The Railroad Week in Review:
Week Ending November 1, 1997

While the world had its collective eye on the roller-coaster markets this week, KCS stock quietly crept up as the year's first double. This combined railroad/financial management company began the year at a split-adjusted share price of $15 and closed the week at $30.50, up 103.33 percent. Next honors went to CN and Providence & Worcester, up 79% and 76% respectively. The rest of the gainers ranged from 30% for CSX down to 2% for UP (merger-watchers note: NS is up just 9.53%) Continuing to bring up the markers are Emons Transp. (off 14%), GNWR (down 19%), RTEX (-36%) and Pioneer (-38%). E-mail "Week in Review" readers got a break-down of how the railroads and their vendors fared in Monday's meltdown. Suffice to say here that a market basket of equal shares in each railroad would have been off just 5.6% and a vendor basket off 5.2$%. Compared to the market as a whole, not bad.

Emons was presented one of three American Short Line RR Assn marketing awards at the Association's annual meeting in Dallas a few weeks ago. The prize- winning service is an innovative solution to an awkward fuel oil delivery system. Fuel for a paper mill in central Maine comes by boat to Portland and up to now had been piped directly to non-rail-served storage tanks. It was then trucked to the user, a dicey situation over two-lane roads, especially in winter.

Emons found on its St Lawrence & Atlantic Railroad (SLR) an alternative site which was cleaned, paved, and contained just for this purpose. They leased 14 tank cars to receive oil by the boatload, delivered to SLR by the trucker. Oil now moves daily by rail in three or four car blocks. Benefits? The customer cut transport costs by a third, now gets a single bill from vendor (vendor bills railroad and trucker), gets a choice of Portland vendors, and a three year contract. And the communities see 2,000 fewer trucks passing through their areas each year. And, this just in, Emons has agreed to lease and operate the 11-mile Berlin Mills Railway which is the shortline connecting the paper mill to SLR.

That being said, I just received the FY 1997 (to 6/30/97) Annual Report from Emons Transportation and it is an excellent read. To begin with, revenues have grown to $16 mm from $12 mm in just four years. In the same period, net income has increased to $773793 from a minus $934235. The company operates three railroads: the SLR (165 miles) plus York Rail (16 miles) and the Maryland & Pennsylvania (26 miles). Together they moved more than 37,000 carloads of freight in FY 1997, for a very substantial average of 179 cars/mile/year.

Emons is unique among short lines in that it not only moves freight cars but also offers value-added services like the bundling example above. Chairman Robert Grossman has developed a new business team that studies prospects' logistical processes and then designs services to improve them. The net result is that carloads were up 7% in FY 1998, some three points more than the national average. The carload mix changed drastically for the better in the fourth quarter with a 10% bump in average revenue per car over the 4Q96. The year ended with per car revenues up 4%.

The company carries about $11 mm in long term debt against total capitalization of $24 mm. The good news is that 11% of this debt is in low- interest or no-interest rehab loans from NH and ME. Current EBIT is $2 mm and covers debt service by a factor of two, safely within Barbara Wilson's 1.2 times debt guidelines (see WIR 10/18). Emons earned nine cents a share for the year, for a trailing PE of 33.3 on Friday's $3.00 close. Price/sales based on 5.9 mm shares comes to 2.72, about what was paid for Conrail.

As you know, Wisconsin Central has a major interest in the New Zealand railroad, Tranz Rail. Profit for the quarter ending Sep 30 was NZ$7.3 MM, down from NZ$9.6 MM for the 1996 quarter, off 24%. Revenues were off 3%. WC Chairman Ed Burkhardt said the decreased profit reflects reduced revenue in a weak New Zealand economy and a one percent increase in operating expenses offset in part by the reduced net interest expense and taxation provision. The operating ratio rose to 90.1 from 86.6 in 1996. Shares of Tranz Rail Holdings Limited are publicly traded on the Nasdaq as TZNRY.

Genesee & Wyoming reported third quarter net income of $2.1 mm, up 21%, on revenues of $23.7 mm, up 24%. Earnings per share increased 15% to 39 cents. Carloads were up 2% to 52,679, however revenue per car increased 27% to $451. For the nine months, net income was up nearly 50% to $6.4 mm on revenues of $71.2 mm, up 30%. Earnings were off a dime to $1.28, an 8% decrease from the prior year. Carloads for the half were up 15% 10 163,430 and revenue per car was up 13% to $435. Regarding the earnings hit, Chairman Mort Fuller said, "There are many one-time costs associated with the new operations in Australia, Canada, and Mexico, and they will serve to reduce earnings in the fourth quarter." Also, UP's problems are hurting G&W operations in several states and the effects will undoubtedly be felt into the fourth quarter as well.

In the midst of all this G&W has made some key personnel changes. First, former Conrail SVP Charlie Marshall has been tapped as President. He replaces Mort Fuller who relinquishes that title to devote full time to his role as Chairman and CEO. Also moving: Carl Belke to VP-Canada; Chuck Chabot to SVP- Australia, and Dave Collins to SVP-NY and Penna. Good moves all, and a hearty congrats to all, especially given the company's growth. As Mort himself put it, "What was a year ago a four-region US railroad is now a four country railroad."

The UP hearings held by the STB on Monday really carried few surprises. A press release from the STB listed more 59 organizations scheduled for testimonies running from 2 to 15 minutes. Shippers and shipper groups comprised the largest representation with governments of all sizes a close second. Railroads ranging in size from BNSF to the Wheeling & Lake Erie were represented, as were the ASLRA and Amtrak. The STB noted late Monday that the UP/SP merger, while causing considerable disruption, had not done "any substantial competitive harm." Perhaps they missed the losses to connecting railroads when the business that used to originate on UP or SP switched to truck.

Meanwhile, regulators have ordered UP to grant some trackage rights to the Texas Mexican Railway, a short line operator (who gave a very good presentation in Dallas, BTW), in order to provide congestion relief in the Houston Area. This fits with what UP said at the same meeting - that they would use connecting short lines to help break the log jam if need be. In a separate development related to the UP problems, both NS and CSX said they would integrate their new routes slowly. It could, they said, take months after getting regulatory approval before linking computer systems and adjusting their operating procedures. Readers will recall UP has been criticized for moving too quickly on certain cut-overs.

--Roy Blanchard

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