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Michigan State University, 2013
Dr. Robert E. Gallamore
Adjunct Faculty
MSU RMP
August 12, 2014
Railroad Metrics: Size, Efficiency, and Financial
Performance
Michigan State University, 2014- 2 -
Common Metrics for Evaluation of Railroads –(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.
Michigan State University, 2014- 3 -
Common Metrics for Evaluation of Railroads – (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
Michigan State University, 2014- 4 -
Some Problems in Using These Metrics --
Measure
Profits
Operating Expense
Length of Haul
Market Share
AAGR (Revenues)
Capital Expenditures
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?
Michigan State University, 2014- 5 -
Martland’s Model Translates Profit to ROI to Re-InvestmentNotice How Market Forecasts Support Revenues, Operating Budgets Relate to Operating Expense, and Capital Budgets Fund Plant, Equipment, and Control Improvements
Source: Carl D. Martland, MIT
Market Forecasts
OE Budgets
CapitalBudgets
Revenue
Profit
Expenses Equipment Control Facilities
Investment
ROI
Signals
Positive TrainControl
Grade Xings
Michigan State University, 2014- 6 -
Types of Performance Measures, Data Sources & Uses by Managers – Carl D. Martland, MIT
Carload Commodity Stats
Michigan State University, 2014- 7 -
Class I Railroad Rankings – 2012 – Road Mileage
Michigan State University, 2014- 8 -
Class I Railroad Rankings – 2012 – Revenue Ton-Miles
Michigan State University, 2014- 9 -
Class I Railroad Rankings – 2012 – Number of Employees
Michigan State University, 2014- 10 -
Operating Ratio is Revenue Divided by Operating Expenses –Smaller is Better
(Traditionally, Below 80% was Good)
Michigan State University, 2014- 11 -
Union Pacific Exceeded $4 Billion NROI in 2012
Michigan State University, 2014- 12 -
UP and BNSF Both Topped $20 Billion in Operating Revenue in 2012
Michigan State University, 2014- 13 -
What a Great Industry We Have Today – The Best Freight Railroads in the World
2012 2011 % Inc.
Michigan State University, 2014- 14 -
A Few Trends to Watch Going Forward
Reinvestment
Policy
Productivity
Performance
Rising Logistics
Costs
Michigan State University, 2014- 15 -
1981=100
Productivity (Hours)
Gross Margin Density
Productivity ($ Exp.)
Velocity
Ave. Haul
Michigan State University, 2014- 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 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 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 University, 2014- 19 -
Coal Has Declined Sharply as a Share of US Energy Production – Large Impact on Rail Freight
Michigan State University, 2014- 20 -
19
78
19
80
19
82
19
84
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92
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96
19
98
20
00
20
02
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04
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06
20
08
20
10
0.00
0.50
1.00
1.50
2.00
2.50
IND
EX
19
80
=1
.0
Index of constant dollar GDP 1980 = 1.0
Constant Dollar Gross Domestic Product
Class I Railroad Revenue Ton-Miles
Railway Revenue Ton-Miles (a Measure of Industry Volume) Track
U.S. Domestic Product – But at Only ¾ the Rate of Growth
Note Impact of the Great Recession
Michigan State University, 2014- 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 University, 2014- 22 -
Michigan State University, 2014- 23 -
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
Class I Capital Expenditures Rose to about $14 Billion Annually in
2012
Capital Expenditures ($ Billions)
Annual C
apit
al Expendit
ure
s (
Billions)
Michigan State University, 2014- 24 -
1999 2001 2003 2005 2007 2009 20110%
2%
4%
6%
8%
10%
12%
14%
16%
18%
STB Revenue Adequacy Findings - 2000-2010 – Follow the Dots
Industry Cost of Capital BNSFCSX GT-CNKCS NSSOO-CP UP
Co
st
of
Ca
pit
al
(In
du
str
y)
or
Re
turn
on
In
ve
stm
en
t (R
ail
roa
ds)
Michigan State University, 2014- 25 -
1999 2001 2003 2005 2007 2009 20110%
2%
4%
6%
8%
10%
12%
14%
16%
18%
STB Revenue Adequacy Findings - 2000-2010 – Follow the Dots
Industry Cost of Capital BNSFCSX GT-CNKCS NSSOO-CP UP
Co
st
of
Ca
pit
al
(In
du
str
y)
or
Re
turn
on
In
ve
stm
en
t (R
ail
roa
ds)
Michigan State University, 2014- 26 -
Return on Investment is Crucial
RO I
If ROI > cost of capital:
• Capital spending expands
• Stronger physical plant; more and better equipment.
• Faster, more reliable service
• Sustainability
If ROI < cost of capital:
• Lower capital spending
• Weaker physical plant, equipment
• Slower, less reliable service
• Disinvestment
Michigan State University, 2014- 27 -
Rail Freight – 3 R’s for Remaining Vital
Re-investmentMust earn returns greater than or equal
to the cost of capitalHuge 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-regulatedMust defeat “open access” proposals
Michigan State University, 2014- 28 -
THANK YOU FOR YOUR ATTENTION