The Blanchard Company

Marketing and Management Support
for Feeder Railroads

The Railroad Week in Review 5/17/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

General News: The NS/CSX/CR merger didn't make its target 6/16 filing date, and as of Friday had still not been filed. In a joint statement, the companies said 6/17 they will file their joint application within the next several days. "The complexity of producing the eight-volume application, which will contain more than 15,000 pages, forced the delay and a public announcement will be made as soon as the application is filed with the STB."

The STB approved a joint NS/CSX request to build seven short track segments to tie their rail systems together with CR, pending completion of the STB's environmental review. The CSX connectors are at Greenwich, Crestline and Sidney, Ohio; and Willow Creek, Ind. NS' request included connectors at Bucyrus, Ohio; Alexandria, Ind.; and Sidney, Ill. The weather is as always a factor, and getting a jump on winter will let trains roll that much sooner once the merger is approved. The buyers feel that, even if for some odd reason the merger does not go through, a few $million for strategic connections is peanuts compared to the $billions invested in the total transaction.

Union Pacific last week announced it will invest $33.8 million this year on four tie-ballast-surface projects. Two jobs in Missouri are $3.4 million downtown St. Louis to Kirkwood and $4.5 million Lamine-Malta Bend. Texas gets two jobs as well, $7.4 million Troup to Palestine and $18.5 million Bay City to a point near Bloomington. Total improvements for the four segments cover 256 miles for an average expenditure of about $132,000 per mile. Elsewhere, UP met with representatives of the Wyoming grain industry to make the point that all growers have an opportunity to ship grain through their local elevators, regardless of shipment size. However, smaller operations won't get the discounts offered to 100-car shippers. Effective July 1, UP will discontinue the gathering rate discount previously allowed to elevators that combined cars to make a 100-car train. Customers had been notified in mid-1996 of the railroad's intent to eliminate this discount.

The American Shortline Association's current "Views & News" letter carries the results of the Association's third annual shortline and regional railroad survey. It's fascinating reading. Non-class I roads serve more than 13,000 customers, generate more than $3.2 billion in revenues and spend some $2.6 billion getting it. They own or lease 159,000 freight cars and 4,200 locomotives. They have more than $6 billion in total assets offset by slightly under $4 billion in long term debt and liabilities. Annual compensation is $900 million. However, the real eye-opener is the 91 billion revenue ton-miles generated.

Regular readers will recognize the name George K. Baum, the Kansas City investment house that follows transportation issues pretty intensively. Two trucking company reports are of note not for the companies but for what they say about the nature of transportation today. The Simmons Transportation write-up says the firm is tripling its business from P&G, and is turning down still more P&G business because it says it can't take on more and still deliver the same level of quality service delivery. Simmons is also adding to its Nestle business at the expense of a competitor who couldn't deliver. With respect to Yellow Freight, earnings estimates are up on cost reductions, quality improvements, strong revenue and tonnage growth, and a stable pricing environment. Message to competitors (railroads included): be consistent and don't bite off more than you can chew.

Investors' Corner: Stock of NYSW parent Delaware Otsego (Nasdaq: DOCP) continues to move around on speculation that the company will be taken over by NS, CSX, or combination of the two. Nathan Fenno, Delaware Otsego vice president of law, has said Delaware Otsego isn't involved in any negotiations and that no offers are on the table. Fenno says further that "to the best of our knowledge this is not insider trading." First quarter results for DOCP show revenues of $7.2 MM, down 5.8% from 1Q96, with a net loss per share of 38 cents, improved from a loss of 55 cents per share a year ago. The current ratio stands at 59%, debt/equity is a respectable 37.7%, and book value remains at just under $19 a share.

RailTex (Nasdaq: RTEX) President Bruce Flohr has sent out a very informative "Letter to Investors" detailing the RTEX "two-prong strategy" to enhance shareholder value. It is most instructive in its explanation of their acquisition strategy, based as it is on qualitative operating factors and quantitative financial factors. Historically, says Flohr, RTEX has paid about 1.6 times sales, and that high quality operators will have the edge in winning bids on class I spin-offs. Moreover, class I transactions resulting in a fixed per-car allowance essentially swap up-front cash for the right to earn a fee in the future. Acquisitions of existing lines may go at a higher PS multiple since a more predictable cash stream may be in the offing. For a copy of the letter, call Flohr or CFO Laura Davies at (210) 841-7600.

Wisconsin Central (Nasdaq: WCLX) popped up on two recent stock-picking screens from S&P. Under "Exceptional Earnings Growth Potential" WCLX appears to be about 15% undervalued on the basis of 20 percent ACG over five years against a current PE of just 17. In terms of trailing earnings, $10,000 invested in WCLX back in May 1992 would now be worth $82,150 for an ACG rate of 52.4%. It is the only rail in either screen.

Line sales department: CP Rail has three railway branch lines in Alberta and Saskatchewan for sale. Bids are due on all 8/15/97. The seven-mile Pivot-Schuster line is in southeastern Alberta. Smiley-Austum is 21 miles in west-central Sask. and hasn't seen a car since Jan '97; the 21-mile Zinger-Major line is so small I couldn't find either end-points on a map, though Major is listed in a 1953 Official Guide as "freight service only, not listed in timetables." CN has a more attractive deal -- 16,000 cars a year on 4.27 miles serving Hamilton's north-end industrial area. And BNSF will sell certain properties located in Lewiston, Idaho, and east of Lewiston to the Camas Prairie Railroad, itself jointly-owned by BNSF and UP. According to a BNSF release, the sale will include some 172 miles of BNSF-owned track in Lewiston and east of Lewiston, 70 miles of track west of Lewiston, rail yard properties in the Lewiston Yard and a variety of freight cars. Each segment currently sees six-day service.

Post Script: A couple of weeks ago I asked readers to drop a note to the publisher of a website promoting, among other things, "train-hopping." For those who missed it, it is linked from a larger "gateway" site, Click on "Freight Railroads" and page down through the alphabetical listing to Train Hopping. (Railserve is keeping the link because it wants to be an inclusive site; however, it has added a warning about the dangerous and illegal nature of the activity.) Alternatively, you can go directly to the offending site at Once you've seen the detailed information available at this site, including a handy list of freight trains to hop at various locations across the country, you might want to send a cautionary note to the site's author, whom you can e-mail at Mail here has generally been supportive of our efforts to discourage train-hopping; however, this response from one of our regular readers was a little unsettling because it misses the point completely. "Unfortunately, your trespasser statistics aren't relevant. Almost all of these 'trespassers' are people walking on ROWs, grade crossing accidents, or suicides. I challenge you to find actual statistics on accidents or deaths involving train riders. I think you would find (if you could) that these make up much less than a 10th of a percent of the trespasser incidents." My e-mail back was rather forceful and suggested the writer take a look at the Operation Lifesaver website.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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