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Show RAILROAD INDUSTRY There has obvioasly been a strong negative effect on physical volumes of rail shipments due to the ongoing economic recession, but there are other factors in play that have kept railroad profits near historic levels. And the outlook can only be on the upside for the railrond industry as a whole. Further, we would anticipate even greater acceleration in revenues and profits for the industry as the economy "turns around," possibly by midyear or later this year. At that juncture we would expect a pickup in general freight shipments with heavier loadings of grain, largely for export; and increased coal shipments, not only for export but for domestic utilities as they make the move from oil to coal fuel. RELIEF THROUGH LEGISLATION In each of the past two years there has been highly important legislation aimed at railroads, which effectively changed their traditional modus operandi. In October 1980 President Carter signed a Rail Act which followed the 1978 deregulation of the airlines as well as the easing of controls over the trucking industry. The Act essentially removed railroads from 100 years under federal regulation. As with other deregulations, the railroads were permitted more autonomy in setting rates for services and were also given flexibility in retention or abandonment or rail system patterns. The really big bonus for the railroads comes in the Economic Recovery Tax Act of 1981, which should substantially bolster railroad finances. As with capital-intensive industries, railroads have been unable to generate sufficient tax liability against which to offset substantial investment tax credits. These have in the past reached their seven-year expiration date before being utilized. Under the new law, however, the expiration period for using up investment tax credits has been extended to 15 years. CASH BONANZAS Further, companies with excess investment tax credits may now sell the tax attributes of certain physical assets, generated by the investment tax credit and depreciation without transferring title to the assets of the second party. What this results in for a company strapped for capital is immediate cash rather than waiting up to 15 years to recover depreciation and investment credits, as before. One other significant feature in the 1981 tax law permits railroads to start writing off at this time the capital cost of track, rather than as before taking a deduction for the capital cost of tract onlyifand whenitwas abandoned. Asa practical matter, use of track capital write-offs will result in few if any of the railroads paying federal income taxes for 1981. MERGER PROSPECTS One outcome of railroad deregulation was actual and proposed merger of certain rail lines. On its own, a given railroad may face regional competition from other lines, but a logical merger combination could well result in economies of operation and capital costs. One apparently highly successful union was the combination of Chessie System and Seaboard Coast Line Industries In-dustries (CSX Corp.). This unit now provides broad rail coverage in the eastern part of the country from the great Lakes to Florida. Also in the works is a combine of Norfolk & Western and Southern Railway, designed to create another powerful eastern and midwest line. Not to be overlooked are the nonrail assets of many railroads. Particularly the western lines are rich in timber, coal, oil and gas, and minerals. In many cases nonrail operations provide the bulk of revenues and profits, with . some lines getting out of railroading to concentrate on nonrail activities. |