Post merger ~stranded~ assets

Trains Magazine General Discussion
1

I spent considerable time the other day, browsing through Bridgehunter.com with particular attention to bridges that were branded “out of service”. The one thing that kept coming to my mind was the sheer amount of costly infrastructure that was abandoned as Penn-Central/Conrail rationalized their plant.

One bridge in particular drove this point home, a now abandoned concrete bridge built in 1969 on the former Panhandle next to Grissom Air Force Base that was new enough to have the PC “worm” logo molded into the cement on it’s side beams, where US 31 passes underneath.

Has anyone ever tried to quantify the value of the assets forfeited to rationalization as the former Pennsy and NYC were consolidated?

Each obviously invested considerable sums building assets that were intended to serve them a long time, and the abandonments would have a similar effect to someone just reaching into the treasury and thowing money to the wind. Wouldn’t it?

2

Sounds like a start-up possibility. A bridge was moved from London to Arizona, and it was nowhere near new. Think of all that unused stuff just waiting to be listed on Ebay! [:-^]

3

A very interesting point, Convicted One brings up!

Rationalization (or call it outright abandonment) has left its marks all over the country. The abandonment of raillines has mostly been seen as a method to recoup the value of assets that have gone beyond usefulness. From time to time there has been a ‘swipe’ made at the outright salvaging of a favorite line by any of a number of companies that salvage and or resale those assets (track,switches, ties, and occasionally, ballast rock).

Here in Kansas there are any number of examples of these efforts at ratonalization or salvage. Just yesterday the wife and i made a trip across US 400 to Southeast Kansas. From the Wichita area, roughly paralleling part of that route there are several plate girdr bridges visible from US 400 that at one time carried a Santa Fe line between Wichita and ultimately to Carthage, Missouri. That is just one line in a State that has had its rail infrastructure decimated from its’ high mileage. I know Iowa as well has suffered over the years as its rail connected towns were rationalized away by railroads.

Point is. why would a salvager work hard to pick up used track materials (rails,plates, spikes, and switch stande- well you get the point and then leave heavy plate bridges over creeks, and even highways? Surely they could salvage those for their value as anything from useable parts/pieces, to their out right value as scrap metal?

And while I’m on the subject: Why tear up a rail line and then leave the rails in situ across even dirt roads as well as the paved variety? I can partially see the paving over of a track, to leave the rails and avoid having to repave a short section of road; but to leave salvage on a dirt or gravel roa

4

Reclaiming assets is a economic proposition for the party doing the reclaiming…does it cost more to reclaim & salvage the property than the salvage value of what is being reclaimed.

Bridges cost a lot to build and also cost a lot to reclaim, probably a lot more than the value of the steel that is reclaimed. Likewise, opening up a road crossing to remove rail costs much more than just leaving the rail in place and letting the governmental body secure the salvage value of several rail lengths when they perform their own scheduled maintenance/upgrades on the crossing.

5

“Each obviously invested considerable sums building assets that were intended to serve them a long time, and the abandonments would have a similar effect to someone just reaching into the treasury and thowing money to the wind. Wouldn’t it?”

The above is what my Engineering Economy textbook referred to as “the sunken cost fallacy.”

Here’s an example that will illustrate what they meant by that term:

Suppose a company (or even an individual) has an older vehicle; it needs new tires and the transmission is making ominous sounds. Should it be repaired or replaced with a new vehicle? To answer that question we’ll do an economy study to determine which alternative costs less.

For the old vehicle repair cost are R1, its estimated life is L1, yearly operating cost is O1, yearly maintenance cost is M1, and salvage value when retired is S1.

For the new vehicle first cost is FC2, estimated life is L2, salvage value is S2, maintenance costs are M2 (which should be less than M1 since the new vehicle is in much better condition), operating costs are O2 (less since new vehicle gets 30 MPG vs. 20 MPG for old vehicle), and there’s an overhaul cost OV2 halfway through the new vehicle’s service life.

We want to determine the annual cost of the two alternatives; to do so the one-time charges such as first cost are converted into an equivalent annual cost using the appropriate formulas and interest rate (i*). The i* used may be the cost of borrowed money, or the company’s desired profit margin, or may be set higher yet, especially if there are many projects to be considered but very limited money available for them.

Once everything is converted to annual charges they are added together to give a total annual cost for each alternative, and a meaningful comparison can be made.

In our vehicle example let’s assume that Alternative 2 (buy new vehicle) has a lower annual cost which indicates that’s the preferred alternative. “Wait a minute,”

6

I was merely interested in the total value of forfeited assets, I don’t think I ever mentioned that there be some vehicle for recovery.

Looking at it through example, as you have, suppose company “A” carry’s a total valuation of $600 million on it’s books, while company B carry’s a total valuation of $400 million.

People talk about merger, and everyone’s exclaiming “OH boy, with a billion dollars of combined resources at our disposal, we will be the ultimate force in the market place” and high handed excelsior such as that.

If however, after the merger it is found that $150 million in asset value from each entity is redundant, and must be shed to minimize loss, your billion dollar entity is now not even 3/4 of what it was touted to be. And the ability to borrow against net worth is severely compromised

Granted, the costs were actually incurred back when the two seperate entities competed against one another, and the lions share will likely never be recovered

Still, the PC bridge in question is quite an amusement, how long did the entity known as “PC” even last:? With the replacement bridge they built not lasting all that much longer before abandonment. Perhaps the right hand did not know what the left hand was doing? Perhaps I give them too much credit for having an actual strategy for the rationalization that was to follow?

7

Thank You! Kurt! I appreciate the explanation. It does make sense.

[ I will now go in and explain to my wife why we spent two thousand dollars to have the cottonwood tree in the back yard taken down. BEFORE it would not fall into the neighbor’s house After, our insurance agent explained to her their loss was covered by their (and our ) insurance carrier. Who would not take the tree out before it fell, and did a heck of a lot more damage than two g’s it cost to take it down before it would fall into their house.]

8

Having spent seven years at USRA (the government-sponsored, free-from-ICC-regulation wielder of the railway scythe, pruner of lines, the grim reaper of all redundant railway lines belonging to the bankrupt properties which were combined into Conrail – trunks, secondary mains and branches alike), I am not aware of any effort to systematically identify, much less quantify, the value of assets that were judged to be redundant and, therefore, not needed – except for their scrap value (the buzzword of the day was “net asset value”). This had to do with settling up the government’s account with the estates of the bankrupts the compensation they were due in return for appropriating them – the Constitution says the federal government can’t sieze assets without compensating their owner. In time, a set

9

To respond to **Convicted One’**s Original Post, even though I’m not an accountant - but you do raise a good point, and perhaps I can shed a little light:

First, the “trivial case” and easiest to address and dispose of is if that bridge had been built by Indiana’s DOT [EDIT] OHDOT to accomodate a road expansion, etc. - in which event, it really didn’t cost the railroad anything, so it didn’t lose anything when the line was abandoned.

More generally, abandoned lines were the railroad equivalent of “dead men walking” - they had been in declining financial health for many years previous, and the abandonment is the equivalent of a pronouncement of death by the coroner. So this is really more a question of timing - the erosion of value of the assets in terms of their earning and/ or salvage value should have been reflected in ‘write-downs’ over those same years. At the end when abandonment occurs, the line wasn’t worth much on the books by then anyway.

Now I doubt that most railroads were that sanguine or forthright, but that’s the theory as I understand it. In those Northeast RR bankruptcy cases, a comparison of their last financial statements before the bankruptcy, with either the payouts to the former creditors and shareholders, and/ or ConRail’s first financial statement, would be illuminating.

The more interesting question you raise is essentially - “OK, then what is the sum total of all of those write-offs over the years - how much of the total investment in that railroad was lost ?” Keep in mind that some of that loss is expected to occur over time, even if the line is a financial success - it’s called “depreciation”, and is an attempt to measure and allocate that cost over time.

And not all rail lines and assets that are abandoned are failures. For example,

10

“So this is really more a question of timing - the erosion of value of the assets in terms of their earning and/ or salvage value should have been reflected in ‘write-downs’ over those same years. At the end when abandonment occurs, the line wasn’t worth much on the books by then anyway.”

Paul:

I don’t think that this is quite correct; if I recall correctly (from my knowledge of property accounting as seen from the engineering department) there was no mechanism in the ICC Accounting Procedures for writing off value because of lack of earning power. As a matter of fact there was no provision for depreciation of track structure at all. The CNW did depreciate track for income tax purposes, but not for the ICC accounting; in other words we had two sets of books on the North Western.

We also had the infamous betterment accounting system to contend with. Here’s how that worked: Suppose that we renewed the rail on a stretch of track; we replaced the existing 10035 (100-CNW) rail with 10025 (100-RE) rail. Under betterment accounting this was classified as a maintenance expense since it was still the same weight of rail. If we replaced 10035 rail with 11525 (115-RE) a fraction ((115-100)/100 or 0.15) of the cost could be capitalized as a betterment, with the rest maintenance expense.

Until recently, there was no provision for depreciation of grading (cuts, fills, tunnels, etc.) either; this was carried on the books at original cost. Of course, there is no depreciation on real estate; that’s always carried at original cost.

So, a line with 0.001 MGTM/M (million gross ton-miles/mile) with 11228 (112-RE) rail, rock ballast, good ties, and ABS signaling had the same book value as a line with 10 MGTM/M (10,000 times as much traffic!) and the same track structure.

Deregulation changed this in the later 1980s, but I was gone from the Engineering Department by then so I’m not up on current accounting.

Kurt Hayek

11

Thanks everyone, you all have touched on points that address my original curiousity.

In such an abandonment, how are property taxes handled? Is the land forfeited to the state to stop the tax induced indebtedness? Or are unpayed taxes allowed to accrue until totaling of a magnitude to justify seizure?

12

Property taxes are handled differently in each state, although most are handled similarily.

Usually there is no local assessment and mill levy applied. Rather the State has a formula for taxing those properties which are a part of the RR’s operations in their entirety. Any properties not used in the coarse of the transportation business are taxed separately. And each States formula will probably not apply in another State.

But to allocate the tax collections reasonably and fairly the most important and productive RR assets will receive a larger share of the allocation. In the case of a line that has been abandoned the allocation will have been substantially lower because of its unproductivity. If the RR still remains in operation within the State then they continue to pay taxes as alluded to above and the location where the line is abandoned will no longer receive an allocation

If the land (ROW) was acquired by the RR in fee then the RR may sell it. This too is likely to be different in each State and will be determined by statute, or by case law.

13

Regarding abandoned bridges – I seem to recall, but can not give you the source, that some of the support spans of the new Kate Shelly span at Boone are recycled from an abandoned Milwaukee Railroad bridge somewhere else in Iowa.

14

True. The box girder spans are from the MILW bridge over the Des Moines River at Madrid, Iowa. This bridge was paid for by the Corps of Engineers and dates to the late 1960s or early 1970s; this was part of the Saylorville Dam project. The original bridge was a steel tower/deck plate girder affair somewhat like the CNW Boone High Bridge but not as high. It was replaced since the steel towers would be partly submerged by the water backed up from the dam (Saylorville Lake).

CNW acquired a segment of the MILW that included the bridge after the MILW abandoned the line; I suspect this segment was purchased partly for the bridge material but primarily to prevent another railroad from making a through route across Iowa (grain shippers did get a segment west of there from Bayard to Co. Bluffs, operated by BN/BNSF, and move some grain traffic on it; this line would have made a good addition but the North Western had snapped it up already). All the east-west MILW trackage acquired by the CNW is now abandoned; it went in pieces over time, some retired by CNW, and later UP.

The concrete piers are still standing, by the way.

Kurt Hayek

15

[emphasis added - PDN]

I’d gladly defer to Kurt’s actual experience with this - it rings true to my small amount of knowledge. A couple of supplemental points:

  • The key word or concept that I should have used in my first post on this thread is “recognize”, as in: "When did or should the railroad have ‘recognized’ the loss in the line’s value on its books - as it occurred over the years, or all at once at the end when the line was abandone
16

Adding another aspect to the diminished and - or diminishing value of a business segment, many RR’s were slow to apply the Internal Rate of Return philosophy and thus spent funds which would have better benefited the company on those declining business segments. A hypothetical (I think) example was mentioned early in this thread.

17

Out here in flyover country, several state highway departments got some E-80 rated bridges as fodder for future grade separations or emergency repairs. A few are still waiting for new homes. A couple of E-65 rated steel bridges are now industry track bridges or used for under track unloading pits after modification.

18

I attended a presentation on the new bridge at the AREMA Conference this past August. A few minutes and slides were devoted to showing the rehab of the former structure - sand-blast, inspect with non-destructive methods, repaint, etc. There are likely more photos and details on that on the Web someplace.

EDIT: For example, this article - “Replacing an Icon - The New Kate Shelley Bridge” by Jeff Teig, P.E., and Tom McCune, P.E., in the Fall/Winter 20009 issue of HDR Engineering’s Transportation Delivered magazine/ newsletter, pgs. 9 - 14, at:

http://www.taxiltech.com/Publication.aspx?pid=35&pkey=gmoltxhai&pageid=12

  • Paul North.
19

Making sure I am reading you correctly, but if the rail line is officially abandoned, the railroad continues to own the land, but is not required to pay any tax on the land, even if it contains $2 million in residual improvements ? (a multi span bridge, for example)…wow!

20

Not as you put it. Remember that any non-operating properties are separately taxed as describded in the beginning of my explanation. Just the operating property will continuine to be taxed by the State and the tax revenue allocated to where continued operations occur.

Again I caution that my response covers , in a general way, the manner in which RR properties are taxed. And it varies from State to State. And the RR may not own all of the land.

They usually sell the salvage rights to a company that reclaims the track structure and sells it for?? ties for landsacping as an example. And as mentioned avove, the bridge may have been built by a public agency for a grade separation.

No simple answers here and perhaps I have gone to far in creating this response which if thoroughly researced may take many pages to analyze.