This document contains information about metrics used to evaluate railroads, including metrics related to size, efficiency, financial performance, and investment performance. It discusses common metrics such as total revenue, ton-miles, operating ratio, profits, and return on investment. It also notes some problems in using some of these metrics and discusses trends in the railroad industry, including rising logistics costs, the need for ongoing capital investment, and the decline of coal as a freight commodity.
Keynote Part 1 - Alternative Funding of Road Projects
American Railroads: Decline and Renaissance in the Twentieth Century
1. Michigan State University, 2013
Railroad Metrics: Size,
Efficiency, and Financial
Performance
Dr. Robert E. Gallamore
Adjunct Faculty
MSU RMP
August 12, 2014
2. Common Metrics for Evaluation of Railroads –
Michigan State - 2 - University, 2014
(Continued Next Slide)
Size
Total Revenue
Ton-Miles
Car-Miles
Employees
Track Mileage
Total Enterprise Value
Profits
Market Share
Operating Efficiency
Operating Ratio = OpExp/OpRev
Productivity = T-m / Empl Hour or T-m
/ $ Labor Wage + Fringe Exp.
Density = T-m / Trk-m
Unit Cost = Total Exp/ T-m
Velocity = Trn-m / Trn Hour
Length of Haul = T-m / Ton
Fuel Efficiency = T-m / Gal.
3. Common Metrics for Evaluation of Railroads –
Michigan State - 3 - University, 2014
(Concluded)
Financial Performance
Profit (Net Income)
NROI (Net from RR Ops)
Margin = (OpRev – OpExp) / OpRev
Revenue / Variable Expense Ratio
Debt / Equity Ratio
Free Cash Flow = (Profit +
Depreciation) - CapEx
CAGR (Revenues) Compound
Annual Average Growth Rate
Moody’s Bond Rating
Investment Performance
Return on Investment
Return on Equity
Return on Assets
Yield = Dividends / Share
Earnings /Share (EPS)
Price per share / EPS = P/E Ratio
Capital Expenditures % of Total
Operating Revenue
Market Capitalization
4. Some Problems in Using These Metrics --
Measure
Profits
Operating Expense
Length of Haul
Market Share
AAGR (Revenues)
Capital Expenditures
Michigan State - 4 - University, 2014
Common
Difficulties/Limitations
Treatment of Extraordinary Items e.g.
Write-downs
Deferred Maintenance
LOH benefit is relative; longer is better if
same traffic rates apply; mergers mess up
LOH metric.
Difficulty of defining markets and
measuring share
Correcting for inflation
Wall Street Fashions – Are they pro or con
CapEx for this RR?
5. Martland’s Model Translates Profit to ROI to Re-Investment
Notice How Market Forecasts Support Revenues, Operating Budgets Relate to Operating
Expense, and Capital Budgets Fund Plant, Equipment, and Control Improvements
Michigan State - 5 - University, 2014
Investment
Source: Carl D. Martland, MIT
Market
Forecasts
OE
Budgets
Capital
Budgets
Revenue
Profit
ROI
Expenses Equipment Control Facilities
Signals
Positive
Train
Control
Grade Xings
6. Types of Performance Measures, Data Sources & Uses
by Managers – Carl D. Martland, MIT
Michigan State - 6 - University, 2014
Carload Commodity Stats
7. CCLlaAsSs SI RI aRilAroILaRd ORAanDk iRngAsN –K2IN01G2S – -R 2o0a1d2 Mileage
32,514 31,868
Michigan State - 7 - University, 2014
20,740 20,023
Miles of Road Operated
6,141 6,134
3,238
BNSF UP CSX NS CNGT CPSL KCS
658
Billions of Revenue Ton-Miles
8. Class I Railroad Rankings – 2012 – Revenue Ton-Miles
658
Michigan State - 8 - University, 2014
6,141 6,134
3,238
BNSF UP CSX NS CNGT CPSL KCS
48,968
521
226
Billions of Revenue Ton-Miles
186
56 37 30
BNSF UP CSX NS CNGT CPSL KCS
9. 186
56 37 30
Class I Railroad Rankings – 2012 – Number of Employees
BNSF UP CSX NS CNGT CPSL KCS
Michigan State - 9 - University, 2014
66
48,968
41,821
30,459 28,987
Number of Employees
6,207
4,189 2,833
UP BNSF NS CSX CNGT CPSL KCS
10. $1,866 $1,757
$696
Operating Ratio is Revenue Divided by Operating Expenses –
Operating Ratio
Michigan State - 10 - University, 2014
Smaller is Better
$227 $159
(Traditionally, Below 80% was Good)
UP BNSF NS CSX CNGT KCS CPSL
67.8% 68.9%
72.4% 73.8% 75.0% 75.6%
88.9%
CNGT UP BNSF NS KCS CSX CPSL
11. Union Pacific Exceeded $4 Billion NROI in 2012
Michigan State - 11 - University, 2014
$3,068
$1,589 $1,209
UP BNSF CSX NS CNGT CPSL KCS
$4,039
$3,542
Net Railway Operating Income
$1,866 $1,757
($ millions)
$696
$227 $159
UP BNSF NS CSX CNGT KCS CPSL
Operating Ratio
12. UP and BNSF Both Topped $20 Billion in
CLASS I ROApIeLrRaOtinAgD R ReAveNnKuIeN iGnS 2 0- 122012
Michigan State - 12 - University, 2014
CLASS I RAILROAD RANKINGS - 2012
$20,898 $20,604
$11,471 $11,040
Operating Revenue
($ millions)
Operating Revenue
($ millions)
$3,068
$1,589 $1,209
UP BNSF CSX NS CNGT CPSL KCS
$4,039
$3,542
Net Railway Operating Income
$1,866 $1,757
($ millions)
$696
$227 $159
UP BNSF NS CSX CNGT KCS CPSL
67.8% 68.9%
72.4% 73.8% 75.0% 75.6%
88.9%
Operating Ratio
$20,898 $20,604
$11,471 $11,040
$3,068
$1,589 $1,209
UP BNSF CSX NS CNGT CPSL KCS
Net Railway Operating Income
13. Freight cars in service 1 1,316,185 1,294,703 1.7
Capital expenditures ($000) $13,470,600 $11,601,093 16.1
New locomotives added 658 473 39.1
New freight cars added 1, 2 53,835 41,814 28.7
Miles of roadway owned 95,391 95,514 (0.1)
What a Great Industry We Have Today –
The Best Freight Railroads in the World
2012 2011 % Inc.
TRAFFIC:
Carloads originated 28,374,746 29,996,959 (5.4)
Revenue ton-miles (000) 1,712,566,650 1,729,256,468 (1.0)
Revenue per ton-mile 3.946¢ 3.745¢ 5.4
Avg. length of haul (miles) 973 917 6.1
FINANCIAL RESULTS ($000):
Operating revenue $69,880,391 $67,102,011 4.1
Operating expenses $50,536,259 $49,262,669 2.6
Current taxes $8,412,213 $6,409,069 31.3
Net railway
operating income $12,287,536 $11,448,403 7.3
Rate of return on
net investment 12.5% 12.1% 3.3
Ordinary income $11,900,165 $10,879,963 9.4
EMPLOYMENT AND
COMPENSATION:
Avg. number of employees 163,464 158,623 3.1
Total wages ($000) $12,764,034 $12,146,364 5.1
Average annual
Michigan State - 13 - University, 2014
wages $78,085 $76,574 2.0
14. A Few Trends to Watch Going Forward
Michigan State - 14 - University, 2014
Reinvestment
Policy
Productivity
Performance
Rising
Logistics
Costs
16. Logistics Costs Will Rise
Fuel and congestion tolls will push up
trucking rates.
Costs of government mandated security.
Insurance costs still increasing sharply.
Interest rates are at historic lows – may
increase, making inventory holding less
desirable – favoring premium transport
solutions.
Expect more distant sourcing to lower labor
costs – more international transportation.
Michigan State - 16 - University, 2014
17. Integral Train Networks for Productivity
Private freight railways survived last 20 years with
productivity growth.
• De-regulation, substitution of capital for labor, PRB coal
• Now must find other means of salvation
Integral trains = next generation technology.
• High asset use, on-time performance, network
optimization
• Coal, intermodal unit trains are the first to use
electronically activated brakes
Depending on how it is implemented, PTC has the ability to
increase railway productivity significantly.
Michigan State - 17 - University, 2014
18. Ongoing Need for Capital Investment
Because heavy traffic wears out plant and equipment
For capacity expansion to handle volume growth
To reconfigure network for shifting demand
To meet government mandates
-- Positive Train Control
-- Locomotive emissions
-- Tank car safety, etc.
Continuing quest for productivity and competitive market
position
One key message of American Railroads: New
technology comes embedded in reinvestment
Michigan State - 18 - University, 2014
19. Coal Has Declined Sharply as a Share of US Energy
Production – Large Impact on Rail Freight
Michigan State - 19 - University, 2014
20. Railway Revenue Ton-Miles (a Measure of Industry Volume) Track
U.S. Domestic Product – But at Only ¾the Rate of Growth
2.50
2.00
1.50
1.00
0.50
0.00
1978
1980
Michigan State - 20 - University, 2014
Note Impact of the Great Recession
Constant Dollar Gross
Domestic Product
1982
1984
1986
1988
1990
1992
1994
1996
Class I Railroad
Revenue Ton-Miles
1998
2000
2002
2004
2006
2008
2010
INDEX 1980=1.0
Index of constant dollar GDP 1980 = 1.0
21. Railroads spend 17% of revenue on
capital investments plus maintenance
and depreciation.
And note railroads kept investing in
infrastructure and equipment – and
plant and rolling stock maintenance –
right through the Great Recession.
Michigan State - 21 - University, 2014
23. $12.0
$10.0
$8.0
$6.0
$4.0
$2.0
$0.0
Annual Capital Expenditures (Billions)
Class I Capital Expenditures Rose
to about $14 Billion Annually in
Michigan State - 23 - University, 2014
2012
Capital Expenditures ($ Billions)
24. Michigan State - 24 - University, 2014
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1999 2001 2003 2005 2007 2009 2011
Cost of Capital (Industry) or Return on
Investment (Railroads)
STB Revenue Adequacy Findings -
2000-2010 – Follow the Dots
Industry Cost of Capital BNSF
CSX GT-CN
KCS NS
SOO-CP UP
25. Michigan State - 25 - University, 2014
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1999 2001 2003 2005 2007 2009 2011
Cost of Capital (Industry) or Return on
Investment (Railroads)
STB Revenue Adequacy Findings -
2000-2010 – Follow the Dots
Industry Cost of Capital BNSF
CSX GT-CN
KCS NS
SOO-CP UP
26. Return on Investment is Crucial
If ROI > cost of
capital:
• Capital spending
expands
• Stronger physical
plant; more and
better equipment.
• Faster, more
reliable service
• Sustainability
Michigan State - 26 - University, 2014
If ROI < cost of
capital:
• Lower capital
spending
• Weaker physical
plant, equipment
• Slower, less
reliable service
• Disinvestment
27. Rail Freight – 3 R’s for Remaining Vital
Re-investment
Must earn returns greater than or equal to the
cost of capital
Huge capital requirements for expansion and
renewal
Reliability improvement
On-time / on-plan: meet customer
expectations
Use technology to improve performance
Remain in the private sector
Not re-regulated
Must defeat “open access” proposals
Michigan State - 27 - University, 2014
28. THANK YOU FOR YOUR ATTENTION
Michigan State - 28 - University, 2014