THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, October 9, 1994 TAG: 9410080189
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BLOOMBERG BUSINESS NEWS
LENGTH: Long : 121 lines
When North Carolina's 75 percent state-owned railroad leased its tracks to a neighboring state's shipping company, a banner headline called the bargain-basement terms ``The Crime of the Century.'' The 19th century.
Nearly 100 years later, the contract between the North Carolina Railroad Co. and Norfolk Southern Corp. is still making news. With only a few weeks remaining, contract negotiations are snagged by conflicting, powerful interests that threaten to leave shareholders and taxpayers . . . well, railroaded.
Since 1895, Norfolk Southern has paid to run freight over tracks linking North Carolina's port at Morehead City to Raleigh, Greensboro and Charlotte. At $783.56 a day, the fee paid by the Norfolk-based railroad is less than the cost of an average household move by its best-known division, North American Van Lines.
The lease's low rates have raised a controversy as old as the contract itself: Should state governments coddle businesses with incentives that, offset by a boost to local economies, could also benefit the public at large?
-The controversy has sparked a century-old feud between the North Carolina government and the railroad's minority shareholders, some of whom can trace family holdings to the company's 1849 founding. The 25 percent owners want Norfolk Southern to pay the hundreds of millions of dollars a state agency says the lease could be worth annually - not the $286,000 it has paid each year for 99 years.
``That's a pittance of what it's worth,'' said Walker Rucker, 71, one of the railroad's five largest shareholders and a great-grandson of the governor who built the railroad. ``My family has waited a century for this damn lease to expire.''
The lease has helped make N.C. Railroad something of a damnable investment. Of the 1 million shares held outside state coffers, only 800 changed hands this month.
Amid surging business and rapid industry consolidation, the railroad and its adjunct real estate holdings are worth as much as $512 million, according to independent appraisals. That puts the lease's annual return on assets at a hardly-worth-measuring 0.05 percent.
More important than lease payments, the railroad generates jobs, said state officials, who cite the 1988 construction of a dishwasher-machine plant that now employs nearly 500. ``It was a key part in locating the plant here in Kinston,'' said Charles Grant, head of shipping for Frigidaire, a division of Electrolux AB. ``We ship in a lot of raw materials and ship out product.''
North Carolina wants to keep the lease terms low so it can use the 317-mile rail network to lure more businesses. ``It's a narrow view to try and get the most money at once,'' said Brad Wilson, general counsel to Gov. James B. Hunt Jr. ``The economic-development issue is as important as a short-term gain.''
Less partisan observers don't always agree. ``There is a recruitment-at-any-cost mentality that has stymied the South's growth in terms of education and roads,'' said George Autry, head of the MDC Inc. economic development group in Chapel Hill. ``North Carolina wants to join the crowd.''
That crowd includes South Carolina, which in 1992 gave Bayerische Motoren Werke AG generous incentives to build a $600 million BMW plant in Spartanburg. Alabama lured Mercedes-Benz by all but buying it a new $300 million plant in Vance this year. TANGLED WEB
For two years, lease negotiations have been held under a cloak of secrecy, but saber-rattling has betrayed some problems. When talks reached an impasse this summer, Norfolk Southern rerouted trains from Atlanta to a junction in Hagerston, Md., over tracks in Tennessee and Virginia. The experiment, which lasted a few weeks, had a message: N.C. Railroad needs Norfolk Southern.
A tangle of major North Carolina corporations that rely upon rail shipping have a keen interest in the negotiations. To keep their transportation costs in check, Philip Morris Co., RJR Nabisco Holdings Corp. and Fieldcrest Cannon Inc. back the old lease terms.
And the livelihoods of more than 300 North Carolina workers at Norfolk Southern hinge on the lease renewal.
The most conflicted interests, it seems, are those of state taxpayers, who, after all, own 75 percent of the N.C. Railroad. While they would surely benefit from the better roads, schools and police forces a multimillion-dollar lease could buy, they could also suffer if higher shipping fees make consumer goods more expensive. FAMILY TIES
North Carolina got into the railroad business in the 1840s, when the state was little more than an aggregation of small, self-sufficient farms. Farmers bore the expense of shipping tobacco, wheat, corn and flour overland to neighboring states for export.
To put every farmer within a two-day rail trip of a deep-water port, Gov. John Morehead (Rucker's great-grandfather) in 1846 pushed through a bill that let the state cover two-thirds the cost of a $3 million railroad. When the project ran $1.8 million over budget three years later, the state's $4.35 million share gave it a unique ownership position in a publicly traded railroad.
The burden of fiduciary responsibility - putting profits first - falls on N.C. Railroad's board of governors. But the N.C. Railroad governors are handpicked by the governor, and thus the ties between the state and the corporation are blurred.
``It's a separate corporation,'' said general counsel Wilson. ``The state maintains its distance. Of course, we share the same goals.''
In 1993, Hunt, a Democrat, wrested control of the board from the appointees of former Gov. James Martin, a Republican. Hunt demanded the resignations of five Martin appointees, including the board's president. The expiration of three directors' terms gave Hunt control of the 15-person board. RESHUFFLED BOARD
According to shareholders and Wall Street analysts, the reshuffling has insured that the board will sign a new lease with Norfolk Southern at terms more favorable to the state, but still nowhere near market value.
Norfolk Southern ``says it is very optimistic it will renew the lease at terms so beneficial that it won't even nick earnings,'' said Michael Lloyd, an analyst at NatWest Securities.
Officials at Norfolk Southern confirmed they are optimistic about signing a new lease at favorable terms, but N.C. Railroad is still racing against time to shore up final negotiations.
If there is no agreement by Jan. 1, control of the railroad could end up in hands of the Interstate Commerce Commission. The ICC has the power to order Norfolk Southern to continue service or to cut it loose and find another operator. It could even mandate the N.C. Railroad to run trains itself.
The last time that happened, Ulysses S. Grant was president. by CNB