UTU News Digest - Wednesday, December 29, 1999

UTU Daily News Digest

Information of interest to operating railroad and transportation employees

Wednesday, December 29, 1999

WASHINGTON: Surface Transportation Board announces proposed Burlington Northern Santa Fe-Canadian National Railroad control transaction

WASHINGTON -- Surface Transportation Board (Board) Chairman Linda J. Morgan announced today that the Board has issued a notice informing the public that the Burlington Northern Santa Fe (BNSF) and the Canadian National (CN) railway systems have formally indicated that they intend to file an application for Board approval for the railroads in their systems to be under common control. [FOOTNOTE 1: The BNSF system includes the Burlington Northern Santa Fe Corporation and The Burlington Northern and Santa Fe Railway Company. The CN system includes the Canadian National Railway Company, Grand Trunk Western Railroad Incorporated, and Illinois Central Railroad Company.] A formal application from these "applicants" is expected to be filed between March and June of next year.

The notice issued by the Board finds that the proposed BNSF/CN control transaction is a "major transaction," which means that BNSF and CN will have to file substantial supporting information, and that the transaction will undergo more extensive review than other transactions.

The Board's notice also observes that, in the past several years, the leading North American railroads have undertaken a series of major transactions that, when taken together, have dramatically reconfigured the entire North American railroad industry. For that reason, and because other carriers will likely respond to this proposal with similar proposals of their own, the notice indicates that the applicants will be expected to include in their application evidence on the "cumulative impacts and crossover effects" that are likely to occur in the wake of the proposed transaction, should it be approved. In particular, the Board indicated that parties will be expected to address the effect of the proposed transaction, and any likely subsequent transactions that would produce further significant consolidation in the industry, upon the national rail transportation policy goals set out in the law. The Board's notice further indicates that, given the recent experience with post-merger rail service disruptions, the applicants also will be expected to include in their application evidence on the likely effects on rail service of any action the Board may take. Of course, interested parties will be entitled to submit, in their comments filed in response to the application, evidence addressing these points.

The Board's notice was issued today in Canadian National Railway Company, Grand Trunk Western Railroad Incorporated, Illinois Central Railroad Company, Burlington Northern Santa Fe Corporation, and The Burlington Northern and Santa Fe Railway Company--Common Control, STB Finance Docket No. 33842, Decision No. 1.

A printed copy of today's notice is available for a fee by contacting: D.C. News & Data, Inc., Room 210, 1925 K Street, N.W., Washington, DC 20006, telephone (202) 463-8112. Today's notice is also available for viewing and downloading via the Board's website at www.stb.dot.gov.

STB says BNSF, CN merger to face broader review

WASHINGTON -- Paying the price for the service failures of previous rail mergers, Burlington Northern Santa Fe Corp. and Canadian National Railway Co. will face a more extensive review of their plan to create North America's largest railroad, the Surface Transportation Board said, the Journal of Commerce reported.

In a routine filing docketing the case, the board, which has the authority to approve or reject the BNSF/CN transaction, advised customers and competitors that it would welcome comment on the latest plan's long-range impact.

Shippers have complained that the board has become a rubber stamp for rail mergers. Since 1995, the STB has approved mergers of Burlington Northern and the former Santa Fe, the Union Pacific and Chicago & North Western, Union Pacific and Southern Pacific, Canadian National and Illinois Central. It also approved the joint purchase and division of Conrail operations by Norfolk Southern and CSX Corp. All except the CN-IC acquisition resulted in varying degrees of congestions and service disruption.

Canadian National and Burlington Northern Santa Fe have said their combination is an end-to-end transaction that would be easier to implement and which should not have the service problems of other mergers.

The latest proposal, which would vault the merged railroads past Union Pacific as the largest in North America, ''may trigger yet another full round of major transactions, as other railroads seek to position themselves and their customers to meet the competitive effects of a unified BNSF/CN,'' the board said.

''In the past several years, the leading North American railroads have undertaken a series of major transactions that, when taken together, have dramatically reconfigured the entire North American railroad industry,'' the STB said. ''This process has proved not to be an easy one, as evidenced by the significant and ongoing adjustments required by railroads, shippers, and rail employees as the implementation process for those transactions continues.''

Under the ''one case at a time'' rule, the STB normally would give consideration only to the impacts of transactions that have already been approved. ''However, given the competitive responses that can be expected of other railroads, we will waive, on our own motion, the rule ...so that applicants and other interested persons can submit, and the Board can consider, evidence respecting the 'cumulative impacts and crossover effects,' that are likely to occur in the wake of a BNSF/CN transaction,'' the board wrote.

''Similarly, parties should address the effect of the proposed transaction and any likely subsequent transactions, that would produce further significant consolidation in the industry, upon the statutory goals...with particular attention to those aimed at fostering sound and competitive economic conditions in the U.S. railroad industry,'' the STB said.

The STB order added: ''Furthermore, as noted, North American railroads, together with their customers and employees, have not yet fully adjusted to the recent wave of major rail transactions. Given our recent experience with post-merger rail service disruptions, we expect applicants and other interested persons to submit evidence respecting the likely effects on rail service of any action we may take, considering again the statutory goals cited above.''

Union Pacific reacted with a statement that said, ''The decision issued by the Surface Transportation Board today is reasonable. It is fair to ask the question whether or not this proposed single transaction will, in fact, trigger a second round of mergers. Given the importance of the rail sector to the health of the economy, the Board is to be commended for looking at the future of the rail industry and how best to serve its customers in the long run.''

The otherwise routine announcement suggests that BNSF and CN will be forced to deal with competitive impact issues that go beyond the immediate effects of their combination.

Although an STB spokesman declined to comment on the order, the STB appears to be setting the stage for a proceeding that could examine further consolidation in the railroad industry, including mergers that have not yet been proposed or negotiated.

CANADA: Key U.S. regulator plans hard look at rail merger

TORONTO -- A key U.S. regulator has raised the bar on railway mergers so it can take an especially hard look at the proposed combination of Canadian National Railway Co. and Burlington Northern Santa Fe Corp, the Toronto Globe and Mail reported today.

CN spokesman Mark Hallman confirmed yesterday that the U.S. Surface Transportation Board (STB) will be more stringent than usual because so many recent railway mergers in the United States have gone awry.

The new rules will give the general public, railway customers and competitors a wider latitude to comment -- and object to -- the proposed merger of CN and BNSF.

But Mr. Hallman said CN was not worried by the board's new rules because the proposed merger should present few problems for regulators, shippers or the public.

"We'll study the ruling and assess its implications," he said in a telephone interview yesterday. "They're taking a very large view of the transaction. But this is largely an end-to-end transaction" that combines two railways with distinct geographic networks.

CN expects to win full regulatory approvals by mid-2001.

Meanwhile, the Montreal-based railway says it could win a substantial shareholding in BNSF if the proposed merger goes sour. In a Form 6-K filed with the U.S. Securities and Exchange Commission this week, CN said it could win up to 65 million shares of BNSF or 12.5 per cent of the shares outstanding if the deal falls through.

The stock option agreement would kick in if BNSF terminates the deal for a wide variety of reasons. Mr. Hallman said they could include a change of heart by a senior executive or a rejection of the deal by the company's shareholders.

CN would be allowed up to 18 months to pick up the shares after the deal went off the rails. It would have to pay the going market price at that time.

BNSF has a similar arrangement. It could pick up 28.9 million shares of CN, representing 12.5 per cent of the Montreal-based company.

The stock swap is included in a wide range of breakup fees that would be due if the merger is terminated. BNSF would be on the hook for as much as $450-million (U.S.) under certain circumstances, while CN would have to pay up to $200-million.

Mr. Hallman said arrangements of this sort are "standard fare in transactions of this magnitude" because they put considerable pressure on the executives to swing the deal. "They bring minds to bear," Mr. Hallman said.

Announced last week, the CN-BNSF merger would create a railway colossus with about 80,000 kilometres of track, 67,000 staff and $18.5-billion in annual revenue. It would be the largest railway in North America with a network that extends across Canada and to every state west of the Mississippi River.

To be renamed North American Railways Inc., the merged company would be based in Montreal, but incorporated in Delaware. BNSF would retain a regional head office in Fort Worth, Tex.

The STB is taking a close look at this deal because several recent mergers have gone sour. There was serious congestion throughout the Southern United States after Union Pacific Corp. bought Southern Pacific Rail Corp. in 1996, and regulators are still trying to sort out the many problems that followed the split of Conrail Inc. between the Norfolk Southern Corp. and CSX Corp. last fall.

"They are giving CN and BNSF a heads-up to alert them that this is going to be viewed as something other than an end-to-end merger," Edward Emmett, president of the National Industrial Transportation League, told Bloomberg yesterday.

But analyst Terry Gardner of Deutsche Banc Alex. Brown seemed surprised by the STB's actions. "This seems like a shot at Burlington Northern and Canadian National," Mr. Gardner told Bloomberg. "It looks like the STB has taken a stance on this merger before it has even been filed."

STB spokesman Dennis Watson said in a telephone interview yesterday that as far as he knew, the STB was planning a standard "major transaction" review of the CN-BNSF deal.

All deals of this size go through a much more rigorous review than simple transactions, he said. CN and BNSF will have to file "substantial supporting information and the transaction will undergo more extensive review than other [smaller] transactions."

Mr. Watson said CN and BNSF have already notified the regulators of their plans to merge, and he expects a formal application between March and June next year. But he said it could take as long as 22 months to process the application.

The process is a lengthy one because the STB invites shippers, consumers, competitors and other interested parties to attend public hearings. It also commissions a wide range of studies that look at the impact of these mergers on the environment, local communities, and industry groups.

In an announcement yesterday, the STB said leading North American railways have undertaken a series of major transactions that together have "dramatically reconfigured" the entire North American industry.

For that reason, the STB will ask CN and BNSF to include evidence on the "cumulative impacts and crossover effects" that are likely to occur if they are allowed to merge.

NEBRASKA: U.P. comment on STB notice regarding the proposed Burlington Northern Santa Fe and Canadian National Common Control Plan

OMAHA -- The following statement is being released by Union Pacific Corporation:

"The decision issued by the Surface Transportation Board today is reasonable. It is fair to ask the question whether or not this proposed single transaction will, in fact, trigger a second round of mergers. Given the importance of the rail sector to the health of the economy, the Board is to be commended for looking at the future of the rail industry and how best to serve its customers in the long run."

WASHINGTON: Here's how to present the new rail merger

WASHINGTON -- Nobody asked, but here's how I would present the proposed Canadian National Railway Inc. combination with Burlington Northern Santa Fe Corp. in Washington so it has the best chance of gaining regulatory approval, a commentary in the Journal of Commerce by Lawrence Kaufman begins.

Just tell the Surface Transportation Board, and anyone else who will listen, that this is just like the Illinois Central transaction. Don't even talk about creating the first real North American railroad. That means big, and you want to get the focus off size.

Remember, the other big mergers have created the hostile environment toward mergers that you must deal with now.

Another reason for downplaying the North American colossus angle: Canadian nationalism. Some Canadians are terrified that the low exchange rate for the Loonie -- the Canadian dollar -- makes it easy for U.S. companies to gobble up the Canadian economy.

CN Chairman and CEO Paul Tellier had a blunt reaction to the nationalism issue last week, when he said in answer to a questioner: "This is not the Americanization of CN -- this is transforming CN into a North American company while retaining a very strong Canadian identity.

"I have no time for nationalists who think they can draw a gate around this country," Tellier said.

Just as Bill Clinton's staff kept reminding him during the 1992 presidential campaign, "It's the economy, stupid!," keep reminding yourself, the shippers, the regulators and the news media: "It's about service." That would not be stupid.

Freight shippers are particularly suspicious of rail mergers after the STB accepted past representations that mergers would result in customer benefits such as improved service and so on.

The approvals were followed by the 1995 Union Pacific-Chicago and North Western service problems, the complete meltdown of service following the 1996 Union Pacific acquisition of Southern Pacific, and the current service failures of the CSX-Norfolk Southern indigestion over their break-up of Conrail.

The Burlington Northern-Santa Fe merger also gave customers a dose of heartburn.

Tell the world that Canadian National and Burlington Northern Santa Fe make the perfect fit at the perfect time. CN did that last year with the Illinois Central acquisition, and it worked.

Point out that there is no overlap, a limited number of connecting points, and that your two companies have a similar culture, or at least the same attitude toward operating efficiency and on-time railroading.

The lack of overlap means no rationalization (line abandonment for those who don't know rail euphemisms), no or little reduction in service options for customers, and little impact on jobs. That last one should be whispered in the ears of every international union officer you can find.

A new twist that wasn't pertinent in the IC transaction: Asian economies are recovering. These two railroads will be well-positioned to move goods to Asia from the Atlantic, Gulf and Pacific ports.

It may be unreal, but tell the regulators how the seamless connection from the coast of California to the coast of Nova Scotia will spur the landbridge: containers moving overland between Europe and Asia rather than through the Panama Canal. After all, your crystal ball is as good as anyone else's.

One critic already has asked, "Are these mergers the only strategic ideas that current rail management can come up with?"

So give them strategic ideas. The prospect of bringing to fruition a new landbridge certainly sounds good.

It's going to be difficult to find customers who will allow CN and BNSF to include a bound letter in their merger applications attesting to the belief that this proposal will be the greatest thing since sliced bread.

Tell the world and the STB up front that it isn't necessary to kill a lot of trees just to demonstrate shipper support. This transaction doesn't have the antitrust issues that other mergers faced, so it isn't necessary to beg customers to support it.

Mount a campaign that allows Canadian National and Burlington Northern Santa Fe to set the agenda of the debate before the STB. The ultimate targets of this effort are the members of the STB and its staff.

This campaign should create an environment that makes it easier for the agency to do what it probably is inclined to do: Approve a merger with few if any costly conditions.

FLORIDA: RailAmerica files registration statement to merge with RailTex

BOCA RATON -- RailAmerica, Inc. (Nasdaq:RAIL) and RailTex, Inc. (Nasdaq:RTEX) yesterday announced that RailAmerica filed a registration statement on December 27, 1999 with the Securities and Exchange Commission covering shares of RailAmerica common stock to be issued in connection with the merger of RailTex with a wholly-owned subsidiary of RailAmerica. The registration statement contains a joint proxy statement/prospectus to be used in connection with the stockholder meeting for each of RailAmerica and RailTex to be held on February 1, 2000.

All RailAmerica stockholders of record at the close of business on December 17, 1999 will be eligible to vote on the proposed stock issuance at a special meeting of stockholders to be held in Boca Raton, Florida. All RailTex stockholders of record at the close of business on December 17, 1999 will be eligible to vote on the proposed merger of RailTex with a subsidiary of RailAmerica at a special meeting of stockholders to be held in San Antonio, Texas. The closing of the transaction is subject to any necessary regulatory approval, including the Surface Transportation Board, and other customary closing conditions.

RailTex (www.railtex.com), operating 26 railroads over approximately 4,100 route miles, is currently North America's largest short line railroad company, with operations concentrated in the southeastern, Midwestern and New England regions of the United States, as well as Eastern Canada and Mexico.

RailAmerica (www.railamerica.com) is a leading international transportation company that owns or has equity interests in 25 short line and regional railroads operating more than 8,400 route miles in the United States, Australia, Canada and the Republic of Chile. The Company also owns Kalyn/Siebert, L.P. and Kalyn/Siebert, Canada, Inc., specialty truck trailer manufacturers with production facilities in Gatesville, Texas and Trois-Rivieres, Quebec, Canada.

ILLINOIS: FAA opts for Y2K fanfare; CTA decides to play it safe

CHICAGO -- Two Y2K transportation decisions to make, two different approaches:

FAA Administrator Jane Garvey will fly coast to coast on New Year's Eve, traveling through four time zones at each stroke of midnight to demonstrate her apparent confidence that airplanes will not get stuck in mid-air, the Chicago Tribune reported today.

A courageous move on Garvey's part, or just a savvy public relations stunt? Back in April, we recall, Garvey was standing on solid ground when the Federal Aviation Administration conducted the make-or-break Y2K computer-readiness test of the nation's air-traffic control system. The clocks were forwarded to Dec. 31, an airplane was sent up over Colorado--and the FAA's hundreds of computer and radar systems handled the date rollover safely and without incident.

The same result, with fanfare added, can be expected Friday night. But why would anyone want to be among the first air travelers to have flown a red-eye flight into the new millennium?

Or better yet, to have spent the magic moment inside a dark subway tunnel or aloft an elevated train track.

In contrast to the FAA's display of supreme confidence, the Chicago Transit Authority will play it extra safe.

CTA commander-in-chief Frank Kruesi has ordered an unprecedented standing down of rail operations to take place Friday just before midnight.

All CTA trains will arrive at the nearest station by 11:50 p.m. and remain standing in the station until about 12:10 a.m., said CTA spokesman Jeff Stern. That way, there is no risk of passengers being stranded on "L" tracks or having to maneuver along the cat walks in dank subway tunnels if a problem occurs.

"We don't have any reason to expect trouble, but this is an extra step to ensure a completely smooth transition into 2000," Stern said. He added that rail service will resume once the go-ahead is given by the CTA's fully computerized command center, which tracks the location of every train in the system as well as the operations of key rail equipment.

For celebrants who wish to ride into the new year on public transit, the fare is a penny on all CTA buses and trains from 8 p.m. Friday until 6 a.m. Saturday.

Extra service will also be added on some rail and bus lines. Trains on the Orange/Midway and Brown/Ravenswood Lines, which regularly end service downtown about midnight, will start their final trips around the Loop just after 1:30 a.m. Service starts back up at 4 a.m. Saturday on the Brown Line and at 5:27 a.m. on the Orange Line.

Green Line trains will keep their regular schedules, serving the Loop until after 1:20 a.m. and resuming at 6:05 a.m. Trains on the Red and Blue Lines serve downtown around the clock.

Extra buses are scheduled to operate to and from midnight fireworks shows and other activities at Navy Pier; the South Shore Cultural Center, 71st Street and South Shore Drive; the lakefront at Buckingham Fountain; and Montrose Harbor.

The CTA will provide service on five bus lines until 2:15 a.m. for people attending the fireworks display at Navy Pier.