The Railroad Week in Review:
Week Ending April 11, 1998

RailTex (RTEX) carloads for March 1998 were up 2% over March 1997; same railroad carloadings were flat. Not surprisingly, March 1998 results took a hit from the UP problems, with nearly a third of the 1997 loads being interchanged with UP. A second hit came from depressed grain prices. July corn, for example, stands at $2.45 a bushel, off from the high of $3. 15. With prices like these it's no wonder farmer's aren't selling.

YTD carloads are up 16% system-wide and 7% same railroad. Not too shabby, considering the on-going UP hits and February's weather-related loses in Georgia. RTEX closed the week at $16.50, up 15.3% YTD, three points better than my railroad market basket and besting the S&P (with dividends) YTD by 2.31 points.

Returning to an earlier thread, I've had further communication with RailTex Finance Director Joe Jahnke about track maintenance. He says the 1998 program calls for $18 mm capital spending on track and roadbed except for the DT&I. A year ago when the DT&I deal closed RTEX committed to a three year, $9.9 mm rehab program, half which will go in this year and get track speed up to 49 mph.

System-wide, RTEX operates about 3,500 route-miles including DTI at 250 miles. This works out to $18 mm on 3,250 miles or $5,500 a mile. On DTI, you have essentially $10 mm on 250 miles, $40,000 per mile. This is all capital spending. Routine T&S (ties and surfacing) for 1997 consumed $14.2 million or 9.5% of revenues. Jahnke notes that for 1998 total spending (capital and expensed MOW) will be in the neighborhood of $32 mm.

So, if DT&I gets $5 mm and the rest of RTEX gets $18 mm in capex, that leaves $9 mm for MOW expense to go against the operating ratio, off about a third from 1997. One might argue that $9 mm over 3,250 miles is a tad light at $2,800 per mile. The counter-argument could be that less MOW expense per mile is needed immediately following a major rehab. Recall the rule of thumb is $5,000 per mile per year to keep class 2 track up to spec. The question now becomes: How long can RTEX let its newly-rehabbed track go at reduced levels?

The answer lies in RTEX' own line-by-line analysis to insure certain corporate benchmarks are met, not only for projected traffic growth but also for a changing carload mix. As we all heard at the NS shortline meeting, heavier axle-loadings are on the way with 286,000 lb. gross weights becoming fairly common and 315,000 lb. cars not far behind. NS made it pretty clear they will expect their shortlines - certain RTEX properties included - to be able to accommodate the heavier cars.

My personal observation has been that railroads in general have not kept after the roadbed infrastructure on so-called light density lines, and many of these lines have been or will be spun off to local operators. The 286's let shippers ship more goods in fewer cars, and as long as car supply remains an operating challenge, the move will continue in this direction. The operator that plans for heavier loads will be well ahead for it.

In another spotlight redux, RailAmerica (Nasdaq: RAIL) released its 1997 results showing total carloads of 69,140. The properties in Chile accounted for 23,000 cars and the balance was in the US. RAIL does not tell us how many cars were "same store" railroads, however a glance at the website helps. Three lines were added to the same store in 1996: Minnesota Northern, Otter Tail Valley, and Dakota Rail, total about 300 miles and 18,000 carloads for a light 60 cars a mile a year. The "same store" eight roads are listed in the 32,000-car range per Ed Lewis' most helpful American Shortline Railway Guide, 5th Edition (Kalmbach, copyright 1996).

If RAIL did 46,000 carloads on 11 roads, it would appear same store lines were flat to down for the year. Mileage-wise, RAIL's 11 shortlines operate some 872 route-miles for an average of 56 cars/mile/year - roughly half the rule of thumb needed to stay healthy. Domestic rail revenues came to $14.7 mm in 1997, or a tad under $17,000 per route mile. Compare this with the $35,000 to $45,000 per mile of our spotlighted GNWR, RTEX, and PWX.

Domestic 1997 railroad operating expenses of $7.4 mm yield an enviable operating ratio of 50.3, which in turn presents a quandary. How can low revenues and carloads generate one of the lowest ORs around? To get a better picture of what's going on I sent my analysis to Wayne August, RailAmerica's Director of Investor Relations, for comment.

He responds, "Our domestic railroads have historically achieved some of the lowest operating ratios in the business. [W]e traditionally spend almost $7,000 per mile to maintain our tracks and we believe that this one of the highest figures that you will find in the short line industry [It is -- rb]."

Wayne goes on to say that these levels of track expenditures are driven by the realization that good track means a safer railroad, better customer service and less exposure to derailment costs. He concludes, "Our railroads have never had a fatality or a hazmat release in [the Company's] 11 years of operation." From this one must conclude RailAmerica is doing the same kind of MOW analysis and planning mentioned in the preceding RTEX commentary.

Here again a large grain-hauling business is eventually going to mean more 286's, a potential loss of per-car revenue, and still greater spending for plant and equipment. Wayne writes, "Same store results were indeed flat owing mainly to the deferral of grain carloadings from the 1997 fourth quarter to early 1998 at our railroads in Michigan and Minnesota. Agricultural products make up some 30% of our domestic carloadings, so the impact of this deferral of loads may have been far greater on our lines than others." All of which seems to say that RAIL and others in this boat need to focus on keeping yield- per-carload at respectable levels by matching infrastructure to economics.

In 1997 shortlines contributed 6.5% of Norfolk Southern's $4.2 billion railway operating revenue. Some 135 different shortline properties handled 247,000 carloads for an average of $1100 per car, a 24% better per-car yield than NS had system-wide. That's more per car than the average for the agriculture and metals/construction group and just 7% under paper/forest products. Post merger, NS projects 220 different shortline connections handling 420,000 carloads and generating $444 mm in revenue. Pro forma, NS is looking at about $6.3 mm in revenue ($4.2 billion actual plus $2.1 billion CR pro forma from Vol. 1 of the Filing, page 183). The shortline share of the total pie increases 50 basis points to 7% and per car yield checks in at $1057, down 4%.

MotivePower Industries (NYSE: MPO) has solidified its position as a provider of low-horsepower locomotives with a $6 mm order to build and maintain four units for a privately-held terminal operator in Texas. Two Cat-powered 1,500 HP units go out the door immediately; the other two will be 2,000 HP jobs to go out later this year. Following delivery, Boise Locomotive will maintain the units under a 10-year agreement.

A correspondent from San Francisco writes, "I've been to Boise for the plant tour and have heard MPO execs speak at conferences. So far, I like the story. I still think their big chunk of business will come from overhauls of existing units. With the new EPA emissions requirements on locomotives, there may be a rush to overhaul existing locomotives pre-January 1, 2002 along with some conversions to meet the new standards. I also like what MPO is doing in Mexico - they just renewed their maintenance and repair contract with TFM." The writer has a position in MPO and is an accomplished rail industry stock watcher.

Several chemical companies have sued or are contemplating suits against UP for, among other things, breach of contract and damage to reputation. Both maintain sizeable fleets of leased equipment and feel UP has misled them in statements filed and commitments made and missed. DuPont in particular says it has made "other arrangements" to mitigate the UP service losses, and unfortunately, these "other arrangements" often hurt the rail lines at the other end of the move blown by UP. Meanwhile, UP maintains that service between Texas and gateways at Memphis and St Louis has been improved however east-west lines across the plains remain congested.

During the STB hearings on rail access and competition this week a blue ribbon panel said the STB should address the revenue adequacy controversy and issue some guidelines based "on sound financial and economic principles." The panel recommended setting up an advisory committee to address shippers' service concerns in a way that streamlines the process and provides a clearer definition of what constitutes a "small shipper." Finally, and key to readers of this letter, the STB said class 1 roads need to "recognize their essential partnership with short-line and regional railroads and to work with small railroads to develop mutual development strategies." Say, "Amen."

--Roy Blanchard

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