41209 SERVICE DATE – OCTOBER 29, 2010
EB
This decision will be
printed in the bound volumes of
the
STB printed reports at a later date.
SURFACE
TRANSPORTATION BOARD
CORRECTED DECISION*
Docket No. EP 558
(SubNo. 13)
RAILROAD COST OF
CAPITAL—2009
Digest: The agency finds that the cost of capital for
the railroad industry in 2009 was 10.43%.
This figure represents the Board’s estimate of
the average rate of return needed to persuade investors to provide capital to
the freight rail industry. The
costofcapital figure, which is calculated each year, is an essential
component of many of the agency’s core regulatory responsibilities.
Decided: October 28, 2010
BY THE BOARD:
One of the Board’s regulatory
responsibilities is to determine annually the railroad industry’s cost of
capital. This determination is one component used in
evaluating the adequacy of a railroad’s revenue each year pursuant to
49 U.S.C. § 10704(a)(2) and (3). Standards for R.R. Revenue Adequacy,
364 I.C.C. 803 (1981), modified, 3 I.C.C. 2d 261 (1986), aff’d sub nom. Consol. Rail Corp. v. United States,
855 F.2d 78 (3d Cir. 1988). The
costofcapital finding 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.
This
proceeding was instituted in Railroad Cost of Capital—2009, EP 558
(SubNo. 13) (STB served Mar. 30, 2010), to update the
railroad industry’s cost of capital for 2009.
In that decision, the Board solicited comments from interested persons
on the following issues: (1) the
railroads’ 2009 current cost of debt capital; (2) the railroads’ 2009
current cost of preferred equity capital (if any); (3) the railroads’ 2009
cost of common equity capital; (4) how the change in BNSF Railway
Company’s (BNSF’s) share prices from November 2009 through December 2009,
following the announcement of BNSF’s acquisition by Berkshire Hathaway Inc.,
should be considered in calculating the 2009 cost of common equity capital; and
(5) the 2009 capital structure mix of the railroad industry on a market value
basis.
We have received
comments from the Association of American Railroads (AAR) that contain the
information that is used in making the annual costofcapital determination as
established in Use of a MultiStage Discounted Cash Flow Model in
Determining the Railroad Industry’s Cost of Capital, EP 664 (SubNo. 1)
(STB served Jan. 28, 2009). Kansas City
Southern Railway Company (KCSR) and BNSF submitted opening comments in response
to the Board’s March 30 decision in this proceeding. Both KCSR and BNSF agree that the price of
BNSF’s shares should be considered in the calculation of the 2009 cost of
common equity capital. Similarly,
Western Coal Traffic League (WCTL), National Grain and Feed Association (NGFA),
and PPL Montana, LLC/PPL Energyplus, LLC agree with
the inclusion of BNSF in the 2009 costofcapital determination. WCTL also raises various issues concerning
AAR’s filing, including allegations such as AAR’s failure to use 20052008
restated financial data, AAR’s selection of growth rates, and AAR’s
failure to provide electronic workpapers for its
calculations. These issues will be
addressed below.
2009 CostofCapital Determination
Consistent with
previous costofcapital proceedings, AAR
calculated the cost of capital for a “composite railroad” based on criteria
developed in the Railroad Cost of Capital—1984, 1 I.C.C. 2d
989 (1985). The following 4 railroad holding companies
meet these criteria: Burlington Northern
Santa Fe Corporation, CSX Corporation, Norfolk Southern Corporation, and Union
Pacific Corporation.
As discussed
below, we have examined the procedures used by AAR
to calculate for 2009 the railroad industry’s: (1) costofdebt capital; (2) cost of
common equity capital; (3) cost of preferred equity capital;
(4) capital structure; and (5) composite aftertax cost of
capital. We estimate that the 2009
railroad cost of capital was 10.43%.
DEBT CAPITAL
AAR
developed its 2009 current cost of debt using bond price data from Standard
& Poor’s Corporation Bond Guide
and a Standard & Poor’s database for those bonds not publicly traded.
AAR’s costofdebt figure is based on
the marketvalue yields of the major forms of longterm debt instruments for
the railroad holding companies used in the composite. These debt instruments include: (1) bonds, notes, and debentures
(bonds); (2) equipment trust certificates (ETCs); and (3) conditional
sales agreements (CSAs). The yields of
these debt instruments are weighted based on their market values.
Cost
of Bonds, Notes, and Debentures (Bonds)
AAR
used data contained in Standard & Poor’s Bond Guide for the current cost of bonds, based on monthly prices
and yields during 2009, for all issues (a total of 61) that were publicly
traded during the year. To develop the
current (in 2009) market value of bonds, AAR
used these traded bonds and 58 additional bonds that were outstanding but not
publicly traded during 2009. Continuing
the procedure in effect since 1988, AAR based
the market value on monthly prices for all traded bonds and the face or par
value ($1,000) for all bonds not traded during the year. AAR computed
the total market value of all outstanding bonds to be $29.548 billion ($17.577
billion traded, and $11.971 billion nontraded). Based on the yields for the traded bonds, AAR calculated the weighted average 2009 yield for all
bonds to be 5.669%. We have examined
AAR’s bond price and yield data and have determined that AAR’s
computations are correct. Our
calculations and data for all bonds are shown in Tables 1 and 2 of the
Appendix.
Cost of Equipment Trust Certificates (ETCs)
ETCs are not actively traded on
secondary markets. Therefore, their
costs must be estimated by comparing them to the yields of other debt
securities that are actively traded. Following
the practice in previous costofcapital proceedings, AAR
used government securities with maturities similar to these ETCs as surrogates
for developing yields. After calculating
the 2009 yields for these government securities, AAR
added basis points^{[8]} to these
yields to compensate for the additional risks associated with the ETCs.
In
2009, one new ETC was issued by BNSF with an interest rate spread 80 basis
points above government bonds with similar maturities. Because it is a current measure of the costs
of ETCs, the 80 basis point spread is used here as the appropriate interest
rate spread above government bonds.
There were 20 ETCs issued prior to 2009 that were outstanding during the
year. Using the yield spreads, AAR calculated the weighted average cost of ETCs to be
3.551%^{[9]} and their
market value to be $708.1 million for 2009.
In
its comments, WCTL expressed concern that AAR
misstated the value of BNSF’s ETCs. On
rebuttal, AAR responded that the ETC values
BNSF used in its tables, for the calculation of the cost of debt and the
weighted cost of capital, are correct.
However, AAR admitted that Appendix C,
submitted in its opening comments, was outofdate. AAR
submitted a corrected version of Appendix C in its rebuttal. After reviewing AAR’s corrected appendix, we
conclude that it is accurate and consistent with AAR’s
debt calculation. A summary of the ETC
computations is shown in Table 3 in the Appendix to this decision.
Cost
of Conditional Sales Agreements (CSAs)
CSAs
represent a small fraction (less than 1%) of total railroad debt, and only 2
CSAs (issued by CSX) were outstanding in 2009.
The cost of CSAs can be estimated by adding an additional factor to the
yield spread between government bonds and ETCs.
AAR used the yield spread between CSAs
and ETCs for 1997 (the last year when a new CSA was issued) of 32 basis points
to develop the year 2009 yield spread between CSAs and government bonds. These 32 basis points are added to the
80 basis point spread between government bonds and ETCs. As a result, AAR
estimates that 112 basis points must be added to the yield of government
bonds with comparable maturities to develop the cost of CSAs. Using this yield spread, AAR
calculated the weighted average cost of CSAs for 2009 to be 2.730%. AAR
calculated the market value for all modeled CSAs to be $43.3 million. We have examined the cost and market value of
the CSAs using AAR’s data, and agree with AAR’s
calculations. Table 4 in the Appendix shows the market value of all modeled CSAs
to be $43.3 million.
Capitalized
Leases and Miscellaneous Debt
As in previous costofcapital
determinations, AAR excluded the cost of
capitalized leases and of miscellaneous debt in its computation of the overall
current cost of debt because these costs are not directly observable in the
open market. Also, in keeping with past
practice, AAR included the book value of
leases and commercial paper in the overall market value of debt, which is used
to determine the railroads’ capital structure mix. AAR
calculated that the market value for the capitalized leases and miscellaneous
debt was $3.919 billion for 2009.^{[11]} We have examined the market value for
capitalized leases and miscellaneous debt using AAR’s data, and we agree with AAR’s calculations.
Table 5 in the Appendix shows
the calculations for capitalized leases and miscellaneous debt to be $3.919
billion.
Total
Market Value of Debt
AAR calculated that the total market value for all debt
during 2009 was $34.218 billion. We have
examined AAR’s data and have determined that AAR’s
calculation is correct. Table 6 in the Appendix shows a
breakdown of the market value of debt.
Flotation
Costs of Debt
AAR
calculated flotation costs for bonds, notes, and debentures by calculating a
yield based on the price to investors and a yield that also included flotation
costs. The difference between the two
yields is the flotation costs expressed in percentage points. For 2009, 5 new issues were reported in 4
filings. A simple average of the 5 flotation
costs is 0.103%. AAR
calculated the 2009 flotation costs for bonds using publicly available data
from electronic filings with the SEC.
For the calculation of ETC flotation costs, AAR
used a historical SEC study composed of railroad ETC data for the years 1951,
1952, and 1955. SEC,
Cost of Flotation of Corporate Securities 19511955 (1957). In that study, AAR
asserts that the SEC determined ETC flotation costs to average 0.89% of gross
proceeds. Id.
Neither recent nor historical data is publicly available for CSAs. Consequently, the ETC figure was
applied. Using 0.89%
for both ETCs and CSAs results in flotation costs of 0.078% and 0.073%,
respectively.
To compute the overall effect of the
flotation cost on debt, the market value weight of the debt outstanding is
multiplied by the respective flotation cost.
The weight for each type of debt is based on market values for debt,
excluding all other debt. All other debt
is excluded from the weight calculation, because a current cost of debt for
that debt has not been determined. AAR calculated that flotation costs for debt equal
0.102%. We have reviewed AAR’s calculations concerning flotation costs and find
that the cost factors developed for the various components of debt are
reasonable.^{[12]} Table
7 in the Appendix shows these calculations.
Overall
Current Cost of Debt
AAR concluded that the railroads’ cost of debt for 2009
was 5.72%.^{[13]} We have verified that the percentage put
forth by AAR is correct. Table
8 in the Appendix shows the overall current cost of debt.
COMMON EQUITY CAPITAL
We estimate the cost of common
equity capital by calculating the simple average of estimates produced by a
Capital Asset Pricing Model (CAPM) and the Morningstar/Ibbotson MultiStage
Discounted Cash Flow Model (MSDCF).
CAPM
Under
CAPM, the cost of equity is equal to RF + β×RP,
where RF is the riskfree rate, RP is the marketrisk premium, and β (or
beta) is the measure of systematic, nondiversifiable risk. In order to calculate RF, we asked the
railroads to provide the average yield to maturity in 2009 for a 20year U.S.
Treasury Bond. Similarly, the railroads
were asked to provide an estimate for RP based on returns experienced by the
S&P 500 since 1926. Finally, we
instructed the railroads to calculate beta using a portfolio of weekly,
mergeradjusted railroad stock returns for the prior 5 years in the following
equation:
R – SRRF = α + β(RM
– SRRF) + ε, where
α = constant term;
R
= mergeradjusted
stock returns for the portfolio of railroads that meet the screening criteria
set forth in Railroad Cost of Capital – 1984, 1 I.C.C. 2d 989 (1985);
SRRF
= the
shortrun riskfree rate, which we will proxy using the 3month U.S. Treasury bond rate;
RM
= return
on the S&P 500; and
ε = random error term.
RF
– The Risk Free Rate
To
establish the riskfree rate, AAR relies on
the Federal Reserve website to retrieve the average yield to maturity for a
20year U.S. Treasury Bond. Using the
average yield to maturity in 2009 for a 20year U.S. Treasury Bond, consistent
with Cost of Capital Methodology—2006, EP 558 (SubNo. 10) (STB served
Apr. 15, 2008), AAR
calculated the 2009 risk free rate to be 4.11%.
We have examined AAR’s data and the data from the Federal Reserve’s
website, and have determined that AAR’s
computation is correct.
RP
– The MarketRisk Premium
Using the approach settled upon in
the Cost of Capital Methodology, AAR
submitted data reflecting a market risk premium of 6.67%. We have examined the underlying data here and
agree that the market risk premium is 6.67%.
Calculating
Beta
The Cost of Capital Methodology
requires parties to calculate CAPM’s beta using a portfolio of weekly,
mergeradjusted stock returns for the prior 5 years in the following equation:
R – SRRF = α + β(RM – SRRF) + ε.
AAR calculations suggest that the value
of beta is 1.0915. AAR and WCTL
agree that the Board’s methodology of converting annual Treasury Bill (TBill) rates to weekly rates should be adjusted to
account for compounding. Because both
parties have proposed this modification, and accounting for compounding would
create a more accurate result, we will modify our previously used method of
dividing TBill rates by 52 weeks, and convert to a compounding method. We will use the formula provided by AAR in its 2009 workpapers to
convert the annual TBill rates to weekly TBill rates. Application of this new formula in the beta
calculation produces a beta estimate of 1.0915.
Cost of Common Equity Capital using CAPM
Having modified the methodology for
the calculation of weekly TBill rates, we calculate the cost of equity as RF +
β × RP, or 4.11% + (1.0915 × 6.67%), which equals 11.39%. Tables
9 and 10 in the Appendix show
the calculations of the cost of common equity using CAPM.
AAR calculated the 2009 market value of common equity for
each railroad by calculating weekly market values for each railroad using data
on shares outstanding from railroad 10Q and 10K reports multiplied by stock
prices at the close of each week in 2009.
AAR calculated the 52week average
market value as $83.350 billion. We have
reviewed AAR’s calculations and have
determined that its market value calculation is correct.
MultiStage Discounted Cash Flow
The cost of equity in a DCF
model is the discount rate that equates a firm’s market value to the present
value of the stream of cash flows that could affect investors. These cash flows are not presumed to be paid
out to investors; instead, it is assumed that investors will ultimately benefit
from these cash flows through higher regular dividends, special dividends,
stock buybacks, or stock price appreciation.
Incorporation of these cash flows, as well as the expected growth of
earnings, are the essential elements of the
Morningstar/Ibbotson MSDCF model.
Cash Flow
The
Morningstar/Ibbotson MSDCF model defines cash flows (CF), for the first 2
stages, as income before extraordinary items (IBEI), minus capital expenditures
(CAPEX), plus depreciation (DEP) and deferred taxes (DT), or
CF = IBEI – CAPEX + DEP + DT.
The thirdstage cash flow is based
on 2 assumptions: depreciation equals
capital expenditures, and deferred taxes are zero. That is, cash flow in the third stage of the model
is based only on IBEI.
To
obtain an average cash flow to sales ratio, AAR
divided the total cash flow in the 20052009 periods by the total sales over
the same period. To obtain the 2009
average cash flow, the cashflowtosales ratio is multiplied by the sales
revenue from 2009. The 2009 average cash
flow figure is then used as the starting point of the Morningstar/Ibbotson
MSDCF model. The initial value of IBEI
is determined through the same averaging process for the cash flows in stages 1
and 2. According to AAR,
the data inputs in the cash flow formula were retrieved from the railroads’
20052009 10K filings with the SEC.
WCTL
contests AAR’s use of 20052008 financial data
taken from originally filed 10K statements.
WCTL specifically requests that the Board use 20052008 data that has
been restated in subsequently filed 10K statements, and made publicly
available. According to WCTL, finance
theory holds that, at any particular time, a firm’s stock price incorporates
all historic price information, as well as all current publicly available
information. Therefore, WCTL contends
that it would be contrary to finance theory to use original financial forecasts
where current pricing information is available.
Further, WCTL states that using original financial statements and
current stock prices would create an inconsistency in the method used to
calculate the cost of equity.
AAR disagrees
with WCTL’s argument regarding the use of restated financial data, arguing that
cash flow is that which is perceived by the investor each year for 5
years. AAR explains that the MSDCF
methodology does not look backward in time to see how past cash flows may have
changed due to, for example, accounting changes that restate past results. AAR
concludes that investor expectations are based on the current financial
condition of a company and its forward prospects.
We
disagree with AAR and conclude that restated
and publicly available financial data should be used in the calculation of the
cost of equity under the MSDCF model. As
a general rule, investors use the most accurate and current data available when
making investment decisions. In fact,
because the Board’s MSDCF model exhibits transparency by using only publicly
available data, we have no reason to believe an investor would use nonrestated
data alone. We also agree with WCTL that
the current stock price, which we use to calculate market values, incorporates
historic price information as well as current publicly available
information. For these reasons, we
believe that the Board’s annual determinations should use the most accurate and
current data available at that time.
We
have reviewed AAR’s and WCTL’s cash flow
inputs, and have determined that WCTL’s inputs have been calculated with the
most accurate and current data available.
Therefore, we will use the restated 20052008 data that has been
submitted by WCTL.
Growth Rates
Growth of earnings is also
calculated in 3 stages. These 3
growthrate stages are what make the Morningstar/Ibbotson model a “multistage”
model. In the first stage (years 15),
the firm’s annual earnings growth rate is assumed to be the median value of the
qualifying railroad’s 3 to 5year growth estimates, as determined by railroad
industry analysts, and published by Institutional Brokers Estimate System
(IBES). In the second stage (years
610), the growth rate is the average of all growth rates in stage 1. In the third stage (years 11 and onwards),
the growth rate is the longrun nominal growth rate of the U.S. economy. This longrun nominal growth rate is
estimated by using the historical growth in real GDP and the longrun expected
inflation rate.
AAR
calculated the first and secondstage growth rates according to the IBES data,
which was retrieved from Thomson One Investment Management. The thirdstage growth rate of 5.8% was
calculated by using the sum of the longrun expected growth in real output
(3.3%) and the longrun expected inflation (2.6%).
In its comments, WCTL asserts that AAR improperly used growth rate estimates from
January 4, 2010, 4 days after the close of 2009. WCTL also asserts that AAR erred by deviating
from the Board’s stated preference for relying upon commercially accepted,
neutral growth rate data models, not data models created for litigation. WCTL contends that AAR’s
deviation circumvented the quality control standards imputed into the median
value calculations developed by Thomson One Investment Management Service.
On rebuttal, AAR
states that source documents used for the IBES growth rates were downloaded on
January 4, 2010, the first business day on which a complete set of
2009 data was available. However, AAR asserts that all growth rates were reviewed in 2009,
not 2010. AAR
also states that WCTL manipulated growth rate results by omitting 2 elevated
rates in the median calculation. AAR opines that the proper way to calculate the median
growth rate is by using data provided by Thomson ONE Analytics, a product of
Thomson One Investment Management Service, which unlike Thomson ONE Banker
provides all available growth rates.
According to AAR, the Thomson ONE
Banker product excludes certain rates due to a lack of consent from the
individual analyst who projected the growth rate. AAR asserts
that the Board should not exclude certain median values of growth rates based
upon how an analyst developed the rate.
Further, AAR concludes that WCTL
provided no reasonable justification to exclude certain growth rates.
After reviewing the evidence
provided by AAR, we have no reason to conclude
that the growth rates have been influenced by 2010 data. Workpapers provided
by AAR indicate that data was downloaded in
2010, but reviewed by the analysts in 2009.
Further, we also disagree with WCTL that AAR
deviated from a commercially accepted growth rate model. AAR used
Thomson ONE Analytics, a commercially accepted growth rate product. The fact that AAR
used additional growth rates from Thomson ONE Analytics in no way invalidates
the estimates gathered. In fact, we
conclude that utilizing these growth rates makes for a more accurate median
value.
After reviewing comments submitted
by AAR and WCTL, we agree that the growth rates provided by AAR
are correct and should be used in the determination of the cost of equity for
2009.
Market Values for
MSDCF
The final inputs
to the Morningstar/Ibbotson MSDCF model are the stock market values for the
equity of each railroad. According to AAR, it used stock prices from Yahoo Finance for
December 31, 2009, and shares outstanding from the 2009 Q3 10Q
reports filed with the SEC.
We
have reviewed AAR’s evidence and agree that
the market values used in the 2009 estimate of the cost of equity using the
Morningstar/Ibbotson MSDCF are correct.
Cost of Common Equity Capital using
MSDCF
AAR
estimates a MSDCF cost of equity of 13.46%.
However, WCTL calculates that its own MSDCF estimate for the 2009 cost
of equity is 13.04%. This variance is
attributable to the following:
(1) original versus restated 10K financial statements; (2) whether
AAR’s growth rates have been influenced by
2010 data; and (3) the median value of each railroad’s growth
estimate. As discussed above, we
conclude that AAR has correctly provided
growth rates for all 3 stages of the MSDCF model. We also conclude that WCTL is correct in
using revised 10K financial statements for the calculation of initial and
terminal cash flow. Accordingly, we
calculate the MSDCF as 13.34%, and we will average this estimate with the cost
of equity derived from the CAPM approach.
Table 11 shows the MSDCF
inputs and the cost of equity calculation.
Cost of common equity
Based on the evidence provided, we
conclude that the railroad cost of equity in 2009 is 12.37%. This figure is based on an estimate of the
cost of equity using CAPM of 11.39% and a MSDCF estimate of 13.34%. Table 12 shows both costs of common
equity for each model, and the average of the 2 models.
Electronic Workpapers
In its Reply, WCTL raises an issue
concerning the production and use of AAR’s workpapers. WCTL
asserts that it sought to obtain from AAR electronic workpapers
to assist in its review of AAR’s
costofcapital calculations. WCTL
states that AAR provided a scanned hardcopy of
its workpapers, a computergenerated (electronically
searchable) .pdf of the workpapers,
and a variety of Excel spreadsheets.
However, WCTL states that AAR provided
no Excel spreadsheets for certain items, including the costofdebt and the
MSDCF calculations. In response, AAR asserts that all of its submissions to the Board were
also made available to other participants, including workpapers. Further, AAR
states that its workpapers included 2 electronic
spreadsheets used for the CAPM beta calculation. AAR also
states that certain spreadsheets would be of little or no value to the Board or
other participants. It should be noted
that WCTL did not file a motion to compel or otherwise bring this issue to the
Board’s attention prior to filing its Reply, nor does it ask the Board to order
the production of additional information or data in this proceeding. Rather, WCTL appears to be requesting that
the Board provide guidance on this issue for future costofcapital
proceedings.
In this instance, we concur with
WCTL that calculation of the cost of capital is a
necessary function in the determination of railroad revenue adequacy, and it is
reasonable to require AAR to submit sufficient
data and information necessary to verify its calculations. Therefore, in subsequent costofcapital
proceedings, AAR is directed to submit to the
Board and parties of record, data and information sufficient to allow
replication of its calculations.
PREFERRED
EQUITY
Preferred equity has some of the
characteristics of both debt and equity.
Essentially, preferred issues are like common stocks in that they have
no maturity dates and represent ownership in the company (usually with no
voting rights attached). They are
similar to debt in that they usually have fixed dividend payments (akin to interest
payments).
There were no preferred stock
issues outstanding at the end of 2009.
CAPITAL STRUCTURE MIX
The Board will
apply the same inputs used in the market value for the CAPM model to the
capital structure.
We
have determined that the average market values of debt and common equity are
$34.218 billion and $83.350 billion, respectively. The percentage share of debt increased, from
21.54% in 2008 to 29.10% in 2009. The percentage share of common equity
decreased, from 78.46% in 2008 to 70.90% in 2009. Table
13 in the Appendix shows the calculations of the average market value of
common equity and relative weights for each railroad. Table 14 in the Appendix shows the
2009 capital structure mix.
COMPOSITE COST OF CAPITAL
Based on the evidence
furnished in the record, and our adjustments to the calculations discussed
above, we conclude that the 2009 composite aftertax cost of capital for the
railroad industry, as set forth in Table
15 in the Appendix, was 10.43%. The
procedure used to develop the composite cost of capital is consistent with the
Statement of Principle established by the Railroad Accounting Principles
Board: “Cost of capital shall be a
weighted average computed using proportions of debt and equity as determined by
their market values and current market rates.”
R.R. Accounting Principles Bd., Final Report,
Vol. 1 (1987). The 2009 cost of
capital was 1.32 percentage points lower than the 2008 cost of capital
(11.75%).
CONCLUSIONS
We find that for 2009:
1.
The current cost of railroad longterm debt was 5.72%.
2.
The cost of common equity was 12.37%.
3.
The capital structure mix of the railroads was 29.10% longterm debt and
70.90% common equity.
4.
The composite railroad industry cost of capital was 10.43%.
Environmental
and Energy Considerations
We conclude that 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 on October 30, 2010.
2.
This proceeding is discontinued.
By the Board,
Chairman Elliott, Vice Chairman Mulvey, and
Commissioner Nottingham.
APPENDIX
Table 1
2009 Traded
& Nontraded Bonds
Railroad

Traded vs.
Untraded

Number

Market Value
($ in 000)

% Market Value
to All Bonds

BNSF

Traded

25

$5,736,076

72.46 %


Nontraded_{}^{}

12

2,179,741

27.54 %


Total


7,915,817


CSX

Traded

10

3,121,230

40.76 %


Nontraded_{}

21

4,536,554

59.24 %


Total


7,657,784


NSC

Traded

11

4,582,692

68.55 %


Nontraded_{}

9

2,102,861

31.45 %


Total


6,685,553


UPC

Traded

15

4,136,773

56.76 %


Nontraded_{}

16

3,151,579

43.24 %


Total


7,288,352


Composite

Traded

61

$17,576,771

59.49 %


Nontraded

58

11,970,735

40.51 %


Total

119

29,547,506


^{1} Includes 1 bond issued during
2009, prorated based on date of issue.
^{2} Includes 1 bond issued during
2009, prorated based on date of issue.^{}
^{3} Includes 1 bonds issued during
2009, prorated based on date of issue.
^{4} Includes 2 bonds issued during
2009, prorated based on date of issue.

Table 2
2009 Bonds,
Notes, & Debentures
Railroad

Number of
Traded Issues

Market Value Traded Issues
($000)

Current
Cost

Weighted
Cost

BNSF

25

5,736,076

5.575 %

1.82 %

CSX

10

3,121,230

5.971 %

1.06 %

NSC

11

4,582,692

6.164 %

1.61 %

UPC

15

4,136,773

5.023 %

1.18 %

Composite


$17,576,771


5.669 %

Table 3
2009 Equipment
Trust Certificates
Railroad

No. of
Issues

Market
Value
($000)

Yield
%

Weighted
$ Yield
($000)

BNSF

7

$ 236,659

3.816 %

$ 9,032

CSX

6

158,149

3.056 %

4,834

NSC

3

97,756

2.944 %

2,878

UPC

5

215,499

3.898 %

8,400

Composite

21

$ 708,063

3.551%

$ 25,143

Table 4
2009
Conditional Sales Agreements
Railroad

Number
of Issues

Market
Value
($000)

Current
Cost

Weighted
Cost)

CSX

2

$ 43,349

2.730 %

2.730 %

Composite


$ 43,349


2.730 %

Table 5
2009
Capitalized Leases & Miscellaneous Debt
Railroad

Capitalized
Leases
($000)

Miscellaneous
Debt^{1}
($000)

Total
Other
Debt
($000)

BNSF

$1,565,435

$(11,353)

$1,554,082

CSX^{}

21,601

56,861

78,462

NSC

47,201

77,508

124,709

UPC ^{}

2,054,486

21,433

2,075,919

Composite

$3,688,723

$144,449

$3,919,014^{2}

^{1} Miscellaneous debt includes unamortized
debt discount.
^{2} This figure includes $85,842
of non modeled ETCs and CSAs.

Table 6
2009 Market
Value of Debt
Type of Debt

Market Value
of Debt
($000)

Percentage of
Total Market Value
(Excluding Other Debt)

Bonds, Notes, & Debentures

$29,547,506

97.52 %

ETCs

708,063

2.34 %

CSAs

43,349

0.14 %

Subtotal

$30,298,918

100 %

Capitalized Leases/Miscellaneous Debt

3,919,014

NA

Total Market Value of Debt

$34,217,932

NA

Table 7
2009 Flotation
Cost for Debt
Type of Debt

Market Weight
(Excludes
Other Debt)

Flotation Cost

Weighted
Average
Flotation Cost

Bonds, Notes, &
Debentures

97.52 %

0.103 %

0.100 %

ETCs

2.34 %

0.078 %

0.002 %

CSAs

0.14 %

0.073 %

0.0001 %

Total

100 %


0.102 %

Table 8
2009 Cost of
debt
Type of Debt

Percentage of
Total Market Value
(Excludes
Other Debt)

Debt
Cost

Weighted
Debt Cost
(Excluding
Other
Debt)

Bonds, Notes, &
Debentures

97.52 %

5.669 %

5.528 %

ETCs

2.34 %

3.551 %

0.083 %

CSAs

0.14 %

2.730 %

0.004 %

Subtotal

100 %


5.615 %

Flotation Cost



0.102 %

Weighted Average Cost of Debt



5.72 %

Table 9
2009 Summary
Output
Regression Statistics

Multiple R

0.706016





RSquare

0.498458





AdjustedR

0.496522





Square






Standard Error

0.031849





Observations

261











ANOVA







df

SS

MS

F

Significance F

Regression

1

0.261097

0.261097

257.4074

1.08192E40

Residual

259

0.262712

0.001014



Total

260

0.523809











Coefficients

Standard Error

T Stat

PValue


Intercept

0.003767

0.001972

1.910649

0.057154


XVariable

1.091453

0.068029

16.04392

1.08192E40


Table 10
2009 CAPM Cost of Common Equity
RiskFree Rate (RF)

4.11%


RF+(Beta x Market Risk
Premium)

4.11% +( 1.0915 x
6.67%)

11.39 %

Cost of Equity


11.39 %

Table 11
2009 MSDCF Railroad Cost of Equity
Railroad

BNSF


CSX


NSC


UNP


Initial CF

$ 897


$ 693


$ 933


$ 980


Input for terminal CF

$ 1680


$ 1099


$ 1209


$ 1591


Stage 1 Growth Rate

12.00 %


11.60 %


12.00 %


13.10 %


Stage 2 Growth Rate

12.18 %


12.18 %


12.18 %


12.18 %


Stage 3 Growth Rate

5.80 %


5.80%


5.80 %


5.80 %


Year

Value on 12/31 of each
year

Present Value

Value on 12/31 of each
year

Present Value

Value on 12/31 of each
year

Present Value

Value on 12/31 of each
year

Present Value

1

$ 1,005

$ 892

$ 773

$ 681

$ 1,045

$ 910

$ 1,108

$ 981

2

1,125

887

863

668

1,170

887

1,254

981

3

1,260

882

963

656

1,311

866

1,418

982

4

1,411

877

1,075

645

1,468

844

1,604

983

5

1,581

873

1,200

633

1,644

823

1,814

983

6

1,773

869

1,346

625

1,845

804

2,034

976

7

1,989

866

1,510

617

2,069

786

2,282

969

8

2,232

862

1,694

609

2,321

768

2,560

961

9

2,503

859

1,900

601

2,604

750

2,872

954

10

2,808

856

2,131

594

2,921

732

3,222

947

Terminal

$ 81,577

$ 24,851

$ 45,627

$ 12,706

$ 44,324

$ 11,114

$ 76,615

$ 22,523



















ΣPV

$ 33,574


$ 19,035


$ 19,285


$ 32,241


Market Value

$ 33,574


$ 19,035


$ 19,285


$ 32,241


COE

12.62 %


13.64 %


14.84 %


13.02 %


Weighted COE

4.07 %


2.49 %


2.75 %


4.03 %


COE

13.34 %








Table 12
2009 Cost of Common Equity Capital
Model


Capital Asset pricing model

11.39 %

MultiStage Discounted
Cash Flow

13.34 %

Cost of Common Equity

12.37 %

Table 13
2009 Average market Value
Railroad

Average Market
Value ($000)

Average Market
Weight

BNSF

$26,171,545,067

31.40 %

CSX

14,690,076,842

17.62 %

NSC

15,517,706,470

18.62 %

UPC

26,970,547,417

32.36 %

COMPOSITE

$83,349,875,796

100.00 %

Table 14
2009 Capital Structure Mix
Railroad

Type of
Capital

Market
Value ($000)

Weight





BNSF

Debt

$9,734,443,000

27.11 %


Equity

26,171,545,067

72.89 %

CSX

Debt

7,995,701,000

35.25 %


Equity

14,690,076,842

64.75 %

NSC

Debt

6,908,018,000

30.80 %


Equity

15,517,706,470

69.20 %

UPC

Debt

9,579,770,000

26.21 %


Equity

26,970,547,417

73.79 %

Composite

Debt

34,217,932,000

29.10 %

Weight

Equity

83,349,875,796

70.90 %


Total

117,567,807,796

100.00 %

Table 15
2009 CostofCapital Computation
Type of
Capital

Cost

Weight

Weighted
Average

LongTerm Debt

5.72 %

29.10 %

1.66 %

Common Equity

12.37 %

70.90 %

8.77 %

Composite
Cost of Capital


100.00 %

10.43 %
