Minn. R. agency 181, ch. 8106, pt. 8106.0400
The approaches to value that will be used in determining the estimated unit value of railroad operating property are cost, capitalized income, and stock and debt except as provided in subparts 4 and 6.
The cost factor that will be considered in the railroad valuation method is the restated cost of the railroad system, plus the restated cost of construction work in progress on the assessment date. The railroad system shall be considered to be made up of the following STB accounts: all road and equipment accounts, including leased equipment accounts; all general expenditures; and other elements of investment and railroad property owned and leased to others as well as railroad property leased from others. Book depreciation and obsolescence shall be allowed as a deduction from the restated cost of the railroad's assets enumerated above. The original cost if known, and the annual lease payments of any leased operating property used by the railroad must be reported to the commissioner in conjunction with the annual railroad report. The commissioner shall incorporate the value of the leased property into the railroad's unit value utilizing this information.
Obsolescence will be calculated through the use of the "Blue Chip Method." This method compares the railroad being appraised with the best railroads in the country, the so-called blue chip railroads. Three indicators of obsolescence will be used. First, a five-year average rate of return will be calculated for the railroad under appraisal. This rate of return is computed by dividing the subject's annual net railroad operating income for each of the most recent five years preceding the assessment, by the railroad's total owned transportation property less recorded depreciation and amortization (net investment in railroad property) for each corresponding year. The resulting five rates of return are then averaged using a simple arithmetic average to arrive at a five-year average rate of return. An example of this computation is as follows:
XYZ Railroad
| Year | Net Railroad Operating Income | Net Investment | Indicated Rate of Return |
| .... | $2,700,000 | $31,500,000 | 8.57% |
| .... | $2,900,000 | $32,000,000 | 9.06% |
| .... | $3,100,000 | $33,500,000 | 9.25% |
| .... | $3,300,000 | $34,000,000 | 9.70% |
| .... | $3,530,700 | $35,000,000 | 10.08% |
| Total 46.66% | |||
| Five-year Average Rate of Return | 9.33% |
A study will then be made of the Class I railroads operating within the United States for the same five-year period using such informational sources as information compiled annually by the Wisconsin Department of Revenue known as the "Blue Chip" Obsolescence Study for STB Class I Railroads. Each year the railroad with the highest rate of return will be selected as the blue chip railroad. The resulting five rates of return will then be averaged to find the five-year average blue chip rate of return. An example of this process is as follows:
| Year | Railroad | Rate of Return |
| .... | ABC | 11.50% |
| .... | FGH | 11.27% |
| .... | JKL | 10.57% |
| .... | MNO | 11.02% |
| .... | XYZ | 10.08% |
| Total 54.44% | ||
| Five-year Average Blue Chip Rate of Return | 10.89% |
The five-year average rate of return for the railroad under appraisal will be compared to the five-year average blue chip rate of return. The deviation of the subject railroad's rate of return from the blue chip railroads' rate of return is the amount of indicated obsolescence. The following example illustrates the computation.
| XYZ Railroad Five-Year Average Rate of Return | 9.33% |
| Blue Chip Five-Year Average Rate of Return | 10.89% |
| Indicated Obsolescence 1 - (9.33% / 10.89%) | 14.30% |
Second, a five-year average freight traffic density indicator will be calculated. This indicator is calculated by dividing the subject railroad's ton miles of revenue freight for the most recent five years preceding the assessment by the average miles of road operated for each corresponding year. The resulting five indicators of freight traffic density are then averaged using a simple arithmetic average to arrive at a five-year average of freight traffic density. An example of this computation is as follows:
XYZ Railroad
| Year | Ton Miles of Revenue Freight | Average Miles of Road Operated | Indicated Freight Traffic Density |
| .... | 1,300,000,000 | 575 | 2,260,000 |
| .... | 1,402,500,000 | 550 | 2,550,000 |
| .... | 1,200,000,000 | 550 | 2,180,000 |
| .... | 1,100,000,000 | 500 | 2,200,000 |
| .... | 1,000,000,000 | 500 | 2,000,000 |
| Total 11,190,000 | |||
| Five-Year Average Freight Traffic Density | 2,238,000 |
A five-year study is then made of the Class I railroads operating within the United States in the same manner and using the same sources as the rate of return study with the exception that this study concentrates on the freight traffic density achieved by the various Class I railroads. Each year the railroad with the highest freight traffic density will be selected as the blue chip railroad. The resulting five freight traffic density amounts will then be averaged to find the five-year average blue chip freight traffic density amount. An example of this process is as follows:
| Year | Railroad | Freight Traffic Density |
| .... | JKL | 2,280,000 |
| .... | FGH | 2,600,000 |
| .... | FGH | 2,200,000 |
| .... | MNO | 2,900,000 |
| .... | ABC | 2,280,000 |
| Total 12,260,000 | ||
| Five-year Average Blue Chip Freight Traffic Density | 2,452,000 |
The five-year average freight traffic density indicator of the railroad under appraisal will be compared to the five-year average blue chip freight traffic density indicator. The deviation of the subject railroad's freight traffic density from the blue chip railroad's freight traffic density is the amount of indicated obsolescence. The following example illustrates this computation:
| XYZ Railroad Five-Year Average Freight Traffic Density | 2,238,000 |
| Blue Chip Five-Year Average Freight Traffic Density | 2,452,000 |
| Indicated Obsolescence 1 - (2,238,000 / 2,452,000) | 8.70% |
Third, a five-year average gross profit margin indicator will be calculated. This indicator measures a railroad's ability to convert gross revenue to net profit. This indicator is calculated by dividing net railway operating income, before federal and deferred taxes, by gross revenues. This calculation is performed using the subject railroad income figures for the most recent five years preceding the assessment. The resulting five indicators of gross profit margin are then averaged using a simple arithmetic average to arrive at a five-year average of gross profit margin. An example of this computation is as follows:
XYZ Railroad
| Year | Net Railroad Operating Income Before Taxes | Gross Revenue | Indicated Gross Profit Margin |
| .... | 4,050,000 | 15,000,000 | 27.0% |
| .... | 4,350,000 | 15,800,000 | 27.5% |
| .... | 4,650,000 | 16,500,000 | 28.2% |
| .... | 4,950,000 | 17,300,000 | 28.6% |
| .... | 5,295,000 | 19,000,000 | 27.9% |
| Total 139.2% | |||
| Five-Year Average Gross Profit Margin | 27.8% |
A study will then be made of the Class I railroads operating within the United States for the same five-year period in the same manner and using the same sources in the two previous five-year studies mentioned above. This study will look at the gross profit margin achieved by the various Class I railroads. Each year the railroad with the highest gross profit margin will be selected as the blue chip railroad. The resulting five gross profit margin percents will then be averaged to find a five-year average blue chip gross profit margin percentage. An example of this process is as follows:
| Year | Railroad | Gross Profit Margin |
| .... | ABC | 30.0% |
| .... | ABC | 31.2% |
| .... | JKL | 29.9% |
| .... | FGH | 32.6% |
| .... | JKL | 33.3% |
| Total 157.0% | ||
| Five-Year Average Blue Chip Gross Profit Margin | 31.4% |
The five-year average gross profit margin percent for the railroad under appraisal will be compared to the five-year average blue chip gross profit margin percent. The deviation of the subject railroad's gross profit margin from the blue chip railroad's gross profit margin is the amount of indicated obsolescence. The following example illustrates this computation:
| XYZ Railroad Five-Year Average Gross Profit Margin | 27.8% |
| Blue Chip Five-Year Average Gross Profit Margin | 31.4% |
| Indicated Obsolescence 1 - (27.8% / 31.4%) | 11.5% |
The obsolescence percentage indicated by this comparison of gross profit margins will be added to the obsolescence indicated by a comparison of rates of return and freight traffic density. The total of these three amounts will be averaged and this result will be the overall obsolescence percentage for the subject railroad. The following is an example of this computation:
XYZ Railroad
| Obsolescence Indicated by Rate of Return Comparison | 14.30% |
| Obsolescence Indicated by Freight Traffic Density Comparison | 8.70% |
| Obsolescence Indicated by Gross Profit Margin Comparison | 11.50% |
| Total 34.50% | |
| Average Obsolescence Percentage | 11.50% |
The obsolescence percentage will then be applied to the road accounts of the subject railroad, excluding land and personal property, after the allowance for depreciation has been deducted. In no instance shall the allowance for obsolescence exceed 50 percent. The following example illustrates how the cost indicator of value is computed and how the allowance for obsolescence is applied.
XYZ Railroad
| Account | Amount | |
| Road | $24,000,000 | |
| Equipment -- Owned and Leased | 9,000,000 | |
| Construction Work in Progress | 4,500,000 | |
| General Expenditures | 1,823,000 | |
| Gross Cost Indicator | 39,323,000 | |
| Less Depreciation | 10,000,000 | |
| Net Cost Indicator | $29,323,000 | |
| Road | $24,000,000 | |
| Less Land and Personal Property | 1,000,000 | |
| Adjusted Road | 23,000,000 | |
| Adjusted Road | $23,000,000 | |
| Depreciation on Adjusted Road | 7,000,000 | |
| Net Road | 16,000,000 | |
| Obsolescence Percent | 11.5% | |
| Obsolescence Amount | 1,840,000 | |
| Adjusted Cost Indicator of Value | $27,483,000 |
This cost indicator of value computed in accordance with this part will bear a weighting of 15 percent of the total unit value estimate of the railroad's property, except in the case of bankrupt railroads, or railroads with no income to be capitalized, as provided for in subpart 6, or railroads not meeting the criteria for use of the stock and debt approach to value as specified in subpart 4. These railroads will be valued using a 40 percent weighting for the cost indicator of value.
The income indicator of value will be calculated by averaging the net railway operating income, as defined by the STB, of the railroad for the most recent five years preceding the assessment. This average income shall be capitalized by applying to it a capitalization rate which will be computed by using the band of investment method. This method will consider:
This rate will be calculated each year using the method described in this subpart.
An example of a computation of the capitalized income approach to value is as follows:
XYZ Railroad
| Year | Net Railway Operating Income |
| .... | $ 2,600,000 |
| .... | 2,700,000 |
| .... | 3,000,000 |
| .... | 3,100,000 |
| .... | 3,492,500 |
| Total | $14,892,500 |
| Average | $ 2,978,500 |
Five-year average Net Railway Operating Income Capitalized at 14.0 percent (2,978,500 / 14.0 percent) equals $21,275,000.
The income indicator of value computed in accordance with this part shall be weighted 60 percent of the total estimated unit value of the railroad's property except in the case of bankrupt railroads or railroads having no net operating income as provided for in subpart 6.
The stock and debt approach to value is the third method which will be used to estimate the unit value of the railroad operating property. This approach to value is based on the accounting principle: assets = liabilities + equity. Therefore, when the value of a company's liabilities (debt) is found and this added to the worth of its stock, a value can be established for its assets (property).
The use of this approach to value will be limited to only those railroads meeting qualifications in items A to C:
XYZ Railroad
| XYZ railroad is wholly owned by ABC Industries Inc. | |
| Net Earnings of ABC Industries | $5,200,500 |
| Net Earnings of XYZ Railroad | $2,600,250 |
| Percent of XYZ net earnings to total conglomerate earnings | 50% |
| Value of share of ABC Industries stock | $100 |
| XYZ Railroad portion of stock value | $50 |
If a railroad has no net earnings, and is part of a conglomerate, then the stock and debt indicator of value will not be used.
The value of the stock used in the stock and debt method shall be an average of the month-ending stock prices for the 12 months immediately preceding the assessment date of January 2. The value of the bonds, equipment obligations, and conditional sales contracts, and other long-term debts shall also be an average of the cost of money quotes for the 12 months immediately preceding the assessment date of January 2. The source for these stock and bond prices shall be Standard and Poor's Stock Guide or other applicable financial service.
An illustration of a computation of the stock and debt approach to value is as follows:
XYZ Railroad Company
| Shares of Common Stock issued x | |
| Average price for preceding year | |
| 1,000,000 x $12 = $12,000,000 | |
| Shares of Preferred Stock x | |
| Average price for preceding year | |
| 100,000 x $15 = $ 1,500,000 | |
| Rate and face value of bonds x | |
| Average price for class of bonds for preceding year | |
| A rated 8% bonds $10,000,000 x 99% of par = $ 9,900,000 | |
| Stock and Debt Indicator of Value | $23,400,000 |
After the gross stock and debt indicator of value has been computed, an allowance will be made for the effect, if any, of revenue from other than railway operations included in this indicator of value. This allowance shall be based on the ratio of a five-year average of net revenue from railway operations, as determined by the STB, to a similar five-year average of income available for fixed charges as determined by the STB. The five-year average will be the most recent five years preceding the assessment date. An example of this computation is as follows:
XYZ Railroad Company
| Year | Net Revenue from Railway Operations | Income Available for Fixed Charges |
| .... | $ 3,000,000 | $ 3,500,000 |
| .... | 4,000,000 | 4,300,000 |
| .... | 5,200,000 | 5,700,000 |
| .... | 6,000,000 | 6,800,000 |
| .... | 5,200,000 | 5,400,000 |
| $23,400,000 | $25,700,000 | |
| Average | $ 4,680,000 | $ 5,140,000 |
| Ratio $4,680,000 / $5,140,000 = 91% | ||
| Gross Stock and Debt Indicator of Value | $23,400,000 | |
| Ratio of Operating to Noncarrier Earnings | 91% | |
| Net Stock and Debt Indicator of Value | $21,300,000 |
The stock and debt indicator of value computed in accordance with this part will bear a weighting of 25 percent of the total unit value of the railroad's property, except in the case of bankrupt railroads, railroads in bankruptcy proceedings, or railroads with no income to be capitalized, as provided for in subpart 6. If no stock and debt indicator of value is computed, the weighting of 25 percent which would have been applied to this indicator of value will be placed on the cost indicator of value.
The estimated unit value of the railroad property will be the total of the three weighted indicators of value. The following is an example of the computation of the unit value.
XYZ Railroad
| Valuation Approach | Value | Weighting | |
| Cost indicator of value | $27,483,000 | 15% | $ 4,122,500 |
| Income indicator of value | 21,275,000 | 60% | 12,765,000 |
| Stock and debt indicator of value | 21,300,000 | 25% | 5,325,000 |
| Unit Value $22,212,500 |
The weighting shown above may vary from railroad to railroad as provided for in subparts 2 to 4.
Railroads which are involved in federal bankruptcy proceedings, adjudged bankrupt, or railroads having no net railway operating income will be valued using the cost and stock and debt approaches to value. If the stocks or bonds of such railroads are not traded, or do not meet the other requirements for use of the stock and debt indicator of value, then these railroads will be valued using the cost approach to value only.
Minn. R. agency 181, ch. 8106, pt. 8106.0400
Statutory Authority: MS s 14.388; 270.84; 270C.06