The Blanchard Company

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The Railroad Week in Review 8/2/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

STB-watchers take note. The Board has denied a BNSF motion to dismiss a Western Fuels complaint concerning competitive access to certain of its coal fields. At issue is whether BNSF has engaged in anti-competitive rate-making thus denying these mines equal access to markets when compared with other mines served by more than one railroad.

The Board's competitive access rules "permit parties that do not own particular rail lines to obtain access to [those] rail lines when necessary to remedy anti-competitive behavior by the owning railroad." Western maintains that BNSF priced coal services at the mines it alone serves so as to make those mines non-competitive with mines served by more than one carrier. The Board refused to dismiss the complaint concluding that it should not do so without holding a full proceeding. However, the Board ruled that BNSF must refund more than $12 mm to coal interests in NM as a result of a Santa Fe overcharge.

In another matter, the STB ruled that its Section of Environmental Analysis (SEA) will prepare an Environmental Impact Study of the Conrail transaction. The SEA has prepared a highly informative and useful web page on the proceeding, www. (nice loco horn SFX!). "The SEA encourages broad participation in the EIS process during scoping and review of the Draft EIS. Written comments on the draft scope of the EIS may be submitted to the Board within the 30-day comment period, no later than August 6, 1997. Contact Mr. Michael Dalton, Project Manager, Conrail Control Transaction, at (202) 565-1530; or Ms. Dana White, Environmental Specialist, at (202)565-1552. (TDD for the hearing impaired: (202)565-1695). Or call the toll-free Environmental Hotline at (888) 869-1997."

CSX issued a statement this week saying it may take a little longer than initially expected to realize the full benefits of its CR acquisition. In essence, the longer STB schedule will limit the `98 benefits however accelerating the program will bring them all in by 2000. Back in April the estimate was that earnings would take dilutive hits of three and tow percent respectively in 1997 and 1998. The corner would be turned in 1999 with 8% accretion and 12% in 2000, and, like NS, with 15% annual accretion going forward. What CFO Paul Goodwin seems to be saying is that even with a slower start long term benefits will be on schedule. And if the UP/SP experience is any indication, that could well be the case.

The FRA has announced plans to team up with NY state in a $280,000 demo project to improve crossing safety along the high-speed rail route between NYC and Albany. It appears the idea is to have locked gates controlled by railroad dispatchers to meet the FRA guideline that crossings "be effectively blocked to vehicular entry where train speeds exceed 110 mph." To cross, you have to call the dispatcher open a cellular phone and ask that it be opened. A public company supplying crossing protection equipment is Harmon Industries (Nasdaq: HRMN), which closed Friday at $23.50. up $3.75 for the week.

Rail stocks this month moved up nicely. With the DJIA up nearly 30% YTD, the bar is pretty high already, however a number of rails managed to stay above it. Not surprisingly, NYSW parent Delaware Otsego (Nasdaq: DOCP) has more than doubled, up 133% for the year. And this week's announcement that CSX is mulling over absorption of NYSW (see below) didn't hurt, either. Canadian National (NYSE: CNI) is closing in on a double, up 73% to $52. The Mexican adventure is paying off for Kansas City Southern (NYSE: KSU). Helped by the surge in its mutual fund business, KSU is up 67% YTD. Meanwhile, the company announced a 3:1 stock split and a 20% increase in the dividend. The action is attributed to both the Mexican interests and financial services boom. CSX and Providence & Worcester both saw gains of more than 40%.

Wisconsin Central (Nasdaq: WCLX), RailTex (Nasdaq: RTEX), and Genesee & Wyoming (Nasdaq: GNWR) continue to lag their Jan 1 prices by more than 20% and Emons Transportation (Nasdaq: EMON) has been nearly cut in half. My personal opinion is they are getting tarred with the same brush as other small caps as market managers and investors stick with the "safe" large caps plus the obvious merger bets.

Regarding possible sale of the NYSW, DOCP President Walter Rich -- owner of 14.9% of DOCP -- said talks with both NS and CSX continue with regard to the sale of certain assets. For its part, CSX said in a separate SEC filing that it "continues to evaluate the possibility of participating with others, consistent with regulatory requirements, in the acquisition of the company." Elsewhere, GNWR has confirmed street rumors that it preparing to bid on two properties in Australia. Also, it reported net 2Q earnings up 38.4% on revenues that were up 24% over 2Q96. Carloads increased 7% to 54,100 over the previous quarter. Finally, one NYC investor sold 45,000 GNWR shares over a 15-day period in July. With an average daily volume of under 50,000 shares, one can see where 45,000 shares looking for a buyer might push down prices. The GNWR story continues to be in its excellent results.

Vendor News. My sampling of ten vendors from ABC Rail to Westinghouse Air Brake has turned in some YTD performances most mutual fund managers might wish they had. MOPO closed at $20.50 for a gain of 165%; expect a triple by year's end. JAII is wending its way out of the doldrums, closing Thursday at 6 5/8, up 77% from Jan 1. Even My old nemesis WNC is up more than 50%, closing at $28.06. The other two car builders in the collection, GBX and TRN, were up 27% and 6% respectively. Odd to see the three so far spread. L B Foster-A (Nasdaq: FSTRA) was up 30% to 4 7/8. And Harmon (Nasdaq: HRMN) closed at $23.50. Perhaps the NY experiment has something to do with that.

MOPO showed up in a recent Zack's report of earnings surprises sporting an 81% increase in quarterly earnings. The company is now included in the Russell 2000, an index of small-capitalization stocks... Smith Barney raised its rating on WAB to outperform from neutral...TRN net operating income was up 9% following the sale of its Halter Marine Group subsidiary...Wabash National (Nasdaq: WNC) reported a 40% increase in sales and earnings jumped to 13 cents a share from a penny. Sales had been limited by a shortage of "composite material," however WNC will bring its own production plant for the stuff on line this quarter....Johnstown America (Nasdaq: JAII) lost a nickel a share on $158 mm sales in the quarter, improved from a loss of 13 cents on $133 mm sales a year ago. JAII shipped 1,032 new and rebuilt cars in the quarter, up from 760 in 2Q96.

New Debt Department. Burlington Northern Santa Fe Corp tapped the corporate bond primary market with a $200 million century bond offering with a 7.25% coupon...RTEX placed $50 mm unsecured notes paying $7.44% to reduce borrowings under the RTEX acquisition bank facility...JAII is going back to the till for another $75 mm of 11.75% senior subordinated notes, same terms and conditions as the $100 mm debt sold in August, 1995, and to be used to pay down senior bank debt. Not a bad idea: JAII has $376 mm in long term debt to $63 mm in equity.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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