MERCER
Management Consulting
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Memorandum
Scott M. Saylor
To: General Counsel
North Carolina Railroad Company
From: Timothy Murphy
Subject: The Net Liquidation Value(NLV) of NCRR
Date: July 28, 1995
9 Pages including exhibits
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We have completed the NLV calculations for NCRR. Exhibit 1 summarizes the
results and contains comments on sources and methodology. Additional detail on
the calculations underlying key assets are shown in Exhibits 2 through 5. A
discussion of our approach, major assumptions, and results follow.
Approach
As you know this valuation represents a desk-top analysis which draws upon our
knowledge of and experience in calculating railroad NLVs. As the case with most
railroad NLV studies this analysis focused on three major inputs:
-the quantity of each type of asset to be valued
-the condition and/or quality of these assets
-their transaction prices and costs associated with disposal
Determining the quantity of track assets was relatively straight forward as
documents provided by NCRR provided information on the most important track
asset, the type of rail used. Other track asset components can be reasonably
estimated from past Mercer work as most railroads do not deviate widely from
their use of these materials. For example, other track metals (associated with
holding rail in place) can be readily estimated from other Mercer work on a per
mile basis and multiplied by NCRR miles. The number of ties per mile is fairly
standard and was obtained from other Mercer studies of railroads having the
similar operating conditions as NCRR. The amount of land was assumed to be what
we used in the RCNLD analysis -- a 200 foot right-of-way plus additional land at
Linwood and Pomona yards.
The second input of a NLV analysis, the condition of assets and/or their
quality, can vary widely over different railroads depending on maintenance
practices and capital investments and on geographic conditions. For this study
the condition of NCRR's key track asset, rail, was provided in general terms in
documents given Mercer. Mercer is also generally acquainted with maintenance
policies on Norfolk Southern and this was useful when judgments had to be made.
Page 2
The greatest uncertainty was the quality of real estate in terms of the nature
of the properties immediately adjacent to the railroad properties. For example,
a railroad that transverses high quality industrial land would obtain greater
land liquidation value than a railroad surrounded by farm land. For this, Mercer
approximated the mix of land based on another NLV study of a railroad that
transversed a mixture of urban and rural properties.
Finally, the third input are the prices that can be obtained for the assets of
and the costs of disposing of them. For track, prices can be directly obtained
by surveying dealers and railroads. A contractor Mercer has used in the past to
collect price information on track components was retained for this study to
update Mercer's price database for certain critical items such as the price of
reusable rail and metal scrap. Other data such as track removal costs and
transportation of materials were taken from Mercer's railroad industry
experience. The most uncertain prices were the value of comparable real estate
surrounding NCRR's right-of-way. For this Mercer used prices from other studies
and which were used in the RCNLD study completed in 1994. Typically, railroad
real estate also suffers substantial mark-downs from the prices of surrounding
real estate due to the unique size and shape characteristics of railroad real
estate and these were also taken from Mercer's experience in other studies.
Assumptions
In developing this NLV Mercer assumed that all revenue service would be
terminated. The dismantling and disposal of assets, it was assumed, would take
place over a period of time consistent with the typical time frame for a
railroad abandonment: no longer than six months for track and signals and up to
a year for bridges. Land would be sold clear of track and structures and because
of the diverse nature of railroad properties to be sold (residential versus farm
versus industrial) and the unique size, shape, and access problems that are
typical of railroad rights-of-way, a three year sales period is anticipated.
Mercer assumed that all metal materials removed in the salvaging process would
be sold on the spot, removed to staging areas for further disposition, or
transported to local dealers for final disposition. Most of the reusable and
scrap ferrous materials would be sold to buyers in a 500 mile radius from the
railroad. Scrap metals other than the better rail scrap would most likely be
purchased by regional mini-mills and high-quality rail scrap would probably be
purchased by a mill with re-roller capability (typically rolled into shapes for
highway guard rails). High quality reusable rail, of which there are large
quantities on the Charlotte-Greensboro segment, would almost certainly be
purchased by a Class I or large regional railroad such as CSX, NS, KCS, or
Wisconsin Central. Ties would be sorted, banded, and sold on-site or from
regional material storage areas. Reusable ties would be of most interest to
industrial, shortline, and regional railroads.
Mercer also assumed that all public grade crossings would be removed and that
there would be minimal reconstruction to meet local and state requirements.
Page 3
For bridges Mercer has assumed that the costs of dismantling and transportation
offset the value of the scrap proceeds so there is no net contribution to NLV
from this asset. State regulations are important to the liquidation value of
bridges. In some states the enforcement of all applicable regulations can
require extensive dismantling of most all structures including the bulldozing of
grades over culverts. Under these conditions bridges can be a sizable net
deduction to the NLV of the railroad line. In other states the railroads can
exercise greater latitude and be selective in recovering only those structures
where the scrap proceeds are greater than the dismantling and transportation
costs.
Land would be classified by its marketability, and marketing efforts would begin
with the most desirable parcels. Commercial and residential real estate brokers
at various locations along the line would be contacted, and property inspections
by the brokers arranged. Sales would take place through brokers but some sales
would result from direct contact with parties that have an immediate interest
such as abutters, utilities and others who have cross-over easements, and
municipalities. It is assumed that the value of NCRR real estate would be what
could be obtained by sale for non-corridor use. Any potential corridor use for
such purposes as power transmission towers, pipelines, or fiber optics is not
considered in this study as these opportunities are very specific to each
property being evaluated and Mercer has no knowledge of such opportunities in
this study. Further it is assumed that in those cases where such longitudinal
corridor use has already been established on NCRR properties by Norfolk Southern
their continued use will not detract from the property values developed in this
study. Finally, it is assumed that NCRR holds fee title (as opposed to easement
rights) to most of its ROW and these properties are largely unaffected by any
reversionary provisions of the land deeds.
Results
The NLV of the North Carolina Railroad is estimated to be about $44 million
(Exhibit 1). This is much lower than the value determined under the Reproduction
Cost New Less Depreciation (RCNLD) valuation approach which in August 1994 was
calculated by Mercer to be $450 million. The major reasons for this wide
difference are:
o the enormous expenses that are required to prepare the
subgrade for placement of track represent almost 30 percent of
NCRR's RCNLD, but have no value in a NLV approach -- in fact,
the subgrade itself also acts to reduce the value of the land
since the raised or depressed roadbed is almost always
inconsistent with the surrounding land use.
o land value is a double edge sword in that under RCNLD the
railroads pay a premium in acquiring land since corridor
purchases tend to bear the cost of tearing apart larger blocks
of real estate and changing the ability of owners to use
property that becomes divided by the right-of-way --
conversely, the sale of land in a railroad abandonment is
hindered by the peculiar ribbon shape of railroad ROW and the
ability to access and use the property under current zoning.
o bridges usually have very small value if any in a NLV.
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o railroad ballast which can be a significant expense under
RCNLD usually have negligible value in a NLV.
o labor expense that is incurred to construct the railroad in a
RCNLD and is a sizable component of the RCNLD value becomes a
deduction to value in a NLV as labor is expended to remove
salvageable assets.
Another factor that will influence the NLV of railroad property is the price of
reusable rail and rail and other metals scrap. As shown in Exhibit 1 the
proceeds from the sale of metals was estimated to be $41 million. Just a few
years ago (1992) the proceeds would be 20 to 30 percent less as the price of
rail and scrap has since escalated in line with the improved economy.
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Please do not hesitate to contact me or my colleague, Bob Waldner, should you
have any questions about this valuation.
Exhibit 1
Summary of NLV Of NCRR
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Charlotte/ Greens- Subtotal Raleigh/ Total Comment
Greens- boro/ Moreh'd
boro Raleigh City
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Mileages
Route Miles 91 82 173 142 315 All miles shown from Charlotte to
Components: Raleigh are from "Statement of Main
Main Track 147 82 229 142 371 Track Rail - NCRR" and from "Yard Side
Other Track 73 20 93 17 110 Tracks On NCRR Property". In the case
Total Track 221 102 323 159 481 of the line from Raleigh to Morehead
City the Other Track was exptrapolated
from the amount of other track shown
between Raleigh and Goldsboro.
Track NLV(000)
Gross Proceeds-
Rail $ 20,004 $ 5,657 $ 25,661 $ 4,243 $ 29,904 See Exhibit 2
OTM $ 4,722 $ 1,987 $ 6,709 $ 3,130 $ 9,840 See Exhibit 3
Turnouts $ 777 $ 192 $ 969 $ 333 $ 1,301 See Exhibit 3
Subtotal (Metals) $ 25,503 $ 7,836 $ 33,339 $ 7,706 $ 41,046
Cross Ties $ 1,465 $ 509 $ 1,974 $ 509 $ 2,483 See Exhibit 3
Subtotal of Gross Salvge $ 26,967 $ 8,346 $ 35,313 $ 8,216 $ 43,529
Deductions--
Track Removal Costs $ (147) $ (82) $ (229) $ (142) $ (371) $3 per foot for CWR and $3.30 for
jointed. See Note 1.
Transportation Costs $ (3,572) $ (1,636) $ (5,208) $ (2,529) $ (7,737) $10 per ton for metals and $1 per
useable tie
Crossing Repairs $ (1,082) $ (385) $ (1,468) $ (599) $ (2,067) Same source as Exhibit 3
Signal Removal Costs $ (339) $ (21) $ (360) $ (33) $ (393) Same source as Exhibit 3
Subtotal of Deductions $ (5,141) $ (2,125) $ (7,265) $ (3,303) $ (10,569)
Total NLV of Track $ 21,827 $ 6,221 $ 28,048 $ 4,912 $ 32,960
Bridges NLV(000) This is usually a relatively small
Gross Proceeds from Scrap amount if selective removal is allowed
Dismantling Costs by state regulations. Otherwise
Total NLV of Bridges $ 0 $ 0 $ 0 $ 0 $ 0 bridges could be negative.
Land NLV(000)
Within 200 Foot ROW $ 3,661 $ 1,736 $ 5,397 $ 3,006 $ 8,403 Exhibit 4 and 5
Linwood and Pomona $ 1,582 $ 0 $ 1,582 $ 0 $ 1,582 Exhibit 4
Total Land $ 5,243 $ 1,736 $ 6,979 $ 3,006 $ 9,985
Buildings NLV(000) $ 1,000 $ 0 $ 1,000 $ 0 $ 1,000 Assumed
(Linwood Only)
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Grand Total NLV(000) $ 28,070 $ 7,957 $ 36,027 $ 7,918 $ 43,945
Per Route Mile $ 308,456 $ 97,038 $ 208,246 $ 55,763 $ 139,508
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Notes:
1. In estimating removal costs Mercer assumed all of the main line
track was welded rail and other track jointed rail.
Exhibit 2
Gross Proceeds of Rail
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Miles Tons By Rail Class Total
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Segment Route Main Other I II III IV Dollars
Track Track @$425 @$380 @$200 @$116 (000)
per ton per ton per ton per ton
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Charlotte-Greensboro 91 147 73 39,711 5,783 3,383 2,177 $20,004
Greensboro-Raleigh 82 82 20 0 8,491 8,491 6,308 $ 5,657
Subtotal 173 229 93 39,711 14,274 11,874 8,485 $25,661
Raleigh-Moreh'd City 142 142 17 0 0 0 36,559 $ 4,243
Total 315 371 110 39,711 14,274 11,874 45,044 $29,904
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Source: Prices per ton by class of rail were based on survey of dealers. Rail
condition was obtained from "Statement Of Main Track Rail - NCRR" with "Good"
condition treated as Class I rail, "Fair" as Class II, and "Poor" or "Worn" as
Class IV rail. According to the FRA Class I rail is generally main line quality
rail, Class II suitable for branch lines, and Class III for light density branch
lines. Class IV rail is generally found in yards and side tracks and is scrap
quality rail. Over 90% of the main line rail in the heavy tonnage line from
Charlotte to Greensboro was considered to be Class I rail.
Exhibit 3
Gross Proceeds of OTM, Turnouts, And Ties
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OTM Turnouts Cross Ties (main only)
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$ Per Mile Total $ Per Mile Total Ties Per Main Line Mile Total
------------------- Dollars Main Dollars --------------------------- Dollars
Main Other (000) Track (000) Sec'd Land- Other
Track Track Hand scape
@$10 @$5 @$0
each each each
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Charlotte-Greensboro $23,455 $17,287 $ 4,722 $ 5,275 $ 777 587 1,465 928 $ 1,943
Greensboro-Raleigh $20,028 $17,287 $ 1,987 $ 2,342 $ 192 228 509 2,262 $ 396
Subtotal $ 6,709 $ 969 $ 2,339
Raleigh-Moreh'd City $20,028 $17,287 $ 3,130 $ 2,342 $ 333 228 509 2,262 $ 686
Total $ 9,840 $ 1,301 $ 3,025
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Source: All per mile amounts shown in this exhibit were developed from an
analysis of the main and branch operations of an eastern railroad and
extrapolated to NCRR based on rail type and distance.
Exhibit 4
Land NLV
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Miles Acres Type A-T-F Cost (Exh 5) Adjustm't #1 - phy'cal & Adjustm't #2 - timing &
----------------- eco factors & liquidation marketing
Per Total -----------------------------------------------------
Acre Percent Adj Total Percent Adj Total
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Within 200 Foot ROW:
Charlotte-Greensboro 91 2,206 Semi-Urb 9,044 19,951 65.7% 6,848 46.5% 3,661
Greensboro-Raleigh 82 1,988 Semi-Rural 4,717 9,377 65.4% 3,247 46.5% 1,736
Subtotal 173 4,194 29,328 10,095 5,397
Raleigh-Morehead City 142 3,442 Semi-Rural 4,717 16,238 65.4% 5,622 46.5% 3,006
Total ROW Land 315 7,636 45,566 15,717 8,403
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Add'l Outside of ROW:
Pomona N/A 43 Urban 25,000 1,076 1,076 20.0% 861
Linwood N/A 300 Rural 3,000 901 901 20.0% 721
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Grand Total N/A 7,980 47,542 17,694 9,985
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Note: Adjustment #1 represents the reduction from A-T-F values due to size and
shape limitations of the railroad property to be sold and liquidation costs.
Attachment #2 represents the DCF impact of the timing of sales, the impact of
reversionary rights, and other reasons for the inability to sell properties,
Exhibit 5
Calculation of Across-The-Fence Values
Per Acre
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Semi-Urban Semi-Rural
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Percent A-T-F Percent A-T-F
Distribution Per Distribution Per
Of Acres Acre Of Acres Acre
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Unusable 44.7% $ 100 44.7% $ 100
Residential 5.7% $10,000 5.7% $10,000
Industrial 32.5% $20,000 10.0% $15,000
Ind'l/Resid 2.7% $12,000 2.7% $12,000
Low Value 3.3% $ 2,000 3.3% $ 2,000
Rural 7.4% $ 3,000 29.9% $ 3,000
Comm'l/In 1.8% $35,000 1.8% $35,000
Mixed 2.0% $35,000 2.0% $35,000
Total 100.0% $ 9,044 100.0% $ 4,717
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