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are included among those which the parties stipulated should be treated as part of the record.

Consideration should be given at this point to the adequacy of the additions and betterments fund to meet the requirements on account of the purchase of these additional eight Diesels, as installment payments on new equipment are capital investments and would not be payable out of income ahead of contingent interest upon the income bonds except by and through the additions and betterments fund or from funds made available through depreciation accruals.

The amounts of payments into the additions and betterments fund' were fixed in the approved plan on the basis of computations made by the trustee that the requirements for additions and betterments to roadway and structures for the period 1943-48 would average about $56,000 a year and that the depreciation on equipment would be sufficient in the next several years to finance necessary new equipment purchases, including the remaining payments of approximately $72,000 a year on the eight Diesel locomotives purchased in 1941, except for about $20,000 to be drawn from the additions and betterments fund through May 1, 1950. By that time the scheduled payments on the eight Diesels first purchased will have been completed. No provision was made for meeting through these funds payments such as those for the second eight Diesels. Assuming the same annual depreciation charges on them as on the first eight Diesels, $24,750, an additional amount of approximately $46,000 would be required in the additions and betterments fund to meet the yearly payments of approximately $70,600 on them, at least through May 1, 1950.

That amount may be somewhat higher than may prove to be required in every year, as there would be some funds available by reason of the margin between the probable depreciation charges on roadway and structures of about $68,000 and the estimated average annual requirements for additions and betterments to roadway and structures of approximately $56,000, and under the discretionary latitude allowed the trustee by the court as to arrangements for the payment for the Last Diesels, including the use of certain funds in special salvage accounts, the yearly installments thereon may not be as high as $70,600. Reengnition is also taken of the fact that the trustee represented to the court that by reason of the purchase of the last 8 Diesels it would not be necessary to purchase 75 of the 160 new hopper cars included, as a otal cost for all the cars of 400000 spread over 15 years, in the true Tee's estimate of future requirements presented at the hearing on the

The basic amount is $65,000 a year at 2 percent of railway operating revenues, which ee a greater, plus, through May 1999. 22hunn a year. Two percent of railway mpment Lag revenues in 1941, for example, paa $14.444.

tion of previous discussions in dealing with them is unnecessary. Absence of comment in this report upon any of the contentions made in the petitions and replies may be taken to indicate that we deem such contentions to have been adequately treated in the prior report.

Capitalization.-Under the approved plan, the total capitalization of the reorganized company is $14,452,844, including $452,844 of equipment obligations as of the effective date, January 1, 1944. The insurance group, which filed the plan upon which hearings were held, requests that the capitalization of $16,250,000, exclusive of equipment obligations, proposed in its original plan be approved, or in any event that the income bonds be increased from $2,500,000 as in the approved plan to $4,000,000, resulting in a capitalization of $15,952,844, including the equipment obligations. The trustee under the Midland mortgage and the Paterson Extension mortgage, the trustee under the general mortgage, the general-mortgage bondholders' protective committee and the group of general-mortgage bondholders either join in these requests or present similar requests, while Miss Merritt requests that $2,000,000 of income bonds in addition to the amount provided in the plan, or $1,000,000 additional income bonds and $1,000,000 additional preferred stock, be authorized. As an alternative to increasing the income bonds to approximately $4,000,000, the trustee under the general mortgage and the group of general mortgage bondholders request that the common stock be increased from 35,000 to 50,000 shares. The insurance group and all of the petitioners representing generalmortgage interests, except one, urge as additional ground for fixing the capitalization as originally proposed by the group, the savings expected to result from the order of the court of July 5, 1944, authorizing the trustee to acquire eight additional Diesel locomotives on a lease agreement at the approximate cost of $753,480, the yearly payments on which, after the initial down payment of 10 percent, will be approximately $70,600 over a period of about 8 years. In the petition of the debtor's trustee in response to which the order was entered, it was stated that on the basis of 1940 wages and prices, an estimated saving of $232,869 a year would be effected by the purchase of these locomotives, and that on the basis of present prices and wages the estimated saving would be increased substantially. It was further stated therein that at the close of the war, or at such time as the traffic of the road drops to the 1940 level, all the facilities required for the operation of steam locomotives may be retired with a resulting reduction of approximately $11,000 a year in expenses due to elimination of depreciation, taxes, and maintenance of these facilities. Copies of the court's order and of the trustee's petition have been transmitted to us by the clerk of the court pursuant to order 49 of general orders in bankruptcy and

are included among those which the parties stipulated should be treated as part of the record.

Consideration should be given at this point to the adequacy of the additions and betterments fund to meet the requirements on account of the purchase of these additional eight Diesels, as installment payments on new equipment are capital investments and would not be payable out of income ahead of contingent interest upon the income bonds except by and through the additions and betterments fund or from funds made available through depreciation accruals.

The amounts of payments into the additions and betterments fund' were fixed in the approved plan on the basis of computations made by the trustee that the requirements for additions and betterments to roadway and structures for the period 1943-48 would average about $56,000 a year and that the depreciation on equipment would be sufficient in the next several years to finance necessary new equipment purchases, including the remaining payments of approximately $72,000 a year on the eight Diesel locomotives purchased in 1941, except for about $20,000 to be drawn from the additions and betterments fund through May 1, 1950. By that time the scheduled payments on the eight Diesels first purchased will have been completed. No provision was made for meeting through these funds payments such as those for the second eight Diesels. Assuming the same annual depreciation charges on them as on the first eight Diesels, $24,750, an additional amount of approximately $46,000 would be required in the additions and betterments fund to meet the yearly payments of approximately $70,600 on them, at least through May 1, 1950.

That amount may be somewhat higher than may prove to be required in every year, as there would be some funds available by reason of the margin between the probable depreciation charges on roadway and structures of about $68,000 and the estimated average annual requirements for additions and betterments to roadway and structures of approximately $56,000, and under the discretionary latitude allowed the trustee by the court as to arrangements for the payment for the last 8 Diesels, including the use of certain funds in special salvage accounts, the yearly installments thereon may not be as high as $70,600. Recognition is also taken of the fact that the trustee represented to the court that by reason of the purchase of the last 8 Diesels it would not be necessary to purchase 75 of the 160 new hopper cars included, as a total cost for all the cars of $400,000 spread over 15 years, in the trustee's estimate of future requirements presented at the hearing on the

The basic amount is $65,000 a year or 2 percent of railway operating revenues, which ever is greater, plus, through May 1, 1950, $20,000 a year. Two percent of railway operating revenues in 1941, for example, was $73,854.

plan, as those 75 cars were intended for the transportation of the railroad's fuel coal. However, the future equipment needs of the reorganized company operating as an independent carrier, in the light of the traffic which may be experienced, is a matter difficult to forecast, and we believe that some provision should be made for additional equipment required for changes in operations due to traffic conditions not immediately predictable. The trustee's estimate of the needs for additions and betterments to road property did not include expenditures for such items as elimination of grade crossings and additional interchange and terminal facilities that may be required from time to time. Under all the circumstances, we regard payments into the fund of $130,000 through May 1, 1950, and $85,000 thereafter, as reasonably required, particularly in order to protect payments of income-bond interest, which, under the provisions of the plan, become due and payable to the extent earned under the method provided for the disposition of available net income. We will modify the plan accordingly.

The plan provides that whenever prior to 1951, the amount of the fund shall exceed $120,000 or whenever in 1951 or thereafter, it shall exceed $100,000, such excess over $120,000 or over $100,000, as the case may be, may be applied, in the discretion of the board of directors, to the purchase or redemption of Terminal bonds, first and consolidated bonds, and income bonds, in the order named, after retirement of all of the immediately preceding class of bonds. In view of the increases in the amounts payable into the fund, the plan should be modified so as to provide that whenever prior to 1951, the amount in the fund shall exceed $165,000 or whenever in 1951 or thereafter, such amount shall exceed $120,000, the excess over $165,000 or over $120,000, as the case may be, may be applied as stated in the plan as to the excess over $120,000 and over $100,000, respectively. The plan further provides that if on May 1 in any year the amount in the fund representing payments in previous years is equal to or exceeds $200,000, no contribution shall be made to the fund in such year. No change in that provision appears to be required.

The insurance group's so-called minimum request that the approved capitalization be raised from $14,452,844 to at least $15,952,844, in which the trustee under the Midland and the Paterson Extension mortgages and the general-mortage interest join, is based upon the treatment of depreciation of roadway and structures in connection with the additions and betterments fund in the prior report. The plan there approved provided that the amount otherwise chargeable out of available net income for the additions and betterments fund should be reduced, to the extent permitted by law and by applicable government regulation, by the amount of any proper charges for depreciation of roadway and structures during the calendar year. The

petitioners contend that, although permitting the contribution to the fund to be reduced by this depreciation, division 4, in its discussion and conclusions as to the permissible income bonds and total capitalization, improperly listed among the charges prior to income-bond interest the full amount of the capital fund, $85,000, rather than the net amount payable into the fund after allowance for the reduction by the amount of the depreciation charges. Based upon the trustee's estimate of yearly charges of from $65,000 to $70,000 for depreciation of roadway and structures and an initial allocation of $85,000 to the fund, these petitioners contend that only $17,000 need be taken from available net income for the fund, and that the $2,500,000 of income bonds authorized by the approved plan should be increased to at least $4,000,000, the increase being the approximate result of capitalizing $70,000 at 412 percent.

Charges to operating expenses for depreciation of roadway and structures have been required only since January 1, 1943. Under our accounting classification, when a unit of depreciable road property, other than land, is retired from service, the ledger value of the unit is credited to the appropriate investment account and the ledger value, less the value of salvage, is charged to the accrued depreciation account, insurance, if any, recovered being credited to the latter account. When the unit is replaced with property of like purpose, the newly acquired property, for the purposes of the accounting classification, is considered as an addition and the entire cost thereof accounted for accordingly. This charge to the accrued depreciation account does not involve any cash, nor does it indicate the setting aside of any fund for the purpose of the replacement, although the replacement involves a cash expenditure. Since the plan permits the use of the additions and betterments fund for total expenditures for additions and betterments, that fund doubtless will be used for replacements of this character, although clearly such expenditures normally should, to the extent that funds representing depreciation charges are available, be paid for out of them. As a rule the costs of such replacements in connection with any comprehensive improvement program would be included in the estimated cost of the program.

In view of the foregoing, we conclude that we should modify the plan so as to provide that the amounts payable to the additions and betterments fund for any year shall be paid from the credits to the reserve for depreciation on roadway and structures in respect of such year, to the extent that such credits are adequate and are earned.

• Cash representing depreciation charges would not be placed under the Classification of Accounts, in a reserve fund as that term is used here.

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