Mr. STAFFORD. Mr. Chairman, Mr. Grady here is Chief of our Field Service and is directly involved in all of our operations that we have going on now regarding Penn Central, with some 13 or 14 examiners and accountants that we have up there. Can he speak to that?

Senator HARTKE. Yes, go right ahead.

Mr. GRADY. The staff we have assigned to the examination now, sir, is about 18 people.

Senator HARTKE. You have 18 people assigned specifically to the Penn Central operation?

Mr. GRADY. Yes, we have 13 in Philadelphia, three in New Haven and two in New York. To actually supplement the cash data here, the forecast data, we receive a daily cash receipts or a daily cash balance and it is phoned in daily by our audit staff to actually check these figures here. The latest cash balance we received was as of July 6th which tied in fairly closely with the actual company's projections.

To specifically answer your question as to the scope of the audit, the scope of the audit has been expanded to cover other items not normally covered in a normal examination. We are going beyond this particular thing. The things we are going into, we are going into many of the areas here that would normally not have been examined as a result of the special investigation concerning the operations here of the Penn Central Transportation Co., the financial situation here of the Penn Central operation, the impact upon the operations of the conglomerate and what impact if any this had upon the transportation company's ability to actually maintain a viable transportation system.

Senator HARTKE. Is there a cash flow statement submitted to the creditor banks by the railroad?

Mr. GRADY. I am not too sure of that. A cash flow statement is currently under preparation which will be available on Friday of this week and it projects the cash flow from August 1st up through, I believe, December 31 of this year.

Mr. KAHN. If I may interrupt, Mr. Chairman, such a statement was introduced as evidence before the reorganization court and was available to the creditor banks as well as other parties at that time. Senator HARTKE. From what dates, though, not August 31st of this year?

Mr. KAHN. This covered the projections for the month of July, sir. Senator HARTKE. What I am asking is, is there furnished a cash flow statement on a daily basis now to the creditor banks?

Mr. KAHN. It is certainly being supplied to the receivership court and the ICC. I would asume the same information would be available to them.

Senator HARTKE. What I am trying to find out is if you are getting the same statement as the creditors.

Mr. KAHN. We have no doubt we are getting the same information as the creditor banks.

Senator HARTKE. What about the problems with electrical power and fuel maintenance?

Mr. KAHN. We have no difficulty there. These are current operating costs and will be treated as such in the reorganization court, as we understand it. There would be no difficulty anticipated in meeting those payments.

Senator HARTKE. All right.

Have you gone back into the cash flow operations of the Penn Central for the past 2 years?

Mr. KAHN. It is my understanding our auditors will be compiling that information as well.

Mr. GRADY. Our instructions to the staff were to make a cash flow study from the inception of the merger of the Penn Central from 1968 up to date.

Senator HARTKE. Have you gone back beyond the merger?
Mr. GRADY. No, sir.

Senator HARTKE. Do you intend to?

Mr. GRADY. It was not our first intention to do so.

Senator HARTKE. Why not? Let me draw the picture for you as to what I am driving at.

I want to find out what happened to the money. I want to find out if they had money ahead of time, if they took money and drained it off from the transportation company to make these acquisitions. I want to find out where that money went to and what caused the demise of this operation.

Mr. KAHN. The Commission certainly shares that concern, Mr. Chairman. We think a good point of departure might be with the merger of the two transportation companies and we think there is, at this point, at least, until our investigation discloses that the contrary may be the case, we think there is little value of going back beyond the date of the merger.

Senator PEARSON. Would you object to filing with the committee your instructions to the auditors in connection with your pending investigation of the Penn Central Company?

Mr. GRADY. No, I would not.

Senator PEARSON. I would ask that be done.

Mr. STAFFORD. Yes.

Senator HARTKE. All right, we will ask the Commission to do that. In line with this, will you furnish to the committee monthly cash flow statements?

Mr. STAFFORD. Yes.

Senator HARTKE. And forecast of cash flows?

Mr. STAFFORD. Yes, we will.

Senator HARTKE. The purpose of this is frankly on this line we hope you will notify us immediately if there is any change which would indicate that the railroad could not continue operating.

Mr. KAHN. That is right.

Senator HARTKE. The fact of the matter is, I would hope you would not wait if you saw some significant change in either direction. That is, a direction which would indicate that the railroad might be required to do something in severing some of its services or curtailing some of its services or stopping them.

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.