The staff of the U.S. Railway Association yesterday questioned Norfolk Southern Corp.'s contention that only Norfolk Southern can save Conrail from financial trouble in the 1990s.
The USRA, an agency set up by Congress to oversee the federally owned freight railroad, also suggested that, based on preliminary findings, a plan offered by Morgan Stanley & Co. to turn Conrail into an independent company through a public sale of stock could be financially viable.
In addition, the agency challenged Norfolk Southern's contention that the proposed merger would have negligible effects on rail traffic patterns. Rather, the USRA staff said, the merger could cause significant disruptions in Midwestern and Western rail traffic and lead to a reordering of the competitive environment of the railroad industry in those areas.
A spokeswoman for Norfolk Southern said the huge transportation conglomerate was still studying the USRA's findings, but was pleased that the agency did not recommend a reversal of the Department of Transportation's plans to sell Conrail to Norfolk Southern.
The conclusions are contained in a report made by the USRA to Rep. James J. Florio (D-N.J.), chairman of the House subcommittee on commerce, transportation and tourism. The subcommittee is scheduled to hold hearings beginning today into the proposed sale of Conrail to Norfolk Southern for $1.2 billion. There has been mounting congressional opposition to the administration's plans for the sale, including suggestions that perhaps the Morgan Stanley plan should be accepted or that Conrail should remain under government ownership.
The study, which a USRA spokesman said was intended to "focus" discussion of the issues involved in the proposed sale, is a follow-up to one prepared by the USRA in April that concluded that Conrail was financially viable for the foreseeable future, despite worries to the contrary by Norfolk Southern and Department of Transportation officials.
Norfolk Southern has said that Conrail can survive the next few years without a takeover, but that the rail line would move into a negative cash flow position after that. The USRA report called that projection "rebuttable," and added "no one can say that the Norfolk Southern predictions will not possibly come true, but the specific reasons advanced for them can be refuted."
Among other things, the USRA report argues that improvements in the overall economy are strengthening Conrail's outlook, despite Norfolk Southern's fears that a continuation of the long-term decline in Conrail's traffic flow and a recession in the next few years could buffet Conrail's finances.
The report challenges Norfolk Southern's belief that Conrail would also experience increased needs for capital investment and reductions in profit margins in the next few years, and argues that Conrail's capital needs will be reduced by the very decline in traffic that Norfolk Southern is worried about. For these reasons and others, USRA said it could not see a possible Conrail cash-flow crunch.
"No one can guarantee the events of tomorrow, but all available evidence supports a finding that Conrail can generate positive cash flow for the foreseeable future," the USRA report concluded.
The report also found that the most recent version of Morgan Stanley's proposal to make Conrail independent, would reduce Conrail's cash on hand steadily through the next five years, because of payments including reimbursement of employes for previous wage concessions and stock holdings. Those reductions would never drop the company's cash position below $500 million, however, which would allow Conrail to keep paying stock dividends.