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3/28/2011



Rail News: Rail Industry Trends

STB should re-examine rail acquisition-related accounting policies, senators say


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Last week, 10 U.S. senators sent a letter to Surface Transportation Board (STB) Chairman Daniel Elliott III expressing concerns about the STB’s treatment of acquisition premiums when assessing a Class I’s asset base. As an example, they cited Berkshire Hathaway’s acquisition last year of BNSF Railway Co., which involved a purchase price about $7.3 billion higher than BNSF’s book value, the senators said.

“Allowing this and future acquisition premiums to be included in a railroad’s regulatory rate base raises a serious concern for captive rail shippers. Put simply, Berkshire Hathaway could pay an inflated price for BNSF, and then pass that cost onto its captive customers in the form of higher rates,” wrote the senators, including Al Franken (D-Minn.), Michael Enzi (R-Wyo.), Tom Harkin (D-Iowa), Tim Johnson (D-S.D.), Mary Landrieu (D-La.), Amy Klobuchar (D-Minn.), Herb Kohl (D-Wis.), Mark Pryor (D-Ark.), Jon Tester (D-Mont.) and David Vitter (R-La.).

By including an acquisition premium in the capital asset base, a railroad is able to “artificially inflate” the revenue-to-variable cost ratio of 180 percent that is required by statute for a shipper to bring a rate dispute before the STB, they wrote. The senators urged the STB to re-examine its accounting policies to better protect shippers.

“The board is necessarily limited in its ability to determine when a rail rate is unreasonably high, but we are concerned that the inflation of this congressionally established threshold will ultimately mean only a very small number of shippers are able to challenge rates before the STB,” the senators wrote.

However, the STB and its predecessors, as well as the Securities and Exchange Commission have long required railroads to follow generally accepted accounting practices (GAAP), so “the regulator has the certainty of using a process that is validated, audited and required regulation,” BNSF officials said in a statement.
 
“Following the acquisition of BNSF by Berkshire Hathaway, a valuation of BNSF assets and liabilities was conducted as required by GAAP,” they said. “Purchase accounting has been used to account for transactions like the BNSF-Berkshire one for past rail transactions, and has resulted in both write-ups and write-downs of net assets. In the case of the BNSF-Berkshire transaction, a rigorous and independent valuation was performed by one ‘Big Four’ accounting firm and audited by a second one.”
 
BNSF’s balance sheet, including its property, plant and equipment, goodwill, and other assets and liabilities were adjusted to reflect the market value paid for the company, according to the Class I.

“As with prior railroad transactions, the assets were not overvalued or undervalued, but accounted for at this fair market value,” BNSF officials said. “In the BNSF-Berkshire transaction, most of the premium paid was accounted for as goodwill, which is not included in the regulator asset base for revenue adequacy determinations.”
 
Congressional advocacy for a special proceeding on the application of GAAP accounting “unfairly and unnecessarily” singles out one transaction, BNSF officials believe.

“BNSF expects that the board will give the issue a fair hearing when it undertakes a review of BNSF’s valuation in the ordinary course of its regulatory proceedings,” they said.


Contact Progressive Railroading editorial staff.

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