The Railroad Week in Review:
Week Ending January 16, 1999

With "earnings week" (really two weeks) set to begin Wednesday we're beginning to see estimates creeping out of the woodwork. Generally, 4Q98 does not appear to have been a particular barn-burner, and nobody's getting very excited about 1999. UNP's problems still haunt and the consensus hovers around 30-plus cents vs. a 41 cent loss a year ago. Both NS and CSX are expected to report lower earnings, again due to the CR process. BNSF may be the sole gainer, and for the quarter the consensus is up less than ten percent.

If the first two weeks of the year are any measure, the gainers have been the ones beat down the most: RTEX up 23%, CP up 11%, UNP up 5%, and GNWR up 4%. Interestingly, the top 4 spots in the Zacks 15-railroad industry group are in order GNWR, TranzRail, CNI, and CP. Excluding non-railroad KSU all the US class 1s are at the bottom of the barrel with UNP the best ranked of the four.

The bright spot is the smaller rail group where we've seen some healthy gains last year and ought to see more this year. One newcomer to the group is Canada's RaiLink (RLK.TO). According to a press release, RaiLink is a publicly traded regional railway company based in Edmonton, Alberta. It is the third largest railway in Canada and the largest regional railway. RaiLink provides freight transportation service to Canada's two national railways and a wide variety of shippers. RaiLink and partner Quebec Railway Corp (QRC) currently operate ten regional railways covering approximately 2,150 miles of track in Alberta, Northwest Territories, Ontario, Quebec and New Brunswick. They are profiled in the February issue of Trains.

The railroad performance measures first instituted for UP have now been taken up by the rest of the rails. The performance measures previously have been used internally by all railroads, but this is the first time the data has been made available to the public. Freight railroads thus become the first industry to publish weekly performance measures. All U.S. Class 1 railroads and Canada's two major railroads are posting the data for their systems. [LINKS]

Another plume in the CSX Chapeau. Mark Mastro has been tapped to join Jim Howarth's Northeastern commercial team out of Selkirk. Mark, for the few who don't know him, has been with the CR shortline group for the last ten years and before that another 15 years experience elsewhere in that merry band. Said Howard in a press release, "Mastro will be our Director-NE Short Line Marketing and will lead the effort which views the smaller railroads as business partners, not merely as an extension of our railroad." Let us hope they ask for the pro formas.

Recall Norfolk Southern had been rumored to be on the lookout for an eastern Pennsylvania intermodal site. It seems they've found one based in Bethlehem and it will be located in the East Lehigh section of the former steel plant. It's adjacent to I-78 and only the width of NJ away from NYC. Naturally NS will be the first customer though it is anticipated CP will be close behind.

L.B. Foster (Nasdaq: FSTR) has increased its investment in the Dakota, Minnesota and Eastern Railroad Corporation (DM&E). FSTR acquired $6 mm of DM&E Series C Preferred Stock and warrants, thereby increasing Foster ownership to nearly 16% of the DM&E's common stock, on a fully diluted basis. DM&E has raised some $22 million of preferred stock and warrants to support the railroad's ongoing capex program plus current operations and to help finance the 280-mile PRB extension is part of this.

Capex is badly needed. There appears to be a fair amount of deferred maintenance which reportedly the FRA has insisted the railroad fix. Two years ago the DM&E's accident rate was one of the highest in the land, however improvements appear to be taking hold and the derailments are down. It's a well-known fact that if you mind the store the FRA will pretty much leave you alone. Flout the old 49 CFR Part 213 (Track Safety Standards) and you can depend on seeing the FRA man a lot. Perhaps the increased FSTR interest will help DM&E keep track of its track.

For the record, the L.B. Foster Company is engaged in the manufacture, fabrication and distribution of rail and trackwork, piling and highway and tubular products. For the nine months ended 9/30/98, total revenues decreased 4% to $158.6 mm on decreased construction work. Net income increased 35% to $3.4 mm. Shares have been trading in the $5 to $ range for the past year.

Florida East Coast (NYSE:FLA) has urged stockholders to reject a December 22 unsolicited tender offer by IG Holdings to purchase up to 4 percent of its common stock. The tender offer price of $30.00 was $5.13 a share lower than the closing price on the day before the offering, and $4.64 less than the past few weeks' price. Seems to me we've seen this movie before.

Just two months ago we wrote (WIR 11/7/98), "Providence & Worcester (AMEX: PWX) this week blew off an unsolicited tender offer to purchase up to 2% of the shares of PWX at a price of $7.85 per share. Not only did the perpetrator not inform PWX, but the offering price is a third less than the current trading level. The railroad said in a press release that the offeror has not disclosed any facts concerning its identity, its financial condition or its resources." Could this be the same outfit?

Canadian National continues to focus on the core railroad as the line sale program continues. The most recent event is an agreement in principle with the Quebec Railway Corporation (QRC, see above) for the sale of CN's 118-mile rail line linking Matane to Rivière-du-Loup, Que. The line is a natural extension of the current QRC rail network in Quebec and New Brunswick when combined with the QRC's Jan 1998 purchase.

Quebec Railway Corporation acquired from CN the 484-kilometer (301-mile) rail network linking Moncton, N.B., and Mont-Joli, Que., also known as the Intercolonial Railway (ICR). The acquisition of the Matane to Rivière-du-Loup line by QRC will add the Matane traffic to its network, as well as the Baie-Comeau traffic, which is transferred to the south shore via the Cogema rail-ferry service. The rail line handles 39,000 carloads of traffic annually and serves major shippers in the aluminum, forest products and newsprint industries. It is used by VIA Rail Canada Inc. for passenger service to the Gaspé Peninsula and the Maritimes.

Also this week Canadian National announced that its Revenue Management unit attained an ISO 9002 certification, a first for Class 1 railroads in North America. ISO certification of CN's Revenue Management unit will benefit customers by increasing efficiencies, improving internal CN communication and understanding of existing service quality, and establishing a responsive problem-solving process. ISO 9002 is part of a series of quality management standards written by the International Organization for Standardization. ISO is a recognizable industry standard of certified excellence.

Locomotive vendor Motive Power Industries (NYSE: MPO, continued its buying spree this week with the $US 14 mm cash acquisition Q-Tron Ltd., a designer and manufacturer of locomotive electronic equipment. Based in Calgary, Alberta, Q-Tron had 1998 sales of about $US 10 mm for its line of event recorders, speed controls, excitation control computers, speedometers and related products. The transaction is expected to be accretive to earnings in the first year.

Just last week MPO acquired G&G Locotronics which makes and sells high-voltage electrical cabinets and control stands for locomotives for $18 mm in cash. Based in Itasca, Ill., G&G Locotronics had sales of approximately $22 mm in 1998. The transaction is likewise expected to be accretive to earnings in the first year.

On another note, MPO is developing a line of low- and medium-HP locomotive units in its Boise Locomotive Division. This is an interesting development at a time when the class 1s seem to be going for the 4,000-HP-and-up units and the shortlines are keeping a lively market for used power like the 2,000-HP GP38-2, the youngest of which is going to be 10 years old. One can get a new, state-of-the art SD70MAC for under $2 mm; the Boise 1500-HP edition unit is half that, a decent GP-38 a quarter of the Boise product. So far the only takers have been some of the public terminal railroads, however MPO says they have "at least one customer expressing serious interest." We shall see.

--Roy Blanchard

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