Railroad Cost of Capital Set at 10.37% for 2021

Written by Marybeth Luczak, Executive Editor
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The Surface Transportation Board (STB) has determined that the cost of capital for the railroad industry was 10.37% for 2021.

This represents the STB Office of Economics’ estimate of the average rate of return needed to persuade investors to provide capital to the industry, according to the STB’s Aug. 2 decision (download below). In 2020, the cost of capital was 7.89%.

Calculated annually, the cost of capital is an aggregate measure and “not intended to measure the desirability of any individual capital investment project”; it “is one component used in evaluating the adequacy of a railroad’s revenue each year … [and] may also be used in other regulatory proceedings, including (but not limited to) those involving the prescription of maximum reasonable rate levels, the proposed abandonment of rail lines, and the setting of compensation for use of another carrier’s lines,” STB explained.

The agency reported that for 2021:

• The cost of railroad long-term debt was 2.63% (vs. 2.54% in 2020).

• The cost of common equity was 12.03% (compared with 9.33% in 2020).

• The cost of preferred equity was 0% (vs. 3.42% in 2020).

• The capital structure mix of the railroads was 17.71% long-term debt (21.16% in 2020); 82.29% common equity (78.84% in 2020); and 0.00% preferred equity (0.00% for 2020).

“This proceeding was instituted by decision served on February 11, 2022, to update the railroad industry’s cost of capital for 2021,” STB reported. “In that decision, the Board solicited comments from interested parties on the following issues: (1) the railroads’ 2021 current cost of debt capital; (2) the railroads’ 2021 current cost of preferred equity capital (if any); (3) the railroads’ 2021 cost of common equity capital; (4) the 2021 capital structure mix of the railroad industry on a market value basis; and (5) the appropriate treatment of Kansas City Southern (KCS) in light of the merger transaction currently under consideration in Canadian Pacific Railway—Control—Kansas City Southern, Docket No. FD 36500. The Board received comments from the Association of American Railroads (AAR) providing the information used to calculate the annual cost-of-capital determination, as established in Use of a Multi-Stage Discounted Cash Flow Model in Determining the Railroad Industry’s Cost of Capital, EP 664 (Sub-No. 1) (STB served Jan. 28, 2009). AAR states that KCS was not included in the 2021 sample because its stock was not listed in the New York Stock Exchange or NASDAQ for the entire year and therefore, it did not meet the Board’s criteria. (AAR Opening 2-3.)” STB wrote that it accepted both “AAR’s submission, which complies with the Board’s established methodology,” as well as its “determination not to include KCS in the 2021 sample because it did not meet the Board’s criteria.” KCS was included in 2020.


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