Schedule 11.—Amount available for payment of defaulted interest—5 class I railroads undergoing reorganization, Dec. 31, 1946

SOURCES: Balance sheet accounts as of Dec. 31, 1946, from reports to ICC, form A, for 1946. Data re cash and material and supplies in year preceding bankruptcy-from ICC Statistics of Railways in the United States. Operating expenses, 1946-from Railway Age, Feb. 15, 1947.

PROPER BASIS FOR ESTIMATES OF EARNING POWER

ESTIMATES OF EARNING POWER CANNOT BE BASED ON TEMPORARY WAR EARNINGS

It will be observed that report 1170 seizes upon a casual remark of one commissioner for the purpose of characterizing the Commission's estimates of future earnings as "gueses." Thus the report unfortunately loses sight of the process that was described by Commissioner Mahaffie:

*** It has been stated, I think, before you that the capitalization is based on depression earnings and sometimes statements are made to the effect that we have taken the worst years of the depression and have thus arrived at the capitalization which the Commission approved for these railroads. The Commission has undertaken in numerous published decisions to state the basis on which it

approves plans. It is required to hold a hearing. It has the benefit of the best evidence that intelligent, experienced, and sometimes brilliant men can bring us as to what the prospects of the property are. We have before us, among other things, the industrial prospects, even what Mr. Jones has done for the property included. And the Commission attempts in the light of that testimony to arrive at a sound conclusion as to what may be reasonably expected as earnings in the future. Now, the Commission may be conservative on that, but it does not base its conclusions on depression earnings. It is not based on the capitalization of earnings for any particular period

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The reports are critical of the Commission's conclusions as to earning power, and express the view that because the Commission was too pessimistic, existing management and stock interests were unnecessarily forced to relinquish their places. This overlooks the fact, however, that the estimates and conclusions of earning power were either wholly or in large measure based upon data furnished by the management, which was in turn representative of the stockholders. In certain instances, such as the New Haven case, the Commission adopted in full the management's estimates of future earnings. In the Chicago and North Western case the Commission adopted an estimate of future earnings submitted by an institutional group that was higher than that submitted by the officers of the management. A similar situation occurred in the Erie case, where the Commission concluded that the debtor's own estimates were "very conservative" and in view of the capitalization adopted the Commission must have concluded that higher earnings should be anticipated.

Both reports attach major significance to the then existing level of earnings, as indicating a fundamentally changed condition since the Commission reports had been formulated. Such an assumption in each of the reports may be attributable to the temporary war conditions existing at the time of their preparation. Subsequent events have demonstrated that their conclusions as to the permanency of a war level of earnings are without support.

If war earnings should be given any consideration at all, it should be only to the extent that these earnings provided railroads with sufficient cash to pay their overdue and unpaid obligations. In Senate Report No. 925, at page 50, it is stated:

The accumulation of interest charges, matured but still unpaid, is the basis for keeping a number of railroad systems in court control. There is considerable evidence that some of them can presently pay all the interest they owe to bondholders. The chairman of the committee illustrated this fact at the hearings on S. 1253, citing the cases of the Cotton Belt and Gulf Coast lines,

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As to the Cotton Belt, the trustee has already applied for a discharge of the trusteeship on these grounds, and schedule 11 shows for the other principal roads still in bankruptcy, plans for which have been approved by the Interstate Commerce Commission, the relation of their cash, temporary cash investments, other current assets and current liabilities to the amount required for working capital and for interest in default. It will be noted that none of these other roads come anywhere near having enough liquid assets to pay up the interest in default, and with the trend of earnings that started in 1946 and which is continuing in 1947 there would not seem to be any prospect that any of them would arrive at this position. Even if they should it does not necessarily follow that they can pay their way out of bankruptcy since many of them have other unsatisfied claims in addition to unpaid interest, such as claims arising from disaffirmance of leases or tax claims.