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The Railroad Week in Review 5/24/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

The big buzz this week was whether Illinois Central is talking merger with Canadian National. As you'd expect, "No comment" is the official word from both, however I thought something might be up when the WSJ called last Monday and asked if I'd heard anything (I hadn't.). Wednesday, IC stock, which had been trading in the low $30s, hit $36.625 a share in late morning, dropping back to $36 at the close and stayed there through Friday's session. For its part, CN continued its stately climb upward, finishing the week at 41 5/8, up 1 3/8 for the week.

Burlington Northern continues its line sale program with approximately 79 miles of branch line track northwest of Centralia, Wash. The buyer will also assume operating rights over the 48-mile U.S. Navy line north of Shelton. Business on the lines consists mainly of forest products and, to a lesser extent, metals and chemicals. Readers will recall that BNSF announced in February 1996 that it would sell approximately 4,000 miles of light-density lines to "qualified operators who can meet shippers' expectations of quality service at the right price," to quote Doug Babb, senior vice president and chief of staff. Prospective bidders will have until mid-June to submit their bids to BNSF. The company expects to finalize the agreement and close the sale by Aug. 1, 1997. For more details, see the BNSF website,

On Friday BNSF announced it had finally concluded the acquisition of about 112 miles of UP track between Beeber and Keddie, CA, for a reported $30 MM. Closing the gap opens up an "I-5 Corridor" for BNSF, stretching from Vancouver BC to San Diego. Trains are expected to begin rolling July 15.

The George Baum Company, an equities research firm in KC MO, follows transportation issues and the chief rail analyst, Corina Bergschneider, keeps me up so date on their latest musings. Last week Baum's BUY recommendation for Harmon Industries (Nasdaq: HRMN) crossed my desk. The current price of $19 represents a discount of about a third off the S&P 500 average PE. Moreover, projects such as BN's Stampede pass, the B&O rehab (see below), more foreign and transit work, plus the new FRA highway crossing program are sure to enhance the fortunes of this long-time supplier.

I thought it might be instructive to look at the year-to-date stock performance of some supplier issues. My market basket runs the gamut from car builders (GBX,TRN, JAII) to a locomotive rebuilder (MOPO) and hardware suppliers (HRMN, WAB). Interestingly, MOPO shows the highest percentage gain YTD, up 77%, closing on a double. Timken (TKR) was second, up 45%, and Johnstown Car (JAII), up 30%. Westinghouse and Greenbrier also posted market-beating increases.

The Morningstar page says "MotivePower Industries designs, manufactures, and distributes locomotive-component parts, provides locomotive fleet-maintenance services to the railroad industry, and overhauls and remanufactures locomotives. Components include electric traction motors, aftermarket engine parts, turbochargers, and cooling systems. The company provides its products and services to every Class I Railroad in North America and various commuter rail and transit authorities, original equipment manufacturers, and other customers worldwide." My bet would be on the rebuilders and component suppliers rather than the car builders this year.

RailAmerica has weighed in with its first quarter results. Revenues for the first quarter rose to $8,057,312, a 31% increase over 1Q96. Operating income for the quarter was $1,286,529, up 37% increase over 1Q96. Net income was up 36% after the loss from discontinued operations of the Company's motor carrier segment. Carloadings more than doubled over 1Q96 and include performance of the new railroads in Washington, Indiana, Pennsylvania, Minnesota and Chile.

There was no mention of "same store" results. However, revenues for RailAmerica's wholly-owned specialty truck trailer manufacturing subsidiary were up 18% in 1Q97 to $4,074,019. Which still leaves RailAmerica more in the trucking business than it is in railroads. Meanwhile, there were changes in the headquarters team. Additions are Wayne August, Director of Corporate Communications and Investor Relations; Marc Jacobowitz, Tax Manager; Gary Laakso, General Counsel; Harry Snyder, Director of Human Resources, Budgets and Special Projects; and Tracy Trent, Manager Financial Reporting.

Also on the new jobs page, RailTex announced the appointment of Greg B. Petersen as Vice-President, Business Development and Acquisitions, effective May 19, 1997. In his new position, Mr. Petersen will be responsible for leading RailTex's acquisition efforts and strategic planning process. Mr. Petersen joins RailTex after eight yeas with AMR Corporation, the parent of American Airlines, where he was most recently Managing Director, Corporate Development.

An item on the CSX website ( tells of plans to start right away on the $220 MM program to upgrade approximately 270 miles of its former B&O route between Greenwich, Ohio, and Chicago. The project will include more than 70 route miles of double and triple track railroad to be installed by the end of 1998. Ultimately, more than 100 route miles of new track will be constructed and another 250 route miles of existing track will be reconstructed and upgraded or surfaced. When completed the line will allow reverse operation over all tracks. Harmon Industries Inc., of Grain Valley, Mo., will provide the signaling. In addition, more than a dozen new connections to short lines, regional carriers and other railroads will be installed.

Right now there are 20+trains a day Chicago-Greenwich. CSX will run another 20 which it will take off the Water Level Route NS is getting. At the moment, the latter sees more than 70 trains a day in the busiest segments. In another development, Les Passa, recently named SVP of Conrail's auto group, will jump to CSX as vice president-commercial integration. The appointment will be effective July 1. He will join the team responsible for integrating those portions of Conrail that CSXT is acquiring into CSXT's commercial areas.

Clarification department: In his Wall Street briefing last month Norfolk Southern CFO Hank Wolf said the addition of CR would "increase railway operating revenues by more than 50%." Hank also said there would be "incremental growth" of railway revenues on the order of $132 MM in '98, $316 MM in '99 and $511MM in '00. This is in addition to the $2 billion in revenues (58% of CR 1996 revenues of $3.6 billion) the acquisition will put on top of Norfolk's $4.1 billion in 1996 railroad revenues.

Washington attorney Fritz Kahn spoke on the STB merger process before the New Jersey Freight Railroads group in Trenton on Wednesday. The issue is adequacy of transportation options to the public, e.g., single line service, car supply, etc. And although the STB may have unlimited discretion to apply conditions like haulage, trackage rights, fixing 2:1 situations, etc., the burden of proof for the application of conditions is on the opponents. Shortlines considering opposing or asking for conditions must speak with single voice. Said Kahn, "Don't ask for the moon," reiterating that the STB will not use its powers to "improve a situation," only to fix adverse effects.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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