tically" the interest costs on municipal bonds and in causing cancellations and postponement of new issues. He has called for repeal or restriction of such financing. APPA wishes to commend the Secretary for his recognition of this problem, and urges that the committee take action to terminate use of pollution control bonds. 1974 FORECAST OF CAPACITY, LOAD, AND RESERVE [Based on 1974 report to Federal Power Commission under Order 383-3] Generating Year 1975 1976. 1977. 1978 1979 1980. 1981. 1982. 1983. 1934. Year 1975. 1976. 1977. 1978. 1979. 1980 1981 1982 1983. 1984. 1 Preliminary. 1975 FORECAST OF CAPACITY, LOAD, AND RESERVE 1 [Based on data prepared for report to Federal Power Commission under Order 383-3] STATEMENT OF ROBERT N. FLINT, VICE PRESIDENT AND COMPTROLLER, AMERICAN TELEPHONE & TELEGRAPH CO. Mr. FLINT. My name is Robert Flint, vice president and comptroller of the American Telephone & Telegraph Co. I have a prepared statement which I would like to have become part of the record. We do appreciate this opportunity to appear before this committee which is concerned with the tax formation of capital. We are particularly interested in addressing our comments to the problems which are confronting the telecommunications industry. There are two proposals before this committee that I would like to specifically allude to. The first one is the investment tax credit, and the second is the proposal to defer the taxation of dividends that are invested in utility expansion programs. Before I address these two items, however, I would like to point out the massive requirements for additional capital which are facing the communications industry, and second, the financial constraints within which this capital must be raised. But just a little bit of background, during the 10-year period ended December 1974, the Bell System has spent in construction programs some $65 billion. Our plant in service during that period has increased from $31.7 billion to $77.7 billion, an increase of $16 billion. This has been obtained at the cost of placing an enormous burden on the capital formation capability of the Bell System. Over $28 billion of that amount, of that $65 billion of construction, has been raised through the sale of securities to investors. In the process our debt has increased from $9.1 billion to $29.5 billion. Our debt ratio has gone up from about 33 percent to about 50 percent. Our annual interest charges have gone from $362 million to over $2 billion. Most significantly, our post-tax interest coverage has plummeted from about six times to about 21⁄2 times. This is significant because this is the measure that is used by the rating agencies and by investors which will determine your ability to raise capital in the future. Looking to the future, the Bell System is going to have to face a radically different situation than that which prevailed 10 years ago. The borrowing margins which we had 10 years ago have been used up and competition in the financial market is extremely intense. Our ability to be able to compete and to compete effectively for the formation of new capital will depend upon our being able to have the opportunity that is available to others in raising capital. The penalty for failure if we cannot is that the Nation's overall productivity has to suffer because we must have an effective communications system as a part of the economy. Now, we also have a very real need to get infusions of new equity capital and, therefore, the two proposals that I want to mention this morning are, first, the investment tax credit, which I am asking that this committee give very careful consideration to in recognizing the fact that because we must compete for capital on terms like all other capital intensive businesses we ask for equal treatment. We are not asking for anything that is not available to the rest of the business community. If you treat us equally so that we are able to compete on an equal footing we are satisfied that we are going to be able to meet our obligations. Now the investment tax credit as you know is scheduled after 1976 to go back to 4 percent on utilities. In our view the rate ought to be for business generally at least 10 percent, and perhaps 12 percent. That will be a matter obviously for your careful consideration. My plea is that you treat us as you treat everyone else. We are out there competing in the capital market. The second item I want to mention is ability to be able to reinvest dividends without paying tax at the time that it is done. This proposal would mean that investors who now, when they receive cash dividends must pay the tax and thus are discouraged from reinvesting in equity capital would be encouraged to reinvest in equity capital, which in the final analysis is what we need. We have all the debt we need. What this country needs is to have the equity investor back in to support the economy. Those are my two proposals. I thank you very kindly. [The prepared statement follows:] STATEMENT OF ROBERT N. FLINT, VICE PRESIDENT AND COMPTROLLER, SUMMARY Mr. Flint's remarks relate to the capital formation requirements of the telecommunications industry, with particular reference directed to two Federal income tax policy proposals before the Committee: (1) the investment tax credit, and (2) the proposal to defer the taxation of dividends re-invested in utility expansion programs. He reviews the massive requirements for additional capital which have been necessary to meet the communications requirements of the American economy. Construction programs over the past 10 years have totaled over $65 Billion. Over $28 Billion of this amount was raised through the sale of new securities to investors. As a consequence, the Bell System debt ratio has increased from 32.7% to 49.8%, and interest coverage has plummeted from "6 times" to "2 times". Thus, Bell System borrowing margins which existed in the 1960's have been used, and it must meet its capital needs for the future under conditions which are radically different from those prevailing just ten years ago. Also, substantial infusions of new equity capital will be required over the coming years. With respect to the investment tax credit provisions, Mr. Flint urges that the Nation's tax laws should provide the Bell System with the opportunity to undertake new construction commitments on equal terms with the rest of the business community. It is further urged that the investment tax credit be extended for years after 1976 at a rate at least equal to 10%, and preferably at the 12% level. Mr. Flint also urges that taxation of common dividends re-invested in public utilities be deferred until the time that the common equity investors dispose of their dividend stock. Such a provision should enhance common equity accumulation, which is critically needed in the utility sector. STATEMENT This statement is submitted on behalf of the American Telephone and Telegraph Company for the Bell System Companies listed on Table I of this statement. We appreciate the opportunity to appear before this Committee in connection with its hearings on tax reform. My remarks relate to the capital formation requirements of the telecommunications industry, with particular reference directed to two policy proposals before the Committee. These two proposals are (1) the investment tax credit, and (2) the proposal to defer the taxation of dividends re-invested in utility expansion programs. I wish to address these two proposals in the light of, first, the massive requirements for additional capital facing the telecommunications industry, and second, the financial constraints within which the telecommunications industry must raise the required capital. During the 10 year period ended December 31, 1974, the principal Bell System telephone companies have met the communications requirements of their customers through construction programs totalling over $65 Billion. (Table II, Col. A.) The number of telephones increased from 72 Million to 114 Million, and telephone plant in service (consisting of central offices, switching centers, outside distribution facilities, etc.) increased during this 10 year period from $31.7 Billion to $77.7 Billion, an increase of $46 Billion. This pattern of sustained growth has been essential to meet the communications requirements of the American economy. These results have been obtained at the cost of placing an enormous burden on the capital formation capability of the Bell System. Over $28 Billion of the $65 Billion construction programs have been raised through the sale of new securities to investors. (Table II, Col. B.) As a consequence, since 1964: Debt has increased from $9.1 billion to $29.5 billion. Debt ratio has increased from 32.7% to 49.8%. Annual interest charges increased from $362 million to $2,057 million. And most significantly, post-tax interest coverage, which is a measure of the quality of debt securities-and thus the measure of the ability to raise future capital has plummeted from well over 6 times in 1965 to about 21⁄2 times the coverage today. The dangers of downgradings in credit standings are real. The Pacific Telephone and Telegraph Company and New England Telephone and Telegraph Company recently have been downgraded and, absent improvement, other Bell System companies, including AT&T itself, are in jeopardy. Thus, looking to the future, the Bell System must meet its capital needs under conditions which are radically different from those prevailing 10 years ago. The borrowing margins which existed in the 1960's have been used, and competition for capital in the financial markets is intense. The ability of the Bell System to compete, and compete effectively, for the formation of new capital will determine whether we will have a communications system which will continue to contribute to the Nation's economic growth. The penalty for failure must impede the Nation's overall productivity. Against this background, it is essential that our tax laws provide the Bell System with the opportunity to undertake new construction commitments on equal terms with the rest of the business community. Also, it is clear that the Bell System will require substantial infusions of new equity capital over the coming years. The two proposals which I wish to discuss are directed toward accomplishing these goals: Investment Tax Credit Earlier this year, in the Tax Reduction Act of 1975, a general increase in the investment tax credit to a uniform rate of 10% was provided for all businesses that had qualifying new investment. Legislation is required to avoid handicapping utilities in future years. The uniform 10% rate under the Tax Reduction Act of 1975 is limited, basically, to new construction undertaken in 1975 and 1976. Thereafter, the investment tax credit rate will revert automatically to a two tier tax credit structure of 4% for utilities and 7% for other businesses, unless new legislation is provided. We submit that there is no logical rationale to permit the law to go back to that discriminatory treatment of utlities. Your Committee, in its report accompanying the Tax Reduction Act of 1975 stated: This lower investment credit for public utilities discriminates against investment in utilities and impedes such investment at a tn.e when the public utilities need large amounts of capital to build up their capacity to meet the growth in demand for their services. (H. Rep. No. 94-19, at p. 12.) We submit that all the reasons for setting a uniform, non-discriminatory rate earlier this year will continue to be equally applicable for the future. We respectfully urge that the investment tax credit provisions in the law be amended to assure that whatever tax credit rate is provided for businesses generally will be allowed also to utilities, including the telecommunications utilities. We further urge that the rate be set at a minimum of 10%, and preferably at a 12% rate. We also urge that such action be taken promptly. Our planning processes require substantial lead time. We are now in the process of establishing our construction plans for 1977 and developing the necessary financing programs to carry out those plans. Early action establishing the investment tax credit rate for 1977, and future years, should provide for more orderly demands on the capital markets. Utility Dividend Reinvestment Tax Incentive Earlier in my testimony I mentioned that AT&T will require substantial amounts of new equity capital over the next several years. This, of course, is a problem facing all utilities. There is an obvious need to stimulate greater investor interest in equity capital. We urge that favorable consideration be given at this time to a specific proposal that was tentatively approved earlier this year, but which was postponed for reconsideration at a time when the Committee would be considering the subject of capital formation. The proposal is to defer the Federal income tax on dividends which shareowners reinvest in utility common stock. The tax would be postponed until the shareholder disposes of that stock, and at the time of such disposition the dividend amount would be taxed at ordinary income rates. This is the same basic proposal recommended by the President's Labor-Management Committee which was appointed to study the special problems facing the electric utility industry. We are confident that if such a proposal were enacted, it would be a powerful stimulant to encourage equity investment. We urge that such a provision should be extended equally to the telecommunicatoins industry which, like the electric utilities, must raise massive amounts of new equity capital, and which must compete in the marketplace for new capital. In summary : (1) The Bell System urges that the rate applicable to the telecommunications industry be maintained at the same level as that applicable to businesses generally. It is further urged that the investment tax credit be extended for years after 1976 at a rate which is at least 10%, and preferably at the 12% level. (2) The Bell System urges that taxation of common dividends re-invested in public utilities be deferred until the time that the common equity investors dispose of their dividend stock. Such a provision should enhance common equity accumulation, which is critically needed in the utility sector. TABLE I-BELL SYSTEM COMPANIES American Telephone and Telegraph Co. The Bell Telephone Company of Pennsylvania. Bell Telephone Laboratories, Inc. The Chesapeake and Potomac Telephone Companies. Illinois Bell Telephone Co. Indiana Bell Telephone Company, Inc. Michigan Bell Telephone Co. The Mountain States Telephone and Telegraph Co. New England Telephone and Telegraph Co. New Jersey Bell Telephone Co. New York Telephone Co. Northwestern Bell Telephone Co. The Ohio Bell Telephone Co. Pacific Northwest Bell Telephone Co. The Pacific Telephone and Telegraph Co. South Central Bell Telephone Co. Southern Bell Telephone and Telegraph Co. The Southern New England Telephone Co. Southwestern Bell Telephone Co. Western Electric Company, Inc. Wisconsin Telephone Co. |