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The Railroad Week in Review 8/23/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

NYSW parent Delaware Otsego Corp (Nasdaq: DOCP) announced Monday that it has agreed to a $22 per share acquisition by a new company to be formed by DOCP president and CEO Walter Rich. NSC and CSX will provide financing, and the new company will be located in Cooperstown NY with Mr. Rich as President and CEO.

According to Nathan Fenno, VP-Law and General Counsel for DOCP, Walter Rich will own 80%of the new company with NS and CSX each holding ten percent. The total transaction value of $55 mm is based on $22 per share times 1.8 mm shares outstanding plus some 2.5 mm shares in stock options, etc. DOCP's 40%ownership of the TP&W will go forward to the new company.

As for Canadian National, the view from here is that, with CP out of the picture, and the DOCP merger agreement and tender offer well along, they will have to move fast. However, with the dawg days of August and peak vacation time upon us, will CN be able to pull it off? We ought to know shortly.

Readers will recall that CR got in dutch with the EPA over some contamination in the Hollidaysburg PA area. Now it appears there is soil and groundwater contamination in and around CR's Elkhart IN yard. The cleanup, estimated at seven to 25 $million, will be handled by CR itself and the surviving Penn Central, now a unit of Ohio-based American Premier Underwriters. Elkhart -- like Hollidaysburg -- will go to NS under the terms of the STB filing.

Two weeks ago the Week in Review reported on two western rate issues before the STB. Both involved coal, and both were "bottleneck" cases of a sort. In a recent settlement, the STB said it has terminated its actions in a similar because the parties reached a negotiated settlement. Said the press release, "Both Board Chairman Morgan and Vice Chair Owen have publicly expressed their preference for negotiated private-sector dispute resolution wherever possible." STB-watchers in the Conrail context please take note.

Of major concern in New Jersey these days is making sure NS and CSX (and certain shortline locomotives) have cab signals and train control equipment which meet the requirements of 49CFR 236.566. Two obstacles remain: who is to supply the equipment, and can enough of it be made and applied in sufficient time. Now comes word that Union Switch has won a $16.6 million contract to provide an Advanced Speed Enforcement System for NJT. This contract represents the first two phases of a $42.3 mm project. The equipment will replace earlier-generation cab signaling equipment provided by US&S.

Providence & Worcester Redux: Peter Lynch makes the observation in his "One Up on Wall Street" that sometimes railroads are asset plays. P&W (AMEX: PWX) looks a bit like one at the moment. Last week we commented on their 1996 results noting the significant increase in earnings. However, once you get into the Annual you find a $million land settlement from Rhode Island works its way through the numbers to a third of EBIT and half net income. So as an operating railroad, PWX didn't have all that great a year. Asset sales made the day at year's end.

Could be 1997 will be a different story. Year to-date freight revenues handily outstrip "other income" by a factor of about 25-to-one. Operating income was 14% of sales (the complement of margin, the operating ratio, was thus 86) and EBIT was 2.22 times interest, still not robust, although an improvement. What I find encouraging is that P&W continues to build a contiguous railroad business through a combination of purchases and leases. They have successfully connected Long Island and New England, albeit with some limited traffic, and so have positioned themselves for further growth in that market. Port activities in Rhode Island are finally moving ahead, although it's hard to tell what niche RI could fill located as it is between Boston and NY. And its B&M connection at Gardner brings NS into play from New London to Attleboro.

And, speaking of growing the business, August 22 was a Day of Reckoning in the Conrail merger process. Parties wishing to participate in the proceedings were to have filed their intent by August 7. Friday was the due date for the details. As the STB schedule puts it, "Description of anticipated responsive applications (including inconsistent) due." All material submitted in this process will be made available to all other parties for purpose of rebuttal or other discovery.

In a similar vein, Conrail shortlines are beginning to discover new business opportunities that will arise after the merger, and they're finding some areas that won't do all that well, either. Among the former are those instances where highly truck-competitive commodities like lumber and paper which could not stand a two-line haul may stand a chance in a single-line world. On the other hand, there are a few cases where what was a single-line haul under Conrail becomes a dual-line haul post-merger. For example, a Conrail-served Illinois vendor shipping into central Penna now finds itself with a CSX origin and an NS destination. Some narrow-margin commodities (STCCs 14 and 33, e.g.) may not be able to taker a two-line haul. How does the receiver/serving shortline protect itself? Fortunately, solutions are at hand. Please drop me an e-mail for details.

A section of the historic Rockville Bridge collapsed Tuesday night dropping five OT hoppers and 500 tons of coal into the Susquehanna River. The incident occurred near the mid-point of the bridge as the part of the span supporting the southern-most track (there are three tracks) gave way. As it turned out, east-west commerce on this portion of the famous ex-PRR Middle Division was only slightly delayed. Only one train was rerouted over the Nittany & Bald Eagle via Lock Haven and by morning the northern-most track was back in operation at reduced speed. As of midweek, the engineers had yet to determine whether it was structural failure that caused the derailment or if the derailment caused the bridge damage. The arches themselves are fine, so Rockville Bridge retains its title as the world's longest stone arch bridge.

The UP had yet another fatal incident last week when four un-manned locomotives rolled from a siding onto the main into the path of an opposing train. Two crew members were killed and more than 8,000 gallons of diesel fuel went up in smoke. According to a news item, the four units were supposed to be picked up by the train they hit. As it was, they got loose and rolled down hill for nine miles into the path of the other train. It was reported here in an earlier dispatch re the spate of incidents that the FRA is looking closely at Operational Tests and Inspections as required by 49CFR 217.9. One shortline I know of keeps a log of its tests and inspections, and in one case used its log to discharge and employee who repeatedly failed to set handbrakes on locomotives he'd shut down. His discharge came after two units he'd last used rolled through a switch onto the main.

The BNSF line sale program continues. RailAmerica (Nasdaq: RAIL) just picked up Number 14 in its shortline group, adding some 44 miles of former BNSF property in and around Hinckley, MN to form RAIL's new St. Croix Valley RR. This is their third deal with BNSF and has a traffic base of about 4,000 carloads a year. At just under 100 cars/mile/year, this ought to bring up the averages nicely. Readers will recall that earlier on RAIL properties tended to be in the 50 cars/mile/year range, and this had in turn had a negative effect on rail results.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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