The Railroad Week in Review:
Week Ending April 24, 1999

This past week began the railroad industry's quarterly series of meetings with Wall Street analysts to pore overt the most recent results. What follows is an attempt to show how companies fared at the core business of running a railroad, absent any special charges or other accounting tools to adjust the net one way on another.

Operating cash flow, largely reflective of the operating ratio, is our primary measure here for two reasons. First, recall the dual missions of Week in Review are to educate and entertain readers working in and for the industry. Second, the editorial thrust is largely toward shortline operators in hopes the methods and results reported here can be applied by the readership to their own situations.

Since most of them don't have situations requiring special charges, the best "apples to apples" comparison with their publicly traded brethren will be operating cash flow. It should be noted, however, that Moody's takes much the same approach. In their recently issued "Rating Methodology" report they say at the outset "Moody's evaluates a company's prospects for generating stable cash flow from operations alone." QED.

First out of the box was BNSF on Tuesday. Operating income for 1Q99 was $480 mm, up 7% from 1Q98 on revenues of $2.2 bn, up 2%. Net for the quarter came to $236 mm up 2% excluding 1Q98's gain on a pipeline partnership sale. The operating ratio for the first quarter improved to 78.1 compared with 79.2 in 1998. The company continued its share buy-back program reeling in another 3 mm shares at an average price of $33.79.

BNSF has to be congratulated for taking some very hard-nosed steps to focus on making the railroad more efficient and rewarding its managers who make it so. Results abound. Locomotives are now averaging 300 miles a day with 85% utilization, both all-time highs. Mean time between loco failure stands at a record 75 days. With a fleet of right at 4,000 locomotives, that means 240 fewer road failures a year. Given the cost of power swaps, recrews, etc., that one day additional between loco failures could mean some real cash.

On-time service measured in cars pulled and placed when advertised is approaching the 90% target. Coal hoppers average 300 miles a day; merchandise cars 105. Partly as a result of the added speed, 24,000 cars of all types, both railroad and private, are stored serviceable.

Chatting with Greg Swienton, VP Coal and Ag, after the formal presentation, I learned further that 80% of the coal fleet is privately owned and as volume goes up cars will be bought in the same ratio. Cars are turning at a rate of five trips a month and that could be improved with better coordination between mine and user. As it is, trains arriving on schedule but with a generating station not ready to take them are constructively placed and the demurrage clock started. Says Greg, the problem will be self-correcting.

I missed the Canadian National presentation, however the reports are in and tell us revenue was off 4% to $1,018 mm on 2% fewer carloads. The big loser was grain, of nearly a third, while coal and fertilizers were off 5%. Gainers included automotive (12%), industrial products, forest products, and intermodal (2% each).

Operating income was up 28% to $236 mm as the operating ratio dropped 5.8 points to 76.8. Net for the quarter was $126 mm without $12 mm in one-time fiber optic license fees, up 21% excluding a special accounting charge taken last year. Commenting on the results CEO and President Paul Tellier said, "CN continues to benefit from improvements in cost control and asset utilization attributable to its comprehensive service plan introduced last fall. The service plan is designed to provide CN customers with more timely and consistent transportation services and to ensure CN makes the most of its assets. As a result, expense reduction during the quarter outpaced the overall decline in revenue, producing a significant increase in operating income and improved operating ratio."

Next up was UP. Union Pacific's report on Thursday is a turnaround story if there ever was one. Operating revenue was up 6% to $2.7 bn as operating expenses fell 7% to $2.4 bn, producing an eleven-fold increase in net to $362 mm. Looking at the railroad by itself, operating revenues were up 7% to $2.5 bn while operating expenses were off 7% for a net of $325 mm, some 14 times the $25 mm reported in 1Q98. As one would expect, the biggest cost cuts were in car hire and fuel. The four-day cut on car cycle time was a big help here.

The operating ratio improved to 85.8 from 98.9. Chairman and CEO Dick Davidson told me in the Q&A that the target for the year is the "low 80s" and they'll get there the usual way - by raising revenues faster than they let the costs go up. I like that. The past 12 months show what can be done as commodity group revenue growth for 1Q99 outpaced carload growth 8% to 6% and average revenue per car went up 2%. Revenue per employee was $47,248 against $44,178, up a respectable 7% by itself.

The UP theme for 1999 will be Back to Basics through reduced failure costs, increased revenues, and reaping the merger benefit potentials. The revenue return seem to be working. Failure costs for 1999 YTD are down to 16% from the 1998 average of 21%, well on the way to the 1999 goal of 14 % and ultimate goal of 10%. Each of the so-called "quality measures" is broken down into components, and the concept can best be illustrated by car utilization. Its components are, in order of effect on productivity, train speed, terminal dwell time, customer delay, and repair/other. By far the largest is train-related, and that's driven by the usual. Back to basics, like the man says.

CSX came to town on Friday with a strong story to tell, maybe not so much in the numbers themselves but what's behind the numbers and what they point to. Revenues corporate-wide were up 3% to $2.54 bn while the operating income was off 1% to 276 mm and the net dropped 18% to 75 mm. The net Conrail effect on earnings was a negative $28 mm. Fortunately, said CEO and Chairman John Snow, "that exposure effectively comes to an end June 1 and we'll see ourselves back to normal in 2000." And that includes capex as well. The $1.5 bn per year rate seen of late will return to its more usual pace of $900 mm to a $billion in 2000 and beyond.

The big news on the railroad surely isn't operating income - flat at $273 mm quarter-to-quarter. It's what SVP Operations Ron Conway and SVP Marketing Aden Adams are doing in their respective realms. It's been remarked here and elsewhere how CSX has seized the visibility initiative in the Northeast vis a vis its archrival, Norfolk Southern. With what appears to be even more commercial types in the field beating the bushes for new business and some striking successes already in first-time ever north-south business commitments, it looks like Adams and Co. are collecting some wins.

On the operating side, Conway tells me they're comfortable the bugs have been worked out in Chicago, the LAM system is well on its way to being fully in place by 9/30, and that cars per crew start are up 3% quarter-to-quarter. Terminal dwell time is down 10% and average train speed is up 10%. There's been a 40% improvement in the train recrew rate, even given the horrific late winter weather. Keep this up and the Adams-Conway act might just get some rave reviews.

In other news this week, Norfolk Southern and Amtrak announced reaching a "memorandum of understanding" regarding Triple Crown (TCSC). Amtrak and TCSC agreed to share the use of RoadRailer multi-modal trailer handling facilities at Portside Yard in the Port of New York and New Jersey and at facilities in Harrisburg and Philadelphia. Also, the MOU establishes the fees and operating conditions for moving TCSC RoadRailers on Amtrak's Northeast Corridor between northern New Jersey and Washington, and on the Keystone Line between Harrisburg and Philadelphia.

One reason rail stocks have been trailing the market through the first quarter of 1999 is the threat of reregulation. Friend, author, speaker, and railroad analyst extraordinaire Tony Hatch has been making the rounds in Washington and elsewhere telling the railroad investment story. He has prepared a very thorough "White Paper" relating the threat of increased railroad regulation to the ability of the industry to attract investors and thus capital.

--Roy Blanchard

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