The Railroad Week in Review:
Week Ending February 14, 1998

What a week. BNSF threatens to ask the STB to undo bits of UP-SP. Then IC and CN announce an engagement. And, perhaps the most positive news of all, NS and CSX come hand-in-hand to tell us who's going to be running the SAA.

The first salvo came when Rob Krebs wrote Dick Davidson that UP's attempts to relieve congestion "have failed, " adding, "We now have enough experience to conclude that the present arrangements, due to the congestion and unique characteristics of Houston and the Gulf Coast area, will not work.'' UP's John Bromley responded to say Krebs' demands were "unacceptable." Three days later UP proposed a "shared area" of a sort, where a joint regional dispatching center would be set up to coordinate all moves between Brownsville and New Orleans. Now it was Davidson's turn to take word-processor in hand: "Joint dispatching is a win-win for all the railroads and would be a significant step forward in improving service in the Gulf area, which obviously would benefit our customers.''

Wednesday's JOC ran a piece by Rip Watson saying that significant problems remain. Terminal dwell times are up, average rain speeds are down. Trains are held for crews or power or both, and as a result, available track space to receive and make up other trains simply goes away. Freight car inventory -- cars in the system -- is back to 335,000 where it was in November. If you want to read the numbers yourself, go to the UP website, business/srps/srrwktoc.shtml for all the gory details, week by week, in table form. Tables only show current weeks, so for changes week-to-week you'll have to do some quill-driving of your own.

On Friday KSC and partner Tex Mex announced intent to file a formal petition with the STB to provide "permanent relief for Houston-based shippers." The proposal calls for divestiture of the former Missouri Pacific line from Houston to Beaumont, Texas to the Tex Mex and KCS jointly with trackage rights, leaving UP to use its newly acquired SP line; divestiture of the underutilized Booth Yard in Houston to the Tex Mex and KCS; divestiture of the abandoned former Southern Pacific rail line from Rosenberg to Victoria, Texas, along with its connections at both ends, to the Tex Mex and KCS; creation of a new, neutral, Greater Houston Terminal Area Railroad, and granting the Tex Mex permanent rights to serve Houston.

The other shoe finally dropped late Friday. The BNSF press release begins, "UP and BNSF agreed today to proceed immediately to set up a joint regional dispatching center for all of their Gulf Coast train operations. They will also exchange half interests in the two pieces of the former Southern Pacific 342- mile Houston-New Orleans line, now separately owned by each railroad. Additionally, both railroads will have access to all customers, including chemical, steel, gas and other companies, along the entire line, including former SP branch lines...KCS and Tex Mex were invited to participate in the Joint Dispatching Center, but so far have declined. " The full text is available at; there's link to the text on the home page.

At this point I have to note the "joint regional dispatching center" concept seems vaguely familiar. As does another proposed UP fix, moving up to 1998 certain capital expenditures previously targeted for 1999. The read from here is each side of the Mississippi is learning from the other side's mistakes. If that is so there is indeed a silver lining to this dark cloud.

With great fanfare Friday WC and the FRA announced that under a new agreement, the railroad will continue to take specific steps to improve track and equipment inspection, training measures, and operating practices. The bulleted list seems to come straight from the regs, except for no more remote control outside industry tracks and no more one-person crews. The proof of success of these measures will come in the next FRA reportable injury tally. (Hmmm. I wonder what the WC ratio was for last year.)

Once Canadian National and came out of the closet on Tuesday and fessed up, IC stock wasted no time running right up to the $39 mark named in the banns. Standard & Poors, however, poor-mouthed the deal, saying there was too much debt. The argument is that the joint debt incurred, on top of IC's outstanding paper, is simply too much, saying, "the financial profile of the combined entity would weaken versus IC's currently sound one. Assuming the acquisition took place at Dec. 31, 1997, combined leverage, defined as total debt/EBITDA, would be in excess of 3.5 times." Thursday Merrill Lynch dropped IC to neutral from buy near time and to accumulate from buy long term.

Tuesday CN and IC told the world they had agreed to a deal in which CN would buy IC for cash and stock totaling around $2.4 billion, about 75% (about $1.8 billion) of which is likely to be debt financed. The resulting increase in debt for the combined companies would about double CN's and IC's existing debt (about $C1.7 billion and US$560 million respectively). The STB will set a timetable for regulatory approval following CN's tender offer for IC's shares and placement of the shares in a voting trust. (Sound familiar?) An STB decision would be unlikely before early 1999.

Shortline holding company Genesee & Wyoming (Nasdaq: GNWR) has posted 4Q97 and year-end results. The good news is record operating revenues of $32.4 mm, up 39.9%, with a 27.6% boost in operating income to $4.3 mm. The bad news is net income was flat, $1.6 million for both the 1997 and 1996 quarters. Basic eps was 30 cents vs. 31 cents a year ago. The street estimate had been 39 cents (Zacks), so the actual eps represents a 23% shortfall. Note this is the second quarter of missed estimates, 3Q97 having been off 9%.

Operating revenues for the year hit $103.6 mm, another record, up 33.2%, operating income was up 17.5% to $16.4 mm for the 1997 period compared to $14.0 million for 1996, an increase of 17.5%, and net for the year came to $8 mm, up 35.4%. Net income for the year was $8.0 mm compared to $5.9 mm in 1996, an increase of 35.4%. Basic eps was a buck-fifty-two with 5.3 mm weighted average shares outstanding, compared to $1.54 for 1996 with 3.8 mm weighted average shares outstanding. Street estimates (Zacks again) stood at $1.56.

The stock closed at $21.25 Friday, off 9.1% for the year. With a 1998 estimate of $2.05 a share and a nominal rail industry multiple of 15, one should be looking at a sticker price of $30 and change by year's end. Go out two years and you could be looking at $40 going on industry averages. The hit against coal revenues (blame UP) and start-up costs (Australia and Canada) are short term only and the fundamentals remain sound.

CSX and Norfolk Southern announced the top management team for the "Conrail Shared Asset Operation" last week. They've tapped Conrail SVP Law Tim O'Toole for president with Don Nelson (now President, Metro North Commuter rail) and Ron Batory (now President, Chicago Belt) responsible for operations. Nelson will become senior vice president-Operations and Batory vice president- Operations.

Last week I promised to put MotivePower Industries (NYSE: MPO) under the industry spotlight. Well, I lied. With everything else going on this week MPO had to take a back seat. I began to run the numbers Saturday night and we have mixed results. Stock price has appreciated nicely 1995-1997, however key indicators like two-year change in debt/equity ratio, return on equity, and equity itself cannot be measured without a better set of financials than what I got on line (10-Ks requested). Recall in 1995 MPO lost $40 mm. They made $11 mm in 1996 and $20 mm in 1997, so it looks like a turn-around. The prudent investor will want to know whether this growth rate can be sustained, and that's why one needs a full set of 1997 financials.

If you want to do some homework, compare the income statements, cash flow, and balance sheets 1995-1997 and see what you get. We'll correct our papers in this space next week.

--Roy Blanchard

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