EE I UDIE

THE

MILWAUKEE ROAD

MAY 1979

--

951-2200

1-­BOO Z ..,.....A L LEN & HAM I L TON Inc.-- Transportation Consulting Division

4330 EAST WEST HIGHWAY

BETHESDA, MARYLAND 20014

AREA CODE 301

May 11, 1979

Mr. Stanley E.G. Hillman Trustee Chicago, Milwaukee, St. Paul and

Pacific Railroad Company 516 W. Jackson Boulevard Chicago, Illinois 60609

Dear Mr. Hillman:

We enclose herewith the second volume of our report on the Milwaukee Road Strategic Planning Studies. The full report is contained in three separately bound volumes:

The first volume contains the Executive Summary presenting in a condensed format the substance of our studies and findings.

The second volume contains a detailed presenta­tion of the background, processes and findings of our studies including all exhibits and appen­dices, except the confidential appendices con­tained in the third volume. The latter are iden­tified as to title by a page in the appropriate section of the second volume.

The third volume contains the Confidential Appendices on Competitive Information presenting marketing and other data, which by its nature is proprietary to the Company.

We will make distribution of this volume in accordance with the instructions received from Mr. John W. Rowe.

1-- Very truly yours,

'J1 -~~~~ BO~ALLEN & HAMILTON Inc.

Enclosure

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l'

r THE MILWAUKEE ROAD

STRATEGIC PLANNING STUDIES

MAY 1979

Prepared By:

BOOZ·ALLEN & HAMILTON Inc. Transportation Consulting Division

Subcontractors:

Thomas K. Dyer, Inc. The Consulting Center, Inc. Transport Consulting Ltd. Harry Williamson, Professional

Engineer

BOO Z . ALL E N & HAM I L TON Inc.

rransporta tion Consulting Division

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f-r II.

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III.

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I 1-­1­

TAB L E o F CON TEN T S

BACKGROUND

l. Recent History of the Milwaukee Road 2. Factors Leading to the Bankruptcy 3. Objectives of the Trustee in

Commissioning the Study 4. Booz, Allen's Assignment 5. The Project Staff

PRELIMINARY SYSTEM ANALYSIS

1. Preliminary Studies of System Configurations

2. Studies of Union Pacific Proposed Acquisition

3. Results of the Preliminary Analyses And Union Pacific Studies

4 . Recommendations Made After Review Of The Preliminary Analyses and the Study of the Proposed Union Pacific Acquisition

SYSTEM CONFIGURATIONS STUDIED

1. The Preliminary Studies as a Basis For the Core System Development

2. Additional Systems Required Analysis 3. Basic Traffic Assumptions for Light

Density Line Deletions 4 . Alternative System Configurations

Studied

Page Number

1-1

1-1 1-2

1-3 1-3 1-4

11-1

11-1

11-3

11-5

11-6

111-1

111-1 111-2

111-3

111-3

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IV. MARKET ANALYSIS

1. Customer Survey 2. Market Opportunities and Estimated

Success Probabilities 3. Traffic Forecasts and Past Trends

VI. RESULTS OF DETAILED STUDIES

1. Risks of Each Option 2. Projected NROI--Opportunity or

Page Number

IV-l

IV-l

IV-6 IV-IO

V-I

V-I V-4 V-5 V-5

V-6 V-7 V-16 V-16 V-19 V-20

V-24

V-26

V-28 V-32 V-33

V-34

VI-l

VI-2 VI-21

V. DATA,

1. 2. 3. 4. 5.

6. 7. 8. 9.

10. 11.

12.

13.

14. 15. 16.

METHODOLOGY, AND ASSUMPTIONS

Data Collection Facilities Inspections Line Segment Listing Traffic Growth Diversion of Traffic and Divisions of

Revenue Computer Simulation of Operations Joint Facilities Car Hire and Freight Car Fleet Size Locomotive Fleet Sizing Normalized Maintenance of Way Rehabilitation and Deferred

Maintenance Plant Rehabilitation Costs for

Milwaukee Road Locomotive Maintenance and

Rehabilitation Freight Car Repair Expense Other Operating Considerations Financial Process and Pro Forma

Statements

the

Income

Risk?

.,

••••

.. " LIS T o F A P PEN D ICE S" APPENDIX A Project Staffing

APPENDIX B Results of Studies of Proposed Union Pacific Acquisition "

APPENDIX C Results of Preliminary Analysis " APPENDIX D Customer Survey Participants

APPENDIX E Sununar~T of Market Opport uni ties by " Conunodity and Success Probability Adj ustmen ts

APPENDIX F Market Opportunities and Success Probabilities

APPENDIX

APPENDIX

G

H

Milwaukee Road Empty Return Ratios

Normalized Maintenance of Way Cost Estimates

APPENDIX I

APPENDIX J

APPENDIX K

APPENDIX L

APPENDIX M

APPENDIX N

APPENDIX 0

Estimated Tie Life

Category II Accounts

Category III Accounts

Gross Rehabilitation Estimates

Financial Hodel Computation !1ethodology

Pro Forma Income Statements Traffic Level Comparison

Locomotive Unit Requirements

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LIS T o F E X H I BIT S

Following Number Title Page

Alternate System Configuration Maps 111-4

1977 System and System Without Light Density Lines

Core and Miles City Core Sub Core and Miles City

Sub Core Kansas City Sub Core Louisville Transcontinental Twin Cities Transcontinental

~ IV-l Firms Participating in Milwaukee Road Customer Survey IV-2

IV-2 Key Factors in Shipper Selection of Mode IV-2

~ IV-3 Key Service Factors Influencing Rail Carrier Selection by Shippers IV-3

IV-4 Milwaukee Road Service Performance

" ~ Compared to Other Railroads IV-3

IV-:-5 Market Opportunities for Milwaukee Road IV-4

IV-6 Milwaukee Road 1977 Traffic Levels And Market Opportunity Projections IV-IO

IV-7 Milwaukee Road 1977 Traffic Levels And Long-Term Market Opportunity Projections IV-12 " IV-8 Gross Tonnage Vs. Real GNP

IV-9 Milwaukee Road Total Tons Carried IV-12

IV-IO Western District Class 1 Railroads Net Ton Mile Index, 1970 to 1977 IV-13

IV-II Milwaukee Road Vs. Burlington Northern Ton Mile Trends 1970 to 1977 IV-13

IV-12

..­Number

V-l

V-2

V-3l1li

.­V-4rI V-5

V-6fit

" VI-l

VI-2

VI-3

VI-4

VI-5

VI-6

VI-7

VI-8

VI-9

VI-10

VI-ll

Following Title Page

Analytical Process System Overview V-l

Milwaukee Road Core Network (Map Example) V-ll

Milwaukee Road Rail and Tie Installations V-21

Normalized Locomotive Maintenance Expense V-28

Net System Car Repair Expense Per Car Owned Including Normal Bad Order Cars: Trends for Selected Railroads V-32

Financial Process Overview V-35

1977 Level Statistics VI-3

Long Term Level Statistics VI-5

Effect of Market Opportunities and Economic Forecast VI-7

Freight Car Summary VI-8

Freight Car Requirements VI-9

Locomotive Summary--Total Units Required VI-9

Plant Rehabilitation Estimates VI-ll

Potential Improvement VI-15

Net Railway Operating Income Estimates VI-23

Projected NROI Comparisons (with improvements) VI-23

Net Plant Expenditure and Additional Equipment Values Assumed Compared to NROI (1977 Dollars) VI-23

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IW rill

I. BACKGROUND

I. BACKGROUND

~

The Chicago, Milwaukee, St. Paul and Pacific Railroad Company filed a petition for reorganization under Section 77 of the Federal Bankruptcy Act on December 19, 1977. Shortly thereafter, Mr. S.E.G. Hillman was appointed Trustee by the Federal District Court for the Northern District of Illinois.

f1,. r­" ,

"

1. RECENT HISTORY OF THE MILWAUKEE ROAD

At the turn of the century the Chicago, Milwaukee and St. Paul was a prosperous railroad serving the Midwest, with lines between Chicago and Milwaukee in the East and Omaha, St. Paul, and Kansas City in the West. The Milwaukee Road depended on connections to convey its traffic to and from the west coast. The uncertainties of such arrangements ap­peared to be disadvantageous. In 1906 the decision was made to extend the Milwaukee Road from the Missouri River to Seattle and Tacoma, and the line was completed in 1909. With the en­couragement of the Anaconda Copper Company, the Milwaukee Road electrified the difficult operating divisions in mountainous areas between 1915 and 1919. This was the first extensive mainline electrification project in the country.

" "

It is widely believed that from the beginning, the Pacific Coast extension was a drain on the Milwaukee Road. Operating expenses and debt service exceeded the revenues of the lines, and traffic increases that were expected did not materialize. It is estimated that the Milwaukee has never had more than 16.5 percent of the northern tier transcontinental freight market, and in most years handled about 14 percent.

In 1925, the Milwaukee Road went into bankruptcy for the first time, and was reorganized in 1927. The depression led to another bankruptcy in 1935, this time to last until 1945.

" The years following the Second World War were fairly pros­

perous for the Milwaukee, and plant and equipment were maintained at adequate levels. The Burlington Northern Merger in 1970 led to an expansion of Milwaukee's traffic rights. As a condition of merger, Burlington Northern (BN) agreed to open eleven new gateways to the Milwaukee Road, including Portland. On the other hand, the BN Merger created a more significant competitive rival for the Milwaukee Road.

I-I

--r I' 2. FACTORS LEADING TO THE BANKRUPTCY

The factors leading to the bankruptcy of the Milwaukee Road are many and complex, but a number of circumstances can be identified that clearly contributed to the bankruptcy.

1 The Milwaukee Road's physical plant had been ex­tensively rebuilt in the years during and after the Second World War, but in recent years adequate revenues were not available to perform maintenance

J

r at normalized levels. By the end of 1977, deferred maintenance had grown to ~582 million as measured in 1977 dollars.

The Milwaukee Road's car and locomotive fleets had deteriorated in recent years, and new equipmentr· was not acquired in large enough quantities to main­tain a fleet sufficient to serve the market.

r The Milwaukee Road's transcontinental mainline had fallen into such disrepair that by 1978 Chicago­Tacoma running times had deteriorated from 55 to 110 hours.

The Milwaukee Road had an average line tonnage of 4.4 million gross tons in 1977, among the lowest

I in the railroad industry. This would suggest that the Milwaukee Road had too much plant for the traf­fic available.

The Milwaukee Road owned only one subsidiary (The

1­Milwaukee Land Company) that could generate funds to offset railroad losses.

A policy of abandonment of light density lines had not been adequately pursued, and the Milwaukee Roadr was operating many miles of very lightly used railroad.

The Milwaukee Road had been losing market share forI a number of years, due in part to:

Significantly increased competitive pressureI due to the Burlington Northern Merger

The increasing integration of Union Pacific1- and Chicago and Northwestern operations.

Losses from railroad operation for the years 1975, 1976, and 1977 totaled approximately $100 millionI on an Interstate Commerce Commission (ICC) accounting basis.

.- 1-2 I

3. OBJECTIVES OF THE TRUSTEE IN COMMISSIONING THE STUDY

I The Trustee is required to determine whether he can develop a workable reorganization plan for submission to the Federal Court overseeing the reorganization of the

I Milwaukee Road. Prior to developing such a reorganization plan to deal with the interests of the Milwaukee Road's creditors, employees, and the public, the Trustee was faced

I­ with the need to evaluate the long-term potential viability of the entire railroad and of various smaller configurations of the property.

I 4. BOOZ, ALLEN'S ASSIGNMENT

I Booz, Allen & Hamilton was asked to aid the Trustee by carrying out strategic planning studies and evaluating rehabili ­tation requirements. The planning studies would be used to de­termine whether all or part of the Milwaukee Road might becomeI viable. Specifically, Booz, Allen was asked to determine:

Availability of traffic for various network

I configurations

Operational requirements for the configurations

I Facilities and equipment required for operations

I Financial impact of each system configuration

Capital investments required to rehabilitate the plant and equipment

I Employment impact of each system.

1- The results of Booz, Allen's analysis would assist the Trustee in determining if there is a long-term viable railroad configuration within the Milwaukee Road. Following that deter­

I mination (and beyond the scope of this study) is the question of whether the Milwaukee has the resources necessary to get from its present situation to long-term viability.

1­

I

1-3

I 5. THE PROJECT STAFF

Booz, Allen & Hamilton performed the bulk of the workI on this project with members of its own professional staff. In areas where particular specialized expertise was required, other firms were called upon to provide aid.

Thomas K. Dyer, Inc.--Normalized maintenance of way, and rehabilitation

I The Consulting Center, Inc.--Economic projections

J Transport Consulting Ltd.--Market opportunities

Harry Williamson, Professional Engineer--Rehabili ­tation requirements.

I Appendix A provides details involved with this assignment.

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I

I I­I 1-4

I

of individuals who were

II. PRELIMINARY SYSTEM ANALYSIS

"

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II. PRELIMINARY SYSTEM ANALYSIS

This chapter addresses the preliminary system analyses carried out in the early stages of this project.

1. PRELIMINARY STUDIES OF SYSTEM CONFIGURATIONS

A number of preliminary studies were performed in order to narrow the field of alternative systems that would be sub­ject to thorough simulation and detailed analysis. At the time that this preliminary work was being performed, some of the complex computer programs and methods used in the detailed analyses had yet to be developed, and available data was not as detailed in many areas. The Trustee desired some prelimi­nary guidance to aid him in directing the ongoing operation of the railroad, and could not await full development of the meth­odology that would be utilized in the detailed studies.

In order to meet these requirements within a reasonable period of time, a "top down" analytical method was developed which utilized detailed data and systems that were available in certain areas at that time, but which relied on abbreviated methods of analysis in other areas.

(1) Components of Systems Analyzed

The thirty-three systems subjected to the preliminary analysis were constructed by dividing the Milwaukee Road into segments representing major gateways or traffic pro­ducing areas, and putting these segments and their traffic together in various combinations. These segments were as follows:

Council Bluffs Line Green Bay Line Duluth Line Rapid City Line Louisville Line Kansas City Line Lines West of Butte Miles City-Butte Hopkins-Miles City Midwest Lines (not included in other segments).

11-1

.,--.

(2) Methodology Used ln Preliminary Analyses

The key elements of the preliminary study meth­odology generally differed in level of resolution from the more detailed studies which followed. The assump­tions and methodology used in the preliminary studies included the following:

Traffic data for each alternative system was developed by including or excluding stations within each of 145 "gathering areas" (or nodes) from the alternative under study. The traffic data and revenues were based on a full four­month 1977 origin-destination traffic file con­taining 294,016 records. " Market analyses were not performed, and esti ­mates were not made of future traffic growth in the preliminary studies.

Light density line (LDL) reductions, and revenue and carload data were based on the Milwaukee Road ICC System Diagram Map dated March 31, 1978 and the Milwaukee Road Light Density Line Study dated March 7, 1977. Due to time limitations, a manual analysis of LDL traffic was carried out " and the traffic identified was deleted from the computerized system traffic base.

Traffic diversions and revenue divisions were estimates based on a breakdown of origin-desti ­nation traffic by area and by class of traffic. The diversion and division analysis was of neces­sity much less detailed than that which was later performed for the detailed studies.

Gross ton-miles were estimated by calculating origin-destination mileage for each carload between the centers of 27 lIsuper nodes, II which were aggregates of the 145 noaes later'used in the detailed operations simulation. Detailed blocking and train operations simulations were not carried out for these preliminary analyses.

The Milwaukee Road responsibility reporting system was utilized to allocate numerous cost figures as they applied to the various alterna­tive systems. Operating costs were determined

1I-2

.:,...,...~

by savings occurring in through freight; local and yard operations on a specific assignment basis. Similar methods were utilized for yard office and station costs with administrative costs reduced on a pro­portional basis. A six-page manual work sheet prepared for each system was utilized to produce modified pro forma income statements.

Joint facility agreements were reviewed and estimates of joint facilities payments and credits were prepared.

Car hire calculations in the preliminary study were based on a simple formula using Milwaukee Road history of foreign and system car miles on line.

Normalized maintenance of equipment was based on estimates of increased locomotive mainte­nance costs derived from data provided by the Milwaukee Road Mechanical Department.

Normalized maintenance of way was calculated using estimates of fixed and variable mainte­nance costs based on the average life of materials, system tonnage density and Milwaukee Road speed requirements. Rehabilitation ex­penses were not considered in the pro forma income statements.

Track and signaled mileage was computed from a detailed line segment file.

Adjustments were not made for inflation. (It should be noted that adjustments for inflation were not made in the detailed studies that followed) .

2. STUDIES OF UNION PACIFIC PROPOSED ACQUISITION

During the course of the preliminary studies, the Trustee asked Booz, Allen & Hamilton to perform an analysis of a pos­sible sale of parts of the Milwaukee Road to the Union Pacific (UP) Railroad.

11-3

.,..,.,.......

Preliminary discussions had been held between the Trustee and the Union Pacific Railroad regarding the sale of portions of the Milwaukee west of Butte, Montana. Sub­sequently, the Milwaukee Trustee asked Booz, Allen to analyze the short-term and long-term effects on the Milwaukee Road of entering into an agreement with the Union Pacific. This proposed agreement assumed a diversion of all transcon­tinental traffic to the Union Pacific routes via the Council Bluffs, Tacoma, Spokane, Marengo and Silver Bow gateways, thus allowing Milwaukee to abadon operations west of Butte.

As a part of these studies, the effect of including or excluding the Kansas City, Terre Haute, Louisville, and Hopkins-Miles City lines was also examined. The various cases which were analyzed are shown in Appendix B.

(I) Assumptions Underlying the Union Pacific Acquisition Studies

There were several assumptions underlying the studies of the possible acquisition by the Union Pacific:

The Union Pacific Railroad would purchase the following line segments:

All lines west of Cedar Falls, except the Port Townsend line and the Raymond branch

Othello to Marengo, with the Marcellus and Moses Lake branches

St. Maries to Manito, with Bovill and Coeur D'Alene branches

Frenchtown to Butte, with the remaining portions of the Bonner branch.

All other trackage west of Butte would even­tually be abandoned.

Marketing arrangements would be made to route traffic back to the Milwaukee at Council Bluffs where that made sense. This does not apply to the case which assumes that the BN made the purchase rather than the Union Pacific.

11-4

Divisions would be similar to existing arrangements.

In one case it was assumed that the Milwaukee would have to operate all trackage west of Butte, feeding through traffic to Union Pacific for two years pending Interstate Commerce Commission approval of the sale and abandonments.

All of these analyses assumed that light density lines identified on the March 31, 1978, Milwaukee Road ICC System Diagram Map were abandoned. In addition it was assumed that the Kennebec-Rapid City line and the Green Bay-Ontanagon line were abandoned.

(2) Changes in Methodology " n n Although a methodology similar to the preliminary

studies was utilized for the Union Pacific acquisition studies, the following were exceptions:

The car hire analysis computed savings by car type for each scenario. Car miles,n average car cycle times, and average per diem and mileage rates by car type were used to calculate car hire savings.

rI A number of branch lines were excluded from these studies that were included in the pre­

n liminary studies.

These changes must be considered in comparisons of the results from the studies.n

" 3. RESULTS OF THE PRELIMINARY ANALYSES

AND UNION PACIFIC STUDIES

Appendix B summarizes the results of the studies of the Union Pacific proposed acquisition. The results of the study

" of the thirty-three alternative system configurations that were analyzed utilizing the preliminary methodology detailed above are summarized in Appendix C. n

tI n 11-5

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I

As noted before, 1977 figures were used throughout these studies without adjustments for traffic growth or inflation. For this reason, and because of the inexact nature of some of the methods used, the numbers developed in these analyses should be used only to rank the various alternative systems in relation to each other and the 1977 system.

4. RECOMMENDATIONS MADE AFTER REVIEW OF THE PRELIMINARY ANALYSES AND THE STUDY OF THE PROPOSED UNION PACIFIC ACQUISITION

As a result of a review of the preliminary analysis of the thirty-three alternative system configurations, the following recommendations were made to the Trustee:

Detailed analysis using more refined methodology should be carried out on a Midwest Core System which would include the Council Bluffs, Duluth, " Louisville, and Green Bay lines.... A Base System consisting of the present routes

" without light density lines should also be analyzed.

n The west coast extension would appear to be a drain on Milwaukee's resources and should not be ,. included in the Core System, but should be in­cluded in the Base System.

A market analysis should be performed to determine the effect of future changes in traffic on the Core System. The Kansas City line was later added to the Core System when it appeared that it could make a contribution when mar~et opportunities were taken into account. "

11-6

III. SYSTEM CONFIGURATIONS STUDIED

III. SYSTEM CONFIGURATIONS STUDIED

Detailed Studies were made of eight alternative system configurations, in addition to the study of the full system, which was operated by the Milwaukee Road in 1977 (Base Case) . The study of the Base Case was made to calibrate the analyti­cal models to the 1977 Annual R-l Report to the Interstate Commerce Commission. This chapter describes the selection process for the Core System that was initially studied, the extension of the study to the additional alternative systems and the assumptions resulting from the deletion of light density lines. The chapter concludes with a brief description of each of the systems studied and the system maps for each configuration.

1. THE PRELIMINARY STUDIES AS A BASIS FOR THE CORE SYSTEM DEVELOP~illNT

The preliminary studies described in Chapter II gave an indication of the relative desirability of certain gateways and geographic areas served by the Hilwaukee Road. These preliminary studies were reviewed with Milwaukee Road staff and then used to define a Core System. This Core System was then subjected to detailed analysis using computer models and the methodology developed for the project.

Individual lines of railroad were excluded from the Core System for various reasons.

The west coast extension was excluded from the Core System after preliminary studies indicated

n that this major segment was producing a negative contribution at 1977 traffic levels, and would require more capital for rehabilitation than would be available from Milwaukee sources.

In a similar fashion, other major gateways and traffic producing areas were retained or removed from the system on the basis of the preliminaryn study results.

111-1

A number of lines were studied to determine if retained revenue was at least equal to the 1977 average revenue of the entire system. Overhead traffic was deducted in order to determine the system average freight revenue for this purpose.*

since the system as a whole had not been profitable with an average revenue density of $38,OOO/mile, the initial definition of the Core used that figure as a minimum revenue density and as the st~rting point to define the Core.

Where questions were present as to revenue remaining after effects of abandonment elsewhere, a visual review of station by station origin-destination traffic data was made to estimate the effect of such abandonments on 1977 revenue per mile.

A number of lines which did not meet the revenue per mile test were included in the Core System at the specific request of Milwaukee's marketing department to allow for future market potential.

2. ADDITIONAL SYSTEMS REQUIRED ANALYSIS

Initial detailed analysis of the Core System indicated that an even smaller system configuration might have greater potential for viability. The resulting Sub Core System was designed to reduce rehabilitation requirements to a minimum. A number of other alternative system configurations were designed so the Trustee could examine specific questions that had been raised during the course of the analysis and have quantitative information to use in the decision process .

.n * The Cutoff Average Density Calculation was made as follows:

1977 System Freight Revenue less overhead traffic

$408 million $ 41 million

Revenue applicable to online origins and destinations $467 million

Divided by 9,700 miles = $38,000/mile revenue density.

111-2

3. BASIC TRAFFIC ASSUMPTIONS FOR LIGHT DENSITY LINE DELETIONS

All lines identified on the Milwaukee Road ICC System Diagram Map dated March 31, 1978, as pending or likely to be abandoned within three years were deleted in their entirety from the systems under study. Traffic and revenue c~anges resulting from light density line reductions were calculated by deleting from the system all stations on such lines on the following basis:

Traffic to and from such stations was treated as if 100 percent were lost to the Milwaukee Road. No relocation of light density line traffic to other Milwaukee Road stations was assumed. It was felt that in view of the dispersed nature of the MilWaukee Road System, such traffic migra­tion would accrue to other railroads if it occurred at all.

Interchanges on light density lines were, however, assumed to be relocated to other points.

4. ALTERNATIVE SYSTEM CONFIGURATIONS STUDIED

The following alternative system configurations were studied in detail:

System Without Light Density Lines--this option excludes all light density lines that were iden­tified on the Milwaukee Road ICC System Diagram Map dated March 31, 1978, as pending or likely to be abandoned within three years. (7,965 route miles)

Core--this option includes main lines betweenn Louisville and Duluth, Chicago and Omaha, and Milwaukee and Kansas City, as well as secondary lines to the Green Bay, Wausau, Sioux City, Sioux Falls, Des Moines, and Madison areas, and a number of feeder lines. (3,894 route miles)

Miles City Core--this option includes all lines ..n·'. in the Core System, plus the Renville-Miles City

line, the New England branch and the Sisseton branch. (4,661 route miles)

111-3

Sub Core--this option is a reduced Core System designed to minimize rehabilitation requirements, and consists of main lines between Louisville, Duluth, Green Bay and Madison, as well as certain feeder 1 ines. (1, 722 route miles)

Miles City Sub Core--this option includes all lines in the Sub Core, plus the Renville-Miles City Line, the New England branch and the Sisseton branch. (2,488 route miles)

Kansas City Sub Core--this option includes all lines in the Sub Core, with the addition of the River Junction-Kansas City line, the Davis Junction­Sabula line, the Burlington-Beloit Junction segment and the East Moline-Albany and Eldridge branches. (2,393 route miles)

Louisville-Transcontinental--this option includes all lines in the Sub Core, plus the transcontin­ental main line from Renville to Portland, as well as the New England, Sisseton, Bonner, Spokane, Coeur D'Alene, Snoqualmie Falls, and Everett branches. (3,861 route miles)

Twin Cities Transcontinental--this option includes the main line from St. Paul to Portland, as well as branches in the Sioux City-Mitchell area and most branches along the transcontinental main line. (4,467 route miles)

Maps of the various system configurations which were studied in detail follow.

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THE MILWAUKEE RO

1977 SYSTEMA D A SYSTEM WITHOUT LIGHT DE!

1977 SYSTEM INC-LUDES RED & BLACK L1NI SYSTEM WITHOUT LDL INCLUDES ONLY B l

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THE MILWAUKEE ROAD

1977 SYSTEM A

SYSTEM WITHOUT LIGHT DENSITY LINES

1977 SYSTEM INCLUDES RED & BLACK LINES SYSTEM WITHOUT LDL INCLUDES ONLY BLACK LINES"----_0.__ --,.__ .""'-\.---1

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THE MILWAUKEE ROAD

CORE

D A MILES CITY CORE

CORE INCLUDES ONLY BLACK LINES

MILES CITY CORE INCLUDES RED & BLACK LINES

----r--·-----.----,-----I"'\ ! ('.-'.-.I i '\. ............/.\.-. ; NORTH DAKOTA 'MINNESOTA

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THE MILWAUKEE ROAD

CORE

A MILES CITY CORE

CORE INCLUDES ONLY BLACK LINES

MI LES CITY CORE INCLUDES RED & BLACK LINES

- .. _--­

ORTH DAKOTA

)uTH DAKOTA

1'4':BRASKA

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J D A Ii 0 "\""".......~.i\J.I •.I---- . I

--------7---- •I •i,II ----____ J

I r----- __ ,i i!

' · .· l II II -,-. _ . I! NEVADA •

.I,I'\

\ !!

I.

UTA Ii

CALIFORNIA \ • I

, COL

J\ / .I. I\,

~ If--------- ..J _

L

------

-THE MILWAUKEE ROAD

SUB COREA D A MILES CITY SUB CORE

SUB CORE INCLUDES ONLY BLACK LINES

MILES CITY SUB CORE INCLUDES RED & BLACK L1NE~

.I-----....I

,I SOUTH D A K 0 T A ,I

! f·-·-·-·------~, . ?t----------____ I "t ~ /' ......./.-......\\ J 0 W A -'_.L.

--L ,,

l...) s: ~.~

5",::-.~'l

o ,J ~~. __ NEB R ASK A 0....) 0" 0011" ;. ."--',, \L-- ~ I 'I1

1 1'1 D \ • ~. ILLINOISI--._----~-------~ \ \ j~ \ 0 (~-~D . \.. I -r KAISAS CITY "? I ; KANSAS i MISSOURI ( (..j'

i I "-.... !:"KE; I __1'1

\~oIi-~

THE MILWAUKEE ROAD

SUB CORE

A MILES CITY SUB CORE

SUB CORE INCLUDES ONLY BLACK LINES

MILES CITY SUB CORE INCLUDES RED & BLACK LINES

\lLJRTH DAKOTA

• :; GUT H D A K 0 T A I

}• ~. __~ -1,

MICHIGAN

. ? -------- ""'-'/o_.'""'\\} 'l. /

. IOWA ' L. l..)

lEBRASKA 0;1 1 OM 1 OE' MOIIES ,...

i ''',~._----._-.? ILLINOIS

r ---------------'" \. ! ~,".I rKAMSAS CITY ~

KANSAS MISSOURIi /

j ."..

I,?l

11 Il 11 .1 11 _1 11 11 11 1'1

11 n rJ n n 11

n n

c A N A

THE MILWAUKEE ROAD

KANSAS CITY SUB CORE A

,...... !---------.--\--.~ 'I, I {"~'~' I i \..'--'../'\.-­I NORTH DAKOTA "MINNESOTA

I t (

't-----._-­

<------.-.J.

1 SOU T H DAKOT A I

I

.I~-_._._---_._.

--------- J'--. " '/'-'""

lOW A "\0 SIDUX CITV

NEBRAS KA

OMAHA ~"'0\ 1I . L. ._ _._),JI . , 'l.,

LLINOIS \r·-·--~·-----·---~~ \\ .." TfRRl HAU1(j (

~,i \... . 'v-7 KANSAS / I\..r LOUISVIllEI I

I ',...r 'VI '-,. ~. .~ E N 1 U C K "i

'.•",..~.

THE MILWAUKEE ROAD

KANSAS CITY SU B CORE A

T--·- ........ , ,---,----,__ .--1 "­

! ( ..... ..--...--.! i \. .--./.\.-. I ' , NORTH DAKOTA 1 MINNESOTA

J \

(

..L '--- .-------- -- _oj

' ~

I-.., <­ 1I SOU T H DAKOTA I

II II

I,

f-----------_· r­ ----- I'-------........ ,,---. . I lOW A'~\O SIOUX CITy

NEBRASKA

OMAHA "'~ _', 0\

i ~._._.-, ).

r'-'--~'-'---'---~~I (i .~. . KANSAS

! MISSOUR

I

---------c

........................ A N------.-. ----._-------_.­

\ \~ ! i'"""",'\ 0_- -­ ­\ 81lWtGS

. r----- . ._/ D A H 0 "\"---•....J'\:I ,

,I---- • J

'-'- J ,.I---~---- . __~_______ II .

•I •'-------'-1IIf. ' i

,

i L.---- _I I TIi NEV.D. I . . . I

\ ! UTA H !, . I J

CAt/FOR \ \. I. I,N,. \ i i

\ . . ~. ~._._._-_._-~_.\. ,

\ I

c A N A D A

i ----- ._.1_ ~-----..._--- ------------,.'.: ".,. 'I • ,.. • \ SO­r..::::,I I! "INNE . S1. (' D A K 0 T A \ , . . (\ NORTH ., \ !>IONTANA, ,

<!7 ....,~ - ~ .) )~ 0_- -­..,... .,"" I

'I .

IDA H 0 ........ ~-,.J'i .\ -r------------·---i SOUTH D A K 0 T A

f· .I ,J _ ._. ! I I w y 0 !>I I N G r------ 'to .! .! '-._--. ' ..r"-,_,~"

101• I• ,f ,I--1--------/ ! NEB R ASK A O."'~ i l , . --L , '!.. Dli! ! L. _I

i i ._~ I UTAH i· ,

!f--.-._......... ( " ~

I • I i. ~r ..." . . AS./ COLORADO • KANS I I

I.i I ,! L ,r ---_. ~,__._ I i I

--

THE MILWAUKEE ROAD

D A LOUISVILLE TRANSCONTINENTAL

I--,

,! SOUTH D A K 0 T AI I "'U-....oo-lll/L

j ~._._._------"~ r--·--- ? hJ" , t #'-0--'-- '-./.-..... \

I, \:(0 lOW A -\ .~~ •

J /1.\ \..) tjoo,-~.--.c;,~".......~,. • ~ '£

NEB R ASK A OMAHA ~ O~S MOINES r J "

-'r 0\ 1i L._._._._._.~ . ~. t 0 I S 1-._._-- ~ \ 'LLI Ni '---.-._-- ( \,\ i '-or KANSAS CITY \"7i • IKANSAS MISSOUR

i ~ , '\..

I

, f

I c A

I N A

I I 'O·~l \,I

"--;~'-,,,-_.,-,,,-,,,,,,,,,,,,,, -.~ ('} '7

I ~ i/ .~.~

I r \ r----. _L. "',J\J/ IDAHo .............. ! i I

'-'- !i I! -- I _--.-',---- I

'--,~ . I '-'-'--r---- , Ii ;. .

I I. , . I JI. INeVADA • L.----T _----------­

\ ! UTA H~ !

CAL/PDRNIA \ •\ I . I\ .

\ I ~ ,

'\ ~._._.-._._.~._.('\ .

c A N A TD A

."".,----------- -- \ __ .-1 I...... ...., , (\ I .I \ ' I

''7---{ ,i1 NORTH 04ROT4 I\ MINNESO(' I) t ........~.J

r' 0--­"WNGS

l

I 0 4 "0 \ .....~ ...I'ir---------- !i J I ' I SOUTH D A K

RAPIO CITYIf i I w YOM I N G! .,/...._....

1----------- . ~ ~-·---r--._._.--.j" i $ , \ I $ ~~I. " ¢

10

~... ;,C\

i i . NEBR4SR4 '"..,.\0I'.l.----,.-- . L..! ,

.,

L~ . o

" i i . ~ . I ~------.-. (f T "I. I. ,, .....0 4

' COLORADO KANSA

. .,• S II. ~ f! I!

"

I, i_ II __._. __ ~i__._ I~---- I. ,

THE MILWAUKEE ROAD

A TWIN CITIES TRANSCONTINENTALD A

-- --r---._ .""­! ----.----,._.......J 't ! (""'.-.,.-.! i '\.'".'/'\..-, ! NORTH DAKOTA \I l MINNESOTA

I

. ~.L_ __ ) '-.-..0\

I ' W I S CON SIN '-' . ()) .

---../ j'

I V~ • SOUTH lI '-',I RAPlOCIIY "",

j ._.~~A_._._._.j • PUrT[ CUTON ? t-.-----.-.~-_. 't MADIIOIO ' ' .. /~"'r ...... _ . ., ./

~

i", lOW A '..-,_.-- ­I ~...'-i t~ t.

;; .$ \ )i N E ~ ~ • BRASKA l 0 ,JL OMAHA '1 DES MOIIES r: . '--, 0\ ri L. . ._./

. ~,I ILLINOIS

r·-·-----.---.---~ \ [ 0 ! (',

~_. .I rKANSAS CITY \1"') KANSAS • UR fI MISSO I

iI

i ',-,.

IV. MARKET ANALYSIS

IV. MARKET ANALYSIS

During the course of this project, it was recognized that relationships between the options might vary with the market served. Further, it was observed that the options involving reduced plant should have ample equipment and re­duced rehabilitation requirements to meet customer service requirements and thus recapture lost traffic.

To assist in the projection of future traffic levels for the various options, three significant market analysis tasks were undertaken:

A customer survey Analyses of specific market opportunities Analyses of traffic trends and forecasts.

These tasks are described below.

1. CUSTOMER SURVEY

As part of the market analysis undertaken for the Milwaukee Road, a cross-section of the railroad's current and potential customers was interviewed to determine the following:

Whether opportunities exist for additional traffic for the railroad

What level of service and equipment would be re­quired to secure additional traffic

How the Milwaukee Road has performed in the past and how it currently compares to its rail, truck, and barge competitors

How the customers feel about specific steps the Milwaukee Road has taken or is contemplating as part of its reorganization efforts.

IV-l

" rt

"

The survey plan, developed with the assistance of Booz, Allen's National Analysts Division" selected 98 customers in a stratified sample. Seventy-two of the 98 customers selected to be interviewed actually participated in the survey. The remainder declined to participate on policy grounds. The respondents were representative of the wide range of industries that railroads traditionally serve, and together account for 63 percent of the Milwaukee Road's present traffic. Non­customers were also included in a few significant instances.

Exhibit IV-l presents a summary of the types of firms that participated in the survey. A full list of the companies interviewed is provided as Appendix D of this report. The results of the survey are indicated below.

( 1) Motor Carrier Competition

The Milwaukee Road has lost traffic to motor carriers in part because of deterioration in its facilities and service.

Shippers generally make modal decisions based on a combination of cost and service criteria. If alternative modes are available, shippers first consider consistency of service and reli ­ability of equipment supply. Where alternative modes provide satisfactory service consistency and availability of equipment, cost of transport tends to be the deciding factor.

Exhibit IV-2 sun~arizes the responses of customers on their weighing of modal selection factors.

The discussions indicated that despite lower costs of rail transport, shippers have shifted from Milwaukee Road and other rail carriers to trucks in recent years because railroads have often provided highly erratic transit times on important routes, and have not been able to assure car supply.

IV-2

11 11

16

EXHIBIT IV-l Firms Participating in

Milwaukee Road Customer Survey

rI NUMBER INDUSTRIES OF FIRMS

, . Equipment and Machinery Manufacturing

Wood and Paper Products 15

Grain and Flour 9

Food Products 8

Chemicals, Minerals, Aggregates 8

Automobiles (Parts and Finished Vehicles) 5

n Retail and Distribution

Coal

4

4

n Beverages and Malt 3

TOTAL 72

n n nn

" " ~

nn

EXHIBIT IV-2 Key Factors in Shipper

Selection of Mode

FACTOR IN ~10DAL SELECTIm1

Cost

Equipment Supply

Consistent Service

Transit Time

Customer Preference

Product Requirements

Other

PERCENT OF TOTAL MENTIONED AS HEHTIOHED

MOST IMPORTANT CONTRIBUTING

36% 23%

22% 18%

13% 20%

13% 20%

8% 5%

6% 5%

2% 9%-- ­

100% 100% - ­ - ­

AS FACTOR

r

r

r r

(2) Fundamental Changes in the Market

Some loss of traffic to truck has been beyond the control of Milwaukee Road.

There have been fundamental changes in the markets and industries that railroads have traditionally served which have increased the attractiveness of motor carriage. Some com­panies in key industries have moved production and distribution facilities closer to markets to provide faster delivery and a local identity. In addition, regulatory constraints have often made it difficult for the railroads to change rates quickly enough to meet truck competition.

These developments have not been controllable by any of the rail carriers and have tended to decrease the transport market share of the total rail industry.

(3) Competition with Other Railroads

The Milwaukee Road risks futher losses in volume because of its current performance relative to competing rail carriers.

The survey indicated that Milwaukee Road is viewed as less competitive than other rail carriers in key service areas including ser­vice reliability, transit time, and car supply.

n These problem areas, while somewhat offset by excellent performance with regard to customer assistance, further endanger Milwaukee's cur­rent business base.

Exhibit IV-3 presents the value shippers place on the different service factors influencing rail carrier selection.111 Exhibit IV-4 summarizes how respondents rated Milwaukee Road performance compared to other railroads in key service areas.

(4) Service Reliability and Equipment Supply Are Critical

Service reliability and equipment supply are the keys to capturing additional traffic and forestalling further decline.

IV-3

1

'" f r-

SERVICE CATEGORY

Equipment Supply

Service Reliability

On-Line Location

Transit Time

Customer Preference

r Customer Assistance

Personnel Competence

r-­ Special Services

r­ Others

r-r J­

r-

r r

EXHIBIT IV-3 Key Service Factors Influencing

Rail Carrier Selection by Shippers

PERCENT OF TOTAL MENTIONED AS MENTIONED AS

MOST IMPORTANT CONTRIBUTING FACTOR

64% 35%

18% 27%

12% 9%

9%

2% 4%

2%

1%

4% 2

11%

100% 100%

11I

n ,.

n

n n n n

n

n ~

n

n n

SERVICE CATEGORY

Equipment Supply

Service Reliability

Transit Time

Customer Assistance

Personnel Competence

BELOW INDUSTRY

PERFORMANCE

84%

81%

66%

25%

47%

EXHIBIT IV-4 Milwaukee Road Service

Performance Compared to Other Railroads

PERCENT OF RESPONSES RATING MILWAUKEE ROAD

COMPARABLE BETTER THAN· TO OTHER OTHER

RAIL CARRIERS RAIL CARRIERS TOTAL

4% 12% 100%

14% 5% 100%

27% 7% 100%

13% 62% 100%

47% 6% 100%

.---­

Providing usable cars when needed on a consis­tent basis was cited by more than 60 percent of the respondents as the way for Milwaukee Road to win business away 'from other rail car­riers and trucks.

Those interviewed noted that once equipment is made available, the Milwaukee Road must offer service at least equal to that now being pro­vided by competing railroads.

(5) Limited Market Opportunities for Milwaukee Road

Some respondents believe Milwaukee Road may have opportunities to improve its traffic base on a limited basis.

The respondents indicate that there are inher­~nt limits to their use of trucks, since some ~roduct characteristics and volumes are not appropriate for truck shipment, and plant fa­cility layouts are in some cases tailored to rail shipment. In addition, some shippers have a policy of spreading their business among modes and carriers where practicable.

The railroads as a whole and particularly the Milwaukee Road are not fully participating in the traffic movements available to them be­cause of equipment shortages.

Many customers indicated that the volume of additional traffic which the Milwaukee Road could anticipate even with improved service and car supply is very limited. Exhibit IV-5 below indicates the percent of respondents who indicated that additional traffic is available.

IV-4

EXHIBIT IV-5

Percent Level of Traffic Available Of Respondents

No additional traffic available 34%

Modest increases available (less than 10%) 52%

Substantial increases available (more than 10%) 14%

100%

( 6) A Long-Term Effort

Increasing the Milwaukee Road's traffic base will require an aggressive long-term effort.

Many of the shippers interviewed pointed out that as the Milwaukee Road's service quality and equipment supply deteriorated in recent years, other carriers stepped in to provide cars and service. These new relationships n are firmly established and proven, and will not be ov~rcome easily. For this reason the recapturt )f traffic from other railroads will not occur ~mmediately. Survey respondents indicated that the Milwaukee Road must demon­strate over time that its service is reliable and its car supply is sufficient before any diversion takes place.

Shippers pointed out that innovative marketing packages may be necessary to make initial in­roads in regaining traffic. Milwaukee Road's aggressive rate-setting and introduction of the Sprint Train were cited as the type of creative approaches to service that will have to continue in order for Milwaukee to increase traffic.

IV-5

(7) Effect of Loss of West End on Shippers

The responding shippers believe that withdrawal of the Milwaukee Road from the Transcontinental market will have little overall impact on the level of service available to shippers.

Seventy-two percent of those interviewed in­dicated that the loss of the Milwaukee Road in the West will have little or no impact on their operations because both local and trans­continental options are available.

However, several respondents in the coal, lum­ber, and grain industries felt that the Milwaukee Road is essential in the West because it is the sole source of transportation at certain facili ­ties. With these exceptions, the decision to pullout of the West was generally viewed as constructive by the customers surveyed.

The overall findings of the customer survey indicate that market opportunities exist for the Milwaukee Road providing it can supply needed equipment on a timely basis and provided the railroad's plant is rehabilitated and it can provide satisfactory service. On the other hand, this would be a long-term effort requiring that the railroad demonstrate over time that it can match other carriers. Realistically, some traffic will be lost because of mar­ket shifts and changing marketing practices.

2. MARKET OPPORTUNITIES AND ESTIMATED SUCCESS PROBABILITIES

With the rehabilitatio~ expenditures assumed, and with normalized equipment and track maintenance, the respondentsn to the survey indicated that Milwaukee Road could recover some lost business as well as gain some new traffic. Wlth this in mind, Milwaukee Road's marketing and sales depart­ments were asked to project a series of "new business" oppor­tunities based on the assumption that added traffic and revenues could be obtained given a rehabilitated plant and adequate equipment availability.

IV-6

11 .,

Ii

(1) Market Opportunities Assumptions

In developing the market opportunities it was as­sumed that:

Equipment availability would be sufficient to cover customer needs on a timely basis. In those cases where the system would be signifi ­cantly reduced, it was assumed that desirable equipment would be concentrated on the remain­ing lines.

Milwaukee Road freight service with a rehabili ­tated plant and adequate power would be the equivalent of that supplied by Burlington North­ern and Chicaqo and North Western, but not better than those railroads' services.

( 2) Market Opportunities Appraisal

With participation by both field and headquarters officials and staff, the market opportunity projections were developed for 25 specific commodity groups. During a six-month period beginning in Autumn 1978, the projec­tions were refined and adjusted through six iterations, with an extensive review conference held with the con­sultants in mid-February, 1979. Each line item was reviewed and success probabilities were assessed by the consultants based on the findings of the survey, existing traffic flows, and the consultant's extensive railroad marketing experience.

In their final form, the forecasts reflect 411 in­dividual new traffic movements over a Milwaukee Road system less light density lines of 7,965 miles. As originally submitted by Milwaukee's marketing and sales staff, the "new business" opportunities included 276,869 carloads producing an estimated $205.5 million of addi­tional Milwaukee Road revenue. Booz, Allen & Hamilton estimated success prqbabilities on a line-by-line basis. After adjustment to reflect the success probabilities, the market opportunities were reduced to 211,384 car­loads producing $145.6 million of additional revenue.

In assessing the success probability adjustments to be applied to the market opportunity projections produced by Milwaukee Road's marketing and sales staff, Booz, Allen took the following considerations into account:

IV-7

The incremental share of the market to be captured was reviewed for realism. In general, the Milwaukee Road traffic officers were fairly conservative in their estimates of the additional share of specific movements which could be se­cured with adequate equipment and competitive service.

Equipment supply and service improvements would not be exclusive to a reorganized Milwaukee Road. Burlington Northern, Chicago and North Western, Soo Line, Illinois Central Gulf and other rail competitors could also make improvements.

Where Milwaukee Road had lost traffic to a com­peting rail line by reason of shortages of equip­ment or inability to perform the required service, it is not reasonable to expect shippers to penal­ize the railroads now serving them by diverting substantial tonnages back to the Milwaukee Road. Some shippers will, however, divert enough traf­fic back to the Milwaukee to establish a viable alternative for their traffic. Where the Mil­waukee Road's service would be naturally superior for a particular movement, substantial diversion would be expected over the long term.

Changed connecting line relationships resulting from possible Milwaukee withdrawal as a trans­continental competitor should not be relied upon in the short term to erode the business of a satisfactorily performing competitor. Dropping the Pacific Coast Extension would not, for example, produce a concurrent change in Union Pacific's present run-through train and interchange patterns, which are linked closely with Chicago and North Western via Fre­mont, Nebraska, and with Burlington Northern via Grand Island. Union Pacific appears to " work most effectively with those connections providing dependable high quality through­route service to and from the eastern markets. For Milwaukee Road to build such a relation­ship via Council Bluffs or Kansas City would require substantial time and an established record of consistent performance.

In anticipating the development of added Mil­

n waukee Road traffic over such gateways as Council Bluffs, Kansas city, Minneapolis-St. Paul

" IV-8

and Louisville, it should be recognized that the originating carrier has no interest in "short-hauling" itself. On traffic from the Far.west, for example, Burlington Northern strl~es for Chicago-direct routing, as opposed to Mlnneapolis-Milwaukee or Council Bluffs­Milwaukee. From the Southwest, Missouri Pa­cific seeks to use its own line into Chicago, as does Louisville & Nashville from the South and Southeast, to the exclusion of Louisville­Milwaukee.

Milwaukee Road's principal strength via all gateways would be in traffic originated or terminated at local industries which can be persuaded to route for Milwaukee long haul via Louisville, Council Bluffs, Kansas City, or Minneapolis-St. Paul.

In assessing the success probabilities, no con­sideration was given to the desirability of the proposed traffic increments or to their profitability.

(3 ) Changes in the Market Opportunities Forecast to Reflect Changes in System Definition

The list of 411 individual new traffic movements identified as possible for the Milwaukee System without light density lines was modified to represent market op­portunities for the other system configurations being studied by use of the diversion process described in detail in Chapter V of this report. Traffic flows and divisions were modified to reflect the various route patterns, and changes in the Milwaukee Road's relation­ship with other carriers were also taken into account. For example, Milwaukee's withdrawal from transcontinen­tal operation would be expected to improve working re­lationships with competing lines and either expand upon or attract a number of movements to the Milwaukee Road.

The traffic and revenue data utilized in the prelim­inary and detailed studies were based on an origin-desti ­nation traffic file for four months of 1977. Details of this data base and its use are contained in Chapter V of this report.

IV-9

I I

(4) Results of Market opportunities Analysis

I Exhibit IV-6 compares the Milwaukee Road's 1977 traffic leveis with the projected market opportunities for each system under study.

Appendix E presents a summary of market opportunities by commodity for the Milwaukee Road system without light density lines, and the success probability adjustmentsI that were applied. Appendix F* presents details of indi­vidual market opportunities and success probability adjustments.]

It is obvious that the market opportunities projec­tions have set some ambitious traffic development goals

I to be achieved in order to produce the projected finan­cial results.

If Milwaukee Road can achieve the freiqht serviceJ and equipment fleet revitalization indicated above as

the basic assumption underlying the market opportunity projections, the results outlined in Appendix E shouldI be individually attainable for any of the 25 discrete commodity groups. The market survey indicates the im­portance of having equipment available for loading and competitive service in capturing new traffic. Producing

I

I those improvements simultaneously for the entire traffic base, however, poses a management challenge of major proportions.

3. TRAFFIC FORECASTS AND PAST TRENDS, , In addition to identifying market opportunities, consider­

ation was given to economic forecasts as well as the participa­tion of the Milwaukee and other railroads in past economic growth.

(1) Traffic Levels Considered

I In order to demonstrate the short-term and long­term potential of the alternative systems, the various

I * This appendix contains competitive data and is not available in

this report.

I

I IV-IO

1

-iiiiiii ii EXHIBIT IV-6

Milwaukee Road 1977 Traffic Levels And Market opportunity Projections

Twin System Miles Miles Kansas Louisville Cities

1977 Without City City City Transcon- Transcon-Sub Core Sub CoreSystem LDL Core Core Sub Core tinental tinental

CARLOADS

1977 Level Traffic 867,061 844,923 644,570 682,734 443,993 480, ')71 498,049 571,871 268,746

Market Opportunities -- 211,384 166,658 172,414 100,866 106,623 114,887 125,697 35,552

PERCENT INCREASE 25.0% 25.9% 25.3% 22.7% 22.2% 23.1% 22.0% 13.2%

REVENUE ($000)

1977 Level Traffic 434,824 423,626 248,238 269,418 146,339 168,115 182,012 271,136 168,802

Market Opportunites 145,643 78,575 84,427 38,121 43,922 49,160 81,709 43,536

PERCENT INCREASE 34.4% 31.7% 31.3% 26.0% 26.1% 27.0% 30.1% 25.8%

----~-

I I options were simulated with four different traffic

levels.

I I 1977 Level--represents the actual traffic

on the entire system in 1977 adjusted for the various system configurations

1977 Level plus Market Opportunities--the market opportunities projections were added

I to the 1977 traffic to represent realization of all the identified market opportunities in 1977 without benefit of economic growth

I I Short-Term plus Market Opportunities--a short­

term growth scenario was developed to reflect the impact of economic growth on the existing 1977 traffic as well as on the projected mar­ket opportunities

I Long-Term plus Market Opportunities--a long~

term growth scenario was applied in the same manner as the short~term growth scenario.

I (2 ) Economic Forecasts

The projections for short-term and long-term growth were developed by The Consulting Center, Inc. and were based on the March 1979 macro~economic forecast of pro­duction indices made by Chase Econometrics. This Chase

I economic scenario included a high probability of a reces­, sion or period of slow real growth during 1979 and 1980. Estimates for the growth in Milwaukee Road's traffic were then developed based on the assumption that:

The trends in the rail industry's market share and the western railroad share of total United States traffic volume would not change. , The rate of decline of these market shares would be reduced to 50 percent of the 1966 to 1977 rates by 1982, mainly as a result of changes in government policies and deregulation.

, ~

I The Milwaukee Road would maintain a market share, in the western region, equivalent to its 1977 traffic and projected market opportunities.

I

I IV-II

I

--

--

Tonnage growth projections were developed for traf­

•• fic originating on Milwaukee Road and for traffic received

from connections in 18 commodity groups.

The projected tonnage growth was converted to growth

••

in carloads and revenue for each traffic flow. It was assumed that the average tonnage per car and the average revenue per car would remain the same.

•There were no growth factors developed for coal

traffic. Instead, the specific flows identified below

• were added to the traffic base to represent future growth in coal.

Weston Spur Coal--10,OOO cars/year, expected to begin moving in 1981

Weston Spur Coal--10,OOO additional cars/year expected to begin moving in 1986

• Panora, Iowa Coal--8,OOO carloads/year, ex­pected to begin moving in 1986.

The short-term growth scenario utilized the Chase economic forecasts for 1981, and the long-term growth scenario utilized the Chase forecasts for 1986.

• The short-term and long-term growth projections

were utilized to modify the market opportunities (as well as the 1977 traffic) to reflect short-term and long­term traffic growth.

• Exhibit IV-7 compares the Milwaukee Road's 1977

traffic levels with the projected long-term market op­portunities for each system under study.

(3) Past Trends in Railroad Participation in Economic Growth

Traffic statistics selected to establish past trendsIII of railroad participation in economic growth were re­viewed for the years 1968 to 1977 for all u.S. railroads.

• Exhibit IV-8 plots u.s. railroad tonnage and Mil­

waukee Road tonnage against real gross national product (GNP). This exhibit indicates that in recent years neither the Milwaukee Road nor the u.S. railroad indus­try as a whole has participated in the growth of the 'economy in terms of tonnage carried. Exhibit IV-9

III IV-12

EXHIBIT IV-7 Milwaukee Road 1977 Traffic Levels

And Long-Term Market Opportunity Projections

System

System Without

LDL Core

Miles City Core SlID Core

Miles City

Stili Core

Kansas City

Sub Core

Louisville Transcon­tinental

Twin Cities

Transcon­tinental

)

CARLOADS

1977 Level Traffic 867,061 844,923 644,570 682,734 443,992 480,071 498,049 571 ,871 269,746

Long Term Market Opportunities - ­ 293,474 240,033 247,066 160,715 167,664 179,159 190,672 48,419

PERCENT INCREASE 34.7% 37.2% 36.2% 36.2% 34.9% 36.0% 33.3% 17 .9%

REVENUE ($000)

1977 Level Traffic 434,824 423,626 248,238 269,418 146,339 168,115 182,012 271,136 168,802

Long Term Market Opportunities - ­ 197,994 113,577 120,769 62,125 69,292 79,857 119,591 59,816

PERCENT INCREASE 46.7% 45.8% 44.8% 42.5% 41.2% 43.9% 44.1% 35.4%

- ~-.:....~.

~ ,-"-~_._._-_._--- -­

I EXHIBIT IV-8 Gross Tonnage

VS.

I Real GNP

I INDEX

200 . I

I 195

190

185

180

175

170

165

160

155

150 ,I 145 j I 140

I135 I

130

125

120

115

___ US RR TONNAGE110 " ,105 ,,'..," -- "' ,, ............., . , ~

100 --f-I~~':'=-'-----'::;':""'~~~":""-Tl~---'---"--~~~~""t--~ II;" • I

95 • ..____MILW RD TONNAGE 'II 90

85

80

75

70

I I I I I I I I 1 I

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977

•I

INDEX

I

I I 200

195

190

185

180

175

I 170

I I

165

160

155

150

I 145

140

135

130

I 125

120

115

110

105

100

I 95

90

85

80

75

70

I I

EXHIBIT IV-9 Milwaukee Road

Total Tons Carried

MILW COAL TRAFFIC

MILW TOTAL TRAFFiC

.,,- -- -' " MILW NON-COAL TRAFFIC

I I I I

1970 1971 1972 1973 1974 1975 1976 1977

I I

indicates that while Milwaukee Road has experienced growth in coal tonnages since 1970, its non-coal ton­nage has actually declined.

Exhibit IV-IO presents net ton-mile figures for eight Western District railroads, and shows that most of the Western District railroads, including the Mil­waukee Road, have experienced an increase in net ton­miles since 1970. The bulk of that ton-mile growth, however, has come from longer hauls and from coal. The impact of increased coal haulage on the Milwaukee Road and Burlington Northern is shown in Exhibit IV-II. These two charts suggest that the Milwaukee Road and Burlington Northern have had little success in attract­ing additional tonnage in non-coal commodities since 1973. Thus, the Milwaukee Road's task of securing the market opportunities largely by diversion from Burling­ton Northern will be difficult since both roads have experienced a decline in non-coal traffic over the past five years and the growing segment of the market--coal-­is not as susceptible to normal solicitation. Exhibit IV-II appears to indicate that in the early 1970's the Burlington Northern's growth in non-coal traffic may have been at the expense of the Milwaukee.

(4) Conclusions

It should be noted from the preceding charts that the railroads, Milwaukee Road in particular, did not participate significantly in general economic growth as represented by the GNP or other indicators. Gener­ally, over the last ten years, Western growth in tonnage or ton-miles was limited to longer hauls of existing traffic and the growth in coal traffic. Other traffic was stable or declined. While the review of Milwaukee Road's market opportunities resulted in an assessment of the probabilities of achieving the individual flows, recent history would suggest that taken as a whole, the market opportunities may be optimistic. On the other hand, much of the new traffic is projected to be recap­tured from other carriers as Milwaukee focuses its equip­ment on key markets and rehabilitates its plant--a diffi­cult, but not unreasonable task. Burlington Northern, a prime target in this effort, has experienced a decline in its non-coal traffic in the last five years. This sug­gests that competition for non-coal traffic may be quite severe. A favorable factor, however, is the strong desire expressed by many shippers to keep Milwaukee in the re­gion as a viable competitor.

IV-13

.- EXHIBlT IV....IO western District Class 1 Railrc

Net Ton Mile Index 1970 - 1977

INDEX

200

195

190 / BN

185

180

175

170

165

160

155

150

145

140

./,.. //. ~ ..,,/

/:

/

/

UP

135

130

125

120

115

/ /

q 110

-.. 105

100

95

&.II 90

UI 85

80 \ 75 "­ '-...-. CRIP 70

I I I I I

1970 1971 1972 1973 1974 1975 1976 1977

••••••••••••

• •••••••••••• •

I I I I

I ]

I , I , I 1

I

1

INDEX

270

260

250

240

230

220

210

200

190

180

170

160

150

140

130

120

110

100

90

80

70

60

50

40

30

20

10

0

90

80

70

1970

EXHIBIT IV"<""ll Milwaukee Road Vs. Burlington

Northern Ton Mile Trends 1970 to 1977

BN COAL

". MILW COAL

BN TOTAL

o BN NON·COAL

"-o • ..",..--0. - ';INDUSTRIAL PRODUCTION ~.____ INDEX·

:7:. -- -- GNP (REAL)

---- .- MILWTOTAL . .' ~~~_-=__~~:""--....--~~..l::-_-r-~L:4Ir==::==; MILW NON·COAL

I I I

1971 1972 1973 1974 1975 1976 1977

,

v. DATA, METHODOLOGY, AND ASSUMPTIONS

V. DATA, METHODOLOGY, AND ASSUMPTIONS

This chapter describes the data and approaches used ,. for detailed analysis of the system configurations described . I

in Chapter III. Assumptions were developed in order to pro­ I

vide a framework to test and evaluate various aspects of the analysis, as well as to supply sufficient data for analy­sis when information was lacking or inconsistent with con­firmed data. The assumptions employed are described in the appropriate sections.

Data used in this study were obtained primarily from the Milwaukee Road and from published sources such as the Association of American Railroads and the Interstate Com­merce Commission. The methodology described in the follow­ing sections outlines the techniques employed in this analy­sis. An overview of the analytical process employed is presented in Exhibit V-l.

~ .

1. DATA COLLECTION

The data gathering focused on 1977 operations of the Milwaukee Road. Where possible materials provided by the railroad were checked through several sources and calibrated as necessary.

(1) Traffic and Revenue Data

Traffic data and revenues were based on a four­month origin-destination traffic file containing 294,016 carloads on which the revenues were settled in the months of February, June, August and October, 1977. The "settlement files"-significantly more accurate than car movement records-provide both volume and revenue information. The resulting four­month data base was annualized by indexing the tonnage, carloads and revenues of 21 selected commodity group­ings to Milwaukee Road's Quarterly Commodity Statistics (QCS) totals for the full year 1977. The four-month data base thus annualized provided a best-available representation of the pattern of 1977 traffic flows by origin-destination, car type, and car ownership.

V-l

;I

I

'I

EXHIBIT V-l Analytical Process

System Overview

1977 MARKET REVENUE SURVEY BASE ~

~ DIVERSIONECONOMIC MARKET ,......­- AND DIVISIONPROJECTIONS ASSESSMENT ANAL YSIS...

MARKET -OPPORTUNITIES

POTENTIAL REVENUE BASE

0/0 FLOWS ADJUSTMENTS

t t 1977

CAR HIRE SIMULATION NETWORKCOSTS AND

MODEL MODEL DEFINITION CYCLE TIMES

, I I I +

FREIGHT CAR LOCOMOTIVE REQUIREMENT REQUIREMENT

COST FINANCIAL I~ BASE MODEL

I'

+ REHAB REQUIREMENTS

(TRACK & LOCOS)

PRO FORMA ADJUSTMENTS STATEMENTS

:\IROI

t + NORMALIZED IMPRovEMENT1977

MAINTENANCE ANAL YSIS ANDCOSTS (Rll

ESTIMATES ADJUSTMENTS

+ NROI

ADJUSTED

Of the 294,016 car sample, 834 records were faulty-­primarily because of key-punch errors subsequently cor­ I '

rected.

Enhancements to the traffic data base included:

Deletion from the data base of traffic ori ­ginated or terminated in 1977 on lines since abandoned.

Use of the UMLER* file to calculate tare weights for each car type. Where none was available, an estimated average weight of 31.0 tons was used.

Trailer-on freight car/container-on freight car (TOFC/COFC) traffic was represented ln the data base by a trailer or container i,l count. An analysis of movements on the three predominant flatcar types (constitut­ing 86 percent of TOFC traffic) showed an average of 1.67 loaded vans per flat car.

An analysis was made of the Milwaukee's empty return ratios. As a result empty return ratios were developed by car type for simulation pur­poses. Details are presented in Appendix G.

(2) Physical Plant and Operating Datad

The Milwaukee Road provided Booz, Allen & Hamilton with operating information, including:

Operating timetables

Track charts

Signal maps

Density maps

Detailed maps of terminal areas

Through and local freight schedules

Blocking manuals

Yard and industrial crew assignments J I, "

* UMLER--Acronym for Universal Machine Language Equipment Register.

V-2

-

Locomotive and car rosters, including depreciation and lease information

Freight car fleet availability data

Shop locations and characteristicsr Joint facility agreements with other railroads

Details of car hire payments and receipts

Car cycle times

Estimates of gross rehabilitation require­ments by line segment.

(3) Administrative and Staffing Data

'Data supplied as a basis for analyzing Milwaukee Road administrative, personnel, and management func­tions included workload and manning levels by location in the following functional areas:

Data processing (including capacity of computer systems and hardware available)

Maintenance of way

--- Maintenance of equipment

Stores, warehousing and distribution of material

Freight stations

--- System accounting functions

Corporate level staff organization

Division level staff organization

Sales and marketing functions

Labor protection agreements in effect and current attrition rates

Details of labor agreements.

,­V-3

I .­I (4) Financial Data

I Two major sources were utilized for financial data:

The 1977 Annual R-l Report filed by the railroad with the Interstate Commerce Commission

The Milwaukee Road's responsibility account­ing system which provides details of charges by activity and by geographic location.

In addition, details of leasing arrangements, property accounts and other materials supporting the annual R-l Reports were provided.

2. FACILITIES INSPECTIONS]

A detailed physical inspection of the operating facili ­ties of the Milwaukee Road was made by the Booz, Allen staff who carried out the analytical work. Inspection activities included the following:

1 Engine and hi-rail trips over most main and secondary main lines to determine condition

, and capacity as well as to identify alternative traffic routes

Detailed study of the physical layout and condition of major yards and terminals

I Examination of facilities at most of the "gathering points" and at important inter­

I changes with other railroads

Interviews with line operating personnel to determine how present operations are conducted and to identify operating problems and oppor­f tunities for improvement. An additional objective was to understand the operating policies of the Milwaukee Road, and the levelI of discipline in the operation

Sketches of track layouts at junctions and in

I terminal areas

J

I V-4

I

----~-----

l:!.­ I I

On-site review of all division dispatching offices

Track rehabilitation inspections.

3. LINE SEGMENT LISTING

A complete inventory was made from the track charts of all lines of railroad owned or operated by the Milwaukee Road and a "line code" assigned to each. Thetabulation included the following information for each segment:

Station names and mileposts

Number of main tracks

Signal system data

Owning carrier and using carriers

Federal Railroad Administration track speed requirement

Coding to allow cross referencing to data produced by the simulation models

Coding to indicate the status of each line segment for each system option being analyzed

Tonnage categories for each segment by ref­erencing the simulation output.

The line segment listing was used to produce, for each system, total line miles and track miles in each tonnage, speed and signal category.

The line miles and track miles in each category were used in the calculation of normalized maintenance costs

·and rehabilitation costs for each system configuration.

4. TRAFFIC GROWTH

TO demonstrate both short-term and long-term potential of the alternative system configurations, the various options were simulated with four different traffic levels. Growth projections were developed and applied to both the existing traffic base and the projected market opportunities.

I'!I I • II'

I [I

I

i. I , I,

I.

V-5

-- , II

;

II

I

"I

j.

Details of the traffic growth methodology are provided in Chapter IV.

5. DIVERSION OF TRAFFIC AND DIVISIONS OF REVENUES

To project traffic availability to each of the systems under study, a diversion analysis was performed.

Origin-destination traffic flows for the system were arrayed by class of traffic for each system under study, subject to the following rules:

If both the origin and destination stations or interchanges were included in the system under consideration, the traffic was retained in full.

If both the origin and destination stations or interchanges were excluded from the system under consideration, the traffic flow was deleted.

If the origin station or interchange was included in the system under consideration and the destina­tion station or interchange was excluded (or vice­versa) and the system configuration under study could logically retain a partial haul in the routing, the flow was diverted through a new interchange point reflecting the portion of the haul that the Milwaukee Road could expect to retain.

The diversion analysis involved examination and di­version of more than 4,000 individual traffic flows for each alternative system.

A diversion analysis is inherently judgmental. To maintain realism and consistency, whenever a difference of opinion arose with the Milwaukee staff assisting in the exercise, the more conservative diversion estimate was used.

Revenue resulting from diversions was based on a de­tailed examination of existing divisions on similar routings. The divisions applied were reviewed with Milwaukee Road's "Rates and Divisions personnel.

The market opportunities traffic forecasts described in Chapter IV of this report were subjected to the same diversion and division process to produce the "new" traffic applicable to each system being studied.

I:

I

I i I,

V-6

J I

I I

I I

6. COMPUTER SIMULATION OF OPERATIONS

To provide an efficient and accurate means of analyzing operations over the various systems being studied, Booz, Allen & Hamilton utilized a family of computer models. Some of these models are derived from simulation models origin­ally developed by the United States Railway Association (USRA) for use in preparing the Final System Plan for Con­rail. Other models have been developed specifically to deal with the wide range of options considered in this study.

(1) Development of the Network Model

Computer-based analysis of traffic flows over railroad networks began with a pioneering effort some 15 years ago indicating that significant improvements

. in operations might be achieved. Blocking and schedul­ing policies used by railroads up until that time had evolved over a period of years in response to specific customer demands and efforts by operating personnel to improve the flow of specific traffic movements. These plans were often developed with incomplete origin­destination information, and as a result many traffic flows did not receive optimum handling. Improvements in one flow were offset by less expeditious handling of other flows.

In preparing the Final System Plan, USRA faced the task of analyzing within a limited time frame, traffic flows over an extremely complex system, in­cluding analysis of various alternative systems. Further it was recognized that when netting two very large numbers, even small percentage changes in either revenues or costs could have a critical effect on the bottom line. Therefore, details could not be sacri ­ficed for expedienc~

It quickly became apparent that USRA could not perform the massive manual effort that would be re­quired to develop the detailed operating plans that its studies required. To provide a tool for this analysis USRA contracted with Stanford Research In­stitute (SRI) for the development of a network analyses model which could be used in an iterative fashion to handle a wide variety of cases. The SRI model has since been expanded and improved under sponsorship of Booz, Allen & Hamilton, and a number of new features have been incorporated.

V-7

• I. I I

I I

I ]

I

I ,

· ....--......

(2 ) Concept of the Operations Simulatio~ Model

Although the simulation model is realistic, it does not make decisions or optimize. It essentially acts as an accounting machine to record the blocking and movement decisions made by the experienced operat­ing personnel using the model. Opportunities for improving the operating plan are pointed out by the model, although the user must decide whether to make a particular change. The net results of each operat­ing plan are then reflected in the operating statis­tics generated after each iteration.

The basic hypothesis in the use of the model is that the operating plan which minimizes the handling of cars provides the greatest service improvements and will generally tend to reduce costs. Since recent experience shows from 18 to 24 hours being consumed each time a car is switched, a significant reduction in car handling can result in sharp improvements in both service and car utilization.

The degree of detail included in the network model employed in these Milwaukee Road studies reflects for the "design day" every movement and every through train in the system.

since the network model is an iterative, rather than an optimizing model, each case is refined to approximately the same level of quality so that com­parisons between the cases will be valid. While it is possible to refine the operating plan endlessly, after relatively few iterations, the subsequent im­provements achieved with each analysis tend to become incrementally minimal. This network model does not have any built-in constraints in yard or link loadings. Such constraints were purposely omitted to permit the analyst to examine link and node loading in detail after each run. Without artificial constraints on the capacity of nodes and links, it is quite easy for ex­perienced operating personnel to verify the results or to anticipate the effects of changes in operating plans.

In those cases where yard or line capacities appear to be taxed, loadings are rearranged to con­form with the practical limits of the facilities. The model provides a detailed description of the loading on each node (yard) and link (main line),

V-8

I ..-­I the number of classifications being made at each yard

and other statistics required to make a preliminary capacity finding.(

(1)I The Network Model Output

The output of the network model includes many s atistics useful to rail management in analyzing t~affic flows and identifying opportunities for im­p,ovement. They include:

A list of blocks made at each transit node and the destination of each block

The number of blocks made at each node

Total system flow handlings and the number of cars receiving one, two, three, four, and five or more handlings during their journey across the railroad

,I Number of originating, terminating, local

jand transit cars handled at each node

Number of passed block handlings . ,

Total train miles, train hours, and gross i

ton miles

Total locomotive unit miles and unit hours

Loading and tonnage of each train over each link

Total loadings of each link in the network

Details of individual flow handlings

A matrix of origin-destination flows showing cumulative traffic in each transit yard on I the system. II

I I

(4 Use of the Network Model in Analyzing Milwaukee Road System Configurations

Availability of the network model made it feasible to I simulate the operations of the various Milwaukee Road systems under study in detail, and to measure the

V-9

effects of changes in operations. The principal steps involved in setting up and using the model are discussed below.

1. Network Design

To design a nodal network for each of the system configurations being analyzed, all of the traffic "gathering points" on the Milwaukee Road were identified through extensive analysis of local pickup and delivery operations and with operating officials. A gathering point is the yard or siding which is either the final point where a car is handled prior to delivery to a customer or interchange, or the initial location where a car is switched upon receipt from a customer or interchange. A gathering point may encompass many stations along many miles of rail­road, or may include only one industrial area, one interchange point with a connecting railroad, or a unit-train origin or destination.

The use of gathering points enabled the large number of individual stations and interchanges on the Milwaukee Road to be condensed into a nodal network of manageable size. The- nodal network used to analyze the Milwaukee System without Light Density Lines consisted of 171 traffic nodes and junctions. The networks for the smaller systems were derived from the 171-node system and were, of course, somewhat simpler.

In a number of instances stations along a line of railroad were served by a local train that picked up or delivered cars at more than one gathering point, depending upon origins or destinations of the traffic involved. These sta­tions were assigned to separate nodes, and affected traffic was routed to the appropriate gathering point with reference to the other end of the move.

After the nodal networks were established for each system, it was necessary to determine how the nodes were connected. Links were there­fore established between the nodes, and a mileage and average running time was determined for each link. Many of the links were strung together into "Standard Routes" for use when routes for

V-IO

. I i , I

I,

i'

I I I

I I I I

---I

Simulation network maps were then prepared for

I each system. Exhibit V-2 provides an example

I of a simulation network map for the Core System. It should be compared to the full map of the Core System in Chapter III.

1 2. Data Input

The annualized 1977 data base, the market opportunities data base, the short-term and long-term growth factors, and the results of the diversion analyses then became the founda­tion for creating traffic data bases for the various traffic scenarios and alternative system configurations being studied.

The traffic data was next recast in the format of the nodal networks by adding the appropriate node for the individual station or interchange at either end of each car movement. Additional refinements followed to ensure that the origin-destination traffic data accurately reflected actual operation of the Milwaukee Road. These adjustments included:

Sub-blocking of interchange traffic to accurately represent the blocks being made for the connecting carriers. In­formation involving route and ultimate origin or destination was utilized to sort appropriate interchange traffic into blocks for connecting carriers. A number of off-line points were thus represented in the nodal network.

Identification and separation of unit ­train traffic from the rest of the traffic base. unit-train traffic was routed to and from separate unit-train nodes.

Separation of high volume piggyback and container flows into separate TOFC nodes for special handling.

Conversion of piggyback traffic from trailerloads to carloads and genera­tion of empty cars. I I

I I I:

each train were entered into the computer.

V-II

•• EXHIBIT V-2

The Milwaukee Road Core Network

11 n 11

~ MARINETTE

...-""

(T

\LE

UKEE

FC

IT

61

MANilLA 'AlEWOOD

lEY

: ....... 65 ..... oKENTLAND ....-yTPW

,R / N /

KCS I ..... 43 ROAD

NA

ATSF COAL

KCSQ_

KCY~\UTE MKT (

\TTA l

209

8GB sou IN TOFC

11 11

I

To ensure that the plans developed would not tax system capacity on a heavy day (typically a Thursday on many railroads), a "design day" was established to represent one-three hundredth of the annualized traffic data base; and design day volumes were utilized in the blocking and train operations simulations. The simulation output was later adjusted to an annual base.

3. Blocking Simulation

"Blocking" is the result of the classifi ­cation or sorting process carried out in the classification yard. Blocks are groups of cars that will generally run together to their common destination or another classification yard where the process is repeated. The effectiveness I

of the railroad's "blocking plan" bears signifi ­ Icantly upon its service levels and efficiencies. The Milwaukee Road's Freight Train Manual of October 17, 1977 as up-dated, was utilized to establish base blocking procedures for the system. Blocking instructions were prepared for each node, and were put into the computer.

Blocking strategies for each system under study and for the various traffic levels were derived from the base system blocking plan through an iterative process. Blocking oppor­tunities were improved within the limits of the physical plant.

To ensure that each yard had the capacity to handle the traffic envisioned in each case, a full review was made of yard loadings and the number of blocks required of each yard after each run of the model. If loading at any yard increased beyond a realistic level in relation to yard capacity,* the blocking strategy was changed to reduce the loading. In one instance I'

it was decided that the benefits of increasing loadings beyond the present capacity of a given yard were great enough to warrant expansion, and in that case provision was made for the necessary capital investment. It should be remembered,

Normally the current level of utilization represents the* "capacity" but exceptions might be made where facilities were known to be under-utilized at present.

V-12

however, that the loadings at many yards were substantially reduced due to the reduction in the size of the system and improvements in blocking.

with the minor exceptions noted above, yards were not called upon to produce more blocks or handle more total throughput for the systems being studied than they had actually handled in 1977. Before exceptions were made, Milwaukee operating staff were consulted to ensure that sufficient operating facilities were available at the location in question to handle the in­crease without capital investment, and yard crew assignments were increased where appropriate.

Where the number of handlings at a yard changed in the various system configurations, yard crew assignments were adjusted, taking into account the industrial switching require­ments and the yard crew schedules in effect.

4. Train Operations Simulation

Again utilizing Milwaukee Road's Freight . Train Manual, 1977 levels of train service were established for the simulations. Details of the operation of each train were entered into the computer, including:

Train route

Frequency

Locomotive requirements

Blocks carried by each train

pickups and setouts

Schedule

Handling instructions for passed blocks and blocks moved on more than one train. ! I

;

I:

I.

V-13

I

-

- --- -.----.---- ­

The train operations simulation for the 1977 system was the starting point for develop­ing train operating patterns for the other sys­tems being studied. Details of locomotive assignments for the system came from the Milwaukee Road Power Assignment Manual dated July 1, 1977.

To represent realistically the costs of the different types of train operations, the simulated trains were designated as thru, local or unit trains as detailed in the Milwaukee Road Train Designation System in effect on January 1,1976.

Train tonnage and length limitations, as well as power requirements were based on Milwau­kee Road operating instructions in effect over each particular line of railroad. All simulated trains were limited to 120 cars to comply with the reduced crew agreement now in effect on the Milwaukee Road. The economic benefits of this agreement were factored into the cost analysis. The economic benefit of improved segment train running times, reduced overtime and a reduction in relieving crews after 12 hours of service was also included.

The initial assessment of main line capacity was handled in a manner similar to the assessment of yard capacity. After each iteration a review was made of gross ton-miles and number of trains traveling over each link in the system. In the few cases where substantial increases in tonnage were proposed, the physical characteristics of the lines were analyzed to ensure adequate capacity. No increase in main line capacity was judged necessary to handle the traffic proposed in any of the cases under study.

5. Unsimulated Local Train Service

The simulation model represents the movement of all trains between nodes in the simulation network. Where local trains perform pickup and delivery service and do not move from one node to another, or operate on lines that are not represented in the train operations simulation, a manual analysis with appropriate changes or

I

.j

I -1

I

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V-14

II

deletions was made for the various cases being studied. The resulting activity levels were added to the simulation output to properly represent the operation of all trains.

6. Post Processor Output to Financial Model

The simulation output provides measures of various activity levels for a design day. A "post processor model" was next developed to con­vert these output statistics into a form usable by the financial model described below.

All appropriate activity indicators were annualized using the proper multiplier.

Train and locomotive miles were calcu­lated for thru, unit and local opera­tions by division and in total.

Gross tonnage was calculated for each link by signal status and speed class/ density category.

Trailing gross ton-miles were computed.

Even a simulation model as detailed as that used in this study cannot measure every single activity that occurs on the railroad. In order to ensure that costs were not understated, the annualized statistics simulated by the model for the Milwaukee Road 1977 system were compared with statistics reported to the Interstate Commerce Com­mission in the railroad's Form R-l for that year, and appropriate calibration factors were computed where applicable. The calibration factors were then used to adjust the appropriate measures of activity in each case being analyzed. These adjustments as­sumed that the planned operation in each case would vary from the actual operation in the same way. This avoids the "windfall" improvement which some­times occurs when comparing a model with reality.

V-15

.-­7. JOINT FACILITIES

Joint facilities not included in the various system configurations were identified by agreement and by the assigned number in the Milwaukee Responsibility Reporting System. A computer summary was prepared by the Milwaukee staff totaling all payments or billings under the agreements identified by the applicable ICC account. These amounts, adjusted for accruals made in 1977, were deducted from the detailed joint facility accounts for the 1977 level costs for each alternative system configuration. As traffic levels increased, those joint facility accounts that were judged to be affected by volume changes were also increased in proportion to the appropriate activity measure (i.e., car miles and carloads originated and terminated) .

It was assumed that all joint facility agreements not required could be terminated without penalty.

8. CAR HIRE AND FREIGHT CAR FLEET SIZE

Car hire estimates were developed for each traffic scenario and system configuration to project the per diem and mileage receivables and payables, as well as the lease costs related to freight cars, racks and trailers. The primary inputs for the development of car hire were:

The traffic data base for the scenario being considered

1977 average times for the various components of the complete car cycle on the Milwaukee Road System

Loading and unloading terminal time

Interchange time

Loaded and empty transit times

Non-productivity time, including bad order days and stored-serviceable days

Node-to-node mileages based on the nodal repre­sentation of the Milwaukee Road developed for the network simulation

V-16

, I

1977 System car-days available

1977 average car-days and car-miles generated offline by system cars delivered to connecting carriers

1977 average per diem and mileage rates implicit in the Milwaukee Road's car hire payments and receipts. Hourly per diem rates were not taken into account.

These inputs were used to develop the car-miles and car-days online and system car-miles and car-days offline associ­ated with each traffic flow. The car-miles and car-days thus synthesized and the average 1977 rates were used to develop estimates of the per diem and mileage accounts for each scenario.

The development of car hire estimates was done on the basis of 21 general car types and four classes of ownership (system, foreign, private and Trailer-Train). This level of detail allowed for notable accuracy and flexibility in test­ing the sensitivity of the estimates. Calibration against 1977 Form R-l data provided an additional safeguard.

Car hire statistics for each scenario were developed by using system averages for 1977 and the calibration factors. It was assumed that:

No improvements in normal yard transit times would occur; however, reductions in transit times were calculated resulting from the fewer "yardings" re­quired with an improved operating strategy and transit time improvements with the rehabilitated plant.

For traffic diverted to interchange, the terminal time was assumed to be the same as that experienced I

in 1977 at the same interchange points. I I I

The car-miles generated offline by diverted loads delivered to connecting carriers were adjusted to I reflect the reduced online mileage and increased offline mileage associated with the move.

The offline car-days for diverted loads delivered to connecting carriers were adjusted to reflect the additional offline haul at an average speed of 500 miles per day.

V-17

.-­The car hire accounts and system fleet requirements are

largely influenced by the car ownership identified in the traffic base. As the system configuration changes it is reasonable to expect this mix to change. In developing the traffic data for alternative configurations, the ownership of cars in diverted traffic flows was modified on the assump­tion that:

If another railroad originated or terminated traffic after diversion which was previously originated or terminated by Milwaukee, the percentage of foreign cars in that flow would increase.

The percentage of foreign cars in a traffic flow was dependent on the class of traffic and car type, and the percentages in the total system in 1977 are applicable to diverted traffic for other scenarios.

Foreign cars would be displaced by Milwaukee cars, to the extent permissible under car service rules, where such displacement was economically beneficial or necessary to preserve market share.

Traffic currently carried in private cars or on Trailer-Train cars would continue to move on the same cars.

The projected traffic flows reflecting new market oppor­tunities were assumed to have a mix of foreign and system cars justified by the extent of Milwaukee's participation in the total haul.

The system equipment requirements by car type for each scenario were developed from the total system car-days required. The total in-service system car-days (online and offline) avail ­able were inflated by a bad order ratio and a stored-serviceable ratio to reflect realistic operating efficiencies. For this purpose a normalized bad order ratio (5 to 6 percent depending on car type) was used to reflect a rehabilitated fleet and the 1977 stored-serviceable ratios were used to represent the normal "cost" of fleet management in the context of the given market demands.

Additional freight cars required to support the growth in traffic or to displace foreign cars were assumed to be obtained by lease. Additional lease costs were based on the average lease cost by car type of the Milwaukee leased fleet in 1977.

V-1S

I J

In the event of an excess of cars, leases were cancelled

1­

without penalty. To the extent the Milwaukee was required to pay a premium for leased cars due to the overall financial condition of the company, the increased costs of such leases are included in the calculations for those systems requiring additional equipment.

9. LOCOMOTIVE FLEET SIZING

Locomotive requirements for each system configuration were determined by formulating a basic fleet designed for the four types of service to which locomotives would be assigned.

Thru road train requirements were developed by creating actual locomotive pool assignments for the trains to be operated.

Unit-train requirements were developed in a similar fashion to thru trains. Future unit-train require­ments were established on a train-by-train basis.

Local train requirements were developed on an as­signment-by-assignment basis.

Yard requirements were developed on a location-by­] location basis.

For the various traffic levels, thru and local train re­quirements were determined by comparing unit-hours operatedI in trains to 1977 unit-hours. Yard requirements were deter­mined with reference to the number of annual yard engine shifts worked.

Using the assumption of 90 percent availability, an out­of-service factor was applied to the basic number of units re­quired for each class of service to determine the total fleet needed.

In determining basic assignments, high-horsepower units were utilized on road trains until the supply was exhausted, and any further requirements were met by use of an appropri­ate number of lower-horsepower units.

After the total locomotive requirement for each system was determined, the components of the fleet were established by applying the mix of thru, unit, local and yard service to the existing fleet, and selecting from it the number and type of units needed. Newer units were retained when practicable, and an effort was made to minimize the number of different types of locomotives. (The 1977 fleet contained 27 types.)

V-19 ~ I

r I Depreciation and lease charges were calculated based

upon the actual fleet of units assigned to each system being analyzed. It was assumed that surplus leased units would be returned to their owners and rental charges elimin­ated. Surplus marketable units owned by the Milwaukee Road were treated as if they were retained and leased out toI other railroads, and appropriate credits were given.

10. NORMALI ZED MAIN1'ENANCE OF WAY

The Pro Forma Net Railway Operating Income (NROI) State­ment for each system configuration that was studied in detail included maintenance-of-way expenses on a normalized basis. The long-term economics of any system are determined by the average annual long-term maintenance-of-way cost to maintain the fixed plant. This is referred to as normalized maintenance.

Normalized maintenance-of-way expense is defined as the average annual cost over the long term to maintain the fixed plant in a condition adequate to support an efficient trans­portation service. In general, annual work function and ma­terial replacement costs for normalized maintenance will be the cost to perform the work function or material replacement divided by the life of the work function or material in years. A 50 percent remaining life would be the result of the long­term installation of the annual requirement of track materials based on usable life and is referred to as a normalized condition.

(1) Effects of Maintenance Cycles

Most maintenance functions are performed on a cycli ­cal basis. For anyone mile of road or specific line, costs can vary greatly, as bridge repairs may be performed

I every ten years, programmed rail replacement every twenty years, tie replacement every six years, etc. Over a total system, the cyclical nature of maintenance work tends to even out.

Upkeep of track represents about 75 percent of the fixed plant maintenance cost (less depreciation). Replace­ment of track materials is about two-thirds of the total track and right-of-way maintenance expense. Therefore, when replacement of track materials is averaging above or below normal, the impact on the maintenance-of-way budget and net income can be significant.

V-20

I I

Normalized maintenance levels only apply to plants which would be operated over the long term. Plants which would not be replaced over the long term, such as an uneconomic light density branch line, can be maintained considerably below normalized cost by using up available track material life until the line is abandoned.

Requirements above or below normalized maintenance in any given period can also be due to the past history of material installations. If expenditures are apprecia­bly below normalized requirements for an extended periodof time, reduction in operating speeds and reliability will result, and maintenance expenditures above normalized levels will be required in the future if operations are to continue.

The Milwaukee Road's installation of ties and rails each year from 1934 to 1977 is shown in Exhibit V-3. As can be seen on these charts, track materials were installed above current* normalized levels until 1950, after which installations were below the normalized level based upon a 37-year life for ties and 62 years for rail on the

I Milwaukee. While it might be expected that tie and rail replacements would be minimal in the years following the surge of installation during the period of World War II,

] for the last twenty-three years Milwaukee Road tie and rail installations have been below normalized levels. Of equal concern, the surge of ties installed in the forties are now coming up for replacement. While this pattern is not unique to the Milwaukee Road, it does represent one of the basic problems to be faced in attempting reorganization.

) After major rehabilitation work such as is con­

templated in these studies, track replacement require~

ments should again be less than normalized for a fiveI to ten year period since during rehabilitation, track material replacement is above normal.

i

I To reduce this long-term surge effect and to mini­mize current expenditures, rehabilitation reauirements should be phased in with normalized maintenance. On this basis,

Current (1977) Normalized Maintenance levels do not reflect* normalized maintenance on lines no longer operated or slated for abandonment.

1

I V-21

I

1.000

EXHIBIT V-3 Milwaukee Road Rail

and Tie Installations

YEAR

MILWAUKEE RAILROAD

TIE INSTALLATIONS 1934 ­ 1977

i I I III I

I

70

10

• 0

- - - - - -_. I I

40

'0

-- ­--- ­- - - ­ - - - - - ­ - ­

- ­ -. ­ - --\'\'''ORMALIZED 1977 NEw RAIL REOuIREM(rH

--!---­ --­.'---._-_.. __ _ ___ -.l.6?.ye~r.~e~_Ka~!-1!..!1 _

ro "

10

MILWAUKEE RAILROAD

NEW RAIL INSTALLED

1934-1977

rehabilitation expenditures are made above normalized maintenance levels only as required to continue opera­tions or to become competitive in time-sensitive markets. In these studies rehabilitation above normalized mainte­nance levels is referred to as "Net Rehabilitation."

(2) Maintenance Costs for the Milwaukee Road

Maintenance costs were developed in accordance with the Uniform System of Accounts of the Interstate Commerce Commission in order to obtain maximum use of historical information.

For use in the Booz, Allen & Hamilton financial model, maintenance-of-way costs were divided into three categories. The accounts included in each category and the methodology used to compute normalized cost for each category are outlined below:

1. Category I--Structure and Facility Accounts (ICC Accounts 221, 227, 229, 231, 233, 275, 241, 244, 247, 253, 257, 265, 273, 281, 282)

..~ '.

Dollar values for Category I accounts were estimated from an analysis of actual expenses and the road property investment in the corresponding capital accounts for the same period.

The estimate of plant investment for each of the system configurations being analyzed was based on an analysis of investment by state for the indi­vidual property accounts contained in ICC Accounts 731 and 732 as of December 31, 1977. The invest­ment amounts recorded for those states not served by a particular system were completely eliminated, while an estimated percentage reduction was made in the investment amounts in those states partially served by a system. In addition, an overall esti­mate was made of the investment required for shops and shop machinery to maintain the equipment required for each of the system configurations.

To simplify the calculation of Category I costs, maintenance outlays were converted to 1977 dollars by use of the AAR cost index. Maintenance costs as related to investment were compared with other

V-22

._­

Class I railroads to arrive at normalized cost estimates. Tables with road property investment and maintenance costs in 1977 dollars for the Category I Accounts for each alternative system configuration are included in Appendix H.

2. Category II--Track and Signal Accounts (ICC Accounts 202, 206, 208, 212, 214, 216, 218, 220, 249, 272)

Normalized rail and tie replacement quantities (Accounts 212, 214 and 216) were estimated from material life forecasts, which are discussed in de­tail in Appendix I. The many other elements of right-of-way and track maintenance (Accounts 202, 218, and 220) were estimated from unit costs devel­oped from cost studies on several railroads, and were varied with annual gross tons operated (as a measure of work function life) and on track-time availability under traffic.

Tunnels, bridge and signal expense (Accounts 206, 208 and 249) were developed from analysis of actual maintenance expenditures of past years (con­verted to 1977 dollars) and their relationship to investment in the corresponding capital account.

Snow removal expense (Account 272) was estimated from analysis of past expenditures converted to 1977 dollars.

Category II expenses were estimated on a per­track-mile basis for a matrix of gross tonnage and track speed categories for tracks with automatic signals, centralized traffic control, and unsignaled. An average cost per mile of yard and switching tracks was also estimated for Category II expense. Normal­ized Category II costs were computed by application of the unit costs to the miles of main track in each tonnage, speed and signal classification, and miles of yard and sidetrack for each alternative system analyzed.

Appendix J contains details of the Category II track mile costs.

, I

'.

,I "

\

, 'I

I

, I.V-23 , I'

I' I

3. Category III--Overhead Accounts (ICC Accounts 201, 269, 271, 274, 275, 276, and 277)

Category III Accounts were estimated as a percentage of accounts in Categories I and II based on analysis of the past expenses on Milwaukee and other Class I railroads. Accounts 269 and 271 were based on the relationship to Account 220. The other accounts (201, 274, 275, 276 and 277) were related to the principal labor accounts in Categories I and II. Pencentage relationships by accounts are con­tained in Appendix K.

11. REHABILITATION AND DEFERRED MAINTENANCE

Rehabilitation of the fixed plant is usually required because of increased traffic, increased service requirements, heavier axle loads, deferred maintenance, or a combination of these reasons. On Class I railroads today deferred mainte­nance is the major reason for rehabilitation of the plant.

Deferred maintenance and rehabilitation can have differ­ent values depending on the purpose of the estimate. Defini­tions of these terms are as follows:

( 1) Deferred Maintenance--Federal Railroad Administration Definition

Deferred maintenance in track materials as estimated in recent FRA studies is based on the deviation from 50 percent remaining useful life in track materials. Reasons for using 50 percent remaining life include:

Fifty percent remaining life is the result if track materials are replaced on a normalized basis over the long term.

Since track materials are not depreciated in the uniform system of accounts of the Inter­state Commerce Commission, the extent to which the normal annual requirement is not met can be considered depletion of the track structure investment.

It can be uniformly applied to different rail systems and mathematically computed for com­parative purposes.

V-24

I

I [

Deferred maintenance computed on this basis is a relative measure of the age of track materials. It is not a measure of track safety or the adequacy of the track for operations. The deferred maintenance on most Class I railroads computed on the deviation from 50 percent remaining life basis is the result of the exten­sive replacement of track materials in the thirties and forties, peaking about 1945. In the fifties, track material replacement dropped dramatically due to reduced requirements. As the need for track material replacement increased in the mid to late sixties and through the seventies, the financial condition of many railroads pre­vented an adequate response. The result has been older track materials and increasing deferred maintenance when measured against 50 percent remaining life. A chart de­tailing installation of treated cross-ties and new rail from the early thirties through 1977 for the Milwaukee

. Road is presented in Exhibit V-3. The pattern of instal ­lation is similar for almost all Class I railroads. The financially stronger roads have been better able to in­crease track material installations as the materials in­stalled in the World War II surge came up for replacement.

The estimated cost of deferred maintenance on this basis is the cost of installing the required track ma­terials to achieve a 50 percent remaining life.

(2) Deferred Maintenance--Interstate Commerce Commission Definition

Under Ex Parte 305, the Commission defined deferred maintenance as:

liThe accrued deterioration of deficiency in the physical operating condition of rail track structures used in the provision of transportation service resulting from the failure and/or inability to properly main­tain plant, which produces an adverse ef­fect on railroad operations to an extent that services to shippers have been ren­dered partially or wholly inadequate and/or has resulted in diminishing the railroad's competitive ability."

V-25

---- - ----------~=--- ------~ -~---------- ~~--------

• The ICC definition has practical value, as it is

•

intended to measure condition against operating needs. It is subject to varying interpretation of when "an adverse effect" is produced and when service is ren­dered "partially or wholly inadequate." This defini­tion also does not require forecasting future require­ments. Since it takes many years for the plant to run down and also many years to upgrade the plant, some forecasting of requirements appears important in addi­tion to the immediate ability of the plant to meet transportation requirements .

The estimated cost of deferred maintenance in ac­cordance with Ex Parte 305 is the cost to eliminate the "accrued deterioration or deficiency in the physical operating condition" as defined by the Commission.

• (3) Definition of Rehabilitation

Rehabilitation of the track structure is the work necessary to bring the track to a defined condition level. As used by the Federal Railroad Administration, for example, in connection with funding of branch line assistance to the States, rehabilitation is the cost to obtain an FRA Class I (10 mph) track condition for two years. In other contexts including this report rehabili ­tation envisions much higher track speeds.

12. PLANT REHABILITATION COSTS FOR THE MILWAUKEE· ROAD

The Milwaukee Road's Engineering Department developed gross rehabilitation estimates for the entire railroad by line segment. These estimates were based on detailed examin­ation of the plant and intimate knowledge of its maintenance history.

The details of these gross rehabilitation estimates are contained in Appendix L.

At the request of Booz, Allen & Hamilton, Harry Williamson, a Professional Engineer and formerly Chief Engineer of the Southern Pacific, inspected during the summer of 1978 more than one-third of the Milwaukee Road's routes, concentrating his efforts on the main lines and certain secondary main lines.

, V-26

•

I

-

-- --- --------.

Mr. Williamson prepared independent estimates of gross rehabilitation requirements for the lines that he inspected, and these estimates, upon review, were found to be within 3.5 percent of the Milwaukee Road's estimates for those same lines. Mr. Williamson is in accord with the Milwaukee Road's methods and results, and for this reason the estimates con­tained in Appendix L were used as the basis for computing net rehabilitation requirements.

The rehabilitation work estimated by Mr. Williamson and the Milwaukee Engineering staff was, in general, to achieve a track condition which would permit safe, reliable main line operation at Class 4 speeds (60 mph maximum freight speed) on main lines east of Miles City and Class 3 speeds (40 mph maximum freight speed) west of Miles City and on secondary main lines. On most branch lines, the rehabilitation work would provide for Class 2 speeds (25 mph maximum freight speeds). If such a program were carried out over a short period, annual maintenance requirements would then be below normalized for approximately four to six years.

In order to determine financial needs over a ten-year period, the rehabilitation required above normalized mainte­nance to achieve a track condition which will meet the oper­ating needs of the various alternatives was estimated by Thomas K. Dyer, Inc. Consulting Engineers specializing in railroad maintenance programs. This is referred to in this report as the minimum rehabilitation/maintenance program.

The rehabilitation portion of the minimum ten-year re­habilitation/maintenance cost was estimated by Thomas K. Dyer, Inc. by subtracting track material replacement included in ten years of normalized maintenance from the estimated total track material replacement requirements over ten years. Total track material requirements were estimated by means of computer analysis of forty-three years of track material in­stallation, the rehabilitation inspections and estimates of Mr. Williamson, and the Milwaukee Railroad engineering personnel.

The minimum rehabilitation/maintenance cost is based on the assumption that rehabilitation/maintenance work would be well-planned and supervised and carried out efficiently by trained, mechanized work crews.

The rehabilitation portion of the minimum ten-year re­habilitation/maintenance cost is referred to as net rehabili­tation cost. This cost has been computed for each alternative system configuration, and the results are presented in Chapter VI of this report.

V-27

, I I I

I I I

I:

;1

!1 • -I

II

I

13. LOCOMOTIVE MAINTENANCE AND REHABILITATION

To develop a method for estimating the maintenance costs for locomotives that would have the flexibility to accommodate the different requirements of various system configurations being analyzed, the Milwaukee Road's loco­motive fleet and past maintenance practices were examined. The principal factors which determine locomotive unit maintenance costs are:

Quantity of locomotive units

Types of assigned service, including thru, local, unit-train, and yard switching

The level of service reliability required

Annual mileage utilization per unit

The degree of locomotive standardization by manufacturer, model, and components

Physical condition and age of locomotive sub-fleets

Maintenance experience with locomotives of each manufacturer.

The 1977 Milwaukee locomotive roster included approxi­mately 705 freight units in 27 classes. The historical main­tenance record of overhauls and maintenance costs of each class were analyzed to determine the degree of deferred main­tenance. Maintenance costs were then developed for each type of operating service to which locomotives were assigned in 1977. After a review of manufacturers' recommendations and the maintenance experience of a number of Class I railroads, these costs were modified upward to reflect a "normalized" level of maintenance. This level of maintenance was expected to sustain a rate of 90 percent service availability for the total fleet.

Composite unit costs were developed to reflect normalized fixed and variable maintenance costs for units in each of the four basic types of assigned service mentioned above. These costs also reflect the inherent characteristics of locomotive design types currently assigned to the four services. The fixed portion of maintenance cost largely reflects periodic overhaul expense, which varies directly in proportion to the

V-28

I

I' i:Ii I

I

;I i

I

I I'

I'

I I

I

]

1

, I I

number of locomotive units operated and maintained. The variable portion of unit maintenance cost largely reflects running maintenance and is directly proportional to mileage operated. Exhibit V-4 presents the fixed and variable com­ponents utilized in estimating normalized locomotive mainte­nance costs.

EXHIBIT V-4 Normalized Locomotive Maintenance Expense

1977 Dollars

THRU SERVICE $22,000/unit/year + 44.0¢/unit mile LOCAL SERVICE $17,200/unit/year + 50.5¢/unit mile UNIT SERVICE S27,700/unit/year + 34.5¢/unit mile YARD SWITCHING $10,300/unit/year + 47.7¢/unit mile

Normalized maintenance costs in this study for motive power for the several system alternatives are based upon the significant assumptions discussed below.

(1) Locomotive Rehabilitation

With extensive locomotive rehabilitation in progress during the period of the studies, it is assumed that the locomotive fleet existing in 1977 would be rehabilitated prior to the baseline year and that maintenance expense would thereafter be held at normalized levels. The nor­malized level of maintenance is at 80 percent of the 1977 actual level plus estimated overhaul expense to sustain regularly scheduled overhauls.

The benefits of rehabilitating the complete locomo­tive fleet are assumed also to improve reliability, and to increase availability of road power from 80 to 90 per­cent. This would result in a reduced fleet ownership re­quirement from 705 to 628 assigned locomotives for the existing system.

( 2) Locomotive Overhauls

It is assumed that the average time interval between overhauls of road and road-switcher power is as follows, based on manufacturer's recommendations:

V-29

1 .­I EMD units--5 years or 450,000 miles/unit,

whichever occurs first

I GE units --4 years or 450,000 miles/unit, whichever occurs first

I Yard switch units--8 years.

The overhaul expense per unit will vary in accord­ance with locomotive builder, model, and physical condi­I tion of each unit. A "normalized" overhaul expense is estimated at about 90 to 95 percent of the unit cost to rehabilitate locomotives under the current Milwaukee Road 4R Act program. In this program, III units are being re­habilitated at an estimated cost of $13.15 million and over a period or 15 months. The estimated average reha­bilitation cost is $118,500 per unit.

Typical estimated unit overhaul expense (including direct overhead) is:

Direct Expense

GP 40 $ 77,500 SD 40 82,200 U30B 106,000

The estimated normalized

Estimated Total Expense

6/77

$ 86,500/unit 92,OOO/unit

118,000/unit

maintenance expense in this study is expressed in two components to reflect fixed and variable expense for purposes of simulation alternatives. Short-term expense variability between simulation alternatives is expressed as a combination of annual dollars per nnit plus cents per unit-mile. The first component (dollars per unit) largely reflects annualized overhaul expense per unit .. The mileage com­ponent reflects running maintenance by locomotive model and group. The first component is also considered a fixed expense in the short term, where there is minor change in fleet quantity of units between alternatives.

(3) Locomotive Requirements

Road locomotive requirements for future levels of traffic are based on locomotive unit-hour requirements relative to the 1977 base as derived from the system simulation. Yard locomotive requirements are estimated

V-30

-I

on the basis of detailed review of yard crew starts- and scheduled hours of assignment by terminal and division.

It is assumed that need will no longer exist for short-term leased units during the winter months to replace mechanically defective locomotives.

I ( 4 ) Selection of Retained Units

In reducing the locomotive fleet to meet require­ments of smaller system sizes, the selection of units is based on the following considerations:

Horsepower ratings and adhesion weight (6-axle vs. 4-axle models)

Deferred maintenance expense liability

Physical condition reflected by age, relia­bility and miles

Maintenance and ownership costs per unit

Fleet standardization benefits.

The selection of drop-outs was not based on a site-specific inspection of units or by individual unit appraisal. It is assumed that the selection of drop-outs is not impaired by ownership, conditional sale, or lease status. Appendix 0 summarizes the loco­motive requirements for the various systems.

(5) Locomotive Fuel Consumption

Locomotive fuel consumption per unit-hour is as­sumed to remain constant before and after system fleet and track rehabilitation. The system-wide average fuel consumption rates experienced in 1977 are used uniformly for all operating divisions and terrain.

V-31

--L L

I

f1::..)

I I I

I ]

I ]

14. FREIGHT CAR REPAIR EXPENSE

In developing normalized freight car repair costs, it was not possible to prepare a bottom-up estimate of rehabili ­tation and repair unit costs as was done for locomotives. A detailed physical examination of the Milwaukee fleet of 25,000 cars was not possible and records are not available to reflect Milwaukee Road individual or fleet car condition and repair history. An alternative method was therefore developed to estimate normalized car repair expense based on current and historical car repair expense trends of six selected railroad fleets.

The six Western u.S. railroads selected as a norm for future Milwaukee Road normalized freight car repair expense were:

Burlington Northern Chicago and North Western Missouri Pacific Rock Island Santa Fe Union Pacific.

The five year Account 314 Car Repair Expense trend was obtained for these railroads and the Milwaukee Road from Interstate Commerce Commission Form R-l records. These were analyzed on a constant dollar trend basis with the results shown in Exhibit V-5.

The average car repair expense of $1,060 per car year for these railroads in 1977 is used as the normalized rate for future Milwaukee Road operations. This level is 44 per­cent higher per unit than the 1977 Milwaukee Road actual car repair expense, and is ten percent higher than the U.S. average.

The analysis of selected railroads also included con­sideration of heavy-bad-order trends over the five-year com­parison period. Unit-costs of all roads were adjusted upward as required to a level reflecting 5.5 percent heavy-bad-order ratio typical for the nation as a whole.

To accommodate the different car utilization requirements of the various system configurations being analyzed, the nor­malized car repair expense of $1,060 was divided into a com­ponent which varied directly proportional to car-miles, and a relatively fixed component which varied with time or directly proportional to total units owned.

V-32

III III M III M III III .­U

III at III III III III III

~ t

EXHIBIT V-5 Net System Car Repair Expense Per Car Owned Including Normal

Bad Order Cars Trends for Selected Railroads

1977 CONSTANT VALUE $

1300 ,,"\ MP ':x ~,." \,

1200 / /

/

~....',SF / . .. ....

...,,.. .­..,.. ~ RI •••••• ~

~ ,.... ,.... 1000 en

___ \_ ' - // to. U.S. AVG. $960.... ___•• -.. \ -' 0/ 0 IOJ~

Cl ..~. ~ 0000 w 6·RR AVE. '--.., •• 00 .'

1977 RANGE

$1170' SF ~ "

.".~~ / ~

/ ~ $1060

//./ 6·RR AVG.

Z .' __ ••• '." @oo " ~ 0 UP ---- • '\. /" •••• <l: a: u BN-----~~--/" ...('/ ::iE w .'. //

.,..---~-__ ",,00••I-ell >­ell CNW a: W MILW C­eil I-ell 0 U

MILW. $735

a: 500 -+-------------------------- ­<! C-w a: I-w z

0..1----.......-----....,------....--------..,-------,

73 74 75 76 77

YEAR

NOTES: "NET CAR REPAIR EXPENSE" EQUALS ACCT. 314 MINUS ESTIMATED FOREIGN CARS DESTROYED.

NORMAL BAD ORDER CARS NOT EXCEEDING 5.5 PERCENT OF TOTAL OWNED.

I

~

For purposes of the simulation, the simplifying assump­tion was made that the cost of repairs to system cars oper­ated off~ine was offset by the credits for repairs by Milwaukee to foreign cars on-line. It was further assumed that the expense of Foreign Cars Destroyed is proportional to Account 415 Cost of Clearing Wrecks.

The selection process to add or drop out numbers and classes of cars on the basis of economic advantage is de­scribed under the car-hire methodology.

15. OTHER OPERATING CONSIDERATIONS

Several other operating considerations in addition to those previously outlined entered into the Milwaukee Road study's basic assumptions and results.

Labor Agreements that were in effect in 1977 were assumed to continue in effect. In addition, the 1978 change in the United Transportation Union agreements which provided for smaller operating crews was incorporated.

Four pending trackage-right possibilities were reviewed in detail but not included as part of the operation or financial model output. The re­sults therefore reflect continued operation via the Milwaukee Road's own existing routes between

Savanna, Illinois and Tama, Iowa

Muscatine, Iowa and Polo, Missouri

Green Bay, Wisconsin and Marinette, Wisconsin

Blue Island, Illinois and Terre Haute, Indiana

Estimates were prepared of the potential impact upon annual operating expenses for each possi­bility. None of the individual proposals would result in a change significant enough to alter the total Net Railway Operating Income, nor would the cumulative amount if all were implemented. The coordinations do, however, have substantial

V-33

-\-..

.~.

effect upon rehabilitation costs. This differ­ence is indicated by the two columns appearing in the rehabilitation exhibit in Chapter VI. (Exhibit VI- 7)

Mileages of main tracks were calculated to reflect the trackage that would remain in each configura­tion. Mileages of yard and other tracks were adjusted downward from the base to meet the operat­ing requirements of each system. This adjustment was made by the officers of the railroad after ob­taining key data from the simulation. The result­ing changes, with Booz, Allen staff modifications, were then entered in the model.

Operating facility capital needs were reviewed for the System without LDL and each subsequent config­uration that was studied. Since those options were considerably smaller, it follows that alternate sys­tems have no capital needs for new facilities. The single exception appears in the configurations that include Tacoma, Washington, where the present yard cannot accommodate projected growth and $5.6 million was added into capital needs for these systems.

-.'

16. FINANCIAL PROCESS AND PRO FORMA INCOME STATEMENTS

The Milwaukee Road study includes the output of a computer-based financial model developed to analyze the revenues and costs for each traffic level resulting from the various system configurations studied. The model in­cludes a three-step process for each system configuration:

Inputs consisting of revenues, revenue adjust­ments, costs and activities for each traffic level.

Computation of the detailed and total revenues and costs according to the computation method­ology for each account category. , Generation of pro forma income statements on a 1977 ICC basis estimating net railway operating income for each traffic level.

The pro forma income statements produced by the computer are then analyzed, and any necessary adjustments are determined to arrive at the adjusted net railway operating

V-34 I

----, - ­.- --- _._>- - --. ­

• income. Exhibit V-6 presents an overview of the financial process. Additional details of the model components and

II the major assumptions underlying the pro forma income state­ments are outlined in this section.

• Data input requirements for the model are recorded on either the activity keypunch worksheet, or the pro forma keypunch worksheet. Both documents are produced by the computer to provide a standard format for recording the data input requirements for each of the various system con­

• figurations studied .

(1) Activity Keypunch Worksheet

-- This activity keypunch worksheet provides a record of those statistics unique to each system for each traf­fic level generated by the three computer models.

The revenue model provides the gross freight revenue and TOFC/COFC revenue amounts, as well as carloads originated and terminated in total, and by specified subdivision.

The car hire model provides total freight car miles by categories:-- System on-line/off-line

Foreign on-line Total on-line System billed lessor.

Freight car units maintained, freight car depreciation and the net car hire amount are also provided by this model.

The post processor for the network simulation model supplies the basis for crew starts by yard location and locomotive units by types of service. It also generates:

Yard handlings by yard location

Train-miles by type of service

Tr~iling ton-miles, and

Gross ton-miles by speed class/density level within signal category.

I, V-35

.. ­

I EXHIBIT V-fi Financial Process Overview

I I

/ I ~ I REVENUE CAR HIRE SIMULATION

MODEL MOOEL MODEL

I I SUPPORTING

DATA

I 1977 ICC

R-l

I I

PRO FORMA

KEYPUNCH

WOR KSHEET

I FINANCIAL

MODEL

I I

IMPROVEMENT

ANALYSIS

AND

ADJUSTMENTS

I I I

I I Road property depreciation, lococomotive rents

and depreciation, as well as joint facility and other miscellaneous rents are manually computed forI each system configuration based on the costs reported for these activities during 1977.

(2) Pro Forma Keypunch Worksheet

The pro forma keypunch worksheet provides a record of freight revenue adjustments, revenues other than freight, and all remaining cost elements for the various system configurations studied. The basis for these data requirements are the 1977 Form R-l Report to the Interstate Commerce Commission and estimates of normalized unit costs for maintenance of way and structures, locomotives and freight cars.

Data supporting the R-l Report was also utilized, where more detailed analysis was needed to develop the

I

] data requirements for the model. The principal source of this data was the Milwaukee Road responsibility reporting system, which was used to determine the trans­portation costs associated with the divisional responsi­bilities for trains and yards, station, supervision and administration. In those instances where the responsi­bility reports were used, the costs were calibrated to the total costs reported in the R-l Report for the ap­propriate detailed ICC accounts.

I

An adjusted data base was also established for those Form R-l accounts affected as reduced system con­figurations were studied. For this purpose, detail amounts by states or locations not served by a system configuration are eliminated from the data base for that option, while amounts relating to states or locations partially served by a given system configuration are re­duced by an estimated percentage. The amounts involved were reported under the following descriptions:

Absorbed switching

Milwaukee motor transport charges

I Barge service charges

Switching revenues

Demurrage revenue

]

, V-36I

•Joint facility freight revenue•

I Road property depreciation

Divisional supervision and administration

I State taxes

I All joint facility freight expenditures except maintenance of joint tracks (Credit)

I The data requirements for the pro forma keypunch worksheet were entered in conformity with computation methodology and the basic assumptions underlying the pro forma income statements described below.

I ( 3) Computation Methodology Developed for

Each Model Category

A computation methodology was developed for the model for each defined category, or in the case of

I the divisional transportation responsibilities, by a defined sub-category (e.g., Category--Yard T&E and Other; Sub-Category--Crew Starts). A model category is defined as one or more of the detail accounts listed in the Interstate Commerce Commission Uniform System Accounts. In those instances where more than one ICC detail account is combined in a model category, theI accounts are grouped into related activity areas or functions. Appendix M presents a description of each of the categories utilized in the model with the com­parable ICC detail account or accounts. The AppendixI also indicates the total amount reported within a cate­gory for the ICC accounts in the R-l Report for 1977, and the computation methodology developed for each cate­gory or sub-category programmed in the model.

I ( 4 ) The Model Produces Pro Forma Income Statements on a 1977 ICC Basis

Pro forma income statements presenting net rail­

• I way operating income on a 1977 ICC basis were prepared

for the full system and for each of the eight alterna­tive configurations studied. A computer produced pro forma income statement was prepared for the full sys­tem as of the end of 1977 (Base Case). This pro forma

V-37 I

u

serves as the comparative or calibration statement to Milwaukee Road's 1977 Form R-l Report to the Interstate Commerce Commission. The revenues and costs presented in the base pro forma equal the revenues and costs reported in the related ICC ac­counts for the railroad's 1977 operations, with the exception of those accounts directly impacted by the assumptions which increase cost levels to a normalized condition for maintenance of way and structures, loco­motives and freight cars. No cost benefits (e.g., re­duced loss and damage expenditures) resulting from the normalized maintenance-of-way expenditures are re­flected in the base pro forma.

The pro forma statements prepared for the eight reduced system options present revenues and costs at a level comparable to 1977 operations for each of the reduced networks, as well as at the three assumed market opportunity levels: current, short-term and long-term. Normalized costs are also assumed for these pro forma statements. In addition, the cost benefits from the normalized expenditure levels and the short­crew labor agreement are included.

( 5) Basic Assumptions

The basic assumptions upon which the pro forma statements are prepared are:

The revenues and costs are stated in constant dollars to reflect 1977 rates and costs.

Solely passeDger revenues and expenses, as reported in the 1977 R-l, are maintained on a fixed basis for all networks except the Twin Cities Transcontinental where no pas­senger service would be operated.

Normalized maintenance-of-way expenses are calculated using estimates of unit costs supplied by T.K. Dyer, Inc. These are ap­plied to the track-mile (yard), or speed class/track density levels (road), appropri­ate to the applicable network.

IJ

V-38

I -

~.~.

Normalized maintenance costs of structures- and facilities are estimated by T.K. DYGr, Inc. based upon the estimates of 1977 prop­erty assets in those states or portions ofI a state served by the applicable network, combined with an analysis of historical expenditures.II, Road property depreciation is based on the estimated 1977 ledger value of the property assets in those states or portions of a state served by the applicable system. -

II No road property dismantling or retirements are assumed in the pro forma statements.

-. Major track condition/wreck-related accounts (i.e., foreign cars destroyed, clearing wrecks, and loss and damage) are reduced to reflect the estimated effects of normalized

U maintenance-of-way expenditures in the eight reduced systems.

-. -. All joint facility accounts are based on the

1977 experience for those facilities retained in the applicable network adjusted for volume changes where appropriate. , Normalized unit-cost estimates were used for locomotive and freight car repairs.

-. Other equipment repair unit-costs and mainte­nance of equipment overhead accounts are based on the 1977 R-l actual costs reported.

-. Equipment depreciation costs are adjusted to reflect the locomotive and freight car require­

-. ment estimates for the applicable networks and for the traffic level for which the pro forma statement was prepared.

-. Division transportation unit-costs (e.g., road and yard T&E, station and yard clerk costs, divisional supervision, etc.) are based on the 1977 actual costs, as reported in the Milwaukee Road Responsibility Reporting Sys­tem (BAR 737) reconciled to the applicable" ICC Accounts in Form R-l.

V-39

"'1.~_.

PI III JIll III III III III III III ~

III ~

III III III ~

III III -..

Other transportation expenses and transporta­tion overhead accounts are based on the 1977 R-l actual costs reported.

Traffic and general 'expenses are based on the R-l actual costs. For reduced system configurations, traffic and general expenses were reviewed on a location basis by depart­ment and function. Appropriate expenses were either eliminated or reduced from 1977 levels based upon an estimate of locations and work­load that would remain in each reduced system. The financial model results reflect this analy­sis. As discussed sUbsequently on adjustments to NROI, this total was further adjusted down­ward to reflect management efficiencies bring- , ing expenses down substantially to the same level in relation to revenues as they are on Chicago & North Western and Rock Island.

Percentage estimates are made on the direct employee cost component for normalized mainte­nance of way and structures and locomotives. All other direct employee cost components are based on the Milwaukee Road's 1977 experience by ICC detail account.

u.s. Government employee compensation taxes are based on the Milwaukee Road's 1977 experience.

Taxes other than u.s. Government are based on the 1977 taxes reported for those states served by the applicable system with the ex­ception of Minnesota, where the gross receipts tax was estimated relating to revenue volume for the reduced systems.

V-40

'._'.

VI. RESULTS OF DETAILED STUDIES

-:.-r' , . .''"-..­

VI. RESULTS OF DETAILED. STUDIES

The results of the detailed studies are directed at providing the Trustee with a base of information to be used in his determination of whether there is, within the exist­ing Milwaukee Road structure a viable, reorganizable rail­road, in whole or in part. "Viability", as it relates to this study, is a concept which can be defined in the extremes, but otherwise is a matter of judgment, as risks are weighed a~ainst opportunities.

In the past, under the conditions contemplated when Section 77 came into being, the reorganization of a rail­road could be accomplished by restructuring the bankrupt's capital since the underlying property was generally presumed to be "viable". Now, however, the cumulative toll of decades of not always enlightened regulation and the massive funding of the infrastructure of competitors has driven out of the railroad industry much of the entrepreneurial and management incentives which existed in their early history. This has placed the nation's railroads in a situation where the basic sickness often is far more serious than recapitalization can cure.

It is not the purpose of this report to reconstruct history and attempt to identify the numerous contributors to the problem that now faces railroad Trustees. The focus of this study has been to develop analyses of the options the Trustee of the M~lwaukee Road might pursue in an attempt to make the best of the bad situation he inherited following the bankruptcy.

The constitutional rights of the creditors demand that the Trustee and the Reorganization Court carefully balance the risks and opportunities of continued operation of all or part of the system with the interests of the public. From a socioeconomic, rather than a legal perspective, if the risks in any option are small or the potential oppor­tunities are great, the creditors' interest in the reorga­nized company would presumably justify satisfaction of the interests of the public. On the other hand, if the risks for the creditors are great and the opportunities marginal, serving the public interests may require public support.

I VI-I

I VI-2-­

Commitments for equipment

Commitments for plant rehabilitation

Likelihood of achieving operating improvements

Other potential improvements1.1 U Overall assessment of risks

Other considerations not analyzed.

(1 ) Managerial Requirements

u The managerial requirements reflecting the scale and complexity of the business will vary with each

u

. option. These requirements are particularly crucial if a turnaround is to be successfully accomplished Principal determinants of the magnitude or the manage­rial requirements which can be quantified would include the size of the system in terms of (1) revenues gener­ated, (2) revenue carloads to be moved, (3) route miles to be maintained, and (4) the number of employees to be managed. The managerial complexities of the various options are harder to quantify on an overall basis and are considered specifically under the various risks and opportunities discussed in the remainder of this chapter.

1. Differences in "Size" of the Configurationsu AS shown in Exhibit VI-I, the various con­figurations have quite different magnitudes, and in fact differ significantly among the dimensions of revenues, carloads, route miles, and employees. For example, the System without Light Density Lines has 83 percent of the route miles of

U the Base System, but retains 97 percent of the gross freight revenues and revenue carloads and requires 93 percent of the employees.

LI 1.1 The Sub Core, the smallest system analyzed,

utilizes only 22 percent of the route miles of the System without Light Density Lines, but re­tains 53 percent of the carloads. On the other hand, Sub Core, with shorter hauls, retains only 35 percent of the revenues and requires 41 per­

II cent of the employees.

LI VI-3

II

r __ lllilliilllill

:~EXHIBIT VI-l ~

1977 Level Statistics

COMPOSITE INDEX MILES OF ESTIMATED NUMBER

GROSS FREIGHT REVENUE REVENUE CARLOADS ROAD OPERATED"SCALE" OPTIONS OF EMPLOYEES~ ~ (000) (000) Index (000)~ Index

1.10 Base 434.8 1. 03 867 1. 03 9.6 1. 20 11. 4 1. 07 1. 00 System wlo LDL 423.6 1. 00 845 1. 00 8.0 1. 00 10.7 1. 00 0.62 Core 248.2 0.59 645 0.76 3.9 0.49 6.6 0.62 0.69 Miles City Core 269.4 0.64 683 0.81 4.7 0.59 7.1 0.66 0.39 Sub Core 146.3 0.35 444 0.53 1.7 0.21 4.4 0.41 0.45 Miles City Sub Core 168.1 0.40 480 0.57 2.5 0.31 4.9 0.46 0.46 Kansas City Sub Core 182.0 0.43 498 0.59 2.4 0.30 5.1 0.48 0.61 Louisville Transcon 271.1 0.64 572 0.68 3.9 0.49 7.0 0.65 0.43 Twin Cities Transcon 168.8 0.40 270 0.32 4.5 0.56 4.3 0.40

-­2. Value of Computer Analyses of "Scale"

Differences lwII ~ The tradeoffs between route miles to reha­

bilitate and maintain and carloads handled, em­ployees supervised and revenues generated, reflect the interactions of the cost and investment factors1,11 considered in the detailed computer analyses which have been carried out in this study as described in Chapter V. In the past, lacking the sophisti ­cation of these state-of-the-art procedures, judgments on these tradeoffs were often made by comparisons of statistics, as shown in Exhibit VI-I. Unfortunately, the interactions between these

LwII &wII

characteristics are extremely involved and past judgments often failed to recognize one or more dimensions of the problem. For example, the optionsIwII involving longer hauls would be expected to show greater revenue per carload, and, as expected, the Twin Cities Transcontinental option generates 1.91,11 times the revenue per carload and 18 percent more revenue per employee than the Sub Core. On the other hand, the Sub Core generates 2.2 times the revenue per route mile as the Twin Cities Trans­<a,. continental option. As reflected in the analyses of NROI and the rehabilitation and equipment com­mitments, the analytical process used here makes it possible to relate these differences without relying on rules-of-thumb and raw judgments.1,11 3. Managerial Requirements Related to "Scale".,. While managerial requirements might vary in­versely with the Gross Freight Revenues related to the other "scale" dimensions, since higher unit revenues provide the managers with greater margins~ in which to manage, an overall determinant of managerial requirements are the basic scale dimen­sions: number of carloads to be moved, miles of.,. road to be operated and maintained, and number of employees to be supervised. Simple averaging of the index values of these three "scale" elements.,. produces the composite "scale" index, as shown in Exhibit VI-l. While on this basis the Sub Core would appear to offer the easiest management task, it would appear that the other two Sub Core options~ and the Twin Cities Transcontinental option would result in managerial requirements of generally

~ a.­ VI-4

la

similar magnitude due to the "scale" within the range of thi~ admittedly imprecise process. Any of these optlons should present easier management dem~nd~ than either of the Core options or the LOU7svllle Transcontinental option and be far eaSler to manage from the standpoint of "scale" when compare? with the present Base System or the System wlthout Light Density Lines.

4. Managerial Requirements If High Level Forecasts Achieved

L. ­

The managerial complexities involved in achieving the "high" level forecasts for long­term growth are discussed in the next section of this chapter which also points out that reach­ing those goals will increase the difficulties of managing the railroad proportionally. Exhibit VI-2 shows the projected gross freight revenues, revenue carloads, and estimated number of employees for each option, as well as a "scale" index com­paring the options on that dimension and an index comparing each option with the 1977 value. As can be seen, the relationships between the options re~ main generally constant with an overall increase in the "scale" dimensions of about 35 percent for~ revenue carloads and about 18 percent for employees.

I Assuming that the miles of road remain constant, the overall effect on management requirements after achieving the "high" forecast of growth would bet,II about 18 percent compared with the 1977 traffic levels for each option except Twin Cities Trans­continental, which would be only 11 percent. The broad relationships of the options would under ~ those circumstances remain about the same as at the 1977 traffic level. In any case, the smaller options should represent a sUbstantially easierL,II management situation at either forecast level than the present system. For the smaller systems, this is partly offset by the ~an~gerial complexities

I and risks inherent in accompllshlng the turnaround of the company. The d~fficult~es and r~sks of man­aging the turnaround wlll be dlscussed ln Succeed-

l,II

lrII ing sections.

~

~

~ VI-5

~

---

1

I !- .P .. .II • • -,_ ,! .. I I • -,- .. • -:- • • EXHIBIT VI-2

Long Term Level Statistics

ESTIMATED NUMBER GROSS FREIGHT REVENUE REVENUE CARLOADS OF EMPLOYEES Index Index Index

OPTIONS vs 1977 ($Mil) Index vs 1977 (000) Index vs 1977 (000) Index

System wlo LDL 1.43 621.6 1.00 1.35 1,138 1.00 1.18 12.6 1.00

Core 1.46 361.8 0.58 1. 37 885 0.78 1.18 7.8 0.62

Miles City Core 1.45 390.2 0.63 1.36 930 0.82 1.17 8.3 0.66

Sub Core 1.43 208.5 0.34 1.36 605 0.53 1.16 5.1 0.40 I

Miles City Sub Core 1.41 237.4 0.38 1.35 648 0.57 1.14 5.6 0.44

Kansas City Sub Core 1.44 261.9 0.42 1.36 677 0.59 1.18 6.0 0.48

Louisville Transcon 1.44 390.7 0.63 1. 33 763 0.67 1.17 8.2 0.65

Twin Cities Transcon 1. 35 228.6 0.37 1.18 318 0.28 1.16 5.0 0.40

~

,­

(2) Uncertainty of Traffic Projections

As noted earlier, projecting future traffic levels for a railroad is always uncertain; project­ing reversals of past trends involves even greater uncertainty both as to the extent and the timing of such a reversal. On the other hand, it is logical to expect that a railroad operating a rehabilitated plant with ample locomotives and equipment should be able to recover at least some of the traffic lost when it lacked these essential components of compe­titive service.

In assessing the revitalized Milwaukee Road's market opportunities, consideration has been given to:

The views of Milwaukee Road customers

Specific market opportunities identified by Milwaukee Road marketing and sales officials

Macro-economic projections

Trends in the railroad industry's pratici ­pation in past economic growth.

Recognizing the uncertainties inherent in traffic projections, the findings of this study are presented throughout with "high" (market opportunities) and "low" (1977 level) projections. The high and low projections do not actually represent extremes. In fact present total traffic levels are below the "low" projection, reflecting in part shipper uncertainties as to the Milwaukee Road's future and further deter­ioration in service levels since 1977. On the other hand, several of Milwaukee's marketing and sales officials have indicated their belief that the "high" projection is too pessimistic about the road's future. Outside observers of the railroad industry, consid­ering past trends, consider the "high" projec­tion to be unrealistically optimistic,_implying that the "high" estimate requires everything to go in the Milwaukee Road's favor. While probabilities have been applied to the individual market opportunities

VI-6

\.1 l

and they have been individually discounted to a more realistic level, the ability of the Milwaukee Road to achieve such gains in all 25 commodity groups simul­taneously, without offsetting losses, appears to re­quire overcoming Murphy's Law*.

Achieving the full level of market opportunities (the "high" forecast) represents a major management challenge. Although optimistic, it is not totally beyond reach, especially in those options where manage­ment attention can be focused and the prerequisite rehabilitation of track on key routes and concentration of the car and locomotive fleet can be accomplished quickly.

As shown in Exhibit VI-3, achieving the Market Opportunities in each option would result in a sub­stantial increase in carloads and revenues compared with the 1977 traffic level (which, as noted, is sub­stantially above Milwaukee's current total traffic level). Achieving the Market Opportunities would crease carloads above 1977 levels between 22 percent and 26 percent with the exception of the Twin Cities Transcontinental option which is 13 percent. Revenue increases range from 26 percent to 34 percent across the options.

The effects of economic growth based upon a macro-economic forecast to 1986 result in more modest carload increases above the Market Opportunity level of from 8 to 11 percent (except Twin Cities Transcon­tinental which is only 4 percent). Revenue increases range from 8 to 13 percent for all options.

Compounding economjc projections with the market opportunities results in increases in carloads of 33 to 37 percent, with the exception of the Twin Cities Transcontinental which gains only 18 percent in car­loads and 35 percent in revenues. Revenue gains on a compound basis run between 41 and 47 percent for the other options. While the System without Light Density Lines shows the highest potential traffic growth, the risks are high in not achieving that growth because that option would permit very little concentra­tion of locomotives, cars and management attention and would require the most massive rehabilitation program.

* Murphy's Law can be paraphrased as follows: "if anything can go wrong, it will."

VI-7

.__ -aT • .~ ..~--~i_ .. • .... -­III II II- - • • • ••• • EXHIBIT VI-;-3

Effect of Market Opportunities and Economic Forecast 'I

Percentage Increase In:

System w/o LDL

%

Core

%

Miles City Core

%

Sub Core

%

Miles City Sub Core

%

Kansas City Sub Core

%

Louisville Trnscn

%

Twin Cities Trnscn

%

Market Opportunities VS 1977 Level

Carloads 25 26 25 23 22 23 22 13

Revenue 34 32 31 26 26 27 30 26

1986 Economic Forecast vs Market Opportunities Level

Carloads 8 9 9 11 10 10 9 4

Revenue 9 11 10 13 12 13 11 8

Long Term Compound Effect Vs 1977 Level

Carloads 35 37 36 36 35 36 33 18

Revenue 47 46 45 42 41 44 44 35

I

I

I

I As shown graphically in Chapter IV, Exhibits IV-8 through IV-ll, the railroad industry's partici ­pation in the growth of the economy in recent yearsI has been disappointing except for coal traffic which accounts for most of the tonnage growth both for the Milwaukee Road and for the industry as a whole. Major Milwaukee Road coal movements can be projected with some accuracy over the next five to eight years due to the lead time to bring new plants or mines on line. Therefore, coal traffic projections have been estimatedI on a specific basis. Economic growth projections used for other commodities reflect a 50 percent reduction in the rate of railroad market share loss based on an assumption that the regulatory climate will improve for railroads between now and 1986. The economic pro­jections thus reflect a favorable adjustment in the trend for the entire industry and could therefore beI considered optimistic. On the other hand, government's role both as a causal and potentially remedial factor in the railroad problem is being recognized. There

I I are signs that regulatory changes favorable to the

railroad mode may be made and the modest gains used here may be achievable.

Of greater concern are the projected traffic gains attributed to achieving the identified Market Opportuni­ties. Based on Milwaukee's past performance, the pro­I jected carload and revenue increases are staggering; however, in the past Milwaukee's equipment and loco­motive fleets as well as plant have been deterioratingI rapidly while many of its competitors have added equip­

.ment and maintained or improved service. 'I I

In the survey of shippers, there was a strong indication that to recapture its traffic and secure new business Milwaukee must offer competitive levels of equipment availability and comparable service. The costs included in the investment base and estimates of NROI reflect both of these conditions, so it is logical Ito assume that at least some traffic is regained as a Iiresult. ! , (3) Commitments for Equipment

Shrinking the railroad should permit Milwaukee to concentrate its cars on its remaining customers and on new opportunities as well. The projected car require­ments for each option are shown in Exhibit VI-4. In

VI-8

.. ;I! ,".~• ~- •• • .- • • I"

EXHIBIT VI-4 Freight Car Summary

1 ~

1977 Fleet Including Heavy Bad Orders and Cars Over 40 Years Old: 24.1

1977 Base Normalized Fleet: 21.9 (Including 7.5 Leased)

-------------------------Thousands of Cars--------------------------­

System wlo LDL Core

Miles City Core

Sub Core

Miles City Sub Core

Kansas City Sub Core

Louis­ville Trnscn

Twin Cities Trnscn

Traffic Recovery To

1977 Levels

Total

Leased

27.8

13.3

17.9

5.8

18.9

6.1

12.0

2.0 2.2

12.9 13.7

3.1

17.2

4.6

10.9

1.6

Traffic Adjusted For

Market Opportunities

Total

Leased

Market Opportunities And

Growth to Long Term Levels

Total

Leased

36.7

22.2

34.7

20.3

25.1

12.9

23.7

11.6

26.3

13.5

24.8

12.0

17.0

6.4

15.3

4.9

18.1

6.9

16.4

5.3

19.4

8.6

17.7

7.0

24.4

11.5

22.4

9.6

14.2

2.8

13.6

2.4

-,. ¥I YI ... YI .,.

Exhibit VI-5 it is seen that the greater the shrinkage, the more of the traffic potential that can be covered by the existing car fleet and the less the new invest­ment (and associated risk) involved. In the larger system option~ substantial equipment investments would be required, generally before the projected new traffic could be secured. There would, of course, be an in­creasing risk that the acquired equipment would not in fact attract the new business anticipated. However, as long as general equipment shortages existed for that equipment type, this risk would be at least partially offset by per diem receipts.

By shrinking its plant substantially, Milwaukee Road would have a short-term equipment windfall oppor­tunity compared with some of its competitors which might have their car fleets dissipated over a larger customer base.

Improving service will also require adequate locomotives. Shrinking the system will reduce the locomotive investment required to provide the service improvements necessary to achieve the market opportunities.

As shown on Exhibit VI-6, all options except the System without Light Density Lines would require fewer locomotive units than are presently available in Mil­waukee's normalized fleet even at the high traffic projection. This will permit upgrading of the remain­ing fleet by retiring the less reliable units and will provide better coverage of train requirements which would enhance service levels. The smaller the system, generally the less the locomotive requirements and the more significant the impact on service reliability. It is assumed that unnecessary serviceable units would be leased to other railroads as described later in this chapter.

(4) Commitments for Plant Rehabilitation Prior to Traffic Recovery

Rehabilitating the plant to competitive levels introduces major risks since, unlike locomotives and cars, the plant cannot be moved to more attractive markets or off-line if the competitive advantages expected are not realized. Additionally, plant reha­bilitation is a prerequisite to improving service but even after rehabilitation, customers indicated through the shipper survey that Milwaukee must prove over time it can provide consistent service.

VI-9

EXHIBIT VI-.5 Freight Car Requirements l

------------------------Thousands of Cars---------------------­

Miles Miles Kansas Louis­ Twin System City City City ville Cities wlo LDL Core Core Sub Core Sub Core Sub Core Trnscn Trnscn

Traffic Recovery to 1977 Levels

Difference From 1977 Normalized Fleet 5.8 (1.7) (1.4) (5.5) (5.3) (4.4) (2.9) (5.9)

Traffic Adjusted for Market Opportunities

Difference From 1977 Normalized Fleet 12.8 4.1 4.5 (2.6) (2.2) (0.5) 2.1 (5.1)

Market Opportunities And Growth To Long Term Levels

Difference From 1977 Normalized Fleet 14.7 5.4 6.0 (1.1) (0.6) 1.1 4.0 (4.7)

Over 40 Year Old Dropouts* 3.1 1.8 2.5 1.1 1.4 1.4 2.3 1.8

Total Additional Cars Required 17.8 7.2 8.5 0.8 2.5 6.3 (2.9)

*40 Year Dropouts Have Not Been Included in the NROI Pro Formas.

- - ~ .~ --- --- - ... - .- ... .­ - .. .. - - ­EXHIBIT VI-6

Locomotive Sumrnary-Total Units Required

J

1977 Actual - 705

1977 Base Normalized - 628

Miles ~1iles Kansas TwinSystem City City City Louisville Citiesw/o LDL Core Core Sub Core Sub Core Sub Core Trnscn Trnscn

Traffic Recovery To

1977 Levels 563 349 376 217 246 257 346 209

Traffic Level With

Market Opportunity

Recapture 664 400 426 241 271 285 399 235

Traffic Recapture And

Growth to Long Term

Level 703 422 451 255 303 240284 416

-

---'-----. --- -- ---_._­

..

..

..

..

There is no guarantee that a rehabilitated plant will be competitive since it may be longer, single tracked, have more grades or curves or otherwise be inherently slower than a competitive route; yet re­habilitation may be necessary just to operate. Addi­tionally, the competitor may also have a normalized plant. Finally, the carrier with the greatest market share has the best opportunity to use run-through train service greatly reducing costs and delays at intermediate yards enroute. For example on the run from Chicago to Seattle on which Milwaukee introduced previously unmatched 55-hour service in the mid-1960's, the Milwaukee now requires over 130 hours while the BN currently offers service competitive with Milwaukee's best mid-sixties service. with complete plant rehabil ­itation on that route, Milwaukee should again be com­petitive and would be expected to regain some of the traffic it lost as its service declined. Diminishing this potential gain, however, is the limited number of traffic sources served directly by Milwaukee both enroute and on the west coast. This was considered in projecting success probabilities on this route .

On the Chicago to Omaha route, Chicago and North Western (CNW) is well along in rebuilding its route and has established many run-through connections with the Union Pacific (UP) and eastern connections. On much traffic,CNW acts as a conduit between the UP and the eastern roads with UP hump yards assembling Conrail, Chessie, and Norfolk & Western (N&W) blocks for direct CNW delivery without further yarding. This not only expedites service on the CNW route, but reduces CNW costs for handling the cars and equipment costs. While a rehabilitated Milwaukee Road (including trackage rights on CNW part of the way) would offer shippers faster service than the Milwaukee can offer now, the ability of the UP to block overhead to eastern connec­tions via CNW would be dissipated if the bulk of the traffic were disaggregated between the CNW and Milwau­kee Road routes. The Milwaukee would have difficulty overcoming this competitive service advantage of the CNW even with a rehabilitated plant to capture an equal share of that market. For this reason, in review­ing the market opportunities involving this corridor, a relatively small gain in market share was projected even with a rehabilitated plant.

In contrast, the Milwaukee Road in the Chicago to Twin Cities Corridor, has the most direct and potentially fastest route. Much of this line is now

.. VI-IO

it

,.,~ p,,, Pi" .,. ,. ..fA fA III ",1/1 ,. IJII -,iii

EXHIBIT VI-7 Plant Rehabilitation Estimates

,'!

Millions of Dollars

Total Rehabilitation Net Rehabilitation Requirement to Bring Track to Com­ Minimum Requirement in Excess of petitive Levels at the End of 1977 Ten Year Normalized Maintenance

Wi thout Coor- With Without Coor- With dinations Coordinations dinations Coordinations

System Without LDL 482 447 231 215

Core 248 213 103 87

Miles City Core 286 251 131 115

Sub Core 125 108 51 45

Miles City Sub Core 163 146 74 68

Kansas City Sub Core 159 128 72 60

Louisville Transcon 249 232 134 128

Twin Cities Transcon 258 258 130 130

.­

.. .. • }

I I I I J I •

being rehabilitated and with the introduction of the "Sprint" service, it is believed Milwaukee is captur­ing not only traffic from competitive railroads, but off the highways as well.

In each case the specific competitive situation was reviewed in assessing the success probabilities resulting from rehabilitation. Generally, the traffic gains projected were modest compared with the total rail market. While these gains were substantial com­pared with Milwaukee's present traffic levels, they are considered realistic. The high and low projections thus reflect a reasonable range of future traffic levels consistent with the assumption of adequate cars and locomotives and a rehabilitated and normally maintained plant as reflected in the NROI projections.

(5) Rehabilitation Requirements

The commitment for rehabilitation represents a major risk especially in the larger system options . As shown on Exhibit VI-7, the total rehabilitation expenditure ranges from $125 million for Sub Core to $482 million for the System Without Light Density Lines. Adjusting the rehabilitation estimate for coordina­tions current~y under study would reduce Sub Core to $108 million with $447 million required for the System without Light Density Lines. This investment would be reduced by rehabilitation projects currently under­way such as the federally-funded project on the Milwaukee-Twin Cities corridor.

Since much of the restoration work required would be accomplished through normalized maintenance as visualized in the NROI calculations, net rehabilita­tion represents the minimum rehabilitation expenditure necessary in the next ten years in addition to normalized maintenance. With contemplated coordinations, the net rehabilitation requirements range from $45 million for Sub Core to $215 million for the present System without Light Density Lines.

The net rehabilitation required on options to the west coast would be from $128 million for the Louisville Transcontinental to $215 million for the System without Light Density Lines. The transconti ­nental traffic is highly competitive with both UP and

VI-II

•••••••

BN. Each of these railroads has adequate equipment and transit times are less than half those presently required by Milwaukee. Thus, much plant rehabilitation investment would be necessary before competitive service could begin. Even then, the Milwaukee might obtain only a token penetration of the UP and BN market share, since their financial and competitive muscle is far greater than Milwaukee's under the most ideal foreseeable conditions.

In contrast, the rehabilitation investment in the Sub Core options is much more modest and the Milwaukee's competitive position stronger with much of its traffic source online. In addition, many of the competitive rail lines are relatively weak with their resources, in some cases, spread over systems equal in size to those now operated by Milwaukee Road.

..

The Net Rehabilitation expenditures shown on Exhibit VI-7 are in large part required to continue operations at any reasonable service level, and in many cases must be made where needed. These urgent requirements limit the Milwaukee's ability to focus rehabilitation on key competitive routes. In the process, however, it should be possible to recognize some competitive priorities in the rehabilitation ef­fort, thus expediting somewhat traffic gains on those routes. Additionally, even before extensive rehabili­tation, some of the traffic should be regained with the concentration of equipment on remaining customers and with the availability of more reliable locomotives. Finally, there is little doubt that present and poten­tial customers have become aware that the Milwaukee Road's continued existence depends upon their support. Revenue-producing carloads must be routed via the Milwaukee Road as soon as cars and locomotives are available. In the shipper survey, there was much good will expressed toward the Milwaukee Road. If Milwaukee can deliver, it should be able to mine some of that good will in terms of traffic recovery.

(6) Potential for Achieving Operating Improvements

The estimates of NROr for the high and low traf­fic projections for each option reflect some operating improvements beyond 1977 levels. While these operating improvements are included in the data generated by the

VI-12

_--------..............iiiiiI....--~l'I!J!!!!!!!!

I I various models, achieving them will require specific

management action. Failing to implement these im­provements is a risk inherent in those options. On

I I the other hand, the level of improvement assumed in

each case should be achievable, especially in the smaller, less complex operations.

1. Improved Blocking and Train Handling

As previously noted, the computer network simulation produced a blocking and train opera­tions plan for handling each flow. Through theI iterative processes of using that model, block­ing and train operations were designed to minimize rehandling of car flows between the various origins and destinations. Improvements in blocking and train handling developed in the model ranged from zero to 15 percent, depending on the option with the greater improvements in the smaller systems

I I which would have capacity for increased classifi ­

cations in existing facilities. Reductions in handlings mean less crew activity and ultimately

I

the cost reductions which were included in the NROI calculations. Car cycles would also benefit from fewer handlings and this was taken into account in per diem calculations. Since the blocking and train handling plans produced by the model are quite ex­plicit and in a form readily used by operating of­ficers, these improvements should be fairly easy to implement.

I 2. Train Size and Crew Cost Adjusted to Reflect Current (1978) Milwaukee Road Labor Agreement

I

I

In carrying out simulations of blocking and train handling, advantage was taken of the Milwaukee Road's new crew-consist agreement which limits train sizes to 120 cars to permit full utilization of crew reductions on trains below that limit. The result ­ing crew-cost reductions, net of the productivity fund payments and other adjustments, were included in the cost base. With close management of crew assignments, these cost reductions should be achieved.

I VI-13

I

3. Milwaukee Terminal Improvements

The cost base has been adjusted to reflect productivity improvements already realized in the railroad's Milwaukee terminal, resulting from capital expenditures and operating changes made following an FRA case study of the facility (and other terminals on three other railroads) in 1977. These cost reductions were not reflected in 1977, but have since been achieved and were thus included in the cost base for this study. It is assumed that management of the Milwaukee terminal, a major terminal in the system, will at least retain the productivity improvements already accomplished.

4. Car Cycle Time and Cost Reductions Resulting from Rehabilitation

Rehabilitation of track should naturally re­sult in improved car transit times and in crew cost reductions related to overtime and recrewing. The cost base and simulation models have been ad­justed to reflect faster transit times over indivi­dual lines (links) resulting in reduced car cycle times and lower crew costs. Locomotive requirements have also been trimmed to reflect better utilization of units resulting from improved link transit times. These adjustments to car and locomotive running times have been made in the model and are calculated on a link specific basis and should, with reasonable management attention, occur almost automatically following rehabilitation. Effective operating super­vision is required to ensure that crews get over the road and do not drag out their operations to continue 1977 overtime and penalty payments.

Derailment and other casualty expenses have also been adjusted to reflect the level of better maintained railroads which should be expected on a rehabilitated Milwaukee Road.

5. Improved Car Hire Policies

In developing the state-of-the-art car hire model used in these studies, it was discovered by Milwaukee Road personnel responsible for car

VI-14

_ -_ ----- ----~ - • -- _..: - __7_- --=--_ -----~-----

I I I I I I f

I

hire that some of the railroad's past practices could be made more effective. These policies are now being changed and transportation officials have indicated that they will use the car hire model for additional tests. Thus, to the extent that the policies implicit in the car hire model differ from Milwaukee Road practices of the recent past, improvements are being made in those prac­tices matching the assumption used in the car hire model and reflected in the NROI.

(7) Other Potential Improvements

In addition to the operating improvements assumed in the simulation and financial models for developing NROI, there are several potential improvements within the managerial control of the Trustee, which for tech­nical reasons have not been included in the structure of the models. The potential improvements used to adjust the NROI are shown in Exhibit VI-B. Appendix N indicates tlfe total adjustment amount realizable from the potential improvements at each traffic level for the eight options. Accomplishing these improvements, along with the many others included in the model and discussed in the preceding section, will require management commit­ment and attention. While these goals should be indivi­dually achievable, accomplishing all or substantially all of them, while reorganizing the company, rehabilitat ­ing the plant and equipment and meeting the market ob­jectives, will be a major undertaking. This is especially true where the scale or "size" of the system and the re­sulting management requirements have not been reduced substantially through a shrinking of the system.

1. Operating Improvements in Other Major Terminals

It was assumed that in a reorganization the Trustee would direct the management to carry out productivity improvement programs in major terminals, similar to those already accomplished at Milwaukee and that proportional results would be achieved in the Twin Cities and Chicago~ Ap­proximately half that level of improvement is assumed to be achievable in the other large terminals operating in each option. These produc­tivity improvements are anticipated in addition to

VI-IS

--• EXHIBIT VI-8 Potential Improvement-

I COMPONENTS

I Operating Improvements in Major Terminals Similar to Those Accomplished in Milwaukee

Traffic Department Expense Reduced to 1977 cm~-RI Ratio of 2.1% of Total Revenues

I General Expenses Reduced to 1977 CNW-RI Ratio of 4.6%

I Potential Contribution of the Experimental Sprint Operation Beyond Traffic Which is Included in the Model

I Long Term Benefit of Welded Rail in Reducing Normalized Maintenance Expenses

I

I Income Potential From Marketable Milwaukee Owner­ship Cars and Locomotives That Projected Traffic Levels Do Not Require.

I I

I I I

I

I

I I

,:..H

~roportional force adjustments, given the changes ln workl~ad at each ~ard for each option and re­flected ln the blocklng and train handling plan.

2. Reductions in Traffic Department Expenses to Match Competitors

In the financial model, Traffic Department expenses were retained in each option as a con­stant percent of total revenues (2.4 percent). Since Rock Island and CNW traffic expense ratios in 1977 were somewhat lower, Milwaukee expenses were reduced to the same ratio, 2.1 percent. In reality, as an element in reconfiguring the railroad as a reorganized property, a position-by-position analysis should be made of the traffic department for the chosen scenario, depending on the nature of its mission. In those scenarios where Milwaukee would compete head-to-head with major carriers for overhead traffic, the traffic department require­ments would differ from those options where the Milwaukee traffic base consisted primarily of on­line customers. The assumption of a lower Traffic Department ratio reflects an observation that the department is currently overstaffed, probably re­flecting Milwaukee's recent accelerated rate of decline in ability to provide competitive service levels. As the plant is rehabilitated, and equip­ment becomes available, and after Milwaukee re­positions itself in the market, the traffic organ­ization and forces should be adjusted appropriately to deal with their new mission.

3 . Reduction in General and Administrative E~penses

In 1977 the operating ratio for general ex­penses on the Milwaukee Road was 6.4 percent of total revenues. As with traffic expenses, the CNW and Rock Island were similar to each other aver­aging 4.6 percent. The Trustee has made much prog­ress in reducing Milwaukee Road expenses since 1977 but, it is felt further stringent controls can re­duce this expense to the 4.6 percent level.

VI-16

u,

I ]-1

I u u

--­lJ II U

4. Potential Contribution of "Sprint Service"

On June 4, 1978, Milwaukee Road introduced its new short-train truck-competitive piggyback concept called "Sprint". This service, developed as a demonstration in cooperation with FRA, has had wide acceptance. The NROI on a 1977 basis has been adjusted to reflect the expected contri ­bution of this new traffic source which shows great promise in the future in this market.

5. Long-Term Benefit of Welded Rail

Until recently, Milwaukee had little welded rail in track. The installation of welded rail in replacement for bolted rail provides a long­term benefit in lower normalized maintenance ex­penses, since the welded rail significantly re­duces track maintenance which is otherwise heaviest at joints. This benefit builds up gradually and would not justify wholesale replacement of exist ­ing serviceable bolted rail on a present-value b~sis. However, where bolted rail is taken out of track in normal or programmed maintenance and replaced by welded rail, a long-term benefit is eventually achieved. This benefit is only con­sidered in the long term or high projections. Maintenance budgets should eventually be adjusted to reflect welded rail economies.

6. Income Potential from Leasing Out Excess Cars and Locomotives

In most of the options, Milwaukee Road is expected to have excess cars and locomotives. In this study it is assumed that the Trustee will retain the owned locomotives which would be attractive for lease to other railroads as well as the owned surplus serviceable cars which could be used to earn rental income. This not only provides income on the retained equipment, but also gives the Milwaukee Road flexibility in meeting its future markets. Changes in per diem rules or considerations such as obsolescence would reduce the attractiveness of this arrangement

VI-17

.';~.

and would require a review of this assumption, which has a significant effect on the adjusted NROI. The alternative of eliminating the ex­cess cars and locomotives from the Milwaukee Road roster would have a negative impact on NROI, but would reduce capital commitments due to the cash availability from the sale of the equipment.

(8) Overall Assessment of Risks

To achieve the high NROI projected for each of the options outlined in the next section will place great demands on Milwaukee Road's management. As previously noted, reducing the scale of the manage­ment requirements should offset in part these demands; however, achieving the full market opportunities will in itself be a major undertaking. Effective monitor­ing of the rehabilitation program to ensure that such investments are applied in the most productive manner is another major task. While many of the operating improvements assumed tend to flow naturally from the rehabilitation program, all will require careful direction and control to ensure that benefits are not dissipated. Additionally, some of the improvements assumed such as terminal productivity will require specific management commitment. None of the improve­ments standing alone are probably beyond management's capabilities. On a cumulative basis, however, there are major risks that the entire program can be accom­plished especially in the larger system configurations. From the previous analysis of the nature and magnitude of the risks involved, it appears that the management risks are generally diminished as the size and complex­ity of the system is reduced.

(9) Other Considerations Not Analyzed

A number of major considerations impacting the risks and opportunities involved in the various options were outside the scope of this study and have not been specifically analyzed. These considera­tions include:

Inflation--All analyses have been carried out in 1977 dollars for both costs and rates. High levels of inflation have been

VI-18

••

+­-.. .. .. .. ~

...

detrimental to railroads generally because of the lag between rising costs and achiev­able increases in rates. Additionally, the less efficient, higher cost carriers such as Milwaukee suffer from the limitations imposed by general rate increases based on require­ments of the more efficient carriers who fear diversion of traffic to other modes if infla­tion-driven rate increases are in excess of their needs. This is a major concern for the Milwaukee.

Deregulation--No estimate has been made of the potential effects of rail deregulation on the Milwaukee Road since it is uncertain at this time whether significant deregulation will oc­cur and what form it may take. Although weaker railroads may be increasingly vulner­able to the competition from stronger roads, deregulation may permit much-needed rate ad­justments on below-cost movements. This rate­making approach will require careful manage­ment and realistic cost and economic analyses. Widespread truck deregulation could have ser­ious effects upon railroad traffic and earnings, especially if the railroads were still regulated or unprepared to react effectively. This is also a major concern .

Labor Protection--Because the legal status of labor protection under the various alternatives is not clear at this time, no attempt has been made to estimate labor protection exposure in this study. To the extent that a labor protec­tion liability exists for any or all of the options, its potential magnitude will be highly significant.

Revisions in Labor Agreements--The analyses carried out in this study reflect existing labor agreements including the changes in crew­manning already negotiated by Milwaukee Road. Much of the benefit of that agreement in the near term is sequestered in a productivity fund. Further modification of the labor agreements and/or recovery of some or all of the funds set aside in the productivity fund could mate­rially improve Milwaukee Road's prospects for viability.

VI-19

--,.. -.. ~

~ ~ 1,11 .... ~

~

~

¥I 1,.11

Increases in Car Capacity--One of the major sources of increased railroad productivity in the last twenty years has been a steady in­crease in average car capacity and heavier loadings per car. A major share of operating costs are managed in relation to the cars handled, while freight rates are primarily related to ton-miles and as a result produc­tivity has somewhat automatically improved. On the other hand, this trend has been ac­companied by serious track problems, soaring maintenance costs, and increasing concerns about derailment hazards. Recent trends in­dicate that the growth in car capacity may be topping out and the past increases in productivity with heavier loadings per car may be ending. It has been assumed in this study, therefore, that average loadings will remain constant by car type into the future. If the upward trend continues, however,op­erating costs (other than track maintenance and derailments) may be overstated.

The Rock Island Situation and Potential Mergers of Other Carriers Have Not Been Considered--Given the current uncertainty of the Rock Island reorganization, as well as the numerous rail mergers now being con­sidered, the study has made no attempt to estimate the impact on r-Hlwaukee of any o'f these potential developments.

The Energy Situation Introduces Additional Uncertainty--It is current popular wisdom that railroads are fuel efficient and will, therefore, benefit from the developing energy crisis. Since the Milwaukee, like virtually all u.S. railroads, is completely dependent upon diesel-electric locomotives burning fuel oil, it is also vulnerable to the oil shortages which in the last fuel crisis found many railroads hard hit. Ad­ditionally, an energy crisis may well put a damper on the entire tonnage-producing economy upon which the railroads are dependent. Un­less losses in other traffic are more than

VI-20

offset by gains in coal revenues in an absolute rather than relative sense, the net effect on Milwaukee and other rail ­roads could be as serious as any major recession.

Per Diem and Demurrage Changes--Recent and currently contemplated shifts in per diem and demurrage rules, with accompanying higher charges, could have a significant impact on NROI, although that effect has not as yet been estimated.

These additional considerations--some with posi­tive and many with negative potential effects--while not quantified in this study, provide a background for considering the risks and opportunities represented by the various options confronting the Trust~e.

2. PROJECTED NROI--OPPORTUNITY OR RISK?

The financial results produced by these studies have validity with respect to their relationship with each other among the several configurations and levels of traf­fic. The absolute numbers that have been produced repre­sent the numbers that would have resulted, assuming the particular situation described represents reality. The financial results also are subject to the many estimates and judgmental assumptions which enter into the final product.

Exhibit VI-9 displays selected financial results using three displays of NROI for two levels of traffic. Appendix N contains the pro forma inccme statements which display statistical and financial data for each system configuration and traffic level. In Exhibit VI-9, the first column indicatef estimated NROI as produced by the computer models. The second column indicates NROI after making adjustments for improve­ments described earlier. Since these improvements should be obtained through prudent management practices, the figures from this column are used in subsequent exhibits and in es­timating NROI ranges. The third column displays NROI with identifiable non-cash items taken out. The two traffic levels displayed represent anticipated results if traffic gains are only sufficient to return to 1977 levels and if long-term op­portunities and growth are both realized.

VI-21

From Exhibit VI-9 it can be seen that no configuration produced a positive NROI at 1977 traffic levels. The pro­jected NROI without improvement ranges from a negative $60.9 mill~on for the System without Light Density Lines to a $26.6 million NROI deficit for the Sub Core option. Even with improvements, the NROI deficit ranges from $55.3 million for the System without Light Density Lines to $15.6 million for the Sub Core. Deducting identifiable non-cash items, the "cash" loss at the 1977 traffic level is still $42.0 million for the System without Light Density Lines but only $7.5 for Sub Core.

Since NROI does not include fixed charges it cannot be equated directly with profit or loss and a breakeven NROI would not normally be considered a viable situation. From this chart it can be seen that at 1977 traffic levels none of the options studied would be considered viable. On the other hand, the smaller systems, especially Sub Core, would be sustaining considerably smaller cash losses than the System without Light Density Lines.

Even if all of the operating improvements discussed earlier are achieved, recovery of traffic only to 1977 levels will not result in the railroad being a successful operation by normal investment standards. Further, the larger system configurations--which would of necessity require a longer time frame in which to achieve the market opportuni­ties (even if successful)--would continue the cash drain. In contrast, the smaller Sub Core configurations should have relatively small cash losses for a shorter period if they can achieve their market opportunities.

If the market opportunities are realized in full, the most attractive option based upon NROI potential alone is the Louisville Transcontinental with a long-term positive NROI of $15.0 million and a "cash" NROI of $25.8 million. The risk associated with this option, as described earlier, is that it involves competing head-to-head with the Burlington Northern and Union Pacific in the East-Northwest market in which they presently have (1) transit times less than half that of the Milwaukee, (2) much higher traffic density (and therefore better opportunities for run-through service) and (3) large equipment fleets tailored to meet their customers' needs. This option requires that Milwaukee make very large rehabilitation and equipment investments before a competitive penetration of the market can be expected to succeed. In the meantime, "cash" losses of nearly $20 million per year might be expected. The probability of ever penetrating this market beyond a token level is quite low, given the level of competition.

VI-22

Again, assuming that the market opportunities are fully achieved, the projected NROIs (as improved) for the other options tend to cluster in a positive range of $2 million to $8 million. As shown graphically in Exhibit VI-lO, the options differ far more significantly on the downside (e.g., 1977 level) than on the upside (Market Opportunities Long Term). It should be noted that the horizontal axis of this chart reflect various levels of traffic recovery, and is not time related.

As discussed earlier, the timing of achievement of the various traffic levels would be approximately proportional to the size of the reorganized railroad and its rehabilita­tion requirements. Further, the chances of success would diminish as the system size and complexity increases.

From Exhibit VI-lO it can be seen that the Miles City Sub 'Core presents the lowest downside risk of the options and focuses on recovering traffic in markets where Milwaukee is already in a strong position. Since much of this traffic recovery is dependent upon reallocation of cars and locomotives to key markets, the market opportunities should be achievable quite quickly and with a considerably higher level of certainty. In contrast, System without Light Density Lines shows the largest potential loss until, and if, the long-term market opportunities " are aCheived. Successfully managing all aspects of a turnaround of the System without Light Density Lines in addition to the scale aspects of managing that property would require the maxi­mum of good luck. Even if everything were to go right during that prolonged period, the railroad might drown in its own interim losses.

Investments in equipment and rehabilitation are required as well as some means of financing operating losses during any turnaround attempt. The chart shown in Exhibit VI-II re­flects the estimated investment in net rehabilitation as well as the additional equipment commitments projected for each option~* The chart also shows the range of NROI (as improved) for the "high" forecast (e.g., Long Term Market Opportunities) and the "low" forecast (1977 levels) for the individual options.

* The equipment commitments are reflected in full in the NROI on a lease basis. The equipment is valued at an estimated 1977 average unit cost for comparative purposes on this chart.

.. :E·;) e: .. I.Iol

· l ­;) l ­e:- 0c: :::::E CI:l

:I

·)

VI-23

--- -- --- -

10

.-.

EXHIBIT VI-10 Projected NROI Comparisons

MIL $ (with improvements)

,­ - - '.... ­

....-.._..-/!:.; J

1------:..-..- .-..~~.- .' ~.....~/ o ..-.. -~. ""':..-"......

",..--" -- .. --.... .'"•••••• :..~-.••;;;Q'" ,,/ . .' ,-,-- -'?./.

",/ "-'--- ~.

J' --­,~ ~r

(10) -. ....-. .' ---------_.-...-" ",

S••CORE'---''''''/ .•/"" -;:..-.-._. -'

M'LES clll S••CORE ...../" •••.••-;;?... /' ,~...-,~/ (20) ':::;'N clll TRANSCO••·····::>... .. .'/ ...-~,...-

SAS CITY SUBCORE "," . • • "~ ,I Ii

LOUISVILLE TRANSCON' • ~.A I(30) ,I

CORE/' , MILES CITY CORE

,,I (40) /

,I , ~

(50) / /

SYSTEM'

1917 LEVEL MKT OPPOR MKT OPPOR MKT OPPOR 'SHORT TERM LONG TERM

----------_.._---- ---!

.: :: :: = EXHIBIT VI-ll

Net Plant Expenditure and Additional Equipment Values Assumed Compared to NROI

(1977 Dollars)

~

~

",

=~ ::c=- :~_=-=-=--.:-=

IB37

~

o 400 395 1:-:;:;:1

326 ...................."

I ~ ~

300

en Z 0 ~

-'- I 1237

~

200Z-en

-' 0

Sa:

I I I tI ~ C

tOO .- I I I 103

51 40

20 8 Il,2 I I 5 .....o r---L_Pf+-JL-~:;r-L-h:d:;:J..' ­

(20) ~

I,',',',',"

L21 (16)

(40) (33) '"

(36)

(551

EQUIPMENT VALUE

PlANT EXPENDITURE

NROI RANGE

335

149

~ ~

136

4 . .... .....-, l.' "'. ..... "','",, .'"".r<-:':-:-I F;:;:</

(18) (23)

15

-''' ­

(21)

SYSTEM CORE MILES CITY ." . SUBCORE MILES CITY KANSAS CITY LOUISVILLE TWIN CITY

WIO LOL CORE SUBCORE SUBCORE TRANSCON TRANSCON"

,,<'~ ~

I I

From this chart it can be seen that the investment commitments of the options vary significantly from $837

I million for System without Light Density Lines to only

I $51 million for Sub Core. The System without Light Density Lines not only has by far the largest managerial require­ment and investment commitment, but also has the greatest downside risk in terms of the NROI loss at 1977 traffic levels. On the upside, the potential NROI is modest com­pared with the other options. In addition, this option would be the most difficult and time-consuming to implement.

The Miles City Sub Core with only 12 percent of the

I investment commitment, has virtually the same upside

I potential and only a third of the downside risk. Only the Sub Core proper has a lower investment requirement, with slightly less upside potential and downside risk.

, Extending the Sub Core to Kansas City requires three times the investment commitment as Sub Core, and has theI same upside potential and a somewhat greater downside risk. This option was considered in detail because of the rapidly growing market potential served by the Kansas City gateway. While the analysis indicates that the Kansas City Sub CoreI is less attractive than either the Miles City Sub Core or the Sub Core proper because of the added investment, its long-term market potential should be reviewed. Additionally,I the joint facility agreement with the Kansas City Southern for Milwaukee's terminal operations in Kansas City should be re-analyzed since it is a significant consideration in esti ­

I mating the attractiveness of the Kansas City Gateway traffic.

, I The Core option (which was originally selected for analy­

sis) and Miles City Core option require substantial invest­ments and have high downside risks and offer no advantage on the high side.

, As noted earlier, the Louisville Transcontinental option has the highest potential if the long-term market opportuni­ties and operating improvements are achieved. On the other

I

hand, at 1977 traffic levels the potential losses are greater than the Sub Core and Miles City Sub Core options. More sig­nificantly, the Louisville option requires the second highest plant rehabilitation ($140 million) and the third highest total investment commitment ($335 million). Additionally, the investment commitment must be largely completed before any meaningful penetration of this highly competitive marketI can be anticipated. The risk is all at the front end of the Louisville Transcontinental option with Milwaukee Road coming from a position of weakness.

I

I VI-24

I

LI UI U La

.~-

The Twin City Transcontinental option also requires a substantial rehabilitation commitment (over 2-1/2 times ~hat of Sub Core) with little incremental grain on the high side and some increased risk on the low side. Actually this option could have disastrous consequences since the Milwaukee would walk away from its direct eastern and southern connections as well as the markets in which it has a str6ng position in Wisconsin. In doing so it would cast its lot in direct competition with the powerful Burlington Northern and Union Pacific for the business of the CNW, Rock Island, SOO Line and local connections to the west coast. It is not at all clear that CNW or even Rock Island would chose to favor the Milwaukee Road route over their much more significant con­nections with Burlington Northern and Union Pacific. On-line local traffic on Milwaukee's route west of the Twin Cities (other than the unit coal trains handled as well as in the Miles City options) is minimal. While the long-haul revenues on the transcontinental routes are more attractive than short­haul revenues in the Sub Core options, the risks and invest­ment requirements more than offset any division advantage.

Since the range of NROI for the "high" and "low" fore­casts on each of the smaller options is reasonably close, the magnitude of the investment and the management risks inherent with the size and complexity of each configuration are most significant in comparing the options. For the several reasons already discussed, the Sub Core proper option, requir­ing the minimum investment, is the most attractive. Extending Sub Core to Miles City improves the upside potential but also nearly doubles the investment commitment. On the other hand, the Miles City Sub Core has the least downside risk of any of the options across the range of potential traffic recovery. If the added investment can be covered with outside funds (reflecting the high level of public interest in this line), the Miles City Sub Core would be the most attractive of the options analyzed.

The alternative not analyzed in this study is total 'liquidation. The Trustee has previously retained the con­sulting firm of Ford, Bacon & Davis to participate in a study of the liquidation value of the property. From the analyses discussed in this report, it can be seen that all of the options considered involve substantial risks. It will be difficult to achieve all of the operating improve­ments while at the same time reorganizing the railroad, rehabilitating the plant, and recapturing the traffic. If the values reflected in the Ford, Bacon & Davis study could

VI-25

be achieved, and if future claims such as labor protection and costs of administration were not too substantial, the risks would seem out of proportion to the opportunities from a business, rather than a public interest perspective. On the other hand, the Sub Core and Miles City Sub Core options result in a substantial partial liquidation of the plant while retaining the heart of the railroad's traffic base and the portion of its route system on which it has the inherently superior plant. Since the investment required is moderate, and the turnaround time, if it is to be successful is not unreasonable, attempting to revitalize one of these options should not foreclose ultimate liquidation and may represent an equitable balance between the public interest and creditoru rights.

Ij

lJ IJ

l. l. l. l

l-

I I VI-26

I

_ ·w ~ _

Pa­Ia -. -. I.

'-. '­a. -. I. I. -. I. I..

'­l­

,

.­

APPENDIX A;

. PROJECT STAFFING

II

L

•APPENDIX A•

I. QUALIFICATIONS OF PRINCIPAL CONSULTANTS

I. The team utilized in this project included 26 consultants with a wide range of experience in the key areas of the study.

• The affiliations of the team members are shown in Exhibit 1. A brief statement of the qualifications of the individual key team members follows:

Project Director

Charles W. Hoppe--Vice President--Booz, Allen & Hamilton, Inc., Bethesda, Maryland. Mr. Hoppe holds a BS in Civil Engineering from Purdue University and an MBA from Harvard Business School. He is Officer-in-Charge of Booz, Allen's Rail Consulting Practice, with over 15 years of management consulting experience involving over half the Class I railroads plus railroads and government agencies in the United States, Canada, United Kingdom, Iran, Peru, Panama, Guatemala, El Salvador. Prior to joining Booz, Allen in 1976, Mr. Hoppe was Vice President for Operations for the United States Railway Association (USRA) with respon­sibility for operations, equipment and facilities planning. He simultaneously served as Director of the 215 proqram with direct line responsi­bility for the-$300 million program for-interim plant and equipment rehabilitation. Prior to entering consulting, Mr. Hoppe had line manage­ment'experience in operations and sales on the Nortolk Southern Railway (now part of the Southern Railway) and operations and mainten­ance of way experience on the Baltimore and Ohio.

Project Manager

Victor Hand--Principal--Booz, Allen & Hamilton, Inc., Bethesda, Maryland. Mr. Hand holds a BA degree in Economics and a Doctor of Jurisprudence De­gree from New York University. He is a member of the New York State Bar. Mr. Hand directs all rail network analyses projects for Booz, Allen. Prior to joining Booz, Allen in 1977 Mr. Hand was Director--Transportation for USRA.

u

APPENDIX A Exhibit 1

PROJECT STAFFING

Booz·Allen & Hamilton Inc.

Officer In Charge

Project Manager

Professional Staff

Neal D. Owen Martin Collins Rohet Tolani D.R. McCulloch David Debord Justin Zubrod Dwight Dingwall William Hart Edwin Mueller Kush Agarwal James Huttinger Baxton Vandiver

Consultants

Peter March Harry Williamson

Thomas K. Dyer, Inc.

T. K. Dyer W. K. Hale F. A. Ingalls R. F. Sweeney R. B. Whalen R. W. Maccabe E. Farnsworth D. F. Jones

Transport Consulting Ltd.

James R. Sullivan

The Consulting Center, Inc.

Richard Trenery

Charles W. Hoppe

Victor Hand

Appendix A(2)

In that capacity he was responsible for the Agency's rail operations simulation analyses. His other responsibilities at USRA included being chief of the property conveyence task force, Manager of Network Analysis and Manager of Main Line Route Analysis. Prior to joining USRA, Mr. Hand had line and staff experience in freight and passenger operations and mar­keting with New York Central, Penn Central, Erie Lackawanna, Central of New Jersey, and Amtrak. His experience ranges from locomo­tive fireman, train conductor, assistant trainmaster, Director of Commuter Operations, and Director of Route Analysis.

Deputy Project Manager--Financial Analysis

Martin Collins--Senior Associate--Booz, Allen & Hamilton, Inc., Bethesda, Maryland. Mr. Collins has a BS in Business Administration-Accounting from St. Joseph's College. He has been with Booz, Allen for eleven years on studies with various railroads and government agencies in the United States, Pakistan, Iran, Taiwan, Thailand, and Malasia. Prior to joining Booz, Allen, Mr. Collins spent eight years with the C&EI Railroad. When he left C&EI, Mr. Collins was the Assistant Comptroller

Mr. Collins was assisted by Mssrs. Tolani, Dingwall, Hart, Agerwall, Huttinger, Vandiver, and March.

Deputy Project Manager--Operations and Equipment Analyses

Neal D. Owen--Associate--Booz, Allen & Hamilton, Inc., San Francisco, California. Mr. Owen holds a BBA degree in Finance from the University of Wisconsin. Since joining Booz, Allen in 1978, Mr. Owen has been engaged in rail operations studies for various railroads, and the Associ­ation of American Railroads. Prior to joining Booz, Allen, Mr. Owen was Vice President--West for Amtrak with line responsibility for Amtrak's operations and maintenance in the Western United States. Prior to tha~ he was Manager of Train Operations for USRA and was the rail technical advisor on the development of the original net­work simulation model developed for USRA. Prior

I Appendix A(3)

I

1­

to joining USRA, Mr. Owen had line operating experience with Amtrak and the Milwaukee Road. In his 19 years with the Milwaukee Road Mr. Owen rose from Telegrapher to Dispatcher, Trainmaster, Assistant Division Superintendent at various points and Assistant to the Vice President­Operations.

I Mr. Owen was assisted by Mssrs. Hart, McCulloch, Tolani, Mueller, Dingwall, and Agerwall.

1- Marketing Consultant

I James R. Sullivan--President--Transport Consulting, Ltd., Wayne, Pennsylvania. Mr. Sullivan has a Master's Degree in Business Administration from the University of Minnesota. Immediately

I preceding his January 1979 association with

••Booz, Allen & Hamilton, Mr. Sullivan concluded a 40-year railroad career in which his most recent assignment was Senior Assistant Vice Pres­ident for Strategic Planning at Conrail. As a member of the new Corporation's initial officer team in mid-197S, he headed the work of con­solidating the sales/marketing functions of the seven bankrupt predecessor lines into a single organization by the April 1, 1976 Con­rail start-up date.

As Vice President of Marketing at Penn Central-­and before that with New York Central--Mr. Sul­livan organized, recruited, and directed the staff responsible for major rail industry progress with multi-level transport of automo­biles, non-transit mileage grain rates based upon a super-country elevator concept, a damage­free high-cube household appliance distribution

II program, the award-winning Flexi-Flo concept for bulk materials, as well as novel applica­tions of unit-train technology to forest pro­ducts and construction aggregate transport.

These activities were preceded by four years

II of New York Central service as Assistant Vice President for Freight Sales at Cleveland and Chicago.

II Before joining NYC in 1960, Mr. Sullivan was Vice President of Marketing of the Minneapolis & St. Louis Railway to which he had come four

II years earlier as Chief of Labor Relations.

Appendix A(4)

Prior to his M·StL service, Mr. Sullivan was in charge of executive and supervisory devel­opment on the Illinois Central Railroad at Chicago. His 18 years of experience with that Company included assignments as Train Master,I Fuel Engineer, Locomotive Engineer, Freight Salesman, and Economic Research Analyst.

j

I Mr. Sullivan was assisted by Mssrs. Zubrod and DeBord of Booz, Allen and by Mr. Trenery of the Consulting Center, Inc. <macro-economic forecasting) .

Normalized Plant Maintenance Consultant

I Thomas K. Dyer--President--Thomas K. Dyer, Inc., Consulting Engineers. Mr. Dyer, a graduate of MIT and a Professional Engineer, is the

I former Chief Engineer of the Boston and Maine Railroad. He is a nationally recognized auth­ority on railroad maintenance of way and struc­tures. He has carried out studies of normalizedI maintenance requirements covering all Class I railroads for the Federal Railroad Administra­tion as well as similar studies for the AAR,I ICC and USRA. Additionally, he has managed major railroad construction or rebuilding projects in Canada, Viet Nam, Brazil, and for

I several u.S. railroads.

Mr. Dyer has been assisted in this project by several members of his firm including Mr. Hale,

I I Ingles, Sweene~ Whelen, MacCabe, Farnsworth

and Jones. Mr. Dyer has worked closely with Mr. Williamson on this project.

Plant Rehabilitation Consultant

I Harry Williamson--A Professional Engineer, and for­merly Chief Engineer of the Southern Pacific Transportation Company. Mr. Williamson has personally inspected many of the key lines ofI the Milwaukee Road and has reviewed and gen­erallyconcurs with the rehabilitation esti ­mates of the Milwaukee Road's Engineering

I Department. Mr. Williamson has also worked closely with Mr. Dyer.

I I

•

• APPENDIX B

RESULTS OF STUDIES OF PROPOSED UNION PACIFIC ACQUISITION•

II II

This Appendix contains company pro­prietary information and has been deleted from this volume.

II ~

~.

II I I I I

I •

.-.

APPENDIX C

RESULTS OF PRELUUNARY ANALYSIS

This Appendix contains company pro­prietary information and has been deleted from this volume.

- - - -~ ~ •

A. E. Staley Manufacturing Co.

A. O. Smith Corp.

Amana Refrigeration, Inc.

American Can of Canada

American Cyanamid Co.

Anaconda Company

Archer Daniels Midland Co.

Armstrong Cork Co.

Benson-Quinn Co.

Bethlehem Steel Corp.

Brockway Glass Co.

Cargill

Carnation

C. F. Industries

Chamption International

Chrysler Corporation

Commerce of t1innesota

Continental Grain

Cotter & Company

CPC International

Crown Zellerbach

Deere and Company

Del t10nte

Diamond International

- • • • • • • • ,. ,. ,. ,.

CUSTOMER SURVEY PARTICIPANTS

Dreyfus, Louis, Corporation

Evans Products

Farmers Union Grain Terminal

Fisher Mills

FMC Corporation

Ford Motor Company

Froedert Malt

General Foods

General Motors

Georgia Pacific

GNP Nekoosa

Hercules Chemical

Hoerner-Waldorf

Honda Motors

Inland Steel

International Harvester

International Minerals & Chemicals

International Paper

ITT-Rayonier

J. 1. Case

JR Simplot

Kni fe Ri ve r Coal

Longview Fibre

Louisiana-Pacific

Martin Marietta

Miller Brewing

Montgomery Ward

Nabisco

North Pacific Lumber

Otter Tail Power & Light

Peavey Company

PPG Industries

Port of Seattle

Potlatch

Procter and Gamble.

Quaker Oats

RAHR Halt

Scott Paper

Se ars, Roebuck

Simpson Timber

Sperry-New Holland

Stauffer Chemical

Uniroyal

United Grain Growers

Western Energy

Weyerhaeuser

Wisconsin Power & Light

Zenith

~

:t:' '"0 '"0 t"l Z t:l H :x: t:l

SUMMARY AND

APPENDIX E

OF MARKET OPPORTUNITIES BY COMMODITY SUCCESS PROBABILITY ADJUST~mNTS

I

I

I I I I

I I I I

'i

I I

APPENDIX E

I. SUMMARY AND

OF MARKET OPPORTUNITIES BY COMMODITY SUCCESS PROBABILITY ADJUSTMENTS

I THE MILWAUKEE ROAD SYSTEM WITHOUT LIGHT DENSITY LINES

I l. ADDITIONAL ADDITIONAL

CARLOADS REVENUES (000) LINE Original Adjusted Original Adjusted

l. 1 Grain 43,952 31,172 $ 46,404 $ 29,625 2 Grain Mill Products 9,391 8,536 8,268 6, 552

l. 3 Farm Products 4, 734 3,907 2,782 2,224 4 Packinghouse Products 300 300 170 170 5 Canned Goods 7, 328 5,219 4,551 3, 305

6 Beverages-Malt 5,177 3,669 3,311 2,396 7 Food Products 3,410 2,821 2,953 2,225 8 Primary Forest Products 3, 339 3,339 950 950

l. 9 Lumber & Plywood 10,249 7, 174 14,584 9, 732 10 Wood & Millwork 2,816 1,956 4,088 820

11 Woodpulp 5, 397 5, 359 6,279 6,249

l. 12 Paper 23,689 18,602 12,176 9,589 13 paperboard 5,550 4,792 5,096 4,526 14 Coal 28,401 28,401 11,811 11,811 15 Cement, Sand, Minerals 13,371 11,412 7,384 5,764

l. 16 Petroleum & Coke 3,256 1,408 2,040 655 17 Chemicals 18,902 11,553 13, 363 7,450 18 Metal Products 24,265 17,733 15,698 11 ,061 20 Machinery 4,140 2,071 3,188 1,486 21 Motor Vehicles 3,070 3,070 7, 365 7, 365

22 Auto Parts 7,805 7,713 3,806 I 3, 732 23 Waste & Scrap 3, 935 3,835 1,654 1,654 24 Freight Forwarders 40,315 24,789 25,189 15 , 305 25 Mfg & Miscellaneous 1,467 683 1,326 328 26 U.S. Mail 2,709 1,896 1,027 669

TOTAL 276,869 211,384 $205,463 $145,643

Percent Reduction After Success Probability 23. H -- 29.1% Adjustment

lJ

'.

~

•..

--.•

APPENDIX F

MARKET OPPORTUNITIES AND SUCCESS PROBABILITIES

This Appendix contains company pro­prietary information and has been deleted from this volume .

"

APPENDIX G

MILWAUKEE ROAD EMPTY RETURN RATIOS

--

I ~"'.

- . -- -- ~.......- . ­

APPENDIX G

I ..

I MILWAUKEE ROAD EMPTY RETURN RATIOS

I CS-ll Car Group System Foreign Private TTX

I I I

I .,, I

01 02 03 04 06 08 09 10 11 12 14 15 17 19 20 22 23 24 25 28 29

Unit Train Flows

1. 04 0.80 0.76 0.90 0.94 1. 03 0.98

1. 09

0.67 0.79 1. 02 1.15 1. 21 0.79

0.20 1.10

1. 23

1. 00

0.52 0.53 0.52 0.67 0.81 1.17 0.74 0.66 0.63 0.56 0.50 0.67 0.93 0.94 1. 23 0.72 1. 21 0.20 0.96 0.91 0.86

1. 00

1. 48

0.14 0.98 1. 00 1. 08 0.96 0.75 0.68 0.97 1.14

0.97 0.98 1.11 1.19 1.16 0.20 0.97 1.10 0.94

1. 00

1.18 0.74 0.20 0.99

0.41

I

-

R I

APPENDIX H

NORMALIZED MAINTENANCE OF WAY , COST ESTIMATES

APPENDIX H

Normalized Maintenance of Way Cost Estimates

1977 Dollars

Sub Core Estima ed

Mi les City Sub Core

Louisville Transf":nnt "Inent"A.

Estimated

T..... in Tra·' 0

~

Cities Kansas City Sub-Core

:oad Property Investment Expense

Road Property Investment Expense

Road Property Investment Expense

Road Property Investmpnt­ ".n '00

Road Property Investmen> Exnense

1.858 232 2.268 284 3.421 428 2 .962 370 2.763 345

12.321 1.060 12.737 1.095 16,753 1.441 7.851 675 13.662 1.175

1.084 109 1.135 115 1.883 190 933 94 1, 123 113

288 20 306 21 447 31 234 16 318 22

484 46 5.11 49 716 69 442 42 527 51

14.420 1.327 15,077 1,387 18,647 1,716 9,999 920 15.558 1.431

1, 384 35 .1,384 35 1,990 50 615 15 1.403 35

1,328 60 1.333 61 1.748 79 612 28 1,459 66

5.278 845 5,631 902 7,832 1 .254 4,644 744 6.069 972

315 24 320 24 440 34 136 10 324 25

1, 836 110 1,807 108 1.982 118 423 25 1,956 117

243 5 257 5 441 9 281 5 277 6

10 • .Ill 735 10. 712 779 13.110 953 6.420 467 11,314 822

- ­ 10 -­ II - - 18 -­ 12 -­ 11

- - 124 -­ 135 -­ 217 - - 148 -­ 142

4.742 5.011 6,607 3.571 5.333

CATeGORY I Accounts ($000)

Account .,,_k~_

Balance Income Sheet Statement

13 221

16 227

17 229

18 231

19 233

20 235

23 241

25 244

26 247

29 253

31 257

35 265

39 273

-­ 281

-­ 282

TOTAL

Total S"se~m Esrimat,rl

Road Property Investment Expense

5,.327 666

24,270 2,087

2,068 209

509 41

926 89

23 .. 634 2,174

1 ,999 50

.1. .. 872 85

10,717 1, 716

458 35

2 .. 258 135

517 10

17,876 1,300

- ­ 25

-" 300

8,922

Plan Est'mated

Roa.d Property Investment Expense

4,528 566

23,058 1,983

1, 762 178

557 39

885 85

22,457 2,066

1,999 50

1,872 85

10,717 1,716

458 35

2 ,258 135

517 10

15,731 1, 144

-­ 25

-­ 300

8,417

Core E<tim' 'ad

Road Property Investment Expense

3,035 379

16,010 1,377

1,200 121

378 26

631 61

17,323 1,594

l,3B4 35

1,454 66

7,464 1. 195

324 25

2,087 125

291 6

14,010 1.019

-­ IS

- ­ 183

6,227

Miles City R~tim

Road property Investment

3,445

16,426

L 251

396

658

17,980

1, 384

1,459

7,817

329

2,058

305

14,611

-­

-­

5

6

6

Core d

Expen

43

1,41

12

21

6:

1,65

3

6

1,25

2

12

1,063

16

195

6,496

·' -.

•

APPENDIX I

ESTIMATED TIE LIFE

l l l l l l (

,­I­l. l l

I APPENDIX 1*

I 1­

Estimated Tie Life

I� Cross ties transmit into the ballast the vertical,

f

lateral and longitudinal train forces applied to the rail. Useful life remains in the tie as long as the wood under the tie plate is sound, wood around the spike is sound, and there is sufficient sound wood in the body of the tie to maintain track gauge and resist rail anchors. The life of wood ties varies with many factors, including the size of the tie, type of wood, creosote treatment, tie spacing, size of tie plate, weight of rail, climate, drainage, quality of track maintenance, car and locomotive axle loads,

I and gross tons operated.

Observations, research and responsible estimates con­cerning average life of creosote-treated wood ties have been

I I made by most u.s. railroads and the American Railway�

Engineering Association over a considerable period of time.� The tie life used in the maintenance estimates in this re­�port is based on published information, many years of track�

1,­maintenance experience of the consultant's staff, interviews with railroad maintenance departments on several railroads located in the eastern, western, and southern territories, inspection of thousands of miles of track throughout the country by the consultant's staff, and actual tie life from ten tie renewal projects. On each tie renewal project, the track material consist, track geometry, track condition, and the gross tons operated were recorded.

I� Average life of ties removed varied from 29 years to

1-­42 years on the ten tie renewal projects. The variation�

"in the life of individual ties removed was from 18 years� to 49 years, although 90 percent of the ties were within� seven to eight years of average life.

I Empirical tie formulas have been developed from the information available with the emphasis on the hard data obtained from the tie renewal projects. These line specific tie formulas have been modified for use in estimating sys­tem tie life varying with average annual gross tons operated and average weight of main track rail during the life of

I *� From Thomas K. Dyer, Inc. 's report to FRA on United States Class 1 Railroads Fixed Plant Requirements.

I� I� I�

......-~I APPENDIX I (2)

I the tie. Annual gross ton miles from ICC Schedule 531 were

I� divided by the miles of main track from Schedule 411 to� obtain annual gross tons over the system. The average weight of rail in main track was computed from Schedule 517.

I The life based on tie renewal projects is due principally to the effects of mechanical wear and bacteriological decay. Additional determinants of tie life are damage resulting from derailments, floods, fires, and handling of ties during loading, unloading, and installation, as well as theft and other causes. These additional factors were estimated to reduce average tie life based on mechanical wear and decay in track by 5 percent.

Loss in tie life also occurs when track is retired,

I as it is uneconomical to rehandle and install ties with

I relatively little life remaining. Analysis of railroad practice in re-use of ties indicates 10 percent to 25 per­cent of tie life is lost when track is retired and the better ties re-used. In some cases, retired tracks are sold in place for removal by an outside party. Such tracks are generally in relatively poor condition. Sale of a retired track in place is estimated to result in a loss in normal tie life of 15 percent to 35 percent. The aver­age loss in tie life for retired track is estimated to be I25 percent. i I

The age of ties removed in tie renewal projects was kept separately for joint ties, shoulder ties (ties adjacent Ito joint ties), and the remaining ties. Joint and shoulder ties average over 10 percent less life than the other ties.

I� Based on these findings, welded rail is estimated to in­�crease average tie life 4 percent.

The empirical formulas

I life incorporating railroad are as follows:

I

I� I�

I� I

derived for average system tie comments to the extent possible

APPENDIX I (3)

AVERAGE SYSTEM TIE LIFE

Main Track Tie Life

Less than 10 MGT (37.4� - .37G)( W ).67 71 + 5.2G

10 MGT but less than 20 MGT = (37.4 - .37G)( W ).67

109 + 1.4G

20 MGT and over = (35.0 - .25G) ( __W,..---__) .67 137

Adjustment for� Welded Rail

Yard and Switching Track Tie Life

Ly = 39.16 - O.lG

Adjustment for Rainfall, Temperature, Frost and Track Curvature

9,945.38 24.7 4.42 + K2� _ (~. 55 - 00231)*]X = [ 11,319.89� * RF + 71.11 + T 5

*When T is equal or greater than 67, this term 0

Average System Tie Life

L X["MLt +� RyLy ("'2 ~ K) ]s

Where: Main track jointed rail tie life in years

L Main track average tie life in yearsT

W Average weight of rail in main track in Lbs./Yd.

G Average gross tons/main track mile (in millions)

M Total system track miles less Class 5T�

Mw Miles of welded rail�

Ly� Yard and switching track tie life (has been reduced 5 percent for life lost due to derailments, etc.)

_------------IIiIiiiiII-------­I

•� APPENDIX 1(4)�

•� X Climate factor

RF Average annual rainfall in inches

I� T Average annual temperature in degrees (F)�

K Curve factor

L = Average system tie life s

I Ratio of main track cross ties to total cross ties in track

I RY Ratio of yard and switching track cross ties to total

cross ties in track

Applicable main track tie life

I� Estimated Rail Life

Rail life is determined principally by mechanicalI wear between the wheel and the rail and by fatigue-related failures. Additional determinants of rail life are damage caused by derailments, floods, fires, wheel burns, handling

I during loading, unloading and installation, corrosion, and defects in the rail at the time of manufacture.

In general, mechanical wear regulates the life of rail

I I on curves whereas fatigue-related failures determine the

life of rail on tangent track. Both mechanical wear and rail failures vary with the gross tons operated over the t~ack. Since lateral forces increase with an increase in individual train tonnage, this is also a factor in rail life, as is wheel loading and length of car.

I Poor line and surface and poor tie condition also increase wheel forces on the rail and shorten rail life. Approximately two-thirds of rail failures occur in theI� joint bar area. Welded ~ail eliminates a major portion of these rail end failures.

I� The increase in axle loads, length of cars, and train length since 1933 has made a considerable amount of small rail in heavy tonnage main track obsolete. Installation

I. of heavier rail has resulted in an increase of about 20 percent in the average weight of rail in main track over the past 40 years.

I.� I.� I.�

• APPENDIX 1(5)

I. Most railroads program main line rail for at least

two-position life. After wear has progressed sufficiently, or frequency of rail failures reach an unacceptable limit, rail is removed and reinstalled on slower speed and/or lighter tonnage main and branch lines or yard track to serve out the remainder of its life. As the average weight of rail increased over the years, two and even three reuse cycles of rail have become common. Over the forty-three years analyzed, 49 percent of the tons of rail laid was new and 51 percent relay including rail made available from track retirements.

I.� I. Rail on curves has substantially less life than rail�

on tangent track. Rail hardening and rail lubricators in­�crease life on curves. In addition, new alloy steels have� been developed with better wear characteristics.�

Empirical formulas were developed based on A.A.R.�

L test data, A.R.E.A. rail life formulas, opinions of respon­�sible railroad maintenance engineers on several railroads,� and the investigations, measurements, and rail renewal� experience of the consultant's staff. The variables in� the formulas included weight of rail, annual gross tons,� p~rcent curved track degree of curvature, rail hardening� and lubrication effects, percent of welded rail, and per­�cent of grade.�

The line-specific rail formulas were modified for use�

L in estimating system rail life,varying with average annual� gross tons operated, average weight of rail in main track,� and percent of welded rail.�

L� Life of new rail was estimated on the basis of two­�

thirds of the original first-position rail installed being� available for additional position life. The one-third not� available for relaying is the estimated amount of rail re­�moved due to defects and service failures, rail used in transposing curves and rail removed to be used as main­

I. tenance rail. The two-thirds relaid also releases second�

L� and third reuse rail for relaying such that total relay� tons equal total new tons. For example, installation of� 1,000 tons of 132 lb. new rail, on being replaced at the� end of its first position life, may make available 670� tons of 132 lb. for relaying. This 670 tons releases� 260 tons of 110 lb. for relaying which in turn releases�

L 70 tons of 90 lb. rail for relaying.�

I.� The empirical formulas derived for average system�

rail life from new to sale for salvage were as follows:�

I.

I APPENDIX I (6)

I I

Average System Rail Life salvage)

(from installation new.until removal for

WK + 2.97�

I G· 337 G + 5�

I� M (C - 1)�+ W

I� Where:

I� Jointed rail life in years

L Average system life of new rail

W Weight of rail in Lbs./Yd.I� R

G Gross tons/main track mile (in millions)

I K = Curve factor

I� M Total system track miles less Class 5T

M Miles of welded rail

I W

C Factor for life increase due to welded rail

I K C

Heavily Curved .53 1.13

I� Moderately Curved .55 1.15

I� Lightly Curved .58 1.17

I I

I I I

APPENDIX J

CATEGORY II ACCOUNTS

.,~--..

APPENDIX J

CATEGORY II ACCOUNTS� Unit Costs Per Mile of Track�

1977 $�

A) RUNNING TRACKS:

FRA Speed Class 0 1 2 3 4

Tonnage Category

01 1,449* 4,561 5,058 5,214 •.-l 0 05 1,449* 4,921 5,673 5,848 +J ...~~ (IS U 10 1,449* 6,057 7,232 7,476 f~ 0 o H 20 8,829 9,140 +J (1":j 30 10,093 10,461.::: 40 11,130 11 ,680

FAA Speed Class 0 1 2 . 3 4

Tonnage Category

u 01 4,734 5,231 5,388 05 5,094 5,846 6,021

u 10 7,405 7,649

u 8 20 7,269 9,002 9,313

30 10,266 10,634 40 11,303 11,853

u FAA Speed Class 0 1 2 3 4

Tonnage Category

UI 'tl Q) 01. 1,727 2,900 3,268 3,902

H H 0') 3,220 3,628 4,380

u I'd l=: 10 4,764 5,939 b'l

•.-l 20 6,038 7,536 7,887 Ul 8,800~ 30

u ::>

*Estirnated Freight Only Cost on Jointly Used Passenger Tracks

~ B) YARD AND SWITCHING TRACKS:

[$4,299 Per Track Milel

CATEGORY II INCLUDES ESTIMATES OF COSTS FOR ICC ACCOUNTS 202, 212, 214, 216, 218, 220, 206, 208, 249 and 272.

APPENDIX K

CATEGORY III ACCOUNTS

.:~lWt..

APPE:NDIX K

IJ� OJ� LI�

APPENDIX L

GROSS REHABILITATION ESTIMATES

-.. LII LI ~.

•� I I APPENDIX L

GROSS REHABILITATION ESTIMATES

I I MAIN LINE ROUTES

Gross Line Track Rehabilitation

Segment Miles Cost

I Tower A-2-0akwood 136.2 $ G,247,875 Oakwood-Grand Ave. Jet. 34.2 1,865,170 Grand Ave. Jct.-Newport 606.4 39,878,749 Newport-Renville 151. 3 6,082,145 Renville-Montevideo 30.0 369,000

I Montevideo-Miles City 569.0 22,706,718

I Miles Cit~-St. Maries 699.0 37,75':J,105 St. Maries-Tacoma 364.7 30,185,481 Chicago-Savanna 188.7 7,651,250

I

Savanna-Council Bluffs 353.0 14,054,750 Faithorn-Latta 172 .2 15,638,395 Latta-Bedford 58.3 4,915,445 Sabl1.1a-Clinton 17.1 Clinton-Na.hant 1.6 292,084 Polo-Moseby 24.8 1,159,400 Moseb~-Kansas City ~v.B 17.0 794,750 Mosen'l-Kansas City EB 17 .5 818,125 Culver-Polo 233.7 11,509,600

I MAIN LINE TOTlI.L 3,674.7 $201,928,042

I SECONDARY MAIN LINE ROUTES

Sturtevant-Kittredge 112.8 $ 5,273,400 Rondout-hTa1\<!orth 41. 5 1,309,750

I N. Milwaukee-Green Bay 105.0 9,709,230 Green Bay-Channing 117.0 6,169,882 New Lisbon-Wausau, 91.6 7,710,659 Portage-Madison 34.3 1,320,531 LaCrescent-Green Island 148.3 8,878,293 Marquette-Canton 291.1 25,840,959 Calmar-}I.ustin 69.3 6,609,181 Austin-MendotaJ 93.7 6,575,758 Mitchell-Aberdeen 128.0 12,186,748 Canton-Mitchell

I 80.3 7,445,474

Plwmner Jct.-Manito 19.9 959,484 Tacoma-Chehalis 67.4 3,222,853

]� SECONDARY ~ffiIN LINE TOTAL� 1,400.2 $103,212,202

I� I�

---

---

-.= '-~

APPENDIX L(2)

,� ,-­

(�

I�

I� I� I�

Line Segment__

Savanna-East Moline Walworth-Janesville Amana-Indian CreEk DesMoines-Herndon Herndon-Spencer Manilla-Morningside Channing-Ontonagon N. Milwaukee-Cambria Watertown-Prairie du Chien Ramsey-Jackson Morningside-Mitchell Elk Point-Sioux Falls Harlowton-Great Falls St. Maries-Bovill Port Townsend-Port Angeles Stewart Jct.-Granville Rockton-Rockford Beloit-Janesville Sturtevant-Racine Davenport-Eldridge Brookfield-Waukesha Milton Jct.-Janesville Milton Jct.-Madison West Allis-Elm Grove Beaver Dam Fox Lake Horicon-Ripon Jet. Brandon·-Markeson Mazomanie-Sauk City Lone Rock-Richland Center Hilbert-l'1enasha Crivitz-Menominee Wausau-Tomahawk Muskego Yd.-West Allis Grand Ave.-Hopkins Ave. Chestnut Street Line Janesville-Monroe Egan-Madison Wells-Minnesota Lake Durand-Eau Claire Fordson Jct.-Fordson

BRANCH LINES

Track Miles

38.7 25.0 25.7 54.0

101.5 86.0 92.8 71.2

132.3 106.0 141.0

70.5 195.0

50.0 50.8 36.0 14.9 14.0

7.6 1l.5 6.2

10.0 32.5 3.7 2.5 2.8

30.4 1l.5 9.4

16.2 20.0 21. 3 41. 7 4.2 6.1 6.3

33.0 26.0

7.6 34.4 4.4

Gross Rehabilitation

Cost

$ 1,590,242 535,250 944,475

2,908,592 3,318,332 3,160,500 4,118,471 3,966,735 2,450,250 9,296,040 7,329,965 2,590,875

13,227,783 4,051,063 3,193,033 2,253,115

704,200 910,540 293,706

1,112,694 190,650 307,500 999,375 135,975

76,875 86,100

1,174,824 1,043,694

781,099 999,810 973,542

1,513,061 3,132,937

129,150 187,575 193,725

2,634,912 802,575 233,700

3,122,006 135,300

Line Segment

Minneapolis-Ft. Snelling Ortonville-Fargo Milbank-Sisseton Andover-Brampton Aberdeen-Edgley Roscoe-Linton Sioux Falls-Sioux Falls Jct. Moreau Jct.-Isabel McLaughlin-New England Mitchell-Rapid City Napa-Platte Bristol-Garden City Great Falls-Agawam Lewistown-Winifred Lewistown-Heath Newport-Metaline Falls Royal City Jct.-Royal City Beverly Jct.-Hanford Frederickson-Morton Sumas-Limestone Jct. Hampton-Lyndon Warden-Tiflis Tiflis-Marcellus Tiflis-Moses Lake Dishman-Coeur D'Alene Bellingham-Sumas Cedar Fails-Snoqualmie Falls Maytown-Helsing Jct.

BRANCH LINE TOTAL

IJ SYSTEM MAIN TRACK TOTAL

IJ SIDE AND YARD TRACKS

SYSTEM TOTAL

IJ� IU�

BRANCH LINES (Continued)

Track Miles

4.2 117.0

37.2 42.6 64.3 74.3 31. 4 55.9

133.0 289.0 82.9 28.8 52.0 43.3 10.3 61.1

5.2 20.8 53.1 8.4 5.3

47.2

20.0 18.3 24.6 11. 2

__....;:1;.;::0.7

3,006.8

8,081. 7

2,300.0

10,381. 7

APPENDIX L(3)

Gross� Rehabilitation�

Cost�

129,150� 9,898,902� 3,154,723� 3,601,756� 5,442,011� 5,966,964� 2,556,929� 3,483,262� 9,581,628�

13,430,273� 6,933,758� 2,196,295� 2,799,120� 2,776,411�

153,750� 6,342,774�

639,600 1,906,935�

206,025� 447,182� 725,700�

1,249,594� 276,750� 678,255� 844,267� 971,089�

$173,203,349

$478,343,593

$ 40,000,000

$518,343,593

1.1

-=­ --=-.~

APPENDIX ~1

FINANCIAL MODEL Cm1PUTATION METHODOLOGY

..�

I: I: £1: E EI:£ ~ :1f1'.W- '.. '-. ,.�

1977� CATEGORY ICC DETAIL MILW R-1 COMPUTATION�

DESCRIPTION ACCOUNT NUMBERS (~OOO ) DEFINITION�

REVENUES

1) TOFC/COFC Revenue� 36,914 Input by Traffic Level----� 12) Gross Freight Revenue� ~4, 824 Input by Traffic Level

Less: Adjustments�

3) Absorbed Switching 12,342 Percent Change Carloads (Orig./Term)�

4 ) Mi1w. Motor Transport 6,879 Percent Change TOFC/COFC Revenue�

5) Barge Services 3,781 Percent Change Foss Carloads�

6) Other (Net) Percent Change Gross Freiaht Revenue�~

Total� Adjustments 26,828

Net Freight Revenue 101 407,996�

7) Swi tching 110 10,978 Fixed For System�

8) Demurrage 137 5,057 Percent Change Carloads (Orig./Term)�

9) Joint Facility Freight 151(F) 2,113 Fixed For S/stem�

10)� Other Freight 135,142,143(F) 861 Fixed For System

11)� Passenger Revenues 102,108,133,143(P) ,151(P) Fixed For System

TOTAL REVENUE 444,502 ~

MAINTENANCE OF \~AY AND STRUCTURES

1) Structures and Facilities� 221 , 227 , 229 , 231 , 233, 235, 241,� 244,247,253,257,265,273,281,� 282 5,139 Fixed For System�

2) Track Miles 202,206,208,212,214,216,218, 43,199 Main Trks: Miles (Speed C1ass/� Density Level) X Unit Cost�

Yard, etc., Trks: Miles ~ Unit Cost�l3) Tools & Supplies and�

Roadway Machines 269 and 271 4,4.12 Percent of Category 2�

4 ) Other 201,274,275,276,277 11,317 Percent of Categories 1 and 2�

5) Dismantling Retired� Property 270 779 Zero Base in Study�

6) Solely Passenger 227 (P) ,253 (P) ,278 (P) 562 Fixed For System� ;J:.o�7) Maintenance of Joint I1jTotal� On-Line Car Miles X Unit CostTrack-Debit 278 and other M of W 8,438 I1jJoint� Facility Charges tIj

8) Maintenance of Joint Z� Track-Credi t 1279 tl�(1,494 ) Percent of Categories 1, 2 and 3

H9) Road Property Depreciation� 266 4,143 Fixed for System X 10)� Retirements - Road 267 4,351 Zero Base in Study

3:TOTAL� M OF W&S 80,866

~~~SS'~I' I�

1977 ~

CATEGORY ICC DETAIL MILW R-l COMPUTATION $DESCRIPTION� ACCOUNT NUMBERS ($000) DEFINITION

MAINTENANCE OF EQUIPMENT

1)� Loco Repairs (Freight) Units X Unit Cost� - Loco Service Types 22,811 Miles X Unit Cost� - Circular 41 Credits (446 ) { Units X Unit Credit�

Total 311� 22,365

2) Freight Car Repairs Units Maintalned X Unlt Cost� - System Cars 17,725 System On-Line/Off-Line�

Car Miles Less Lessor�~Malntalned Car Miles X Unit Cost�

- Foreign Cars Destroyed 2,870 Foreign On-Line Car ~iles X Unit Cost� Total 314 20,59~

3) Hi-Way Revenue Equipment� Repairs 318 335 Percent Change TOFC/COPC Revenue�

4 ) Work and Miscellaneous� Equipment Repairs 326,328 1,861 Trailing Ton Miles X Unit Cost�

5) Solely Passenger All Passenger Except� Repairs Depree ia tion :,278 Fixed For System�

6) Dismantling Retired System On-Line/Off-Line Car� Equipment 329 421 Miles Less Lessor Maintained�

{ Car Miles X Unit Cost

7)� Shop & PP Machinery 302,304,306 1,037 Percent of Category 1

8)� Other 333,334,339 814 Percent of Categories 1 and /.

Percent of Labor-Component� 9) Supervision 301 3,770 Categories 1 thru 8 .�

10) Health and Welfare, Percent of Labor Component Injuries 332,335 2,841 Categories 1 thru 9

11 ) Joint Maintenance of Equipment-Debit 336 700 Total On-Line Car Miles X Unit Cost

12) Joint Maintenance of Equipment-Credit 337 (80) Fixed For System

~uipment Depreciation

13) Freight Locomotives� 2,665 Input by Traffic Level� ~

t-el14) Freight Cars� 7,177 Input by Traffic Level t-el 15) Other 940 Fixed For System tlj

Z16) Retirements� (02) Fixed For System o Total 330,331 ~,700 H

17) Shop and Power Plant Depreciation 305 272 Fixed For System 3:

TOTAL M OF E� 66,90'!

X

1'1'1 IIII III I�

CATEGORY DESCRIPTION

TRAFFIC

Salaries & Expenses

1) Freight

2) Solely Passenger

3) Health & Welfare

4) Other

TOTAL TRAFFIC

TRANSPORTATION

Division Direct and Allocated Costs

1) Yard

a) Yard Engine T&E b) Vacation, etc. c) Yardmaster & Other d) Vacation, etc. e) Yard Clerks, Supplies,

& Expenses f) Allocated

,. ....t-. q) Kansas City Joint

Agency Yard CostsI}' Sy.u. Total

:1 ~

aj Unit Train b) Thru Train c) Local Train d) Vaca tion, etc. e) Allocated

System Total

3 ) Station and Other Sub-Divisional

a) Small Volume Sub-Divisions

b) Large Volume Sub-Divisions

c) Alloca ted

System Total

ICC DETAIL ACCOUNT NUMBERS

351 thru 354 (F)�

351 (P)�

359�

357,358,360�

377 thru 380,388,389

392,401

373,376,405,406,408,410,411

1977 MILW R-l

($000)

9,636

55

489

603

~~

40,387

43,127

13 ,476

COMPUTATION DEFINITION

J Percent of Net Freight Revenue

Fixed For System

Percent Labor Component Category 1

Percent Category 1

Location Crew Starts x Unit Cost Percent SUbcategory la Location Fixed for System Percent Subcategory lc

jStep Function Percent of Change lYard Handlings For Location Percent SUbcategories la thru lf

Yard Handlings x Unit Cost

Division Train Miles x Unit Cost Division Train Miles x Unit Cost Fixed for System Divisions Percent Subcategories la thru lc Percent Subcategories la thru ld

:t>' tU tU tt:l Z

Fixed for System Sub-Divisions jStep Function Percent of Change lCarloads for Sub-Division

o H X

Percent Subcategories 3a thru 3c 3:.

• • • • -----• ~ ~ ~.. .. ..� 1977�

CATEGORY ICC DETAIL� MILW R-l COMPUTATIONDESCRIPTION ACCOUNT NUMBERS ($000) DEFINITION

TRANSPORTATION (Continued) J 4) Supervision and Other

a) Supervision Fixed for System Divisions (70%)b) Dispatching Trains Step Function Percent of Change

{Train Miles For Divisionc) Supervision Percent of Categories 1 thru 3

and Subcategories 4b (30%)d) Other Percent of Subcategories la thru 4c� System Total� 371,372,373,376,405,406,408,�

410,411 6,744� 5) Short Crew Reduction�

Estimates�

a) Yard Total Division Crew Starts x Unit Cost

b) Road Total Division Train Miles Road� x Unit Credit�

Total Division Direct� and Allocated Costs 103,734�

6) Train Engine House� Expenses 400� 2,185 Locomotive Miles x Unit Cost

7 ) Train Supplies and Total Car Miles x Unit Cost and Expenses 402 7,277 Total Train Miles x Unit Cost

8) Signal & Communication� Operations 404,407 4,054 Percent Change Total Carloads�

9) Clearing Wrecks and� Loss & Damages 415,418� 14,692 Trailing Ton Miles x Unit Cost

~

10) Other Hi-Way 422 675 'I:lPercent Change TOFC/COFC Revenue 'I:l

11) Solely Passegner All Passenger Except Fuel 6,128 Fixed for System tIj Z o

12) Departmental Super­ Percent Change Labor Component H vision and Other 371,373,376,410,411 3,492 Categories 1 thru 11 :x:

3:13 ) Health and Welfare 409 6,608 Percent Labor Component Categories 1 thru 12

c-- c c--c-:c c c­1977

CATEGORY ICC DETAIL MILW R-l CO"'.PUTATION DESCRIPTION ACCOUNT NUMBERS ($000) DEFINITION

'i ~ TRANSPORTATION (Continued)

14) Injuries 420 7,102 Percent Labor Component Categories 1 thru 12 and Total Train Miles x Unit Cost

15) Insurance and Other Damages 414,416,417 1,255 Percent of Net Freight Revenue

16) Fuel

a) Road 394(F) 30,603 Trailing Ton Miles x Unit Cost b) Yard 382 (F) 4,078 Yard Engine Hours x Unit Cost c) Passenger 394 (P) ,382 (P) ~ Fixed for System

Total Fuel 36,193

17) weighing and Inspection Bureaus 374 686 Percent Change Total Carloads

18) Joint Facilities

a) Joint Yards-Debit 390 4,919 Total Carloads x Unit Cost b) c) d)

Joint Yards-Credit Joint Track-Debit Joint Track-Credit

391 412 413

(804) 2,739

(1,217)

Fixed Total Fixed

for System Carmiles x for System

Unit Cost

Total Joint Facilities 5,637

TOTAL TRANSPORTATION 199,718 =

GENERAL AND MISCELLANEOUS

1) Salar ies and Expenses 451,452 16,679 Percent Labor Component All Prior Categories

2)

3)

Law Expenses

Pensions and Paymen ts

Severence

454

457,460

2,364

2,946

Percent All Prior Categories

Percent Labor Component All Prior Categories

:t:>' I'Q I'Q trj

4) Health and Welfare 456 953 Percent Labor Component Categories 1 and 2

Z 10 H

5) Other 453,455,458,460 4,323 Percent Category 1 X

Joint Facilities & Other ::s: 6) General 461,462 367 Fixed for System

7 ) Miscellaneous & Other 441,448,452,460,461 (All Passenger) 902 Fixed for System

TOTAL GENERAL & MISCELLANEOUS 28,534

• • • • • • • -� lilt .. ~ ~ ~ ,.. ~

1977� CATEGORY ICC DETAIL MILW R-l COI-'.PUTATION�

DESCRIPTION ACCOUNT NUMBER ($000) DEFINITION�

JTAXES

U.S. Government

I} Payroll Taxes 33,934 Percent Labor Component All Prior Categories

Other

2} State Specific Taxes 8,043 Fixed for System

532� 41,977TOTAL TAXES

RENTS

l} Car Hire 536 55,790 Input by Traffic Level

2} Locomotive Rents (Net) 504,537 9,363 Input by Traffic Level

3} Floating Equipment Rents 539 594 Fixed for System

4 } Work Equipment Rents 507� (23 ) Fixed for System

Joint Facility Rents

5} Rent Income-Freight 508 (1,222) Fixed for System

6} Rent Payable-Freight 541(F} 6,674 Fixed for System ~

7} Rent Payable-passenger 541(P} 460 Fixed for System� '" tIj '" NET RENTS� 71,636 Z C1 H

:3:

X

-�

APPENDIX N

PRO FORMA INCOME STATID1ENTS TRAFFIC LEVEL COMPARISON

------------

----

I� '­�I I I I I ,_..

,­

r�

,.�

( $ Millions)

CARLOADS (OOO's)

REVENUES� Net Freight� Other�

Total

OPERATING EXPENSES M of W M of E Transportation Traffic Gen'l & Misc.

Total

TAXES R.R. Other�

Total�

RENTS� Locos� Car Hire� Other (Net)�

Total

NET RAILWAY� OPERATING INCOME�

DEPRECIATION, ETC.

PARENTHESIS ( ) = LOSS

APPENDIX N(l)

EXHIBIT 1 Milwaukee Road

Pro Forma Income Statements Traffic Level Comparison

R-l "Base" 1977 1977

Hevenue Revenue $ Percent $ Percent

869 -­ 867 -­

408.0 408.0 36.5 36.5

444.5 444.5

80.9 18.2% 100.2 22.5% 66.9 15.1% 75.7 17.0%

199.7 44.9% 199.8 44.9% 10.8 2.4% 10.8 2.4% 28.5 6.4% 28.7 6.5%

386.8 87.0% 415.2 93.3%

34.5 7.8%33.9 7.6% 8.1 1. 8% 8.0 1. 8%

42.0 9.4% 42.5 9.6%

9.4 2.1% 9.3 2.1% -12.6%55.8 12.6% 55.9

6.5 1. 5%6.4 1.4% 71.6 16.1% 71.7 16.2%

(55.9) (8 L 9)

19.5 13.6

~ ,. ,. ,.,. ,. fA ,.,,. ,. ,. ,. ,. ,. II P. ,. ..�

EXHIBIT 2 System Without Light Density Lines

Pro Forma Income Statements Traffic Level Comparisons

(S Millions) 1977 LEVEL MARKET

OPPORTUNITY

MARKET OPPORTUNITY Short Term

MARKET OPPORTUNITY

Long Term 1

Hevenue Revenue Revenue Revenue $ f'cx:cent $ Percent $ Percent $ Percent

CARLOADS (ODD's) 845 1056 1059 1138

REVENUES Net Freight Other

397.3 36.~

533.5 37.7

540.4 37.7

584.3 38.1

Total 433.$ 571. 2 578.1 622.4

OPERATING EXPENSES M of W 92.7 21. 4% 100.2 17.5% 100.6 17.4% 101. 4 16.3% M of E 79.2 18.3% 97.0 17.0% 97.5 16.9% 102.6 16.5% Transportation Traffic

182.3 10.5

42.0% 2.4%

217.5 14.1

38.1% 2.4%

218.9 14.3

37.9% 2.4%

229.4 15.4

36.9% 2.4%

Gen'l & Misc. 28.9 6.7% 12.9 5.8% 33.1 5.7% 14 2 5 5% Total 393.6 90.8% 461. 7 80.8% 464.4 80.3% 483.0 77.6%

TAXES ~.

Other 32.7 8.0

7.5% 1. 8%

37.5 8.0

6.6% 1.4%

:37.7 8.0

6.5% 1. 4%

38.9 8.0

6.3% 1 1 %

Total 40.7 9.3% 45.5 8.0% 45.7 7.9% 46.9 7.6%

RENTS ------r;oc0 s

Car Hire 3.7

45.1 2.0%

10.4% 9.2

73.7 1. 6%

12.9% 9.2

73.3 1. 6%

12.7% 9.2

80.8 1. 5%

13.0% Other

Total (Net) 6.4

60.2

1. 5%

13.9%

6.5

89.4

1.1%

15.6%

6.5

89.0

1.1%

15.4%

6 4

96.4

1 05k

15.5% >' 'l:l 'l:l tIJ

NET RAILWAY Z OPERATING INCOME (60.9) (25.4) (21. 0) (3.9) tJ

H

ADJUSTMENTS 5.6 7.4 10 .2 12.3 X

Z NROI ADJUSTED (55.3) (18.0) (10.8) 8.4

~

N

DEPRECIATION, ETC. 13.3 13.9 13.9 14.1

PARENTHESIS () LOSS Route Miles Operated 7965

Track Miles Maintained: Main Track Miles 7530 vard & Side Track Miles ~

!J~.. ~~.~~!t~!t~~~~~~~~~

EXHIBIT 3 Core

Pro Forma Income Statements Traffic Level Comparisons

MARKET MARKET

($ Millions) 1977 LEVEL MARKET

OPPORTUNITY OPPORTUNITY Short Term

OPPORTUNITY Long Term J

I:evenue Revenue Revenue Revenue S T'2Tcent S Percent $ Percent $ Percent

CARLOADS (OOO's) 645 811 815 885

REVENUES Net Freight Other

230.9 32 ?

303.1 14 1

308.9 'ld 'l

336.7 34 8

Total 263.8 337.4 343.2 371. 5

OPERATING EXPENSES M of W 51.9 19.7% 55.2 16.4% 55.9 16.3% 57.7 15.5% M of E ';8.2 18.3% 57.8 17 .1% 58.0 16.9% 61. 3 16.5% Transportation Traffic

115.0 6.1

43.6% 2.3%

133.0 8.0

39.4% 2.4%

134.4 8.2

39.2% 2.4%

141. 3 8.9

38.0% 2.4%

Gen'l & Misc. 1 q ') 7 4!i 21 8 ~ c;!i 21 .9 6.4% 22.7 6.1% Total 240.7 91.3% 275.8 81. 8% 278.4 81.2% 291. 9 78.5%

TAXES R.R. Other

20.2 3.8

7.7% 1. 4%

22.6 3.8

6.7% 1.1%

22.8 3.8

6.6% 1.1%

23.7 3.8

6.4% 1. 0%

Total 24.0 9.1% 26.4 7.8% 26.6 7.7% 27.5 7.4%

RENTS Locos Car Hire

C .0 27.0

3.0% 10.2%

8.0 44.0

2.4% U.()'/;

f1. (1

44.1 2.3%

12.8% 8.0

49.3 2.2%

13.3%

Other (Net) 4.1 1. 6% 4.3 1. :; % 4.3 1. 3% 4.3 1. 2%

Total 39.3 14.8% 56.3 16.7% 56.4 16.4% 61. 6 16.7% :t:' '0

NET RAILWAY OPERATING INCOME (40.2) ( 21.1) (18.2) (9.5)

"d tIl Z

ADJUSTMENTS 7.0 8.4 10.2 11.8 o H ><

NROI ADJUSTED (33.2) (12.7) (8.0) 2.3 Z

DEPRECIATION, ETC. 9.9 10.3 10.3 10.5 w

PARENTHESIS ( ) LOSS Route Miles Operated 3894

Track Miles Maintained: Main Track Miles Y~:r:n & Side Track Miles

3958 1227

- ­ .. .. ... ­ .. • • • EXHIBIT 4

Miles City Core Pro Forma Income Statements Traffic Level Comparisons

($ t1illions) 1977 LEVEL MARKET

OPPORTUNITY

MARKET OPPORTUNITY Short Term

MARKET OPPORTUNITY

Long Term

$ r:evenue l'c.l:cpnt $

Revenue Percent $

Revenue Percent $

Revenue Percent

CARLOADS (000'5) 683 855 860 930

REVENUES Net Freight Other

Total

251. 6 33.0

284.6

329.8 34.3

364.1

336.1 34.3

370.4

364.7 34.8

399.5

OPERATING EXPENSES M of W M of E Transportation Traffic Gen'l & Misc.

Total

59.1 51. 3

12:0.2 6.7

2::1.5

260.8

20.8% 18.0% 43.3%

2.4% "7.2%

91.7%

62.0 61. 4

141.5 8.7

22.7

296.3

17.0% 16.9% 38.9%

2.4% 6.2%

81. 4%

62.8 61. 9

143. 3 8.9

22.9

299.8

17.0% 16.7% 38.7%

2.4% 6.2%

81. 0%

64.5 65.2

150.3 9.,6

23.8

313.4

16.1% 16.3% 37.6%

2.4% 6.0%

78.4%

TAXES ~.

Other Total

21.7 4 ()

25.7

7.7% 1 .4%

9.1%

24.2 4 0

28.2

6.6% 1 1".

7.7%

24.5 4 0

28.5

6.6% ]]%

7.7%

25.4 4 0

29.4

6.4% 1 0%

7.4%

RENTS Locos Car Hire Other (Net)

Total

NET RAILWAY OPERATING INCOME

ADJUSTMENTS

8.3 28.1 4.2

40.6

(42.5)

" c..... . -'

2.9% 9.9% 1. 5%

14.3%

8.3 45.7 4.2

58.2

(lil.6)

A h

2.3% 12.5%

1. 2% 16.0%

8.3 45.7 4.2

58.2

(16.0)

1 () ?

2.2% 12.3~

1.1% 15.7%

8.3 50.9 4.3

63.5

(6.8)

11 7

2.1% 12.7%

1.1% 15.9% >'

I-cJ I-cJ I:Ij Z t:J H :x:

NROI ADJUSTED (36.0) (10.0) (5.8) 4.9 Z ~

DEPRECIATION, ETC. 10.3 10.7 10.7 10.9

PARENTHESIS ( ) LOSS Route Miles 0gerated 4661

'T'rj.lck ~hles Maintained: ···· .. Main Track Miles 4729

va,d & Side Track Miles -r37O

- -•••••. . . . . . . ~

~.I II :. 11-. ;~~~,:-• EXHIBIT 5

Sub Core Pro ~orma Income Statements Traffic Level Comparisons

~

;

($ Millions) 1977 LEVEL MARKET

OPPORTUNITY

MARKET OPPORTUNITY Short Term

MARKET OPPORTUNITY

Long Term

$ Hevenue rcr.-cent $

Revenue Percent $

Revenue Percent $

Revenue Percent

CARLOADS (000' s) 11,44 545 - 559 -

605 -­

REVENUES Net Freight Other

Total

136.1 28.6

164.7

170.7 29.4

200.1

176.3 29 4

205.7

193.7 ?Q $'l

223.5

OPERATING EXPENSES M of W M of E Transportation Traffic Gen'l & Misc.

Total

28.6 33.1 75.5 3. ~

14.3

ISS.1

17.3% 20.1% 45.8%

2.2% 8.7%

94.1%

30.8 38.5 85.2 4.5

15.9

174.9

15.4% 19.2% 42.6~

2.3% 7.9%

87.4%

31.0 38.9 86.0 4.7

16 0

176.6

15.1% 18.9% <:::'.8%

2.3% 7 $'l'l.

85.9%

31. 6 41.1 90.3 5. 1"

1 t; <:;

184.6

14.1% 18.4% 40.4% 2.3% 7 ~ ..

82.6

TAXES ~.

Other Total

13.2 2.6

15.8

8.0'i; 1. 6%

9.6%

14.7 2 ~ 6

l7.3

7. 3 ',', 1. 3%

8.6%

14.8 2.6

17.4

7.2% 1. 3'E;

8.5%

15.3 '2 .. 7

18.0

6.8% 1. 2'6

8.0%

RENTS ---r:ocos

Car Hire Other (Net)

Total

NET RAILWAY OPERATING INCOME

ADJUSTMENTS

6.4 10.7

3.3

20.4

U6.6)

11.0

3.9% 6.5% 2.0%

12.4%

6.8 18.6

3.3

28.7

(20.8)

12.3

3.4% 9.3% 1. 6%

14.3%

6.9 18.9

3.3

29.1

(17.4)

14 1

3.4% 9.2% 1. 6%

14.2%

7.1 21.8

3.3

32.2

(11." )

1" ?

3.2% 9.8% 1. 5%

14 .5'1:

;:J::>l '"d '"d i:I:1 Z t:l H X

Z

NROI ADJUSTED (15.6) (8.5) (3.3) 3.8 V1

DEPRECIATION, ETC. 8.1 8.3 8.3 8.4

PARENTHESIS ( ) LOSS Route Miles Operated 1722

Track Miles Maintained: Main Track Miles V~r~ ~ <:;i0P ~r?rk Milps

1867 --rf6

..!aIII iiii� EXHIBIT 6

Miles City Sub Core� Pro Forma Income Statements� Traffic Level Comparisons� 1

MARKET MARKET MARKET OPPORTUNITY OPPORTUNITY

($ Millions) 1977 LEVEL OPPORTUNITY Short Term Long Term

I:evenue Revenue Revenue Revenue $ Percent $ Percent $ Percent $ Percent

CARLOADS (000' s) ~:lQ 587 601 648

REVENUES 157.4 197.9Net Freight 204.0 222.3�

Other 28.7 29.4 29 c; ?Q 7�

Total 186.1 227.3 233.5 252.0

OPERATING EXPENSES M of W 3G.Q 19.3% 38.0 16.7% 38.2 16.4% 38.7 15.4% M of E 36.2 19.5% 41.5 18.3% 42.0 18.0% 44.2 17.5%� Transportation� 83.8 45.0% 93.8 41.3% 94.6 40.5% 99.0 39.3%

5.4 2.3% 5.9 2.3%Traffic 4.2 2.3% 5.3 2.3% Gen'l & Misc. 14.8 8.0% 16.2 7.1% 16.3 7.0% 16.8 6.7%

Total 175.0 94.1% 194.8 85.7% 196.5 84.2% 204. '6 81.2%

TAXES 14. G 8.0% 16.2 7.1'( 16.3 7.0% 16.9 6.7%~.

2.8 1. 5% 2.8 1. 2% 2.8 1. 2% 2.8 1.1%Other Total 17.6 9.5% 19.0 8.3% 19.1 8.2% 19.7 7.8%

~NTS

5.8 3.6% 7.2 3.2% 7.3 3.1% 7.4 2.9%Locos 11. 7 6.3% 20.0 8.8% 20.3 8.7% 23.5 9.3%Car Hire :J:<�

Other (Net) 3.3 t-cJ�

1. 8% 3.3 1. 5% 3.3 1. 4 % 3.3 1. 3% t-cJ

Total 21.8 11.7% 30.5 1:3.5% 30.9 13.2% 34.2 13.5% tr:1 Z

NET RAILWAY o HOPERATING INCOME (28.3) (17.0) (13.0) (6.5) X

q a 11 7 1", 2 14.0ADJUSTMENTS Z cr:

.2 7.5NROI ADJUSTED (18.4) ( 5.3) ..

DEPRECIATION, ETC. 8.4 8.7 8.7 8.7

'<oute Hiles O~erated 2488PARENTHESIS ( ) LOSS

Track ~iles Maintained: Main Track Miles 2637� Yard & Side Track Miles --asS�

t-~ I. £ ~ R R·~ ~~' RR.� EXHIBIT 7

Kansas City Sub Core Pro Forma Income Statements Traffic Level Comparisons

($ Mill ions) 1977 LEVEL MARKET

OPPORTUNITY

MRKET OPPORTUNITY Short Term

MARKET OPPORTUNITY

Long Term }

$ r:evenue l'cJ:'cent $

Revenue Percent $

Revenue Percent $

Revenue Percent

CARLOADS (000 's) 498 -­ 613 626 - 677

REVENUES Net Freight Other

Total

169.8 29.9

199.7

214.7 30.7

245.4

222.6 30.7

253.3

244.3 31.1

275.4 -

OPERATING EXPENSES M of W M of E Transportation Traffic Gen'l & Misc.

Total

37.7 38.0 89.5 4.5

16.2

185.9

18.9% 19.0% 44.8%

2.3% 8.1%

93.1%

40.5 43.7

101.8 5.7

17.9

209.6

16.5% 17.8% 41. 5%

2.3% 7.3%

85.4%

40.9 44.4

103.6 5.9

18.0

212.8

16.2', 17.5% 40.9%

2.3% 7.1%

84.0%

41.9 46.6

108.2 6.5

18.6

221. 8

15.2% 16.9% 39.3%

2.3% 6.8%

80.5%

TAXES ~.

Other Total

15.6 3.1

18.7

7.8% 1. 6%

9.4%

17.3 3.1

20.4

7.0% 1. 3%

8.3%

17.4 3.1

20.5

6.9% 1. 2%

8.1%

18.0 3.1

21.1

6.5% 1.1%

7.6%

RENTS - Locos

Car Hire Other (Net)

Total

NET RAILWAY OPERATING INCOME

ADJUSTMENTS

6.9 16.5

4.1

27.5

(32.4)

9.8

3.5% 8.3% 2.0%

13.8%

7.3 26.8

4.1

38.2

(22.8)

11. 0

3.0% 10.9% 1. 7%

15.6%

7.5 27.2 4.1

38.8

(18.8)

12.3

3.0% 10.7% 1. 6%

15.3%

7.6 31.4 4.1

43.1

(10.6)

14.1

2.7% 11. 4 % 1. 5%

15.6%

;J;I:-0 ;-0 tx:l Z o H X Z

NROI ADJUSTED (22.6) -

(11. 8) (6.5) 3.5 -.J

DEPRECIATION, ETC. 8.7 8.8 8.8 8.9

PARENTHESIS ( ) LOSS Route Miles Operated 2393

Track Miles Maintained: Main Track Miles 2502� Yard & Side Track Miles --era�

EXHIBIT 8 Louisville Transcontinental Pro Forma Income Statements Traffic Level Comparisons )

MARKET MARKET MARKET OPPORTUNITY OPPORTUNITY

($ ~Iillions) 1977 LEVEL OPPORTUNITY Short Term Long Term

r:evenue Revenue Revenue Revenue $ Percent $ Percent $ Percent $ Percent

CARLOADS (000 IS) 572 698 710 763 -

REVENUES Net Freight 252.1 327.4 333.6 364.1 Other 30.5 31. 3 11 1 '< 1 (:,

Total 282.6 358.7 364.9 395.7

OPERATING EXPENSES M of W 56.S 20.0% 58.9 16.4% 59.1 16.2% 60.4 15.3% M of E 53.1 18.8% 64.1 17.9% 64.8 17.8% 67.6 17.1%� Transportation 122.3 43.3% 143.8 40.1% 144.8 39.7% 150.2 38.0%� Traffic 6.7 2.8% 8.7 2.4% 8.8 2.4% 9.6 2.4%� Gen I 1 & Misc. 20.1 7.1% 22.7 6.3% 22.9 6.3% 23.4 5.9%

Total 258.8 91. 5% 298.2 83.':"% 300.4 82.4% 311.2 78.7%

TAXES 21. 6 7.6% 24.5 6.8% 24.7 6.8% 25.3�

Other 4.7 1.7% 4.7 13% 4 7 1 '<!i� R.R. 6.4%

II 7 1 ')!i

Total 26.3 9.3% 29.2 8.1% 29.4 8.1% 30.0 7.6%

tlJ':NTS 8.0 2.8% 8.3 2.3% 8.3 2.3% 8.3 2.1%Locos .,,,

L\> .. ' 7.3% 33.8 9.4% 33.7 9.2% .18.4 9.7%Car Hire ~

~

5 .. C 1. 8% 4.9 1. 4% 4.9 1. 3% 4.9 1. 2% 'uOther (Net) 'lj�Total 33.6 11. 9% 47.':1 13 .1% 46.9 12.8% 51.6 13.0% M�

Z� C1NET RAILWAY�

OPERATING INCOME (36.1) (15.7) (11.8) 2.9 H� X

7. 1 8."" () g 12.1 ZADJUSTMENTS OJ�

NROI ADJUSTED (29.0) (7.4) (1.9) 15.0�

DEPRECIATION, ETC. 10.3 10.7 10.7 10.8

PARENTHES I S ( ) LOSS ~oute Miles Operated 3861

Track Miles Maintained: Main Track Miles 3821 Yard & Side Track Miles 1587

~III-IIII

EXHIBIT 9 Twin Cities Transcontinental Pro ~orma Income Statements Traffic Level Comparisons } MARKET MARKET

MARKET OPPORTUNITY OPPORTUNITY ($ Millions) 1977 LEVEL OPPORTUNITY Short Term Long Term

Hevenue Revenue Revenue Revenue $ f'cJ:"cent $ Percent $ Percent $ Percent

CARLOADS (000 's) 270 305 -­ 304 -­ 31B

REVENUES Net Freight Other

158.6 3.9

200.5 4.0

202.5 4.0

216.6 4 n

Total 162.5 204.5 206.5 220.6

OPERATING EXPENSES M of W 41. 3 25.4% 44.7 21. 9% 44.8 21.7% 44.9 20.4% M of E 36.8 22.6% 45.5 22.2% 45.7 22.1% 47.0 21. 3% Transportation Traffic

67.4 4.2

41. 5% 2.6%

79.7 5.2

40.0% 2.5%

79.7 5.3

38.6% 2.6%

81. 5 5.7

36.9% 2.6%

Gen'l & Misc. 14.9 'l.2% 17.2 8.4% 17.2 8.3% 17.4 7.9% Total 164.6 101.3% 192.3 95.0% 192.7 93.3% 196.5 89.1%

TAXES ~.

Other

13.5 3.2

8.3% 2.0%

15.5 3 2

7.6% • 6%

15.6 < ?

7.6% 1. 5%

15.7 < 2

7.1% 1 <;~

Total 16.7 10.3% IB.7 9.2% 18.8 9.1% 18.9 8.6%

RENT::; Locos Car Hire Other (Net)

Total

6.3 4.1 2.0

12.4

3.9% 2.5% 1. 2%

7.6%

6.7 5.8 2.0

14.5

3.3% 2.B% 1. 0%

7.1%

6.7 5.6 2.0

14.3

3.2% 2.7% 1. 0%

6.9%

6.8 6.7 2.0

15.5

3.1% 3.0%

.9%

7.0%

:J::' '"0 '"0 tx:l Z o

NET RAILWAY H

OPERATING INCOME (31. 2) (21. 0) (19.3) nO.3) :><:

ADJUSTMENTS 9.8 10.5 14.3 15.8 z 1.0

NROI ADJUSTED (21.4 ) - -

(10.5) (5.0) 5.5

DEPRECIATION, ETC. 6.9 7.8 7.9 8.0

PARENTHESIS ( ) LOSS Route Miles Operated 4467

Track Miles Maintained: Main Track Miles 4066 Yi9r<'l & si.r1P 'T'ri'lrk -.li 1 ,,<; ll'lf?

..� I !

APPENDIX 0�

LOCOMOTIVE UNIT REQUIREMENTS�

• • - - - - - - - - - - •� Locomotive unit Requiremnts

Based On Number of Present Units Retained Type of Unit

Unit Thru Train Local Yard

Alternative System Configuration Service Service Service Switching Total

System Without LDL 245� 29 108 180 563 + Market Opportunities 317 42 114 191 664� + Short Term Market Opportunitj~s 318 49 114 191 672 + Long Term Market Opportunities 337 52� 116 198 703

Core 126 16 56 151 349� + Market Opportunities 153 29 58 160� 400 + Short Term Market Opportuni~ies 151 36 60� 160 407 + Long Term Market Opportuniti~s 160 39 58 165 422

Miles City Core� 131 29 61 155 376 + Market Opportunities 157 42 63 164 426� + Short Term Market Opportl\cj. t:i",s 157 49 65 165 436� + Long Term Market Opportunit~2s 166 52 63 170 451�

Sub-Core 64 16 28 109 217� + Market Opportunities 76 20 28 117 241� + Short Term Market Opportunities 75 24 28 118 245� + Long Term Market OpportuDi~j~~ 81 24 28 122 255�

Miles City Sub-Core 69 29 34 114 246� + Market Opportunities 81 34 34 122 271 :t>

"'0+ Short Term Market Opportuni~j~8 80 37 34 123 274� "'0 + Long Term Market Opportunit~es 86 37 34 127 284 tI:l

Z�

Louisville Transcontinental 138 29 48 131 346 oH�

+ Market Opportunities 178 34 48 139 399 :x: + Short Term Market Opportu~~~~es 178 37 48 141 404 o + Long Term Market Opportunities 185 37 48 146 416�

Twin City Transcontinental 95 16 48 50 209� + Market Opportunities 118 16 48 53 235� + Short Term Market OpportL,n i. U.AS 118 16 48 53 235� + Long Term Market Opportu!1i j:joi'; 119 16 51 54 240�

Kansas City Sub-Core 85 16 30 126 257� + Market Opportunities 94- 24 30 137 285� + Short Term Market Opportunities 94 29 30 138 291� + Long Term Market Opportunities 101 29 30 143 303�

l