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Senator PEARSON. I assume from your prior responses you cannot state how much of the assets of the parent and subsidiaries are now unencumbered ?

Mr. STAFFORD. Yes, I believe that is right. Senator PEARSON. And you would be unable to state for the record what assets are available for security for loans or to raise cash?

Mr. GRADY. At this time, yes. Senator PEARSON. What happened to the assets of the railroad when the parent holding company was formed ?

Mr. GRADY. The assets of the carrier stayed as a part of the carrier.

Senator PEARSON. Were there any transfers from the railroad company to noncarrier companies ?

Mr. GRADY. As far as the Penn Central Co., the top holding company, we have not been able to find any substantial transfers of any of the transportation company's assets up to the holding company.

Senator PEARSON. You testified as to the movement upwards. How about the movement downwards into the subsidiary?

Mr. GRADY. There have been several transactions between the Penn Central Transportation Co. and the Pennsylvania Co.

Senator PEARSON. Are you prepared to discuss those at this time, what the transfers were, what they consisted of!

Mr. GRADY. We do not have a list today. We can furnish you with a detailed list of all the transfers that have been made and our staff is going over all of the intercompany transactions, particularly those involving the carrier.

Senator PEARSON. Well, you can supply that for the record.

Lot me ask you this: Has the Penn Central exchanged transportation assets for nontransportation assets such as real estate companies or pipelines?

Mr. GRADY. I am not sure. As to the question that they transferred transportation assets to subsidiaries of the Pennsylvania ?

Senator PEARSON. Yes. I am talking about the transfer of transportation assets to corporate entities not primarily involved in the furnishing of transportation services ?

Mr. GRADY. It is a difficult question to answer because the Penn Central Transportation Co. really owns the Pennsylvania Co., so when it transfers an asset down it transfers an asset that it controls. In the past, prior to the holding company, there was not a great concern because the profits presumably would flow up to the top company which was the Penn Central Transportation Co. or at that time it was called the Penn Central Co.

Senator PEARSON. The point I was trying to develop by these questions is whether or not the transportation assets were being transferred, no matter which direction they may move, for nontransportation assets so as to strip the transportation company of valuable assets.

Mr. GRADY. I presume there has been some transfer of assets. The extent of the transfer of assets we have under study as part of the audit review here of the impact upon the intercompany actual transfers of assets between the group.

Senator PEARSON. Which corporation is in reorganization ?

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1 See letter dated Nov. 18, 1970 in Part 3 of these hearings.

Mr. GRADY. The Penn Central Transportation Co.

Senator PEARSON. Are the assets of the other companies available to keep the railroad in operation?

Mr. Kahn. Among the principal assets of the Penn Central Transportation Co. is its 100-percent stock interest in the Penn Central Co. It remains for the court to determine the extent to which the stock interest of the Pennsylvania Co. and other companies are assets comprising the estate of the Penn Central Transportation Co. This is a matter for the court to determine.

Certainly the court's actions today, in disallowing certain of the creditor banks to take beneficial interest in the stock of Pennsylvania Co., suggests that at least for the time being the reorganization court may be treating the Pennsylvania Co. stock as an asset of the Penn Central Transportation Co. and through it the other subsidiary holdings.

Senator Pearson. In a very general way, what is the role of the ICC in relation to a conglomerate organization such as the Penn Central? What are the limits of such organization's legal right and power to transfer assets? What is the power and the duty of the ICC to exercise its statutory oversight responsibility, generally, and, specifically, how was that power exercised in relation to Penn Central ?

Mr. Kahn. The Interstate Commerce Commission's jurisdiction is certainly over carriers. It has jurisdiction over a holding company only insofar as that holding company acquires control of two or more carriers. The subsidiary companies of a carrier are not within the control of the Interstate Commerce Commission for accounting and reporting purposes unless such subsidiary companies themselves control carriers.

The Pennsylvania company has been designated by the Interstate Commerce Commission as a carrier because the Pennsylvania company controls among others in the D.T. & I., the T. P. & W. and other railroads. On the other hand, the Penn Central Co. is a parent company and has not been designated to be a carrier since it acquired only control of the Penn Central Transportation Co., a single carrier.

Senator PEARSON. Now, what is the authority of the ICC to oversee the handling of assets of a carrier company within a conglomerate such as the Penn Central Co.?

Mr. Kaun. A carrier, Senator Pearson, under the statutory scheme is free to make such investments as in its managerial discretion it seems best so long as there does not have to be a security issue.

Senator PEARSON. That is the only time the ICC gets into the picture?

Mr. KAHN. That is correct.

Senator PEARSON. When was the last opportunity for the ICC to take a look at Penn Central Co.'s situation?

Mr. Kahn. It is my understanding, sir, that the most recent reported authorization under section 20a was the one to which I earlier referred, No. 25854, dated October 29, 1969. That is the last reported one. If there were minor unreported authorizations in the interim, I do not presently have that information.

Senator PEARSON. We maybe going over some old ground now, but, what is the scope of inquiry by the ICC into the financial structure of a carrier corporation at the time authority is sought from the Commission for the issuance of securities? What is the scope of that inquiry, how wide is it, how deep is it? What are the possibilities at such a point in time and such a point of responsibility of discerning a situation that should be regulated ?

Mr. GRADY. I am not sure I understand the question.

Senator PEARSON. At the time the ICC exercises the authority, duty, and responsibility to look into the financial structure of a carrier corporation in connection with the issuance of securities, what is the nature of the investigation at that time? Is it extensive enough to detect impending financial troubles so as to prevent a situation like Penn Central in the future?

Mr. STAFFORD. First, of course, Senator, our primary interest is the public service and therefore, we are interested in being assured that this is necessary for the continued viable service that we expect from the road. As long as it is within a reasonable level of cost, we generally permit this to go on through, as long as we are assured that it is in the public interest to continue the operation of the road.

Senator PEARSON. What is the nature of the record of that October 1969 proceeding?

Mr. MATTRAS. My name is John Mattras and I worked on that proceeding

We of course have regulations that prescribe the type of information they are to furnish us in the first instance. When we feel that information is not sufficient we ask for additional information and I am sure we had it here.

I might say I was so concerned with this before it was even sent to the Commission that I do recall a conference with the general counsel of the Penn Central and at that conference I expressed my apprehension over the fact that they were using short-term financing in part to refinance long-term debt.

Senator PEARSON. Is that an unusual procedure ?
Mr. MATTRAS. Yes, sir, and I told them so.
Are you referring to the conference with him?

Senator PEARSON. No, I am referring to the issuance of shortterm securities, to refinance or refund long-term obligations.

Mr. MatTras. This, in my judgement, is imprudent financing in general. I qualify that. You are faced with a market situation. This is not limited to Penn Central, many other industries found themselves in the same predicament. The Penn Central told us that the market conditions did not permit at that time long-term financing but that they were undertaking, in a number of ways, the possibility of longer term financing, that this is what they contemplated and were in fact working on and the Commission's report covers this point.

Now, we asked for a lot of data, much of which is in the report, on the financial situation as of that time. We scrutinized this.

Now, our predicament was this. The Commission's report covers the situation as to working capital, which we pinpointed very clearly. We say, if I may quote, "applicant feels that long-term financing at the present time is not feasible due to the tight money situation. Although we are sympathetic to the applicant's problems"?

Senator PEARSON. Are you reading from the report and order issued in the 1969 proceeding?

Mr. MATTRAS. That is right "Although we are sympathetic to applicant's problem, short-term financing has traditionally been relied upon to finance short term needs and is not normally regarded as a proper source for 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 short-term credit to refinance maturing long-term debt or to finance long-term capital expenditures could expose a carrier to 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."

Senator PEARSON. Was the condition of the market in October of 1969 the only reason cited for the issuance of short term obligations?

Mr. MATTRAS. Sir, that was the primary reason. They indicated that they were-of course, the record shows that their working capital was not what they wanted. We state that in here. But the company's position was serious and the market condition was tight.

Senator PEARSON. I thought you stated in the report that you made a judgment and determination that the company's financial position was strong.

Mr. MATTRAS. Yes, I am getting to that. Their working capital position was not strong and we said that, but we said their overall position was strong. At that time, one must remember that Penn Central had tremendous assets.

In the right market conditions, assuming there was no recession, many of those assets could be spun off at good prices. Some of them may be encumbered, but still their value normally is far greater than what the encumbrance would be. It was in the term of the overall situation that the Commission felt they could-or I felt, the Commission might have felt, that they could overcome this works ing capital problem within a short time and we put on a 2-year limitation to make sure they were going to do something about extending this debt.

Senator PEARSON. But you would not look at the situation again as a Commission for 2 years, isn't that so?

Mr. MATTRAS. We put a 2-year limit on these notes, but if they come to us again, we look at it or if our accounting people inform us we look at it. We did not anticipate the tremendous losses they were going to have early this year, nor did we see the fact that they wouldn't be able to raise money in the market.

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