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

Brief Summary w/ Reccomendation
A financial lease is lease in which the service provided by the lessor
to the lessee is limited to financing equipm ent. All the other
responsibilities related to the possession of equipment; which
includes m aintenance, insurance and taxes, are owned by the
lessee. A financial lease is alm ost 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 m ore difficult to set-up,
and harder to find a counter party. There are m ultiple 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 purchase
The advantages to this is it is the easiest m ethod 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 Corporation
The 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 funding
Congress 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 m ajor infrastructure related projects.
The alternative that I would choose is to rely on federal sources. Although the disadvantage is that the grant m oney is a prem ium and
precious comm odity and m ay 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 im portant of all of the transportation
infrastructures. Federal sources could be pulled from the railroad industry in order to give the m oney to the airline sector.

Group PowerPoint Presentation

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
-Am trak 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 tim e and travel at 150 m iles per hour
-High quality - comfortable amenities and highly personalized service
The Equipment
-Am trak 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 locom otives 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.

Financing
-Initial proposed investm ent: $267,900,000
+Towards 6 locomotives and 7 train sets
-Financing options:
+Borrow and Buy
+Lease
-Buy equipm ent at end of lease in 2020 at higher of term inal or fair m arket 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 Am trak with a 20 year term at 6.75% per annum
-Am trak to make semi-annual payments of $12,303 m illion
+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
-Am trak would m ake sem i-annual payments
-Alternatives to the lease
+Leasing without purchasing the equipm ent 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 equipm ent at end of lease in 2020 at higher of term inal or fair m arket value
-Assumption - Amtrak could exercise an early buyout option
+Acquire the equipm ent 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 sam e future cash flows as those of a financial lease
+Valued the lease against buy and borrow loan strcuture
Rely on Federal Sources
-Use federal m oney to fund equipm ent purchases
-Purchase of Acela equipm ent would be considered a capital - asset acquisition
-Federal grants a precious comm odity
+Concern? Should Amtrak want to use grant money for this project even though it could be efficiently financed through the capital
markets
Advantages vs Disadvantages of Leasing
-Advantages
+Scheduled payments are tax deductible hence generating tax shield for Amtrak
+No immediate lumpsum payment
+Offsetting the unachievable econom ies
-Disadvantages
+Lesee unable to depreciate - loss of depreciation tax shield
+Lease with option m ay seem more attractive
+Loss of salvage value if equipment returned

Note about the Case

Attached 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.
Am trak 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 m iles). This makes the DCF calculation
pointless, unless you are super agressive in what Am trak 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 com mon sense for the analytical solution.