.National Railroad Passenger Corporation (Amtrak): Acela Financing Case Study

A financial lease is lease in which the service provided by the lessor to the lessee is limited to financing equipment. All the other responsibilities related to the possession of equipment; which includes maintenance, insurance and taxes, are owned by the lessee. A financial lease is almost always non-cancellable. A financial lease is fully paid out amortized over its term.

The advantages over debt are it is not recorded the same on the balance sheet. Instead of being debt, it shows up as a footnote. The multiples and ratios will not be affected the same as it would be if it was debt. There are disadvantages of a financial lease over debt. A financial lease is more complicated, and it more difficult to set-up, and harder to find a counter party. There are multiple sources that are offering debt, and it is much easier for a company like the National Railroad Passenger Corporation to obtain debt than it is to establish a financial lease.

The National Railroad Passenger Corporation has three financing options available to them to choose from. They include:

1. Take on debt to fund the purchaseThe advantages to this is it is the easiest method for National Railroad. Based on the financial statements of National Railroad, they can easily obtain debt from a financial institution in order to make the purchase. A disadvantage is the liability is recorded in full on the balance sheet.

2. Financial institutions, such as BNYCF, can lease the equipment to the National Railroad Passenger CorporationThe advantages for National Railroad is the method that the liability is recorded on the financial statements. Because it is a lease, the liability on the balance sheet is not the same amount in option one.

3. Obtain federal fundingCongress has agreed to allow funding to continue for funding Amtrak for capital appropriations. Federal grant monies could be used. A disadvantage to using federal funding would be grant money may not be available in the future. And future expenses may be more important than this. Future expenses could include safety overhauls or major infrastructure related projects.

The alternative that I would choose is to rely on federal sources. Although the disadvantage is that the grant money is a premium and precious commodity and may not be available in the future if it is used now. But, if it is not used now, federal sources may not be available in the future even if it is not used. Especially since railroads are considered the least important of all of the transportation infrastructures. Federal sources could be pulled from the railroad industry in order to give the money to the airline sector.

Brief Summary w/ Reccomendation

Brief Overview-Primary provider of passenger rail service in the United States-Provides service to more than 20 million intercity passengers-Operates 516 stations in 44 states-Never profitable in 30 year history-Had been receiving annual subsidies from the federal government-In 1997, Congress pass ARAA which would stop federal subsidies in 2002-Amtrak developed new business plan - bring in net annual revenues of $180 million by 2002

Acela-"New way of doing business"-High speed rail service to reduce travel time and travel at 150 miles per hour-High quality - comfortable amenities and highly personalized service

The Equipment-Amtrak needs to purchase +15 dual-cab high-horsepower electric locomotives+20 high-speed train sets-Each train consists of+One first-class coach car+One bistro car+Three coach cars+One end coach car+Two power cars

Equipment Cost-The 15 high-speed locomotives will cost $7,161,300 each, or $107,419,500.-The 20 train sets will cost $32,129,050 for a total of $642,581,000.-The total cost will be $750,000,050.

Group PowerPoint Presentation

Financing-Initial proposed investment: $267,900,000+Towards 6 locomotives and 7 train sets-Financing options:+Borrow and Buy+Lease -Buy equipment at end of lease in 2020 at higher of terminal or fair market value -Early-buyout option in 2017+Rely on federal sources

Preliminary Assumptions-Profitability of Amtrak+Ability to take advantage of tax shields-Salvage value+Different values were calculated based on the period-Potential Market at The End of Lease Term

Borrow and Buy-Major bank will underwrite a bond issuance for Amtrak with a 20 year term at 6.75% per annum-Amtrak to make semi-annual payments of $12,303 million+Beginning in December 1999+Locomotives and train sets serve as collateral-Potential Problem? Public market already saturated since Amtrak has recently issued debt?

Lease-Leveraged lease structure-BNY Capital Funding LLC would act as a lessor+Provide equity funds to finance purchase-Amtrak would make semi-annual payments-Alternatives to the lease+Leasing without purchasing the equipment at the end of term -Amtrak will realize a loss from the salvage value+Leasing with purchasing the equipment at the end of term -Buy equipment at end of lease in 2020 at higher of terminal or fair market value -Assumption - Amtrak could exercise an early buyout option +Acquire the equipment from BNYCF in 2017 at $126.6 million-There are 2 methods to valuing the lease:+Valued the lease against an "equivalent loan" -The equivalent loan schedules the same future cash flows as those of a financial lease+Valued the lease against buy and borrow loan strcuture

Rely on Federal Sources-Use federal money to fund equipment purchases-Purchase of Acela equipment would be considered a capital - asset acquisition-Federal grants a precious commodity+Concern? Should Amtrak want to use grant money for this project even though it could be efficiently financed through the capitalmarkets

Advantages vs Disadvantages of Leasing-Advantages+Scheduled payments are tax deductible hence generating tax shield for Amtrak+No immediate lumpsum payment+Offsetting the unachievable economies-Disadvantages+Lesee unable to depreciate - loss of depreciation tax shield+Lease with option may seem more attractive+Loss of salvage value if equipment returned

Note about the CaseAttached below is the spreadsheet (excel file) for the Amtrak case. One of things to keep in mind is this case is not the typical case. Amtrak is government subsidized and is not profitable, has not been profitable in all 30 years and probably can never turn a profit because of the American's mindset on mass transportation for short distances (less than 50 miles). This makes the DCF calculation pointless, unless you are super agressive in what Amtrak would be able to achieve. But given what has happened, you would be stupid to forecast aggressive growth in this industry. So in this case, the break-down of the financials are not as important as the analytical analysis of the industry in the USA. All in all, use common sense for the analytical solution.