Monday, September 28, 2009

Rail cost of capital exceeds average return on investment

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The Surface Transportation Board has determined that the railroad industry's pre-tax cost of capital for 2008 was 11.75%, slightly higher than the previous year's 11.53%.

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This means there's still a wide gap between the cost of capital and the industry's return on investment (ROI). The STB recently announced that the average ROI in the 12 months ended June 30, 2009 was 8.94%, down from the 9.20% ROI posted in the prior 12-month period.

In the STB's most recent calculation, two railroads earned an ROI that exceeded the cost of capital—Norfolk Southern (10.33%) and Soo Line (CP), 12.09%. The ROI of other Class I railroads ranged from Kansas City Southern's 7.13% to BNSF's 9.69%.

In announcing its new cost of capital determination, the STB noted that it uses the figure "in evaluating the adequacy of individual railroads’ revenues each year" and in “determining the reasonableness of a challenged rail rate, considering a proposal to abandon rail line, or valuing a particular railroad operation.”