The Blanchard Company

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The Railroad Week in Review 2/15/97
featuring: The Battle for Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

On Friday afternoon I got a call from a friend saying he took exception to our last week's report that "Excluding the New England Central RR, same store carloadings would have been up 12%." NEC, a unit of RailTex, was up nicely in YTY carloadings, according to my caller. Looks like we have a disconnect. The RTEX earnings announcement says same store loadings were up 8% over 1995, which seems to indicate somebody was in fact off for the year. Let me look into this and get it right next week.

The current S&P report on RTEX, hot off my fax as I write, says RTEX has lost 11% of its value YTD against a 5% gain for the S&P 500. Long Term Debt is $80.4 MM against $113 MM equity, or 71%. The price-earnings-growth (PEG) ratio for RTEX stands at 78 based on Friday's close (a PEG of 100 is fair value). The downside is that 10% debt service on $80 MM of LTD is 60% of the projected 1997 earnings. The real question then becomes what that will that do to future retained earnings and the ability to fund an adequate repair and replace (capex) program.

As for RTEX offshore ventures, I tend to take a more parochial view of regional and shortline railroading than some: if the rail you've got can't touch the rail you want, you want the wrong rail. Contributors Tim Eklund and Jon Gbur share this view, and the results posted by Mort Fuller's Genesee & Wyoming -- which follows a similar pattern on a regional basis -- would seem to add further validity to the argument.

To be sure, there is the Overseas Is Better school of thought. However, whereas it may be fine for the Dow stocks with multi-$billion revenue streams, it does not necessarily follow for hundred $million companies with debt equaling 60% of income. Every time you start a separate property you have to provide the complete operating plant. Sure, some SG&A can be sloughed off to HQ, however that's small potatoes in the larger picture.

In the context of the Conrail merger, there has been some question as to impact on CP and the Susquehanna. In my view, CP's St. Lawrence & Hudson (SLH, ex-D&H) stands to gain more from the Conrail merger than does the New York, Susquehanna & Western. SLH already has rights over pieces of CR that remain regardless of who wins the CR battle and goes direct to places nobody else goes without interchange, like the Pacific Northwest and eastern Canada. It is readily acknowledged that its trackage rights over CR to Philly and NYC haven't worked because (a) SLH had no terminals to go to and (b) getting the railroad has been tough.

Norfolk Southern's "Balanced Rail Competition" approach to the merger addresses both problems by its commitment to sell off a NYC access route complete with yards and to open up the South Philadelphia terminal area -- owned by the city and the Belt Line -- to all comers. Which bodes well for traffic lanes such as Philadelphia-Montreal. Moreover, NS is committed to making relatively short stretches of trackage rights, in this case Philadelphia to Scranton, work. It is unclear what will happen in CSX/CR, except that their remarks to shippers and shortlines seem to indicate there will be no ownership changes and market access patterns will remain the same.

As for the Susquehanna, the outlook is less clear. Their owned route out of the NYC market is a circuitous affair which puts them on CR's "southern tier" (former Erie) east of Port Jervis and still in the midst of the MTA's Metro North Commuter Rail (MNCR) district. West of Port Jervis, NYSW depends on the kindness of strangers all the way to Buffalo. If CSX gets CR, they'll use the former NYC "Water Level Route" via Albany and the West Shore for SeaLand, not NYSW. Ditto NS for its Hanjin trains which now use NYSW rights.

Another reader asked about the New York Regional Railroad (Nasdaq: NYRR), a re-wrapping of the New York Cross Harbor Railroad (NYCH) which operates a carfloat from Greenwich (NJ) Yard to Bay Ridge, Brooklyn. It interchanges with the Long Island Railroad (LIRR) which comes to the NYCH over the former New Haven Railroad freight line between Bay Ridge and Fresh Pond Jct. in Queens. Municipal Solid Waste and sludge from LI has been a mainstay of NYCH business as Conrail has preferred to route its carload interchange with the LIRR via Selkirk and the former New York Central Hudson Division through Poughkeepsie, Harmon, Yonkers, and the Hell Gate Bridge to Fresh Pond.

As you may have heard, there is talk in NY of building a rail tunnel from Staten Island to Brooklyn, something CSX-predecessor Baltimore & Ohio first contemplated in the thirties when it operated the Staten Island Railroad (SIRR). Bob Crawford, CEO of NYRR, told me over lunch last week that the tunnel talk has raised the visibility of rails to LI to a level unheard of in years, and even if they DO build the tunnel, that's years away and it gives him a great opportunity to rebuild the business. He surely has a point.

Moreover, the Norfolk Southern plan for opening up the NYC/NJ market to competitive access means NYRR will be able to interchange with not only NS/CR but also the SLH, the NYSW, and whoever buys the line NS intends to sell to create the second "owned line" into the North Jersey terminal area.

Of late, no Week in Review has been complete without at least some nod to The Battle for Conrail. The news this week was Norfolk's tender offer for all remaining Conrail shares, a new Board slate, and a plan to re-write the Board's rules. The first is pretty straightforward. The second would reduce the board from 11 to 8 members and would be comprised wholly of prominent Philadelphia area names, such as the President of Bryn Mawr College and Chairman of the Pew Charitable Trust. The third eliminates staggered terms. Meanwhile, CSX extended its tender for 20.1% more of Conrail assuming it can get the opt-out provision voted in and Conrail postponed the annual shareholder meeting until December 19.

And that was the Week That Was.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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