The Railroad Week in Review:
Week Ending May 22, 1999

The shocker of the week was the surprise announcement that Canada's RaiLink (TSE: RLK) has agreed to be acquired by RailAmerica (Nasdaq: RAIL) in an all-cash deal for $C8.75 a share. We first reported on RTL back in January (WIR, 1/16, 23/99) noting "Of particular interest to railroad investors, as of the end of Q398 RLK sports an operating ratio in the mid-80s and EBITDA/interest coverage ratio of about ten. Long term debt is around 44% of equity and 31% of capitalization. With $22 mm cash in its corporate jeans, RLK is well-positioned to buy more properties."

The skies darkened considerably for RLK in February when OmniTrax made off with a 25% piece of the company. We wrote (WIR 3/13), "Privately held OmniTrax, a Denver-based shortline holding company, has acquired 25% of Canada's RaiLink (TSE: RLK) in just two bites, the first 2/12, the second 2/19." A press release from RLK dated 2/22 said simply, "No member of the Board of Directors of management of RaiLink has been contacted by OmniTrax disclosing the intention of OmniTrax."

Then on March 10 RLK sent out a release saying it had authorized its financial advisor, HSBC Securities, "to approach parties who may have an interest in consummating a transaction with the company…to enhance shareholder value." Looks like they succeeded. As of May 14, 1999, RaiLink had approximately 8.36 million common shares outstanding on a fully diluted basis, giving the transaction a potential equity value of approximately $C73.2 mm ($US 50 mm).

The 12/31/98 financials for RLK show total assets of $C88 mm including $C6 mm each of cash and working capital. LTD had swollen to $28 mm against equity of $C52 mm. Revenues for the year came in at $C40 mm with operating expenses at $C35 mm. The EBITDA of $C10 mm handily covered interest payments of $C1 mm.

Which means RAIL is paying about 1.8 times sales for a property that has a part interest in many miles of heavy traffic in eastern Quebec plus full title to many miles of sparse traffic northern Alberta (for a map, see The question now becomes how will RAIL pay for it? Recent acquisitions include the CP lines on Vancouver Island (price undisclosed), the V/Freight lines in Australia ($US 103 mm) and now this ($US 50 mm). The 1998 operating cash flow was $5.7 mm against interest payments of $4.9 mm and $36 mm in payments on debt and cap leases.There was $56 mm in new debt issued.

Well, it's finally over (almost). On Monday CSX Corporation (NYSE: CSX) and Norfolk Southern Corporation (NYSE: NSC) formally notified the Surface Transportation Board (STB) that they will begin operating their respective parts of Conrail on June 1, 1999. On Thursday the STB's Linda J. Morgan confirmed the date. Got your lawn chairs, fans, and programs ready?

Elsewhere, NSC has signed an agreement with New York Cross Harbor Railroad (NYCH) to provide exclusive access to the NYCH bulk terminal facility at Bush Terminal in Brooklyn starting June 1. The facility will feature 124 car spots, complete paving, security, full fencing, lighting, a truck scale, 24-hour access, full-time personnel and an office building. NS will gain access via the NYCH car float from the Conrail Shared Asset Area (SAA) Greenville (NJ) yard.

Always on Friday. Burlington Northern Santa Fe (NYSE:BNI - news) said Friday it was slashing 400 jobs, or 7 percent of its salaried work force, and naming a new president as part of a restructuring at the second-largest U.S. railroad. It said the move was aimed at boosting profits and cutting costs in part because revenues are slipping to below levels of a year ago. As a result, its second-quarter earnings will fall below the current Wall Street consensus estimate of 60 cents per share and the 58 cents per share reported for the 1998 quarter, it said.

BNSF will reduce 1999 cash capital expenditures by an additional $100 million, bringing total 1999 cash capital expenditures to $1.85 billion. This reduces 1999 total capital expenditures to $2.275 billion. Total 2000 capital expenditures will be reduced to the $1.8-to-$1.9 billion range, with cash capital expenditures in the $1.5-to-$1.6 billion range. Followers of the capital spending game will recall there has been some carping in the corridors about the major rails spending too heavily on capital projects. Could be they were onto something.

Krebs reported that, "Revenues are currently trending slightly below the second quarter of 1998. As a result, we anticipate that quarterly earnings will be below the $0.58 cents per diluted share reported for the second quarter of 1998. In addition, we estimate that the severance costs associated with the planned reductions will be between 6 and 8 cents per share. For the most part, these costs will be offset by a reversal of 1995 merger-related severance reserves."

The executive floor will see some big changes. Matt Rose, currently Senior Vice President and Chief Operations Officer, has been elected President and Chief Operating Officer, effective June 1, with responsibility for both operations and marketing. He will report to Rob Krebs, who will retain the positions of Chairman and Chief Executive Officer. Reporting to Rose will be Charles Schultz, who has been elected Executive Vice President and Chief Marketing Officer, also effective June 1. Carl Ice, currently Vice President, Operations North, has been promoted to Senior Vice President, Operations, reporting to Rose, effective - you guessed it -- June 1. Shortline friend and advocate Doug Babb will leave the company.

Good news for the wood trade: Canadian National (NYSE: CNI) will add 400 new centerbeam flat cars to its lumber car fleet this year at a cost of $35 mm. By year-end CN will have spent $125 million over three years to acquire 1,300 new centerbeam cars for lumber producers. The current centerbeam fleet consists of 6,600 cars, of which nearly 3,300 are 73 feet in length. And if you don't like centerbeams, CNI has 4,000 box cars equipped to handle lumber products.

Forest products are big business at CN, accounting for 21 per cent of total 1998 revenue. Lumber is the largest revenue producer among forest products hauled by CN, making up 40 per cent of all forest products revenue. Service, too, is on the upswing. Said Tellier, "Our service is now built around operating procedures that run trains on optimum schedules with only minimal variance to the day-to-day plan. Cars have precise schedules, stated in hours, rather than days. Our goal is run a railroad with the efficiency and reliability of a conveyor belt.'' And that's the way is should be.

Sick joke of the week department: WASHINGTON (AP) -- The government sent a letter Monday to the truck driver involved in the Bourbonnais, Ill., Amtrak crash that accused him of falsifying his driving time log book and informing him he will be fined. Federal regulations allow a fine of $500 per instance. That's pretty cheap for killing eleven and injuring another hundred souls.

And to really turn the screws, the driver will lose his license for 60 days because of a ticket unrelated to the crash. He has been ticketed for moving violations at least seven times since 1993. A spokesperson for the highway administration said she "hopes the letter and punishment will send a message. We are committed to communicating to commercial drivers that falsifying logbooks will not be tolerated.'' Never mind driving around the gates into a train's path. But we'll get that sucker on logbooks, yessiree! By way of comparison, a freight railroad operating a train at eleven mph in a ten-mph zone can be fined up to $10,000. Go figure.

--Roy Blanchard

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