Economic factors currently impacting utility construction projects may make utility and right-of-way contractors want to revisit their financing options for adding equipment to their fleets in 2017, says Al Herndon, utilities sales manager for Terex Financial Services (TFS).
“While it’s difficult to know for sure what the financial policies of the new Trump Administration will be, in late 2016, the U.S. Federal Reserve increased interest rates for only the second time since 2006. As rates begin to rise and with the Fed forecasting three further rate hikes in 2017, interest expense will have a much greater impact on contractors’ bottom lines,” adds Chris Johnson, U.S. sales director for Terex Financial Services.
Meanwhile, two regulatory changes affecting assets and balance sheets are worth reminding fleet owners about. “How you financed your fleet in the past may not be what you want to do in the future,” says Johnson. First, the bonus depreciation will be phasing out, and second, a Financial Accounting Standard Board (FASB) pronouncement will now require all leases to be accounted for within company financial statements.
Last year, it was announced that the 50 percent Bonus Depreciation, which is part of Section 179 in the tax code, will be extended through 2019. “But 2017 is the last year equipment acquisitions can take advantage of the full 50 percent depreciation,” said Johnson. “After that, bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019. This is an incentive for fleet owners to buy equipment under the tax shelter. Remember, you can’t get the bonus depreciation if you are leasing.”
With that said, there have traditionally been very good reasons to consider leases. “Historically, leases could be made off-balance sheet, not showing as either an asset or a liability,” says Johnson. That will no longer be the case after the effective date — December 2018 for public companies and December 2019 for other organizations.
The reason it’s worth reminding contractors about this now is that many leases are for five- to seven-year terms. As we approach these effective dates, contractors may want to establish shorter lease terms if they plan to enter into new leases in 2017.
Despite the new pronouncement, leasing may still be the preferred option in some situations. “As equipment ages, maintenance cost and downtime for larger repairs tend to increase,” says Herndon.
For some contractors it makes more sense to lease equipment to keep their fleets fresh, reducing maintenance cost as well as the expense that comes with downtime. In addition, some jurisdictions, such as California, have such stringent emissions regulations, that leasing may make more sense than buying.
“If your accountant hasn’t advised you of these accounting changes, it’s a good idea to schedule a meeting to determine what combination of renting, leasing or financing is best for your company,” explains Herndon.
A good third option is renting, which easily fulfills short-term needs, and for companies that are financially leveraged, renting may be the only option.
Why OEM Financing Makes Sense
“Much has changed in equipment financing in just a few short years,” says Herndon. At the height of the recession, conventional lending opportunities dried up, making it difficult for companies to obtain financing for capital assets. As an alternative, OEM financing provides equipment owners in a niche market with several benefits.
“Terex Financial Services knows the equipment and the industry, so we can typically take a greater risk than conventional lending institutions,” says Johnson. “We also partner with our customers to take an equipment lifecycle management approach, offering a variety of financial solutions that are flexible.”
Several years ago, The Goldfield Corp., Melbourne, Fla., a provider of electrical transmission construction and maintenance services to the energy infrastructure industry, decided to supplement traditional secured lending it received through banks. “We had secured a number of Master Services Agreements. Our primary equipment dealer introduced us to financing facilities offered by OEMs,” explains Stephen Wherry, CPA, senior vice president and CFO for The Goldfield Corp.
“Terex offered leasing arrangements that could be customized to fit our needs. Terex’s knowledge of residual values for equipment it manufactures allows them to tailor the financing for us.” TFS provides leases to Power Corporation of America, a wholly-owned subsidiary of The Goldfield Corp.
The Goldfield Corp. uses a combination of services — financing, leasing and rental-to-purchase options. “Leasing allows the equipment experts to bear the risk of the decline in the value of the equipment and to handle the remarketing of the equipment at the end of the lease term,” says Wherry. “We can focus on the work and supporting our workers with superior specialty equipment.”
Wherry explains that this combination of financial services allowed the company to achieve five primary goals:
1. Have new, safe and reliable equipment.
2. Have the term of the Master Lease Agreements for the equipment correspond to the term of the MSA contracts.
3. Improve reliability of equipment to
4. Improve employee morale and
5. Customize fleet lifecycle to meet the specific needs for each utility contract.
TFS recently announced that in 2016 — the second year in a row — it received excellent Net Promoter Scores that are on par with “best in class” organizations in the broader financial services market. A Net Promoter Score is obtained by a third-party interviewing and auditing process, which measures a customer’s overall experience.
Obtaining financing or appropriately structuring leases can be a time-consuming task, but OEM financing is an option. As Johnson notes, “We work hard to provide solutions that are individually structured to complement customers’ cash flow and budgets so that you can achieve your business goals
Tony Rust is the North American sales manager for Terex Utilities.