42676                    SERVICE DATE – LATE RELEASE OCTOBER 16, 2012

EB

 

SURFACE TRANSPORTATION BOARD

 

Docket No. EP 552 (Sub-No. 16)

 

RAILROAD REVENUE ADEQUACY—2011 DETERMINATION

 

Digest:[1]  The Board finds that two Class I railroads (Norfolk Southern Combined Railroad Subsidiaries and Union Pacific Railroad Company) are revenue adequate for the year 2011, meaning that two of the Class I railroads achieved a rate of return equal to or greater than the Board’s calculation of the average cost of capital to the freight rail industry.

 

Decided:  October 15, 2012

 

            This annual determination of railroad revenue adequacy under 49 U.S.C. § 10704(a)(3) is made in accordance with the standards and procedures developed in Standards for Railroad Revenue Adequacy (Standards I), 364 I.C.C. 803 (1981), Standards for Railroad Revenue Adequacy (Standards II), 3 I.C.C. 2d 261 (1986), and Supplemental Reporting of Consolidated Information for Revenue Adequacy (Supplemental Reporting), 5 I.C.C. 2d 65 (1988).  Pursuant to those procedures, which are essentially mechanical, a railroad is considered revenue adequate under 49 U.S.C. § 10704(a) if it achieves a rate of return on net investment (ROI) equal to at least the current cost of capital for the railroad industry. 

 

            In Railroad Cost of Capital—2011, EP 558 (Sub-No. 15) (STB served Sept. 13, 2012), we determined that the 2011 railroad industry cost of capital was 11.57%.  By comparing this figure to the 2011 ROI data obtained from the carriers’ Annual Report R-1 Schedule 250 filings, we have calculated a revenue adequacy figure for each of the Class I freight railroads that were in operation as of December 31, 2011. 

 

            A summary of the ROIs for all Class I railroads is set forth in Appendix A to this decision.  Appendix B provides the railroads’ R-1 Schedule 250 data that was used to compute the ROIs.  We find two carriers (Norfolk Southern Combined Railroad Subsidiaries[2] and Union Pacific Railroad Company) to be revenue adequate for 2011 and one carrier (CSX Transportation, Inc.) was very nearly so.  Our findings will be final on the effective date of this decision. 

 

            This action will not significantly affect either the quality of the human environment or the conservation of energy resources.

                                                                             

            It is ordered:

 

1.  This decision is effective October 16, 2012.

 

2.  Notice of this decision will be published in the Federal Register.

 

            By the Board, Chairman Elliott, Vice Chairman Mulvey, and Commissioner Begeman.

Vice Chairman Mulvey commented with a separate expression.

 

___________________________________

 

VICE CHAIRMAN MULVEY, commenting:

 

Each year the STB issues a finding on how well the individual railroads have performed in achieving sufficient earnings so that they are “revenue adequate.”  Although Class I railroads today are profitable, each year few (if any) are found to be revenue adequate by the Board’s regulatory measure.  While this is commonly viewed as an inconsistency, it is important to understand that the Board’s revenue adequacy metric takes into account not only the income sufficient to attract capital, but also the revenue necessary over the long term to maintain and improve the large and costly infrastructure over which railroads operate – the interstate rail network – as well as the costs of locomotives and rolling stock.        

                                                                                                                                                                                                                                                          

APPENDIX A

 

           

Railroad	BNSF		CSX	GT			KCS	NS	SOO		UP
Combined/Consolidated Net Railway Operating Income For Reporting Entity	3,273,728		1,883,505	568,033			231,347	1,954,829	193,817		3,474,941
Add:  Interest Income from Working Capital Allowance – Cash Portion	303		0	16			453	1,830	93		0
Add:  Income Taxes Associated with Non-Rail Income and Deductions	6,751		5,742	16,658			(2)	28,241	(62)		51,353
Add:  Gain or (loss) from transfer/reclassification to nonrail-status (net of income taxes)	18,463		(1,052)	1,305			345	21,721	(99)		26,703
** Adjusted Net Railway Operating Income **	3,299,245		1,888,195	586,012			232,143	2,006,621	193,749		3,552,997
** Calculating the Adjusted Investment in Railroad Property for the Reporting Entity **
Combined Investment in Railroad Property Used in Transportation Service – Ending Balance	48,016,953		23,920,332	9,760,234			2,844,653	23,346,518	3,889,931		38,392,908
Combined Investment in Railroad Property Used in Transportation Service – Beginning Balance	46,300,386		22,927,514	9,433,123			2,572,767	22,141,872	3,703,035		36,912,303
Combined Investment in Railroad Property Used in Transportation Service – Average	47,158,670		23,423,923	9,596,679			2,708,710	22,744,195	3,796,483		37,652,606
Other Elements of Investment – Ending Balance	0		0	1,863			0	0	1,135		0
Other Elements of Investment – Beginning Balance	0		0	1,863			0	0	1,135		0
Other Elements of Investment – Average	0		0	1,863			0	0	1,135		0
Interest During Construction – Ending Balance	0		0	2,113			4,320	2,580	21,504		43,302
Interest During Construction – Beginning Balance	0		0	2,113			4,320	2,580	21,504		43,309
Interest During Construction – Average	0		0	2,113			4,320	2,580	21,504		43,306
Net Rail Assets of Rail Related Affiliates – Ending Balance	331,245		0	143,737			0	0	0		0
Net Rail Assets of Rail Related Affiliates – Beginning Balance	318,021		0	200,443			0	0	0		0
Net Rail Assets of Rail Related Affiliates – Average	324,633		0	172,090			0	0	0		0
Working Capital Allowance – Ending Balance	1,032,167		239,548	36,233			73,782	479,292	38,109		971,985
Working Capital Allowance – Beginning Balance	662,693		218,469	51,939			65,931	649,032	86,135		900,106
Working Capital Allowance – Average	847,430		229,009	44,086			69,857	564,162	62,122		936,046
Accumulated Deferred Income Tax Credits – Ending Balance	15,520,951		7,576,556	3,217,372			673,659	7,943,800	1,132,870		11,789,873
Accumulated Deferred Income Tax Credits – Beginning Balance	14,219,432		7,010,537	2,985,545			558,326	7,489,154	1,105,164		11,092,135
Accumulated Deferred Income Tax Credits – Average	14,870,192		7,293,547	3,101,459			615,993	7,716,477	1,119,017		11,441,004
Tax Adjusted Net Investment Base – Ending Balance	33,859,414		16,583,324	6,718,856			2,240,456	15,879,430	2,772,531		27,531,718
Tax Adjusted Net Investment Base – Beginning Balance	33,061,668		16,135,446	6,695,984			2,076,052	15,299,170	2,661,367		26,676,965
* Tax Adjusted Net Investment Base *	33,460,541		16,359,385	6,707,420			2,158,254	15,589,300	2,716,949		27,104,342
TAX ADJUSTED RETURN ON INVESTMENT	9.86%		11.54%	8.74%			10.76%	12.87%	7.13%		13.11%
The line item descriptions in this schedule are defined in the instructions to the Schedule 250 appearing in Supplemental Reporting of Consolidated Information for Revenue Adequacy Purposes, 5. I.C.C. 2d 65, 80-82 (1988).  The Schedule 250 form and instructions are not published in the Code of Federal Regulations.

                                                                                                                                                                                   

APPENDIX B