$5,065,000 through the sale of common stock to reimburse its treasury for capital expenditures made, and in 1955 the Western Maryland realized $5,272,000 in this manner to provide a part of the funds required to pay off the accumulated arrears of dividends on its preferred stock.

Contrasted with this is the showing in manufacturing industries where 21 percent of the new securities issued represented stock or equity financing, or 28 percent for electric, gas and water, utility industry, 10 percent for communications, and 23 percent for all other industries.

In the communications industry, nearly half of the securities classed as bonds were of the convertible type issued by one company, and its experience indicates that 99 percent of such bonds are converted ultimately into common stock. If adjustment is made for this conversion, then 53 percent of the communications industry financing was represented by equity financing. Furthermore, of the $5 billion 352 million of bonds issued by railroads, $3 billion 721 million, or 70 percent, were equipment obligations, and again I repeat they mature serially over a 15-year period, or less, are not subject to refunding, and, therefore, must be met from the cash earnings of the railroads.

Therefore, to finance improvements to the road, to obtain downpayments for equipment financing, and to finance any expansion, until some drastic change for the better occurs in the railroad industry we must depend almost entirely on retained earnings and depreciation cash. Depreciation, as you know, is the amount that we charge out each year on the estimated wearing out of the equipment and the road. It is a noncash item. But that goes back into the property plus retained earnings. Depreciation charges also are based on original cost, and are unrealistic because of the obsolescence factor and because of the inflationary spiral in the postwar period, there is a further gap representing the difference between our cost initially, dating back some years, and the fact that when we come to buy the new equipment it costs two or three times what we paid for it originally or the rate at which we have depreciated it.

Now let us examine the future outlook from a financial standpoint. In chart P, a comparison is made with the same industry groups and in connection with my remarks concerning working capital. Approximately 35 percent of the total capitalization of class I railroads is in the form of debt and for Pennsylvania Railroad 34 percent. For the other industries shown the percentage of debt to total capitalization ranges from a low of 8 percent in the case of the metals and mining industry to a high of 28 percent in the case of the tire and rubber industry. Not only does the debt of the railroads constitute a higher percentage of capitalization than is generally found in other industries, but more important, as we have seen from the chart dealing with the composition of debt, a higher proportion of that debt is in the form of equipment obligations which are nonrefundable and which impose an ever-increasing drain on cash. This condition is not found in the other industries.

Looking ahead 10 years, it appears from chart Q that the cash outlay for payment of existing debt maturities, both bond and equipment, plus an estimate of future equipment maturities, will mean that over this period the class I railroads will be called upon to put out $4

billion 213 million or roughly $420 million a year just to meet maturities. Now if we add to that the interest charges on this debt, we find that we come up with a total figure for debt service during the 10year period of almost $8 billion, actually an average of $785 million a year. With one possible exception, all of this must be paid out in cash, since obviously interest charges are not susceptible to refunding, nor are equipment maturities. The bond maturities which, it is true, in some cases might be refunded, amount only to $713 million, or less than 10 percent, and these figures have been adjusted to the extent that planned refundings on the part of the Pennsylvania Railroad, in the amount of $75 milllion, have been eliminated. Naturally, the intentions of all the other class I railroads are not known to us, but any variation in this figure would not be of great significance in any

event.

Turning to the Pennsylvania Railroad, in chart R, we find that during the same period it is estimated that the cash outlay for payment of principal of outstanding and projected debt, after allowing for certain refunding operations, which I have already mentioned, still comes to a total of $552 million, and if we add to this estimate the annual interest charges of $329 million, we have a grand total of $881 million payable by the Pennsylvania Railroad during the period, or slightly more than 10 percent of the debt service of the industry. This represents an average of $88 million a year, and I might add it does not allow anything for the cost to the Pennsylvania Railroad for the floating of any additional bonded debt to finance expansion, other than equipment purchases.

In the case of the latter, I am speaking of equipments, we have estimated that equipment debt will be expanded by about 20 percent industrywise. We know this is insufficient to finance the amount of equipment which we believe will be needed, but we do believe this is probably the maximum that we can be reasonably sure the market will absorb. In the 10-year period ahead of us, a substantial portion of this 20 percent increase may very well be required to meet anticipated increased costs of equipment, and to the extent that it is, it will further handicap the railroads in procuring sufficient equipment (cars and engines) to meet projected demands.

In the case of the Pennsylvania Railroad, we have only allowed for the issuance of $30 million equipments a year, which represents actually a decrease over what we have outstanding over the period, but necessity dictates this policy if we are to preserve even our deteriorated credit position. I can assure you that both the industry and the Pennsylvania Railroad are faced with an almost unsurmountable drain from this standpoint, coupled with all the other factors present.

Chart S sets forth the sources and applications of funds on a cash basis for the industry as a whole, as projected over the next 10 years. On the left hand side are indicated the amounts of cash it is estimated will be available and the sources from which they will be derived. First of all is the item of $6.6 billion representing depreciation. This figure is arrived at based on figures compiled by the Association of American Railroads as received from various class I railroads as to their projected capital expenditures. Next is $4 billion which will be derived through financing, or in other words, through the sale of equipment obligations. Here again, although the announced intentions of all the class I railroads indicate very large expenditures for

equipment, we have felt called upon to limit the amount that can be realized to $400 million a year as being the amount we believe the market may be able to absorb. The net income figure of $8.4 billion is based on average earnings of the railroads over the last 5 years. Obviously we had to make some assumptions in the connection, and as of now, we know of no reason why the railroads will fare any better than in the past 5 years, which has been an era of great prosperity generally, although as pointed out previously not shared in to any large extent by the railroads.

If anything, this earnings estimate may be too optimistic since they have been distorted by accelerated amortization. However, as indicated on the chart the amount available from all sources aggregates $19 billion during the 10-year period.

Turning now to the application of funds during this period, maturities of bonded and equipment debt amount to $4.2 billion, capital expenditures at an average of $112 billion a year, based on figures compiled by the Association of American Railroads from class I railroads directly, total $15 billion, and dividends are estimated to be $3.9 billion. This figure is based on the average dividends paid over the last 5 years. You will note that there will be a cash deficiency during the period of more than $4 billion, or in other words, just over $400 million a year.

In our opinion, the capital expenditures shown are far below what actually are needed. However, in the event some question might be raised as to this item, in the second column in table 23, we have reduced capital expenditures to $11.2 billion, representing the average expenditures for this purpose over the last 5 years. All other figures are the same, except that with reduced capital expenditures there is obviously a slight reduction in depreciation as a source of cash.

Since we all know that these expenditures have been inadequate, and furthermore that even to duplicate the same facilities would cost more because of increased costs, they are definitely out of line. However, even on this reduced basis, a loss is shown in working capital during the period of $600 million.

This $600 million figure compares with estimated working capital of all class I railroads, as mentioned before, at the end of 1956, of $1 billion, so that if this estimate turns out to be correct, working capital would be cut 60 percent during the 10-year period. As I said at the outset, we believe that working capital is down to a minimum if not a danger point at this very time.

If, as shown on the chart, the loss in working cash is over $4 billion, the industry would have a working capital deficit of $3 billion. Obviously in such an event the railroads could not operate and stay solvent.

Now, if we turn to look at the situation with respect to the Pennsylvania Railroad, where I know the situation more intimately, capital expenditures have been estimated at $120 million a year. We actually know that, based on the condition of our freight equipment and the antiquated state of our own passenger equipment, plus the need for pressing improvements to our road in the way of centralized traffic control, modernization of yards, and straightening of track curvatures, we should spend, as estimated by our president, $200 million a year not $120 million-or $2 billion over the 10-year period.

However, on the basis of the $120 million figure, over the 10-year period we will be short $615 million, which compares with our work

ing capital at the end of 1956 of $72 million. If we consider the situation as shown on the second column of table 24, on the basis of capital expenditures over the last 5 years, which were insufficient, we still come up with a deficiency of more than $200 million. Obviously we cannot afford either of these deficits and remain solvent.

I think these source and application charts, together with the other facts we have examined, point up clearly the problems facing the railroads today. We are dealing with a patient which is seriously ill and which cannot stand very much more in the way of additional adversity. If we are to keep pace with the anticipated growth in the Nation's economy, some means must be found to place the physical property of the railroad industry in excellent condition, and also to allow it to acquire additional capacity to meet increasing demands, without further endangering its financial position.

The result otherwise will be that industry in general will be hampered by an inefficient transportation system, and in the event of war, the very life of the country may be endangered.

Gentlemen, none of the figures you have seen includes increases in costs because of the proposed legislation before this committee. Testimony by the railroad industry will indicate how substantial these costs will be. Under the circumstances existing today, we do not believe there is any reasonable justification at this critical point to add additional unnecessary burdens on the industry.

Initially I indicated that what I have presented to you today is a condensation of the complete statement which I have asked to file with you. I hope that you will accept the complete statement for filing and give it consideration, because I have dealt only with the highlights. The complete statement contains many pertinent facts which warrant your study and consideration. I respectfully urge that the legislation before this committee not be reported favorably.

That is all, Mr. Chairman.

The CHAIRMAN. Thank you very much, Mr. Bevan.

Your entire statement, together with the exhibits which you have presented with it, will be included in the record. I think these charts as well as the statement are very important and should be a part of the record.

Mr. BEVAN. Thank you, sir.

(Mr. Bevan's prepared paper with exhibits follows :)

STATEMENT OF DAVID C. BEVAN, VICE PRESIDENT, FINANCE, THE PENNSYLVANIA

RAILROAD Co.

In connection with H. R. 4353, Proposing substantial changes in both the Railroad Retirement and Unemployment Insurance Acts

Mr. Chairman and gentlemen of the committee, my name is David C. Bevan, and my home is in Gladwyne, just outside of Philadelphia, Pa. I have had over 25 years financial experience, including almost 6 years with the Pennsylvania Railroad.

Upon my graduation from Harvard Business School in 1931, I became associated with the Provident Trust Company of Philadelphia, working in practically every department of the bank, but spending a substantial amount of time on investments in the trust department, which naturally covered also the investments in railroad securities. I was an officer of that bank when I left in 1942 during the war. For 2 years I was, first a member of the Lend Lease Mission to Australia, and later its acting head, and in the final year of the war, 1945, I was deputy head of the Mission of Economic Affairs, London.

Shortly after my return to the Provident Trust Co., in 1946, I became assistant treasurer of the New York Life Insurance Co., later becoming treasurer. The latter is the fourth largest life insurance company and at the end of 1955 had assets of about $6,050,000,000. As treasurer of that company, I had direct supervision over investments as well as fiscal operations.

In 1951, I came to the Pennsylvania Railroad as financial vice-president and also as a director. Since that time all financial operations have been under my direct supervision. I am also a director and chairman of the finance committee of the Norfolk & Western Railway Co., director and member of the executive committee of the Provident Trust Co., and member of the board of managers of the Western Savings Fund Society, Philadelphia.

As indicated by the foregoing, I have followed the railroad industry closely for a good many years and have had the advantage of following trends in the industry from an objective standpoint, as well as now having an active participation in trying to work out the problems that confront both the industry and more particularly the Pennsylvania Railroad.

The Pennsylvania Railroad consists of about 10,000 miles of owned and leased lines, with just over 24,000 miles of track. Our railroad serves 13 States and the District of Columbia, as may be seen from the map at the front of the exhibits. We account for almost 10 percent of total revenues for the industry, and from the standpoint of the latter are the largest company in the railroad industry. In 1956 revenues were $991 million, roughly divided 20 percent in passenger and allied revenues and 80 percent in freight. In the years 1951 to 1953, inclusive, gross revenues were slightly in excess of $1 billion. Total assets of the consolidated Pennsylvania Railroad system are in excess of $3 billion and funded debt and equipment obligations outstanding at the close of 1956 amounted to $962 million. As of December 31, 1956, the number of employees totaled 101,949, down substantially from the 126,000 employed in 1952 and 1953 or the postwar high of 151,000 in 1946. Total salaries and wages paid in 1956 amounted to $542 million, or just under 55 percent of our gross revenues. In 1956 we paid in railroad retirement taxes and unemployment insurance taxes over $33 million, or approximately 10 percent of the total retirement and unemployment taxes paid in that year by Class I railroads of $334 million. Other pertinent highlight statistics may be found in table 1.

The transportation industry is vital to the American economy, both in times of peace and war, and for a long number of years the railroad industry has represented the backbone of the transportation industry. With the motor and air carriers either reaching or approaching maturity in the postwar era, competitive forces exist in the transportation industry to a greater degree than ever before. As an indication of the importance of transportation to our economy, it has been estimated the American public spends about $84 billion annually for commercial transportation services, common carrier equipment, motor vehicles and accessories, and highway construction and maintenance. This is equivalent to approximately 25 percent of our national income which is running at an annual rate of about $340 billion. The transportation industry as a whole employs about 10 percent of all our labor and at the same time constitutes one of other industries' best customers. It is estimated that the industry consumes about 50 percent of petroleum, 62 percent of rubber, 28 percent of steel, 21 percent of aluminum, and 14 percent of copper used in the United States.

The absolute essentially of the railroads in time of war is clearly indicated by what transpired during World War II. They carried more than 90 percent of all military freight and 97 percent of all organized military traffic, and in 1944 they carried about 70 percent of all intercity freight traffic moved, and in the same year they handled over 95 billion passenger-miles, more than twice the total for any year in history prior to the war.

The railroads performed a truly herculean task during World War II, but unfortunately the industry as a whole faced the postwar period with a very badly worn-down plant as a result of the all-out effort during the war. This fact, coupled with estimated total expenditures by the Federal Government for domestic inland transport facilities in the 10 years following the war of over $5 billion, consisting of $3,600,000,000 for highways, $700 million for airports and air navigation aids and $800 million for inland waterways, has made the postwar period a difficult one for the railroads. In addition, outmoded restrictive regulatory procedures and spiraling costs in an inflationary economy have helped to place the railroad industry in a most serious position. Furthermore, ironically it appears that despite an optimistic outlook for business prosperity in general