The Railroad Week in Review:
Week ending June 17, 2000

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Companies can now communicate with their markets directly. If they blow it, it could be their last chance.
Companies need to realize their markets are often laughing. At them. Cluetrain Clues 19, 20.

London's Financial Times on Friday reported that German business application software developer SAP has teamed up with Commerce One, a US-based e-commerce logistics software provider, to energize its lagging sales. True, this is not a pure railroad play but the FT article neatly summarizes the major players and what they do.

First, we have in supply chain management and Ariba in B2B exchange software. Then there's Siebel in customer relationship management. Of course IBM has always been there one way or another, and we can't forget Oracle, out of the box fastest. Note that it's a crowded field and neither the Gang of Four's Arzoon nor BNI's Freightwise made FT's list.

I mention this because yet another payer has emerged on the scene, The site advertises itself as "the leading net market for the rail industry, designed for the industry, by industry veterans." Which is interesting because it surely escaped my notice as I trolled the Internet looking for rail applications. Unfortunately, the website does not say who's behind it. I have written to ask and will report my results in this space.

In a related development UP this week formed a new subsidiary, Fenix, to capitalize on its portfolio of technology companies, assets and capabilities. These include AMCI with its suite of wireless software products and PS Technologies for workforce management software. UP Technologies is the third leg, and it has established itself in shipment monitoring, item level tracking, inventory management, operations management and electronic gateway messaging. Finally, Fenix itself will be forming a fourth company to apply its extensive telecommunications capabilities in the wireless access and broadband network markets. And the new CEO is a veteran of both Nokia (the cell phone people) and Philips Electronics.

The other shoe has finally dropped at KSU as the FAM spin-off and reverse split of the railroad shares was approved at Thursday's shareholder meeting. Skipping the bones of contention surrounding the deal, suffice to say KSU expects it to be a fait accompli by July 12. Shareholders of record on June 28 will receive two shares of common stock of Stilwell Financial for every one share of KSU common stock, which works out to about 223 mm shares. Recall too that stockholders had already OK'd a reverse split of KCSI common stock to be effective upon completion of the spin-off. Accordingly, on July 12 each two shares of KCSI common stock will be converted into one share of KCSI common stock.

Regarding the meeting, a knowledgeable chap in KC, one with whom I have been corresponding for some time on this matter, writes, "What I surmise: 1. The Stilwell spin off is the beginning, not the end of this restructuring; 2. The railroad is strategically positioned for quick sale; 3. Janus will soon be separated from Stilwell in a tax-free spinoff to Stilwell shareholders; 4. DST will merge with the remainder of Stilwell. Be patient, these guys know what they are doing. I asked my son Nicholas, 17, what he thought. Nick replied: 'They remind me of Berkshire Hathaway.' Me too." My correspondent writes he was able to pick off more shares before it broke 80. It's nice to see money and mouths co-located.

It's déjà vu all over again at FEC. The timing of the spin-off to St. Joe's shareholders of St. Joe's 54 percent equity interest in Florida East Coast is expected to be delayed as the IRS has requested certain additional information. The companies had previously indicated they expected the transaction to be completed in late second or early third quarter of 2000. The completion of the transaction is conditioned on the receipt of a revenue ruling from the IRS as to the tax-free nature of the distribution. Sound familiar?

According to the press release, "St. Joe will exchange all of its shares of Florida East Coast common stock for an equal number of shares of a new class of Florida East Coast common stock. The holders of the new class of Florida East Coast common stock will be entitled to elect 80 percent of the members of the Board of Directors of Florida East Coast, but the new Florida East Coast common stock will otherwise have substantially identical rights to the existing common stock. The new class of Florida East Coast common stock will be distributed pro rata to St. Joe shareholders in a tax-free distribution. St. Joe will not retain any equity interest in Florida East Coast after the spin-off is completed. A majority of the Florida East Coast minority shareholders have already approved the transaction." I wonder how long this one will take.

A consistent theme in conversations with railroad customers is the lack of consistency, reliability, and reasonable transit times. As a major paper shipper said, "Railroad purchasing departments would never accept the kind of vendor performance their own companies deliver to their customers." Happily, there are signs of improvement. CN has lopped 24 hours off its Toronto-Vancouver intermodal service by offering a later cutoff at origin, adding power, carefully selecting operating windows and offering and early morning delivery at destination. According to CN, it's "fully competitive with expedited, transcontinental truck services in truckload and less-than-truckload segments."

As for the carload business, Daniel Machalaba writes in Friday's WSJ, "Customers say CN's efforts are beginning to pay off for the company's shipments of chemicals, lumber, paper, food products and other merchandise freight that account for more than half of its traffic. Canadian National now delivers chemicals shipments 90% on time, compared with 67% for the rest of the railroad industry, said one major shipper, who added, 'Canadian National runs its freight trains much more like passenger trains. If all the other railroads ran that way, we could remove inventory and rail cars from the supply chain.'"

One place where scheduled carload service is alive and well is with Amtrak. This week I rode Amtrak's Empire Builder, the Chicago-Seattle train, and its 29-car consist was evenly split between SuperLiners and RoadRailers. Says Ed Ellis, Amtrak's VP for Mail & Express, "If there weren't a demand for scheduled service that beats trucks we wouldn't be doing this." And the latest growth spurt is a new arrangement with CP Rail in Detroit.

Amtrak has opened a new joint shipping facility located at the former Michigan Central Railroad terminal site, built in partnership with CP Rail and Michigan DOT. Daily departures will offer guaranteed second or third morning delivery of time-sensitive goods anywhere in the United States. So if Amtrak can build a business on scheduled service, and CN can cut transit time to improve its product offering, there is proof it can be done. And that's good news.

The STB has issued a decision on updating its computation of the railroad industry's cost of capital for 1999. The Board found the composite after-tax cost of capital rate for 1999 to be 10.8%. The figure is based on a current cost of debt of 7.2%; a cost of common equity capital of 12.9%; a cost of preferred equity capital of 6.3%; and a capital structure mix comprised of 35.5% debt, 62.7% common equity, and 1.8% preferred equity. The quarterlies coming out in a month will be instructive.

GNWR's May carloadings were up 25% YTY largely driven by a whopping 74% increase in the Australian trade. North American business, which includes Canada and Mexico, was up 25%, half of that coming from South of the Border. Forest products were up in Oregon, coal was up in Pennsylvania and NY, and metals took the lead in Canada. Chartwise, the stock is nicely above both its 50-and 200-day MA's, rare for the industry group. But nice none the less.

--Roy Blanchard

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