Letter from W. H. Hulsizer (Omaha) to G. F. Ashby (Omaha), May 7, 1942

File: 3703.1 OMAHA - May 7, 1942 (COPY) Mr. G. F. Ashby - Omaha: (2) Since our report to Mr. Jeffers of March 26 we have been giving, as you suggested, further intensive study to the possible transfer of the LA&SLRRCO'S investment in the Las Vegas water sup-ply system to the Las Vegas Land and Water Company. This study indicates such transfer would be almost wholly advantageous, and I recommend it for several reasons: 1. Over 90% of the water passing through the trans-mission mains is now taken by the Water Company, and this situa-tion binds fair to continue indefinitely. 2. The I.C.C. Bureau of Valuation has protested the inclusion of our large and growing investment in the Las Vegas water-producing property in account 701. They take the position the property should be transferred to account 705, and it is prob-able we cannot leave it in account 701. 3. The investigations of the Nevada Public Service Commission uncovered the details of Union Pacific charges against the Water Company for water, and as a result there has been criti-cism of rental charge based on 6% of the investment in land and im-provements and 4% of the cost of improvements for annual depreciat-ion. By sale of the L.A. & S.L. property to the Water Company the 6% interest charge would not be a controversial item, and ap-preciation can, in my opinion, be more acceptably determined by applying to the different features of the property, rates based 2. upon the anticipated service life of each. The present calcula-tion of depreciation is made solely for the purpose of billing on the LVL&W Co. for water, as no depreciation is recorded in the railroad accounts. If the LA&SLRR property/transferred to the Water Company depreciation charges on that property would be in-cluded in operating expenses with corresponding credits in that Company's reserve for depreciation on the same basis as now applied by the Water Company on its presently owned property. 4. As a matter of policy it seems desirable to transfer to the ownership of the Water Company the railroad investment in the plant, because the railroad makes a profit, or has the appear-ance of making a profit from the Water Company in the process of delivering the water, and the Water Company, after meeting the rail-road's charges for water, passes them on to the Las Vegas customers whose payments enable it also to make a profit. In other words, the expense for water as now handled furnishes ground for the con-clusion that the Union Pacific directly and indirectly collects two profits out of the Las Vegas community for the water used in the town. This source of criticism should be removed. 6. The twelve monthly bills rendered and yet to be rendered in 1942 by the Union Pacific against the Water Company for water supplied will total $27,210 (12 months at $2267.60, the amount being determined annually). These bills are credited in their entirety to operating revenue account 143, Miscellaneous. Most of this sum is made up of interest at 6% and depreciation at 4%, neither of which credit items is counterbalanced by 3. charges in operating expenses or any other account. If instead, the Water Company were operating the plant, it would be charging the Union Pacific for water supplied the water tank, roundhouse, etc., and railroad operating expenses would then include charges aggregating perhaps $9,000 per annum (see tabulation following) instead of the present set-up whereby railroad operating revenue is this year to include a credit of $27,210, with operating expenses including some minor costs, and taxes, about $1,200, paid on the property. Thus, without al-lowing for interest payable by the Water Company on indebtedness growing out of the sale to it of the railroad property, there would result a reduction of $35,000 in UPRR Co. annual income sub-ject to income tax. The LVL&W Co. should be able to pay something each year on the purchase price of the plant, and this would bring about a reduction of interest; at 4% the interest would not greatly ex-ceed $17,500 per annum when the present program of improvement is completed, and there would still remain a net reduction in rail road income, subject to income tax of some $17,500. 6. The revenue received from water sales and the ex-pense of maintaining and operating the entire plant would not a-lone justify the present LVL&W Co. tariff for water users, but on the combined investment in the plant which will be the Water Com-pany's investment if it purchases the LA&SL property, it will be seen that no more than a fair return is being earned. This show-ing should insure the preservation of the present water tariff. 4. In the following tabulation I have endeavored to forecast about what the operating results of the Las Vegas water supply plant for one year would be if the LVL&W Co. entirely owned and operated it. The figures are for the year 1941, and except as noted are those ac-tually stated or recorded for the year. The results for 1942 will be larger both in revenue and in expenses, the latter particularly in the items of depreciation and taxes. The investment also will be substan-tially increased. Revenue from sales of water to private customers $64,436 Revenue from sale of water to U.P.R.R.Co. ) (255,047,468 gallons * 34,094,885 cu. ft. (For purpose of this statement estimated at 2 3/4 cents per 100 cubic feet 9,376 Total revenue Expenses and taxes (omitting 6% interest on U.P. investment) Normal maintenance LVL&W $ 4,532 Depreciation " 1,394 Taxes * 7,387 General and admin, expenses LVL&W 12,965 Normal maintenance UPRB 1,250 Est. Depreciation (calculated on individual classes of LA&SLRR improvements aggregating $249,786.33 at 12/31/41). 5,360 Est. Taxes (calculated at 1 3/4% - the basis named by Charles Adams - on recorded cost of LA&SL RR Co. land and improvements, $284,772.21 4,984 Est. 37,872 Net income (not allowing for interest paid or payable, which may be around $17,500 cn maximum sum of indebtedness) Investment at 12/31/41: LVL&W 132,544.72 LA&SL 284,772.21 Total - Estimated return on combined investment ($35,940 % $417,317) 8.61% 5. In the foregoing I have considered the LA&SL invest-ment as to be transferred without deduction for depreciation. Ac-tually no depreciation reserve exists on the railroad books; all that the railroad company has received for the use of the plant has been treated in its accounts as miscellaneous revenue. It might be considered that the "depreciation" charged the Water Company was all accounted for in the replacements that have been made of the former wood stave pipe with oast iron and other perma-nent piping. None of the wood stave piping, so far as I have noted, lasted 25 years; 15 to 20 years is all that can be expected for it at Las Vegas. It may also be argued that the 4% "depreciation" was just a way of increasing the charge for interest on the investment because of the uncertainty of the permanence of the water plant. There is this to be said also, that "depreciation" if overcharged at 4% on the railroad property used jointly was undercharged at 2% on the LVL&W Co's old wood pipe lines. But all of the old wood piping has been taken out and replaced, whether railroad or water company property. There should be no heavy replacements in the entire plant for many years if the present wells and springs continue in service; the cast iron pipe used in the mains should be good for 75 to 100 years. Against transferring the LA&SL investment to the Water Company is the fact that thereby the railroad would turn over an essential property to another company which in the course of time might pass under the control of interests unfriendly to the Union 6. Pacific, whereby the coat of Union Pacific water might be greatly increased, but this would seem to be in our control unless the municipality takes over the plant, which it might undertake in any event. Original Signed W. H. HULSIZER