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The Railroad Week in Review 7/5/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

Monday morning 6/30 Norfolk Southern Chief Financial Officer Hank Wolf held a conference call to cover some of the recent improvements to the pro formas submitted as part of the STB filing. First things first, however. The STB wanted 1995 base year figures and projections could not be adjusted for growth or inflation. One of the goals of the call was to update the numbers as a result as further discussions with CR and to plug in some revised savings and growth figures.

Assuming a July 1998 start-up, three-year annual projected incremental revenues for the combined NS+CR are estimated to be $42, $222, and $423 million. Three years out, revenue enhancements from new single line service will amount to $199 mm, from coal $105 mm, from new intermodal business taken from the highways $151 mm, and from carload $30 mm. That total of $585 mm is then reduced by $162 for estimated diversions to other carriers and modes, for a net of $423 mm in 2000.

On the expense side of the ledger, savings will come from economies of scale resulting in lowered costs across the board and from putting more cars in existing trains. Such synergies will yield up $733 mm in '98, $257 mm in '99, and $432 mm in '00. Three years out Wolf said the savings will be G&A $132 mm largely from computer facilities consolidation, $127 mm in equipment expense, mostly from better locomotive utilization and a fleet reduction of 300 units (shortliners and leasing companies take note), and $59 mm in wayside and signal from fewer derailments and bringing everybody under the NS safety program. Transportation savings will remain about as forecast in the $104 mm range, and there will be another $10 mm in "other" savings.

There will be no significant changes in the operating plan as filed with the STB. The synergies above are driven by that plan, and it is expected that earnings increases will show up in 1998 at some small accretive rate rising to 25% a year in 2000 and beyond. Capital expenditures over and above the NS base line were initially estimated at $729 mm for years 1-3 in the filing now look more like net $471 mm due to increased operational savings. (note: the base number doesn't change: NS is still going to spend the $729M. The $471M number is a net number after $258M in savings--$190M for smaller locomotive fleet, $34M for material management (consolidated inventories) and $34M for other savings.) Net capital expenditures 1998-2000 rise to $1.2 billion a year then drop back to a $billion a year after that.

The debt taken on to finance NS share of the CR purchase takes NS to a 60% debt/capital rate. The stock repurchase program originally scheduled for $60 mm a year starting in 1997 has been put on hold and that money earmarked to draw down the purchase debt. By 2000 the debt/capital ratio should be down to a more respectable 50%. Wolf concluded saying he'd have more details at the July 23 quarterly analysts meeting.

One of the best ways to increase railroad regulation is not, as some have said, through the merger game, but by failing to operate safely. Three fatal accidents this month, one on CSX which involved evacuating a town, and two on the UP have caused the FRA to sit up and take notice. In a prepared statement, Joline Molitoris said, "We are concerned about any gaps that may exist in accident prevention systems stemming from inadequate testing or deficient dispatching procedures that can lead to train collisions.''

As a result, the FRA will be looking more closely at railroads' operational tests and inspections programs (see 49CFR 217.9) to see what each railroad has done, and what it intends to do to comply with the program's objectives. Additionally, the FRA want to be doubly sure railroad operating supervisors personally have contacted each train dispatcher responsible for controlling train movements in non-signaled areas by July 5.

In last week's UP incident, about 14 miles northwest of Topeka, a train that was supposed to stop for a meet overshot the switch and hit the opposing train six cars back form the locomotive. Some 20 cars wound up on the ground and local authorities evacuated 1,500 area residents when it was discovered there had been spills of chlorine and sulfur dioxide. The engineer who overshot the switch was killed. Meanwhile, over on METRA outside Chicago, a UP dispatcher error put a coal train onto a track lined for a commuter train. The error was caught in time for the trains to stop two miles apart. That's not much of a margin, however. At 60 mph, that's two minutes, so it's not like there was whole lot of time to right the wrong.

Conrail has attracted the attention of the Environmental Police in Hollidaysburg, PA. What a news article calls "environmental problems" emerged when the state Attorney General's office confirmed that "hazardous waste had been dumped on large portions of the Conrail property." State officials noted the amount of contamination discovered to date exceeds what one would expect on the property of a firm disposing of the stuff by the book. The affected area is half a mile long and more than a tenth of a mile wide. DEP has given Conrail until Wednesday, July 9, to sign a cleanup agreement or DEP will issue its own order. Part of the order requires Conrail to identify all waste disposed of at the site and submit a cleanup plan and implementation schedule for DEP approval. The discovery of the contamination goes back to a 1994 investigation based on employee allegations of improper waste disposal.

The Journal of Commerce reports that a coalition called Grupo Ferrocarriles Mexcano comprised of UPRR and two Mexican partners were awarded a long-term concession on Mexico's Pacific North rail line which they won late last week with an uncontested $404 million bid. The government had secretly set a minimum bid of nearly $347 million. The business plan put forward by the UP coalition calls for expenditures of at least $200 million on track repair and equipment, and much of that will be new locomotives and locomotive repairs to give users of Mexican railroads new and rapid efficiencies, said John H. Rebensdorf, the UP's vice president of strategic planning.

Michigan is looking to sell the four shortlines it owns. Potentially on the block are Tuscola & Saginaw Bay (290 miles), Huron & Eastern (44 miles; Indiana & Northeastern (27 miles), Adrian & Blissfield (12 miles). The Michigan plan would open up TS&B's best part, the 50 miles between Durand and Ann Arbor , to trackage rights for all five connecting railroads. Both RailTex and RailAmerica have interests in the area.

Canadian National has opened its new Chicago CargoFlo terminal. The new 35-acre CargoFlo facility occupies the former CN Intermodal terminal, located eight miles southwest of downtown Chicago, offering easy access to Interstate 55. Fully paved, fenced and illuminated, the eight-track terminal provides loading and unloading capacity for 120 rail cars. Chemical-Leaman will be the operator. (From a CN press release)

Investors' Corner, thoughts for the week department: Why does WCLX trade for more than six times book and revenue when the industry average is closer to 2.5 times each? Why does RTEX continue to lag these averages when their corporate objective is the same as WCLX, i.e., grow the top line through acquisitions? Drop us a line and tune in next week for our thoughts on these matters. BTW, rail stocks for the first half returned a tad under 15% YTD less dividends vs. the DJIA 19%.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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