The Railroad Week in Review:
Week Ending February 7, 1998

The big news this week is the report that Illinois Central may be negotiating to sell itself to Canadian National. Which really isn't surprising when you consider there have been several joint ventures, most recently the intermodal yard in Chicago. The first clue something was up came in the overnight options market early in the week. Then came word that the transaction could be a 75/25 cash/stock deal worth about $2.4 billion assuming IC goes for $39 a share. Officially, "Illinois Central said an agreement has not been concluded with Canadian National, and there is no assurance a transaction will be completed." Wall Street seems to be taking notice of something. IC closed the week at $36.50, up more than $3 on the week; CN finished at $53.44, up $3.50.

The synergies are intriguing, to say the least. CN gets to the Gulf for Canadian grain and maybe even an ocean barge to Mexico. IC goes from being "a north-south railroad in an east-west world" to being part of a system that covers North America both across and down. And both companies have relentlessly been driving down operating ratios by growing the top line and running faster, smarter railroads. The question now becomes, Whither KCS?

Speaking of which, Kansas City Southern Railroad is now more definite about being spun off from its holding company. According to S&P Credit Watch, KCS "plans to separate its railroad and financial services businesses in a different sequence than previously announced. The planned separation of the company's transportation and financial services businesses is now likely to be accomplished via a 100% spin-off of its financial services businesses, leaving Kansas City Southern Industries almost exclusively in the railroad business, but with a significant debt burden. A subsequent common stock offering is then envisioned to reduce debt." Of $900 mm outstanding a third is related to last year's equity investment in the Mexican railroad privatization.

Elsewhere, Kansas City Southern has won an exclusive 25-year concession from Panama to operate the railway along the Panama Canal, which it hopes to convert into an operational cargo intermodal system. The aim is to set up a container shuttle service between oceans to complement the ports and canal. KCS investment will likely be in the $70 mm range and it is hoped the operation will be up and running in two years. There will be a 5% royalty on all earnings due the Panamanian government. Equipment maker Mi-Jack of Chicago will partner up with KCS.

Hub Group (Nasdaq: HUBG), a major truckload broker and intermodal terminal operator, had revenues of $272 mm in 4Q97, up 5.4% over 4Q96. Intermodal revenue was up 1.3%, truckload brokerage was up 22.5%, and logistics revenue increased 30.3%. Net for the quarter came to $2.8 mm, up 15.8%. Net income increased 15.8% to $2.8 mm from $2.4 mm in the comparable period last year. EPS rose 4 cents to 40 cents, up 11% quarter-to-quarter. For the year, revenue was up 41.1%, squeaking past the $billion mark for the first time. The net rose 40% to $9.5 mm. As in the quarter, brokerage and logistical services revenue growth surpassed intermodal, 35% to 14%. Earnings were up 16 cents to $1.31, or 14%. Not bad, considering a fourth quarter severely hampered by the UP/SP service follies.

There are two lessons in the news from HUB. First, if you manage your resources, you can weather almost anything. Second, if you focus on services, and use operations to support those services, you can make a lot more money. Note the slim margins on the intermodal and ramp operations, and compare that to what you can do fixing other peoples' processes. It's the path more shortlines ought to take, and Robert Grossman's success in log services at EMON is proof of that particular pudding.

RailTex (Nasdaq: RTEX) racked up some nice numbers for the quarter and year with record carloadings, operating revenues, net income and earnings. For the quarter, revenues were up 21% on 40% more cars (shrinking yields, however), the net rose 33% and eps 32%. However operating income was off $6 mm quarter-to-quarter as the operating ratio crept up to 86.3 from 81.6 a year ago driven by higher non-recurring expenses in purchased services, among others. For the year, Revenues hit $148.8 mm, up 23% on 36% more carloads. Operating income was up 4%, net up 7%, and earnings up 6% to $1.16 a share, despite a 3-point rise in operating ratio to 84.5.

"Same Railroad" operating revenues increased 7% and 6% for the quarter ended and the year ended December 31, 1997, respectively. The operating ratio for "Same Railroad" properties (excluding corporate expenses) improved to 76.1% in the quarter from 77.9% in the same quarter in 1996 and improved to 74.2% for the year ended December 31, 1997 from 76.5% for the year ended December 31, 1996. January carloads were up 38% over 1/97 with gains in autos, railroad equipment, coal, chemicals, lumber, metals, non-metallic ores, food, farm products, and other products. On a "same railroad" basis, carloadings increased 13% to 34,853 in January 1998 from 30,912 in January 1997, primarily due to higher coal, lumber and metals shipments.

Interest expense increased 52.7% to $10.5 mm from $6.9 mm year to year. Chief culprits were acquisition debt and the Brazil enterprise. EBITDA increased 11.7% to 35.9 mm, but not enough to keep interest coverage from dropping 125.6 basis points to 3.14, putting it on the low side of the range enjoyed by RTEX peers.

The BNSF Hazardous Materials team is in the field running drills in California. According to a press release, "BNSF, along with city and county emergency teams will test their skills when a simulated propane leak or hazardous materials spill is detected in a rail yard. A specially designed tank car, provided by the Chevron Company, plus an intermodal portable tank container and BNSF locomotive will be included to broaden responder knowledge of rail equipment." Part of the exercise drill will be to train teams in removing trapped personnel from the scene and minimizing environmental damage.

Shortliners take note: Both BNSF and NS are stepping up their efforts to integrate shortline operations and marketing with their own. Henry Lampe, shortline guru at BNSF, tells me they're looking for written three-year plans outlining "strategic partnerships" (see also my column in the January 1998 Railway Age). In fact, a friend at one of those shortlines writes, "We met with BNSF in December at their short line meeting. There were 3 major initiatives resulting from the meeting: 1) BNSF, seeking improved communications with their short lines, asked shortlines to submit a 3-year business plan for each line that interchanges with them. 2) A BNSF/Short Line Operations Advisory Committee was formed and they've already had their first meeting in Ft Worth. 3) A BNSF/Short Line Equipment Advisory Committee was formed and the first meeting is scheduled for 2/12."

Over at NS, they're planing a shortline gathering at the Hotel Roanoke for late March. Ike Prillaman, EVP for Marketing and Sales at NS and I chatted at length the other day about shortline concerns, especially those of lines they'll "inherit" from Conrail. The point in mentioning both Lampe and Prillaman is that here are strong indications that senior management is seriously committed to strengthening ties with their class II and II connecting roads. If you've got concerns, and want them voiced by a neutral party, drop me an e-mail. I'll see that the word hits the mark.

MotivePower Industries (NYSE: MPO) posted record earnings per diluted share of 32 cents for the fourth quarter of 1997, up 45 percent from the prior-year quarter, the sixth consecutive quarter of reporting record profits and its highest quarterly profit ever. Quarterly revenues were $88.6 mm and generated a net of $6 mm, for a margin of 6.8%. Earnings for the year came to $1.11 a diluted share, up from 66 cents a year ago. That's 68%, if you're counting, and represents a PEG of 0.32. Stock watchers will recall that when a company is growing at a rate twice its PE, it yields a PEG of 0.5 and rates a good look as an investment potential. I plan to put it under the industry spotlight and report the results in this space in a week. In the meantime, check out the press release on-line. It's a good read.

For dessert, here's some CR history, courtesy of Bob Fort's NS news room: From the late 1800s to the present, Conway Yard, sometimes affectionately called the "matron on the Ohio," has served as a vital east/west link on the Conrail system. Old-timers referred to it as "the mother yard" of railroads, and, as late as 1983 a large sign at the entrance described it as "The Biggest Push-Button Yard in the U.S." Situated along four miles of the northern bank of the Ohio River 22 miles northwest of Pittsburgh, Conway still is Conrail's largest yard and the only one with a two-hump classification system. The oldest building at Conway is the 85,000-square-foot engine house, which opened in 1907.

--Roy Blanchard

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