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Net Salvage Value

The transfer and discontinuance process of the Canada Transportation Act provides access to net salvage value determinations to parties involved in commercial negotiations for the continued operation of a railway line or to governments who may use the line for any purpose.

"Net salvage value" refers to the market value of an asset less the costs associated with its disposal.

Section 143 of the Act requires a railway company to advertise the availability of a railway line for continued railway operation before discontinuing operation of that line. Parties are free to negotiate an acceptable sale price. However, any party to the negotiation for transfer of a line can ask the Agency to set the net salvage value of the line for continued operation. In setting the net salvage value, the Agency may include the cost of replacing railway line assets that were previously removed by the railway company if the Agency is of the opinion that the railway removed the assets in order to reduce traffic.

If an agreement for the transfer of a railway line for continued operation cannot be reached within six months, a railway company that chooses not to continue operating the line must then, in order to discontinue its operation, offer to transfer all of its interests in the line to all levels of government at no more than net salvage value, for any purpose, pursuant to Section 145 of the Act.

When a government has accepted a railway company's offer to transfer a line, the parties have 90 days after the acceptance of the offer to agree on the line's net salvage value. If they cannot agree on this value, either party may ask the Agency to determine the net salvage value.

The process for arriving at a net salvage value for a line of railway traditionally includes the determination of the net salvage value of track materials, the determination of the cost of environmental restoration, the determination of the value of the land, and the determination of the commercial impact leases or agreements may have on the overall net salvage value of the railway line.

In order to determine the net salvage value of track materials, the gross salvage value of such track assets must first be determined. The quantities of the track and other materials forming part of the line of railway are therefore determined. Assets are then classified by quality - either scrap or reusable categories. The market value of each type of asset by its quality is then established from various market sources, such as federally regulated railway companies, short line railway companies, rail and other track materials' manufacturers in the United States and in Canada, and rail salvaging companies in both countries. The gross salvage value of the track and other track materials is then determined by calculating the product of the quantities and market values of the individual assets.

The net salvage value of the track and other track materials is then calculated by subtracting from the gross salvage value, the costs of removal and salvaging of the track and other materials. Salvaging and removal costs are estimated from the same market sources described above.

The determination of the environmental restoration costs greatly depends upon the type of contamination, its extent, the risk of off-site contamination and varying regulatory requirements for differing land uses. In order to estimate the impact on the net salvage value of the property, a Level I environmental site audit, and possibly Level II and III audits, would be required.

The determination of the value of the land used in the operation of the rail includes land comprising the right of way and accompanying yards and spur tracks as well as land supporting buildings and sheds, etc. The land value is generally determined by evaluating the submissions of interested parties and any supporting documentation. In some cases, the Agency may request an independent accredited land appraiser to provide an opinion on the submissions of the parties or for the appraiser to conduct an assessment.

The final element in the valuation exercise is the Agency's consideration of any effect, financial or otherwise, resulting from a lease or agreement which may impact on the calculation of net salvage value.

The Agency has issued the following decisions regarding net salvage value determinations:

• 530-R-1998: Application by the St. Lawrence & Hudson Railway Company Limited for a determination of the net salvage value of the Goderich Subdivision between mileage 31.75 and mileage 34.9, in the city of Guelph, in the Province of Ontario.

• 175-R-1999: Application by the City of Prince Albert and the Rural Municipalities of Prince Albert No. 461 and Birch Hills No. 460 for a determination of net salvage value of CN's Tisdale Subdivision between mileage 136.2 and mileage 157.6, in the Province of Saskatchewan.

• 545-R-1999: Application by CN for a determination of the net salvage value of CN's Arborfield Subdivision between mileage 0.00 and mileage 19.4, in the Province of Saskatchewan.

• 542-R-2000: Application by CN for a determination of net salvage value of CN's Cudworth Subdivision, from mileage 38.8 to mileage 84.6, in the Province of Saskatchewan.

In two instances, the Agency has been requested to determine net salvage values outside of the requirements of the Act.

In 2002, the Province of Nova Scotia requested the Agency to determine the net salvage value of the Cape Breton and Central Nova Scotia Railway's Sydney Subdivision. The Nova Scotia Utility and Review Board had granted the railway's application to discontinue service and abandon a portion of the Sydney Subdivision, pursuant to the Province of Nova Scotia's Railway Act, 1993. The Agency completed its report in early 2003. Subsequently, the Province of Nova Scotia co-ordinated an agreement, based on a business case solution, which would provide for increased traffic on the line.

In 2003, the Province of Manitoba requested a net salvage value determination for the Hudson Bay Railway Company's Sherridon Subdivision. The Agency completed its report in late July of 2003. In April 2004, the Governments of Canada and Manitoba had developed a solution with the Hudson Bay Railway Company for continuation of the service between The Pas and Pukatawagan, Manitoba until the end of December 2004. Negotiations are currently under way for the sale of the line to the Keewatin Railway, which is a joint venture of three First Nations: Mathias Columb, War Lake and Split Lake. The plan is for the Keewatin Railway to take over the line at the end of the year. The Hudson Bay Railway Company will continue to operate the line on its behalf for two years while providing training to the Keewatin Railway's employees.