The Financial Viability of Conrail Page: 61
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-61-
USRA concluded that required funds would increase by
$1 billion primarily to pay for the extra equipment which
would be needed to handle growth. If existing equipment
cannot be utilized more efficiently through better car
management, yard and track rehabilitation, and other oper-
ating improvements then more freight cars and locomotives
must be purchased. A portion of this equipment could pro-
bably be financed by external equipment obligations but
during the startup period ConRail cannot assume a larger
interest burden. Consequently, much of the capital needs
must be met with Federal funds.
Using data provided by USRA an attempt was made to
calculate the increase in expenses that would occur due to
these operating failures. The total reduction in income is
estimated at $1.8 billion which exceeds the estimated $1.5
billion in income generated during the planning period.
Serious consequences would result from an operating
failure. The concept of an 'Income based reorganization"
could be placed in jeopardy if ConRail fails to produce
profits. The creditors' argument that their property had been
taken would be strengthened and a sizable deficiency judge-
ment could be entered against the government. The Certificates
of Value issued by the government would be exercised by the
creditors because ConRail stock would be virtually worthless
thus further draining federal funds. The rehabilitation pro-
gram could be delayed as management attempted to use rehabili-
tation funds to cover operating deficits. Rather than redeeming
Series A Preferred Stock for cash, ConRail would continue to
pile up interest-bearing securities virtually eliminating the
prospect of ever becoming a private corporation. Penn-Central
calculated an alternative estimate of savings achievable through
cost reduction. If ConRail handled 1985 tons atthe 1976 expense
level, costs in 1985 would increase by $463M (1973 dollars) .
Penn-central predicts, based on an "exhaustive study" of savings
achievable through plant rehabilitation and elimination of deferred
maintenance that only about $200M (1973 dollars) could be saved
once the rehabilitation is complete. A loss of $263M (1973 dollars)
in operating savings in 1985 would translate into approximately a
$657M (inflated dollar) decline in profits in that year. This
far exceeds the $397M projected in profits for 1985 and implies
that ConRail would not generate a profit during the planning
period. ConRail would improve somewhat on these savings by reducing
Penn-Central costs through consolidation of the bankrupts' facilities
and by increasing volume which reduces per unit costs. However,
for ConRail to make a profit, operating improvements would have to
substantially exceed Penn-central cost savings estimates.
In summary, if ConRail fails to achieve the planned opera-
ting improvements and produce a profit during the planning
period, it will remain a public entity that will cost the
government significantly more than the proposed $1.85 billion.1Penn-Central: Memorandum on FSP 9/5/75.
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United States. Congress. Office of Technology Assessment. The Financial Viability of Conrail, report, September 1975; [Washington D.C.]. (https://digital.library.unt.edu/ark:/67531/metadc39342/m1/70/?q=no.+77%2C+55th+congress: accessed July 18, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.