Saturday, August 03, 2013

Rail cost of capital fell slightly in 2012

Written by  Luther S. Miller, Senior Consulting Editor
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Rail cost of capital fell slightly in 2012

 Herzog Contracting Corp.

The Surface Transportation Board announced Friday, Aug. 2, 2013, that it has determined that the rail industry’s after-tax cost of capital was 11.11%. Last
 year, the cost of capital was 11.57%.

The cost of capital represents the STB’s estimate of the average rate of
 return needed to persuade investors to provide capital to the freight rail
 industry. More specifically, it is defined as the minimum rate of return on investment that providers of capital require as a condition for investing in or lending to a railroad. A railroad's cost of capital is the average cost of equity (common and preferred stock) and debt (i.e., bonds, equipment trust certificates, financial lease arrangements), weighted by its percent of capital structure. “The cost of debt is straight forward. The cost of equity is more subjective, but generally what a prudent investor would expect to earn on that investment,” according to Railway Age Contributing Editor Frank N. Wilner.

STB said the cost of capital figure “is an essential component of 
many of the agency’s core regulatory responsibilities. The Board uses the 
cost of capital figure in evaluating the adequacy of individual railroads’ 
revenues each year.” It also uses the figure when determining the 
reasonableness of a challenged rail rate, considering a proposal to abandon
 a rail line, or valuing a particular railroad operation.

The Board's decision in Docket No. EP 558 (Sub-No. 16) is available at the
STB website at

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