The Railroad Week in Review:
Week Ending January 31, 1998

Recall the movie "1776" in which at every critical juncture "New York abstains" was heard from that state's august delegation. The tradition continues, at least in regard to the Conrail merger. Both senators Moynahan (Dem.) and D'Amato (Rep.) are abstaining from approval of the merger, choosing instead to join a chorus of local complaints over the "east of Hudson" and Buffalo issues. In other words, just CSX reaching the boroughs of New York City doesn't make it. As for Buffalo, better isn't enough.

Interesting. The STB is under no mandate to add competition where there was none pre-merger. The City never had more than two railroads, the NYC and New Haven. To be sure, the Penn, Lackawanna, Erie and others got to the Big Apple by barge; however, lack of city trade dried up all that business. The Central's famed West Side operations closed down for the same reason. Be that as it may, having CSX down the Hudson Division through Poughkeepsie and the expanded Providence & Worcester reaching Long Island a la the NH of old essentially re-creates what NYC had before Conrail. So where's the beef?

As for the complaint that New York industries would face a competitive disadvantage against New Jersey, which stands to gain new competition from NS and CSX, NJ has always had more railroads than NYC pre-Conrail. So again, the STB is under no obligation to make things better than they were, just to do the shipping public no harm. As for Buffalo, the senators say the split doesn't meet muster because it doesn't fit the desires of a local shipper lobby. The argument is that Buffalo would be hurt because the merger plan failed to give that city the same new competition as Detroit, which is viewed as a rival for international cargo shipments between the United States and Canada.

But wait, doesn't Buffalo have the two Canadian roads plus CSX and NS? Isn't that the same number as Detroit? I don't get it. See page 233, Vol. 3B of the filing re Buffalo, page 223, Vol. 3B re CP in Detroit and the CN 7/14/97 press release re its Detroit presence.

More earnings this week, and a sampling follows. However, note that a change in the FASB rules requires earnings to be reported two ways, basic and diluted. Basic earnings per share represents net income divided by the average number of shares outstanding. Diluted earnings per share reflects the potentially dilutive effect of additional shares that could become issued and outstanding, principally as a result of exercising stock options. Where there is little dilution, as in NSC or today's WCLX, it's of little consequence. In other cases the difference in measures can be sizable.

Car-maker Johnstown Industries (NYSE: JAII) seems finally to be making money on freight cars. Revenues from freight car operations were $87.1 mm in the fourth quarter and $234.7 mm for 1997, compared with $46.6 mm and $197.8 mm in the comparable periods last year. Fourth quarter 1997 shipments of 1,428 new freight cars, double 4Q96. For the year JAII delivered 4,507 cars against 3,470 in 1996.Year-end backlog was 4,201 cars vs. 774 a year ago. Putting it all together, JAII had 1997 revenues of $650.3 mm and net income of $7.5 mm, or 76 cents per share, vs. $560.0 mm revenues and a net loss of $5.4 mm, 55 cents per share, a year ago. Looking forward, the street consensus looks for 90 cents a share. All per-share info on a diluted basis.

As an aside, the Western Pennsylvania US District Court has granted JAII a preliminary injunction "prohibiting Trinity from marketing, manufacturing, using, selling or leasing its infringing Aluminator II coal gondola freight car or any imitation thereof." The injunction follows the rulings in mid-1997 by the Court of Appeals for the Federal Circuit which held that Trinity's Aluminator II coal gondola freight car infringes Johntown's patent that is embodied in its BethGon Coalporter freight car.

Wisconsin Central (Nasdaq: WCLX) saw 4Q94 revenues increase 19% to $83 mm from 4Q96 and the operating ratio improve to 78.2 from 80.3, still quite high compared to NS (70.4) and IC (60.7). Operating expenses were up only 15%, including what WCLX calls a "significant" derailment. Contributions from offshore operations in Great Britain and New Zealand were off slightly, owing to higher expenses in the former and the Asian Contagion in the latter.

For the quarter WCLX eked out a slight income gain to $17.7 mm from $17.4 mm, before the $1.6 mm extraordinary debt retirement charge posted in 4Q96. Per share was flat at $0.34 before the charge, which came to 3 cents a share. Street estimate was for 35 cents and used the 34-cent, pre-charge number for 4Q96. Interestingly, estimates were at 47 cents back in September.

Operating revenues for the full year amounted to $333.5 mm, up 19.8%, not counting the $13.3 mm hit for disputed switch charges in 1996. After that, and after the 1.6 mm for debt reduction (above), the 1996 net was $48.2 mm, 96 cents a basic share. For 1997 the figure is $1.52 (FASB dilution shaves a penny). Equity income from NZ came to about a $million; GB added another $7 mm. Street estimates stand a buck seventy-four for 1998, having started at $2.05 three months ago. The 1998 PE is 14.6, about a 3.5% discount to the industry. A more usual PE for WCLX is closer to 20, which puts the 1998 year-end target price in the $34-$35 range.

On a related note, Wisconsin has just passed a two-man crew law, partly at the prodding of the UTU, and it looks like Minnesota and Illinois may follow suit. The way I read the legislation (provided by the WC Law Department), the person actually controlling the locomotive has to be a Certified Locomotive Engineer (CLE) as defined by 49 CFR Part 240. The second person in the cab has to be a qualified trainman in the sense of having passed a rule book exam and being qualified on the track segment operated. The trainman can get down on the ground "to perform switching activities" and other work.

Locomotive "servicing engineers" and "student engineers" may still operate as long as the requirements of Part 240 are met. But it also means there has to be a second qualified person in the cab with a hostler, and that's a change. Needless to say, it's a productivity hit and BNSF, UP, and CP have all lined up behind WC on it. Things like this do have a tendency to spread left to themselves, so the issue will be closely watched I'm sure.

Norfolk Southern (NYSE: NSC) had yet another record quarter and year, once you back out CR merger costs. Railway operating revenues reached a fourth-quarter record, $1.06 billion, up 4%. Net income in 4Q98 was $244 mm excluding Conrail-related items, an increase of 22%. Even with CR, earnings were up 12%. Basic and diluted earnings per share including Conrail-related items were a record $0.59, up 11%. Excluding Conrail-related items, basic and diluted earnings per share would have been $0.65, up 23%.

For the year, railway operating revenues were a record $4.22 billion, up 3%. Earnings rose to $828 mm, up 8% over 1996; CR-related items took that down to $771 mm. Per share, basic eps would have been $2.20, $2.19 diluted, also up 8%. Include the CR hits and eps drop to $1.91 basic and $1.90 diluted, off 6%. Intermodal revenues were up 12%, metals/construction 7%, paper/forest 6%and chemicals 5%. Coal revenues were about even with 1996.

Elsewhere, Chief Operating Officer Steve Tobias said they hope to have a management team named for the Shared Asset Areas (SAAs) fairly soon. This is in line with what I had gathered unofficially at the CSX meeting last week. And, as I wrote in my January Railway Age column, shortlines and customers in the SAAs (Philly, Newark, Detroit) need be in no hurry to nail down the operational details. These things will have to be sorted out at the time on the ground by the folks put in charge. If you think otherwise, look to Texas where UP tried to mandate everything in Houston from Omaha. NS and CSX seem to be doing the right stuff to avoid a repeat.

Railroad stocks were up 0.3% in January, in line with the DJIA. Winners were RTEX (15.1%), WCLX (8.5%) and CNI (5.7%). The big loser was GNWR (-9.1%) on no news (I'll try to get some news this week). Vendors did better, up 4.8%, driven by the likes of Ansaldo (ASIGF, 34.0%), Johnstown Car (JAII, 29.9%), and Motive Power (MPO, 21.8%). The biggest losses were Timken (TRB, 6.1%) and Greenbrier (GWX, also 6.1%). Calculations are based on a hypothetical $2,000 in each of 15 railroad and 14 vendor stocks at the 12/31/97 closing price.

--Roy Blanchard

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