The Railroad Week in Review:
Week Ending December 20, 1997

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On Tuesday Wisconsin Central said it expects 4Q97 results be about the same as they were in 4Q96, or $1.18 per share citing higher casualty expenses, higher than expected labor costs. Analysts surveyed by First Call have steadily reduced estimates for the period from $1.70 three months ago. So it's no surprise 1998 estimates are dropping as well, to $1.98 from $2.04 in the last 90 days. The question now becomes whether WCLX can hold the 41 cents projected for the Mar 98 quarter.

How real are the diminished projections? On Wednesday Burkhardt's Boys went down 5 7/8 to 21 3/8 on 4Q EPS below analysts' estimates. Then, as if to show the volatility of this market, AG Edwards on Thursday upgraded the stock to Buy from Maintain and it added back 3/8 of a point on four times the usual daily volume. And there was a post to the Yahoo WCLX message board suggesting Burkhardt will focus on offshore and Reilly McCarren, late of Gateway Western and before that CR, will mind the US store. I haven't asked Rosemont for confirmation yet.

Regarding WC's New Zealand holdings, a Moody's press release is quite helpful. The service has assigned a Baa1 rating to the approximately US$74.5 million Tranz Rail Finance Limited Pass Through Certificates, Series 1996. The rating is based on an unconditional guaranty of the underlying payments by Tranz Rail Limited (the wholly owned subsidiary of Tranz Rail which conducts virtually all of the commercial operations) and the pass-through nature of the trust.

The ratings reflect Tranz Rail's position as the only operator of commercial rail service in New Zealand and the importance to the country of effective rail transport, the operating benefits from a well organized privatization and a moderately leveraged capital structure. Moody's expects alternative liquidity, including a multi-year Cash Advance Facility, will be adequate to support the issuance of commercial paper. Moody's also notes that the Wisconsin Central-led consortium has caused Tranz Rail's operating ratio and other key operating statistics have improved to levels approaching those of the North American Class I railroads.

By way of review, Tranz Rail integrates a network in New Zealand of approximately 2,400 miles of track and 350 freight locomotives, 500 owned or operated trucks, and three roll-on roll-off rail ferries as the country's largest multi-modal transport provider. Approximately 70% of Tranz Rail revenue is from rail freight with the balance split between inter-island ferry and passenger rail service.

Over at RailTex, the 10-Q for the period ending 9/30/97 has been an invaluable resource for identifying the trouble spots that may be causing the stock price to continue its decline. The hit list is not pretty. From the UP problem, a $200,000 hit to net income. From the CR merger, revenue hits of some $10 mm could be accumulated among the New England Central, Indiana Southern, and Indiana & Ohio. These three have filed requests with the STB for limited trackage rights to remedy the potential loss of revenue and rectify operating inefficiencies and the responsive applications of all three were accepted by the STB in Decision No. 54 on November 20. I expect to see a set of applicant rebuttals later in the week.

I breakfasted with Emons Chairman Robert Grossman when he was in town the other day. Of particular interest were his plans for growing the railroad, paring down the debt load, and taking several other key steps to enhance shareholder value across the board. None of the key ratios are out of line with his peers (GNWR, RTX, RAIL), and the 12% operating margin is half again as good as RTEX or GNWR and six times that of RAIL. Debt is 4+ times EBITDA, higher than either GNWR (0.9) or RTEX (2.9) yet half that of RAIL.

The record shows steady increases in carloads, revenues, and income over the past five years. The 1997 capital program of $2.3 mm was 240% of 1992's yet debt has been pared back 10.6% in the same period. Perhaps one of the most telling numbers concerns track. As a rule of thumb I figure a shortline ought to be spending about $5,000 per mile per year to keep class II track up to specs. Grossman's group will spend four times that in 1997, including capitalized programs. And everybody knows better track means a more efficient railroad. In sum, then Grossman feels 1998 will be a turnaround year for Emons, and I'll be eager to watch.

A good friend and business associate, Dan Mazur, has been appointed assistant vice president Strategic Planning for Norfolk Southern Corporation effective Jan. 12. He is currently assistant vice president Asset Management and Development, Unit Train Service Group, for Conrail in Philadelphia, having been appointed AVP just last summer. Good move for Dan, excellent choice for NS in this slot.

Vendor Notes: ABC Rail Corp's new issue of $25 mm in senior sub notes has been assigned a rating of 'BB' (Double-B). The rating agency reports, " ABC has reported disappointing earnings over the past several quarters due to slower order flows from the major Western Class 1 railroads and difficulties in completing manufacturing process improvements. With the resolution of its operating difficulties and an expected resumption in sales growth, the company's earnings and cash flow should begin to improve in the second half of fiscal 1998."

We often in this letter use EDBITDA ratios to measure fiscal health. The rating agency used two in its rating process, noting "EBITDA/interest declined from 5.1 times in fiscal 1996 to 3.6 times in fiscal 1997. Debt/EBITDA increased from 2.3 times to 4.1 times over the same period. The 'BB' rating assumes that there will be improvement in the company's credit measures in the next year from their currently weak levels. Should this improvement fail to materialize, the rating could be reviewed."

Wednesday Greenbrier announced orders for another 1,000 railcars valued at approximately $60 million. The orders include of 200 double-stack intermodal platforms and 500 89' flatcars for TTX Company and 300 conventional railcars for various customers. The cars will be built at the Company's Gunderson and Trenton Works facility. All cars will be delivered in calendar 1998. Add that to the backlog announced recently and you get bookings for $360 mm and 7,300 cars.

--Roy Blanchard

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