[LETTERHEAD OF MERCER MANAGEMENT CONSULTING]
Privileged and Confidential
Prepared for Use of Counsel
August 12, 1994
Betty Jo Christian, Esq.
Steptoe & Johnson
1330 Connecticut Avenue, NW
Washington, DC 20036-1795
Dear Betty Jo:
As requested by Betty Jo Christian in her memorandum of July 28, 1994, I am
enclosing our estimates of Reproduction Cost New Less Depreciation (RCNLD) for
NCRR properties for each of the six scenarios listed in her request. The results
of our analysis are summarized in the table immediately below and the
assumptions regarding unit reproduction costs, depreciation rates, and other key
valuation factors are detailed in the enclosed exhibits.
Summary of RCNLD Estimates
RCNLD Interest Rental*
Scenario ($ million) ($ million)
- ----------------------------------------------- ----------- ----------------
1 Land only - 50' ROW 40 4.6
2 Land with grading and bridges - 50' ROW 180 20.5
3 Land only - 200' ROW 115 13.1
4 Land with grading and bridges - 200' ROW 260 29.6
5 Land with grading, bridges, track and signals
- 200' ROW 400 45.6
6 Land with grading, bridges, track and signals
- 200' ROW plus yards and shops** 412 47.0
- ----------
* At ICC - determined rail industry composite cost of capital for 1993 of
11.4%
** Excludes Linwood Yard with RCNLD of $38 million
[LETTERHEAD OF MERCER MANAGEMENT CONSULTING]
Betty Jo Christian, Esq. CONFIDENTIAL
August 12, 1994
Page 2
There are several cautions that need to be mentioned with respect to these
estimates. First, while these estimates represent a further refinement of our
initial RCNLD work in our September 1993 Preliminary Report, they are still
based on a "desktop" analysis of track charts, aerial photographs, and the like
and do not include any physical inspection on our part of any of the NCRR
properties.
Second, while we believe the estimates to be reasonable for purposes of
counsel's assessment of the RCNLD approach, additional work would have to be
conducted prior to submission of RCNLD values in any proceeding before the ICC.
Such work would include site-specific inspections of track, bridge and grading
condition, and site-particular values for real estate. These more detailed
on-site sample observations would be used to further refine the desktop
estimates and provide a basis for standing reply and cross-examination efforts
in any proceeding.
Finally, you will note per Exhibit 5 in the enclosure that approximately $38
million of the nearly $50 million in RCNLD value for yards and shops is
attributable to Linwood Yard. This $38 million is the estimated RCNLD for the
yard as a whole. To the extent that the NCRR-related portion of the yard is
deemed to be only a small portion of the total facility, most of this value
would drop from the scenario 6 value.
Per Scott Saylor's request, in his July 28, 1994 memorandum, we have also
separately estimated (Exhibit 8) the RCNLD value of the equipment at issue
between NCRR and NS to be $30 million. This value presumes replacement of early
20th Century locomotives and cars with their modern-era equivalent at the
depreciated rates shown in the exhibit.
We have not taken into account in this analysis the costs to maintain the rail
track and related rail facilities on NCRR, leaving this issue open for possible
future review.
Sincerely,
/s/ Timothy R. Murphy
- ------------------------------
Timothy R. Murphy
Principal
Enclosures
cc: Tim Walsh
Scott Saylor
---------------------------
Privileged and Confidential
Prepared for Use of Counsel
---------------------------
Reproduction Cost New Less Depreciation (RCNLD)
Summary of Estimates
- ---------------------------------------------------------------------------------
Interest Rental Interest Rental
RCNLD at 11.4% at 16.6%
Scenario(a) ($ million) ($ million)(b) ($ million)(c)
- ---------------------------------------------------------------------------------
1. Land Only - 50' ROW 40 4.6 6.6
2. Land with grading and bridges
- 50' ROW 180 20.5 29.9
2a. Scenario 2 without bridges 161 18.4 26.7
3. Land only - 200' ROW 115 13.1 19.1
4. Land with grading and bridges
- 200' ROW 260 29.6 43.2
4a. Scenario 4 without bridges 241 27.5 40.0
5. Land with grading, bridges,
track and signals - 200' ROW 400 45.6 66.4
6. Land with grading, bridges,
track and signals - 200' ROW
plus yards and shops(d) 412 47.0 68.4
=================================================================================
(a) Per Steptoe & Johnson memorandum of July 28, 1994.
(b) ICC-determined rail industry composite cost of capital for 1993 (post
tax).
(c) The 11.4% cost of capital on a pre-tax basis using the Federal Statutory
tax rate.
(d) Excludes Linwood Yard with RCNLD of $38 million.
============================================================================== 2
CONFIDENTIAL
Summary
Summary of NCRR Results According to Steptoe & Johnson Categories
Scenario 1. Land Only - 50 Ft ROW
- -----------------------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
----------------------------------------------------------------------------------------------------
Charlotte-Greensboro $16,865 $16,865
Greensboro-Raleigh $8,647 $8,647
Subtotal $25,512 $25,512
Raleigh-Morehead City $14,974 $14,974
Total $40,486 $40,486
- -----------------------------------------------------------------------------------------------------------------------------
o land values are scaled downward from the values in 3. for 200 ft ROW assuming
a minimum constant of $50,000 per mile. For example, the 200 ft ROW value for
Charlotte-Greensboro is first reduced by $50,000 per mile ($4.55 million) and
then multiplied by 25%, reflecting the 50 ft vs 200 ft ROW. The resulting amount
is then added to $4.55 million.
Scenario 2. Land Plus Grading & Bridges- 50 Ft ROW
- -----------------------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
----------------------------------------------------------------------------------------------------
Charlotte-Greensboro $55,112 $10,716 $16,865 $82,693
Greensboro-Raleigh $35,055 $3,972 $8,647 $47,674
Subtotal $90,167 $14,688 $25,512 $130,367
Raleigh-Morehead City $30,353 $3,917 $14,974 $49,244
Total $120,519 $18,605 $40,486 $179,611
- -----------------------------------------------------------------------------------------------------------------------------
o assuming 95% of grading and 100% of bridges shown in Exhibit 3.
Scenario 3. Land Only - 200 Ft ROW
- -----------------------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
----------------------------------------------------------------------------------------------------
Charlotte-Greensboro $53,811 $53,811
Greensboro-Raleigh $22,288 $22,288
Subtotal $76,099 $76,099
Raleigh-Morehead City $38,596 $38,596
Total $114,695 $114,695
- -----------------------------------------------------------------------------------------------------------------------------
o based on per acre values in Exhibit 1 (times 1.5 for assemblage) and acres
shown in Exhibit 2.
CONFIDENTIAL
Scenario 4. Land Plus Grading & Bridges- 200 Ft ROW
- ------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
---------------------------------------------------------------------------------
Charlotte-Greensboro $58,013 $10,716 $53,811 $122,540
Greensboro-Raleigh $36,900 $3,972 $22,288 $63,160
Subtotal $94,913 $14,688 $76,099 $185,700
Raleigh-Morehead City $31,950 $3,917 $38,596 $74,463
Total $126,863 $18,605 $114,695 $260,163
- ------------------------------------------------------------------------------------------------------------
o see Exhibit 3 for grading and bridges assumptions
Scenario 5. Land Plus Grading - 200 Ft ROW- plus Track & Signals
- ------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
---------------------------------------------------------------------------------
Charlotte-Greensboro $11,375 $3,413 $58,013 $77,312 $10,716 $53,811 $0 $214,639
Greensboro-Raleigh $2,460 $36,900 $28,700 $3,972 $22,288 $0 $94,320
Subtotal $11,375 $5,873 $94,913 $106,012 $14,688 $76,099 $0 $308,959
Raleigh-Morehead City $3,195 $31,950 $14,910 $3,917 $38,596 $0 $92,568
Total $11,375 $9,068 $126,863 $120,922 $18,605 $114,695 $0 $401,527
- ------------------------------------------------------------------------------------------------------------
o see Exhibit 4 for signals and track
Scenario 6. Land Plus Grading - 200 Ft ROW- plus Track & Signals & Yards & Shops
- ------------------------------------------------------------------------------------------------------------
Grade X Shops &
Signals Protection Subgrade Roadway Bridges Land Yards Total
---------------------------------------------------------------------------------
Charlotte-Greensboro $11,375 $3,413 $58,013 $77,312 $10,716 $53,811 $48,757 $263,396
Greensboro-Raleigh $2,460 $36,900 $28,700 $3,972 $22,288 $962 $95,282
Subtotal $11,375 $5,873 $94,913 $106,012 $14,688 $76,099 $49,720 $358,678
Raleigh-Morehead City $3,195 $31,950 $14,910 $3,917 $38,596 $0 $92,568
Total $11,375 $9,068 $126,863 $120,922 $18,605 $114,695 $49,720 $451,247
- ------------------------------------------------------------------------------------------------------------
o see Exhibit 5 for yards and shops
CONFIDENTIAL
Exhibit 1
Real Estate Land Values
Semi-Urban Semi-Rural
----------------------------------------
Value Per Value Per
Percent Acre Percent Acre
- -------------------------------------------------------------------
Unusable 0.0% $100 0.0% $100
Residential 10.3% 10,000 10.3% 10,000
Industrial 58.7% 20,000 10.0% 15,000
Ind'l/Resid 4.9% 12,000 4.9% 12,000
Low Value Ind'l 6.0% 2,000 6.0% 2,000
Rural 13.3% 3,000 62.0% 3,000
Comm'l/Ind'l 3.2% 35,000 3.2% 35,000
Mixed 3.6% 35,000 3.6% 35,000
Total 100.0% 16,262 100.0% 7,475
- -------------------------------------------------------------------
Assemblage Factor 1.5 1.5
Grand Total 24,392 11,212
- -------------------------------------------------------------------
CONFIDENTIAL
Exhibit 2
RCNLD Land Derivation
(thousands of dollars)
- --------------------------------------------------------------------------------------------------------
Real Estate - Land
---------------------------------------------------------
Reproduction Assem'age RCNLD
--------------------------------------------------------- Factor
ROW Acre
Miles Width-ft Acres Type Cost Total
- --------------------------------------------------------------------------------------------------------
Charlotte-Greensboro 91 200 2,206 Semi-Urb $16,262 $35,874 150.0% $53,811
Greensboro-Raleigh 82 200 1,988 Semi-Rural $7,475 $14,859 150.0% $22,288
Subtotal 173 4,194 $50,733 $76,099
Raleigh-Morehead City 142 200 3,442 Semi-Rural $7,475 $25,731 150.0% $38,596
Total 315 7,636 $76,464 $114,695
- --------------------------------------------------------------------------------------------------------
CONFIDENTIAL
Exhibit 3
RCNLD Subgrade and Bridge
(thousands of dollars)
- --------------------------------------------------------------------------------------------------------------------------
Subgrade Bridges
-------------------------------------------------------------------------------------------
Reproduction Reproduction
-------------------- ----------------------------
Cost per Depr'n Length Cost per Depr'n
Miles Mile Total Percent RCNLD in Feet Foot Total Percent RCNLD
---------------------------------------------------------------------------------------------------
Charlotte-Greensboro 91 $850 $77,350 25.0% $58,013 7,144 $3,000 $21,432 50.0% $10,716
Greensboro-Raleigh 82 $600 $49,200 25.0% $36,900 3,783 $3,000 $11,349 65.0% $3,972
Subtotal 173 $126,550 $94,913 10,927 $32,781 $14,688
Raleigh-Morehead City 142 $300 $42,600 25.0% $31,950 4,352 $3,000 $13,057 70.0% $3,917
Total 315 $169,150 $126,863 15,279 $45,838 $18,605
- --------------------------------------------------------------------------------------------------------------------------
o subgrade per mile costs from conversations with Wilbur Smith. Their
Winston-Salem route study of 1986 was used as reference.
o bridge feet from NS bridge lists and represent bridges NS maintains. The cost
per foot of bridge construction was taken from the Wilbur Smith study.
CONFIDENTIAL
Exhibit 4
RCNLD Derivation Of Signals. Grade Crossing Protection and Track
(thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Signals Grade Crossing Signals Roadway-Main Track
--------------------------------------------------------------------------------------------------------------
Reproduction Reproduction Reproduction
------------------ ---------------------- ---------------------
Cost No. Cost Cost
per Depr'n per per Depr'n Track per Depr'n
Miles Mile Total Percent RCNLD Mile Install'n Total Percent RCNLD Miles Mile Total Percent RCNLD
--------------------------------------------------------------------------------------------------------------
Charlotte-Greensboro 91 $250 $22,750 50.0% $11,375 1 $75 $6,825 50.0% $3,413 147 $700 $103,082 25.0% $77,312
Greensboro-Raleigh 82 1 $75 $6,150 60.0% $2,460 82 $700 $57,400 50.0% $28,700
Subtotal 173 $22,750 $11,375 $12,975 $5,873 229 $160,482 $106,012
Raleigh-Morehead City 142 1 $75 $10,650 70.0% $3,195 142 $700 $99,400 85.0% $14,910
Total 315 $22,750 $11 375 $23,625 $9,068 371 $259,882 $120,922
- ------------------------------------------------------------------------------------------------------------------------------------
o cost per mile consistent with Wilbur Smith estimate of track construction on
Winston-Salem line and with Mercer's estimates.
o depreciation rates reflect superior condition of Charlotte-Greensboro line
which has a large proportion of new materials in the track structure. The other
lines tend to use a larger portion of reuse track materials.
CONFIDENTIAL
Exhibit 5
RCNLD Yards & Shops
(thousands of dollars)
Yards
-------------------------------------------------------------------------------
Linwood Charlotte Pomona Raleigh
---------------------------------------------------------------------
Within Within Within
Bldgs Only Other 200ft ROW 200ft ROW Other 200ft ROW Total
- ----------------------------------------------------------------------------------------------------------
Charlotte-Greensboro $1,102 $37,460 $2,954 $2,680 $4,560 $48,757
Greensboro-Raleigh $962 $962
Subtotal $1,102 $37,460 $2,954 $2,680 $4,560 $962 $49,720
Raleigh-Morehead City $0
Total $1,102 $37,460 $2,954 $2,680 $4,560 $962 $49,720
- ----------------------------------------------------------------------------------------------------------
o see Exhibits 6 and 7
CONFIDENTIAL
Exhibit 6
Yard Characteristics Summary
Feet Total Trk
Tracks per Track Feet (thous) Acres
Linwood Yard-total 355 300
Class tracks 48 4000 192
Rec/dep 8 14000 112
Lead 4 6000 24
Loco servicing 7 2000 14
Rip 5 1000 5
Misc 2 4000 8
Class Yd 161
Length 5000
Width 1400
Loco/Rip 50
Length 2700
Width 800
Other 90
Length 11200
Width 350
Pomona-total 79 75
Class tracks 26 2200 57
Rec/dep
Lead 4 4000 16
Loco servicing
Rip
Misc 2 3000 6
Class Yd 29
Length 3000
Width 425
Loco/Rip
Length
Width
Other 46
Length 4000
Width 500
CONFIDENTIAL
Exhibit 7
Yard Value Calculations
------------------------------------------------------------------------------------------------------------
Pomona Linwood Charlotte
------------------------------------------------------------------------------------------------------------
Total Within 200 ft ROW Total Within 200 ft ROW
------------------------------------------ ------------------------------------------
Components Value Components Value Components Value Components Value Components Value
(000) (000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
Land
Acres 75 32 300 12 12
Value/Acre $25,000 $25,000 $3,000 $25,000 $25,000
Total Land $1,880 $803 $901 $298 $298
- ------------------------------------------------------------------------------------------------------------------------------
Grading
Trk Ft(thou) 79 55 355 59 59
$ Per Ft 57 57 57 57 57
Total Grading $4,500 $3,150 $20,170 $3,344 $3,344
- ------------------------------------------------------------------------------------------------------------------------------
Track
Trk Ft(thou) 79 55 355 59 59
$ Per Ft 70 70 100 70 70
Total Track $4,435 $3,105 $28,400 $3,296 $3,296
- ------------------------------------------------------------------------------------------------------------------------------
Equipment $6,600
- ------------------------------------------------------------------------------------------------------------------------------
Buildings-Other 6
Sq Ft 21,500
$/Sq Ft $50
Total Other $1,075
- ------------------------------------------------------------------------------------------------------------------------------
Buildings-Rip & Loco 2
Sq Ft 42,400
$/Sq Ft $40
Total Rip & Loco $1,696
- ------------------------------------------------------------------------------------------------------------------------------
Total Above $10,815 $7,058 $58,842 $6,938 $6,938
- ------------------------------------------------------------------------------------------------------------------------------
Non Land Subtotal $8,935 $6,255 $57,941 $6,640 $6,640
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation 70.0% 70.0% 35.0% 60.0% 60.0%
- ------------------------------------------------------------------------------------------------------------------------------
Non Land After Depre $2,681 $1,876 $37,662 $2,656 $2,656
- ------------------------------------------------------------------------------------------------------------------------------
Land $1,880 $803 $901 $298 $298
- ------------------------------------------------------------------------------------------------------------------------------
RCNLD $4,560 $2,680 $38,563 $2,954 $2,954
- ------------------------------------------------------------------------------------------------------------------------------
RCNLD-Bldg Only $1,102
- ------------------------------------------------------------------------------------------------------------------------------
UP's Livonia $58,000
31 Class tracks
Linwood Extrapolated based on class tracks $89,806
------------------------------------------------
Raleigh
------------------------------------------------
Total Within 200 ft ROW Mile
------------------------------------------------
Components Value Components Value
(000) (000)
- ------------------------------------------------------------------
Land
Acres 9 9
Value/Acre $15,000 $15,000
Total Land $138 $138
- ------------------------------------------------------------------
Grading
Trk Ft(thou) 18 18
$ Per Ft 57 57
Total Grading $1,038 $1,038
- ------------------------------------------------------------------
Track
Trk Ft(thou) 18 18
$ Per Ft 70 70
Total Track $1,023 $1,023
- ------------------------------------------------------------------
Equipment
- ------------------------------------------------------------------
Buildings-Other
Sq Ft
$/Sq Ft
Total Other
- ------------------------------------------------------------------
Buildings-Rip & Loco
Sq Ft
$/Sq Ft
Total Rip & Loco
- ------------------------------------------------------------------
Total Above $2,199 $2,199
- ------------------------------------------------------------------
Non Land Subtotal $2,061 $2,061
- ------------------------------------------------------------------
Depreciation 60.0% 60.0%
- ------------------------------------------------------------------
Non Land After Depre $825 $825
- ------------------------------------------------------------------
Land $138 $138
- ------------------------------------------------------------------
RCNLD $962 $962
- ------------------------------------------------------------------
RCNLD-Bldg Only
- ------------------------------------------------------------------
Note on Linwood buildings and equipment:
The six other buildings include: 1 general yard office 3 floors @ 50ft
x 100ft, 1 misc @ 25ft x 100ft and 4
misc @ 20ft x 50ft
The loco and rip include: 1 locomotive servicing facility @ 60ft
x 140ft and one rip @ 170ft x 200ft
Equipment includes: Includes $1.6 million rip and $2
million loco and $3 million yard
CONFIDENTIAL
Exhibit 8
Rolling Stock
-------------------------------------------------------------------------------------------------
Locomotives Coaches Frt Cars Other Total
----------------------------------------
Passgr Freight Switcher
- --------------------------------------------------------------------------------------------------------------------
Number 8 12 3 14 123 18
Replacement Each $ 2,000,000 $ 1,500,000 $ 1,200,000 $ 1,200,000 $ 55,000 $ 55,000
Replacement Total $16,000,000 $18,000,000 $ 3,600,000 $16,800,000 $ 6,765,000 $ 990,000 $62,155,000
Depre % 50.0% 50.0% 80.0% 50.0% 50.0% 80.0%
RCNLD $ 8,000,000 $ 9,000,000 $ 720,000 $ 8,400,000 $ 3,382,500 $ 198,000 $29,700,500
- --------------------------------------------------------------------------------------------------------------------