GAO-02-912R Amtrak’s Route Profitability Schedules

United States General Accounting Office

Washington, DC 20548

July 15, 2002

The Honorable John McCain

Ranking Minority Member

Committee on Commerce, Science, and Transportation

United States Senate

Subject: Financial Management: Amtrak’s Route Profitability Schedules Need

 Improvement

Dear Senator McCain:

Each year, Amtrak must provide an Annual Operations Report to the Congress1

 that

shows revenue, cost, and profit or loss on all its train routes in the form of route

profitability schedules and an annual audited financial statement. The Congress uses the

information provided on these schedules to help evaluate Amtrak’s financial

performance, including the profitability of individual Amtrak routes.

In addition, Amtrak periodically receives requests from the Congress or its staff to

provide route profitability schedules at different times of the year. In response to such a

request, in May 2001 Amtrak provided your staff with schedules that included

comparative data for fiscal years 1999 and 2000. In November 2001, Amtrak provided

schedules with data for fiscal year 2001 that also included data for fiscal years 1999 and

2000 that differed from the information previously provided in May. Also, it was not

readily apparent how any of the schedules tied to Amtrak’s audited financial statements.

This letter summarizes the information provided during our briefing to your staff on May

14, 2002. The enclosed briefing slides highlight the results of our work and the

information provided. You asked that we (1) determine the reasons for the differences

between the totals on Amtrak’s annual route profitability schedules for the same periods,

and how the schedules correlate to the audited financial statements, and (2) comment on

the general clarity and usefulness of the schedule presentations.

Results in Brief

In November 2001, Amtrak changed the way it prepared its route profitability schedules

and applied this new method to information previously provided in May 2001 for fiscal

years 1999 and 2000. Based on the initial information requested and provided, the

schedule totals could not be readily reconciled to the audited financial statements for the

corresponding periods. According to Amtrak officials, in order to focus on the operating

 1

Pursuant to Section 24315(a)(1) of Title 49, U.S. Code, Amtrak is required to provide this report, which

includes revenue, cost, and profit or loss for all its train routes to the Congress no later than February 15th

of each year.
2 GAO-02-912R Amtrak’s Route Profitability Schedules

profitability of its routes, Amtrak excluded certain items included in the financial

statement amounts in preparing the route schedule data. As a result, the totals for both

sets of schedules did not tie directly to the audited financial statements. In addition, for

the November 2001 schedules, Amtrak changed the mix of these excluded items, which

caused the differences between the two sets of schedules. The clarity and usefulness of

the schedules provided to congressional staff were impaired because there was limited

explanation of how these schedules were prepared, why they changed, and how they

correlated to the audited financial statements. With Amtrak’s assistance, we were able

to reconcile both sets of schedules to the audited financial statements.

In the course of our work, we also noted that Amtrak allocated certain profits from its

other business activities to its routes as a reduction in route net cost. According to

Amtrak, it allocated these profits to partially offset the losses incurred on scheduled

Amtrak routes. Prior to November 2001, Amtrak allocated these profits to all Amtrak

routes in proportion to their share of total operating costs. In November 2001, Amtrak

began allocating these profits only to routes with losses. Amtrak’s allocation of these

profits from its other business activities undermines the ability to assess whether or not

individual routes are operated profitably. The more recent change to allocate those

profits solely to routes operating at a loss further erodes the ability to compare the

operating results of individual routes. Collectively, these practices compromise the

usefulness of these schedules to help congressional decisionmakers assess route

profitability.

Recommendations

To improve the clarity and usefulness of the route profitability schedules provided to

congressional staff and others, we recommend that the President and Chief Executive

Officer of Amtrak make the following changes.

• Provide a clear explanation of the methodology used in preparing the schedules,

including how they correlate to the audited financial statements.

• Clearly explain any changes in the method for producing the profitability schedules

on the face of the schedules.

• Discontinue the allocation of non-core profits to the route profitability schedules.

Agency Comments

We obtained oral comments on a draft of our briefing slides from Amtrak officials.

Amtrak officials generally agreed with our findings and recommendations and their

comments have been incorporated as appropriate. Amtrak officials made the following

additional points: (1) Amtrak is asked to provide financial information on an expedited

basis and in varying formats to a variety of organizations; (2) the schedules provided to

the Congress in May and November 2001 were not part of Amtrak’s reporting mandate to

provide annual financial information on its train routes; and, (3) a detailed narrative

explanation of changes made was provided in February 2002 in the mandated annual

report. Amtrak officials agreed, however, that more clarity on the informal submissions

would be appropriate.
3 GAO-02-912R Amtrak’s Route Profitability Schedules

Scope and Methodology

To fulfill our objectives, we reviewed the route profitability schedules provided in May

2001 and November 2001. Using the schedules, we (1) compared the fiscal years 1999

and 2000 total revenues, net cost, and profit or loss amounts presented in both sets of

Amtrak schedules and discussed identified differences with Amtrak officials, (2)

compared schedule totals to the audited financial statements, and (3) reviewed the

schedule presentations for clarity and usefulness.

We did not review detailed data underlying the amounts reported in these schedules or

assess Amtrak’s route cost accounting methodologies. We conducted our work from

February 20, 2002, through March 15, 2002, in accordance with generally accepted

government auditing standards.

----------------------------------------------------------

This report is available on our home page at http://www.gao.gov. If you have any

questions about this report, please contact me at (202) 512-8341 or John C. Fretwell,

Assistant Director, Financial Management and Assurance, at (202) 512-9382. You may

also reach us by e-mail at fretwellj@gao.gov or calboml@gao.gov. Key contributors to

this assignment were Lisa J. Crye, John C. Fretwell and Doris G. Yanger.

Sincerely yours,

Linda M. Calbom

Director, Financial Management and Assurance

Enclosure
Enclosure

4 GAO-02-912R Amtrak’s Route Profitability Schedules

1

National Railroad Passenger Corporation

(Amtrak)

Amtrak’s Route Profitability Schedules Need

Improvement

Briefing to Staff of the Committee on Commerce, Science, and

Transportation, United States Senate

May 14, 2002
Enclosure

5 GAO-02-912R Amtrak’s Route Profitability Schedules

2

• Pursuant to Section 24315(a)(1) of Title 49, U.S. Code, Amtrak is

required to provide an Annual Operations Report to Congress no later

than February 15 of each year on revenue, cost, and profit or loss for all

its train routes. Amtrak provides this information in the form of schedules

called “Financial Performance of Scheduled Amtrak Routes.” Congress

uses this information to help evaluate the profitability of individual Amtrak

routes.

• In addition to the required submission mentioned above, Amtrak

periodically receives requests by Congress or its staff to provide these

schedules at different times of the year. Schedules provided to

congressional staff in May 2001 included comparative data for fiscal

years 1999 and 2000. In November 2001, Amtrak provided schedules

with data for fiscal years 1999 – 2001. The fiscal year 1999 and 2000

data provided in November 2001 was different than that provided in May

2001.

Background
Enclosure

6 GAO-02-912R Amtrak’s Route Profitability Schedules

3

• Section 24315(d) of Title 49, U.S. Code requires Amtrak to submit annual

audited financial statements.

• It was not readily apparent how the schedule totals tied to the audited

financial statements.

Background (cont.)
Enclosure

7 GAO-02-912R Amtrak’s Route Profitability Schedules

4

Objectives

With regard to the schedules provided in May 2001 and November 2001,

you requested that we

• determine the reasons for the differences between the annual schedule

totals for the same periods, and how the schedules correlate to the

audited financial statements, and

• comment on the general clarity and usefulness of the schedule

presentations.
Enclosure

8 GAO-02-912R Amtrak’s Route Profitability Schedules

5

Scope and Methodology

We reviewed the schedules provided in May 2001 and November 2001,

and

• compared the fiscal years 1999 and 2000 total revenues, net cost, and

profit or loss amounts presented in both sets of Amtrak schedules, and

discussed identified differences with Amtrak officials,

• also compared schedule totals to the audited financial statements1 and,

with the assistance of Amtrak officials, reconciled schedule totals to the

financial statements, and

• reviewed the schedule presentations for clarity and usefulness.

1 At the time of our review, the fiscal year 2001 audited financial statements had not been issued.
Enclosure

9 GAO-02-912R Amtrak’s Route Profitability Schedules

6

Scope and Methodology (cont.)

We did not review detailed data underlying the amounts reported in these

schedules or assess Amtrak’s route cost accounting methodologies.

We requested comments on a draft of these briefing slides from Amtrak.

We received oral comments from Amtrak that were incorporated into these

briefing slides as appropriate.

We conducted our work from February 20, 2002 through March 15, 2002 in

accordance with generally accepted government auditing standards.
Enclosure

10 GAO-02-912R Amtrak’s Route Profitability Schedules

7

Results in Brief

In November 2001, Amtrak changed the way it prepared its route

profitability schedules and applied this new method to information

previously provided for fiscal years 1999 and 2000.

The schedules provided to congressional staff included limited explanation

of how these schedules were prepared, why they changed, and how they

correlated to the audited financial statements.2

To focus on the operating profitability of its routes, Amtrak made certain

adjustments to the financial statement amounts in preparing the route

schedule data. In addition, because Amtrak allocated certain profits from

its other business activities to the schedules, the clarity and usefulness of

the schedules in helping Congressional decision makers assess route

profitability was impaired.

2 With Amtrak’s assistance, we were able to reconcile the schedules to the audited financial statements.
Enclosure

11 GAO-02-912R Amtrak’s Route Profitability Schedules

8

Results in Brief (cont.)

Clearly explaining the route profitability schedule preparation method and

discontinuing the allocation of other business profits to the routes would

improve the schedules.

We made several recommendations that will help clarify the schedule

presentation and improve their usefulness.

Amtrak officials generally agreed with the substance of our briefing and

recommendations, and provided oral technical and clarifying comments.
Enclosure

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9

Reasons for Differences

Amtrak changed the way it prepared the route profitability schedules in

November 2001 and applied this new method to information previously

provided for fiscal years 1999 and 2000. As shown in the following table,

the route loss totals in the November 2001 schedules differed from the

route loss totals in the schedules provided in May 2001.

 Route Loss (in millions)_________

Fiscal Year May 2001 November 2001

 1999 $476.0 $511.3

 2000 $471.2 $506.0

Based on the initial information requested and provided, these amounts

could not be readily reconciled to the related audited financial statements

for the corresponding periods.
Enclosure

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10

Reasons for Differences (cont.)

According to Amtrak officials, in order to focus on the operating profitability

of Amtrak routes, Amtrak made certain adjustments to the financial

statement amounts in preparing the route schedule data provided in May

2001 and November 2001, which is why the totals for both sets of

schedules do not directly tie to the audited financial statements.

In addition, for the November 2001 schedules, they changed the mix of

these excluded items, which caused the differences between the two

sets of schedules.
Enclosure

14 GAO-02-912R Amtrak’s Route Profitability Schedules

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Reasons for Differences (cont.)

Prior to November 2001, Amtrak excluded the following revenues and

expenses that were included in the financial statement amounts when

preparing their route profitability schedules:

• Other Business (including Commuter) revenue and related expenses3

• Certain Corporate expenses (e.g., salaries & benefits, office rent)

• Federal and state capital payment revenues and related interest income on those

payments4

• Depreciation expense

• The non-cash portion of employee post retirement insurance expense

• Cost of progressive overhauls5

3 Other Business revenue and related expenses include items such as work for other railroads, and real estate operations and development. As

 discussed later, profit (termed non-core profit) from these other lines of business was added back to the route profitability schedules and resulted in

 reducing route net cost.

4 Federal and state capital payments are grants to supplement passenger and other revenue generated from operations. These grants are to be used

 for modernizing the track and other infrastructure Amtrak owns, purchasing locomotives, passenger cars, and other rolling stock (such as mail cars

 and express cars).

5 Progressive overhauls are phased equipment overhauls that are performed each year in lieu of a comprehensive, or “heavy”

 overhaul every 4 years.
Enclosure

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Reasons for Differences (cont.)

Amtrak officials advised us that they changed their schedule preparation

method in November 2001 to better conform to a financial measurement

concept that presents earnings before interest, taxes, depreciation, and

amortization (EBITDA).6 As a result, Amtrak no longer excludes:

• the non-cash portion of employee post retirement insurance expense

• the cost of progressive overhauls

Also, in keeping with the EBITDA measurement concept, Amtrak changed

the way it accounted for interest expense. Under the old method, interest

was included in the route schedule net cost. Under the new method, it is

excluded.

6 EBITDA is a financial measure used by many analysts and investors to assess a company’s operating performance. It eliminates the items listed above which are typically included in the determination of net income.

.
Enclosure

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13

Reasons for Differences (cont.)

Amtrak stated that eliminating interest, taxes, depreciation and

amortization, which removes the capital and financing expenses of the

corporation, allows a clearer understanding of operating performance.

In order to provide comparability with fiscal year 2001 data, Amtrak applied

the new method to restate schedule data for fiscal years 1999 and 2000.

.
Enclosure

17 GAO-02-912R Amtrak’s Route Profitability Schedules

14

Clarity and Usefulness

Clarity and usefulness of the Amtrak route profitability schedules was

impaired because

• the original schedule preparation methodology was not explained

clearly,

• when the preparation method changed, it was not completely evident

from the schedules what had changed and why, and

• based on the initial information requested and provided, annual totals

presented in the schedules could not be readily reconciled to the related

audited financial statements, which caused confusion for those

analyzing Amtrak’s financial results using both sources of information.

With Amtrak’s assistance, we were able to reconcile the schedules to the

audited financial statements.
Enclosure

18 GAO-02-912R Amtrak’s Route Profitability Schedules

15

Clarity and Usefulness (cont.)

In the course of our work, we also noted that Amtrak allocated non-core

profits to Amtrak routes as a reduction in route net cost.7 According to

Amtrak, non-core profits are allocated to partially offset the losses incurred

on scheduled Amtrak routes.

Amtrak changed the allocation method in November 2001.

• Under the old method, non-core profits were allocated to all Amtrak

routes in proportion to their share of total operating costs.

• Under the new method, Amtrak allocated non-core profits only to routes

with losses.

The usefulness of the schedules under both methods is compromised

by this allocation of non-core profits.

7 Non-core profits include profits, if any, from other business activities such as work for other railroads, and real estate operations and development.
Enclosure

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16

Clarity and Usefulness (cont.)

The allocation of non-core profits to Amtrak routes undermines the ability

to compare route profitability.

• Under both allocation methods, year-to-year comparisons of the

profitability of a given route are distorted. Reported route profitability

rises or falls with changes in non-core profits, which are unrelated to

actual route performance.

• The new method that allocates non-core profits only to routes with

losses further distorts comparisons of route profitability during a given

year. Routes with losses appear to have lower losses, and the reported

differences between profitable and unprofitable routes are diminished or

possibly eliminated.
Enclosure

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17

• The route profitability schedules provided to congressional staff in May

and November 2001 lacked transparency because there was little

explanation of how the schedules were prepared, why they changed,

and how they correlated to the audited financial statements.

• The allocation of non-core profits to routes undermines the ability to

compare performance among scheduled routes.

• These preparation methods compromise the usefulness of the

schedules to help Congressional decision makers assess route

profitability.

Conclusions
Enclosure

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18

We recommend the President and Chief Executive Officer of Amtrak make

the following changes to improve the clarity and usefulness of the route

profitability schedules provided to congressional staff and others.

• Provide a clear explanation of the methodology used in preparing the

schedules, including how they correlate to the audited financial

statements.

• Clearly explain any changes in the method for producing the

profitability schedules on the face of the schedules.

• Discontinue the allocation of non-core profits to the schedules.

Recommendations
Enclosure

22 GAO-02-912R Amtrak’s Route Profitability Schedules

19

Amtrak officials generally agreed with the substance of our briefing and

recommendations, and provided oral technical and clarifying comments,

which we incorporated as appropriate. They made the following additional

points.

• Amtrak is asked to provide financial information on an expedited basis

and in varying formats to a variety of organizations.

• The schedules submitted to Congress in May and November 2001

termed informal submissions by Amtrak officials, were not part of

Amtrak’s reporting mandate to provide annual financial information on

its train routes.

• In February 2002, Amtrak did provide a detailed narrative explanation

of changes made in the mandated annual report on the financial

information on its train routes.

Amtrak officials agreed, however, that more clarity on the informal

submissions is appropriate.

Agency Comments

(190061)