Legacy Corporations Status (B&M/MEC/ST/PTM)

Reposted here for further topical discussion...

KSmitty wrote:Yes, by paper company I meant it has no operatating department. Land ownership, and equipment don't mean it isn't a paper company. The corporate identity of Portland Terminal is Pan Am Railways and all maintenance & operations on PTM property are conducted by the lessor ST. PTM is still in existence to provide PAR with an extra reporting mark, should they ever decide to use it, and tax shelter.

KSmitty wrote:Plus keeping it saved them the expenses of having to transfer all the real estate to another identity.

I don't necessarily agree that the savings on this particular transaction is all that significant that they wouldn't do this if they had good reason to. I'm also not entirely certain that PTM or any of the other legacy corporations provide any particular tax advantages. Honestly the only real advantage that I can see is that keeping all of the companies separate would allow PAR to bankrupt them separately, if they so chose. In short if one end of the system starts to lose a lot of money PAR could cut it lose without having to unwind or spinoff some portion of the company. The nice part about this is that the separate networks have boundaries that follow their business area boundaries as well.

KSmitty wrote:And remember B&M, MEC, ST and PTM are all still separate identities, they never formally merged, so they will all stay in existence until they are formally merged out, and if that hasn't happened yet, I don't know why it would.

See above.

Sometimes maintaining separate ownership of lines allows companies to sell off pieces much easier than if they didn't. This can help create a situation where the value of the parts are greater than the whole together. PAR has mastered this by selling off their defunct branch lines piece meal to the State of Maine.

Just to note, that was a bit misquoted. I never wrote the 3rd paragraph in the large quoted block, I may enjoy good spirited debate but not enough to disagree with myself in the same post :D

Realistically, ST is the only railroad in Pan Am Railways that makes money. Besides property taxes, it is also the only railroad with any day to day expenses. It is fully possible that MEC, PTM and B&M lose money every year, while ST is the only profitable chunk of the rail division. I'd imagine that corporate taxes are much lower when you lose money than when you make oodles...similar to (if I understand correctly) CP's usage of the StL&H subsidiary to essentially create a company that lost money to separate it from the profitable portions of CP. Allowing much larger write offs than if the losses were just deducted from CP's bottom line and also allowing the company to take a much more aggressive labor/management stance. If the same philosophy is held on PAR, ST operating allows a much tougher management/labor stance (but there's a whole other topic for that...) and allows B&M/MEC/PTM to be used for writeoffs.

Obviously, the 4 railroads have retained separate identities even if just on paper, for some financial reason, be it taxes or something else. Pan Am like any company is money-motivated and wouldn't retain 4 identities if it could merge them into 1 and make/save just as much money. Taxes or labor seem to be the obvious money savers as they are generally consistent and always dependable (especially taxes) sources of outgoing money. Maintenance, fuel, car hire, equipment purchases and other operational considerations all vary too much for me to see it as singly important enough to provide a reason to keep them separate.

KSmitty wrote:Just to note, that was a bit misquoted. I never wrote the 3rd paragraph in the large quoted block, I may enjoy good spirited debate but not enough to disagree with myself in the same post :D

Entirely my fault. I left a [/quote] in place that should have been deleted and then didn't catch it on preview.

KSmitty wrote:Realistically, ST is the only railroad in Pan Am Railways that makes money. Besides property taxes, it is also the only railroad with any day to day expenses. It is fully possible that MEC, PTM and B&M lose money every year, while ST is the only profitable chunk of the rail division.

This is possible if they are still depreciating assets (which might explain why they left the Rigby roundhouse in place for so long). Otherwise if they are 100% depreciated it would seem to me that they would only be losing a very negligible amount of money, unless of course they have some kind of uneven contractual relationship with MEC and the B&M. This might not even be legal anyways, nor would it be useful as losses are most useful when they are protecting profits, meaning they need to occur within the same corporation.

KSmitty wrote:I'd imagine that corporate taxes are much lower when you lose money than when you make oodles...similar to (if I understand correctly) CP's usage of the StL&H subsidiary to essentially create a company that lost money to separate it from the profitable portions of CP. Allowing much larger write offs than if the losses were just deducted from CP's bottom line and also allowing the company to take a much more aggressive labor/management stance.

I'd love to know more about how that works.

KSmitty wrote:Pan Am like any company is money-motivated and wouldn't retain 4 identities if it could merge them into 1 and make/save just as much money.

This is what I really wonder about. What is the real advantage here?!?

gokeefe wrote:Entirely my fault. I left a [ /quote] in place that should have been deleted and then didn't catch it on preview.

Not an issue just wanted to set it straight.

gokeefe wrote:This is possible if they are still depreciating assets (which might explain why they left the Rigby roundhouse in place for so long). Otherwise if they are 100% depreciated it would seem to me that they would only be losing a very negligible amount of money, unless of course they have some kind of uneven contractual relationship with MEC and the B&M. This might not even be legal anyways, nor would it be useful as losses are most useful when they are protecting profits, meaning they need to occur within the same corporation.

Depreciation makes sense, many of the locomotive may still be depreciating, B&M/MEC GP7/9's were transferred to ST, while newer units were left alone, the older units would have been fully depreciated by 1985 or so, while GP's built in the mid 60's forward would still have had depreciation value. By "selling" units to ST from B&M and MEC, it allows for depreciation to continue (SP did that with their SD45 fleet, so I'm using that as precendent). I wouldn't think the roundhouse had any value left to depreciate, and would assume it stayed because it was stable and would be presumably expensive to tear down if it had anything nasty like asbestos in it.

gokeefe wrote:I'd love to know more about how that works.

In regards to the StL&H it was always my understanding that it was spun off into subsidiary as a way to separate east coast losses from CP's books and combine those losses into a single organization that would allow it some form of tax shelter. (I'm not CPA, so I can't explain what the shelter would be, other than the fact you wouldn't pay taxes on money you lose.) Then again, I've done some reading on the StL&H and it seems it was designed to isolate CP's eastern lines to prepare them for spinoff. It was also used to allow management to take a much more hands on approach to the operations and become more aggressive on pruning back the system and agreements with labor. ST served GRS/PAR the same way, as Guilford leased to ST the portions of lines to be abandoned they wished to retain and let the old entities abandon the remaining sections (example-Calais Branch-ST leased the still active section, and MEC abandoned the rest). ST was also used to prune back labor agreements. In many regard the StL&H venture by CP was out of GTI's playbook.

gokeefe wrote:This is what I really wonder about. What is the real advantage here?!?

I cannot definitely answer that, all I can do is speculate. But honestly, unless you can talk to someone in Pan Am Railway's accounting or legal department you will not get a definite answer. They have for 25 years now operated a successfully merged system without ever merging. It might be as simple as they didn't feel like writing up the paperwork to file for a merger, but I imagine it a mix of depreciation, taxes, and a savings on legal fees to formally merge the 4 entities makes it worth it.

Edit-I also don't see where ownership would play a role in the State of Maine purchasing rail lines. Maine has made a policy decision that it is going to preserve as many rail options as possible, and has purchased lines from MM&A, Maine Central (GRS/PAR) and the old GT property to Portland. Whether Maine Central or Acme Railroad Co. owns the line, Maine would try to preserve it. The only place where separate identities would matter would be if they decide to shrink to the old Maine Central and sell south of Rigby off (as has been suggested/discussed elsewhere) Even a full scale sale of the lines could be transacted if the B&M and MEC were one identity. Railroads transact sections of line often and it doesn't require a separate identity to split operations and move assets from one company to another.