STB sets 2013 railroad cost of capital at 11.32%
Written by William C. Vantuono, Editor-in-ChiefThe Surface Transportation Board on July 31, 2014 issued its decision calculating the railroad industry’s after-tax cost of capital for 2013 as 11.32%, a slight increase over 2012’s 11.12%. The cost-of-capital figure represents STB’s estimate of the average rate of return needed to persuade investors to provide capital to the freight rail industry, and is used to determine if railroads are revenue-adequate.
STB found that, for 2013, the cost of railroad long-term debt was 3.68%; the cost of common equity was 12.96%; the cost of preferred equity was 3.87%; and the capital structure mix of railroads was 17.69% long-term debt, 82.31% common equity, and 0.004% preferred equity. These figures are used in determining the cost-of-capital figure.
Calculated annually, the cost-of-capital figure “is an essential component of many of the agency’s core regulatory responsibilities,” STB said. “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.”
Last year, for 2012, STB found that only Norfolk Southern and Union Pacific were revenue-adequate, based on their individual cost of capital figures.
