Friday, September 18, 2009

Morgan Stanley: Rail legislation foreseen as month ends

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In a conference call with Morgan Stanley analysts William Greene and Adam Longson, former Surface Transportation Board Chair Linda Morgan anticipated a draft version of rail legislation to be introduced by Sen. Jay Rockefeller (D-W. Va., pictured at right) “very soon," and likely before the month ends. Morgan Stanley foresees a “compromise bill” resulting as Congress seeks to handle a potentially contentious issue.

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Morgan told the Morgan Stanley duo a focus on other issues, including healthcare and climate, has delayed rail legislation, but Congress is likely to act now and not wait for 2010, a congressional election year. “If a rail bill is going to pass by year-end, the end of September is likely a critical deadline for introducing draft legislation,” the analysts said in a note.

“The mere introduction of rail legislation will create headline risk for rails, and the recent appreciation in shares makes the stocks increasingly vulnerable to a near-term correction,” Greene and Longson warned. “There are three key areas the proposed legislation is likely to address: 1) provisions to strengthen the STB, giving it more authority, resources and commissioners; 2) provisions to help increase customer access to the rail networks; and 3) reforming review process on rail rates and service.”

Added Morgan Stanley, “Significant compromise is the most likely outcome, in our view. Any rail bill will need consensus to ensure it passes with little debate, given the proposed timeline. The rails may support a compromise bill to avoid potentially more onerous legislation, while shippers may accept a compromise to avoid potentially walking away with nothing.

“We don't think a compromise bill will lead to a wholesale change in rail economics. While far from the best-case scenario, this is more favorable than antitrust legislation or re-regulation, which could affect rail profitability in a materially negative way,” Greene and Longson wrote.