ntoii, Kane Rcscarf h, inc
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Senator Craig Lawing, Co-Chairman December 1, 1982
Representative Listen B. Ramsey, Co-Chairman Page 2
of both companies is thin and the shares trade only at odd lot
prices. Thus, there is neither a reported earnings base nor a
market framework within which parameters of value might be deter-mined.
Valuation methodologies vary but the usual approach for
a railroad appraisal is based on either an asset valuation or a
valuation of earnings depending on the purpose of the studies.
The earnings valuation techniques are used to determine the com-mercial
value of the railroad, while an asset valuation is useful
in the event of a liquidation. The asset valuation is also useful
for purposes of renegotiating lease arrangements. It also provides
parameters of value within which values developed from earnings
tests may fall.
To make an asset valuation, a physical inspection of the
property by an informed appraiser is necessary. Thus, we requested
that the State arrange for our valuation engineer, Mr. Everett M.
Hodges,* to go over the properties of both roads with an official of
Southern Railway. Mr. Hodges and various engineers spent two days
inspecting the combined mileage of the two companies, 315 miles from
Charlotte to Morehead City. Thereafter, Mr. Hodges developed values
which, in his judgment, reflected the asset values of the properties
at today's price levels.
Over the years, the Interstate Commerce Commission (ICC) has
stressed the importance of earning power in the valuation process and
for purposes of developing merger terms. Thus, we requested Southern
to prepare an actual earnings statement for the North Carolina Rail-road
for the years 1977-1981. The revenue accounts were developed
from the actual volume of traffic moving over the company's mileage;
the expenses were determined by using expense ratios of Southern ap-plied
to the revenues of the railroad as developed. In the case of
the Atlantic and North Carolina, railroad earnings are reflected in
the income statements filed with the ICC by the Atlantic and East
Carolina, lessee-operator. With this information for both companies,
we were able to use our valuation tools to determine the value of the
properties as operating entities rather than as leased lines.
It should be realized that in the valuation processes,
there is no one precise valuation figure which would reflect all
elements of value. Rather, a range of values is developed on which
a judgmental determination may be based. Thus, the purpose of the
PKRI study is to find a range of supportable values which might be
used for negotiating purposes with Southern in anticipation of the
termination of the present lease arrangements, or in the event of
* Mr. Hodges was formerly associated with Ford, Bacon & Davis, Inc.,
a well-known engineering firm which over the years has specialized
in valuing transportation properties.
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