CSX buys loco 696 AC4400. At some point it sells it to Progressive Rail PRLX and they patch it with their road name and then they lease it to CSX. Is this something to do with depreciation, that allows both companies to profit from the deal?
Henry
COB Potomac & Northern
Shenandoah Valley
According to NSDash9.com, the locomotive is actually being leased to NS for their power shortage along with a lot of other ex-CSX locomotives.
http://www.nsdash9.com/leased.html
I have read lots of books related to the "creative financing" of the railroads and business in general. I've come away with some basic understanding but it is far too complicated for my little brain to get around.
I believe the first premise is, if you can use someone else's money to conduct your business, all the better.
If you can get that money without paying taxes and interest on it, all the better!
It all comes down to who has the sharpest pencil. A railroad can lease and not have to use "capital" which is taxed at a higher rate. Another good point about leasing is that traffic demands vary so much they don't want to have to pay for a new locomotive that is going to be sitting in dead storage in a year-or-two.
It also allows for maintenance to be handled by somebody else. We can close down our expensive shops and "farm out" the maintenance.
Even before leasing the railroads would "float" a bond and form an equipment trust, basically like a car loan. That's why you see "Trust Plates" on equipment so often.
I tried to understand the financing of two brothers, OP and MJ Van Sweringen who built a huge railroad empire, essentially using credit and betting the assets of one railroad to buy several more railroads.
Their whole house of cards colapsed in October 1929, of course. Even today there are leases coming due on some properties that were granted "99 year leases" way back when and now these leases have to be re-negotiated at 2018 prices and sticker-shock is making for some fancy financing.
When you get into holding companies, wholly owned subsidiaries, and throw a few bankruptcy recieverships in there and things really get complicated.
https://en.wikipedia.org/wiki/Van_Sweringen_railroad_holdings
I really don't know how these corporations can keep their books in order these days.
I don't know the exact numbers but I'll bet the majority of new locomotives coming out of GE are leased rather than purchased outright.
One good thing about leases, it allows smaller operators to have reliable equipment that otherwise would have been scrapped.
LTE_GP30_2185b by Edmund, on Flickr
This is an ex-Reading 5517, GP-30 built in July, 1962, working on the Indiana Northeastern at Edon, Ohio. LTE is Larry's Truck and Electric, a leasing operation.
http://www.railpictures.net/photo/364662/
Cheers, Ed
I'd guess the two biggest reasons are maintenance and availability. A railroad might decide that it makes more sense to sell that 20+ year old GE unit to a leasing company, rather than pay to maintain the locomotive themselves. They can lease engines from a leasing company without worrying about a costly breakdown or failure. If the engine quits working, it goes back to the leasing company (and another engine takes it's place).
Some railroads have high seasonal traffic, like grain traffic in late summer to early winter in the Midwest. Leasing allows railroads to get extra units when they're needed, without having to buy units that may sit idle for part of the year. (Note that before leasing companies became common, railroads often leased engines from each other. The Missabe Road in the 1950's-60's would often lease engines from Great Northern during the iron ore shipping season, but then lease their own SD-9s out to the Soo Line or other railroads while the Great Lakes were frozen over in winter.)
Overall it's not much different than a business and their automobile fleet. For some companies it works out best to buy and maintain their own vehicles, for others it makes more sense to lease the cars. For a few companies, a combination of both is best.
I am not and never have been a railroad bean counter and what I'm going to say is based on knowledge acquired 1960-1980s.
Most railroad equipment was owned by a financial institution, and diesel locomotives were considered fully depreciated after 15 years. Once a locomotive was fully depreciated, it could be retired and returned to the owning institution. Here, a decision was made as to whether or not there was an economical service life and value on the used locomotive market. If there was traffic demand and the unit was viable, it found a new career in the second hand market. If demand was weak or the unit was of an unpopular type, it met the torch.
Today's railroads seem to want a floating pool of short and long term lease power they can dip into as needed. They will keep a core roster of the latest and best units and fill the rest of their needs with fully depriciated, high horsepower engines that they used to own. They avoid the maintenance costs and the cost of idle power during traffic slowdowns. The second hand lessor bought the units for little over scrap value which allows the lessor to make the lease terms very attractive vs. buying new power. This is impacting orders for new locomotives and causing pain for the builders.
Fifteen year depreciation may be the reason CSXT 696 became PRLX 696.
You are confusing two different financial transactions with this conversation.
Let's say CSX purchases 100 locomotives from GE, they get a loan from a bank and the locomotives are put up as collarteral for loan, which is the trust plate on the locomotive. The loan may run for 10 or 15 year depending on terms. CSX then owns the locomotives and then depreciates them for the 15 years allowed by the tax code (The 15 year depreciation was what made the diesel a viable alternative to the steam locomotive which had to be depreciated for 40 years). CSX is also required to maintain and keep these locomotives in good working order. After 15 years they can sell them, trade them in or whatever.
The leasing company can purchase old locomotives or new locomotives and then rent them to CSX on a horsepower/hour used basis. CSX is liable for the fuel and minor repairs and the leasing company is responsible for the major repairs unless CSX was negligent in operating the locomotives. The Leasing company gets to depreciate the locomotives again based on the purchase price, but used locmotives would have a lower useful life for depreciation purchases.
Rick Jesionowski
Rule 1: This is my railroad.
Rule 2: I make the rules.
Rule 3: Illuminating discussion of prototype history, equipment and operating practices is always welcome, but in the event of visitor-perceived anacronisms, detail descrepancies or operating errors, consult RULE 1!
There's also tax advantages involved because of certain deduction involved with leasing equipment.
Whats to say that CSX didn't lease them from Progressive in the first place and let them have them back?
Its not a railroad thing. Its a business thing. Many different kind of companies do it with Property and Equipment.
It's called a sale-leaseback.
I knew the advantages once upon a time, and they vary.
One reason would be if CSX owned the loco for a period of time, it might be fully depreciated on their books, IOW, has no book value, -0-. But since its an operating loco in good condition, it has real value. Selling it at market value would generate cash, then they rent it back from the seller to continue using it for their operations, and make lease payments over time. The seller makes money from the implied interest rate built into the lease. (similar to a 5 year loan at 6%)
CSX then uses the cash from the sale to make a downpayment on a new loco. The old loco is able to generate enough revenue to earn its lease payments, and the new loco earns its keep as well. CSX is using both locos.
Its a fancy way of getting cash to buy something else and expand, probably ultimately cheaper than if they went to a bank to finance the entire new loco.
Hope that makes sense.
- Douglas
Remember PRLX is owned by the same company that owns EMD, Progress Rail. So it might just be part of the purchase agreement. Lease to a line for 15 years, then take it back to make it part of the PRLX fleet after the original railroad has used it.