The Railroad Week in Review:
Week Ending October 25, 1997

As promised, I journeyed to NYC last Wednesday to attend the NS, UP, and KSC Wall Street presentations of third quarter results. None of the lines had anything earthshaking about earnings; everybody is reporting ho-hum railroad results as you've probably already read elsewhere. A word is in order, however on some highlights that were not reported in the popular press.

For NS, the theme was that the more the process is delayed, the less money can go into making the merger work. It doesn't take long to run into real money when the holding pattern consumes a $million a day. CFO Hank Wolf brooks no dispute that this thing will go off as scheduled, with an STB decision in July. EVP-Operations Steve Tobias stressed Nofolk's industry-leading safety record and the more than 400 NS employees working in some 70 merger implementation teams. The message was clearly that what's happening in the west is not bloody likely to happen here. And David Goode, asked what would happen if NS were ready and CSX were not, responded that NS would do what it could by itself, saying "NS success will not be affected by CSX efficiency." Elsewhere, the operating plan for the CSAO is due at the STB 10/29.

Across the street at the UP meeting, Dick Davison held forth saying the railroad already sees improvements internally, even though not all improvements will be immediately evident to all shippers. Train hours lost waiting for power was down to 2,243 by 10/17 from a high of 3,824 on 9/19. Hours lost by trains held for crews had dropped to 663 from 1,083 in the same period. System car inventory remained at the 348-349,000 level in the period as against a system goal of 310,000. Regarding system congestion, perhaps the most telling numbers were the four-point hit to the OR (78 before congestion, 82 reported) and about $30 mm in lost revenues. Don't run off and sell your UP stock yet, however. The view from here is that this wobble represents a tremendous buying opportunity. In the last week alone it's bounced back from a low of $60.81 to close Friday at $64.75. That's 6.48%.

Meanwhile, UP announced it will annul six of the 50 daily trains it runs between Chicago and Texas effective November 1. The suspension affects train traffic originating and terminating at Union Pacific's yards in Dolton, Ill., near Chicago and St. Louis moving to Texas. Affected Texas terminals include Mesquite, near Dallas; Houston and San Antonio. Other traffic handled in Chicago under the Southern Pacific agreement on Illinois Central will not be affected. Mexico intermodal traffic also will not be affected.

Moving back across the street once again for deli sandwiches and cokes courtesy of KCS, the group heard Landon Rowland, Joe Monello, and Mike Haverty expound of their recent adventures. It became obvious very quickly why the focus forward will be on financial management. Investment in the Janus and Berger funds rose to $72 billion at the end of August from a "mere" $50.3 billion on 12/31/96, an increase of 43%. The railroad, on the other hand has grown from 1,700 miles in 1993 to more than 6,500 miles if you include the Gateway acquisition plus rights over Tex-Mex, TFM, and Dennis Washington's ex-Soo/MILW properties. Revenue and income were up about 8% for the quarter and 6% YTD. Earnings were somewhat less due to TFM start up costs.

And now, class, the moment you've all been waiting for: discussion of the KCS rail spin-off. It'll come in 1/98 and represent about 60% of the holding company's railroad equity and most of its $882 mm in long-term debt. Said Rowland, the IPO will be used to pay down a large chunk of debt and the holding company will want to keep some. Just how much won't be known till they file later on this year. In this regard, I was talking with some of the analysts after the meeting as to how they value the railroad. The consensus was as a "street multiple" of its estimated earnings. Said one, "I don't want to buy the company, I just want to buy its stock." First Call's 1997 multiple is 16.31. As for the 12 months ending 9/30 the railroad earned about $22 mm. Based on 107 mm shares, that's 21 cents a share. Times 16.31 is $3.42. For what it's worth, KCS stock closed Friday at $34.06 and a street estimate of the Financial Management side of KCS at $30 a share.

Amid reports that the BMWE would let commuter agencies operate while the union was on strike, Senator D'Amato, Governor Whitman, Amtrak, the Federal Railroad Administration and the BMWE -- along with involved commuter railroads -- all say such a plan does not exist. Now it turns out the union has told reporters it is unable to draft a plan because it does not know the railroad well enough. In one article, BMWE General Chairman Jed Dodd is quoted as saying the trains could run for a while in a strike scenario without a full complement of maintenance workers "unless there's a wreck or something." Then in Sunday's Phila Inquirer there was report that the unions have reached an agreement to let at least the SEPTA and NJ Transit lines run. I shall be very interested to see how that comes off. Especially since most of the track Amtrak owns and maintains is here in the northeast.

Complicating matters was a congressional vote against a measure that limited certain worker protections so that they would apply only to Amtrak. The democratic side of the aisle provided sufficient "nays" for it to go down 223-195. According to a newswire, "The House bill also authorizes $3.4 billion to operate Amtrak through 2000 while allowing for route changes to reflect customer demand and creation of a new board of directors with authority to recommend to Congress plans to transfer Amtrak assets to a private corporation." So, while labor, congress, and the riding public play brinkmanship, measures to make Amtrak perform like a business languish. Lovely.

Canadian Pacific has finally reached an accord with CSX and NS regarding what it can and cannot do in the northeast. The details remain confidential, however press releases from both NS and CP shed some light. "Railway customers located in New Jersey, the Buffalo/Niagara Frontier area, the greater Philadelphia area and those located in a number of other, smaller geographic areas in the Northeast will receive effective commercial access to and from CPR markets." Moreover, the CSX side of the agreement "also provides shippers in the New York City and Long Island areas with effective access to the CPR for the movement of traffic currently handled by trucks. As part of the CSX settlement, CPR provides CSX with similar access to the Montreal market for traffic currently moving by truck.

Finally, this ray of hope. Penn DOT is committing some $7.6 million in grants to help shortline and regional railroads improve rail freight service in Pennsylvania. Amounts range from $20,000 to a quarter of a $million. If you operate in Pennsylvania, and did not get visited by Santa this year, and want to know why, send a note to Everybody who reads this newsletter will see your post, and you can ask for help in having Santa visit next year.

--Roy Blanchard

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