Article: BCG&A Excerpts From the ICC's 1930 valuation report

The following comments are selected from the 1932 Interstate Commerce Commission valuation of the Boyne City, Gaylord & Alpena railroad in anticipation of its sale to the New York Central (Michigan Central) railroad. The comments are summarized to those that give insight into the operation and customers of the BCG&A.

To review the complete ICC report including financial figures, go to page 538 {Hathitrust page 568) by clicking on the link below:

https://babel.hathitrust.org/cgi/pt?id=uiug.30112105101627&view=1up&seq=568&skin=2021

1932. ICC comments about the value of the BCG&A: The property of the BCG&A is in general a single-track steam-operated railroad, with main line about 91.52 miles long and about 109.61 miles of all tracks, extending across the upper end of the southern peninsula of Michigan. Equipment includes 8 locomotives and 41 other units available for present service. Much of this equipment is not in serviceable condition at present, and most of it would be classified as in scrap condition, according to Central standards. Car equipment is not used in interchange service. Even by shortline or branch-line standards the roadbed is narrow, grades and curvature are severe, and the property is in poor repair. The main line for 48 miles, or a little more than half its length, is laid with 70-pound rail, the remainder lighter. Ballast is mostly sand, but there is some gravel. Heavy expenditures will be needed to put the property in condition suitable for the movement of New York Central trains. 

The outlays necessary to rehabilitate the entire roadway, including arrears of maintenance and necessary additions and betterments required for Central operation, total $343,029. Also the right of way in the vicinity of the Upper South Branch Thunder Bay River, T.30 N. E. 5 E., was purchased in 1913 subject to a reservation by the grantor of the right to flood the lands for the purpose of building a power dam raising the level of the branch, 18 feet above low water. The cost of elevating the BCG&A track to accommodate an initial raising of the water level 10 feet, required immediately, will be $40,366; and if the track is elevated to provide for a full 18 feet rise of the water, the cost will be $153,353. The latter expenditures can be deferred, however, and perhaps avoided, since the dam may never be raised to the full height contemplated; and it is not probable that it will be required within 15 years.

Equipment owned and in use on the BCG&A is not suitable for Central service. The value of motive power and rolling stock which it will be necessary for the Central to assign to service on the BCG&A has not been determined, but can be supplied without additional purchases by the Central. The motive power presumably can be supplied from units retired from service on other lines.

The principal liens and encumbrances to which the BCG&A property is subject include first mortgage bonds due in 1937 in the amount of $800,000, on which interest for 1930 is unpaid, and tax liability amounting to $90,569.64 as of December 31, 1930, or more than three times the railway tax accruals for the years 1928, 1929, and 1930,  The property is also subject to contract trackage rights covering about 15 miles of line at the eastern end, granted to an industry (Sensibar project, see infra) unless the contract is invalid as affecting the BCG&A or its assigns, or the right has lapsed from nonuse subsequent to the hearing. [The agreement provided that if no train should be run under the trackage right on or before May 15, 1931, the contract should terminate as of that date. It also provided that sale, merger, or transfer of the property should be made subject to the trackage right granted. The contract was entered into while these proceedings were pending with notice to the Central and acquiescence by it.]

LOCAL CONDITIONS AFFECTING TRAFFIC

The BCG&A is located 45 miles south of Mackinaw Straits and the nearest other east-and-west cross-State line extending from lake to lake is 130 miles farther south. The principal points on the BCG&A's91.52 miles of road are Boyne City, 2,650 population in 1930, Boyne Falls 199, Gaylord 1,627, and Alpena 12,166. The last named, on the eastern end of the line, does not contribute traffic proportionately with the population, and what profitable traffic there is centers about the western end of the road, being confined for the most part to the 7.13 miles at the western extremity between Boyne City and Boyne Falls. The railroad does not reach the lake front at Alpena, terminating about 1 mile from the center of the city. The largest single factor in the present business of the BCG&A , and a very important one proportionately to the whole, is a tanning and extract company located at Boyne City. The arbitrators point out that, comparing the BCG&A with other roads serving the northern end of the peninsula, the counties in
which the former is located show a relatively high assessed valuation of real estate and a relatively high number of voters per mile of road, but the comparison does not appear to be of immediate importance in this instance in the determination of the commercial value of the railway property since, notwithstanding such conditions, traffic on the BCG&A  has not been in profitable volume, and population and business in the territory appear to be declining.
Moreover, the Michigan Central, one of the roads on which the comparison is based, is said, in so far as its lines in this district are concerned, to have an operating ratio of about 200, that is to say, to receive operating revenues only sufficient to meet half its operating expenses, exclusive of rents and interest charges.

In the five counties of Michigan traversed by the BCG&A, 374,024 acres out of a total of 1,637,760 acres are non-freight-producing lands, that is to say, lands owned by the United States, the State of Michigan, and hunting, fishing, and recreation clubs, and lands upon which taxes are delinquent for from three to five years. The population of the communities served by the BCG&A, the townships in the vicinity, and the counties traversed have decreased between 1920 and 1930. The railroad is paralleled for its entire length by gravel or concrete highways. Timber has been the main source of traffic in the past but the remaining supply, excluding that in Government reforestation reserves, is negligible.

Apparently the only remaining industry of importance at Boyne City is the tanning and extract company. The activities of the W. H. White Company and associates which contributed largely to the railroad's traffic in former years ceased in 1927. Two other lumber companies, a charcoal-iron company, chemical works, and a cooperage company had also discontinued by the end of that year or earlier. Other industries, which it was hoped would take the place of those lost, including a brick yard, a cement industry, a flooring industry, and an automobile-body works have failed to materialize. There has been drilling for oil, but none found within 100 miles of the BCG&A. The number of farms has decreased in each of the counties served.

TOPOGRAPHIC CONDITIONS

As noted in our valuation report under section 19a, Boyne City, Gaylord and Alpena R. R. Co., 119 I. C. C. 778, of record herein, the road at its western end lies in the Boyne River Valley where the river empties into Lake Michigan. The interior land is mostly level to rolling and generally swampy, except between Boyne Falls and Sparr a distance of about 23 miles where rough and choppy country is encountered. The soil is sandy gravel. Annual snowfall is heavy.

ECONOMIC AND FINANCIAL HISTORY OF THE PROPERTY

The BCG&A was incorporated in 1905, and in the same year acquired its line from Boyne City to the connection with the Pennsylvania Railroad at Boyne Falls, 7.31 miles, by purchase. It extended this line to a connection with the Michigan Central at Gaylord, 16.93 miles, between 1905 and 1907; and completed the present line to the connection with the Detroit and Mackinac at Alpena, the eastern terminus, from 1912 to 1918. Extension to Gaylord was for the dual purpose of reaching additional timber lands and to secure more favorable divisions of rates with the trunk-line carriers. The eastern part of the extension toward Alpena, 24 miles, was constructed before a connection with the older line to the west was completed, the $195,000 necessary for the construction of that segment being advanced by local residents not connected with the interests in control of the corporation.

The property as at present constituted has always been dependent upon lumber traffic as its principal source of revenue and such traffic is now virtually exhausted. The property has never enjoyed any marked prosperity even with the benefit of the lumber traffic; and conditions for the future without such traffic are not promising. The W. H. White Company interests, which terminated activities in 1927, had previously operated heavily in lumber and furnished
about 21 per cent of the Alpena freight traffic since 1906. While no corporate control is exercised over the Alpena, individuals connected with the White companies or those individuals in association with R. E. Olds own most of the stock and constitute a majority of the board of directors.

TRAFFIC

The principal business of the road is freight. The passenger business has dwindled, and since the building of parallel highways for automobile traffic has become negligible. Revenues from operations for the year 1930 were $98,780 freight, $1,857 passenger, $9,569 mail, $2,587 express, $371 switching, $193 demurrage, and $2,862 miscellaneous. The BCG&A has connections with other carriers for the interchange of traffic as follows: With the Detroit and Mackinac Railway Company at Alpena; with the Pennsylvania, at Boyne Falls, Mich.; with the Michigan Central at Gaylord, Mich.

SAVINGS AND ADDITIONAL EXPENSES OF SYSTEM OPEEATION OPERATION EXPENSE

The BCG&A has estimated the gross savings in operating expense (not including car hire) of system operation at $26,137 and the additional expense at $18,429. The Central on the other hand admits gross savings of $26,361 but contends that added expenses, not including additional taxes and interest on the investment required for rehabilitating the property, would amount to $57,235. There was thus virtual agreement as to the total amount of economies, if not as to the separate items, and a substantial difference as to added expenses. The arbitrators accepted the Central estimate.

Large added expense of system operation would appear to be unavoidable in view of the better service that would be expected by the public from that company, the higher wages it would have to pay under general agreements with its present employees, and the low standards of maintenance recently followed by the BCG&A. Moreover, the Central witness, in view of his greater experience with Central management and operating conditions on the existing system, must be regarded as better qualified to estimate the results of Central acquisition of the BCG&A in this respect. The BCG&A in its exceptions and on brief argues, however, that the Central's estimate requires amendment in a number of particulars before acceptance.

Salaries of a car inspector, a dispatcher, and an assistant trainmaster, it is stated, must be eliminated from the
statement of expenses which the Central will have to meet; and an adjustment made for a reduction of $300 in the salary included for a station agent. Also charges for membership in the freight association, printing tariffs, and certain miscellaneous charges should be stricken out or reduced; the estimated net added expenditure for maintenance of way and structures scaled down; and further savings in general office expense should be taken into account. The reductions which the BCG&A would now apply to the Central's estimate total $34,853, and if approved would reduce the net additional expense computed to a net decrease in expense of $3,979. Of the $34,853 total difference, $19,082 applies to maintenance of way and structures, including $10,512 for annual replacements of crossties. The latter sum is arrived at on the assumption that since about 71 per cent of the ties now in the track can remain for
a time after rehabilitation of the property, the Central's subsequent annual replacements of crossties, as compared with the BCG&A in the past, need not exceed the ratio of 100 to 71, if the same grade of ties is used. And if a better tie is used, it is argued that the number required would diminish proportionately with the increase in price. According to this analysis the Central's estimate provides for the renewal of about 7 per cent of the crossties each year, the BCG&A's for about 4 per cent. We are not persuaded that the assumptions made by the Alpena nor the result arrived at are appropriate. Most of the remainder of the adjustment sought for maintenance of way represents an alleged overstatement of labor costs. It is argued that the Central will require only the same number of men the Alpena has been employing on this work, or 25 instead of 33, as estimated for the 92 miles of road. In view of the different standards of maintenance we are not convinced that this adjustment should be made. Questions as to the number and compensation of operating employees required under Central management account for $8,191 of the remaining difference. As to such matters we are disposed to accept the estimate of the witnesses familiar with Central operating conditions, methods and policies, where, as here, it is not shown by competent testimony that the estimates are unreasonable.

For general-office expense the adjustment sought amounts to $4,767. This item has already been scaled down by $13,220 to eliminate salaries and the lighting, heating, etc., of the offices. The aggregate is less than the total charges to the account; but in the absence of further showing as to what the balance in the account includes, no
further adjustment appears to be required, although it is expected that the separate general offices for the operation of the BCG&A would be abolished.

The remaining items are not large in the aggregate. In some instances all, or a part of the adjustment sought, should probably be made if it were possible to determine in detail all the increased and decreased expenses to result from system operation. In our opinion this is not altogether practicable, and only an approximate estimate at best is possible. The Central's estimate appears reasonable on the whole; and if all items of saving are not taken into
account neither are all items of added expense. Our conclusion is that for the reasons stated there will necessarily be a large net increase in operating expense under Central management and that the sum estimated by the Central, $30,874, approximates as nearly as practicable the amount of the net added increase that must be met.

The BCG&A insists that it is everyday experience with railway consolidation that a net savings and not a net added expense, such as we have estimated here, is brought about. This result, it says, is effected through elimination of administration charges and elimination of some of the duplication in costs of services. Consolidations have been, it is true, often projected for the reason that substantial net economies were expected by those in control. But it, of course, does not follow that in every instance,- or in the present instance, a sufficient saving of the character suggested can be accomplished to offset the cost of materially improving the service on the line to be consolidated, and to provide substantially increased compensation for the operating employees.

Fuel coal.—In 1929 fuel coal was purchased by the BCG&A in the amount of $12,305.75. The a rerage purchase price, including freight paid to foreign lines, was approximately 78 cents per ton or 22 per cent in excess of the same cost to the Michigan Central. The longer hauls required for deliveries to the BCG&A explain most if not all of the difference, the greatest quantities of the Michigan Central coal being used on its main line to the south, nearer to the
mines. There is no proper support for the BCG&A 's contention that a saving of 10 per cent at the mines could be accomplished; and if there had been, there is no way of estimating from the evidence before us what proportion of the saving would merely offset losses in revenues on the Central's other lines where a commercial rate has been heretofore received for hauling coal for the Alpena's consumption. If through purchasing in larger bulk the Central can effect a small saving, the total, however, does not appear to be important. The record is inconclusive on the question, and in estimating earnings under Central operation of the BCG&A , no considerable savings in the purchase of coal will be taken into account.

BUSINESS IN PROSPECT ON THE BCG&A 

Sensibar project.—Some progress has recently been made in arranging for the development of large gravel deposits tributary to the BCG&A line at Stinson, 15 miles from the eastern end. A discontinued pit with the land for a much larger pit has recently changed hands, and the purchasers have recently invested some $82,000 in land and options and committed themselves for an additional $44,000. Properties at other locations were also involved in the same
deal, bringing the total of expenditures and obligations to $159,000.

This occurred some time ago, but it is said that further progress toward production at the pit has been only temporarily halted by the general decline in building operations. The purchasers are experienced in this line of activity and their connection with the enterprise affords considerable promise of future success. The bulk of gravel according to the plan will be hauled eastward by private cars, locomotives, and train crews over the track of the BCG&A under a trackage contract with the BCG&A , and thence by water to the various large cities upon the Great Lakes. The tonnage will be very great, and a witness for the BCG&A estimates an addition to gross revenues, even under the low return agreed upon in the trackage contract of from $43,750 to $131,250 per annum. A part of the gravel will also be shipped westward under tariff rates yielding an estimated further increase in gross revenues of from $17,000 to $51,000 per year to the BCG&A , it is said. Including $28,595 additional cost of maintaining way and structures, which is what the BCG&A considers would be required in any event under Central standards, the estimated additional cost of handling the gravel shipments will be from $77,975 to $97,475 for the BCG&A as presently operated. Under what are termed "average shipments" the additional net income of the BCG&A would thus be $34,525, or sufficient to convert the recent operating deficit into a small net income if valuation expenditures are also reduced. There will be, moreover, if the plan is carried out as projected, an additional net income, as estimated by the BCG&A , of from $13,800 to $41,400 for the Michigan Central lines.

A number of objections are urged by the Central against the practicability of the Sensibar project, not the least of which is that the use of the trackage rights upon which its success is dependent would be an unlawful preference to the injury of other shippers of gravel on other lines. It is not our function to determine such a question as this upon the record here made in this case, in advance of complaint filed by any interest or concern alleging injury. The question must be left open, but in appraising the value of the Sensibar contract to the BCG&A property such consideration must be given as would be given in ordinary commercial transactions, to the fact that the doubt in this respect increases the uncertainty of the eventual success of the project. The other objections of the Central have to
do with other obstacles in the way of the plan. The BCG&A road must be extended to the water, and a crossing with the Detroit and Mackinac remains to be acquired. And arrangements for necessary port facilities at Alpena, either by new construction or by contract for the use of existing facilities, are not yet completed. Success of the venture is, of course, by no means assured and the present worth of the prospect as a possible source of traffic for the BCG&A  is only a small fraction of what it would be if the enterprise had already proved itself in actual production and the profitable sale of its product. It has not reached a point where it can be said to have an important bearing on the commercial value of the BCG&A .

New business at Boyne City.

Prospective developments at Boyne City of brick and cement plants, an automobile-body manufacturing plant, and hardwood-flooring industries, which the BCG&A urged at the earlier hearings as probable sources of additional revenues, had not materialized at the time of the last hearing; but this may be due to the general business conditions, and need not be taken as indicating that similar developments are impracticable under more
favorable circumstances.

Other prospects.

There is a very large cement manufactory at Alpena on the eastern end of the road. In 1922 about 80,000 tons were shipped over the BCG&A, and 39,000 tons in 1924, from which the BCG&A received $40,956 in gross revenues; but in 1928 this traffic had dwindled to three cars in all. Failure of the BCG&A to maintain daily service may account for some of the loss in this traffic, and the Central, if it provides such service in connection with the gravel traffic from the Sensibar pit, may be able to recover a part of the business that has been lost. It is not probable, however, that the gains to be secured will equal any large proportion of the business handled in 1922 to 1924, since the traffic appears to move normally by other routes, and special circumstances not now in effect appear to have brought the traffic to BCG&A rails in those years.

A tanning and extract company at Boyne City has recently been providing an increased traffic for the Alpena, although it has not escaped a severe decline in 1930, and shows promise of increasing again when conditions return to normal. Owing to its requirements for raw materials this plant will perhaps have to remove from its present
location at some future time but the testimony of record does not indicate that that event is sufficiently close at hand to have any important bearing on the present value of the BCG&A . The total traffic, both inbound and outbound, produced for all roads by this business was $177,895 for the first 11 months of 1930.

Mention is also made in the testimony of extensive limestone deposits in the general vicinity of the Alpena, some of which are owned by industrial concerns of national importance. No attempt has been made of record to state when or to what extent the future development of these deposits may affect the traffic of the BCG&A . The bearing on the present value of the railroad property appears to be remote.

The BCG&A further points out that generally the territory served by its road is at present in the process of transition from a stage in which the timber resources of the territory were exploited to a state of stabilized agricultural and industrial diversification. This transition began about 1924. Development, present and prospective, of this character is relied upon by the BCG&A in justification of the commercial value it seeks for its property. The results thus far
accomplished in both agricultural and industrial development are reflected in the recent earnings and traffic statistics herein noted or included under the head of prospects above mentioned. Further progress may doubtless be confidently expected when national conditions improve, justifying the continued operation of the property; but there is little assurance that the process will be sufficiently rapid to overcome the effect of the current lack of earnings on the present commercial value of the property. The contention of the BCG&A that the future prospects of the property are such as to greatly increase its commercial value over what is indicated by recent business and earnings is not sustained.

[ICC Reports Volume 180, 1932]