The Railroad Week in Review:
Week Ending February 13, 199

Wisconsin Central posted record 4Q98 income from North American operations, up 40% to $25.5 mm. The North American 4Q98 operating ratio improved 7.7 points to 70.5 from 78.2 in 4Q97. Operating revenues hit a record $86.3 mm, up 4% or $3.2 mm from 4Q97 on 5% fewer carloads. Now while we don't as a rule like to see carloads drop, we like it even less to see revenues drop at a faster rate than carloads, or even to increase at a slower rate than carloads. Both bespeak decreased revenue per carload and a potential degradation in profits. Here, WC takes a hit in cars while revenues actually increase, meaning more revenue per car. No wonder the OR took such a healthy leap!

For the 1998 year WC reported net income of $76.3 mm or $1.49 per diluted common share, compared with $77.4 mm, or $1.51 per diluted common share for the year ago period. Record North American results were offset by a 30% drop in net overseas affiliate income. Contributions from EWS came to $21.7 mm vs. $29.9 mm in 1997 while the Tranz Rail share declined to $4.9 mm from $8.7 million in 1997. In England, steel, a major commodity for EWS was off significantly and on the other side of the world the Asian market softness and exchange rates damped those results.

Kansas City Southern's 4Q98 railroad division earnings improved to a plus seven cents a share from a negative buck twenty-nine in 4Q97 and to a positive 34 cents from a negative $1.23 a year ago. The difference is a $1.32 restructuring charge in 4Q97. Absent that, 4Q98 earnings from on-going operations improved to $0.07 from $0.03 a year ago; for the full year, earnings from ongoing operations rose a whopping 255% to $0.32 from $0.09.

Of particular interest, the quarterly TFM loss narrowed to two cents a share from nine cents and for the full year to 13 cents from 16 cents a year ago. US operations were good news and bad news. The bad is that the US side took a 25% hit as quarterly earnings per share declined to $0.09 from $0.12. The good news is that US results for the year were up 80% to $0.45 from $0.25. Still no definitive word on when the split will occur as the rail operation is set apart from the mutual funds business.

Emons Transportation reported a 27% operating revenue increase to $5.2 mm for its fiscal 2Q99 ending 12/31/98 and a 26% hike in YTD revenues to $10.3 mm. Before tax income for the quarter was up 16% to $525,000 excluding a $156,000 one-time startup charge for its St. Lawrence & Atlantic (SLR) unit's new line in Canada. For the six months, pre-tax income jumped 50% to $12 mm. Income after tax is a slightly more complicated manner.

Evidently the FASB rules say the massive tax credit awarded last year has to be amortized over the next eight years. Consequently the provision for income taxes rose to $257,000 from $22,000 quarter-to quarter and to $521,000 from $43,000 year-to-year. The amortization amounts to $220,000 and $442,000 respectively for the quarter and year, so the actual tax liability is $37,000 for 2Q99 and $79,000 YTD. Got that?

Preferred shares continue to take the cream off the top, $216,000 for the quarter and $105,000 YTD. Common eps dropped to three cents from six for the quarter and rose to nine cents from eight YTD as a result of the preferred and the tax treatment. Absent tax amortization and preferred common shareholders would have earned eight cents for the quarter and 15 cents YTD. Now try this: annualize 15 cents for six months to 30 cents for the year, apply a nominal rail multiple of 15, and voila! A $4.50 share price.

RailTex reported 4Q98 carloadings up by 14% to 150,503 with operating revenues up by 11% to $43.4 mm, primarily due to better revenues on its "Same Railroad" properties. Operating income increased by 38% to $7.4 mm. Net income was $4.5 million, or $0.48 per diluted share compared to $3.8 million, or $0.41 per diluted share in 4Q97. For the full year, carloads increased 13% to 549,513 as operating revenues increased 8% to $161 mm and operating income increased 20% to $27.7 mm. Net income for the year-ended 21/31/98 was $11.0 mm, or $1.20 per basic and diluted share, compared to $10.6 mm, $1.16 per basic share and $1.15 per diluted share, for 1997. Excluding the effects of the non-recurring events, operating income increased 17% to $26.8 mm and net income increased to $11.0 million and earnings per basic and diluted share both increased to $1.19.

Want to know what your state DOT's are doing about rail? Here's a partial run-down from one fellow who shall remain nameless for the obvious reasons. Still (and again) looking for ways to assist short lines with tax credits, finding funds to match $75 mm "Taxpayer Relief" dollars from Amtrak, accompanying other southern states onto the high speed rail path in a way helpful to all, getting a Charlotte to Washington high speed rail EIS started, and (last but definitely not least) waiting for the NCRR/NS lease negotiation to be resolved. And that's just before lunch.

You ought to hear the relief out there in shipper land as more and more are convinced June One is the Real Conrail Split Date. For it's part, Norfolk Southern issues a steady stream of "Implementation Update" memos. This just in: Don O'Brien, AVP for Implementation, says NS has developed a series of "business readiness measures" which are used to guide NS down the critical path to a quality closing. These measures were developed by the individual Conrail implementation teams to assess three implementation goals of NS - move cars safely, protect revenue and pay employees. The categories of readiness are "good to go on Day One," "in need of a contingency plan," and "not ready." Progress is summarized across four operating scenarios: NS allocated areas, Shared Assets Areas, auto ramps and coal. Currently, almost 25 percent of the business assessment metrics are out of the "not ready" state.

In an interview with Reuters, Westinghouse Air Brake (NYSE: WAB) Chairman William Kassling said, "The rail sector is poised for a lot of growth. Although rails and locomotives have the competitive advantage of environmental, labor and fuel costs over the trucking industry, the sector needs to improve its reliability and flexibility." Specifically citing Conrail and Union Pacific mergers, Kassling is concerned that if they aren't done right the outcome will not be good for anybody. Said he, "In the next five to 10 years, both industries [suppliers and carriers] will be depending on each other. We're on the cutting edge of technology as the rail industry looks to increase train speed, reduce gaps between trains to increase capacity and cut costs." Failure to do better at what rails do best will send more customers into the arms of competing modes, he rightly concludes.

Last weekend I visited southern Arizona for a few days. The parade of long Union Pacific trains and new power on the old Espee is beautiful to watch. Seeing one or two hundred-car/platform trains an hour each way was most gratifying, to say the least. The local supervisor told me they do 30-40 trains a day out here, that Tucson terminal turns out 1,000 cars a day and the average dwell time is under the 24-hour goal. Other signs of a return to health are there, too. A shortline operator tells how UP solved a too-long cycle time on empty returns of a shipper's private cars with unit trains. The Tucson super confirms some key shortline interchange tracks are being lengthened to accommodate increased traffic. And there are signs the new "industry agreement" between the class 1s and the "small railroads" will see use in his corner of the world. Life is good.

Elsewhere, UP and BNSF formed a joint dispatching agreement covering three of the nation's biggest rail centers in a bid to improve rail service in southern California, the Kansas City area and the coal-rich Powder River Basin in Wyoming. The agreement was patterned after another dispatching arrangement covering the Houston and Gulf Coast areas. The railroads will form coordinated dispatching centers in San Bernardino, Calif., and Kansas City, Mo. Union Pacific dispatchers supporting UP's line from North Platte, Neb., into the Powder River Basin of Wyoming will join BNSF dispatchers at BNSF's Network Operations Center in Fort Worth, Texas.

The other shoe finally dropped on the "bottle neck" issue as the federal appeals court ruled that carriers have a right to set their own rates on routes they serve exclusively. Recall back in Jan 97 the STB ruled that connecting roads with sole access to a power plant over a relatively short distance from interchange with line haul railroads can't be forced to offer a set price for the short-haul service to shippers. According to a Bloomberg report the U.S. 8th Circuit Court of Appeals agreed with the STB, noting that no law "explicitly requires carriers to provide separate local rates for the captive portion of service, and that to require them to do so would undermine railroad's right to establish their own routes and rates." In the original case, certain utilities asked the STB to order the railroads to eliminate what they said were excessively high rates for the final leg of the trip to a captive customer. The board rejected the utilities' request.

BT Alex. Brown initiated coverage of railroad companies on Tuesday. Burlington Northern Santa Fe and Canadian National both drew BUY ratings; CSX and Union Pacific got "market perform" rating. NS was not mentioned. Also, Jill Evans at J. P. Morgan scored CSX with a "market perform" rating and a $48.00 twelve-month target price.

--Roy Blanchard

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