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

Robert Grossman, CEO of Emons Transportation Group (Nasdaq: EMON) held a small tete-a-tete lunch for some of his investor relations friends in Philly last week and a worthwhile gathering it was. We got the back of the back room at the 15th Street Bookbinders so it was quiet and Robert could hold forth.

The business model has evolved to one of running a core railroad and contracting out to warehousemen, intermodal operators, local trucking firms and other related service providers. Recall EMON is buying the 94 miles of railroad they need to connect their St. Lawrence & Atlantic (SLR) with the CN main outside Montreal. This makes SLR part of the CN-IC system, which is especially important to the state of Maine, the only net producing state in the Northeast. SLR's route is cleared for double stack, the terminal infrastructure is in place, and the power, platforms, and people are in place. Doubling the size of the intermodal traffic base can take place with only incremental hikes in costs. Do I hear a lower intermodal operating ratio?

Going forward, Grossman sees a $25 mm (sales) property near term. At two or three times sales that could equate to a market cap up to $75 mm. There are 7.8 mm diluted common shares out. Do the math and you get about $9.50 a ticket. It's selling for a third of that today. FY98 pre-tax earnings were $1,488,000 vs. $1,171,000 last year, up 27%. Income available to common share holders was based on 5.76 mm shares last year and 5.95 mm shares this year, a change of 3.2%. Adding dilution from options and convertible preferred the 1997 share count adjusts to 6.29 mm shares and 1998 goes to 7.83 mm shares, a change of 24.5%.

One way to get rid of the convertible preferred is to convert it and then buy it back. I can't say if that's the plan, but it's surely something to be considered. Especially since cash flow is the name of the game now. EMON's track spending program is split between capital and operating expense and is running at double the shortline average of $5,000 per mile per year on mostly Class 2 and 3 track with little Excepted. More medium HP locos are on order to fill out the fleet. And Grossman says there will be no common dividends because the best way to grow shareholder value is to grow the franchise. Shortline railroad dividend payers please take note.

Readers of WIR know well the Class 2 and 3 roads are playing a bigger and bigger role in the futures of the remaining class 1s, contributing roughly 10% (more or less) of revenues, ranging from $700 mm for NSC to $1.5 bn at UNP. A property like EMON is unique given its regional focus and its focus on running what it has well vs. adding lines for the sake of adding lines. Say Amen to that.

Providence & Worcester (AMEX: PWX) posted 3Q98 results this week and the big news is the virtual elimination of debt and drastic decline in interest expense. Operating revenues were up 7.5% to $6.4 mm however income from operations fell 12.8% to $1.5 mm thanks largely to a reduction in government grant reimbursement for railroad highway at grade rehabilitation projects.

Other income, including income from the sale of properties, easements and licenses, as well as unique, nonrecurring items, rose $1.3 mm from a relatively paltry $108,000 last year. Earnings per share (diluted) on net income of $1.6 mm increased to $.46, after giving effect to a net extraordinary loss of $24,000 from early retirement of debt, from $.41 on net income of $959,000 in 1997. For the nine months ended September 30, 1998, PWX operating revenues rose 6.5% to $17.3 mm while income from operations fell 5.5% to $2.7 mm.

Heidi Eddins, Vice President, Secretary and General Counsel noted that the third quarter and nine-month earnings per share calculation reflects, on a weighted average basis, the issuance by the Company of 1 million additional shares in March 1998. As a result of the Company's stock offerings in March and October of 1998, the Company has retired all of its debt obligations.

Apropos of the recent sub-par tender offer from IG Holdings, correspondent Tom Murray reports the Wall Street Journal and Dow Jones News Service have carried a number of stories over the past month about below-market offers for stock of various companies by IG Holdings, which is based in Phoenix, AZ. The target companies have included Greyhound Bus Lines, Friendly Ice Cream, Station Casinos and Metromedia International. Nuff said.

Aden Adams, un-retired and newly back at CSXT as VP-Merchandise Sales and Marketing, barely got his chair seat warm before naming old NY hand Jim Howarth VP-Northeast Commercial Operations based in Selkirk. For Howarth, that's going home since he's a native of Albany, got his degrees in Oneonta and Albany, and started railroading 27 years ago on the Susquehanna. Howarth will be responsible for leading a sales force covering a territory from Montreal to Washington and from Cleveland to Boston. He will be concentrating on growing the business base through the development of transloading facilities and enhanced relationships with regional and short-line railroads. We especially approve of the latter.

Further West, Union Pacific (NYSE: UNP) says it will hire 60,000 men and women over the next 12 years. According to CBS Newswatch, the hiring push is the biggest since the 1970s. One of the railroad's big needs is for train crews, where engineers average $68,400 a year; conductors, $54,000. Crew members who want to work lots of trips can make $100,000 or more. UNP says the jump in hires is due partly to a need to untangle severe traffic congestion. But even without the traffic problems, the railroad would have been hiring aggressively, said Kevin Naylor, assistant vice president of human resources planning for the railroad.

The STB's Draft Environmental Impact Study (DEIS) of the planned merger of Canadian National (NYSE: CNI) and Illinois Central (NYSE: IC) "would not have any significant adverse environmental impacts,'' so long as minor environmental mitigation measures were adopted. Overall, the draft assessment determined that the "proposed CN/IC acquisition would have positive effects on the environment. These benefits would occur on a system-wide basis, primarily through increased efficiency on existing routes that the proposed CN/IC acquisition would facilitate. These potential benefits include reductions in fuel consumption, air pollutant emissions, highway traffic and highway accidents."

Last week readers were challenged to think about productivity measures for railroads: it is the car, the train, or what? Whatever it is, rail revenues in cents per ton mile have since 1981 decreased 26% in current dollars and 56% after inflation adjustment. Coal now accounts for 40% of revenues, and the next largest segment is farm products (STCC 01) at 9%, so by now half the tonnage is low value stuff. Cost of capital remains around 11% and ROI is stuck at less than 10%. So, yes, it seems mix IS the problem, and someplace the "mixing down" has got to stop. We need to see the Erie and Santa Fe recoup the strawberry trade, I guess.

But it won't happen this year. Carload traffic through October was up 2.3% and intermodal boxes were up 0.6%. Canadian carloads were off 3.6% and boxes up 1.1%, almost flat. Quarterly and YTD earnings recently posted were a lot better than that, which is one sign the rails are still taking cost out to keep the numbers up. Yet shippers want more and better rail (see below), and that costs more, not less. See Resor, WIR 10/31, page 2.

The main shipper message from the AAR Town Meetings has been one of needing better communication and consistency. The AAR website ( has lengthy summaries of the Chicago, Houston, and Atlanta meetings. In its prologue, the AAR says, "Predictability of railroad service has emerged as a matter of primary concern for railroads and their customers. In an effort to improve customer service, the Association of American Railroads (AAR) initiated a series of five regional meetings designed to give customers a forum for expressing their concerns and to provide an opportunity for discussion and problem-solving." A close read is heartily recommended to railroad operators and users alike.

Scary factoid of the week: According to the AAR's Stats and Facts board (also at active railroad employees are paid $14 bn a year while those drawing railroad retirement are paid $7 bn a year. There are 281,000 active employees supporting 703,000 retirees. What's wrong with this picture?

--Roy Blanchard

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