January 30, 1997 Confidential PRELIMINARY DRAFT
Materials Prepared for Discussion
North Carolina Railroad Company
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North Carolina Railroad Company
Table of Contents
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1. Overview
2. Alternatives for the NCRR Valuation
3. Discount Rate Analysis
4. NCRR Stock Price Performance
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CONFIDENTIAL
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North Carolina Railroad Company Preliminary Draft
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1.
Overview
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CONFIDENTIAL
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North Carolina Railroad Company Preliminary Draft
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2.
Alternatives for the NCRR Valuation
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CONFIDENTIAL
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North Carolina Railroad Company Preliminary Draft
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3.
Discount Rate Analysis
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CONFIDENTIAL
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North Carolina Railroad Company Preliminary Draft
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4.
NCRR Stock Price Performance
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CONFIDENTIAL 32
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North Carolina Railroad Company
Overview
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The North Carolina Railroad Company (NCRR), through the Special
Committee of its Board of Directors, is considering the value of the
NCRR to its minority shareholders in expectation of receiving a
buyout offer from the State of North Carolina (the State), the
majority shareholder of the NCRR.
Background
The major value of the NCRR is as owner of 317 miles of railroad
right of way and track in North Carolina. Most of NCRR's property
had been leased primarily to Norfolk Southern and its predecessors
in leases that expired at the end of 1994.
The NCRR negotiated a lease extension agreement (the Agreement) with
Norfolk Southern that was unanimously approved by the NCRR Board of
Directors on August 10, 1995. On July 29, 1996, a federal judge
invalidated the lease agreement, on the basis that a majority of
NCRR's minority shareholders had not been represented at the annual
meeting and therefore there was no quorum.
Subsequent to the invalidation of the Agreement, the NCRR filed a
motion with the Surface Transportation Board (STB) to set an interim
and permanent rate for Norfolk Southern to pay to use the NCRR line.
On August 26, 1996, the State announced that it was considering a
buyout of the NCRR and that it had retained Nationsbank as its
financial advisor.
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CONFIDENTIAL 33
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North Carolina Railroad Company
Perspectives of Value
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[GRAPHIC OMITTED]
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Value of Lease to NCRR Value of NCRR - to State
1. Value of lease payments 5. Similar values paid by states
under lease extension agreement for access to railroad corridors
2. Value of STB mandated lease payments
Value of NCRR - to Norfolk Southern Value of NCRR - to Others
3. Value up to the cost of diverting 6. ROW usage payments
traffic
4. Value of NCRR traffic
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North Carolina Railroad Company
Alternatives for the NCRR Valuation
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=========================================================================================================================
ALTERNATIVE PROS CONS
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Lease Value
o Current NCRR Board approved lease o Represents a commercially o Valuation not supported by minority
extension agreement negotiated agreement shareholders
o Potential for state to renegotiate
o RCNLD o Potential for high valuation o Numerous interpretations
o Potential outcome from STB ruling o STB outcome uncertain
o Dispute over ownership of assets
o NLV -- o Low valuation
o Unlikely to be used by STB
o Lease to Third Party o Value enhancing amendment to the o Potential for State to renegotiate
current situation
Norfolk Southern Value
o Diversion Analysis o Yields high valuation o Uncertain as to how much NS would
give up
o Income Value o Higher valuation than lease o Uncertain as to how much NS would
extension give up
o Railroad purchases o Numerous transactions with o Not necessarily comparable to NCRR
available data situation
State of North Carolina Value
o Corridor purchases o Transactions are probably most o Difficult to correlate data
comparable to a state buyout
o Land Value o Base cost for replacing the ROW o Not a full costing (only land)
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North Carolina Railroad Company
Valuation Methodologies
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($ in Millions except per share values)
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PRELIMINARY
METHODOLOGY VALUATION RANGE PER SHARE VALUE COMMENT
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Lease Value
Lease Extension Agreement $145 - $190 $33.76 - $44.46 $8 million NS lease
Replacement Cost New Less $70 - $474 $16.39 - $110.60 Surface Transportation Board (STB) Methodology
Depreciation (RCNLD)
Net Liquidation Value (NLV) $75 - $78 $17.42 - $18.22 STB Methodology. Only used once previously
Third Party Lease $154 - $199 $35.95 - $46.46
Value to Norfolk Southern
Diversion $782 $182.56 Capital cost and extra operating cost
Income $212 - $255 $49.59 - $59.43 NCRR Share of NS North Carolina income
Railroad Purchases $280 - $330 $65.37 - $77.04 Income value plus sale price (Raleigh to
Morehead City)
Value to State
Corridor Purchases $450 - $740 $105.06 - $173.17 Florida and California corridor purchases -
purchase price based on RCNLD
Land Value NC DOT Estimates $225 - $250 $52.53 - $58.36 Cost of a 200 ft., 317 mile ROW between Morehead
City and Charlotte
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CONFIDENTIAL 36
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North Carolina Railroad Company
Preliminary DCF Valuation Ranges -- Lease Extension
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($ in Millions except per share values)
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REAL DISCOUNT RATE
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VALUE 4.5% 5.0% 5.5% 6.0%
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Perpetuity of Lease Payments (1,7) $207.0 $186.7 $170.1 $156.3
Perpetuity of NCRR Expenses (1,2,7) (13.3) (12.0) (11.0) (10.1)
Value of Renewal Payment (3) 0.7 0.7 0.7 0.7
Less Value of Indexing Cap (4) (6.2) (5.6) (5.1) (4.7)
------ ------ ------ -------
Equity Value $188.1 $169.8 $154.7 $142.2
Equity Value Per Share (5) $43.93 $39.65 $36.15 $33.23
Non-Railroad NCRR Assets (6) $2.35 $2.35 $2.35 $2.35
Adjusted Equity Value $190.4 $172.1 $157.1 $144.6
Adjusted Equity Value Per Share (5) $44.46 $40.18 $36.67 $33.76
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Assumes transaction closes 12/31/97
(1) Assumes Mid-Year Discounting
(2) $550,000 in 1995 dollars, indexed by the IPD-GDP
(3) Assumes a $5.0mm payment received 12/31/2023, discounted at 8.0%
(4) Assumes the Indexing cap has a (3.0)% impact on revenue value
(5) 4,283,470 shares outstanding 9/30/96 10-Q
(6) Non-railroad real property not producing income.
(7) IPD-GDP deflator values used were 2.24% for 1994, 2.57% for 1995 and
1.73% for 1996.
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CONFIDENTIAL 37
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North Carolina Railroad Company
NCRR Revenue Sources-Lease Extension
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REVENUE SOURCES PER YEAR(1) ISSUES
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Tier 1 Revenue Certain Under Lease
Lease Extension $8,000,000 Indexed by the GDP deflator
1968 Lease 81,319 Fixed
Non-operating Properties 100,000 NCRR Estimate
Dividend 4,500 30 shares of the University
---------- Railroad with a $150 dividend
Tier 1 Revenue $8,185,819
Tier 2 Revenue - Unresolved Issues
CSX/1862 Chatham Railroad Lease $115,000 Under negotiation:
- $80,000 track usage fee,
indexed
- $35,000 Non-operating
lease pass-throughs
Lease Extension CSX Usage payment 250,000
Tier 2 Revenue $ 365,000
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Tier 1 & Tier 2 Revenue $8,550,819
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(1) 1995 dollars
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North Carolina Railroad Company
NCRR Cash Costs -- Lease Extension
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NORMALIZED NCRR OPERATING COSTS - 1995 DOLLARS(1)
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$ 275,000 Salaries & Administrative
45,000 Professional Fees
- Consulting
100,000 Insurance & Taxes
30,000 Capital Expenditure
100,000 Other
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$ 550,000
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(1) Cash costs grow at the rate of the implicit price deflator of the gross
domestic product (IDP - GDP)
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CONFIDENTIAL 39
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North Carolina Railroad Company
Estimate of STB Determined Rental
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In the absence of an agreement between the NCRR and Norfolk Southern
for a lease of the NCRR's property, as the result of an NCRR
petition, the STB should rule on the NCRR's request to set both
interim and permanent lease rates for Norfolk Southern's use of the
NCRR.
Choice of Methodologies
There is no prescribed methodology for the STB to follow in setting
rates for track usage, however Replacement Cost New Less
Depreciation (RCNLD) is the methodology with the most precedent. Net
Liquidation Value (NLV) has been used in one case. If the STB rules
on the rent to be paid by the NCRR there is no guarantee that the
STB will use either of these methodologies to calculate the rate to
be paid, or it may make adjustments in the way it applies them.
Lack of Precedent
It must be noted that the STB has not presided over a case in which
a non-operating entity has leased its tracks to an operating
railroad. The fact that the NCRR is a REIT adds to the complexity of
the situation and makes the outcome of the STB hearings more
unpredictable.
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CONFIDENTIAL 40
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North Carolina Railroad Company
STB Lease Rate Setting -- RCNLD
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Reproduction Cost New Less Depreciation Analysis
($ in Millions)
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POTENTIAL GROSS RENTAL LESS
POTENTIAL PROPERTY DEFINITIONS (1) RCNLD ANNUAL RENTAL(3) UPKEEP (4)
VALUATION(2) @11.7% @11.7%
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1. Land only - 50' ROW (Right of Way) $ 40 $ 4.7
2. Land with Grading and Bridges - 50' ROW 180 21.1
2a. Scenario 2 without Bridges 161 18.8
3. Land only - 200' ROW 115 13.5
4. Land with grading and bridges -200' ROW 260 30.4
4a. Scenario 4 without bridges 241 28.2
5. Land with grading, bridges, track and signals - 200' ROW 400 46.8 $ 22.1
6. Land with grading, bridges, track and signals - 200' ROW plus yards
and shops excluding Spencer (Linwood) Yard 412 48.2 23.5
7. Land with grading, bridges, track and signals - 200' ROW plus yards
and shops including Spencer (Linwood) Yard 450 52.7 28.0
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(1) Examines various definitions of property varying from narrow to broad.
(2) Based upon Mercer Management Consulting analysis.
(3) STB rail industry composite after-tax cost of capital for 1995.
(4) Assumes maintenance of $10.2mm and capital expenditures of $14.5mm, based
on Mercer Management Consulting analysis.
Possible STB options:
(i) Use a restricted asset definition (Scenarios 1 to 4a) and leave NS the
upkeep; or
(ii) Use a full asset definition (Scenario 5, 6 or 7) and charge the NCRR for
upkeep.
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North Carolina Railroad Company
RCNLD Lease Values
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Perpetuity Value of RCNLD Leases (6)
(Dollars in Millions, except per share values)
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PERPETUITY OF GROSS RENTAL LESS
RENTAL @ 6.0% UPKEEP @ 6.0% (5)
--------------------------------------------
POTENTIAL 11.7% PER 11.7% PER
POTENTIAL PROPERTY DEFINITIONS(1) RCNLD VALUATION RENTAL(3) SHARE(4) RENTAL(3) SHARE(4)
(2)
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1. Land only - 50' ROW (Right of Way) $ 40 $70.2 $16.39
2. Land with Grading and Bridges - 50' ROW 180 351.3 82.01
2a Scenario 2 without Bridges 161 313.1 73.10
3. Land only - 200' ROW 115 220.8 51.54
4. Land with grading and bridges -200' ROW 260 511.9 119.50
4a Scenario 4 without bridges 241 473.7 110.60
5. Land with grading, bridges, track and signals - 200' ROW 400 793.0 185.12 $369.1 $86.17
6. Land with grading, bridges, track and signals - 200' ROW plus yards 412 817.1 190.75 393.2 91.80
and shops excluding Spencer (Linwood) Yard
7. Land with grading, bridges, track and signals - 200' ROW plus yards 450 893.3 208.56 469.5 109.61
and shops including Spencer (Linwood) Yard
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(1) Examines various definitions of property varying from narrow to broad.
(2) Based upon Mercer Management Consulting analysis.
(3) STB rail industry composite after-tax cost of capital for 1995.
(4) 4,283,470 shares outstanding.
(5) Assumes maintenance and capital expenditure of $24.7mm.
(6) Includes a one-time charge for NCRR general and administrative expenses of
$10.1mm.
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CONFIDENTIAL 42
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North Carolina Railroad Company
STB Lease Rate Setting -- Net Liquidation Value
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Net Liquidation Value (NLV) has been used on one occasion by the
STB. It may be used if the STB were to allocate maintenance to
Norfolk Southern.
Net Liquidation Value Methodology
($ in Millions)
=============================================================================
POTENTIAL NLV GROSS ANNUAL
POTENTIAL PROPERTY DEFINITIONS VALUATION RENTAL 11.7% (1)
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Property including Spencer (Linwood) Yard $43.9 $5.1
Property excluding Spencer (Linwood) Yard $42.2 $4.9
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(1) STB rail industry composite after-tax cost of capital for 1995.
Source: Mercer Management Consulting analysis.
Perpetuity Value of NLV Based Rental(2)
($ in Millions, except per share values)
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POTENTIAL NLV VALUE AT VALUE AT
POTENTIAL PROPERTY DEFINITIONS VALUATION 6.0% 6.0%
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Property including Spencer (Linwood) Yard $43.9 $78.0 $18.22
Property excluding Spencer (Linwood) Yard $42.2 $74.6 $17.42
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(2) Includes a one-time charge for NCRR general and administrative expenses of
$10.1mm.
(3) 4,283,470 shares outstanding.
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CONFIDENTIAL 43
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North Carolina Railroad Company
Lease to Third Party
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There may be some interest from a short line operator to lease or
purchase the right to operate freight service from Raleigh to
Morehead City.
NS also may be perceived as the only logical operator of the
Raleigh-to-Charlotte line.
Value Implications
o Mercer Management Consulting believes the Raleigh-Morehead
City line is currently a loss maker and therefore there should
be no loss of NS revenue (under the Lease Extension
Agreement).
o Assumes the freight rights on the Raleigh-to-Morehead City
segment are valued at 2.0x revenues ($9.0mm).
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CONFIDENTIAL 44
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North Carolina Railroad Company
Preliminary Diversion Analysis --
Roanoke/Bristol/Knoxville Line
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Cost and Value Impact on NS
($ in Millions)
========================================================================
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Annual Operating Cash Flow Impact on NS in 1997 $ 69.0
NS 1997 Operating Cash Flow Multiple (1) 7.4x
Implied Loss of Value to NS Due to Lost Operating Cash Flow $ 511
Replacement Capital Requirement $ 271
Total Estimated Valuation Impact $ 782
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Source: Mercer Management Consulting Analysis
(1) As of 1/28/97
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North Carolina Railroad Company
Impact of Additional Car Mileage and Traffic
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Mercer Management Consulting estimates that the annual operating
cash flow impact to NS to divert traffic from the NCRR is
approximately ($69)MM.
The Key assumptions:
o NS would retain all divertible traffic and upgrade the
Roanoke/Bristol/Knoxville line
o NS would lose all local and non-divertible overhead traffic on
the NCRR
o NS would retain traffic forwarded to and received from the
NCRR, but would experience a diminished length of haul and
diminished revenue and operating costs
o Changes in NS operating costs are based on analysis using the
Uniform Rail Costing System (URCS)
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North Carolina Railroad Company
NS Replacement Cost for the NCRR
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Mercer's estimate for the capital cost to replace the NCRR is $271MM
based upon:
o Upgrading the Roanoke/Bristol/Knoxville route to carry all
non-captive overhead traffic from the NCRR.
o 304,000 carloads to be diverted
o Estimates provided by NCRR and adjusted for recent events
- ---------------------------- ---------------------------- ----------------------------
Line Segment Item/Quantity Total Cost ($MM)
- ---------------------------- ---------------------------- ----------------------------
Roanoke - Bristol Passing Track/10.5 miles $16
Bristol - Knoxville CTC/90 miles 14
Passing Track/14 miles 21
Knoxville - Ooltewah CTC/86 miles 14
Passing Track/12 miles 18
Bull's Gap - Atlanta 2nd Main Track/135 miles 189
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$271
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CONFIDENTIAL 47
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North Carolina Railroad Company
NCRR Operating Cash Flow to Norfolk Southern
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Mercer Management Consulting prepared estimates of NS' NCRR derived
operating cash flow using three different methods. The yearly
figures are:
Regression Model --> $33.4 million
North Carolina State Reporting --> $34.4 million
NS System Total Reporting --> $28.7 million
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Range $28.7 - $34.4 million
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NS 1997 Operating Cash Flow Multiple 7.4x
(3)
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Implied Enterprise Value $212.4 - $254.6 million
Implied Per Share Value $49.59 - $59.43
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(1) Revenues were estimated and allocated based on gross-ton
mileage information derived from NS' traffic density map.
(2) Estimates were developed for three segments of the NCRR line:
Charlotte - Greensboro; Greensboro - Raleigh; Raleigh -
Morehead City.
(3) As of 1/28/97.
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North Carolina Railroad Company
Selected Comparable Railroad Transactions
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U.S. Class 1 Railroad
($ in Millions)
===================================================================================================================================
ADJUSTED VALUE AS A MULTIPLE OF
-------------------------------
ADJ. PRICE /
DATE ANN./ TARGET COMPANY ADJUSTED ADJ. PRICE/ TRACK MILE OPERATING OPERATING
DATE COMP. ACQUIRING COMPANY EQUITY PRICE PRICE MGTM (1) ($000'S) SALES CASH FLOW INCOME
- ------------------------------------------------------------------------------------------------------------------------------
10/23/96 Conrail, Inc./ $10,465.7 $12,425.2 N.A. $701.4 3.3x 12.6x 17.7x
Pending Norfolk Southern Corp.
10/15/96 Conrail, Inc./ $9,762.9 $11,722.4 N.A. $661.8 3.1x 11.8x 16.6x
Pending CSX Corp.
1/17/96 CCP Holdings, Inc. / $139.0 $157.0 $34.9 $184.7 2.1x 4.4x 4.6x
6/13/96 Illinois Central Corporation
11/10/95 Mexrail Inc./ $46.9 $46.9 N.A. $299.0 2.6x N.A. N.A.
12/12/95 Kansas City Southern
Industries
8/3/95 Southern Pacific Rail Corp./ $4,012.9 $5,476.0 N.A. $377.7 1.7x 12.5x 18.7x
9/11/96 Union Pacific Corp.
3/23/95 Chicago & North Western/ $1,573.6 $2,667.7 N.A. $477.1 2.4x 8.9x 11.8x
6/23/95 Union Pacific Corp.
1/18/95 Santa Fe Pacific Corp./ $3,635.8 $4,770.4 N.A. $611.6 1.8x 7.6x 11.1x
Withdrawn Union Pacific Corp.
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(1) Mercer Management estimates.
(Continued on next page)
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North Carolina Railroad Company
Selected Comparable Railroad Transactions
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U.S. Class 1 Railroad
($ in Millions)
===================================================================================================================================
ADJUSTED VALUE AS A MULTIPLE OF
-------------------------------
ADJ. PRICE /
DATE ANN./ TARGET COMPANY ADJUSTED ADJ. PRICE/ TRACK MILE OPERATING OPERATING
DATE COMP. ACQUIRING COMPANY EQUITY PRICE PRICE MGTM (1) ($000'S) SALES CASH FLOW INCOME
- ------------------------------------------------------------------------------------------------------------------------------
12/23/94 Santa Fe Pacific Corp./ $4,077.8 $5,212.4 N.A. $668.2 1.9x 8.3x 12.2x
9/22/95 Burlington Northern Inc.
7/19/94 Kansas City Southern $638.7 $1,573.7 $59.4 $551.2 3.1x 8.2x 11.1x
Withdrawn Industries, Inc.
(Railway Division)/
Illinois Central Corporation
9/12/92 MidSouth Corporation/ $213.5 $350.0 $58.6 $318.2 3.2x 8.2x 11.1x
6/10/93 Kansas City Southern
Industries, Inc.
1/8/92 Green Bay & Western $7.7 $10.2 N.A. $40.0 0.5x N.M. N.M.
8/27/93 Railroad Co./
Wisconsin Central
Transportation Corp.
(Itel Corp.)
1/8/92 Fox River Valley Railroad Co./ $54.4 $79.3 $72.1 $375.8 2.8x 9.6x 13.3x
8/27/93 Wisconsin Central
Transportation Corp. (Itel
Corp.)
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(1) Mercer Management estimates.
(Continued on next page)
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North Carolina Railroad Company
Selected Comparable Railroad Transactions
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U.S. Class 1 Railroad
($ in Millions)
===================================================================================================================================
ADJUSTED VALUE AS A MULTIPLE OF
-------------------------------
ADJ. PRICE /
DATE ANN./ TARGET COMPANY ADJUSTED ADJ. PRICE/ TRACK MILE OPERATING OPERATING
==============================================================================================================================
DATE COMP. ACQUIRING COMPANY EQUITY PRICE PRICE MGTM (1) ($000'S) SALES CASH FLOW INCOME
05/16/90 Delaware & Hudson Railway/ $25.0 $25.0 N.A. $28.9 N.A. N.A. N.A.
1/18/91 Canadian Pacific Ltd.
2/20/90 RF&P Corp. (Railway $135.0 $135.0 N.A. $1,194.7 2.7x 6.5x 8.4x
10/10/91 Operations)/
CSX Corp.
-----------------------------------------------------------------------------------
High: $72.1 $1,194.7 3.3x 12.6x 18.7x
Average: 56.3 463.6 2.4x 9.0x 12.5x
Median: 59.0 427.4 2.6x 8.3x 11.8x
Low: 34.9 40.0 0.5x 4.4x 4.6x
-----------------------------------------------------------------------------------
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Implied Enterprise Value of NCRR
NCRR - Average $292.8 $147.0 $195.4 $309.6 $331.3
NCRR - Median 306.8 135.5 211.6 285.5 312.7
Implied Per Share Value of NCRR
NCRR - Average $68.35 $34.31 $45.61 $72.28 $77.33
NCRR - Median 71.62 31.63 49.41 66.66 73.00
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(1) Mercer Management estimates.
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CONFIDENTIAL 51
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North Carolina Railroad Company
Value to the State
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The NCRR represents a railroad operation and right of way (ROW) that
will be of increasing value to the State as time passes and the cost
of reproducing the ROW increases.
The use of the railroad for economic development and transit
purposes has value to the State in a number of ways, including:
o Taxation revenue o Right of way usage
o Reduced highway spending o Employment
o Environmental Priorities
Valuation of the benefits of full ownership of the NCRR by the State
is difficult to quantify, especially considering that passenger rail
services, while often desired by a government are usually cash flow
negative. Two recent railway corridor purchases by the states of
Florida and California show that replacement cost can be a proxy for
value in instances in which a State is purchasing a rail corridor
for public use.
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CONFIDENTIAL 52
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North Carolina Railroad Company
State Uses For the NCRR
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================================================================================
PROPOSED USES OF THE NCRR
- --------------------------------------------------------------------------------
Triangle Transit Authority Chartered with providing public
transport within the Triangle area -
is proposing to run passenger commuter
service over NCRR lines in the
Triangle.
High Speed Rail Corridor(1) The NCRR line between Charlotte and
Raleigh has been designated as part of
a high speed rail corridor by the U.S.
Department of Transport, linking
Charlotte to Washington, D.C.
Global Transpark(1) Rail service along the NCRR's route is
seen a major supporting element for
the establishment of the Global
Transpark in eastern North Carolina.
Promoting Economic Encourage industry to locate close to
Development(1) the NCRR through the use of
concessional freight rates and
favorable leases on NCRR property. The
NCRR is seen as an important element
for the further development of the
Morehead City port.
Corridor Uses(1) ROW use for oil, gas, water or sewer
lines; communications lines and power
transmission.
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(1) Report of the Governor's Special North Carolina Railroad Study Group.
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CONFIDENTIAL 53
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North Carolina Railroad Company
State Rail Corridor Purchases
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Two recent purchases of railroad corridors give an indication of the value place
by a State on the ownership of a railroad corridor in fast growing and densely
populated areas.
($ in Millions except for per share values)
====================================================================================================================
IMPLIED NCRR (1)
ACQUIROR/SELLER DATE DESCRIPTION PRICE PRICE PER MILE PRICE PER SHARE
- --------------------------------------------------------------------------------------------------------------------
State of Florida/ 1988 81 miles of track from $ 263 $ 3.25 $ 240.42
CSX Corp West Palm Beach to Miami.
CSX retained freight rights
State of California/ 1992/1993 340 miles of track sold to
Santa Fe 8 transportation agencies $ 482 $ 1.42 $ 104.91
in the Los Angeles area
Average
$ 2.34
NCRR at Average Price 317 Miles $ 740 $ 2.34 $ 173.17
NCRR RCNLD 317 Miles $ 450 $ 1.42 $ 105.06
- --------------------------------------------------------------------------------------------------------------------
Note: The valuation basis of the Florida/CSX transaction was RCNLD.
(1) Based on price per mile by 317 miles and 4,283,470 shares
outstanding.
The section of NCRR track from Raleigh to Charlotte offers the State
the section of the track most ready to be used for passenger
service, while the section of the track from Raleigh to Morehead
City is where the railroad is important to the economic development
aims of the State.
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CONFIDENTIAL 54
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North Carolina Railroad Company
NCRR Right of Way Land Value - NCDOT Estimate
- --------------------------------------------------------------------------------
In December 1996, the right-of-way (highway) section of the North
Carolina Department of Transportation estimated the cost of
acquiring land to duplicate the NCRR right of way. The cost estimate
was $225MM - $250MM.
Land Value Estimates
- -----------------------------------------------------------------------------
LOCATION DOLLARS PER ACRE
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Morehead City, Havelock, New Bern Kinston $50,000 - $200,000
Outlying Morehead City and Selma 2,000 - 10,000
Raleigh, Durham and Research Triangle 30,000 - 200,000
Rural areas of Durham, Orange and Alamance counties 5,000 - 10,000
Burlington 40,000 - 80,000
Rural Alamance and Eastern Guilford 5,000 - 25,000
Greensboro/High Point 50,000 - 100,000
Rural Davidson County 4,000 - 4,000
Salisbury 40,000 - 80,000
Kannapolis, Concord and Charlotte 40,000 - 60,000
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CONFIDENTIAL 55
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North Carolina Railroad Company
IPD - GDP Estimate
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Lease Extension Agreement between NCRR and Norfolk Southern contains a provision
for the payments by Norfolk Southern to be indexed, on a lagged basis, by the
Implicit Price Deflator of Gross Domestic Product (IPD-GDP). An estimate of an
average rate 1.0-3.0% for the IDP-GDP for the next 50 years will be used.
There are few published long term estimates for the US IPD-GDP
available from reliable sources. As a result a Credit Suisse First
Boston economist was consulted. His view is:
o There has been, and continues to be, a shift in the fiscal
policies of Governments globally towards fiscal restraint and
balanced budgets;
o This will lead to the IPD-GDP averaging between 1.0%-3.0% over
the next 30-50 years, compared to a compounded annual rate of
4.4% from 1960 to the third quarter of 1996;(1)
o This estimate does not take into account the impact a major
war or oil shock could have on inflation as the timing and
impact (if any) of these events difficult to estimate.
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(1) Data inconsistencies make a comparison of IPD-GDP values prior to 1960 to
those after 1960 inconsistent, however including the 1950's in the
equation would lower the average compound IDP-GDP rate. For the CPI it
lowers the average 0.55% and for the Producer Price Index (PPI) by 0.42%.
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CONFIDENTIAL 56
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North Carolina Railroad Company
Measures of Inflation
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Consumer Price Index, Producer Price Index and IPD - GDP
Quarterly Year-on-Year Percent Changes
1950-1996 Q3
[LINE GRAPH OMITTED]
Source:
PPI and CPI, Bureau of Labor Statistics, IDP - GDP, Bureau
of Economic Analysis.
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CONFIDENTIAL 57
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North Carolina Railroad Company
Preliminary Discount Rate Analysis
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=====================================================================================================================
SECURITY/INDEX NOMINAL YIELD BENEFITS OF USING AS PROXY DOWNSIDES OF USING AS PROXY
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P&WV Common(1) 7.86% o All revenues derived from o Under the terms of the lease,
long-term operating lease with NS annual payments do not grow with
REIT structure inflation
o Relatively small market capitalization
o P&WV lease goes through 2067 (less
renewal risk)
NS Preferred(2) 6.36% o Reflects subordinated, unsecured o Fixed rate coupon
position in long-term NS obligation
o Does not grow with inflation
o Preferred has DRD eligibility
S&P Utility Index(3) 5.05% o Dividends grow roughly with o Reflects common stock and
inflation utility-specific risk
o Distributes majority of earnings
as dividends
NS Long Term Debt (4) 7.54% o Actual long term NS debt, o No inflation adjustment
(2021) reflecting unsecured position in Low renewal risks
long term NS obligation
U.S. Government 3.45% o Reflects inflation premium o Controversy over the exact CPI
CPI Indexed Bond(5) definition and novelty may depress
yield.
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(1) NS railroad lease that qualifies for REIT tax status. Assumes quarterly
dividend of $.14 per share; $7.13 per share closing price 1/28/97. Market
equity value of $10.6 million.
(2) Based on $2.60 annual dividends; $40.88 closing price 1/29/97.
(3) As of 1/28/97.
(4) As of 1/28/97.
(5) First auction of 10 year U.S. Government CPI indexed bonds occurred on
1/29/97, with an acceptance yield of 3.45%.
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CONFIDENTIAL 58
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North Carolina Railroad Company
Preliminary Discount Rate Analysis
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Potential Estimates of Real Discount Rate
=============================================================================================================================
P&VW S&P UTILITY US GOV'T REFERENCE
SOURCE COMMON NS PREFERRED NS DEBT INDEX INDEXED BOND RANGE
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Current Nominal Yield 7.86% - 7.86% 6.36% - 6.36%(3) 7.54% - 7.54% 5.05% 3.45%
Long-Term Inflation Expectation 3.00% - 1.00% 3.00% - 1.00% 3.00% - 1.00% - -
---- ---- ---- ---- ---- ----
4.86% - 6.86% 3.36% - 5.36% 4.54% - 6.54% 5.05% 3.45% 4.5 - 6.0%
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Impact of Inflation Rate Escalation Cap
=========================================================================
ANNUAL COMPOUND RATE
1960 - 1995 1950 - 1995
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IPD - GDP 4.39% NA
Consumer Price Index 4.71% 4.16%
Producer Price Index 3.87% 3.45%
IDP-GDP Under Index Cap 4.11% (1)
Impact on Value (3.81)%(2)
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(1) Lease Extension Agreement indexing cap of 4% adjustment plus 75% of
IPD-GDP movement in excess of 4.0%
(2) Discounted at 8.0% and includes IPD-GDP adjustment cap.
(3) Does not include a yield adjustment for DRD. Adjustment would result in a
yield of 9.0% assuming a 38.0% tax rate.
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CONFIDENTIAL 59
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North Carolina Railroad Company
Recent Stock Price Performance
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Daily Closing Prices
January 3, 1996 to January 29, 1997
[BAR GRAPH OMITTED]
Source: IDD Information Services/Tradeline.
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