The Railroad Week in Review:
Week Ending December 13, 1997

Some may say this is old news, but now it's official. CP subsidiary St Lawrence & Hudson will definitely remain part of the larger system due to what CP calls substantial "cash flow improvement and new opportunities and will be fully supported in its efforts to build its market franchise in the East." Since its creation in 1995, the StL&H had been under strong pressure to dramatically improve its performance and reduce its costs. According to a press release, creation of the StL&H was the culmination of more than 10 years of frustrated efforts to attach woefully inadequate returns and skyrocketing costs in the East. The StL&H was created as a separate company for two reasons. The first was to give a strong dedicated management team freedom to deal with the highly competitive eastern market. The second was to provide the CPR with options if the turnaround didn't make the grade. This is surely a great compliment to the accomplishments of Jacques Cote, Paul Gilmore, and a cast of hundreds.

Elsewhere, SL&H plans to use the so-called "Iron Highway" between Montreal and Toronto. The technology, intended to offer a smoother ride and faster terminal handling, carries freight on a continuous platform without couplers between the individual cargo-carrying units that are used on conventional rail equipment. Loading and unloading is done on a ramp that is part of the platform assembly. St. Lawrence & Hudson said it would spend C$20 million (US$14 million) to upgrade the service, including lease of equipment that was used on CSX and terminal expansions in Toronto and Montreal. (Some years ago CSX spent major bucks to make it work and then dropped it. )

Norfolk Southern, CSX and the National Industrial Transportation League (NITL) have reached agreement with regard to the Conrail deal. Included are creation of a shipper advisory council, acknowledgement of the importance of consummating labor implementing agreements, installation of management information systems and switching between NS and CSX at CR points. Ed Emmett, president of the league, was quoted by the Bloomberg news service as saying NITL "will support the sale in all respects, except in areas where we haven't reached agreement."

According to an article in the Journal of Commerce, rate provisions of the Conrail merger include a multiyear rate freeze for customers whose current single-line service on Conrail would become a dual-railroad haul by CSX and NS because of the breakup plan. This has been a major concern to eastern shortlines in cases where what was a Conrail/CSX move beyond the shortline becomes NS/CSX. The agreement says that existing interchange points that shippers can specify for routing of freight cannot be changed "as long as they are economically efficient." That clause prevents CSX and NS from taking actions to control how freight is routed.

The expected Conrail merger Control Date will be Aug. 22, 1998, 30 days after the STB's written decision and is the so-called "effective date" of the decision. On that date Conrail stock can be removed from trust and NS and CSX can exercise ownership rights. Moreover, constraints upon the buyers' access to Conrail data are eliminated and certain transition implementation activities can begin, provided they are not inconsistent with existing labor agreements. The Closing Date, or "Day 1," is not necessarily the date NS and CSX actually begin separate operations of their respective parts of Conrail. That will most likely come several months later. The exact date of closing can't be established yet because there's a lot to do first. Labor agreements must be in place and employees thoroughly trained in their new responsibilities. Computer systems must be linked up. And any STB-imposed conditions have to be met.

The STB has issued its Draft Environmental Impact Statement (EIS) on the Conrail merger. The Draft EIS is part of an ongoing evaluation of the potential environmental impacts associated with these changes. It is based on the independent environmental analysis being conducted by the Board's Section of Environmental Analysis (SEA). SEA's analysis has included an extensive public scoping process to identify potential environmental issues, review of public comments, and consultations with public agencies. The public may comment on the Draft EIS by February 2, 1998. has introduced what may be the best portfolio tracker around. It's free, and links latest price with YTD performance, charts, news, and research all with one click of a mouse. Each year I run a sample portfolio of $2,000 invested in each railroad stock and post daily surprises and YTD gains monthly. I had been using AOL and an excel spreadsheet; however Yahoo will do it all for me. The URL is, if you're interested.

Sample highlights for Saturday: The biggest gainer was PWX, up 150%, followed by KSU at 102%. Losers are RTEX, GNWR, and WCLX, down 42%, 33%, and 29% respectively. Recall these re the three I picked as the best buys based on trailing and forward estimates over three years. (By way of disclosure, I have positions in all three.) Yahoo uses Zacks for recommendations, and they have RailAmerica at the top of the heap with a strong buy rating. Somebody must be listening because RAIL made the most active list on Tuesday.

A reader writes, "It is possible that the strength of the dollar is having an effect on RTX, GNWR and WCLX. If most of the debt to acquire and rebuild these operations is in US dollars it will be difficult to generate debt service when revenues are denominated in weak currencies. Australia and New Zealand are also impacted by association with the Pacific Rim weakness. England doesn't look too vulnerable yet except as its currency is strong against some of its major export buyers. Chile , Mexico ,Argentina and Brazil could get beaten up but that be partially offset by exporting more as the currency weakens.

RailTex reports that November 1997 carloadings increased 44% to 43,390 from 30,143 in November 1996 with gains in autos, railroad equipment, coal, chemicals, metals, non-metallic ores, paper, farm products, and other products. On a ``same railroad'' basis, carloadings increased 9% to 32,264 in November 1997 from 29,683 in November 1996. Year-to-date November 1997 carloadings increased 35% to 446,353 from 330,241 in the prior year period. ``Same railroad'' carloadings increased 5% to 334,318 from 318,297 in the prior year period. (Looks like the DT&I kicking in.) A RailTex spokesman told me revenue changes are reported quarterly.

Vendor notes: ABCR continues to have its earnings estimates fall. The July 98 estimate is now $0.98, down from $1.18 (off 17%) in the past three months. GBX, on the other hand, has gone to $1.01 from $0.85 in the same period for its Aug 98 fiscal, an increase of 39%. These earnings changes are important because over time companies on the move tend to stay on the move while the laggards fall further behind. Proof of that particular pudding is easy. A $2,000 investment in ABCR last Jan 1 would be worth $2,075 today; that same investment in GBX would be a whopping $3475. Harmon's order backlog as of 9/30 was an all-time high of $88.9 million, up 75 percent from the same time last year, and 50 percent from year-end 1996.

And now for something completely different: In 1866, Alexander Mitchell, master mechanic of a Conrail predecessor, the Lehigh & Mahoney, designed a freight locomotive with a 2-8-0 wheel arrangement and named it "Consolidation," which became the standard designation for that wheel arrangement. Another Conrail predecessor locomotive, the Reading Class K-1sb, a 2-10-2, built by Baldwin in 1931, was the world's largest of that wheel arrangement.

--Roy Blanchard

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