This document discusses financing options for Amtrak's Acela high-speed rail service. It analyzes Amtrak's financial history and challenges in being profitable. Amtrak needs $750 million to purchase equipment for Acela. The best option is to lease the equipment from BNY Capital Funding, which provides tax benefits and removes liability from Amtrak's balance sheet while still allowing ownership. The analysis concludes the lease is preferable to taking on debt or relying solely on federal grants due to Amtrak's unprofitable history and limited prospects for future profitability.

1. Corporate Finance
Assignment #3 – National Railroad Passenger Corporation (Amtrak) :
Acela Financing
EPGP 2009-10 - Term III- Individual Submission
14-Jan-2009
Instructor: Prof. A. Kanagaraj
Submitted by:
Rajendra Inani - #27
CF –Individual Assignment#3 Page |1

2. Table of Contents
2
1 National Railroad Passenger Corporation (Amtrak): Acela Financing.................................................3
1.1 Introduction - National Railroad Passenger Corporation .................................................................3
1.2 Acela – Acceleration & Excellence.....................................................................................................3
1.3 Case Observation ..............................................................................................................................4
1.4 Available Options ..............................................................................................................................5
2 Income Statement - Amtrak : Acela Financing ..................................................................................6
3 Cash Flow - Amtrak : Acela Financing ...............................................................................................7
4 Conclusion .........................................................................................................................................7
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3. 1 National Railroad Passenger Corporation (Amtrak): Acela Financing
1.1 Introduction - National Railroad Passenger Corporation
• 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
1.2 Acela – Acceleration & Excellence
• 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
o 15 dual-cab high-horsepower electric locomotives
o 20 high-speed train sets
o Each train consists of One first-class coach car, One bistro car, Three coach cars, One
end coach car, Two power cars
• Equipment Cost
o The 15 high-speed locomotives will cost $7,161,300 each, or $107,419,500
o The 20 train sets will cost $32,129,050 for a total of $642,581,000
o The total cost will be $750,000,050
• Financing
o Initial proposed investment: $267,900,000
o Towards 6 locomotives and 7 train sets
• Preliminary Assumptions
o Profitability of Amtrak
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4. o Ability to take advantage of tax shields
o Salvage value
o Different values were calculated based on the period
o Potential Market at The End of Lease Term
1.3 Case Observation
This case is different from any typical financing and leasing case due to following.
1. 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).
2. This makes the DCF calculation pointless, unless performance is super aggressive in what
Amtrak would be able to achieve. But given the past history it is difficult 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.
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5. 1.4 Available Options
The National Railroad Passenger Corporation has following three financing options available to them
to choose from.
Available Explanation Advantage Disadvantage
options
1 Debt from • Major bank will underwrite a bond • Based on the • Liability is
financial issuance for Amtrak with a 20 year financial recorded in
institute term at 6.75% per annum statements, full on the
• Amtrak to make semi-annual can easily balance sheet
payments of $12,303 million obtain debt • Potential
beginning in December 1999 from a Problem?
• Locomotives and train sets serve financial Public market
as collateral institution already
- saturated
since Amtrak
has recently
issued debt?
2 Lease from • Leveraged lease structure - BNY • Liability is • Lesee unable
BNYCF Capital Funding LLC would act as recorded in to depreciate
a lessor - provide equity funds to the financial - loss of
finance purchase statement, but depreciation
• Amtrak would make semi-annual would not be tax shield
payments in balance • Lease with
• Alternatives to the lease - Leasing sheet as in option may
without purchasing the equipment option 1 seem more
at the end of term - Amtrak will • Scheduled attractive
realize a loss from the salvage payments are • Loss of
value tax deductible salvage value
• Leasing with purchasing the hence if equipment
equipment at the end of term - Buy generating tax returned
equipment at end of lease in 2020 shield for
at higher of terminal or fair market Amtrak
value • No immediate
• Assumption - Amtrak could lump sum
exercise an early buyout option - payment
Acquire the equipment from • Offsetting the
BNYCF in 2017 at $126.6 million unachievable
• There are 2 methods to valuing the economies
lease
o Valued the lease against an
"equivalent loan" -The
equivalent loan schedules the
same future cash flows as those
of a financial lease
o Valued the lease against buy
and borrow loan structure
3 Federal • Grant money is a premium • Federal grant • It could be
Funding and precious commodity and may can be used efficiently
not be available in the future if it is for capital financed
used now. appropriations through the
• Money can be used for more capital
important projects like safety, markets
overhauls or major infrastructure
projects

6. 2 Income Statement - Amtrak : Acela Financing
(In millions of dollars)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Revenues
Passenger related and other 1,152 1,177 1,213 1,341 1,392 1,441 1,491 1,543 1,597 1,653
YoY Revenue Growth (passenger) 2.17% 3.06% 10.55% 3.80% 3.50% 3.50% 3.50% 3.50% 3.50%
Commuter 184 213 234 242 260 272 284 297 310 324
YoY Revenue Growth (commuter) 15.76% 9.86% 3.42% 7.44% 4.50% 4.50% 4.50% 4.50% 4.50%
Reimbursable 77 107 108 91 91 100 100 100 100 100
Federal payments - - - - 542 441 444 426
Total revenues $1,413 1,497 1,555 1,674 2,285 2,253 2,319 2,366 2,007 2,077
Expenses
Salaries, wages and benefits $1,330 1,241 1,236 1,299 1,448 1,484 1,521 1,559 1,598 1,638
Train operations 358 321 321 365 356 365 374 383 393 403
Facility and office related 153 172 181 187 190 195 200 205 210 215
Maintenance of way goods and services 45 73 59 46 52 53 55 56 57 59
Advertising and sales 91 90 109 98 102 105 107 110 113 115
Interest 185 144 149 160 181 186 190 195 200 205
Depreciation and amortization 245 230 238 242 294 301 600 1,000 1,100 1,250
Other 83 34 25 39 15 15 16 16 17 17
One time charges/(gains) (244) - - - - - - - - -
YoY growth of expenes (total) 2.63% 0.56% 5.09% 8.29% 2.50% 13.27% 15.07% 4.63% 5.82%
Total expenses 2,246 2,305 2,318 2,436 2,638 2,704 3,063 3,524 3,687 3,902
Operating income/(loss) $ (833) (808) (763) (762) (353) (451) (744) (1,158) (1,680) (1,825)
Exclude federal payments and related interest 577
Operating loss restated $(833) $(808) $(763) $(762) $(930) $(451) $(744) $(1,158) $(1,680) $(1,825)
Federal Grants:
Federal operating grant $352 392 285 223 202
Excess railroad retirement taxes 150 150 120 142 142
Federal capital - interest - - - 42 -
Federal capital - progressive overhaul & other - - 36 37 82
Total federal grants $502 542 441 444 426 0 0 0 0 0
Net loss $ (331) (266) (322) (318) (504) (451) (744) (1,158) (1,680) (1,825)

7. 3 Cash Flow - Amtrak : Acela Financing
(In millions of dollars)
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
EBIT (331) (266) (322) (318) (504) (451) (744) (1,158) (1,680) (1,825)
Tax - - - - - - - - - -
Earnings after Tax (331) (266) (322) (318) (504) (451) (744) (1,158) (1,680) (1,825)
+Depreciation 245 230 238 242 294 301 600 1,000 1,100 1,250
-Capital Expenses 250 253 255 258 260 274 298 320 343 365
-Increase in NWC 220 225 230 235 247 250 255 265 310 375
Free Cash Flow (556) (514) (569) (569) (717) (674) (696) (743) (1,233) (1,315)
PV of FCF (521) (451) (468) (438) (517) (455) (441) (440) (685) (684)
4 Conclusion
• Terminal Value – Negative
• PV of Terminal value – Negative
• Value of Company – Negative
• Recommendation – Lease from BNYCF – please refer Para 1.4 – Available Options table
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