Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 76 - Determination of Value of Railroad Companies › Rule 701-76.4 - Stock and Debt Approach to Unit Value

Current through Register Vol. 47, No. 3, July 24, 2024
(1) The stock and debt approach to unit value
				estimates the market value of the operating property by combining the market
				values of the common stock, preferred stock, debt, current liabilities, other
				liabilities, leases, and deferred credits associated with the operating
				property of the railroad company, on the basis that the market value of these
				items may be used as a surrogate for the market value of the operating property
				itself.
(2) The market value of the
				long-term debt associated with the operating property shall be calculated by
				first determining a ratio, based on book values, whose numerator shall be the
				operating property and whose denominator shall be the total property of the
				railroad company. This ratio shall then be multiplied times the gross market
				value of the long-term debt and the result obtained shall be the market value
				of the long-term debt associated with the operating property.
The market value of publicly traded debt shall be determined
				  by utilizing an average of the monthly high and low value of the debt for the
				  12 months preceding the valuation date. The values to be utilized shall be
				  obtained by reference to any acceptable reporter of the market on which the
				  securities are traded. If all or some of the securities are not publicly
				  traded, the value of the securities shall be determined by appropriate
				  comparable securities. The comparable securities shall be publicly traded and
				  shall have a similar maturity date and coupon rate, as well as risk indicators
				  similar to the untraded security. In each instance, the railroad company shall
				  provide the department a statement of the market value of all securities and an
				  explanation of how that market value was derived, including the identity of any
				  comparable securities utilized. In the event that any utility is unable to
				  utilize the foregoing rule to value its securities, it may provide the
				  department with its own determination of the fair market value of its untraded
				  securities together with a complete explanation of why the foregoing rule was
				  not used and a detailed explanation of the method used.
(3) The market value of the preferred stock
				associated with the operating property shall be calculated by first determining
				a ratio, based on book values, whose numerator shall be the operating property
				and whose denominator shall be the total property of the railroad company. This
				ratio shall then be multiplied times the gross market value of the preferred
				stock and the result obtained shall be the market value of the preferred stock
				associated with the operating property.
The market value of publicly traded shares of preferred stock
				  shall be determined by utilizing an average of the monthly high and low value
				  of the preferred stock for the 12 months preceding the valuation date. The
				  values to be utilized shall be obtained by reference to any acceptable reporter
				  of the market on which the preferred stock is traded. If all or some series of
				  the preferred stock are not publicly traded, the value of such preferred stock
				  shall be determined by appropriate comparable securities. The comparable
				  securities shall be publicly traded and shall have the same or a similar
				  dividend rate, as well as risk indicators similar to the untraded preferred
				  stock. In each instance, the railroad company shall provide to the department a
				  statement of the market value of its preferred stock and an explanation of how
				  that market value was derived, including the identity of any comparable
				  securities utilized. In the event that any railroad company is unable to
				  utilize the foregoing rule to value its securities, it may provide the
				  department with its own determination of the fair market value of its untraded
				  securities together with a complete explanation of why the foregoing rule was
				  not used and a detailed explanation of the method used.
(4) The market value of the common equity of
				a railroad company associated with the company's operating property shall be
				determined by capitalizing the income available to the common equity holders
				from the operating property, by an appropriate and compatible common equity
				return rate, all of which shall be determined as follows:
a. The calculation of the income to be
				capitalized shall begin with the railroad company's net income after taxes but
				before interest charges and preferred dividends for the 12-month period
				preceding the valuation date. The net income after taxes, but before interest
				charges and preferred dividends, shall be determined from the railroad
				company's regulatory report, or if no regulatory report is filed, from the
				audited financial statements of the railroad company. In the event the railroad
				company has no income or has a negative income, an alternative method shall be
				used to determine the market value of the common equity.
b. The income determined in
				76.4(4)
"a"
shall be adjusted by deducting any net income
				included therein received from nonoperating property and, conversely, the
				referenced income shall be increased to account for any net loss created by any
				nonoperating property.
c. The
				income determined in 76.4(4)
"a"
shall be further reduced by
				that portion of the preferred dividends serviced by the income generated by the
				operating property, which shall be calculated by multiplying the total
				preferred dividend requirement by the ratio determined in 76.4(3).
d. The income determined in 76.4(4)
"a
				"
shall be further reduced by that portion of the debt service
				provided by the income generated by the operating property, which shall be
				calculated by multiplying the total debt service by the ratio determined in
				76.4(2).
e. If there are any other
				interest payments required, a determination shall be made as to whether the
				underlying obligation was used to purchase operating or nonoperating assets. If
				no direct determination can be made, the interest payment shall be allocated in
				the same fashion as the debt service and preferred dividends. If the underlying
				obligation can be shown to be associated particularly, or in some specific
				proportion, to operating or nonoperating property, the interest payment shall
				be allocated either entirely or in such proportion to operating or nonoperating
				property. It shall be the obligation of the railroad company, in its reports to
				the department, to identify and detail any interest payments which are
				particularly associated with operating or nonoperating property, and if the
				railroad company fails to do so, the department may determine that all such
				payments may be allocated between operating and nonoperating property in the
				same ratio as is the debt service and preferred stock dividends (see subrules
				76.4(2) and 76.4(3)).
f. Any
				extraordinary item affecting the income determined herein shall be eliminated
				in the calculation of the income shown under this rule.
g. The equity rate of return for the railroad
				company shall be determined by the use of the capital asset pricing model
				although where appropriate discounted cashflow models may be utilized as an
				alternative. Only in circumstances where these models are not able to be
				utilized will reliance be placed on a risk premium model or upon an
				earnings-price ratio, or other similar model, for determining the expected
				market rate of return on equity.
h.
				The income attributable to operating property available to the common equity
				holder as determined in 76.4(4)
"a"
to
"f"
shall then be divided by the equity rate as determined in 76.4(4)
"g,
				"
and the result shall be the market value of the common equity
				associated with the operating property.