The Blanchard Company

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The Railroad Week in Review 3/22/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

Some say the split of Conrail assets and routes between CSX and NS is a prelude to the creation of a transcontinental railroad. Not according to NS Chairman David Goode, speaking in Charlotte, NC, Tuesday night. "The jury is still out on transcontinental railroads," said Goode. "It's not absolutely clear to me whether they're the right thing."

For now, Norfolk's first priorities are rationalizing the eastern half of the country's rail routes through the split-up of Conrail and developing those networks, Goode said. "Once we absorb and develop the system ... then we'll have a balance, with two relatively equal systems in the west and two in the east," he said. "Then we'll see what the next step is." Bob Fort, Norfolk's VP (recently tapped, I might add, so congrats are in order) for public affairs, added, "It'll take us a good couple of years or longer to get this new system in the east rationalized."

And as if to show what's possible short of outright merger, Norfolk Southern and Burlington Northern Santa Fe have begun offering interline intermodal service between Louisville, Ky., and points in both the Pacific Northwest and Pacific Southwest. The service runs via NS between Louisville and Kansas City, and via BNSF to origin/destination. All BNSF intermodal traffic is handled at Norfolk Southern's Louisville ramp which now operates 24 hours a day Monday through Friday and 8 a.m. to noon Saturday.

Union Pacific (NYSE: UNP) said Tuesday that it will relocate its corporate headquarters to either Dallas-Fort Worth or St. Louis from Bethlehem, Pa., and cut the number of headquarters employees to about 45 from about 120, as part of a restructuring of its holding-company functions. Union Pacific said many of the corporate functions would be managed "more efficiently" by integrating them into the Omaha-based Southern Pacific Railroad. According to a press release, Union Pacific said the Southern Pacific and Chicago and North Western mergers - which made Union Pacific the nation's largest rail system - coupled with the spin-off in October of its oil-and-gas unit Union Pacific Resources focused the company as a "pure" transportation company, necessitating a review of corporate structure.

An intriguing pair of notes showed up today in Section C of Wednesday's WSJ. In "Abreast of the Market," the writer says since 1994 the stocks in the S&P 500 index have risen to 19.2 times earnings from roughly 15, the highest since the 60s, except for recessions. Across the page, in the DJ averages on page C3, was a box telling us the PE Ratio for the DJIA was 17.5 a year ago against 19.2 today, a rise of 1.7 points, or ten percent. In the same period, DJIA dividend yields dropped to 1.95% from 2.15%.

The transports, according to the DJTA, saw the PE drop to 15.9 today from 16.2 a year ago and yields increase to 1.25% from 1.10% a year ago. What this tells me is that the transports are running against the crowd -- less pricey and more productive than the broader average. This might must be the time to add a transport or two to your nest egg.

On the C-Span televised merger hearings Thursday I was amused when Arlen Specter suggested Penna businessman Michael Hawbaker look to the Norfolk Southern solution for Pennsylvania Power & Light (NYSE: PPL) for his own situation. You see, Hawbaker originates aggregate on a shortline in central Penna and wants to ship to his facilities on the Buffalo & Pittsburgh unit of Genesee & Wyoming (Nasdaq: GNWR). Under a plan whereby the B&P was to buy the connecting Conrail line, it was to be a two-shortline haul and so very economical.

Trouble is, the line sale to B&P never came off and Norfolk will get the connecting line. Hawbaker wants the shortline to get trackage rights over the line being bought by NS. What NS had done for PP&L was essentially make itself invisible as an intermediate carrier, effectively lowering the utilities rail transportation costs, according to a PPL press release. NS is an intermediate carrier for some fairly short haul moves from Penna coal producers.

What was amusing about Specter's remarks is they came at the end of several weeks of testimony in New Jersey, NY, and Pennsylvania. With each succeeding hearing, there was increasing evidence NS had been out doing its homework. Shortlines, ports, and shippers all embraced the "Principles of Balanced Rail Competition" first proposed by NS back in October. The chief downside was the generally poor treatment these same people had experienced in previous mergers and they didn't want a repeat.

The question is asked, "It looks like Canadian National (NYSE: CNI) is pretty serious about gaining access to the port of New York and Elizabeth NJ. Anyone think they have a shot?" As I see it, they have as good a shot as anybody who wants to get there but does not own the tracks. Remember, Norfolk and CSX are paying three times sales for this railroad (90 mm shares times $115 is $10.35 billion. CR had $3.7 billion in 1996 revenues, ergo 2.8 or 3 times sales). The signs are there will be a fair amount of rate pressure to be competitive. So if CN wants to come to town, they must prepare to pay to play just like everybody else. Perhaps the answer is haulage or joint rates with CSX and DOCP via Watertown and Syracuse or with NS via Buffalo and Binghamton.

As Burlington Northern Santa Fe has discovered with its newfound trackage rights over UP/SP, sometimes you can do more with a haulage or even joint rates than you can given the expense of using those rights. The message is: Be careful what you ask for. You might just get it. CN has done a whale of a job. I'd hate to see too much of a push here dilute their otherwise fine story.

BNSF said Wednesday first quarter earnings will be about 20 percent below the $1.21 reported for the same period last year. Operations were set back by winter storms, blizzards and mud slides across northern rail lines, from Minnesota to Washington and Oregon, between December and earlier this month. Second quarter results are anticipated to show significant improvement over the first quarter. Could be. Both Brown Brothers, Harriman and Goldman Sachs have upgraded Burlington to market outperform.

Greenbrier (NYSE: GBX) said earnings for both the manufacturing and leasing and services segments of its business will be below earlier expectations. According to First Call, the mean estimate for Greenbrier's second quarter is $0.25 a share, down from $0.39 a year earlier. The estimate for the full fiscal year, ending August 31, is $1.00 a share, versus $1.29 in the previous year, according to First Call. The culprit, said Greenbrier, was softer industry-wide demand for new freightcars. Meanwhile, the GBX leasing and services segment has filed for protection under Chapter 11 of the Bankruptcy Code.

Continuing in its program toward a railroad managed by business units, CSX has created its latest with the Appalachian Service Lane to improve service to the coal regions of Kentucky, Tennessee and western Virginia. The business unit extends to Etowah City, KY, from south of Cincinnati, and continues through Virginia and North Carolina to Spartanburg, SC, and handles about 40% of its coal carloads.

On Friday Conrail announced special backhaul rates on southbound food shipments originating in the Northeast and Midwest. The new program offers transportation rates at a motor carrier equivalent of less than 60 cents per mile to Atlanta and Jacksonville, or an average of 45 percent below that of trucks for similar point-to-point service. Under this new program, shippers of canned, packaged and bottled goods, and a variety of dry bulk food commodities originating in New York, Massachusetts, Michigan, and Pennsylvania are eligible. Shortliners, be sure you're included. Last time CR's food group did something like this, you were not. But when you squawked, you were. A call to your shortline rep is in order.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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