THE PUBLIC, THE INVESTOR AND THE RAILROADS OF NEW ENGLAND AN UNPREJUDICED ANALYSIS OF THE AFFAIRS OF THE BOSTON & MAINE AND NEW YORK, NEW HAVEN & HARTFORD RAILROADS AND AN APPEAL FOR JUSTICE AND SOUND FINANCE By BURTON L. READ THE FINANCIAL PUBLISHING COMPANY 7 HANCOCK AVENUE BOSTON, MASS. THE PUBLIC, THE INVESTOR AND THE RAILROADS OF NEW ENGLAND AN UNPREJUDICED ANALYSIS OF THE AFFAIRS OF THE BOSTON & MAINE AND NEW YORK, NEW HAVEN & HARTFORD RAILROADS AND AN APPEAL FOR JUSTICE AND SOUND FINANCE By BURTON L. READ THE FINANCIAL PUBLISHING COMPANY 7 HANCOCK AVENUE BOSTON, MASS. COPYRIGHT, 1913 THE FINANCIAL PUBLISHING Co. 7 HANCOCK AVE., BOSTON ALL RIGHTS RESERVED CONTENTS Page A WORD ABOUT FAIR PLAY 5 The Case at issue 6 Certain Proposals 7 WHAT is WRONG ? 8 New England as a Railway Territory 8 Short-sighted Policies 9 Growing Demands of Business 9 The Investment Phase of the Case 10 New England Railroads a Decade Back 10 The Change to Modern Methods n THE FINANCIAL POSITION OF THE BOSTON & MAINE RAILROAD . 12 Recent Reverses 13 Reassuring Factors 14 Improvements in the Property 15 Stockholders' Money in Betterments 16 Increase in Maintenance Expenditure 17 The Leased Lines 18 What the Boston & Maine Owns 19 The Rental Obligations 21 Excessive Rentals Small 22 Earnings in New Hampshire 23 The Company's Future 25 THE FINANCIAL POSITION OF THE NEW YORK, NEW HAVEN & HARTFORD RAILROAD 26 Combined Earnings of Properties 26 The Boston & Maine and Ontario Investments 27 The Company's Dividend Policy 28 Assets and Liabilities 29 The Depreciation Problem 30 Good Condition of Way and Structures 30 Equipment 31 Trolley Properties 32 Steamships 33 Financial Results of Subsidiaries 34 The Outlook 36 [THREE] 267759 Page THE PUBLIC AND THE NEW ENGLAND RAILROADS .... 37 The Question of Equity 37 Fair Dealing in the Interest of the Public 38 The Point at Issue 38 The Case of the Boston & Maine 39 As to the New Haven 39 Outside Investments as a Factor 40 REASONABLE LINES OF POLICY 41 Expenditures at Boston 42 The Tunnel Proposal 43 Electrification 43 The Question of Rates 44 Higher Costs of Railroading 45 No Compensation in Rates 46 The Outlook for Rate Readjustments in New England . 46 Interstate Rates and Other 47 The Joint Control of the New Haven and Boston & Maine . 48 Some First Principles 49 Their Application to New England 50 The Question of Service 50 The Boston & Maine Needs the New Haven . . . .51 If Continued New Haven Control, in What Form? . . 52 The Present Status 52 The Lease Method 52 As to Consolidation 53 A New England Railway System 54 THE FINANCING OF THE BOSTON & MAINE 55 An Obstructed Stock Issue 55 Dangers of Further Bond Output 56 As to a Stock Issue "at Par" 56 The One Thing to Do 57 Temporary Borrowings Should be Reduced 58 Difficulties of Equipment Trust Plan 59 THE TIME FOR A LIBERAL VIEW 60 [FOUR] THE PUBLIC, THE INVESTOR AND THE RAILROADS OF NEW ENGLAND A WORD ABOUT FAIR PLAY This discussion is addressed to the investors in the New York, New Haven & Hartford and Boston & Maine railroads and their leased and controlled lines, and to the public of New England in its relations with these companies. First, as to some basic principles. The investor who risks money in a private business is entitled to that return which can be earned by the sale of the product or the services of such business in the open market. The investor in shares of a public utility is not so placed. He is limited in his return ; always in theory, and now to a growing extent in practice. The public, which enables a corporation to carry on a business by virtue of rights of eminent domain, the use of public ways, and perhaps even protection in some degree of monopoly, rightfully reserves the power both to fix the quality of the service and to limit the corporation's charges, But while the public holds this power over the corporation, it is itself under obligations to those who contribute funds to the providing of a public service- No more than for any business enterprise, can the State protect investors in a public utility against bad management, or against misfortune for which the public is not to blame. It cannot guarantee stockholders a dividend. Rarely, nowadays, does it even guarantee the bondholders. But in the exer- cise of its power over service and over rates it both can, and should, do three things : First, restrict its demands upon the companies to that extent and quality of service which is justified on business grounds. Second, permit the adjustment of rates and charges on a basis that will meet the cost of the service rendered, including sufficient maintenance of the property, and a proper return upon every dollar of capital honestly employed in the business. [FIVE] Third, cooperate in all reasonable ways toward the conduct of the service on the most efficient and economical basis. A proper return includes, in the case of capital stock, not simply the rate which can be had upon a mortgage investment or its equivalent, but in addition enough to compensate the owners of the business for the risk incurred. Moreover, when the policy of the public for a long series of years has made possible the fixing of any reasonable rate of dividend, upon the basis of which the company's shares have been habitually bought and sold in the market, no such change can be made as to reduce that dividend without an implication of bad faith. If, however, the property has not been sufficiently maintained, it would appear that dividends have been to a corresponding extent excessive, and should be reduced until such deficiency has been made good. The Case at Issue The Boston & Maine Railroad, barring most unforeseen alterations in circumstances, is about to suspend dividend pay- ments upon its common stock, after uninterrupted payments for seventy-five years at an average rate of about 7^4 per cent. Partly owing to the resulting loss through its indirect owner- ship of more than half of the stock of the Boston & Maine, partly in consequence of other unfavorable developments, the New York, New Haven & Hartford Railroad is expected to place its stock upon a six per cent dividend basis, following payments for nineteen years at 8 per cent, one year previously at 9, and twenty-one years in the earlier history of the road at 10 per cent. Boston & Maine common stock has sold recently at 65, comparing with 210 in 1899, and with 175^4 m 1906. New Haven stock has touched 113^2, comparing with 255 in 1902 and with 216 in 1905. Even the guaranteed stocks of leased lines, especially of the Boston & Maine system, have suffered sympathetic declines. In what has been said above relative to certain underlying equities of the railway proposition, there has been no desire to blame the public for these unfortunate conditions, further than as our study may demonstrate in the public's attitude toward the railroads, either past, present, or proposed, any violation of the principles there defined. It has been plainly stated that the [six] public cannot protect investors, or at least cannot protect stockholders, against mistakes in management or against mis- fortune not related to public policy. And our review of con- ditions, it is believed, will show that to both of the last-named causes some of the present troubles of New England railway investors are due. We are concerned in arguing simply that the public has a duty toward investors, and should be as zealous in conform- ing to that obligation as in demanding that the public service corporation perform its duty to the people. With this principle in view, and consistently with the three lines of policy above proposed, the following suggestions are ventured as an equit- able position of the public toward New England railways and their investors in the present situation. The arguments in favor of such proposals will be stated elsewhere. Certain Proposals (1) Requirement of all capital outlays not reasonably necessary should be deferred or withdrawn. This applies especially to proposed electrification throughout the Metro- politan district, and certain other expenditures at Boston ; but not necessarily to a connecting north and south tunnel and electrification in connection therewith, though in this matter caution is necessary. (2) It should be the purpose of the authorities of the New England States to assist in an equitable readjustment of rates, especially in Boston & Maine territory, having in view a moderate increase in aggregate revenues to compensate in some degree for higher cost of operation. (3) All proposals for separate control of the Boston & Maine system should be dismissed, and the New Haven man- agement should be encouraged in efforts toward more econ- omical and effective operation of the two roads. The control should continue for the present under the existing arrange- ment, and inquiries should be inaugurated with a view to future outright consolidation of the two properties, with adequate protection to the interests of Boston and northern New Eng- land. Under no circumstances should the Boston & Maine be leased to the New Haven. Before arguing these proposals it will be necessary to consider the financial position of the Boston & Maine and New York, New Haven & Hartford railroads. [SEVEN] WHAT IS WRONG? It is the mode in current discussions to attribute to the management now dominant in the New England railways most of the ills having to do with them ; and this has naturally extended in some degree to the troubles of stockholders. No effort will be made at this point to define the degree of responsibility, if any, attaching to that management, other- wise than to observe that for the decline in Boston & Maine stock the New Haven management, though now in control of the system, is in no degree accountable. It is proposed to point out, rather, that we are confronting problems which have more to do with conditions attending the development of rail- ways in New England than with persons, or with personal acts or policies. New England as a Railway Territory At the outset, it should be remembered that the building and operating of railroads in New England is a matter radi- cally different from railway building and operation across western plains. The hilly, irregular, and rocky character of much of the territory, combined with a climate augmenting the resulting difficulties in maintenance and operation; the com- plexity of short lines and short hauls with proportionately large terminal, station, and junction expense ; the multitude of highway crossings with imperative demand for separating grades at the more important; these and other things con- tribute to swell construction and operating costs and to keep down net revenues. All this is far from implying that New England is not a favorable territory for railroading. Such disadvantages are largely offset by the dense population of a large portion of the area served, together with the native energy of our people and a high degree of industrial prosperity. Nor do the facts cited explain why certain railways in other sections, roads which also have their construction and operating difficulties, should seem in a financial position superior to that of the New England lines. Yet such factors have no slight importance in account- ing for prevailing conditions ; an importance due, not so much to these natural handicaps in themselves, as to their combina- tion with other difficulties arising from an unsystematic devel- opment and a misguided financial policy. [EIGHT] Short-sighted Policies Let us suppose some critic of a generation ago to have stated that certain New England railroads were laboring under disadvantages which were likely sooner or later to embarrass them. The suggestion doubtless would have been met with tolerant smiles, and a reference to the large dividends then being paid. Who, it would have been asked, could presume to say that the level-headed business men on the boards of directors of these railways were unable to determine whether such dividends were being earned, and would continue to be earned? The view thus expressed would have seemed well sus- tained, under the conditions then existing. Despite some handicaps, our railway enterprise had been favored in many ways. The more important lines were constructed, not in the fashion of many western roads, in advance of population and business, but to serve communities already fairly well developed. Moreover, while railway construction in New Eng- land was by no means exempt from mis judgments and doubt- ful financial methods, on the whole our roads seem to have been commendably free from stock watering of a serious char- acter, and from other intricacies of high finance which at some stage have entangled certain western lines. Some roads, it is true, chiefly in the less populous and prosperous sections, encountered trouble at one or another period of their development; and the assistance of the public treasury was in certain cases an important factor. Yet many of the more important companies were able from the start to give a good account of themselves even to take over the burdens of less successful connecting or competing lines and not only to meet obligations but to pay substantial dividends to stockholders. So far as indicated by the statistics, and these are reasonably complete for more than forty years back, the New England railway properties as a whole have given their shareholders a better return than those in any other group of States. Growing Demands of Business But the high tide of prosperity upon our railroads from the stockholders' viewpoint came at a period when trans- portation was still virtually in its infancy, and when the com- [NINE] munities served were yet to see their most remarkable growth. Those responsible failed, seriously though perhaps excusably, to foresee the demands which were shortly to be made upon the facilities of their roads by rapidly growing traffic and the exactions of modern railroading, and to consider that the out- lays to be required were constantly growing as land values advanced and antiquated facilities became more closely inter- twined with growing communities and peculiarities of topog- raphy. Officials of the many small systems which at the period in review still comprised our railroad map did not as a rule realize, not only that in the course of time the demands of transportation were to require an almost universal merging of the New England roads, but that along with such merging both the community and the roads were to feel acutely the effects of a haphazard railway development through a host of small companies, some three hundred in the aggregate, and that sooner or later large expenditures must be made for the wiping out of primitive separate facilities and the substitution of unified plants. Nor did they realize that before many years public authority was to lay a firm grip on railroad rates, with resulting embarrassment to railroad managements and investors. The Investment Phase of the Case In view of this grave misunderstanding, this condition of fictitious soundness, it was natural that the stocks of New England railways should be placed upon a false basis as to dividends and market value. And it was equally natural that as the true condition was gradually revealed, and with it the necessity of spending earnings liberally upon the properties and buttressing the credit of the roads for the purpose of raising large amounts of new capital, those responsible for the rail- ways' financial policy should have hesitated to impose upon their thousands of stockholders the severe hardship involved in the one change of policy most clearly called for. That policy was the radical curtailment of dividends. New England Railroads a Decade Back Ten years ago the two principal systems, having absorbed between them the greater part of the New England railway mileage, were operating with a conservatism not to say back- wardness in transportation policy, and a liberality in divi- [TEN] dends, reflecting plainly the peculiar conditions above cited. In the territory of the Boston & Maine system the dividend ideas of a previous generation had become fastened upon the community, not alone in the dividend rate of the parent system, but through a series of leases, with guaranteed rentals now realized to have been in some cases excessive. On the whole, the New York, New Haven & Hartford was in the stronger position of the two roads; a condition reflecting in the main, apparently, the greater population density and in- dustrial growth of the territory served, and important traffic advantages. Both roads, however, were behind the times. Some steps had been taken toward modernizing, but the prop- erties in the main were not up to increasing demands. The Change to Modern Methods It was at this juncture that the New Haven, realizing its inadequacy, called in a president of modern ideas to reconstruct the system but to continue the 8 per cent dividend. The new executive vigorously attacked his problem, and with strong financial backing and assisted by the prestige of his road with stockholders, who were asked to put up large sums of new capital, he began railroading upon a modern plan. Plant and equipment were vastly improved. And in addition to the rehabilitation of the New Haven system proper, a policy was pursued of expanding the interests of the road to include a large number of trolley properties, certain additional steam- boat lines, and a large additional mileage of steam railway, including the Central New England, the New York, Ontario & Western, and the Boston & Maine and Maine Central. All of these changes involved heavy increases in capital stock and indebtedness, and rapidly mounting charges. Yet the territory was growing, business was expanding; the man- agement was full of optimism. Despite some question, in view of the bad condition of the New Haven road when Mr. Mellen assumed charge, whether it would not have been wiser to have reduced the dividend at that time, the company evidently would have pulled through without the present menace to its 8 per cent rate had it not been for these adverse factors : d) Rising cost of operation, especially the necessity for large increase in wages, without opportunity for corresponding advance in rates. [ELEVEN] (2) Loss of income through reduction of the Boston & Maine dividend in the fiscal year 1911 from a 6 to a 4 per cent basis (with prospective suspension of dividends on common stock) also the passing of the New York, Ontario & Western dividend in the fiscal year 1912. (3) Dividend returns from certain trolley and other investments insufficient to compensate for their carrying cost. (On this point see, under discussion of the New Haven's financial position, the combined income account including all net earnings of subsidiaries. It is to be remembered, however, that the parent company cannot conveniently collect in divi- dends all of these net earnings.) Beginning about three years after the inauguration of the New Haven's altered policy, the Boston & Maine also entered upon a courageous plan of improvement, and this policy has been pursued on a somewhat larger scale since the legalizing of control by the New Haven, in 1909. The Boston & Maine has not been troubled with losing investments, as has the New Haven for which it has contributed the most important single instance but has felt severely the advance in operating cost, sharing with the New Haven the burden of heavily increased pay-rolls. Combined with other adverse factors reviewed elsewhere, and with the necessity for higher main- tenance charges, this development has made necessary a reduc- tion of almost one-half in the common stock dividend as com- pared with the rate paid up to and including 1908, and virtually a decision to suspend the dividend altogether beginning with the coming new fiscal year. In a further consideration of the present financial condition of the two companies it is convenient to deal first with the Boston & Maine, both because of the more serious reverses recently in that company's standing and the important bearing of the Boston & Maine position on that of the New Haven. THE FINANCIAL POSITION OF THE BOSTON & MAINE RAILROAD At the end of the fiscal year 1912, the Boston & Maine Railroad had outstanding common stock to the amount of $3955>39> and preferred to the amount of $3,149,800; the [TWELVE] common stock being 92.6 per cent of the whole. The common stock at the end of the fiscal year 1905 was $24,638,070; the preferred stock the same as at present. During the eight- year period, from 1905 to 1912 inclusive, the results of the road's operation, credit being given for all charges against earnings for additions and improvements, were as below. The rates given apply to the common stock outstanding at the end of the year; the preferred receives 6 per cent regularly. Rate Earned Rate Paid Balance After Per Cent. Per Cent. Dividend Payments 1912 2.8 4.0 Deficit, $477,703 1911 .4 5-5 Deficit, 1,602,982 1910 9.3 6.0 Surplus, 982,101 1909 7.1 6.0 Surplus, 570,242 1908 2.0 7.0 Deficit, 1,409,661 1907 8.6 7.0 Surplus, 625,863 1906 7.5 7.0 Surplus, 217,273 1905 6.9 7.0 Surplus, 76,926 In the 1912 annual report President Mellen stated that the process of rehabilitating the road would take at least two years more, and added, "The full effect of the economies expected will not be available, and the net results in consequence will not be flattering; but it is believed that the property will be able, under existing conditions, to fully earn the dividends now paid, and probably, if conditions continue as favorable as at the present time, an extra slight disbursement may be anticipated at about the close of each fiscal year." Recent Reverses At the time the above was made public, early in the fall of 1912, business conditions in Boston & Maine territory were promising. Since then these conditions have changed sharply for the worse. The road has continued also to feel the effect of rising operating costs. Borrowings in the money market have cost more. On the first of January an increase of nearly thirty per cent took effect in the charge for rentals of foreign freight cars. With all of these reverses, the prediction of Mr. Mellen proves unfortunately to have been in error, and there appears every reason to anticipate not only that the road will show for the current year no material balance earned [THIRTEEN] on the common stock, but that the four per cent dividend, only sustained of late by drawing down the Company's al- ready slender profit and loss surplus,* will be suspended altogether. Under such circumstances it is not unnatural that the investment public should recall, with some uneasiness, an- other factor in the Boston & Maine situation, to which atten- tion was called in a rather startling way by President Mellen less than two years ago. The lease of the Suncook Valley Railroad, a seventeen-mile New Hampshire line of slight importance, expired at the end of 1911. Apropos of its re- newal, which was accomplished at one-half the former rental, Mr. Mellen wrote to counsel for the stockholders of the leased road a letter which contained the following: "The major portion of the mileage of our leased lines in New Hampshire is at the present time far from self-support- ing, considering present conditions surrounding railroad oper- ation in that State, and is fast coming to be so great a burden that it may become a necessity to reduce the rentals paid, if not by negotiation with the owners, in last resort, through the medium of the courts and a receivership. Nothing but the support given the Boston & Maine in the present crisis in its affairs by the New Haven has thus far saved it from such a recourse . . ." Reassuring Factors In ways which bear the stamp of authority, it has been declared since the recent decline in share values that all idea of a Boston & Maine receivership "may be instantly dis- missed." Plainly, such a policy would seem remote from the ideas of the New Haven management if that company, as appears from all the evidence, desires to retain its control. Yet, under circumstances such as those just reviewed, the stockholders and holders of the bonds and guaranteed stocks as well may be excused for wishing at least to examine the situation a little more closely with respect to the real merits *This now stands at $1,812,090, not including assets secured through premiums received on issues of capital stock, the amount of such premiums being $6,501,620. The surplus would be much in- creased, presumably, by writing into the assets all present values of right of way and real estate, as was done for the New Haven in the Validation report. [FOURTEEN] of the case. In such an inquiry the results seem favorable ; provided, at least, that the road is left to work out its prob- lems along business lines, is not unduly burdened with un- profitable improvements, and is not too rigidly restricted as to rates. One reason for a more hopeful view is to be found in the large growth of the company's business. From 1901 the year after the Fitchburg lease to 1912, inclusive, the gross earnings of the system increased from $30,807,000 to $45,990,000. This is almost a fifty per cent gain in gross, with an increase in main track owned and leased of slightly over five per cent. Improvements in the Property A second favorable point is the improved physical condi- tion of the property. That the condition to-day is not what could be wished is well understood, both from matters of general knowledge and the peculiar combination of circum- stances reviewed above in our outline of New England rail- way development. Yet it must not be assumed that the Boston & Maine to-day is a stationary or retrograding prop- erty, for the reverse is true. We have noted that a period of Boston & Maine rehabilitation set in about three years after Mr. Mellen's becoming president of the New Haven. It may be said further that in the seven fiscal years, from 1906 to 1912, inclusive, capital expenditures upon the system aggre- gated about $38,046,000, divided as follows : Equipment $21,754,822 Tracks, bridges, culverts, tunnels, etc. 4,571,792 Buildings, structures, real estate, etc.. 4,744,451 Separation of grades 3,049,729 Block signals 1,152,051 Other improvements and capital ex- penditures 2,773,512 It is interesting to note that of the above total the amount pertaining to the period since the beginning of New Haven influence in the Boston & Maine system, that is, the four fiscal years from 1909 to 1912, inclusive, is $23,544,000. A statement very recently made public shows that from the date of formal control, with New Haven executive officers in charge, which [FIFTEEN] was September i, 1910, to the present, money has been put into capital expenditures to the amount of about $18,800,000. Considerable additional amounts have been appropriated, being in large part contingent upon pending measures of financing. The last annual report, in recommending the issue of new stock and bonds, specified among other objects of ex- penditure the purchase of 6,000 freight cars partly to meet a forthcoming advance in the per diem charge for use of cars of other systems 100 passenger cars, and 80 locomotives. Other items included additional second, third, and fourth track, sidings and spur tracks, engine houses, bridges, freight houses and yards, and miscellaneous necessities of the road, The new securities proposed have not yet been issued, but the betterments have been partly provided for by temporary bor- rowings referred to elsewhere. In short, the Boston & Maine property has been vastly improved, and the improvements have shown in earnings, operating economies, and service. Equipment has been greatly increased, new tracks have been laid, freight houses and yards have been enlarged. Large expenditures are being made to improve facilities at the important gateways where traffic is interchanged with other lines to the north and west. Much remains to be done, but it is plain that the sys- tem is already in an encouraging state of progress. This applies also to the controlled Maine Central, in which the Boston & Maine has been called upon to make a large addi- tional investme.nt. Stockholders' Money in Betterments Improvements have not been brought about simply by increase of indebtedness. The debt increased, it is true, dur- ing the 1906 to 1912 period, from $31,305,000 to $55,849,000. But of the $38,046,000 mentioned as the total of capital expenditures for twelve years, almost half, or in figures $18,522,000, was secured by the issue of capital stock. Two sales of stock were made during the period ; the first, in 1906, of $4,203,700 par value at $165 a share ; and the second, in 1910, of $10,663,700, at $110 a share. In both cases the greater part of the issue was subscribed for at the offering price, the remainder being disposed of by auction at a somewhat lower figure. [SIXTEEN] It may occur to the reader, as well, that according to the annual reports, certain betterment expenditures have been made from earnings. On this point, unhappily, the case for the road is far from strong. It is true that during the four fiscal years from 1907 to 1910, inclusive, the company reported betterment expenditures charged against earnings, to the aggregate amount of about $814,000, (not counting $170,000 spent in the last two years in betterments to leased lines and charged against the parent company as rentals). It is also true that in various years during the period from 1906 to 1912, inclusive, a surplus was reported after all charges and divi- dends, the aggregate of such amounts being $1,662,000. Thus far, we should have an apparent improvement in the com- pany's financial position to the total amount of $2,477,000. But the reverse of the shield is quickly apparent. For in three years of this period 1908, 1911, and 1912 the com- pany reported deficits amounting, all told, to $3,490,000. This figure includes for the hapless year 1908 both the formally re- corded deficit of $866,000 and the contingent fund of $543,000, representing unappropriated surplus for the previous six years, which was drawn into the earnings account to help meet a seven per cent dividend, of which less than three per cent was earned. So it will be seen that instead of a gain of $2,477,000, the real result for the period so far as shown by income accounts was a loss of $1,013,000. Increase in Maintenance Expenditure This, however, is not quite the end of our analysis. From a closer study, not of the general income account, but of the detailed record of operating expenses, there appears one factor which should considerably more than offset the adverse show- ing above explained. This is the increase in expenditures from earnings for maintenance of property. During the seven-year period ended with the fiscal year 1907, the period covered by the accountants' report to the Commission on Commerce and Industry, the average annual expenditure for maintenance of way and structures per mile of main track owned and leased, was $1,525. For the five- year period, ended with the fiscal year 1912, the average was $1,864. In the 1911 and 1912 years, respectively, it was $2,174 and $2,023. In the first-named period the average [SEVENTEEN] annual allowance for locomotive repairs, renewals, and depre- ciation was $1,531 per locomotive; in the second period it was $1,830. The average annual allowance for repairs, re- newals, and depreciation of freight cars was $58.40 in the first period ; $83-00 in the second. In the item of passenger car maintenance alone the comparison is not favorable, the average for the first period, $527, comparing with $498 for the second- In the 1910 and 1911 years, however, the allowances per car were respectively $525 and $591. From the favorable comparisons cited, covering by far the greater part of the maintenance expenditures, stockholders may reasonably infer that their equity in the property has been materially increased during the last few years, aside from the better conditions brought about by the raising of new capital. It does not follow, because maintenance ex- penditures have increased, that they have reached a figure any larger than is reasonably required. The evidence indi- cates rather (see Commerce and Industry report) that the allowances of the previous period were too low. Yet this does not destroy the favorable character of the showing above cited. We are not considering so much the comparison of present conditions with any definite standard, as the progress from a poor standard to a better one. So regarded, the figures cited are significant and encouraging. Stated in a form more sug- gestive to the general reader, they show that during the past five fiscal years the company has spent about $5,688,000 more on maintenance accounts than would have been spent, the nature of road and equipment being equal, had the stan- dards of the earlier period been adhered to. Given any neces- sary deductions, this figure would seem at least to contain a margin wide enough to offset very amply the losses above referred to in the company's income accounts. The Leased Lines But conceding these favorable aspects of the case, what will they profit to the Boston & Maine stockholder if, as in various ways more than intimated, the road in combination with its greatly increased operating costs is laboring under a heavy burden of unremunerative leases? Since the recent fall in Boston & Maine stock, President Mellen has been asked whether any official plan is in contem- [ EIGHTEEN] plation whereby a readjustment may be sought of the rentals of the Boston & Maine's leased lines ; to which the reply was made that "Such a thing has absolutely never been consid- ered." This is a welcome reassurance, and apparently dem- onstrates the needlessness of sharp declines in some of the guaranteed stocks which accompanied the break in the shares of the parent road. Yet investors inevitably recall Mr. Mellen's pointed remarks, above quoted, in the Suncook Valley episode, and the fact that the question of losing rentals figured prom- inently both in the arguments of counsel and the official find- ings in the subsequent New Hampshire rate investigation. It may very well be, indeed, that the Boston & Maine intends if humanly possible to comply with the leased line contracts to which it has deliberately committed itself. That is wholly creditable. But where is the comfort to Boston & Maine stockholders? The investor will ask, naturally, whether the improvements made and the better earnings promised mean simply that the company is being placed in a better position to pay these large rentals, and that the owners of the company's thirty-nine millions of common stock, many of whom have paid prices all the way up to $210 a share, are to be left somewhat completely in the cold. In view of this state of uncertainty, it seems worth while to review carefully the leased line situation, and to point out that so far as the evidence indicates stockholders may feel assured on both of these points : first, that there is no vital necessity of reduction of leased line obligations ; and second, that with any fair adjustment between rates and operating expenses the company should be able to meet its rental obli- gation and pay reasonable dividends in the not distant future to its own stockholders. What the Boston & Maine Owns At the outset, it may be well to point out how much of the Boston & Maine system the stockholders own, and how much is leased. Of the lines owned the most valuable are the two important roads between Boston & Portland, Maine, owned with the exception of a few miles out of Portland. These lines make a total of 206 miles ; 157 miles double- tracked. One of them is the descendant of the original Boston & Maine ; the other of the former Eastern Railroad. From [NINETEEN] Jewett, Maine, on the Eastern, a line 73 miles in length extends to Intervale, N. H., connecting with the Maine Cen- tral. The company also owns the former Massachusetts Cen- tral, about 96 miles from a point some five miles out of Boston to Northampton, connecting with the Boston & Albany, the Central Vermont, or Grand Trunk line, and the New Haven. Also, through recent purchase now reflected in the company's floating debt, the lines owned include the former Worcester, Nashua & Rochester; 139 miles from Worcester practically to Portland, including 46 miles of double track. Aside from these main lines, the company has about 203 miles of branches more or less important, including 31 miles of double track ; and 398 miles of side track. Altogether the mileage of road owned is 707, or 32 per cent of the total road owned and leased (2,215 miles), and the mileage of track owned 1,343, about the same proportion of the total track owned and leased. The value of road owned is given in the company's balance sheet as $55,326,452, but no valuation is published for leased roads. Equipment owned is valued at $28,660,650, compared with a valuation of $8,161,553 for equip- ment owned by leased roads. These figures as to the value of the company's own property are subject to deductions by reason of depreciation $3,070,228 in total amount. The Boston & Maine's capital stock of $42,655,000 com- pares with $60,219,700 for leased roads; funded debt of $43,849,000 compares with $43,588,000. The total capitaliza- tion of the Boston & Maine proper is about 45 per cent of the aggregate for the whole system owned and leased. Including the Boston & Maine's floating debt, now $22,000,000, the proportion is 51 per cent. The leased lines, of which there are about twenty-five all told, need not be described in detail, but attention should be called to their principal features. They include the Fitchburg, from Boston to Rotterdam, N. Y., one of New England's two great east and west lines, and embracing also the connec- tion with the controlled Rutland system with its Montreal route and connecting steamships on the Great Lakes. They include the Boston & Lowell and Nashua & Lowell, forming the trunk line of the Southern Division; the Northern, pro- viding the connection with the Grand Trunk at White River Junction, the Concord & Montreal to the White Mountains, [TWENTY] and the latter, with the Connecticut & Passumpsic, provid- ing the important connection with the Canadian Pacific at Newport, Vt. These, with the Connecticut River, forming about half of the road's north and south line through central New England, which is continued by the Connecticut & Passumpsic, form the most important strategically and other- wise of the leased properties. The Rental Obligations Now, as to whether the leased roads are unprofitable and rental obligations should be reduced. A first glance at the company's income account, with respect to rentals, makes a quite decided impression. "Rentals of leased roads" are re- ported for the last fiscal year as $5,176,878. But from this amount is to be deducted at once, as absolutely unchange- able, $1,722,353, consisting of interest on the assumed bonds. Further deductions are to be made of $32,720 on account of organization expenses, and $84,620 for additions and better- ments charged as additional rental. These deductions leave the amount paid as dividends to leased line stockholders, $3,332,184. Even this seems quite a large amount, compared with $1,767,951 paid in the same fiscal year to the Boston & Maine's own stockholders on a volume of stock equivalent in par value to more than two-thirds of the total stock of the leased lines. In making this comparison it should be noted, how- ever, that if the Boston & Maine were still paying a com- mon stock dividend of 7 per cent as in quite recent years, instead of 4 per cent, its dividends to its own stockholders in the last fiscal year would have been $2,952,174, or almost nine-tenths the amount paid to leased line stockholders. Next, with respect to the possibility of any of the rental dividends being reduced, we must eliminate completely sev- eral important lines. The Fitchburg lease, providing for 5 per cent on the preferred stock, was made through special act of the Massa- chusetts Legislature as recently as 1900. No claim has been made that the rental is too high for this important road, and there is no likelihood of its being disturbed- The annual amount required is $943,000. With the Fitchburg lease goes that of the Vermont & Massachusetts, covering about one- [TWENTY-ONE] fourth of the Fitchburg Division main line ; dividend guar- antee, $191,580. Three others, which may be at once eliminated, are the Boston & Lowell, the Concord & Montreal, and the Con- necticut River; counsel for the company having stated before the New Hampshire Public Service Commission that these leases are profitable. This admission as to the Concord & Montreal is especially significant, as the history of that com- pany includes certain of the least creditable episodes in New Hampshire railway history. The guaranteed dividends on these three properties aggregate $1,472,230. The aggregate for the five leases mentioned is $2,415,230, bringing the net amount to be considered down to $916,954. Three other important leases may doubtless be elimin- ated, on strategic grounds. These are the Nashua & Lowell, the Northern, and the Connecticut & Passumpsic. All three are parts of through routes vital to the system, and, so far as may be inferred, either profitable or not materially otherwise. These three dividend guaranties amount to $406,104, and their deduction brings down the total amount in question to $510,850. Even from this sum it would probably be neces- sary in any complete investigation to make considerable fur- ther reductions, as the guaranties are largely in line with the dividends paid by the various companies as independent lines previous to the leases. Excessive Rentals Small It may be readily seen that the amount possible to be saved for stockholders by any attempted reduction of leases is after all a small one, and a matter of little importance as affecting the dividend position of the Boston & Maine Rail- road. In fact, a semi-official statement of recent date declares that "the sum total of extravagant guaranties is not a matter of over $250,000 or $300,000." It is added that the only factor of danger as to the profitableness of some of the more im- portant leased lines is the chance of a Grand Trunk extension from White River Junction to Boston a plan now buried practically beyond hope of revival. But, in view of all these considerations, why, it may be asked, did President Mellen declare that "the major portion of the mileage of our leased lines in New Hampshire is at the [TWENTY-TWO] present time far from self-supporting," and threaten a receiv- ership? For one thing, it is true that New Hampshire con- tains quite a number of leased lines, mostly small, which are doubtless questionable propositions. It must be remembered, also, that Mr. Mellen was sparring for advantage in a business deal involving one of these leases- But, more important, he was confronting the determination of New Hampshire author- ities to enforce the statutes of 1883 and I&&9, prohibiting higher rates on most of the New Hampshire leased lines than the charges in force in these earlier years. As another contribut- ing factor, the Boston & Maine was suffering from what was alleged to be an unjust increase in its New Hampshire taxes. Earnings in New Hampshire Moreover, it must not be inferred that Mr. Mellen's state- ment lacks verification, at least if the New Hampshire lines are to be credited only with their direct earnings. Since the letter in question appeared, the New Hampshire Public Ser- vice Commission has made public its report in the rate inves- tigation having to do with the statutes above mentioned, and in this report a carefully prepared estimate is made of the earnings of the New Hampshire lines. It has seemed worth while to prepare, on this basis, as correct an exhibit as possible with available data as to the profits and outgoes on all New Hampshire leased mileage. It will be noted that the earnings as compiled by the Commission for twelve months ended last September amount to 22 per cent of the gross earnings of the whole system for the last fiscal year, and this proportion is employed as probably the most nearly approximating a just division of various charges against income. The exhibit follows : New Hampshire earnings of Boston & Maine lines, eleven months, ended August, 1912 $9,926,493 Add September (treated as equivalent to August) . . 1,150,478 Earnings for twelve months $11,076,971 Deduct 15% as proportion of New Hampshire lines (main track) owned by company 1,661,545 Earnings of New Hampshire leased lines (22% of gross for whole system fiscal year ended June, 1912) $9,415,426 [TWENTY-THREE] Deduct 76% for operating expenses 7,155,724 Balance $2,259,702 Deduct New Hampshire taxes for twelve months ended September, 1912 ($646,409, minus 15% account of lines owned) 549,448 Balance $1,710,254 Deduct 22% of hire of equipment for 1912 fiscal year 234,079 Balance $1,476,175 Deduct 22% of a proportion of B. & M. interest charges, corresponding to proportion of equip- ment and certain other items to capital assets of the company 149,235 Earnings of New Hampshire leased roads applicable to rental obligations on the same $1,326,940 The rental obligations being as follows : Concord & Montreal $833,503 Northern 216,104 Manchester & Lawrence 1 12,960 Nashua & Lowell (in proportion to New Hamp- shire mileage, 36%) 26,280 Pemigewasset Valley 32,790 Concord & Portsmouth 25,000 Wilton 20,400 Peterboro 15,700 Suncook Valley (readjusted) 8,517 New Boston 2,800 New Hampshire lines of Boston & Lowell (V-2. Man- chester & Keene) 30,040 New Hampshire lines of Fitchburg (Cheshire, Monadnock, Peterboro & Shirley) 145,000 New Hampshire lines of Connecticut River (Ashuelot) 21,000 Total $1,490,094 Deduct balance of earnings as above 1,326,940 Apparent net loss on New Hampshire leased mileage $163,154 [TWENTY-FOUR] It is to be remembered that the earnings credited above are direct earnings only, and give the roads no credit for value as parts of important through routes or feeders to the main lines. Yet the figures would seem in a general way to sustain the statement of Mr. Mellen, while they also furnish some confirmation of the statement above quoted placing the sum total of extravagant leases, of which the majority seem to be charged to New Hampshire, at from $250,000 to $300,000. They tend to bear out also the assertion in the New Hamp- shire rate report that "If the Boston & Maine is ever brought to the hands of a receiver it will not be by reason of the exist- ing New Hampshire leases," and they do not indicate any necessity for an attempted scaling down of rental obligations- The Company's Future Moreover, it would seem reasonably certain that the lease obligation alone should not stand in the way of resumption of Boston & Maine dividends, if they are to be passed, at a fairly early date, and ultimate payment of something like former rates. It has been shown above that stockholders in the Boston & Maine are not simply holders of a gambling chance on the result of leases, but that they are the owners in fee of a large and valuable property aside from the portion of the plant operated under lease. It is conceded, also, that some of the important leases are profitable. Between these two sources of income, and considering constant expansion of business and the continually improving condition of the road, it seems reasonable to regard the Boston & Maine as properly a dividend payer, barring certain difficulties of the moment with relation to operating expense, high cost of money, and inability to obtain additional return for the services rendered. Restoring of the Boston & Maine at any early date to some- thing of its former investment status will require at least fair business conditions, and a square deal on the part of the public toward the company; but there appears a reasonably good chance that it will come, provided no dangerous experiments are made by way of separate control. Its coming will be earnestly hoped for, not only by Boston & Maine investors but by stockholders in the New York, New Haven & Hartford, whose prospective loss by curtailment of that system's divi- dend is in good part a result of the New Haven's investment in the Boston & Maine system. [TWENTY-FIVE] THE FINANCIAL POSITION OF THE NEW YORK, NEW HAVEN & HARTFORD RAILROAD For the fiscal year ended June 30, 1912, the New York, New Haven & Hartford Railroad Company reported after the payment of eight per cent dividends on its $179,583,000 of capital stock, requiring $14,315,540, a deficit of $929,989. This was in the usual form of income account, including the earn- ings of the numerous subsidiary properties only to the extent of dividends paid to the parent company. A consolidated income account of the "New York, New Haven & Hartford Railroad System" taking in all subsidiaries excepting the New York, Ontario & Western, the Boston & Maine and the Maine Central, exhibited a surplus over the dividend of $305,835. Combined Earnings of Properties In view of the question raised by these figures as to whether the company's position should be judged by its in- come account as a steam railroad corporation or by the con- solidated net earnings of all properties with the exceptions noted it is of interest to reproduce here the table of "sur- plus net earnings in excess of dividends paid" given in the company's last annual report. Surplus as Reported c lirT o, lc t nr n,- for the N.Y., N.H. & ^vft^m Hartford RR. Co. Syst{ 1912 Deficit..* $903,228 $ 305,835 1911. .. .Deficit. . 1,267,539 456,712 1910 1.037,793 2,711,033 1909 Deficit.. 4536i3 85,606 1908. .. .Deficit. . 2,516,692 Deficit... 2,560,866 1907 2,217,841 1,770,277 1906 3,718,285 4,506,621 1905 308,052 901,215 Total for eight years . . .$2,140,898 $8,176,436 * In the income account this figure is $929,989. It should be understood that in the above showing the description, "earnings in excess of dividends paid," means the combined net earnings of the system in excess of dividends paid by the parent New York, New Haven & Hartford com- pany, the dividend paid by the subsidiaries to the parent com- pany being eliminated as inter-company transactions. [TWENTY-SIX] The Boston & Maine and Ontario Investments This style of report has been criticized on the ground that while including all net earnings of companies included in the "system," so-called, whether or not paid to the parent company in dividends, it includes also the dividends received from the investment in the Boston & Maine and Ontario & Western companies controlled but not so included whether or not these dividends have been earned. This is a valid objection in principle, but in practical effect the method criticized has not resulted in a too favorable showing, at least so far as concerns the bearing of these two investments. A statistical statement on this subject involves certain debatable points, owing to the fact that the New Haven first acquired an interest in the Boston & Maine in early 1907, sold it at the end of the fiscal year 1908, and re-acquired it, through the Boston Railroad Holding Co., during the following year. It seems the soundest method, however, to consider that the New Haven has had a Boston & Maine ownership without interruption, beginning with the fiscal year 1908. Employing a forty per cent proportion for the first two years and since then the increased percentage owned through the Holding Company, that part of the net deficit of the Boston & Maine, 1908 to 1912, inclusive, corresponding to the New Haven's proportion of ownership, was $915,229. On the other hand, the New Haven's one-half proportion of the total surplus of the New York, Ontario & Western in the period from 1905 to 1912 was $1,035,539, making a net result favorable to the New Haven of $120,310. The Maine Central is left out of this reckoning, as it figures only through the Boston & Maine. The road has shown good results. For the fiscal year 1912, the New Haven's quota of the Boston & Maine deficit was $253,181, but this was about offset by the company's proportionate share, $236,864, of the New York, Ontario & Western surplus ; the difference adverse to the New Haven being $16,317. It would appear that assuming adequate upkeep of all the properties, steam railway and other, the New Haven system as a whole held its own during the 1912 fiscal year with the 8 per cent dividend paid, but, as regards its financial posi- tion, made little progress. [TWENTY-SEVEN] The Company's Dividend Policy Until quite recently, the New Haven management has ad- hered to its position that the 8 per cent dividend rate should be maintained, though that policy has been many times crit- icized. The first sign of a possible change in this position came when a decision was reached, owing to difficulties in the coal fields, to pass the 2 per cent dividend on the stock of the New York, Ontario & Western for the fiscal year 1912, with no assurance of early resumption. It was not conceded then that the resulting stoppage of $583,200 of annual revenue from this source would imperil the customary 8 per cent to New Haven stockholders, and such indeed might not have been the case had business conditions in New England ful- filled their promise at that time. But the Ontario reverse proved one of a series of events which seem now to have about persuaded the directors that the continuance of 8 per cent after the close of the current fiscal year would be im- prudent. One of these developments was the tightening of the money market during the fall of 1912, in such manner that in refinancing $30,000,000 of short-term obligations in November the company was obliged to incur additional interest charges of about $525,000 annually for the same amount of money. Another was the sudden reversal of business conditions, al- ready mentioned, which in combination with further increase in operating cost especially in wages has led to a decrease in net earnings compared with the corresponding period of the previous year, very nearly cancelling by the end of February the substantial gain of the July-October period. This reversal has promised to recoil doubly upon the New Haven, for its effects upon the controlled Boston & Maine system have been so serious as to make it almost out of the question for that company to continue even its modest 4 per cent dividend beyond the quarterly payment on April I. This will not affect the New Haven's financial position for the current fiscal year, but subsequently it will mean a loss of $875,000 a year, in addition to a carrying loss on the Boston & Maine investment already estimated, with New Haven stock paying 8 per cent, at $800,000 annually. Such a series of adversities could hardly do otherwise than dishearten a little the most courageous board of directors, and it has been virtu- [TWENTY-EIGHT] ally announced that with the first quarter of the next fiscal year the dividend will come down to a six per cent basis ; this, at least, unless in the event of a "miraculous" improve- ment in business conditions. For the current year it is fairly well assured that the company will report a rather substantial deficit. Assets and Liabilities The Validation report, published two years ago as the outcome of a legislative measure for the legalizing in Massa- chusetts of certain security issues, credited the New Haven with assets exceeding all liabilities, including capital stock, of $101,612,000; comparing with the surplus reported by the company at the end of the fiscal year 1910 of *$!4,i96,ooo, plus premiums on capital stock (not counted as liabilities in the Validation report) of $20,630,720. This figure is subject to an important modification with re- spect to the Boston & Maine investment, for which the Valida- tion commission allowed full cost or book value, making an ex- ception to its general rule for the reason that the investment was acquired at such valuation under Legislative authority in this State. From this cost value there has been a shrinkage of about $11,580,000,! which would reduce the surplus figure as stated to $90,032,000. The principal factor in this showing is the greatly increased value of right of way and real estate over the company's own figures. The company's equipment was taken at depreciated value, but no deduction was made for depreciation on track and structures, estimated by the board's engineers at $16,270,000. That this was not deducted, however, was considered justified by certain offsetting considerations which were discussed at length in the report. It is to be remembered that the Validation report had no reference to the company's current assets and liabilities, except- ing as these formed a part of the total assets and liabilities. It was not concerned with the amount of the company's resources *At the end of 1912 this was $12,575,471; premiums were $32,786,089. fThe decline from cost value of holdings acquired since the Validation report has been about $2,620,000, making the total $14,200,000. This shrinkage, however, is of less practical importance than the loss of dividend return from the Boston & Maine, considered elsewhere. [TWENTY-NINE] realizable in cash (which are very considerable), and did not touch upon the question of current income and outgo. It pro- vided, however, an unbiassed valuation for all of the properties, some of which were radically scaled down 'from the company's own figures, and was conclusive as showing that the company was capitalized well within the cost and value of its properties. While it included some assets of a debatable character, it also excluded many elements of probable future value.* The Depreciation Problem From the investor's standpoint the Validation report is im- portant, also, as bearing upon the important question of depre- ciation of various parts of the property. It is of vital importance to know whether the margin reported as available for dividends is really free and clear, after all necessary expenditures from earnings for the maintenance of the property aside from capital outlays; and this problem applies to the properties of subsidiar- ies as well as of the main company. Good Condition of Way and Structures It may be said at once that as to maintenance of way and structure there is no evidence of other than a very satisfactory maintenance. In the seven years ended with the fiscal year 1907, the average maintenance expenditure per mile of main track owned and leased was $1988. For the five years ended 1912, the average was $2230. During this time there has been much new track and structure, which would tend in the first instance to diminish the maintenance requirement, and so increase the fa- vorable character of the comparison. Such an exhibit cannot be taken as conclusive, but it is significant in connection with cer- tain official commendations of the condition of the road, and es- pecially that of the Validation report, in which Professor Swain, in charge of the valuation, said: "It is the unanimous testimony of every one concerned in this work, who has examined the line or any part of it, that the property is maintained in remarkably good condition." * These various assets which are more or less subject to differ- ence of opinion fully offset, in the view of the writer, the company's large "contingent" obligations, few of which seem likely to become real obligations. [THIRTY] Equipment It is not clear whether this approval referred without quali- fication to the equipment as well as track and structures. From the fact that in the aggregate valuation of the property a consid- erable deduction was made for depreciation of equipment, but none for road and structure, it would seem that upon that point some reservation was made. An examination of the recent maintenance figures, therefore, is of interest. It appears that for the seven-year period ended 1907 the average allowance for re- pairs, renewals, and depreciation of locomotives was $1841 ; for the five year period ended 1912 it was $2043. The showing as to rolling stock is, on its face, not so favorable. For the first period the average per freight car was $68.10, and per passenger car, $532. For the second period the figures were, respectively, $59.03 and $492. The last two comparisons, which alone appear unfavorable among eight of similar character which we have made for the New Haven and Boston & Maine systems, need not be taken as proof of undue saving in these accounts. They are probably ac- counted for in considerable degree by the fact that a large quan- tity o'f new equipment has been placed on the road, requiring at first a rather low allowance for repairs. This is especially true of freight cars. In view of the large per diem payments which had been required for the use of freight cars of foreign lines, a matter made especially serious by the New Haven's position as a terminal road, the company set out some five years ago to in- crease heavily its own freight car equipment. This has been carried so far that an outgo of $628,860 on car hire account in the year 1908 the excess of payments to other roads over rentals received for the company's own cars on other lines was changed into a credit balance in 1912 of $472,409. With respect to loco- motives, the fact of new equipment would tend to improve a showing already favorable upon its 'face. As to cars, both pas- senger and freight, it undoubtedly qualified any conclusion which might be drawn from figures apparently adverse. Without the most careful engineering examination, it can- not be concluded that the figures as they stand are either favor- able or the reverse. Comparisons with other roads are necessar- ily defective, owing to the great variety of conditions, and this applies with about equal force both to comparisons per unit and comparisons per mile of service. In the course of a long study [THIRTY-ONE] of this subject from available figures, the writer has reached no other conclusion than that the New Haven's equipment mainte- nance about corresponds on the whole to average practice, con- sidering all conditions as to the nature and performance of the equipment.* For the 1911 fiscal year the company's charges seemed a little low in comparison with certain roads operated under similar conditions; but whatever ground of criticism may have existed at that time, the condition has since considerably improved. In the 1912 fiscal year as compared with 1911, the locomotive maintenance per engine increased from $2155 to $2305; freight car maintenance per car, from $56.50 to $68.68; passenger car maintenance, from $502 to $528. It may be noted also that the company has recently adopted the policy of "scrap- ping," on a larger scale than before, some of the light and ineffi- cient locomotives representing a part of its inheritance from the past; and this policy prevails likewise on the Boston & Maine. Trolley Properties With regard to subsidiary properties, referring chiefly to the trolley lines and steamboats, the best testimony available re- mains that of the expert accountants of the Commission on Com- merce and Industry, reporting in 1908. This report compared the maintenance on the trolley lines with that on certain other lines operating under similar conditions, and concluded that the New Haven's figures were so much higher as to indicate the in- clusion of considerable sums for reconstruction and improve- ments, and that the earnings had not been overstated, but un- derstated. The comparisons mentioned were with the former Old Colony and Boston & Northern lines (Massachusetts Electric). Since the time of that report maintenance charges on the latter properties have somewhat increased. From the figures available it is not possible to draw final conclusions, but there is some interest in a comparison so far as it goes. The comparisons are made on the basis of percentage of main- tenance to gross earnings, including in the case of the Con- necticut Co. the earnings from gas, light and water properties * This is apart from the fact that certain other companies report very substantial surplus earnings over dividend requirements, (which the New Haven has not done of late years) such surplus being in effect more or less of a provision against depreciation of the prop- erties. [THIRTY-TWO] (now separate), which for the three earlier years contributed an average of 11.5% of gross. Mass. Electric Connecticut Co. Rhode Island Co. 1912 I/.00% 20.00% 16.60% 1911 16.21 (not published) 1910 *i6.52 17.03 13.08 1909 15.00 12.80 11.13 1908 13.70 16.91 15.68 * Nine months ended June 30. Taking these figures in connection with the statement of the accountants above referred to, it would seem at least that there is no distinct evidence of under maintenance, and that at present the showing is a good one. Yet it is not wholly clear, on the other hand, that the conditions since the official report referred to have remained equally as favorable as those before. To clear away any reasonable doubts in the minds of investors, the company should allow complete presentation of all relevant evidence on the subject Steamships This suggestion applies still more to the matter of the steamboat properties. On this subject the accountants' report was less favorable, finding that for the 1907 year the com- panies spent for repairs 4 per cent of the value of the steam- ships, and that this amount did not sufficiently provide for depreciation as well as repairs. It was noted, however, that any inadequacy on this point was more than offset in the entire income account of the New Haven by the liberal charges against current income for in- terest on cost of construction on properties not ready for operation, which might legitimately have been charged to property accounts. The latter policy, it should be observed, has been con- tinued since the time of this report. In the 1911 annual re- port of the company reference was made to such charges amount not stated in connection with work on the New York, Westchester & Boston, the New York Connecting Rail- way, and certain other projects; and in the last report it is stated that the interest to June 30, 1912, on account of the Westchester road amounted to $1,675,489. It is also true that [THIRTY-THREE] certain additions have been made to various reserves of the parent and subsidiary companies ; officially stated at $3,533,022 for the eight years 1905 to 1912, and augmented by interest earnings of the funds thus increased. But these matters, while proper enough to consider, are not directly related to the steamship properties. So far as concerns actual maintenance allowance for the steamships, there is no information at hand to lead to a conclusion other than that of the accountants. In the rather brief reports for the steamship companies the item of repairs is not separated from other operating ex- penses. A little more light is to be had from the Validation report, which, although it does not segregate repairs, shows for the New England Navigation Company and the Hartford & New York Transportation Company a total allowance for "depreciation and other deductions" for the five years from 1906 to 1910 of $561,986. This is 3.20 per cent of the book valuation of the steamship properties, $17,569,000, and 6.45 per cent of the reduced valuation in the Validation report, $8,710,000. It would seem that on this subject, as well as the matter of the trolley lines, somewhat more complete informa- tion should be made public by the company, showing either that the properties have been fully maintained or that any deficiency is adequately offset in other ways. More definite information may be anticipated, perhaps, from the forthcoming report of the Interstate Commerce Commission. In view of the reservations made in the foregoing dis- cussion, it should be clearly understood that none of the facts or figures cited are placed before the reader in a critical spirit, but that the effort has been simply to point out what seem to be the weak points in the company's position, if any, not fully revealed by well-known facts as to net earnings and dividend requirements. It should be realized, also, that even though some ground of criticism may exist as to certain phases of the depreciation policy, stockholders need feel no great concern regarding them in view of the large excess of all assets over liabilities as indicated by the Validation report. Financial Results of Subsidiaries Certain criticisms of which much use is made in current discussions of the company relate to its ambitious expansion [THIRTY-FOUR] program during the administration of President Mellen. It is pointed out that in this period the company's total capital stock and funded debt has increased from $57,487,000 to $384,650,000; and that of the total property investment of $419,573,000, some 55 per cent represents properties other than steam railways owned. This in itself would not be of neces- sity a valid criticism from the investor's standpoint ; but stress is laid also upon the fact that these outside investments, as a whole, have resulted in a considerable carrying loss, com- paring the income from them with the amount of money an- nually paid out by the company as interest and dividends on the money raised to purchase the controlled properties. Reference to this phase of the situation has already been made in connection with the Boston & Maine and New York, Ontario & Western investments. In a previous dis- cussion, also, the writer has called attention to carrying losses on the trolley and steamship properties estimated, at a fair average cost for the money, at about $2,500,000 for the fiscal year 1911, though a little less in 1912. But it must be remem- bered that estimates of this kind are based in part upon the 8 per cent dividend rate now being paid upon the company's nearly $180,000,000 of capital stock, and that if as now antici- pated, the dividend is reduced to 6 per cent annually, some of this loss to the company will automatically cease. Such a reduction will save the company's treasury about $3,592,000 annually an amount about equivalent to the carrying loss on the principal subsidiaries for the 1912 fiscal year. It is a further aspect of the case that, as mentioned at the beginning of this review of the New Haven's condition, the showing is a better one when account is taken of the actual earnings of the subsidiaries rather than of the amount paid in dividends to the parent company. For the last fiscal year the excess of earnings over dividend payments thus reported was $1,236,000, and barring the temporary loss threatened through the stoppage of the Ontario and Boston & Maine dividends, there appears reason to believe that the showing will improve from year to year. Opinions vary as to the company's policy in acquiring various subsidiaries, especially the trolley properties. The fact remains that they were acquired, for reasons the manage- ment at the time believed valid, and the steps then taken [THIRTY-FIVE] cannot well be retraced. It is a condition, not a theory, which confronts the management and the stockholders. Every effort is being made, plainly, to put the subsidiaries on a more pay- ing basis. Earnings have shown good increase from year to year, and with the growth and prosperity of the territory they should continue to gain and eventually assist in the restora- tion of the now menaced 8 per cent dividend- Another factor which will help will be accruing returns from certain expendi- tures temporarily unproductive, such as the New York, West- chester & Boston investment. The Outlook In what is said above, there has been no desire to depict the New Haven as other than a strong, virile corporation. The com- pany is suffering from some mistakes of judgment, both in the past and, perhaps, recently, and from a certain amount of bad luck, in common with other railroads, regarding operating ex- penses. But it is aggressively managed, it serves a remarkable territory ; it is increasing its business and the facilities for hand- ling it, and has many elements of promise for the future. Gross earnings from steam railway operations increased from $40,132,- ooo in the fiscal year 1901 to $64,993,000 in 1912 ; a gain of about 62 per cent with an increase of 6^2 per cent in main track owned and leased, and a somewhat faster rate of growth, it will be noted, than that of the Boston & Maine. The writer believes that the dividend should be reduced by at least the two per cent anticipated, and that the lower rate should continue in force until the Boston & Maine is more nearly on its feet and other subsidiaries are giving a better return. In justice to stockholders, and especially those who have subscribed to new stock in recent years on the eight per cent dividend basis, the customary rate should be restored when reasonably possible. When this time will come is a question depending largely upon business conditions. It has seemed on all the evidence that the conservative dividend policy now outlined for both the New Haven and the Boston & Maine, and fully reflected in share values, makes fairly good provision against any probable further recession in business. No one can foretell with assur- ance but that more severe times will be witnessed than are now anticipated, in which case policies should be shaped accord- ingly. But there is also a chance of conditions materially better than anticipated. [THIRTY-SIX] THE PUBLIC AND THE NEW ENGLAND RAILROADS Our review of the financial position of the two properties in question shows in general 1 I ) That the conditions do not indicate any necessity for the reorganization of the Boston & Maine Railroad or attempted re- duction of rental obligations, and that in the event of suspension of common stock dividends a fairly early renewal should be pos- sible, provided only that the road is not improperly handicapped.* (2) The New York, New Haven & Hartford shows a strong underlying position. It is apparently in a position to pay 6 per cent dividends, and to restore the rate eventually to 8 per cent, the appropriate time for such action, however, being partly con- tingent upon the renewal of Boston & Maine dividends. Here, again, we are assuming an attitude of reason on the part of the public. Indeed, in any effort under current condi- tions to analyze the dividend position of a railroad, the inquirer is somewhat at a loss whether to emphasize chiefly the question, "Is the business status of the company such as to permit the pay- ment of dividends?" or "Will the public allow dividends to be earned?" The Question of Equity In view of the tone of certain current discussions in this vicinity, it would seem possibly in violation of the conventional- ities to hold that the public is under any possible obligation to- ward investors in railroads. This would not justify the exclusion of an argument plainly in the interest of justice and fair play. But as this phase of the subject has been somewhat neglected, to say the least, in most comments upon the New England situation, it may be well to add two further suggestions to the proposals along this line advanced at the beginning of our discussion. First, the idea that stockholders are entitled to a given rate of return is by no means a novelty, considering the country as a whole. Various decisions of courts and public service commis- sions have contained opinions as a proper rate of return. In * Certain reports have mentioned two years as the anticipated time of suspension. It is not clear, however, how this can be defi- nitely forecasted in view of the uncertainties of business conditions and other factors. [THIRTY-SEVEN] one of the Minnesota rate cases the rate named was 7 per cent, and in other instances higher percentages have been held proper.* Fair Dealing in the Interest of the Public And aside from the matter of equity, there is a large consid- eration as to the interest of the public itself. Good railroads mean the raising of capital. This can be accomplished, within limits of prudence, only by the issue of capital stock as well as of bonds. The issue of capital stock in addition to the amount outstanding, and for any satisfactory price, means that the com- pany must be paying an adequate dividend, and that such divi- dend is protected by some margin of earnings in excess of the amount required for its payment. Moreover, a railroad which cannot pay dividends has a poor market for its bonds. Exac- tions upon the railroads which impair their dividend-paying power mean not simply a violation of justice, but also that the railroads themselves will remain stationary or retrograde, and the public in the end will suffer. The Point at Issue The question which now presents itself to the investors and public of New England not the only question, but second to none in importance is this: Are the owners of New England railroads, in view of their recent and prospective losses, entitled to a change in public policy toward them? It has been urged at another point that an adequate return upon a capital stock investment includes a compensation for risk ; also that when the policy of the public for a long series of years has made possible the establishing of a given rate of return, within reason, that fact should be considered in the formulation of a present policy; but that if certain dividends have been paid at the expense of proper maintenance of the property such divi- dends are to that extent excessive, and the amount of such ex- cess should be considered in judging the claims of the investor upon the public. Now how do these principles apply, broadly, * It would not seem that railroads should be limited to definite percentages; but beyond a certain fair return the interest of the public may require that further dividends shall depend upon increased effi- ciency and economy of operation, rather than upon rates. [THIRTY-EIGHT] in the case of the Boston & Maine and New York, New Haven & Hartford railroads? The Case of the Boston & Maine First, as to the Boston & Maine. Dividend payments for seventy-five years have averaged about 7^4 P er cent. They have been as high as 10 per cent in some years, and were at 7 per cent as recently as 1908. For about two years now stockholders have received only 4 per cent, which has not been earned, and the signs point to a suspension of dividends altogether. It has appeared that for a long time the property was doubtless under-maintained, but that for some six years past great improvement has been made in this respect, increasing expenditures being made from earnings on maintenance accounts ; that much new capital has been invested by stockholders in improvements, such capital in- cluding large amounts paid in as premiums upon new stock is- sues; also that large borrowings have been made for the purpose of rehabilitating the property, the effect of the interest charges so incurred being felt now in threatened cessation of dividends and a radically lower value for the stock. Whether the deficiency in maintenance in past years has been made up by outlays from earnings is a question to be answered, conclusively, only by the most complete engineering and account- ing examination. But on the face of the returns it would seem that the deficiency has been made up in considerable degree ; and stockholders are to be asked to make still further sacrifices toward this end. The question, then, comes to this specific form: Are Bos- ton & Maine common stockholders entitled, when necessary re- adjustments are completed, at least to a seven per cent divi- dend ? And if so, in what ways should the public cooperate in making that dividend possible ? To the first part of this question the writer is disposed to answer, "Yes." The second query has been partially answered in the introductory part of this review, and is considered further below. As to the New Haven Next, with respect to the New Haven. This company paid 10 per cent for twenty years, 9 for one year, and for the last nineteen years the rate has been 8 per cent. The higher dividend [THIRTY-NINE] of earlier years was probably in good part at the expense of maintenance, and there appears no strong reason for considering it under present conditions. But it is quite reasonable to ask, whether stockholders are not entitled to the customary 8 per cent barring a temporary reduction due to losses on the Bos- ton & Maine and Ontario investments, and certain necessary re- adjustments. With respect to losses on account of these two investments in other railroads, it is plain that New Haven stockholders have no claim to receive compensation for such losses through the earnings of their own company. Their claim is simply that of the New Haven company as a stockholder in the controlled roads, in which capacity that company should be regarded on the same basis as other stockholders. So in so far as restoration of the New Haven dividends to the former rate may depend upon resumption of Boston & Maine dividends in the event of sus- pension New Haven stockholder's are dependent, so far as public policy is concerned, upon the attitude of the public toward the controlled company. That subject has been considered above. Outside Investments as a Factor It is somewhat unfortunate that the question has been com- plicated also by the absorption into the company of a variety of properties other than those required for steam railway trans- portation (in which the company's Long Island Sound steamship lines should properly be included). This applies especially to the trolley properties. The fact that certain losses have been incurred in some of these enterprises lends capital to critics of the road, and permits the argument that no concessions are called for on the part of the public to make up for such losses. This, in principle, is true. But before deciding that the mat- ter has any important bearing upon the question at issue, it is necessary to consider carefully, the precise extent and nature of such losses. It is apparent from the Validation report that the present valuation of certain properties is less than the cost value, though such deficiency is more than compensated by increased value of other parts of the system. But upon the evidence of actual net earnings of subsidiaries as shown above, as distin- guished from dividends received from them, it would not appear that the income position of the company has been vitally affected ; [FORTY] and if this is the case, then the matter of losses or apparent losses in subsidiaries need not enter into the problem as regards the just attitude of the public toward the road. Our reasoning comes substantially to this: An eight per cent dividend rate has been established and paid for a long period. The property, apparently, has been sufficiently main- tained, or deficiencies in maintenance in certain respects have been compensated in other ways. But this cannot be fully deter- mined in the light of present evidence, and inquiry should be made to show all the facts. The customary dividend rate seems about to be reduced, owing largely to the anticipated suspension of dividends on the controlled Boston & Maine system. This mat- ter does not enter into the relations of the public and the New Haven. But if the time comes when income is resumed upon the Boston & Maine investment, it would seem on the evidence at hand that no obstacles should be placed by the public in the way of resumption of the customary rate of the New Haven dividend if the general prosperity upon the company's lines should suggest such action. REASONABLE LINES OF POLICY At the beginning of this review, it was urged that the public in fulfilling its share of the mutual responsibility be- tween the community and the public service corporation should use reason and moderation in its power, through legis- lation, over service and facilities ; that it should permit the adjustment of rates in accordance with the cost of the service and the amount of the investment; and that it should coop- erate in all reasonable ways toward the most efficient and economical conduct of the business. Considered with relation to the New England roads, the first of these suggestions was held to apply especially to certain proposed expenditures in the vicinity of Boston ; the second, to the question of improv- ing the New England transportation status by readjustment of rates in such manner as to compensate somewhat in the company's revenues for heavily increased cost of the service; the third, to the joint operation of the New York, New Haven & Hartford and Boston & Maine systems. These topics will now be more fully considered. [FORTY-ONE] Expenditures at Boston It is not proposed to review the long series of legislative complications having to do with proposed transportation im- provements at Boston, but simply to consider these proposals briefly from the financial standpoint. They include the follow- ing: A tunnel connection between the north and south sides of the city, with numerous terminal rearrangements and per- haps a new central passenger station ; a tunnel under the harbor to East Boston ; and electrification throughout the Metropolitan area. The probable cost of these improvements can be stated only in the most general way. A bill which has been before the last two Legislatures providing for a lease of the Boston & Maine to the New Haven (regarding which see objections elsewhere) requires that expenditures shall be made for such purposes by the two roads not exceeding in the aggregate $80,000,000, and not exceeding in any one year $16,000,000. For the cost of a north and south tunnel the figure has been mentioned of $18,000,000, but this is little more than a guess in the absence of a decision as to the number of tracks, location, the question of a central passenger station, and other matters. With respect to electrification, the Joint Board on Metro- politan Improvements (1910) estimated the cost for the Met- ropolitan area at $40,000,000 including the Boston & Albany but subject to additions if electrification were to apply to all freight as well as passenger traffic. The figure reported for the Boston & Maine was $18,889,000 ; for the New Haven, $13,862,000, the latter amount, however, being for passenger traffic only and not including changes in tracks, structures, and road-bed. A leading advocate of electrification has recently criti- cized these estimates as "most exaggerated," citing as evi- dence the statement of a New Haven official giving $20,000,000 as the cost of electrification work completed, in progress, or authorized, on various parts of that system, including a greater amount of single track than that contained in the Metropolitan area. There appeared every reason to believe that the esti- mates above referred to were made in good faith, though under difficulties as to just what plans and methods would be adopted. It is quite possible that progress has been made [FORTY-TWO] in the last three years toward more economical methods. Probably of more importance, however, as accounting for the difference between the two sets of figures, is the fact that the last-named cover work including several rather long stretches of road in comparatively open sections of country. Such work would hardly figure on the same basis as electri- fication of very numerous short lines in a congested Metro- politan area, with much greater density of traffic. The Tunnel Proposal As to the business utility of these improvements. They will not, plainly, bring additional earnings to the roads to any material extent; but this in itself is no final objection. The north and south tunnel is a much needed improvement, and would seem to promise material operating economies, pro- vided it were used not only for long distance trains and freight but also for frequent operation of through north and south suburban passenger trains. These economies would be effected through elimination of terminal and transfer ex- pense, and reduced idleness of equipment. In what proportion the saving would offset the annual expense involved is an- other question, with every indication that a considerable finan- cial burden would remain. Such burden might not be a serious matter under the improved financial condition of the roads which should exist by the time the tunnel would be built and ready for use. But such improved conditions are not assured, and the matter should be approached with great caution, especially as to the danger of placing the tunnel project ahead of other improvements which may be more vitally needed, such as equipment and freight handling facili- ties. A harbor tunnel would not seem likely to compensate at all sufficiently for the expense. Electrification The electrification problem, from the financial standpoint, is somewhat involved. The Joint Board above referred to re- ported, in an argument of conspicuous ability, against any compulsion being placed upon the railroads to electrify their lines throughout the Metropolitan district. It was shown con- vincingly that electrification of some twenty radiating main and branch lines for short distances into the suburbs, with [FORTY-THREE] continuance of steam power beyond the electric zone, would mean not economy but added cost, and would simply entail a heavy financial burden upon the roads, meaning either a drastic cut in net earnings from the suburban service or large increases in suburban rates. It was noted in this report, however, that electrification would be required through a tunnel and to convenient points beyond in each direction, and attention was called to the more favorable financial aspect of electrification of through lines. Since this report was made the New Haven system has pushed the work of electrification from New York to New Haven, and at the Boston end has made necessary provision, legal and financial, for carrying out the work between Boston and Prov- idence. Presumably it will be a matter of no very long time before the whole Shore Line route between New York and Boston will be electrically operated, and whenever a tunnel at Boston materializes the system will naturally be continued to points on the Portland Division at least. Outside of this natural and proper development there is no good reason, under present conditions, for forcing sub- urban electrification. The executive head of the Boston & Albany Railroad has testified that such electrification upon his line would mean an annual net loss in its operation of at least one-half million dollars per year. How it would affect other roads is mostly matter for surmise, but the Boston & Maine at least is in no position to stand such an outlay, and will not be in such a position for a long time. Its financial condition demands imperatively that capital outlays shall be kept down to the lowest figure consistent with efficiency of service, and so far as possible shall be confined to improve- ments directly productive of revenue or capable of paying for themselves in the economies effected. The Question of Rates The second topic in this series concerns the attitude of the public toward the adjustment of rates in accordance with higher operating costs. This question involves large economic and social questions the latter pertaining especially to the compensation of labor which are outside the scope of a purely investment study. It has been repeatedly mentioned in this review that the [FORTY-FOUR] New England roads, in common with railroads elsewhere, have had to deal with sharply rising costs of operation, maintenance, and betterments, including higher cost of many necessities but bearing most sharply in the matter of wages. For example, the report of the Boston & Maine for the fiscal year 1911 stated that during this period the company was obliged to pay additional wages to the amount of $2,468,457 for the same class, character, and quantity of labor, or an amount greater by about twenty-five per cent than the entire amount paid in dividends in that year. It was in the same year that common stock dividends were reduced from a six to a four per cent basis. The New Haven has been simi- larly situated. The rising tendency of wages continues ; the locomotive engineers have recently received an advance, the case of the firemen is in process of arbitration at the time of this writing, and the trainmen also are demanding advances. It will serve to emphasize the importance of these develop- ments to note that in the 1912 fiscal year the wages paid to Boston & Maine enginemen and trainmen amounted to $7,378,000, or 16 per cent of gross earnings. And the demand for higher pay extends to various other departments. Higher Costs of Railroading In his recent testimony with respect to electrification, above referred to, Vice-President Hustis of the New York Cen- tral (in charge of the Boston & Albany) gave certain facts so vital in their bearing on this subject that they are herewith reproduced : Expenses for material and labor have increased tremen- dously during this period (1900 to 1912) ; fuel, for instance, one of the largest single items of expense, being 19 per cent of the total operating expenses, has increased approximately 25 per cent in cost per ton. Passenger cars, which in 1900 cost $6,751, to-day cost $15,750, an increase of 133 per cent. Freight cars, which in 1900 cost $550, to-day cost $1,025, an increase of 86 per cent. Native ties, which in 1900 cost 45 cents, to-day cost 65 cents, an increase of 44 per cent. The cost of lumber has increased about 50 per cent. Passenger locomotives, which in 1900 cost $13,800, to-day cost $23,700, an increase of 72 per cent. Engine nouses for the smaller engines cost $2,000 per stall in 1900; to-day the cost is $7,000 per stall; an increase of $150,000 for a thirty-stall house. While there have been some economies in operation, par- ticularly in the freight service, by reason of the use of heavier [FORTY-FIVE] power, it has not been at all commensurate with the increase in the cost of equipment. So far as the passenger service is concerned the increased weight of passenger equipment has almost entirely offset the increase in the weight of locomotives. During this period wages have likewise increased, and this has been particularly true during the past several years when increased wages and improved conditions have resulted in increased compensation as follows : Engineers, 35 per cent ; firemen, 39 per cent; conductors, 34 per cent; trainmen, 42 per cent ; yardmen, 54 per cent. No Compensation in Rates In the 12-year period covered by the figures of Mr. Hustis given above, general rates have shown no increase. The average revenue per ton of freight per mile of the New Haven system in 1901 was 1.479 cents; in 1912 it was 1.371. The Boston & Maine reported for 1901 an average of 1.158; in 1912, of 1.089. Owing to certain causes related to the proportion of low- grade to high-grade freight, this comparison is not to be taken as absolute, but it is sufficiently conclusive that freight rates as a whole have not advanced, but rather declined. During the same period the average revenue per passenger per mile on the New Haven has declined from 1.763 cents to 1.720; on the Boston & Maine there has been a slight advance ; from 1.763 cents to 1.782. The question of revenue is not exclusively a question of rates. It involves problems concerning the expansion or con- traction of shipments in given lines with alterations in rates, of so fixing the rates as to attract competitive business, and others too intricate for consideration here. The net returns, also, are affected by the matter of efficient and economical operation. But a condition like that reviewed above, coupled with facts elsewhere reviewed as to the impairment of the companies' dividend position, seems fairly conclusive evi- dence that the rate situation now existing requires some change. It is not so much, necessarily, a question of raising all rates, but of general readjustment, levelling up and not down in the case of any inequalities, and having in view some moderate increase in total revenues- The Outlook for Rate Readjustments in New England The Interstate Commerce Commission is to undertake a process of physical valuation of railways under Act of Con- [FORTY-SIX] gress. This work appears likely to occupy three or four years. Meantime it is assumed, with how much justification is un- certain, that permission for any general advance in rates, refused two years ago, will be held in abeyance. But in case that the condition in New England should seem to call especially for some addition to revenues, there are circum- stances which make it seem possible that this territory might receive some consideration before the laborious valuation process has been concluded. One reason for this statement is the fact that the Inter- state Commerce Commission is just completing an exhaustive inquiry into the New England railway situation in all phases, including the financial and physical condition of the roads. In this it has been assisted by the results of the Validation inquiry with respect to the New Haven, and for the Boston & Maine, the results of the thorough New Hampshire rate investigation. Another circumstance is the recent tendency of the New England States to begin to work together for the good of the whole territory a movement which has taken form in the so-called New England Railroad Conference appointed by the various Governors, and which seems likely to lead to some permanent form of joint commission. Any such board should give this matter the most serious attention, with a view pos- sibly to presenting the case of New England before the Fed- eral authorities. Interstate Rates and Other This relates to interstate charges. Under the conditions which have recently come about, however, with respect to the large power of the Interstate Commerce Commission over in- terstate rates, charges within State limits are more or less rigidly restricted by those applying between States, and the way to any general advance in New England, so far as it may seem advisable, lies through the consent of the Interstate board. In view of the wide attention attracted by the recent rate investigation in New Hampshire, it has doubtless been as- sumed that the position of that State against releasing the Boston & Maine from the unusual statutory restrictions on New Hampshire rates is a seriously adverse factor in the [FORTY- SEVEN] Boston & Maine's position. Such does not seem to be the case, even though the restrictions in question are held by the New Hampshire Supreme Court to apply to interstate as well as intra-state business. A computation by the writer from the figures given by the New Hampshire Public Service Commission indicates that after making all deduction for lines not involved, joint rates not involved, and other factors, the amount of New Hamp- shire business in any way affected by the matters at issue is equal to only a little over five per cent of the annual gross earnings of the company. A billing test conducted by the Commission indicated that the amount collected in 1911 in excess of legal maximum charges was equal to .295 of one per cent of the gross earnings for the year, 1.365 per cent of net operating revenues, and .309 of one per cent on the capital stock. The position of New Hampshire will be an important factor, however, in any general effort to readjust rates more favorably to the company, especially as the question most seriously affects the Boston & Maine system. It does not need emphasis that the matter of rate advances must be approached with great care not to affect adversely both the interests of the territory and the revenues of the roads, by placing New England at a disadvantage compared with other sections. On this account, it is to be hoped that whatever changes might occur in New England rates, so far as these could affect the competitive interests of the territory, would correspond to advances in the near future by railroads generally. To some extent, however, the matter could be locally treated, and there should be no hesitation in such a policy. The public, of course, does not wish to pay more. But this does not affect the question of justice, and there is, furthermore, the public's own interest to consider. The com- munity wants more and better transportation. How will this be had without allowing the railroads a living profit? The Joint Control of the New Haven and Boston & Maine We have now considered the two suggestions advanced at the beginning of this discussion, with reference to relieving the roads from excessive capital outlays, and possible im- provement of revenue by readjusting rates. The final topic of this series relates to cooperation by the public in regard to [FORTY-EIGHT] efficient and economical operation of the properties, and the specific proposal made toward this end is cessation of de- mand for the separation of the Boston & Maine Railroad from the control of the New York, New Haven & Hartford. It was originally proposed in this discussion to consider this matter at considerable length, with relation to all possibilities having to do with State control of the Boston & Maine or control by business interests independent of the New Haven. The dangers intended to be pointed out, however, have been in good part so conclusively demonstrated by the events of the last few weeks as to make such argument largely superfluous. The public has now had an opportunity, in the light of facts already reviewed in detail concerning the Boston & Maine's financial position, to judge with more accuracy than was pre- viously possible just what a task would confront a new man- agement of that property, whether public or other, and what would be the chances of minority stockholders. But as the matter of separate control is still before the public in various ways, as for instance in some half a dozen bills before the present Legislature, it seems necessary to consider it in cer- tain general phases. Some First Principles At the outset, it should be remembered that we are dis- cussing these questions from the financial and investment standpoint. In a consideration of this kind, many important questions as to railway management, traffic, operation, and service must be sparingly treated, and especially is this true as to matters local or sectional rather than general. Yet no inference should be drawn that in the view of the writer the standpoint of the banker or the investor is distinct from that of the public; much less, hostile to it The community demands good railroads properties well constructed and maintained, well equipped as to all facil- ities, managed with a maximum of efficiency, a minimum of friction and delay. By its railroads, in marked degree, a com- munity is known. Backward, badly equipped roads give evi- dence of a backward community. Well equipped, efficient roads testify to prosperity, enterprise, progress. And the quality of the railroad depends in the main upon the strength of its treasury ; upon the ability of the company to spend [FORTY-NINE] earnings upon the road, to build up reserves, and to raise new capital. Their Application to New England At the beginning of this review it was sought to show, briefly, certain reasons why our New England roads are not in a stronger financial position. For such a condition the reasons advanced included, it will be recalled, the following: an extravagant dividend policy in past years, owing to early prosperity and failure to realize future demands; the hap- hazard development of our railway map through a multi- plicity of small companies ; natural conditions contributing to high construction and operating costs ; and recent large advances in operating expense, notably in wages, and inabil- ity to make material advances in rates. All of this, it would seem, points to imperative need, in the interest of investors and public alike, of effecting every economy reasonably possible in the management and opera- tion of our railroads. And if such economies may be effected by joining the two principal systems under one management, eliminating unnecessary duplications of service and delays in traffic interchange, this would appear a strong argument for such policy. The Question of Service It must be remembered that changes such as these in railway operation are not measures of economy only, but measures also of increased efficiency in service. Having listened to many days of evidence at the recent hearings of the Interstate Commerce Commission, the writer is aware of the widespread complaint as to service in Boston & Maine territory since the New Haven control of that system ; nor does he seek to exonerate the management for any errors of operating or traffic policy which may have been in part re- sponsible. But, without prejudging the findings of the Com- mission, it may be said that much evidence has been sub- mitted also on behalf of the New Haven management, attrib- uting these troubles largely to certain inevitable complications with growth of traffic beyond facilities ; and to what might be called readjustment pains incident to the efforts of the New Haven to reform the operating methods of the Boston [FIFTY] & Maine in line with improved methods lately introduced upon its own system. These difficulties would not appear of permanent character. The Boston & Maine Needs the New Haven Nor is the greater potential efficiency of the joint opera- tion the final argument. In a period like the present, even more than under better conditions, it is of the greatest im- portance to the Boston & Maine, and to New England so far as affected by conditions on that road, that Boston & Maine credit should be reinforced by the credit of the New Haven. And if the two roads are to be required before many years to spend many millions of capital upon tunnel connections and other improvements at Boston, this is still more true- Indeed, the Boston & Maine is plainly unable now to incur such ex- penditures alone, without large financial assistance by the Commonwealth. The New Haven, as compared with the Boston & Maine, has vital advantages in territory and traffic. The region served by its lines has a greater density of population, many times over, than that of the Boston & Maine. The New Haven serves New York City, Connecticut, Rhode Island, and the southern portion of Massachusetts. The Boston & Maine serves northern Massachusetts, New Hampshire, and parts of Vermont and Maine ; also touching New York State and Canada. The population density of Rhode Island is 508.5 per square mile; of Massachusetts, 418.8; of Connecticut, 231.3. These three rank respectively as first, second, and fourth among the States of the Union; with New Jersey as third. Now compare the northern group ; New Hampshire, 47.7 ; Vermont, 39; Maine, 24.8- Moreover, so far as the evidence serves, the southern or New Haven portion of New England is advancing at a somewhat better rate than the northern or Boston & Maine portion aside from some of the principal cities which the Boston & Maine serves, of which several are reached by both companies. It is true that the Boston & Maine receives a larger proportion of through business ; but this is hardly a strong reliance, considering that the tonnage so secured is less than five per cent of its total. To put the matter in more concrete form, the New Haven system proper earned in the last fiscal year $31,048 gross per [FIFTY-ONE] mile of road, compared with $20,492 for the Boston & Maine ; and $9,102 net, compared with $4,858. If Continued New Haven Control, in What Form? What if the joint control is to continue? Should it re- main in the present form, through the Boston Railroad Hold- ing Company ? Should it take the form of a lease ? Or should the two companies be consolidated? The Present Status Much worse policy can be imagined than that of con- tinuing the present status. Under existing conditions the New Haven has complete executive authority over the Boston & Maine, the president and Boston vice-president of the former holding corresponding offices in the controlled com- pany ; the traffic and operating officials of the two roads work in harmony, and it is possible for the New Haven to work out in the main, provided only that it has reasonable assurance of being left in control, its plans for unifying and coordinating the two systems. There is nothing to prevent the requiring of the two roads to be connected by tunnel at Boston, and such other improvements as are necessary. Yet the Common- wealth retains its power, if in the end matters should go badly, to take over the Boston & Maine control. The arrangement does not work injustice to Boston & Maine minority stock- holders, who receive what the road can pay them and who still stand a chance, despite their misfortunes, of better things in the future. The Lease Method The report of the Commission on Commerce and Indus- try in 1908 contained the following: A lease of the Boston & Maine Railroad to the New Haven is not desired by the latter ; and if there were no other objections it is enough to point out that it would be inex- pedient to burden the New Haven Company with the fixed charge of a heavy rental. Since this report was written, the situation has not changed excepting in such a way as to justify more thor- oughly the attitude of the commission. It is not to be assumed that there are no arguments favoring the plan. A lease would [FIFTY-TWO] facilitate the process of unification, eliminating necessity for joint rates and increasing the possibilities of through service, with resulting economies in switching and transfer cost. For illustration, it would end, presumably, the labor complications now involved in running through trains with the same train crew from one system to another. But the objections are serious. Under present condi- tions, with the Boston & Maine practically out of the dividend- paying-class, it is of course out of the question that the New Haven would think of assuming a guarantee upon the stock. The question may possibly recur when conditions improve, but every effort should be resisted toward any such sweeping extension of the lease system in a territory where it is already somewhat overdone. It would be radically against the inter- ests of New Haven stockholders, at least in principle, and if the property can be placed in a dividend paying position again, it would not be in the long run, probably, in the interest of stockholders in the Boston & Maine. As to Consolidation The final possibility is consolidation outright; Boston & Maine stock to be converted into New Haven at an agreed ratio, or, preferably, the shares of both companies to be con- verted into stock of a new corporation, to be incorporated primarily in Massachusetts under such a title as the New England Railway Lines. With the legislative practicability of this plan, considering other States concerned as well as Massachusetts, this study is not concerned. Moreover, it is certain that no such proposal will have serious attention under existing conditions. The question is one of principles, and, if we may venture to use the word, ideals. So regarded, the consolidation plan would seem on all available evidence the best one, for public and investors alike. It would remove every obstacle, of a legal or operating na- ture, to the complete unification of the two systems, and to the development of the highest efficiency in railway service that the resources of the New England territory can support. It would unite the credit of the two roads, thus providing the best possible basis for the financing of improvements. It would place upon the shoulders of the united system the burden of expensive changes at Boston. It would avoid injustice to the [FIFTY-THREE] stockholders either of the New Haven or the Boston & Maine system assuming only an equitable basis for conversion of stock. New Haven stockholders would not be shouldered with a losing lease. Boston & Maine stockholders would be left with a good chance of recovering their losses with future development and prosperity of the unified roads. A New England Railway System Advocacy of a consolidation does not mean favoring, un- qualifiedly, New Haven control of the Boston & Maine, or even New Haven control of the New Haven system itself, as now exercised ; but rather a Boston, Massachusetts and New Eng- land control of an all New England railway system. With proper provisions and safeguards at the outset it is difficult to believe that Massachusetts, possessed of more than half the population and fully half the wealth of New England, located centrally in the territory of the combined system, and having within its limits a larger percentage of the mileage of that system than any other State, would not be able to protect adequately the interests of Boston and the Common- wealth. The further argument applies that the present minority stockholders in the Boston & Maine would become a voting element with full rights in the new corporation, instead of remaining a powerless minority or being relegated to the merely investment position of stockholders in a leased road. Moreover, by exercising previous to consolidation its power to take over the securities of the Boston Railroad Holding Company, the Commonwealth if it desired could secure the control of a considerable quota of the stock of the new com- pany, placing it with such business interests as would be likely to look out especially for the interests of Boston and northern New England- For conveniently accomplishing this purpose, with suitable protection to the Commonwealth, it might be advisable to retain in existence the machinery of the Boston Railroad Holding Company. [FIFTY-FOUR] THE FINANCING OF THE BOSTON & MAINE An Obstructed Stock Issue While the Boston & Maine Railroad shows a condition inherently sound, as urged elsewhere, the company is in an awkward position as regards the raising of new capital. Many improvements are desired. There is a floating debt now amounting to $22,000,000, consisting of two one-year loans of respectively $12,000,000 and $10,000,000. The first, due June 10 of this year, represents the outlay for purchase of the Worcester, Rochester & Nashua Railroad; subscription to the company's pro rata share (about half) of a Maine Central stock issue of $5,004,300, purchase of new stock of leased lines for the financing of improvements upon the same, and other capital expenditures. The second, due Feb. 3, 1914, has been put out as a temporary measure to provide for subscription to still another issue of Maine Central stock, refunding of certain bonds, and various improvements and equipment pur- chases now under way. For the purpose of making definite provision for such outlays, the stockholders at the last annual meeting author- ized the issue of $10,663,700 of new stock and $7,500,000 of bonds. The stock issue is now indefinitely delayed by the severe decline in the price of the shares on the market; the bond issue by certain legal complications outside the Com- monwealth. Assuming the adjustment of difficulties in other States, there is no serious objection to the issue of these bonds, if a satisfactory market can be found for them. Their amount will not cause the funded debt to exceed materially the amount of the capital stock and premiums, to which, until recently, the company was in theory restricted by Massachusetts law. Moreover, it happens fortunately that by a very recent change in a law never any too wise* the company will be able to * The provision that to legalize its bonds as savings bank in- vestments a railroad must have paid in dividends in cash an amount equal to not less than four per cent per annum on its capital stock in each fiscal year for the five years next preceding the investment. The idea that payment of dividends is a test of financial strength is a curious fallacy not confined to New England but unfortunately characteristic which is in part responsible for the Boston & Maine's [FIFTY-FIVE] suspend dividends if necessary for a period not exceeding two years, without throwing out of Massachusetts savings banks bonds previously issued. Dangers of Further Bond Output But beyond this issue the company should not go in in- creasing its debt, until more money has been invested in the company's stock ; and this regardless of any legal restrictions or the removal of the same. Bonds so issued would be a doubt- ful investment. Intentions to keep the company solvent and to meet all charges may be ever so good, and if no mis-steps are made the writer believes that this can be done. But there are too many uncertainties in the situation to justify any in- vestor in putting a dollar into any further Boston & Maine bond issue without first demanding that it shall be matched by a dollar invested by the owners of the road. It may be argued that money invested by bondholders would bring a return sufficient to meet the interest charges, but this does not follow. Too many things are being de- manded of the road which do not promise such return. If money can be raised by stock issue to provide for such out- lays, there is a reasonable certainty that the bond investment will be sufficiently revenue-producing or that it will give equivalent advantage in operating economies. But otherwise there is no such certainty, under existing provisions of the law. As to a Stock Issue "at Par" What then? Shall the company try to put out its pro- posed ten millions of new stock? The market price of Boston & Maine at this writing is about 70. The law forbids a stock issue at less than par. Of course there could be possibly only one buyer the New Haven. That company would be ex- pected to take its pro rata share of a little more than half, or possibly, in the assured absence of other stockholders' sub- scriptions, the entire amount. No such transaction should be present position. The amount earned available for dividends is the real test. Demanding the payment of a given rate, without even specifying that the amount must be earned after all proper charges, means simply that in the face of difficulty the company will weaken its financial posi- tion to keep its bonds in the savings banks, as the Boston & Maine has recently done. Such a law protects stockholders, not bondholders. It cannot protect stockholders indefinitely, and in the end it is bad for all concerned. [FIFTY-SIX] allowed, even if the New Haven were willing, which it evi- dently is not. It would mean practically a free gift of cor- porate funds, to the excess of par value over the real value. It should render the New Haven directors liable for the debts of that company, to the extent of such gift. It should be re- sisted by New Haven stockholders, if necessary by legal means. The One Thing to Do There is one conclusion, and one only. The Legislatures of Massachusetts, New Hampshire and Maine should grant per- mission for the Boston & Maine to issue stock at whatever discount is necessary from the par value. The company could then prudently issue bonds to the amount of cash actually re- ceived from such issue, but no more under present conditions. It will be protested, of course, that allowing a stock issue below par would be "a departure from settled policy" and so on. But such policy should give way, if necessary, to the re- quirements of sane finance. Moreover, that policy has in- volved one feature which provides the most ample reason for the departure now proposed. For many years the public authorities, the company, and investors, equally blinded to the real condition of the road, cooperated in the issue of new Boston & Maine stock at heavy premiums. Thirteen years ago, in accordance with an act of the Legislature, the company issued new stock at 190. Seven years ago an offering was made, and mostly taken by stockholders, at 165. If it now becomes necessary, in order to extricate the road from an embarrassing financial position, to allow stock to be issued at perhaps a twenty-five point discount instead of a premium, no hesitation should be had in adopting this perfectly logical corollary of the former method, at least to the extent that such discount would be within the limits of the company's previous receipts from premiums. Certain dangers must be considered, to be sure. It might be urged, for example, that if the Boston & Maine should be compelled to add a stock liability to its balance sheet of over $10,000,000, matching it with cash to perhaps only three- fourths of that amount, the result would be to wipe out the surplus and substitute a deficit. This difficulty is apparent only. Under the accounting rules of the Interstate Commerce Commission, the company would be able to charge off the dis- [FIFTY-SEVEN] count against premiums received on previous issues. Such premiums are stated in the company's balance sheet at $6,501,620. A point of real importance is that if such an offering were made it might remain in part unsubscribed-for ; an unpleasant situation. To avoid this, any permission granted to issue stock below par should provide that such issue, or at least that part of it in excess of the New Haven's share, should be protected by an underwriting satisfactory to the authorities. It should not be considered for a moment that such an issue would be an injury to holders of the existing stock. In- stead, by providing the one safe way out of the company's financial perplexity, it should help them. Temporary Borrowings Should be Reduced It may be, indeed, that the company's officers will see no immediate necessity for such a step, believing it possible to re-finance temporarily the company's large floating debt until conditions look more promising. But it is practically cer- tain that such renewed borrowings will be at increased rates of interest, while through an issue of stock and supplementary issue of bonds, the interest charge could be substantially re- duced. Moreover, the floating debt is too large for prudence. It has been suggested also, with a semblance of author- ity, that the company may undertake to secure a large quan- tity of additional freight equipment through the issue of equipment trust certificates, possibly to the amount of some $16,000,000. At first glance this plan, even without the preliminary of a stock issue, would have something to commend it. Money raised by equipment certificates can be used for no other pur- pose, and so is virtually certain to be income-producing. This is not the case with the proceeds of a general bond issue. Moreover, a special argument exists in this instance in the fact that an increase of ten cents per day took effect on the first of the current calendar year in the rental of foreign freight cars. This advance, amounting to about 29 per cent over the present rental, would have increased the company's debit balance on car hire account for the 1912 fiscal year by $305,000. The added charge which it will incur this year is one reason for the company's threatened dividend stoppage, [FIFTY-EIGHT] and it is a highly important reason also for the desire to in- crease heavily the number of the road's own freight cars, as the New Haven has already done. Difficulties of Equipment Trust Plan There are certain criticisms of the policy, however, In order to avoid an unfavorable effect upon the income account, to say nothing of showing more earned for dividends, the company must be sure that the equipment purchased will give sufficient return, through direct earnings and saving of car rentals, to meet not only the interest upon the certificates but also a large annual charge for serial retirement. This seems a difficult proposition, and especially considering the possibility at any time of a very severe reversal in business conditions, as a result of which some of the equipment would be out of employment. And while no one anticipates trouble for the Boston & Maine enough has been said on that sub- ject elsewhere it must be remembered that in the event of any financial embarrassment a company is usually obliged to pay charges on its equipment certificates even ahead of bond interest; else the equipment is lost. It is not intended to argue that the company cannot make some use of equipment certificates, to a reasonable amount. But it is believed that this device should be used with great cau- tion- Further, it would provide for only one part of the company's needs. All things considered, there appears noth- ing in the proposal to suggest any qualification of the above argument in favor of the old-fashioned methods of financing by stock issues, supplemented by bond issues, and such leg- islation as is necessary to make this possible. Whatever financing may be permitted by the State, whether by way of such concessions as proposed or other- wise, it will probably be considered good policy to restrict the company in the use of the funds to actual improvements, putting a stop to purchases of leased line stocks. Some of these purchases seem thus far to have proved of doubtful expediency, and there is no call for their continuance. It may seem best also to disapprove further extensions of the com- pany's lines, especially for strategic purposes in relations with other railroads. And as above urged at length, the public [FIFTY-NINE] should go very slowly in demanding or permitting any bur- densome expenditures at Boston. All suggestions of a State loan should be disregarded. The State can accomplish the most good by enabling the company to help itself. THE TIME FOR A LIBERAL VIEW The railway problem in New England is complicated and difficult. But it is safe to say that to no one is it quite so complicated or quite so difficult as to the railroad men charged with the responsibility of providing adequate service for this important territory, and of keeping the properties with their large capitalization solvent and dividend-paying. The public has demanded, justly enough as population and industry has increased and the standards of good railroading have been raised, more and more in the way of service and facilities. And the demand, we may add, is as eager and per- sistent as is the disposition in some quarters to condemn and oppose the railway management on any and all grounds, re- gardless of the effect of such attitude upon the credit and efficiency of the companies. All of this comes back upon the stockholders. It should be realized, as was pointed out early in this discussion, that these thousands of New England stockholders are not the arrogant beneficiaries of high finance. Many of them are not wealthy. Their investments have been made in good faith and actuated by confidence in the economic great- ness of New England, in the ability and integrity of the rail- way managements, and, not least, in the intention of the laws, the courts, and public opinion to deal fairly and equitably with honest investment interests- That economic conditions have worked against them by imposing upon their properties demands of a severity greater than anticipated or planned for in the earlier days of pros- perity, and that the shareholders' chosen officials have made mistakes, is not the fault of the public. But legislation adding needlessly to the burdens thus imposed, or thought- less interference with the most practical and economical work- ing out of our railway problem, would be plainly the fault [SIXTY] of the public and would reflect seriously upon the public good faith toward those who have placed capital, under legislative charter, in our public utilities. And not only would such a policy violate justice and good faith, but in obstructing the needed financing of railway development it would also violate common sense. [SIXTY-ONE} THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO SO CENTS ON THE FOURTH DAY AND TO $I.OO ON THE SEVENTH DAY OVERDUE. , 29Nov'6!Wc ' 1 REC'D LD ' LD 21-100m-7,'40 (6936s) UNIVERSITY OF CALIFORNIA LIBRARY