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CONRAIL INC.
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NORFOLK SOUTHERN CORPORATION
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December 3, 1996
David Lee
Pennsylvania State Employees'
Retirement System
30 North Third Street
Harrisburg, Pennsylvania 17108-1147
Attached are answers to the questions you raised in regard to Norfolk
Southern's proposed acquisition of Conrail. I hope these are useful to
you in your board presentation.
If you need any additional information from us, please do not hesitate
to call me at (757) 629-2861 or FAX (757) 629-2361.
Sincerely,
/s/ Deborah H. Noxon
cy: W. J. Romig
PA SERS response to questions regarding an CR/NS merger
Q. What are the job impact implications of the Norfolk Southern proposal?
o The CSX and Conrail systems are duplicative (see enclosed rail
maps) in many areas. This means redundancies, particularly in PA,
MD, DE, and OH, and thus major job losses if CSX acquires Conrail.
As the Conrail and Norfolk Southern rail systems complement each
other, job losses will be less in the Norfolk Southern proposal.
o In the long term, Norfolk Southern expects the Norfolk
Southern-Conrail combination to generate substantial new business
and increased job security.
Q. What are the potential implications of your proposal on PA state
tax revenue (vs. a stand-alone Conrail)?
Due to Norfolk Southern's limited presence in the State of
Pennsylvania, if Norfolk Southern successfully merges with Conrail
we project tax revenues in the State of Pennsylvania to increase.
Income taxes should remain at Conrail's current level with an
increase in taxes corresponding to an expected increase in
operating income after the merger. Property taxes in Pennsylvania
also are expected to increase a minimum of 15%. In addition, we
project an increase in franchise taxes in Pennsylvania.
Q. Are there any provisions in the Norfolk Southern plan which could
enhance economic development at the Port of Philadelphia?
o A new high-tech multimodal terminal is planned for the old
Philadelphia Navy Yard, which has been discussed with the Mayor of
Philadelphia.
o RoadRailer(R) trains, via the NS and CR bimodal subsidiary Triple
Crown Services Co., will provide truck competitive service to
midwest and southern destinations.
o A Norfolk Southern-Conrail combination will provide the only
doublestack container service from the Port of Philadelphia to and
from the southeast.
o Norfolk Southern brings superior intermodal experience to the Port
of Philadelphia. NS intermodal growth more than doubles the growth
of the industry average while Conrail reaches the mean and CSX lags
far behind(since 1988).
Q. Have job security issues been discussed under your plan?
o As discussed, since the Norfolk Southern and Conrail systems
complement each other, job losses are expected to be less than in a
CSX-Conrail combination.
o Federal law mandates application of standard labor protection in
rail mergers. These conditions protect rail employees against
merger related adverse effects.
o As the pension plans of both Conrail and Norfolk Southern are
overfunded, retirement security is ensured, while the CSX pension
fund has been on the Pension Benefit Guarantee Corporation's list
of "Top Fifty Companies with the Largest Underfunded Pension
Liability." Conrail employees should not want their retirement plan
commingled with CSX.
Q. In the public media, CSX appears to be committed to the merged
corporate headquarters in a Philadelphia location. Does your plan
provide for a similar framework as your rival bidder?
o CSX's headquarters in Richmond, VA, employs under 200 people, and a
Philadelphia headquarters under CSX ownership would require no more
jobs and perhaps fewer. CSX has made no guarantees regarding the
other Philadelphia-based Conrail jobs--they could go to
Jacksonville, FL, where CSX's operations are centralized.
o In a letter to Conrail's board of directors (October 23, 1996),
Norfolk Southern Chairman, President and CEO David R. Goode
indicated that Norfolk Southern would be willing to consider the
location of a merged corporate headquarters in Philadelphia. A copy
of the letter is attached.
Q. In addition to the valuation differences between the CSX and
Norfolk Southern offers, what do you feel are the most compelling
reasons for a Norfolk-Conrail vs. a CSX-Conrail combination?
o A Norfolk Southern-Conrail combination encourages a balanced
competitive structure for Eastern railroad service with two rail
systems of comparable size and scope. It acknowledges that large
markets must be served by more than one railroad; that ownership of
major trunk lines and effective terminal access are required for
true competition; and that competition is weakened when less than
fair value is paid for assets (see enclosed Principles of Balanced
Rail Competition).
o A Norfolk Southern-Conrail combination will create a stronger, more
competitive eastern transportation market and a far more balanced
freight rail system than the proposed CSX-Conrail merger. A
combined CSX-Conrail will control almost 70% of the total of CSX,
Conrail and NS rail freight, resulting in extreme market dominance.
A Norfolk Southern-Conrail combination will not dominate eastern
freight.
o Important markets, including New York, Northern New Jersey, Boston,
Pittsburgh, Philadelphia, Wilmington and Youngstown, will only have
one Class I carrier service in a CSX-Conrail combination (an
effectual monopoly). A Conrail-Norfolk Southern combination will
preserve (and possibly enhance) two carrier service in these and
many other areas, allowing shippers a choice for rail service.
o Conrail customers will obtain better access to the Southeast and
improved single system coverage in the East. Also, Conrail
customers will benefit from a combination with Norfolk Southern,
widely acclaimed as the safest, most efficient and best managed
railroad.
o In addition to competitive pricing resulting from volume
efficiencies, Norfolk Southern-Conrail will provide a level of
service that only a broad network can provide. We will be able to
undertake more initiatives such as our recent vehicle distribution
agreement with Ford. We will be able to improve intermodal service
between the Northeast and Southeast, making our intermodal network
more competitive with alternative truck services.
