On the other side of the coin, I would be just as interested, and I think the committee would, if indications were that there was a sudden reversal that indicated they were moving into a better circumstance.

Mr. STAFFORD. This is one of the basic purposes of the study, as well as setting up guidelines to be used on other roads where we feel there might be a problem.

Mr. KAHN. In that connection, I think it might be worthwhile to mention that yesterday's development posed a real threat to the economic viability of the Penn Central Transportation Co., even in receivership. As you will recall, three railroads were struck and there was a threat of a retaliatory lockout.

If that had occurred, the cash flow picture would have been thrown askew and the continued viability of that enterprise would have been jeopardized. Happily, of course, the emergency procedures have been invoked.

Senator HARTKE. All that does is add to our troubles.

Mr. KAHN. Very significantly, sir.

Senator HARTKE. Yes, it is unfortunate that we have to deal with this in a transportation crisis of this proportion. The whole country could be put to a standstill overnight.

Mr. KAHN. I think the legislation you are considering is not supported by the Commission in any sense of crisis. I think the Commission is persuaded for a need of a loan guarantee program separate and apart of the immediate crisis of the Penn Central Transportation Co.

Senator BAKER. I understood that there was a request by the committee to supply a monthly statement of operating projections or cash flow projections.

Mr. STAFFORD. That is right.

Senator BAKER. One of the things that concerns me, and it might be incorporated in your monthly report to the committee, is items of deferred maintenance. Some charges can be deferred indefinitely in some categories. I am not certain, but I will guess that a good bit of ordinary routine maintenance is being deferred in order to improve the cash position.

Mr. STAFFORD. That is right.

Senator BAKER. Would you be in a position to give us some estimate at some point how much is being deferred and for how long?

Mr. KAHN. This is a very difficult thing to pin down, Senator, in that the standard of maintenance itself is a very elusive item. But certainly auditors are compiling this information, yes.

Senator HARTKE. I think Senator Baker makes a good point.

In other words, we still want to find out, if we can, I think it has been delayed much too long now. I think we should have known this. But there is no need to go behind that.

Mr. KAHN. In that connection, I think it is fair to say that the Commission recognized well before June 21st the financial difficulties in which the Penn Central Transportation Co. finds itself.

Senator HARTKE. Can you give us the time when it became evident to the Commission?

Mr. KAHN. At the time, the $100 million debenture of the Pennsylvania Co. failed to find a ready market and it became accentuated and became quite obvious when the management of the Penn Central Transportation Co. was seeking a Government guaranteed loan. It was very obvious at that point.

Senator HARTKE. Was it obvious to you before that time?

Mr. KAHN. The Commission had indications even before that, yes, sir.

Senator HARTKE. When did it have indications before that?

Mr. KAHN. The Commission report on October 29, 1969, calls attention to the fact that the Penn Central Transportation Co. was invoking short-term financing devices that were more appropriate to long-term financing; yes, sir.

Senator HARTKE. What action, if any, did you take upon that, anything?

Mr. KAHN. In view of the market conditions, the Commission in its report of October 29 approved that particular transaction because of the needs of the company.

Senator HARTKE. Did you make an investigation at that time into any of its financial operations or did you attempt to?

Mr. KAHN. The Commission had a reasonably comprehensive picture at the time it considered this particular application.

Senator HARTKE. In that October report, what type of financing was involved?

Mr. KAHN. This was authorization for, I believe, $50 million of unsecured short-term credits.

Senator HARTKE. Would this come under section 20 a (2)?

Mr. KAHN. Yes, sir, that came under section 20 a.

Senator HARTKE. In your survey at the same time you did approve of the short-term financing, correct?

Mr. KAHN. That is correct, noting, however, that the approval was reluctantly given because of the strained circumstances in the capital market.

Senator HARTKE. Did you feel if you did not grant the authority at that time that it would impair the ability of the carrier to perform its function?

Mr. KAHN. I think that is a fair conclusion to draw from that report, sir.

Senator HARTKE. Did you require at that time any statement from the company as to the good faith that they would make in this type of approach toward their financial need?

Mr. KAHN. I think at that time there was no need apparent for calling for that kind of extraordinary statement.

Senator HARTKE. Why not?

Mr. KAHN. We do not normally question the good faith of an applicant.

Senator HARTKE. Well, you had a situation develop here in which you seriously questioned whether or not the indebtedness was first compatible with the public interest, you questioned that, did you not? Mr. KAHN. But, sir, I noted the fact that we were as much concerned by the state of the market as we were by the state of the railroad itself.

Senator HARTKE. Of course. I think we will make that report part of the record.

(Testimony resumes on p. 180.)

(The information follows:)

INTERSTATE COMMERCE COMMISSION REPORTS

FINANCE DOCKET NO. 25854

PENN CENTRAL TRANSPORTATION COMPANY NOTES

Decided October 29, 1969

Authority granted to Penn Central Transportation Company to issue its shortterm unsecured promissory notes in the nature of commercial paper in aggregate principal amount not exceeding $50 million at any one time outstanding, subject to condition.

Edward A. Kaier and Edwin K. Taylor for applicant.

REPORT OF THE COMMISSION

DIVISION 3, COMMISSIONERS TUGGLE, DEASON, AND HARDIN

BY DIVISION 3:

The Penn Central Company (name changed to Penn Central Transportation Company on October 1, 1969), by application filed September 12, 1969, as supplemented October 2, 1969, seeks authority under section 20a of the Interstate Commerce Act to issue its short-term unsecured promissory notes in the nature of commercial paper during a period ending September 30, 1974, in aggregate total principal amount not exceeding $50 million at any one time outstanding. No objection to the application has been offered.

Applicant is a common carrier by railroad subject to part I of the Interstate Commerce Act. It was incorporated under the laws of the Commonwealth of Pennsylvania by special act dated April 13, 1846, and acts supplemental thereto, as The Pennsylvania Railroad Company and is the surviving company of a merger with The New York Central Railroad Company effective February 1, 1968. Applicant amended and restated its articles of incorporation on May 19, 1969. It operates or is authorized to do business in the States of Connecticut, Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, Massachusetts, Missouri, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Virginia, West Virginia, and in the District of Columbia.

Pursuant to resolutions of its board of directors adopted August 27, 1969, applicant proposes to borrow a presently undetermined total aggregate principal amount within a period ending September 30, 1974, from one or more banks and other lenders, and to issue and deliver in evidence thereof through Morgan Guaranty Trust Company of New York, New York, N.Y., as its issuing agent, short-term unsecured promissory notes in the nature of commercial paper, not in excess of $50 million at any one time outstanding. The notes would be dated as of the date of issue, would mature not more than 1 year from date of issue and would be issued at any time and from time to time during a period ending September 30, 1974, in any principal amount which is not less than $50,000, but in aggregate total principal amount not in excess of $50 million at any one time outstanding.

The commercial paper notes would be of two types, discount notes without interest, and nondiscount notes with interest. The discount rate or the interest rate would not exceed the highest prime rate of interest of leading commercial banks in New York City at the time of borrowing plus 1% percent per annum. The notes would be unsecured and would be in the form set out in the application.

Although commercial paper notes are ordinarily drawn with a 270-day or less maturity, the commercial paper notes proposed to be issued by applicant will have a maturity as long as 1 year from date of issue. To this extent they will vary from the ordinary commercial paper notes.

Applicant has presently outstanding $150 million of commercial paper, consisting of $100 million authorized in Finance Docket No. 25179, on July 22, 1968, and $50 million authorized in Finance Docket No. 25570 on March 19, 1969, as modified on August 12, 1969. By second supplemental order dated September 25, 1969, in Finance Docket No. 25570, the order of March 19, 1969, was further modified so as to extend to December 31, 1970, the time within which applicant may issue the notes authorized therein. In addition, applicant has $250 million of revolving credit notes outstanding, which were authorized in Finance Docket No. 25622, on May 12, 1969. The details of these outstanding obligations are shown in appendix A.

The proceeds of the issue would be used (1) to reimburse applicant's treasury in part for past capital expenditures and matured obligations, and (2) to replenish its cash. Applicant furnished a listing of roadway and structure projects, each over $250,000 carried out in the period January 1, 1966, to August 31, 1969, which totaled $207,264,000. These, together with $90,936,000 of similar projects of less than $250,000 each indicate a total of $298,200,000 was expended for such projects during said period. Those projects together with capital expenditures for equipment during the same period amounting to $418,695,000, produce a grand total of $716,895,000 of expenditures for roadway and equipment during the period. The details of the equipment expenditures are summarized in appendix B. Capitalizable assets as of June 30, 1969, excluding applicant's investments in affiliated companies and other investments, consisting of investments in road and equipment, less depreciation and amortization as of that date, amounting to $2,697,964,372, exceeded capitalization of $2,042,189,682 consisting of longterm debt due within 1 year $75,165,330, long-term debt due after 1 year $1,638,516,414, capital stock $241,092,700, and premiums and assessments on capital stock $87,415,238, by $655,774,690. As of June 30, 1969, applicant's current liabilities of $500,391,914 exceeded its current assets of $452,023,797 by $48,368,117. Applicant has been subjected to fairly heavy capital expenditures and maturities in recent years. As previously indicated, the improvement program totaled $716,895,000 for the period 1966, 1967, 1968, and the first 8 months of 1969. Debt maturities were $320,700,000 making a total of debt maturities and capital expenditures of $1,037,595,000 during the period. Details of these items are set out in appendix C together with the financing means used during the period. Of the total amount, $828,875,000 was financed through equipment trusts, conditional sales agreements, stock options, revolving credit agreements, commercial paper, Eurodollar loan, and other financing mediums, leaving a balance of $208,720,000 not financed during the period.

According to the investment banking firm which usually handles applicant's commercial paper, unless market conditions change, there is a market for an additional $50 million of applicant's notes.

Issuance of commercial paper notes of a maturity of not more than 1 year apparently affords applicant access to a source of money at relatively favorable interest rates. Its commercial paper rate, exclusive of the % of 1 percent commission to the commercial paper dealer, at the present time ranges from 84 percent to 8% percent per annum, whereas, the bank prime rate is 81⁄2 percent per annum at the present time. However, applicant states that lending banks require borrowers to maintain compensating balances on deposit amounting to 15 to 20 percent of the borrowing from the bank and such requirements add to the cost of bank borrowing.

50-934 0-71-pt. 1- -12

Since December 31, 1965, applicant has completed long-term financings of equipment in the amount of $332,400,000. In addition, in July 1969, The Pennsylvania Company, applicant's subsidiary, sold $35 million of long-term securities and contemplates the sale of an additional $40 million in the last quarter of the current year. Applicant alleges that it is currently intensively studying various alternatives for a long-term financing program in 1970. Market conditions, legal restrictions, cash requirements and other variables will reportedly determine applicant's decision relative to its 1970 financing program, but at present, applicant contemplates the inclusion of (a) a blanket mortgage or collateral trust, (b) additional issues of a subsidiary, and/or (c) the sale of assets.

Applicant feels that long-term financing at the present time is not feasible due to the tight money situation. Although we are sympathetic to applicant's problem. short-term financing has traditionally been relied upon to finance short-termi needs and is not normally regarded as a proper source of long-term financing of capital expenditures or for refinancing of maturing long-term debt. As of June 30, 1969, applicant had a deficit working capital situation which can be expected to worsen if reliance on short-term financing is increased. The exhaustion of shortterm credit to refinance maturing long-term debt or to finance long-term capital expenditures could expose a carrier to a serious crisis in the event of an economic squeeze, at which time a carrier may require short-term financing for traditional use. We are, therefore, concerned about the use of short-term financing for long-term purposes and feel that where necessary it should be resorted to cautiously.

On the whole applicant is in a strong financial condition and in view of the present tight money market and applicant's stated intent to negotiate long-term financing as soon as it is feasible, we conclude that the application should be approved, subject to a condition restricting the issuance of such notes to a period not exceeding 2 years from the date the order herein is served.

Subject to the aforesaid condition, we find that the proposed issue and sale by Penn Central Transportation Company of its short-term unsecured commercial paper promissory notes in principal amount not exceeding $50 million at any one time outstanding, as aforesaid, (a) is for lawful objects within its corporate purposes and compatible with the public interest, which are necessary and appropriate for and consistent with the proper performance by it of service to the public as a common carrier, and which will not impair its ability to perform that service, and (b) is reasonably necessary and appropriate for such purposes. An appropriate order will be entered.