STB sets 2014 rail cost of capital at 10.65%

The Surface Transportation Board has set the rail industry’s 2014 after-tax cost of capital at 10.65%, some 6% lower than the 2013 figure of 11.32%.

The cost of capital figure represents the Board’s estimate of the average rate of return “needed to persuade investors to provide capital to the freight rail industry.”

Calculated annually, the cost of capital figure “is an essential component of many of the agency’s core regulatory responsibilities,” STB says. “The Board uses the cost of capital figure in evaluating the adequacy of an individual railroad’s 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.”

STB solicited comments from interested parties on the following issues: (1) the railroads’ 2014 current cost of debt capital; (2) the railroads’ 2014 current cost of preferred equity capital (if any); (3) the railroads’ 2014 cost of common equity capital; and (4) the 2014 capital structure mix of the railroad industry on a market value basis. Comments were received from the Association of American Railroads (AAR) based on “Use of a Multi-Stage Discounted Cash Flow Model in Determining the Railroad Industry’s Cost of Capital,” EP 664 (Sub-No. 1), which the STB served on Jan. 28, 2009. The Western Coal Traffic League (WCTL) and the Arkansas Electric Cooperative Corporation (AECC) replied to AAR’s submission.

STB determined that, in 2014, the cost of railroad long-term debt was 3.58%; the cost of common equity was 12.06%; the cost of preferred equity was 3.69%; and the capital structure mix of the railroads was 16.66% long-term debt, 83.34% common equity and 0.00% preferred equity. These calculations figured into STB’s 2014 composite railroad industry cost of capital number of 10.65%.

“Railroad Cost of Capital,” Docket No. EP 558 (Sub-No. 18), may be viewed and downloaded at the Board’s website here.