commission imposes the stipulated conditions negotiated
with applicants, the following carriers do not oppose the merger: the
Atchison, Topeka and Santa Fe Railway Company (Santa Fe),
Chicago and North Western Transportation Company (CNW),
Illinois Terminal Railroad Company (ITC), the Family Lines,
Southern Railway Company (Southern), Kansas City Southern
Railway Company (KCS), Southern Pacific Transportation Company
(SP), St. Louis Southwestern Railway Company (Cotton Belt), Union
Pacific Railroad Company (UP), and Missouri-Pacific Railroad
Company (Mopac). The stipulated conditions are set forth in
appendix K. BN and Frisco support these conditions.
Six railroads are opposed to the merger. They are Chicago, Rock
Island and Pacific Railroad Company, William M. Gibbons, trustee
(Rock Island), Chicago, Milwaukee, St. Paul and Pacific Railroad
Company, Richard B. Ogilvie, trustee (Milwaukee Road or MILW),
Soo Line Railroad Company (Soo Line), Illinois Central Gulf
Railroad Company (ICG), Missouri-Kansas-Texas Railroad
Company (MKT or Katy), and Denver and Rio Grande Western
Railroad Company (DRGW or Rio Grande). Additionally, the
Railway Labor Executives’ Association (RLEA); John W.
McGinness, Illinois Legislative Director of the United
Transportation Union (UTU-IL); Railway Employees’ Department,
AFL-CIO (RED); M. S. Stuckey, General Chairman of United
Transportation Union on Illinois Central Gulf Railroad Company
(UTU-ICG); M. M. Winter, General Chairman of United
360 I1.C.C.
59
Transportation Union on BN (UTU-BN); lowa Department of
Transportation, Transportation Regulation Board (IA-DOT); Illinois
Department of Transportation (IL-DOT); Kansas City Board of
Trade (KC Board); Montana Wheat Research and Marketing
Committee (MT-Wheat); Wyo-Ben, Inc.; Riceland Foods; Superior
Corp.; and John W. O'Neil oppose the merger.
No parties support Soo Lines’ requests for trackage rights over BN
between Superior, WI, and (a) McGregor, MN, (b) Schley, MN, and
(c) Bald Eagle, MN. BN, Frisco, DOJ, and UTU-ICG oppose the
request. BN and Frisco also oppose all other relief requested by Soo
Line (set out in appendix K).
ICG's proposal for trackage rights over Frisco between Memphis,
TN, and Jasper, AL, and terminal operations over Mopac in
Memphis is opposed by BN, Frisco, DOJ, and UTU-ICG. BN and
Frisco also oppose the other conditions sought by ICG.
The CNW proposal for trackage rights over BN between the Twin
Cities and the Twin Ports over the White Bear Lake route is
supported by BN and Frisco. However, DOJ opposes these trackage
rights.
SP’s proposed trackage rights in Portland, OR, are supported by
BN, Frisco, and Crown Zellerbach. UP, DOJ, and UTU-ICG are
opposed.
Milwaukee Road's proposed trackage rights to serve coalfields in
eastern Montana are supported by the Wisconsin Power and Light
Company (WI-P&L), Northern States Power Company, and the
Westera Energy Company, but opposed by BN, Frisco, DOJ, and
UTU-ICG. BN and Frisco oppose other conditions sought by
Milwaukee Road.
Rock Island's proposal for trackage rights over BN between
Denver and Golden, CO, is supported by the Adolph Coors
Company, the major shipper on the line. BN, Frisco, DOJ, and UTU-
ICG oppose the trackage rights. Rock Island's use of the DRIKNW
line is opposed by BN, Frisco, Termicold, Lamb-Weston, and Alcoa.
Applicants oppose all other proposed protection for Rock Island.
The indemnity protection sought by MKT is supported by the
Lower Colorado River Authority, La Barge, Inc., Breton
Corporation, Clareden, Inc., the Denison Area Chamber of
Commerce, and Gifford-Hill & Co., Inc. This condition is opposed
by BN, Frisco, and DOJ.
DOJ also opposes the proposed indemnity conditions sought by
Milwaukee Road and Rock Island.
360 1.C.C.
60
The impact of the merger on each rail carrier participating in the
proceeding and the relief requested are discussed separate below.
MILWAUKEE ROAD
Summary of Milwaukee Road's position
MILW contends that applicants have not shown the merger to be
in the public interest. Many of its benefits could be accomplished
without merger. Milwaukee asserts that 50 percent of all merger
benefits attributed to the transaction would be derived from
diverted traffic. MILW notes that applicants contend there is
insufficient traffic to justify run-through operations short of merger;
however, when diversions add to applicants’ traffic base, such
operations will commence.
MILW questions some of the anticipated benefits of the merger.
It believes that applicants’ “improved car supply” is an un-
substantiated claim, particularly in view of the impossibility of
estimating the effect of internal traffic reroutings. Applicants’
proposed minor reductions in overhead staff conflict with the BN
chairman’s offer of continued employment to all Frisco senior
management, thereby destroying a prime merger economy. MILW
also contends that another claimed economy, joint purchasing,
could be done now without merger, but BN policy stands against it.
MILW contends that the supporting shippers agree that they could
not count on applicants’ innovative ratemaking policies, which
could occur without merger.
MILW points to other shortcomings in applicants’ case. MILW
notes that applicants failed to calculate any benefit from increased
productivity, one of the foremost problems of the railroad industry.
MILW points out that terminal congestion directly affects railroad
productivity and that applicants’ proposal does nothing to relieve
the general problem at their Kansas City interchange. MILW fears
that, with the elimination of applicants’ interchange at Kansas City,
the situation may become worse. It believes that the same result may
occur at St. Louis. MILW contends that problems may stem from
the necessary conversion of applicants’ incompatible informa-
tion/computer systems. MILW stresses that the slightest miscalcula-
tion easily could cause the monumental foul-up experienced follow-
ing the Penn Central merger.
MIL W asserts that neither applicant needs the merger to saves its
service as each is a large, strong, and prosperous railroad. MILW
360 L.C.C,
61]
believes that BN’s low rate of return for its transportation division
must be considered in conjunction with its line-upgrading and
construction investments, which would provide the rate of return
relied upon by investors. MILW contends that merged, the
applicants will be able to expand their return on investment
exponetially, not arithmetically, to an extent overwhelming to
competitors. Even if reorganzied, MILW asserts that its competition
would disappear in the Chicago-Kansas City market and diminish in
other markets as a result of this merger. MILW submits that the
public interest will not tolerate that result and that the proposal
must be denied.
Should the merger be approved, Milwaukee Road seeks
imposition of conditions for its benefit. On brief Milwaukee Road
abandoned its request to use BN's Dayton's Bluff Yard. It maintains
its request for the following conditions: (1) access to BN's coalfields
near Colstrip and Kuehn, MT, through trackage rights over BN lines
from Miles City, MT; (2) indemnification for traffic losses since
1970 as a result of the Northern Lines Merger and losses from this
merger, including the cost of labor protection, reduced by
Milwaukee Road revenue gains as a result of conditions imposed for
its benefit; (3) liquidated damages of $100,000 for every violation by
the new company of any condition which may be imposed upon the
merger, (4) revision of all joint-facility agreements between
Milwaukee Road and BN to allow free assignment by Milwaukee
Road of its rights; and (5) modified traffic conditions similar to the
standard “DT&I conditions.””°
Scope of operations
In 1976, Milwaukee Road operated in Idaho, Illinois, Indiana,
lowa, Kentucky, Michigan, Minnesota, Missouri, Montana,
Nebraska, North Dakota, Oregon, South Dakota, Washington, and
Wisconsin. It entered bankruptcy on December 19, 1977. Since that
date, Milwaukee Road has engaged in a massive abandonment
program. Recently a majority of the Commission recommended to
the bankruptcy court that Milwaukee Road be permitted to abandon
all lines west of Miles City, MT (2,497.7 miles). The scope of future
MILW operations will depend on the reorganizability of the carrier
and the resulting configuration.
“Detroit, T. & LR. Ca. Control, 278 LC.C, 488 (1980)
360 L.C.C,
62
Traffic diversion and net impact of merger
Milwaukee Road contends that applicants seriously understated
the gains that will be achieved by the merged company, as well as
the losses to competing carriers. Applicants admit that MILW will
sustain a loss of $3,054,960. Milwaukee Road estimates that its
losses as a result of the merger will be $14,089,930. Milwaukee
Road firmly believes that the new company, with its inherent
advantages of single-line service, abundance of equipment, and
combined sales force, will have the ability to “outsell” its
competition. Milwaukee Road's traffic study shows a $5.7 million
loss in the first year after the merger is consummated and an $8.3
million loss in the second year. Milwaukee Road points out that
applicants’ traffic study excludes traffic that was moving entirely
over other rail carriers’ lines. Neither applicant studied traffic which
did not appear in their records.
Milwaukee Road contends that the Commission should not regard
as mere rhetoric applicants’ boasts of the “synergistic effect” of the
merged railroads’ future success in wresting traffic from
competitors. Milwaukee Road maintains the traffic losses it
projected from the Northern Lines Merger fell far short of what
actually occurred. (Milwaukee Road projected a loss of $16 million
per year and claims that, at todays’ average revenue per car to
Milwaukee, its losses from that merger exceed $19 million.) BN’s
testimony reveals that new traffic not presently carried by applicants
is a target of the merger. Milwaukee Road contends that the
judgmental error made by Frisco as to divertibility (based on the
existing Frisco system rather than on the merged railroads) is
sufficient cause to discard the applicants’ traffic study. Additionally,
Milwaukee Road objects to the reliance by applicants on subjective
factors such as “good relations” with customers to justify diversion
estimates.
Applicants show a revenue loss of $3,054,960 in diverted traffic
from Milwaukee Road, in contrast to the Milwaukee Road study
Showing $5,775,340 for divertible traffic. Milwaukee Road has
submitted a chart of traffic movements which alleged accounts for
$2,037,634 of the $2.7 million difference between Milwaukee
Road's divertible traffic and applicants’ conceded diversions.
Milwaukee Road notes that the understated amount. coupled with
applicants’ admitted revenue diversions, results in a total loss of
$5,091,794 on divertible traffic only. A comparison between
applicants’ and MILW's traffic studies shows that a difference of
360 1.C.C,
63
only $682,746 exists. MILW contends that the close correlation
between the traffic studies, as corrected, proves that applicants’
traffic study was deliberately understated and is of no evidentiary
weight.
MILW contends applicants were remise in not considering the
long-term effects of the merger on competing railroads. In its study,
MILW identified and quantified traffic not presently handled by
either BN or Frisco, but subject to diversion upon consummation of
the merger. It concluded a vulnerable category to identify the long-
term impact of the merger. Milwaukee Road asserts that the merger
will strengthen only applicants and their share of the transportation
market at the expense of competing carriers. Further, as the strength
of the applicants increases with the advantages the merger will
create, the more vulnerable MILW’s traffic becomes.
In MIL W's traffic study, full value was given to the merged status
of the applicants. MILW's traffic Study shows that 10,480 cars and
$5,775,340 in revenues were classified as vulnerable traffic. The
total amount of cars to be diverted exceeds 23,000: the revenue
diversions exceed $14 million.
Abandonment of Milwaukee Road's lines west of Miles City, MT
would reduce Milwaukee Road's system substantially.‘' However,
even with this reduction, Milwaukee Road alleges $7,991,635 will
be either divertible ($3,740,224) or vulnerable to diversion
($4,211,411) as a result of the proposed merger. Milwaukee Road
points out that additional Single-line service between points such as
Minneapolis-Chicago and Houston-Dallas-Oklahoma City, and
Houston and Argo, IL only intensifies its problems.
MILW notes that applicants took the Position that all but three
railroads could survive the revenue loss caused by the traffic
diversion by making a few economies. The three systems which
concededly would not be able to adjust to diversions, but are
candidates for liquidation, are Milwaukee Road, Rock Island, and
MKT. Although MILW operations currently produce a large deficit,
MILW is endeavoring to reorganize so as to minimize dislocations
and the possibility of Federal intervention. Loss of $14.1 million or
more in annual revenue is a lethal attack upon the foundation of the
trustee's reorganization plan. MILW submits that it has exhausted
the possibilities of practicing economies in operations. It has been
‘A majority of the Commission recommended to the bankruptcy court that it permit Milwaukee
Road to abandon these lines in AB? (Sub-No. 86), Richard & Ogilvie, Trustee of the Property of
Chicago, Milwaukee, St. Paul and Pac Vic Railroad Company—A bandonment—Por tions of Pacific
Coast Extension in Montana, Idaho. Washington. and Oregon (nor printed), decided January 29.
19RO
360 LCC.
64
in bankruptcy since December 19, 1977, thus, deferring most prior
debts. It is striving to abandon its money-losing lines, and 55 sepa-
rate abandonment applications have been filed with the Commission
since December 1977. Milwaukee Road expects most of the revenue
it loses as a result of the merger to be translated directly to net loss.
It suggests that such a loss could be disastrous, for it amounts to
fully 5 percent of the revenues forecast under the trustee's reorgani-
zation plan.
Applicants address Milwaukee Road's arguments that (1) approval
of the merger will interfere with the trustee's efforts to reorganize
the Milwaukee Road, and (2) by diverting traffic from the
Milwaukee Road, the merger will impair its ability to compete
effectively with the new company. Applicants assert that neither of
these arguments address the proper issue of whether the proposed
merger will improve transportation services to the shipping public,
but instead are premised on preservation of Milwaukee Road as a
corporate entity.
As to the first argument, applicants assert that progress in railroad
industry restructuring through end-to-end mergers must not be
impeded while the reconfiguration or liquidation of bankrupt
carriers is determined. Applicants suggest that the problems of
bankrupt carriers are unrelated to this merger and that in the case of
the Milwaukee Road there is substantial doubt as to whether it is
reorganizable at all.
Applicants state that Milwaukee Road's second argument is also
unfounded. The Milwaukee Road claims that diversions to the new
company will impair its ability to compete with the new company in
the corridors which both presently serve assumes that Milwaukee
Road is today a viable competitor. Applicants dispute that
assumption. Milwaukee Road is engaged in an ambitious
abandonment program that may involve one-third of its system.
Plans for abandonment include, according to applicants, the line
between Muscatine, IA, and Kansas City, thus, removing Milwaukee
Road from the Chicago-Kansas City market. Applicants also note
that Milwaukee Road is involved in negotiations for the sale of
substantial parts of its system. By its own withdrawal from
transportation markets, Milwaukee Road has allegedly established
that it is not presently a viable competitor and that the protective
conditions it seeks would not serve the public interest.
Applicants also argue that Milwaukee Road has grossly
exaggerated the impact of the proposed merger. Applicants estimate
360 1.C.C.
65
that Milwaukee Road will lose $3,054,960 in gross revenue, with a
resulting net revenue loss of $353,571 a year. Even the $3 million
figure is said to be overstated because it is based on 1976 traffic.
Since that time, Milwaukee Road has lost considerable traffic it
formerly carried due to service deterioration and inadequate
equipment. Applicants assert that a substantial portion of the
predicted losses Milwaukee Road attributes to this merger have
already taken place and will continue as a result of factors entirely
unrelated to this merger. Therefore, applicants argue, the plight of
Milwaukee Road should not be used as a basis to deny the merger.
Impact on shippers—loss of service
Milwaukee Road asserts that depletion of its revenue base caused
by the merger directly will cause cessation of service. Milwaukee
Road states that continued service on its Chicago-Kansas City route
presently is justifiable. However, it is highly probable that the
revenue losses over the Kansas City gateway seriously will deter
MILW's participation in this competitive market. Retention of
MILW's Chicago-Kansas City route despite loss of interchange
traffic from the BN-Frisco merger would place Milwaukee Road in
immediate jeopardy.
MILW points out that IA-DOT believes that in the present
proceeding, important rail service may be lost and competition
eventually retarded and, in many areas, lost altogether. MILW
believes that the opinion of IA-DOT should be afforded particular
weight because of the State's familiarity with the economic problems
of MILW and other of its serving railroads and the State's knowledge
of the needs of its commerce. MILW notes that continued service
over its main line to lowa interior points (Chicago-Omaha) is not a
part of the trustee's reorganization plan. However, permutations of
the trustee's reorganization plan may permit continuance of MILW
service in the grain gathering areas. MILW service along eastern
lowa on the Chicago-Kansas City route would continue if the Kansas
City interchange traffic does not disappear through the diversionary
impact of this merger.
Applicants state that Milwaukee Road has failed to introduce any
evidence that its claimed traffic diversions will impair any essential
transportation services offered to the shipping public. Appticants
argue that there is considerable excess rail capacity in the Midwest
and that, in the event of cessation of service or liquidation of a
bankrupt carrier such as Milwaukee Road, other viable carriers will
360 L.C.C.
66
be available to provide service over economically feasible lines. As
support for this position, applicants cite Milwaukee Road’s own
program of sale and abandonment of trackage. These activities,
according to applicants, indicate that other viable carriers will be
called upon to assume Milwaukee Road's services regardless of this
merger. Applicants suggest that by emphasizing the need to preserve
its Current corporate structure instead of preservation of essential
transportation services, Milwaukee Road has failed to present a case
against the merger.
Applicants also argue that Milwaukee Road's reliance on Iowa as
an example of lost service is misplaced, for Milwaukee allegedly
plans to dispose of most of its facilities in lowa as part of its
reorganization plan whether or not the merger takes place.
Moreover, applicants assert that other midwestern railroads have
expressed great interest in purchasing Milwaukee lines in lowa.
Impact on employees
Milwaukee Road suggests that its expected loss of $14,090,000 a
year will result in a general reduction in its employment of about 5.5
percent. Milwaukee Road estimates that reductions will involve the
following: 26 executive personnel, 137 professional and
adm
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