Verbatim Report of the Annual Meeting ...

3. INVESTMENT MADE IN THE COMPANY'S PROPERTY FOR EACH DOLLAR OF GROSS BUSINESS

The word "investment," as used in this, is intended to cover all costs incident to the production or replacement of a property and its business.

The figures obtained showing the ratio between investment and gross earnings are as follows:

Companies having annual gross receipts over one million dollars.

Annual gross receipts over 34 and less than one million dollars.

Annual gross receipts over 1⁄2 and less than 34 million dollars.

Annual gross receipts over 4 and less than 2 million dollars.

The above figures must, necessarily, be considered approximate because they are in all cases obtained from appraisals made after the completion of the property and at a time when the actual cost of construction was not available. There is always room for an honest difference of opinion as to the cost of replacement of an existing property and no two engineers making such an appraisal would arrive at exactly the same result.

All of the above figures are, however, based on appraisals made by competent engineers of long experience and I think may be accepted

as approximately correct. The appraisals of companies (a), (b) and (h) of companies having receipts of over $1,000,000 were made at a time when these properties were not properly equipped to handle their full gross business and give adequate and first class service. The valuations in these cases are, therefore, low and had the physical properties been adequate for the business handled, I think that investment per dollar of gross would have, undoubtedly, been as high as $4 in each case.

Taking the average of all of the companies given in the above table, I find an average investment of $3.92 per dollar of gross earnings. It would appear from the figures that the average investment per dollar of gross is practically the same in smaller companies as in the larger. It is, of course, true that the average investment per mile is much greater in large cities than in small. It is also true that the gross earnings per mile of track are much greater in large cities than in small and these two factors, apparently, offset each other when comparisons are made between the total investment and the total gross earnings.

In considering these figures, it should be borne in mind that in many of the larger cities of the country the investment per dollar of gross earnings materially exceeds the figures given in the above table.

4. THE PERCENTAGE RETURN ON THE COMPANY'S INVESTMENT WHICH MUST BE EARNED TO PROVIDE FOR TAXES, DEPRECIATION, OBSOLESCENCE AND TO ATTRACT CAPITAL FREELY TO THE BUSINESS

It is hardly practical to obtain definite data for this fourth item but I think it may be possible to arrive at figures which we will all agree are reasonable.

In the matter of depreciation and obsolescence, testimony is available in many court cases and in hearings before public service commissioners giving the opinions and experience of engineers and operators who have had practical experience in the care of street railway properties. The opinions of these men differ, as to details, but I think we will not be far wrong in assuming that they will agree fairly well that at least three per cent. of the investment over and above ordinary maintenance charges, should be set aside to provide for replacement of property due to depreciation, obsolescence and other causes.

I think that 12 per cent. of the value of the physical property may be said to fairly represent the average amount paid in taxes.

The return on the Company's investment, which must be earned to attract capital freely to the business is not so easy to determine. The return necessary for this purpose, no doubt, varies in different sections of the country. In the older communities, where conditions are considered more stable, an investment would, no doubt, be freely

made for a lower return than would be expected in the newer and more rapidly growing sections of the West. In the State of Massachusetts the stocks of domestic street railway companies are nontaxable and the business of the company is very largely protected by laws, which have reduced its menaces and hazards. Under these circumstances, investors are satisfied with a lower return than they would expect in other states.

Considering average conditions throughout the country, however, it does not seem to me that we will be far wrong if we assume that a street railway company should be able to earn 8 per cent. on its investment, if it is to secure freely the capital necessary to develop its business. It might be well to point out in this connection that the securing of new capital is, in this country, an exceedingly important part of the business of a street railway company. The cities throughout the United States are growing at an exceedingly rapid rate and new capital must be continuously obtained if the community is to be properly served.

In a group of companies scattered all over the country, with which I am familiar, the investment required has doubled on the average once in about seven years.

We have then a total of at least 121⁄2 per cent. on the Company's investment which should be earned to provide for taxes, depreciation and obsolescence and to attract capital freely to the business.

5. THE MAXIMUM LENGTH OF HALF TRIP IN MILES FOR PROFITABLE OPERATION

Taking the above figures and applying them as indicated in our 1911 report, we arrive at the following figures as the maximum length of half trip in miles for profitable operation:

Companies having gross receipts over one million dollars.

Annual gross receipts over 34 and less than one million dollars.

Annual gross receipts over 1⁄2 and less than 4 million dollars.

Annual gross receipts over 14 and less than 2 million dollars.

The above figures indicate that passengers may be profitably carried a longer distance in the large cities for a five cent fare than in the small cities. This is due to the fact that in the large cities the number of passengers carried per half trip and, consequently, the receipts per half trip is greater than in the small cities. It would appear, however, that even in the large cities a distance of from 3% to 4 miles for a five cent fare is the maximum length of half trip for profitable operation, if we assume, as above, that at least 121⁄2 per cent. should be earned to provide for taxes, depreciation and obsolescence and a reasonable return on the capital invested.

As a matter of fact, there are, of course, a considerable number of the larger cities in which the length of half trip would average over 32 to 4 miles, and it is evident that in the cities where this condition exists, the companies are either operating under exceptionally favorable conditions as to investment or low operating expenses per car mile, or, they are not earning 8 per cent. on their investment after setting aside 3 per cent. for depreciation and obsolescence. The real truth is that there are very few street railways in the country which are to-day earning 8 per cent. on their investment and setting aside 3 per cent. for depreciation and obsolescence, after paying all operating expenses and taxes.

It is because of this fact that our Committee has been appointed to consider the question of a reasonable basis of fare. It is because of this fact that in recent street railway conventions, the one question which has overshadowed all others is the financial problem; the question of how the street railways, facing continually higher cost of materials and labor and greater length of haul for five cents, are to earn a sufficient net return to attract new capital necessary to carry on their business.

The above figures would seem to indicate quite clearly that urban street railway lines, exceeding four miles in length must be a burden on the company rather than a source of profit if operated for a five cent fare. It would also appear that an additional charge over and above the present five cent fare should be made on all lengths of haul exceeding four miles. To bring this change about is a far more

difficult problem than to point out its necessity, but it is a real problem which the street railways of the country are bound to face and is one in which the American Electric Railway Association can be of great help through carrying on a proper campaign of publicity.

6. SUMMARY

In order that the above figures may be more readily compared, I have grouped them in one table in the following summary:

Annual gross receipts over one million dollars