Reports on audit of government corporations and agencies, etc

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05TH CONGRESS HOUSE OF REPRESENTATIVES DNo. cuM

EXAMINATION OF FINANCIAL STATEMENTS

PANAMA CANAL COMPANY AND CANAL ZONE

GOVERNMENT, FISCAL YEAR 1977,

TRANSITION QUARTER, AND FISCAL

YEAR 1976

COMMUNICATION

FROM

THE COMPTROLLER GENERAL OF THE
UNITED STATES

TRANSMITTING

A REPORT ON THE EXAMINATION OF FINANCIAL STATEMENTS OF THE
PANAMA CANAL COMPANY AND THE CANAL ZONE GOVERNMENT FOR
THE FISCAL PERIODS ENDED SEPTEMBER 30, 1977, SEPTEMBER 30, 1976,
AND JUNE 30, 1976, PURSUANT TO SECTION 106 OF THE GOVERNMENT
CORPORATION CONTROL ACT

NOVEMBER 30, 1978.-Referred to the Committees on Government Operations, and
Merchant Marine and Fisheries and ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON: 1978

36-736

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COMPTROLLER GENERAL OF THE UNITED STATES
WASHINGTON. D.C. 20548

B-114839

The Honorable Thomas P. O'Neill, Jr.
Speaker of the House of Representatives

Dear Mr. Speaker:

Pursuant to the Government Corporation Control Act
(31 U.S.C. 841), we have examined the financial statements
of the Panama Canal Company for the fiscal periods ended
September 30, 1977, September 30, 1976, and June 30, 1976.
We also examined the Canal Zone Government's financial
statements for the fiscal periods ended September 30, 1977,
September 30, 1976, and June 30, 1976, because the Company
and the Government are closely related in terms of purpose
and organization and because the Company is required by
law to absorb the net cost of the Canal Zone Government.

Chapter 3 of the report highlights the treaty impact
on Canal operating costs.

We are also sending this report today to the President
of the Senate. Copies are being sent to the Director, Office
of Management and Budget; Secretary of the Army; and President
of the Panama Canal Company.

Sin ely yours,

Comptroller General
of the United States

ii

COMPTROLLER GENERAL'S FINANCIAL STATEMENTS OF THE PANAMA
REPORT TO THE CONGRESS CANAL COMPANY AND THE CANAL ZONE
GOVERNMENT FOR FISCAL PERIODS 1977,
TRANSITION QUARTER, AND 1976

DIGEST

For a clear understanding of GAO's assessment
of the financial statements of the Panama
Canal Company and the Canal Zone Government--
the interrelated U.S. agencies charged with
administering the Canal--this summary begins
with definitions and recent development.

The Company

--transits ships through the Canal,

--provides services to shipping
interests,

--maintains and operates the locks,

--provides support services, and

--carries out various administrative
functions for the Canal Zone Govern-
ment.

The Canal Zone Government operates and
administers a variety of services, such as

--education,

--health,

--sanitation,

--protection, and

--postal (in the Canal Zone).

On September 7, 1977, the United States and
the Republic of Panama signed treaties to
terminate all prior agreements for the
operation of the Panama Canal and agreed to

Tear Sheet. Upon removal, the report ID-78-61
cover date should be noted hereon.

enter into a new relationship for its future
operation. The Panama Canal Treaty and
Permanent Neutrality and Operation Treaty
were ratified by the U.S. Senate on April 18,
1978, and March 16, 1978, respectively. The
Panama Canal Treaty dissolves the present
Canal organization and creates a New Panama
Canal Commission supervised by a Board com-
posed of U.S. and Panamanian nationals. It
is anticipated that the Commission will be-
come effective on October 1, 1979.

U.S. legislation has been drafted to imple-
ment the treaties. Thus, financial state-
ments have been prepared under the assumption
that the Canal organization will continue to
operate without material change in the scope
of its operations. (See p. 10.)

The Canal operation is self-sustaining except
for the cost of facilities acquired for
national defense, interest on (1) interest
capitalized during the construction of the
Canal, and (2) U.S. investment in the Canal
Zone Government, and some other costs.
(See p. 10.)

As of September 30, 1977, the United States
has recovered about $1.2 billion of $1.9 billion
invested. Recovery of a part of the balance of
$753.1 million is precluded by congressional
action. (See p. 12.)

The Company's Board of Directors approved
a change in accounting policy and the Company
exercised its legal right in fiscal year 1976
to defer payments to the U.S. Treasury for
unearned costs included in operations. These
costs amounted to $9.3 million for fiscal
periods 1976 and the transition quarter but
were fully recovered and paid to the U.S.
Treasury during fiscal years 1977 and 1978.
(See p. 13.)

Another change in the method of accounting
was to recognize the accrued liability for
employees' leave on an actual basis in lieu
of using estimates.

The Company's principal source of revenue
comes from tolls collected. Vessel measure-
ment rule changes, a toll rate increase,
crude oil transits from Alaska, and expected
modest increases in other transits have or
will increase toll revenue. (See p. 15.)

Certain unaudited financial statements
prepared by the Canal organization show
the effect of inflation by restating
historical dollars in terms of purchasing
power at September 30, 1977. (See p. 17.)

GAO reviewed a Company-prepared study
addressing the impact the Treaty will
have on the cost of operating the Canal.
Estimates show that operating costs will
increase by $46 million in the first year
and that, had there had been no Treaty,
a profit of $9.3 million would have been
realized in 1980. (See p. 19.)

In GAO's opinion, subject to uncertainties
relating to the implementation of the 1977
Panama Canal Treaty, the Company's finan-
cial statements (schedules 1 through 5)
present fairly its financial position at
September 30, 1977 (FY 1977), September 30,
1976 (transition quarter), and June 30, 1976
(FY 1976), and the results of its operations,
changes in the investment of the United
States, and changes in financial position for
the fiscal periods then ended, in conformity
with generally accepted accounting princi-
ples which--except for the accounting policy
changes described in note 3 to the financial
statements with which GAO concurs--have been
applied on a consistent basis. (See p. 25.)

In GAO's opinion, subject to uncertainties
relating to the implementation of the 1977
Panama Canal Treaty, the Canal Zone Government's
financial statements (schedules 6 through
13) present fairly its financial position at
September 30, 1977 (FY 1977), September 30,
1976 (transition quarter), and June 30, 1976

Tear Sheet

iii

(FY 1976), and the results of its operations
and changes in the investment of the United
States for the fiscal periods then ended, in
conformity with the principles and standards
of accounting prescribed by the Comptroller
General which--except for the accounting
policy change described in note 3 to the
financial statements with which GAO concurs
--have been applied on a consistent basis.
(See p. 26.)

Contents

Page

DIGEST i

CHAPTER

1 INTRODUCTION 1
Financing of activities 2

2 COMMENTS ON FINANCIAL STATEMENTS 10
Uncertainties that could affect
the financial statements 10
Costs excluded from the Company's
financial statements pursuant
to law
Equity of the U.S. Government 12
Accounting changes 13
Toll rate changes and other
economic conditions affecting
toll revenue 15
Inflation-adjusted statements 17

3 TREATY IMPACT ON CANAL OPERATING COSTS 19
Company's Treaty implementation
plan 19
Change in scope of operations will
result in operating deficits 20
Other Treaty-related issues may
have an impact on operating costs 21

4 SCOPE OF EXAMINATION AND OPINION ON
FINANCIAL STATEMENTS 25
Panama Canal Company 25
Canal Zone Government 26

FINANCIAL STATEMENTS

Schedule

1 Panama Canal Company balance sheet,
September 30, 1977, September 30, 1976,
and June 30 1976 28

36-736 0 79 -2

Page

Schedule

2 Statement of operations and earned
capital reinvested, fiscal year ended
September 30, 1977, transition quarter
ended September 30, 1976, and fiscal
year ended June 30, 1976 30

3 Statement of contributed capital, fiscal
year ended September 30, 1977, transition
quarter ended September 30, 1976, and
fiscal year ended June 30, 1976 31

4 Statement of changes in financial position,
fiscal year ended September 30, 1977,
transition quarter ended September 30,
1976, and fiscal year ended June 30, 1976 32

5 Statement of property, plant and equipment,
September 30, 1977, September 30, 1976,
and June 30, 1976 33

Notes to financial statements 35

lA General price-level balance sheet,
September 30, 1977 40

2A General price-level income statement
for the year ended September 30, 1977 42

Notes to price-level financial statements 43

6 Canal Sone Government balance'sheet,
September 30, 1977, September 30, 1976,
and June 30, 1976 44

7 Statement of operations, fiscal year ended
September 30, 1977 47

8 Statement of operations, transition quarter
ended September 30, 1976 49

9 Statement of operations, fiscal year ended
June 30, 1976 51

Page

Schedule

10 Statement of changes in the investment of
the United States, fiscal year ended
September 30, 1977

11 Statement of changes in the investment
of the United States, transition
quarter ended September 30, 1976

12 Statement of changes in the investment
of the United States, fiscal year
ended June 30, 1976

13 Statement of property, plant and
equipment, September 30, 1977,
September 30, 1976, and June 30, 1976

Notes of the financial statements

6A General price-level balance sheet,
September 30, 1977

7A General price-level income statement for
the year ended September 30, 1977

Notes to price-level financial statements

APPENDIX

I

Board of Directors Panama Canal Company

CHAPTER 1

INTRODUCTION

The Panama Canal enterprise consists of the Panama Canal
Company and the Canal Zone Government, both U.S. Government
agencies charged with maintaining and administering the
Panama Canal. These agencies are closely interrelated in
terms of purpose, organization, and operation.

The Company is a wholly owned U.S. Government corpora-
tion managed by a Board of Directors. The Canal Zone Govern-
ment is administered by the Governor of the Canal Zone who
is also president of the Company.

The Secretary of the Army, in an independent capacity,
is the direct representative of the President of the United
States as the sole stockholder of the Company and as super-
visor of the administration of the Canal Zone Government. He
also appoints the Company's Board of Directors. The Company
was without a Board of Directors from April to September 1977,
because, as is customary when a new U.S. President is elected,
the previous board members submitted resignations effective
April 1, 1977. The new board members appointed by the
Secretary of the Army are listed in appendix I.

The Panama Canal Company transits ships through the
Canal, provides services to shipping interests, maintains
and operates the locks, and provides support services.
Support services include vessel repairs and operation of
the harbor terminal, operation of a railroad, electric power
system, communication system, and water system. It also
provides services essential to employee welfare, such as
operation and maintenance of rental housing, retail stores,
and service and recreational facilities. In addition, under
the terms of an interagency agreement, the Company admin-
isters the legal, personnel, and budget and accounting oper-
ations of the Canal Zone Government.

The Canal Zone Government operates, administers, and
conducts a variety of functions associated with civil govern-
ment, including education, health, sanitation, protection,
and postal services in the Canal Zone. The accounting system
of the Canal Zone Government was approved by the Comptroller
General in June 1964.

The United States and the Republic of Panama, by trea-
ties dated September 7, 1977, agreed to terminate prior

treaties pertaining to the operation of the Panama Canal and
to enter into a new relationship for operating the Canal.
The new treaties, referred to as the Panama Canal Treaty and
the Treaty Concerning the Permanent Neutrality and Operation
of the Panama Canal, were ratified by the Senate on April 18,
1978, and March 16, 1978, respectively, and set forth new
terms and arrangements for managing, operating, maintaining,
improving, protecting, and defending the Canal.

When the new Panama Canal Treaty enters into force,
the current organization will be dissolved and a new U.S.
agency, called the Panama Canal Commission, will be estab-
lished. It will be supervised by a Board composed of nine
members, five U.S. nationals and four Panamanian nationals.
Until December 31, 1989, a U.S. national will act as Admin-
istrator of the Commission, with a Deputy Administrator from
Panama. After that time, these positions will reverse.
Chart 1 shows the Canal organization (the Company and the
Government) and chart 2 the proposed Panama Canal Commission
organization. The four photographs on the following pages
were furnished by the Company and illustrate some of the
functions or activities of the Canal organization.

FINANCING OF ACTIVITIES

As prescribed by law (2 C.Z.C. sections 62 and 412),
the Company is expected to (1) recover all costs of operat-
ing and maintaining its facilities, including depreciation,
(2) pay interest to the U.S. Treasury on the U.S. Government's
net direct investment in the Company, and (3) reimburse the
U.S. Treasury for (a) annuity payments to the Republic of
Panama under the Convention of 1903, as later modified, and
(b) the net costs of operating the Canal Zone Government,
including depreciation on fixed assets. The Company returns
any funds in excess of working and foreseeable capital require-
ments to the U.S. Treasury as dividends.

The Canal organization is designed to be self-sustaining.
The Panama Canal Company finances its operating and capital
expenditures with revenue from transit tolls and support ser-
vice operations. The Canal Zone Government, on the other
hand, receives annual appropriations to finance its operating
and capital expenditures. These are returned to the U.S.
Treasury through (1) recovery of charges for services render-
ed by the Government and (2) payments by the Company for the
net cost of the Government (i.e., operating cost, including
depreciation and other non-fund expenses in excess of recover-
ies for services rendered).

Tolls from canal transits are the Company's major
source of revenue. The toll rates are established by the
Company subject to the approval of the U.S. President
(2 C.Z.C. sections 411 and 412(a)). The basis of the toll
rates is prescribed by section 412(b) of title 2 of the
Canal Zone Code.

"Tolls shall be prescribed at rates calcu-
lated to cover, as nearly as practicable,
all costs of maintaining and operating the
Panama Canal, together with the facilities
and appurtenances related thereto, including
interest and depreciation, and an appropri-
ate share of the net costs of operation of
the agency known as the Canal Zone Government."

Canal toll rates, initially established in 1914,
remained the same through fiscal year 1974, except for a
slight adjustment in 1938. Since 1974, the effective rate
of toll increases has been about 43 percent, including the
latest increase in November 1976 of 19.5 percent. Vessel
measurement rules were also revised in 1976 and became
effective in March of that year.

The effect of the November 1976 toll increase and
rules changes on toll revenue is discussed further in
chapter 2.

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CHAPTER 2

COMMENTS ON FINANCIAL STATEMENTS

UNCERTAINTIES THAT COULD
AFFECT THE FINANCIAL STATEMENTS

The September 7, 1977, Treaties referred to as the Panama
Canal Treaty and the Treaty concerning the Permanent Neutral-
ity and Operation of the Panama Canal, were ratified by the
Senate on April 18, 1978, and March 16, 1978, respectively.
Legislation has been drafted to implement the Treaties and
uncertainties still exist as to the full financial effect of
the Treaties on the Canal organization. Thus, as stated in
the Panama Canal Company's and the Canal Zone Government's
financial statements (footnotes 12 and 11 respectively), the
financial statements have been prepared as if the Canal organ-
ization would continue to operate without material change in
the scope of its operations.

Chapter 3 further discusses the financial impact the
Panama Canal Treaty may have upon Canal operations in the
future.

COSTS EXCLUDED FROM THE COMPANY'S
FINANCIAL STATEMENTS PURSUANT TO LAW

Legislation and related hearings indicate that the Canal
organization is designed to be operationally self-sustaining
and impose no burden on the U.S. taxpayer except for:

--The cost of facilities acquired for national
defense.

--Interest on (1) interest capitalized during
construction of the Canal and (2) the U.S.
investment in the Canal Zone Government.

--Extraordinary expenditures on losses incurred
through directives based on national policy
and not related to the Company's operations.

The Company is not legally required to reimburse the
U.S. Government for certain other costs incurred annually on
behalf of the Canal organization. Comments on these costs,
which totaled over $2.1 million in fiscal year 1977, are pre-
sented below.

Annuity to Republic of Panama

Article I of the 1955 treaty between the United States
and the Republic of Panama increased the annual annuity pay-
able to Panama from $430,000 to $1,930,000. It also required
adjusting the annuity as the relationship between the U.S.
dollar and gold changed; in accordance with this, the annuity
was increased to $2,328,200 in fiscal year 1974 and has
remained the same through fiscal year 1977.

The U.S. Treasury pays the annuity from appropriations
received by the Department of State. However, title 2, sec-
tion 62 (g) of the Canal Zone Code, requires the Company to
reimburse the U.S. Treasury for the original annuity of
$430,000 plus adjustments. Thus, the Company's portion of
the annuity paid in both fiscal years 1976 and 1977 was
$518,718; the remaining $1,809,482 was borne by the U.S.
Government in each year. Total annuity payments from U.S.
Government funds were more than $34.8 million through fiscal
year 1977.

Recurring annuities and compensation
payments to certain former employees

Construction annuities and injury and death compensa-
tions are paid annually to certain employees of predecessor
agencies of the Canal organization. During fiscal year 1976,
the transition quarter, and fiscal year 1977, these payments
amounted to $902,987 and were made from funds provided by
other U.S. Government agencies.

Construction annuities are paid by the U.S. Civil
Service Commission to U.S. citizens (and their widows)
who helped to construct the Canal between 1904 to 1914.
These annuities are paid pursuant to the act of May 29,
1944 (58 Stat. 257), as amended.

The Company pays injury and death compensations to
employees (and their dependents) of predecessor agencies
of the Canal organization. It is reimbursed for these
payments by the U.S. Department of Labor.

As shown below, payments totaled $58,263,164 through
fiscal year 1977.

Injury
Construction and death
Period annuity compensation Total

Through fiscal
year 1975 $51,565,991 $5,794,185 $57,360,176

Fiscal year 1976 302,476 135,480 437,956

Transition quarter 62,962 34,354 97,316

Fiscal year 1977 226,647 141,069 367,716

Total $52,158,076 $6,105,088 $58,263,164

EQUITY OF THE U.S. GOVERNMENT

As of September 30, 1977, the U.S. Government had
invested $1,921 million 1/ to facilitate the operation of
the Panama Canal as an international public utility. At
the same time, it had recovered about $1,168 million 1/,
leaving an unrecovered investment of $75-3.1 million. This
is an increase of $16.7 million since June 30, 1975.

Of the $753.1 million unrecovered, $577.8 million (see
schedules 1 and 10) is regarded as the U.S. investment in
the equity of the Panama Canal enterprise. Of the remaining
$175.3 million, $128.9 million represents U.S. investment
prior to the reorganization of the enterprise in 1951.

Recovery of a large part of the $175.3 million
is precluded by specific congressional actions. For
example, specific laws exempt interest charges on capital
invested in the Canal Zone Government and on the Thatcher
Ferry Bridge, which totalled $57.4 million at September 30,
1977. Therefore, the interest costs for these exempt items
have not been recovered. Also, under the 1955 Treaty and
other Treaty commitments, the United States has transferred
property valued at about $34.7 million to the Republic of
Panama without reimbursement.

Return of U.S. Government investment

The Company currently is not required to make regular
repayments of the U.S. investment. Dividends are declared
only when the Board of Directors determines that funds in

1/These amounts do not include $868 million in appropri-
ations made for Canal Zone Government operations, since
they are merely advances that are returned to the U.S.
Treasury.

excess of working capital and capital requirements are
available.

Since its incorporation in 1951, the Company has paid
$40 million in dividends, with the last payment in 1969.
Reimbursement for the Canal Zone Government operating costs,
including depreciation, is made to the U.S. Treasury annu-
ally, which results in a systematic recovery of the U.S.
investment in the Canal Zone Government.

Neither the new Treaty nor the draft implementing
legislation contain provisions concerning repayment of the
unrecovered investment. Thus, if any of it is to be re-
covered over the life of the Treaty, the extent and method
of repayment should be prescribed by law; a major consid-
eration is the extent to which the shipper and the taxpayer
should share the cost of the unrecovered investment.

Although only $40 million has been recovered in divi-
dends, about $291.6 million in interest on the net direct
investment of the U.S. Government has been paid to the U.S.
Treasury since 1951. According to the draft legislation
for implementing the new Treaty, the requirement to pay
this would be eliminated; it was considered that eliminating
this obligation would be needed to help make the new Commis-
sion self-sustaining. This matter is still open, however,
due to a reservation adopted by the U.S. Senate while con-
sidering the Treaty for ratification. In essence, the
reservation provides that, unless otherwise enacted by the
U.S. Congress, the Panama Canal Commission will be obligated
to continue to pay to the U.S. Treasury the cost of interest
on the U.S. Government investment.

ACCOUNTING CHANGES

The Company's Board of Directors approved a change in
accounting policy beginning in fiscal year 1976, under which
the Company exercised its legal right (2 C.Z.C., section 62)
to defer payment to the U.S. Treasury of certain unearned
costs included in operations. The method of accounting for
these deferred payments, which represent costs not earned
and therefore recoverable from subsequent earnings, is in-
cluded in footnotes 1 and 3 to the financial statements. We
concur in this change in accounting policy.

Before fiscal year 1976, net income or loss each year
was recorded as an increase or decrease of earned capital
reinvested in conformity with generally accepted accounting

13

36-736 0 79 4

principles. About $21.3 million of losses had been so
charged to earned capital reinvested for fiscal years
1973 through 1975. Withholding the payments to the U.S.
Treasury for fiscal year 1976 and the transition quarter,
however, required the Company to regard the unearned costs
as deferred charges to be recovered from future earnings.
This is in conformity with generally accepted accounting
principles as applied to a rate-regulated enterprise and is
consistent with the Company's treatment of other costs to
be recovered from future operations through the rate-making
process.

The amount deferred for the two periods totaled
$9.3 million; $4.5 million of this amount was recovered
in fiscal year 1977 and $4.8 million in fiscal year 1978.
The total was paid into the U.S. Treasury during these
years.

The accounting policy change was not implemented
until fiscal year 1976, although the Company incurred
consecutive annual operating losses beginning in fiscal
year 1973 and extending through the transition quarter
ending September 30, 1976. Losses totaled $30.6 million
during the period; $21.3 million prior to fiscal year
1976, when the policy change was implemented, and $9.3
million subsequently.

As reported by the Company in footnote 3 to its fin-
ancial statements, net income or loss was recorded before
implementation of the policy as an increase or decrease
of earned capital reinvested. As shown below, this re-
sulted in earned capital decreasing from $196.7 million
at the end of fiscal year 1972 to $175.4 million at the
end of fiscal year 1975. The table also shows what the
effect on earned capital reinvested would have been under
the prior policy.

Net income Earned capital reinvested under
Fiscal year or loss prior policy new policy
---------------(000 omitted)---------------

1972 $1,247 $196,720
1973 -1,327 195,393
1974 -11,798 183,595
1975 -8,219 175,376
1976 -7,357 168,019 $175,376
Transition
quarter -1,946 166,073 175,376
1977 4,463 170,536 175,376

As shown, by deferring losses recoverable from subse-
quent earnings, earned capital reinvested is not reduced.
As long as this policy is applied, earned capital rein-
vested will not be reduced. It will, however, increase due
to net income once the outstanding loss deferrals have been
fully recovered. This should occur in fiscal year 1978,
because, as reported in footnote 3, the balance of the loss
deferral ($4.8 million) has been recovered and paid into the
U.S. Treasury during that fiscal year.

The Company changed its method of accounting beginning
in fiscal year 1976, under which the accrued liability for
employees' leave will be stated on an actual rather than
estimated basis. As stated in footnote 3 to the Company's
financial statements, this change, with which we concur,
provides a more accurate matching of revenues and expenses
on a fiscal year basis.

The change decreased the Company's liability and net
loss in fiscal year 1976 by about $1.3 million, of which
about $0.9 million was applicable to operations of prior
years. The Company's net loss was further decreased by
about $0.6 million, representing the effect of the change
on the net cost of the Canal Zone Government, an operating
cost borne by the Company. Of this amount, about $0.3 mil-
lion was applicable to operations prior to fiscal year 1976.

TOLL RATE CHANGES AND OTHER ECONOMIC
CONDITIONS AFFECTING TOLL REVENUE

The Company's principal source of revenue is tolls
collected from vessels passing through the Canal. The
following table shows the results of transit operations
for the fiscal periods 1974 through 1977.

Number of Toll
Fiscal year, transits Tons of revenue
(note a) (note b) cargo (note c)
(millions)
1974 15,269 149.7 $121.3
1975 14,735 140.6 143.3
1976 13,201 117.4 135.0
Transition
quarter 3,313 30.9 35.5
1977 13,087 123.2 164.7

a/ Fiscal years ended on June 30 for 1974 through 1976;
transition quarter included July 1 through September 30,
1976; fiscal year ended September 30 for 1977.

b/ Includes Colombian and Panamanian Government vessels
and ships transiting for repairs.

c/ Toll revenue equals tolls and toll credits.

The March 1976 changes in the vessel measurement rule,
November 1976 toll rate increase, North Slope crude oil
transits, and an expected modest increase in basic transits
have had or will have a direct impact on the transit opera-
tions.

Effective March 23, 1976, changes in the rules of meas-
urement increased the average tolls paid by vessels using
the Canal by 4.5 percent. The rules changes adopted by the
Company, subject to approval by the U.S. President, would
have increased toll payments by an estimated average of
9 percent, but the President withheld approval of a proposed
new rule which would have included space occupied by deck
cargo in net tonnage. The changes in measurement rules did
not result in uniform increases in tolls'paid by various
types of vessels. The average amount of the increases var-
ied from 0.9 percent for dry-liquid bulk carriers to 8.5 per-
cent for general cargo ships and 27.7 percent for passenger
vessels.

Effective November 18, 1976, rates of tolls were
increased as shown on the next page.

Old New Amount of
rate rate increase

Per Panama Canal net ton:

Laden $1.08 $1.29 $0.21

Ballast .86 1.03 .17

Per displacement ton .60 .72 .12

Crude oil from Alaska's North Slope was first shipped
through the Canal on August 31, 1977; during June 1978,
these transits averaged 3.1 daily with average daily tolls
of about $87,000. Vessels transiting from the Atlantic to
the Pacific are in ballast (empty). These vessels receive
Alaska crude oil from super tankers anchored off the coast
of Panama in The Bay of Parita and then transit to the
Atlantic laden. Daily average transits consider both
ballast and laden vessels.

Based on shipments through June 30, 1978, the Company
estimated that toll revenue from North Slope crude oil
traffic during fiscal year 1978 would be about $20 million.
An International Research Associates' study dated January
1978 estimated that such 1978 traffic would produce about
$19.8 million in toll revenue, or 11 percent of the total
estimate of $182.3 million. GAO agrees that this is a
reasonable estimate.

INFLATION-ADJUSTED STATEMENTS

Certain financial statements of the Canal organization
which were presented on the conventional basis of histori-
cal costs have been restated to show the impact of changed
price levels on financial condition and the results of oper-
ation (schedules 1A, 2A, 6A, and 7A). Although these sup-
plementary statements are based on the conventional state-
ments, neither we nor the Company's General Audit Division
have audited them. We have, however, 'reviewed and concurred
with the concepts and methods employed in their preparation.

Historical dollars have been restated in terms of pur-
chasing power at the end of fiscal year 1977. The change
in the value of money has been measured by using the Gross
National Product Implicit Price Deflators provided by the
U.S. Department of Commerce, a generally accepted index.
Replacement costs were not considered.

The restatement of revenues and expenses reflects,
except for depreciation, the change in purchasing power
of the dollar during the fiscal year. Depreciation was
restated based on the investment in the plant, reflecting
the age of plant in service. Plant and equipment and
the investment of the United States were restated from
July 1, 1951, the date the Panama Canal Company was organ-
ized, although, in fact, the major portion of the plant
facilities, e.g., locks and canal, came into service in
1914.

According to the Accounting Principles Board's State-
ment Number 3:
"* * comparison of current prices during and
prior to World War II would probably not be
reliable enough for accounting purposes because
of the dissimilarity of goods and services
exchanged then and now. * 1945 is probably
the earliest point that offers reasonable
comparability of goods and services with later
periods. All assets acquired, liabilities
incurred, or owners' equity accumulated prior
to 1945 should generally be treated as if they
had originated during 1945."

Accordingly, the restated value of the Company's assets and
related depreciation at September 30, 1977, are necessarily
understated.

While the statements are subject to refinement, they
are sufficient to provide an understanding of the impact of
inflation on the Company's financial condition and operation
results.

CHAPTER 3

TREATY IMPACT ON
CANAL OPERATING COSTS

Provisions of the new Panama Canal Treaty generally pro-
hibit the Panama Canal Commission from providing commercial
services to private individuals or organizations.

The Treaty also calls for dissolving the present Canal
organization which provides education, police protection,
postal and custom services, and health and medical services.
This will have a substantial effect on the organization and
staffing of the new Panama Canal Commission.

Upon entry into force of the Treaty, some of the discon-
tinued services will be transferred to Department of Defense
agencies and others will be assumed by the Republic of Panama
or private persons subject to its authority. Functions
necessary for the efficient management, operation, and
maintenance of the Canal will continue for this purpose only.

This chapter highlights the impact some of these changes
may have upon the cost of Canal operations, employment levels,
and other related issues. The data presented is based on
our review of the Canal Organization's Treaty implementation
plan. We evaluated the methodology and reasonableness of
the Company's planning assumptions, mission statements, and
impact or actions required.

COMPANY'S TREATY IMPLEMENTATION PLAN

On October 17, 1977, the Panama Canal Company and Canal
Zone Government initiated a study to assess the impact of
the Panama Canal Treaty on the cost of operating the Panama
Canal and the level of toll rates required for the Canal to
operate on a self-sustaining basis. This was done to ensure
that preparations would be well underway, should both Treaties
be ratified at an early date.

A Treaty Planning Committee composed of top Company
officials was provided with data by all operating units con-
cerning organizational, functional, staffing, and facility
changes determined necessary as a result of the Treaty. Bud-
get projections were submitted as well. Formal input from
Panamanian Government or other organizations of the Republic
of Panama was not obtained.

The Committee established the planning period, general
assumptions, and guidelines necessary to ensure uniformity
in approach and completeness of the implementation plan.

The plan covers three important dates or periods: (1)
the date of Treaty ratification, (2) the following 6-month
period until the Treaty enters into force, and (3) the
30-month transition period after the Treaty enters into
force. The plan is also based on a number of assumptions
which, if not realized, could materially affect results;
foremost among them are that:

1. The Treaty will enter into force on
October 1, 1978.

2. Both parties will comply with the imple-
mentation schedules imposed by the Treaty.

3. The period to be planned for commences
with the exchange of instruments of rati-
fication and will terminate 3 years later.

4. The organization of the Panama Canal
Commission will be patterned after that
of the Panama Canal Company to the extent
possible.

The Company's estimate assumed the Treaty would enter
into force in fiscal year 1979, however, with the passage of
Reservation Number 4 to the Treaty Resolution for Ratifica-
tion it now appears likely that the Treaty will not enter
into force until fiscal year 1980. Nevertheless, the factors
which result in increased or decreased costs or revenues
appear to be about the same whether the Treaty enters into
force in fiscal 1979 or 1980.

The study represents a draft proposal, and some revisions
have been made and others are anticipated as further review is
completed by the Company.

CHANGE IN SCOPE OF OPERATION
WILL RESULT IN OPERATING DEFICITS

The plan estimates that in the first year of operation
under the Treaty, gross costs of operating the Canal would be
reduced by about $170.7 million because certain Company and
Government activities and the obligation to pay interest on
the U.S. investment in the Canal would be eliminated. Since

many of the activities to be eliminated are income-producing,
however, there would also be a loss of income during the period
of about $142.1 million, for a net reduction of $28.6 million.

This, however, will be more than offset by (1) required
payments to Panama of about $66.8 million and (2) Treaty
transition costs of $7.8 million. Thus, the net result
would be to increase the cost of operations the first year
(1980) by $46 million.

It was also estimated that, had there been no Treaty,
a profit of $9.3 million would have been realized in the
first year. Adjusting the $46 million by this amount pro-
duces an estimated net operating deficit of $36.7 million
in the first year of operation under the Treaty.

The plan also projected the following deficits for
fiscal years 1981 through 1984.

Expenses not covered
by revenues
(millions)

1981 $38.2
1982 36.2
1983 39.1
1984 59.0

As a result of the above deficits it is estimated that,
for the Commission to remain self-sustaining, toll rates
would have to be increased by 19.5 percent under the first
year of the Treaty. This increase would be sufficient to
cover expenses through 1982, but further increases would
be required to provide an additional $2.9 million in 1983
and $23.2 million in 1984 to cover projected deficits.

OTHER TREATY-RELATED ISSUES MAY
HAVE AN IMPACT ON OPERATING COSTS

The following issues have not been fully resolved by
the implementing legislation or are subject to uncertainties
which make it difficult to assess their impact on the fin-
ancial operations of the Canal.

Treaty impact on personnel
costs

Several Treaty-related costs must be borne by the
Commission or other Federal agencies because of personnel
changes. These changes involve the transfer of former Canal
organization employees to other Federal agencies, recruiting
qualified people to operate the Canal, early retirements,
and reductions in force.

Transfers to other agencies

The Federal agencies that acquire employees from the
Canal organization in accordance with the Treaty will
assume the liability for the cost of accrued leave and/or
repatriation of these employees. Since this cost has
generally been recovered through tolls from shippers
using the Panama Canal, the Commission will retain funds
equal to the estimated liability and reduce this liability
with a concurrent increase in capital. Therefore, the
burden of the costs when paid in some future year will
shift from the shipper to the taxpayer because the acquir-
ing Federal agency will have to request appropriations to
cover the payments.

One alternative would be to have the Company deposit
in the U.S. Treasury an amount equal to the estimated
costs of accrued leave and repatriation of transferring
employees so that this expense will not be passed to
the American taxpayer. Company officials have advised us
that a policy has not been formulated on this matter.
Current draft legislation does not address this issue.

Recruitment and personnel levels

Once the Treaty enters into force, the living and
working environment for the Commission employees will
change significantly and may adversely affect the Commis-
sion's ability to retain or recruit qualified personnel
for key positions. For example, the turnover for U.S.
employees was reported as considerably higher in 1976 and
1977 than in the past. This was believed to be due partly
to Treaty-related uncertainties and a general fear of the
change in benefits and living and working conditions that
might result.

The Company estimates that the total work force will
decline from 14,563 in fiscal year 1979 to about 8,055 in
1984. U.S. citizen employment will decline by 1,836 during
the same period, of which 1,205 will be transferred to other
Government agencies. Non-U.S. citizen employment will decline
by 4,672, of which 1,515 are subject to transfer to other U.S.
Government agencies.

The Company has identified 1,300 positions as essential
for efficient continuity of operations and management under
the new Treaty, including skilled craft, technical, profes-
sional, supervisory, and managerial positions. About 400
positions are considered as nonrecruitable or nontransferrable
because they are not readily available from local sources or
because they require extensive on-the-job training or experi-
ence. Many of these positions have been difficult to fill in
the past. Unless implementing legislation adequately addres-
ses the means of retaining and recruiting qualified personnel
for key positions, the efficiency and effectiveness of Canal
operations may be adversely affected.

Early retirement and
reductions in force

The cost of early retirement and reduction in force
actions that would occur upon entry into force of the Treaty
could be significant. The Company, because of uncertainties
concerning the number of people that may be affected, did not
estimate the cost. However, a preliminary estimate by the
Civil Service Commission calculated the cost of early retire-
ment at $135 million, to be financed by congressional appro-
priations. Implementation of the Treaty will displace approxi-
mately 6,500 U.S. and non-U.S. citizen employees from their
existing employment with the Company. However, it is not
known how many employees will transfer to other agencies,
retire early, or seek other employment. Most U.S. citizen
employees would be eligible for repatriation, and some non-
U.S. citizens would be eligible for repatriation back to
their place of hire.

Elimination of interest payments
to Treasury on U.S. investment

The Company is currently required to pay interest to
the U.S. Treasury on a portion of the U.S. investment in
the Company. The interest-bearing investment amounts to

about $319 million as of September 30, 1977, on which the
Company paid $18.1 million in interest expense for fiscal
year 1977. Total interest payments to the Treasury, since
the establishment of the Company in 1951 through Septem-
ber 30, 1977, have been about $292 million.

Although the Treaty makes no mention of interest
payments, the Company, based on knowledge that draft
legislation to implement to Treaty would eliminate the
requirement for an interest payment to Treasury, did not
consider such payment in its estimates. The payment is
projected to be about $20 million for the first year
under the Treaty, However, in view of Reservation
Number 6 enacted by the Senate in the Treaty ratification
processes, it appears less likely that interest expense
will be foregone.

Reservation 6 to the Treaty, adopted by the Senate
90 to 10 during Treaty ratification deliberations, pro-
vides that, unless otherwise directed by congressional
legislation, the Panama Canal Commission be obligated
to reimburse the U.S. Treasury for the interest cost on
the net direct investment in the Panama Canal Commission.

Eliminating the interest payments will relieve some
of the pressure to increase toll rates, but it will also
reduce Treasury receipts and will, thereby, indirectly
be a cost to the U.S. taxpayer. If the interest payments
to Treasury are required to be made, the estimates of
cost under the Treaty are understated. How much the
interest expense will be depends on the interest rate
to be determined by the Treasury and the interpretation
of what comprised the net direct investment.

CHAPTER 4

SCOPE OF EXAMINATION
AND OPINION ON FINANCIAL STATEMENTS

We have examined the Company's Balance Sheet as of
September 30, 1977, September 30, 1976, and June 30, 1976,
and its related statements of operations, changes in invest-
ment of the United States, and statement of changes in
financial position for the fiscal years and the transition
quarter then ended.

Because the Company is required to assume the net cost
of the Canal Zone Government as an operating expense and
because it acts as an agent for the Canal Zone Government in
advancing funds for its monthly operations, construction, and
other activities and collecting its revenue, we also examined
the Canal Zone Government's Balance Sheet as of September 30,
1977, September 30, 1976, and June 30, 1976, and its related,
statements of operations and changes in the investment of the
United States for the fiscal years and the transition quarter
then ended.

We made our examination in accordance with generally
accepted auditing standards and, accordingly, included such
tests of the accounting records and such other auditing pro-
cedures as we considered necessary in the circumstances.
During our examination, we gave consideration to the financial
audit work performed by the Company's internal auditors.
Because of the extent of coverage and adequacy of the internal
auditors' work, we were able to limit the extent of our tests
of the Canal organization's accounting records.

PANAMA CANAL COMPANY

In our opinion, subject to uncertainties relating to the
implementation of the 1977 Panama Canal Treaty as described
in note 12 to the financial statements, the accompanying fin-
ancial statements (schedules 1 through 5) present fairly the
financial position of the Panama Canal Company at September 30,
1977, September 30, 1976, and June 30, 1976, and the results of
its operations, changes in the investment of the United States,
and statement of changes in financial position for the fiscal
years and transition quarter then ended, in conformity with
generally accepted accounting principles which--except for the
accounting policy changes described in note 3 to the financial
statements with which we concur--have been applied on a con-
sistent basis.

CANAL ZONE GOVERNMENT

In our opinion, subject to the uncertainties relating
to the implementation of the 1977 Panama Canal Treaty as
described in note 11 to the financial statements, the
accompanying financial statements (schedule 6 through 13)
present fairly the financial position of the Canal Zone
Government at September 30, 1977, September 30, 1976,
and June 30, 1976, and the results of its operations and
changes in the investment of the United States for the
fiscal years and transition quarter then ended, in con-
formity with the principles and standards of accounting
prescribed by the Comptroller General--except for the
accounting policy change described in note 3 to the fin-
ancial statements with which we concur--have been applied
on a consistent basis.

FINANCIAL STATEMENTS

PANAMA CANAL COMPANY
Balance Sheet
September 30, 1977, September 30, 1976,

and June 30, 1976

ASSETS
PROPERTY, PLANT AND EQUIPMENT:
At cost.;.............................
Less accumulated depreciation
and valuation allowances
(Notes 4 and 5)................ ......

CURRENT ASSETS:
Cash (Note 6):
Fund balance in U.S. Treasury
checking account....................
Cash in commercial banks, on
hand, and in transit................

Accounts receivable, less allowance
for doubtful accounts of $8,936,071;
$8,027,347, and $7,591,989, respec-
tively (Note 7). .....................

Inventories:
Merchandise held for resale.........
Materials and supplies, less
allowance for obsolete and
excess inventory of $574,776,
$608,611, and $624,177,
respectively........................

Other current assets..................

OTHER ASSETS:
Deferred charges:
Retirement benefits to certain
former employees...................
Other...............................

Unearned costs recoverable
from subsequent earnings
(Note 3a)............................

TOTAL ASSETS............................

1977

$892,460,659

383.408,880

509.051,779

44,500,116

2,642,598

47,142,714

12,436,576

9,818,261

16.755.107

26,573,368

1,579.378

87,732,036

.9665,000
2,408,222

4.840,065

16.913.287

$613.697.102

Transition
Quarter

$868,843,595

367.074.799

501,768,796

43,449,723

2.707.036

46,156,759

9.918,228

8,664,311

15.649.021

24,313,332

1.465,798

81,854,117

10,181,000
3,205,901

9.302,768

22,689.669

$606.312.582

1976

$864,566,192

362.753.503

501,812.689

41,307,402

3.375.279

44,682,681

10.809.185

8,692,150

16,452,525

25,144,675

427,432

81,063.973

10,561,000
3,489,802

7,356.656

21,407,458

$604.284_.12

The accompanying notes are an integral part of this statement.

SCHEDLE 1

PANAMA CANAL COMPANY
Balance Sheet
September 30, 1977, September 30, 1976,

LIABILITIES

1977

SCHEDULE 1

and June 30, 1976

Transition
Quarter

INVESTMENT OF THE UNITED STATES:
Contributed capital:
Interest-bearing (5.677%,
5.591%, and 5.199%,
respectively)......................
Non-interest-bearing.................
Earned capital reinvested..............

CURRENT LIABILITIES:
Accounts payable:
U.S. Government agencies............
Other................................

Accrued liabilities:
Employees' leave (Note 3b)...........
Salaries and wages..................
Retirement benefits to certain
former employees....................
Employees' repatriation..............
Claims for damages to vessels.......
U.S. Treasury (Note 8)..............
Other...............................

Other current liabilities.............

OTHER LIABILITIES AND RESERVES:
U.S. Treasury (Note 3a)..............
Retirement benefits to certain former
employees ...........................
Employees' repatriation .............
Lock overhauls.......................
Casualty losses (Note 9)............
Other (Note 7).......................

TOTAL LIABILITIES......................

$318,905,112
18,051,630
175,376,040

512,332,782

4,591,326
5_113,677

26,535,663
5,340,257

1,460,000
895,000
10,604,305
9,040,085
2,325,690

56,201,000

1;459,320

67,365,323

$318,898,623
18,051,630
175,376,040

512,326,293

4,565,023
4 319 997

23,083,404
4,318,530

1,431,000
881,000
6,266,588
7,967,858
2,115,731

46,064,111

902,319

55,851,450

4,840,065 9,302,768

8,205,000
6,862,000
8,162,669
750.987
S5,178,276

,33,998,997

8,750,000
6,959,000
7,620,516
896,006
4.606,549

38,134,839

$613,697102 $60L_6,31282

$319,005,661
18,051,630
175,376,040

512,433,331

6,089,069
3,802,635

9,891,704

23,018,730
3,573,566

1,457,000
904,000
6,443,788
7,838,987
2,298,259

45,534,330

1,183,714

56,609,748

7,356,656

9,104,000
6,850,000
6,880,319
591,009
4,459,057

35.241,041

$604,284.120

The accompanying notes are an integral part of this statement.

29

36-736 0 79 5

1976

SCHEDULE 2 PANAMA CANL COMPANY SCHEDULE 2
Statement of Operations and Earned Capital Reinvested
Fiscal Year Ended September 30, 1977, Transition Quarter Ended September 30, 1976,
and Fiscal Year Ended June 30, 1976

OPERATING REVENUES:
Tolls............................
Other..........................
Total operating revenues......

OPERATING EXPENSES:
Maintenance of channels and
harbors.......................
Navigation service and control..
Locks operation.................
General repair, storehouse,
engineering and maintenance
services......................
Marine terminal operations.....
Transportation and utilities....
Retail and housing operations,
including cost of goods sold
of $27,532,161, $6,056,297,
and $26,068,450, respectively..
General and administrative......
Interest.......................
Net cost of Canal Zone Government
Other.........................
Total operating expenses......
Net loss before recognition of
cumulative effect of change in
accounting for employees' leave
liability.......................
Cumulative effect on prior years of
change in accounting for employees'
leave liability (Note 3b):
Company operations..........
Net cost of Canal Zone Government

NET REVENUE OR (UNEARNED COSTS)
(Note 3a).......................
EARNED CAPITAL REINVESTED:
Unearned costs (Note 3a):
Transferred to other assets...
Recovered from operations.....

Balance at beginning of period..

Balance at end of period........

1977

?164,685,365
121,755,040
286,440,405

23,947,616
35,779,842
22,588,537

7,408,408
18,232,917
"23,112,753

47,928,640
45,652,076
18,106,470
21,037,302
181183.142
281,977,703

Transition
Quarter

$ 35,465,477
29.464,616
64.930,093

6,257,884
8,188,699
5,325,635

1,973,793
4,342,212
5,882,240

10,853,428
11,223,615
4,457,359
4,463,548
3,907,792
66,876,205

4,462,702 (1,946,112)

(4,462,702)

175,376,040

$175,376,040

The accompanying notes are an integral part of this

1,946,112

175,376,040

$175,376,040

statement.

1976

$134,987,867
115,124,255
250,112,122

17,506,636
32,499,795
21,901,454

7,527,910
16,255,821
19,884,866

45,349,348
44,369,569
16,627,119
22,649,145
14,147,763
258 719 426

(8,607,304)

938,715
311,933

(7,356,656)

7,356,656

175,376,040

$175,376,040

SCHEDULE 3 PANAMA CANAL COMPANY
Statement of Contributed Capital
Fiscal Year Ended September 30, 1977, Transition
September 30, 1976, and Fiscal Year Ended June

Balance June 30, 1975......................

Plant reactivation and transfers, net...

Balance June 30, 1976......................

Plant reactivations and transfers, net...

Balance September 30, 1976 ................

Plant reactivations and transfers, net....

Balance September 30, 1977..... ...........

Interest-
bearing

$318,866,812

138.849

319,005,661

(107.038)

318,898,623

6.489

4318,905,112

SCHEDULE 3

Quarter Ended
30, 1976

Non-interest-
bearing

$18,051,630

18,051,630

18,051,630

$18,051 630

The accompanying notes are an integral part of this statement.

SCHEDULE 4

1977

Transition
Quarter

SOURCE OF FUNDS:

From Operations:
Revenue ........... ....................
Less operating expenses:
Net cost of Canal Zone Government.....
Interest on net direct investment.....
Annuity to Republic of Panama..........
Other expenses.........................
Extraordinary credits prior years'
leave liability adjustment............
Total operating expenses ..........

Net revenue or (unearned costs)
(Note 3a)..........................

Add transactions not requiring outlay of
funds:
Deferred payments to U.S. Treasury
(Note 3a)..............................
Depreciation.............................
Provision for Canal lock overhauls......
Provision for casualty losses............
Assumption of liability to Canal Zone
Government for doubtful accounts
receivable, net of amounts written off.
Amortization and adjustment of deferred
charges................................

Total funds from operations.........

Net change in working capital other
than cash...............................

TOTAL..............................

APPLICATION OF FUNDS:

Canal lock overhauls expenditures..........
Casualty losses...........................
Capital expenditures.......................
Other...................................
Increase in cash..........................

TOTAL .............................

$286,440,405

21,037,302
18,106,470
518,718
242,315,213

281,977,703

$64,930,093 $250,112.122

4,463,548
4,457,359
129,680
57,825,618

66,876,205

4,462,702 (1,946,112)

(4,462,702)
18,895,979
2,530,000
5,154,255

571,726

956.477

28,108,437

6.621.911

$ 34,730,348

$ 1,987,846
5,299,274
26,431,952
25,320
985.956

$ 34.730.348

1,946,112
4,701,051
744,000
549,384

147,492

364,179

22,649,1 5
16,627,119
518.718
218,924,444

(1,250.648)
257,468.778

(7,356,656)

7,356,656
18,377,329
2,975,000
2,190,999

558,061

894.545

6,506,106 24,995,934

(74.363)

$ 6.431.743

$ 3,804
244,386
5,087,214
(377,738)
1.474,077

$ 6,431.743

1,177,405

$ 26,173,339

$ 2,433,647
2,057,5:3
19,989,32
(853,000)
2.545.742

$ 26.173,339

The accompanying notes are an integral part of this statement.

1976

SCHEDULE 4

PANAMA CANAL COMPANY
Statement of Changes in Financial Position
Fiscal Year Ended September 30, 1977, Transition Quarter
Endtd September 30, 1976 and Fiscal Year Ended June 30, 1976

SCHEDULE 5

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PANAMA CANAL COMPANY

Notes to Financial Statements

1. Summary of Significant Accounting Policies.

The application of generally accepted accounting principles to the
Panama Canal Company, a Government corporation established by the Congress
comparable to-a public utility, determines the manner in which costs are
recognized. The basis for toll rates is prescribed in Section 412(b) of
Title 2 of the Canal Zone Code, which provides:

Tolls shall be-prescribed at rates calculated to cover, as
nearly as practicable, all-costs of maintaining and opera-:
ting the-Panama Canal, together with the facilities and
appurtenances related thereto, including interest and
depreciation, and an appropriate share of the net costs of
operation of the agency known as the Canal Zone Government.

Under Section 62 of Title 2 of the Canal Zone Code, certain payments to
the U.S. Treasury for the cost of interest, a portion of the annuity, and
net costs of the Canal Zone Government included in.costs of operation are
required to be-made annually to the extent earned, and if not'earned shall
be made from-subsequent-earnings. The amount for recovery from subsequent
earnings is transferred from "Earned Capital" to an account within the
"Other Assets" classification. To the extent subsequent annual revenue
realized exceeds annual costs incurred, the amount of unearned costs
recovered is charged back to "Earned Capital" and equivalent payment made
to the U.S. Treasury.

a. Property, plant and equipment. Property, plant and equipment
are recorded.at cost or, if acquired from.another Goverpment agency, at
original cost to such agency. Administrative-and other general expenses
and the:cost of funds used during construction are not capitalized. The
cost 0f minor items-of.property, plant and equipment is charged to expense.

b. Depreciation. 'Depreciation is provided using a straight-line
method applied on a composite basis. This method provides straight-line
depreciation plus additional annual depreciation, identified as composite,
to provide for premature plant retirements.

c. Accounts receivable. An-allowance for losses arising from
uncollectible accounts receivable is provided by a charge to expense.

d. Inventories. Operating materials and supplies are restated
.annually at last receiptccost. An.allowance to reflect the estimated cost
of obsolete-and excess materials and supplies is established by an annual
charge to expense. Merchandise held for resale is stated at average cost.

&. Retirement benefits. Employer payments to the contributory
Civil Service Retirement System covering substantially all employees are
.charged to expense. The Company has no liability for future payments to
employees under this system.

Non-United States citizens employees who retired prior to
October 5, 1958 arc not covered by the Civil Service Retirement System but
do receive benefits under a separate annuity plan. The amounts of the pay-
ments made under this annuity plan are recorded as a current-year expense.
The liability of the Company for future annuity payments to these former
employees or their eligible widows is reflected in the Balance Sheet as
"Retirement Benefits to Certain Former Employees" and an equal amount is
recorded as a Deferred Charge.

f. Deferred costs. The incremental costs of major systems and
engineering studies, and extraordinary maintenance costs, except for lock
overhauls, are deferred until completion and then amortized on a straight-
line basis over periods not exceeding five years.

g. Reserve for lock overhauls. A reserve is provided through an
annual charge to expense to cover the estimated cost of periodic lock
overhauls.

h.. Reserve for casualty losses. A reserve is provided through
an annual charge to expense to cover the estimated cost of marine accidents,
fire, and other casualty losses.

2. Transition Quarter.

The Budget and Impoundment Control Act, Public Law No. 93-344,
established a new fiscal year beginning October 1 and ending September 30,
effective with fiscal year 1977 (October 1, 1976 through September 30, 1977).
The Act also established a transition quarter of July 1 through September 30,
1976 as a bridge between fiscal years 1976 and 1977. These statements
report the financial condition and results of operations for fiscal year
1977, the transition quarter, and fiscal year 1976;

3. Accounting Changes During Fiscal Year 1976.

a. Beginning in fiscal year 1976, the Company exercised its right
under Section 62 of Title 2 of the Canal Zone Code to defer payment to the
U.S. Treasury of certain liabilities to the extent not earned from current
operations. The method of accounting for the deferred payments and the
unearned costs recoverable from subsequent earningsis described in Note 1.

Before fiscal year 1976 the net income or loss each year was
recorded as an increase or decrease of earned capital reinvested in
conformity with generally accepted accounting principles. About $21.3 million
hnd been so charged to earned capital reinvested for fiscal years 1973
through 1975.

However, the withholding of the payments to the U.S. Treasury
for fiscal year 1976 and the transition quarter required the Company to
regard the unearned costs as deferred charges to be recovered from future
earnings. This is in conformity with generally accepted accounting principles
as applied to a rate-regulated enterprise and is consistent with the Company's
treatment of other costs to be recovered from future operations through the
rate-making process.

Thus, the amount deferred for the two periods totaled $9.3
million. $4.5 million of this amount was recovered in fiscal year 1977
and the balance, $4.8 million, was recovered in fiscal year 1978. The
total was paid into the U.S. Treasury during these years.

The following table illustrates the balances of earned capital
reinvested as they would have been reported if the Company had not changed
its accounting for unearned costs.

Transition
FY 1977 Quarter FY 1976
(In millions of dollars)

Balance at beginning of period $166.1 $168.0 $175.4
Net revenue (unearned costs) 4.5 (1.9) (7.4)

Balance at end of period $170.6 $166.1 $168.0

b. Commencing in fiscal year 1976 the accounting for the accrued
liability for employees' leave was changed from an estimated to an actual
obligation basis. The change was made to properly recognize and disclose
the leave liability and to provide a more accurate matching of revenues and
expenses on a fiscal year basis.

The change decreased the Company's liability and net loss in
fiscal year 1976 by $1,344,526 of which $938,715 was applicable to opera-
tions of prior years. The Company's net loss was further decreased by
$623,831 representing the effect of the change on the net cost of the Canal
Zone Government, an operating cost borne by the Company. Of this amount,
$311,933 was applicable to operations prior to fiscal year 1976.

4. Plant Valuation. Allowances.

Valuation allowances have been established as follows: (a) $14.6
million at September 30, 1977, $14.7 million at September 30, 1976, and
$14.8 million at June 30, 1976 to reduce to usable value the cost of prop-
erty, plant and equipment transferred to the Company from the Panama Canal
(agency) at July 1, 1951, and from other Government agencies subsequent to
that date; (b) $50.9 million at September 30, 1977, September 30, 1976, and
June 30, 1976 to offset interest costs imputed for the original construc-
tion period; and (c) $65.3 million at September 30, 1977, September 30,
1976, and June 30, 1976 to offset the cost of defense facilities and sus-
pended construction projects, the latter being principally the partial
construction of a third set of locks abandoned in the early part of World
War II.

Property, plant and equipment offset by valuation allowances, when
fully or partially reactivated, are reinstated by a reduction in the valua-
tion allowance and by an increase to the interest-bearing contributed
capital account.

5. Depreciation as Percent of Average Cost of Plant.

The provisions for depreciation, expressed as percentages of aver-
age cost of depreciable plant-exclusive of valuation allowances, were 2.52%
for fiscal year 1977, 0.64% for the transition quarter ended September 30,
.1976, and 2.547 for fiscal year 1976.

6. Cash.

The large cash balances are maintained to satisfy solvency require-
ments as defined by Office of Management and Budget instructions on budget
execution. All cash exceeding current operating requirements is kept on
deposit with the U.S. Treasury.

7. Accounts Receivable.

The accounts receivable include doubtful Canal Zone Government
receivables, for which the Panama Canal Company is guarantor, amounting to
$5.2 million at September 30, 1977; $4.6 million at September 30, 1976;
and $4.5 million at June 30, 1976. Corresponding amounts are recorded in
the allowance for doubtful accounts. Other liabilities and reserves
include a liability to the Canal Zone Government equal to these receivables.

8. Accrued Liabilities U.S. Treasury.

Accrued liabilities U.S. Treasury consists of $6.9 million and
$2.1 million for a total of $9.0 million withheld from the U.S. Treasury
to cover Canal Zone Government employees' leave accrual and repatriation
liabilities, respectively, until these amounts are appropriated from the
U.S. Treasury to the Canal Zone Government. This withholding excludes
leave liability of $1.2 million assumed by the Canal Zone Government from
the predecessor agency and $2.2 million repatriation liability incurred
but not accrued prior to 1966. The total leave liability of $8.1 million
and total repatriation liability of $4.3 million is shown in the Canal
Zone Government Balance Sheet.

9. Reserve for Casualty Losses.

The reserve for marine accidents had a debit balance at the end
of fiscal year 1977 which was charged to current year operating expenses.
Charges of $5.3 million during the year to the reserve exceeded the accu-
mulated provision of $4.3 million due to the number and size of ship
accidents for which the Company was responsible. In view of the fiscal
year 1977 experience, the annual rate of accrual was reevaluated and
increased to $6.0 million in fiscal year 1978.

10. Contingent Liabilities and Commitments.

The estimated maximum liability, in addition to liabilities taken
into the accounts, which could result from pending claims and lawsuits was
$8.1 million at September 30, 1977. In the opinion of management and
Company counsel, these pending claims and lawsuits will be resolved with no
material adverse effect on the financial.condition of the corporation.

Commitments under uncompleted construction contracts and unfilled
purchase orders amounted to $26.6 million at September 30, 1977. Of this
amount, $1.3 million in unfilled purchase orders were prepaid. In addition,
the Panama Canal Company is liable for an indeterminable amount with respect
to death and disability payments under the Federal Employees' Compensation
Act.

The Company held as custodian negotiable securities in the face
amount of $6.1 million at September 30, 1977 to guarantee payment by third
parties of their obligations.

Effective May 9, 1969, the Company entered into a 25-year contract
with the Instituto de Recursos Hidraulicos y Electrificacion, an autonomous
agency of the Republic of Panama, for the purchase of electric power to be
produced by that agency. The contract was suspended by mutual agreement
from September 1, 1972 through December 31, 1976, a period of four years and
four months. As of September 30, 1977, the Company's minimum liability over
the remaining period of the contract amounted to approximately $71.3 million.

11. Borrowing Authority.

The Company has authority to borrow funds from the U.S. Treasury
not to exceed $40 million outstanding at any time at interest rates to be
determined by the Secretary of the Treasury. At September 30, 1977 none of
this amount had been borrowed.

12. Uncertainties Which Imoact on Financial Statements.

On September 7, 1977 the President of the United States and the
Chief of Government of the Republic of Panama signed the Panama Canal Treaty
of 1977 and a Treaty Concerning the Permanent Neutrality and Operation of
the Panama Canal. The treaties have been ratified in accordance with the
constitutional procedures of the United States and the Republic of Panama
and will enter into force six calendar.months from the date of the exchange
of the instruments of ratification which shall not be effective earlier
than March 31, 1979, unless legislation necessary to implement the provi-
sions of the Panama Canal Treaty shall have been enacted by the Congress
of the United States of America before March 31, 1979. These treaties will
terminate all existing treaties between the two countries pertaining to the
Panama Canal and produce major changes in the civil authority and the organi-
zation, scope of activities, and ownership of property of the Panama Canal
enterprise.

Until the treaties enter into force, the Panama Canal Company will
continue to operate without material changes in the scope of its activities.
These financial statements, therefore, do not purport to reflect the effect
of the treaties on the assets, liabilities, investment of the United States
Government, or the operating results of the Panama Canal Company.

SCHEDULE 1A

PANAMA CANAL COMPANY
General Price-Level Balance Sheet
September 30, 1977
(Unaudited)

ASSET S

PROPERTY, PLANT AND EQUIPMENT:
At cost.......................................
Less accumulated depreciation and valuation
allowances..................................

CURRENT ASSETS:
Cash:
Fund balance in U.S. Treasury checking
account.. .................. ..............
Cash in commercial banks, on hand, and in .
transit...................................

Accounts receivable net.....................
Inventories:
Merchandise held for resale................
Materials and supplies net................

Other current assets ..........................

OTHER ASSETS:
Deferred charges:
Retirement benefits to certain former
employees.................................
Other......................... ...... .........
Unearned cost recoverable from subsequent
earnings........:............................

TOTAL ASSETS ............................

Historical
Dollars
(Thousands

$892,461

383.409

509,052

44,500

2.643

47,143

12.437

9,818
16 755

26,573

1.579

87,732

9,665
2,408

4.840

16.913

$613 697

General Price-
Level Dollars
of dollars)

$2,094,666

934,171

1.160,495

44,500

2.643

47,143

12,437

9,818
17,107

26,925

1.579

88,084

9,665
3,293

4.840

17 798

$1.266.377

The accompanying notes summarize the methods empl~red in the preparation of
this statement.

PANAMA CANAL COMPANY
General Price-Level Banance Sheet
September 30, 1977
(Unaudited)

SCHEDULE 1A

L i A B.I L I T I E S

1NVEST1ENT OF THE UNITED STATES:
Contributed capital:
Interest-bearing ............................
Non-interest-bearing........................
Earned capital reinvested......................

CURRENT LIABILITIES:
Accounts payable:
U.S. Government agencies.....................
Other.......................................

Accrued liabilities:
Employees' leave...........................
Salaries and wages...........................
Retirement benefits to certain former
employees ..............................
Employees' repatriation.....................
Claims for damages to vessels...............
U.S. Treasury...............................
Other.......................................

Other current liabilities.....................

OTHER LIABILITIES AND RESERVES:
U.S. Treasury...............................
Retirement benefits to certain former
employees...................................
Employees' repatriation......................
Lock overhauls...............................
Casualty losses...............................
Other.........................................

TOTAL LIABILITIES...............................

Historical
Dollars
(Thousands

$318,905
18,052
175,376

512,333

4,591
5,114

9.705

26,536
5,340

1,460
895
10,604
9,040
2,326

56,201

1,459

67.365

4,840

8,205
6,862
8,163
751
5,178

33,999

$613.697

General Price-
Level Dollars
of dollars)

$ 807,303
38,850
315,879

4,591
5,114

9,705

26,536
5,340

1,460
895
10,604
9,040
2,326

56,201

1,459

67,365

4,840

8,205
6,862
10,943
952
5,178

36,980

$1,266 377

SCHEDULE 2A

PANAMA CANALT COMPANY
General Price-Level Income Statement for the Year Ended
September 30, 1977
(Unaudited)

SCHEDULE 2A

Historical
Dollars
(Thousands

General Price-
Level Dollars
of dollars)

Operating revenues.............................
Operating expenses:
Cost of goods sold...........................
Interest......................................
Operating expense............................
Administrative expen:e........................
Net cost of Canal Zone Government............
Depreciation ................................

Operating revenue or (loss)....................
General price-level loss....:..........*.........

Net revenue or (loss) .......................

29,542
18,106
149,045
45,351
21,037
18,896

281,977

4,463

$292,455

30,162
18,486*
152,175
46,303
24,497
41,883

313,506

(21,051)
(2,180)

$123.231)

The accompanying notes summarize the methods employed in the preparation of this
statement.

*Reflects only actual interest paid and no imputed costs of equity capital.

$ 4,463

PANAMA CATAL COMPANY
Notes to Price Level Financial Statements

1. Methods employed in the preparation of the general price-level
financial statements:

a. Historical dollars are restated in terms of purchasing
power at the end of fiscal year 1977. The change in the value of money
has been measured by using the gross national product implicit price
deflators provided by the U.S. Department of Conmerce.

b. The restatement of revenues and expenses, except for
depreciation, reflects the change in purchasing power of the dollar
during the current fiscal year. The restatement of depreciation expenses
for the year is based upon the investment in pToperty, plant and equipment
revalued to. reflect their ages. Property, plant and equipment and the
investment of the United States are restated from July 1, 1951, the date
of reorganization of the enterprise although the major proportion of the
plant facilities, e. g., the Canal itself and the locks, were placed in
service in 1914.

c. The net change in valuation of assets and liabilities,
normally an increase during a period of inflation, is credited to the
investment.

d. Generally accepted accounting principles have been followed
except to reflect the change in the purchasing power of the dollar.

2. Price-level-adjusted cost of property, plant and equipment does not
purport to be replacement cost.

CANAL ZONE GOVERNMENT
Balance Sheet
September 30, 1977, September 30, 1976, and June 30, 1976

ASSETS

1977

PROPERTY, PLANT AND EQUIPMENT:
At cost.......................
Less accumulated depreciation
and valuation allowances
(Notes 4 and 5)...............

CURRENT ASSETS:
Fund balances and cash:
Fund balance in U.S. Treasury
Cash on hand and in transit..

U.S. Treasury securities
(at par)......................

Accounts ,receivable:
Panama Canal Company (Note 6)
Other .......................

Inventories (at average cost)..

Other current assets............

SUMS DUE FROM FUTURE APPROPRIATIONS
(Note 7)........................

TOTAL ASSETS.....................

$113,000,264

52.090,952

60,909,312

7,546,833
224,859

.7,771,692

690,000

5,178,276
3.581,243

8,759.519

982.240

12,214

18,215,b65

13,144,261

$ 92,2694238

Transition
Quarter

$109,501,453

49,376,639

60,124,814

7,992,707
215.645

8.208 352

690,000

4,606,549
6.569.262

11,175,811

936,512

13,345

21,024,020

12,123.034

$ 93,271,868

1976

$108,297,309

48,653,213

59,644,096

11,858,250
250.232

12,108,482

990.000

4,459,057
4,399,740

8,858.797

879,040

13.067

22,849,386

12,023,163

$ 94,516,645

The accompanying notes are an integral part of this statement.

SCHEDULE 6

CANAL ZONE GOVERNMENT

SCS

Balance Sheet
September 30, 1977, September 30, 1976, and June 30, 1976

LIABILITIES

INVESTMENT OF THE UNITED STATES:
Invested capital (Note 4).........
Unobligated capital fund...........
Unobligated operating funds.........
Obligated funds...................

CURRENT LIABILITIES:
Accounts payable:
U.S. Government agencies..........

Postal money orders payable......
Less deposits with U.S. Postal
Service.........................

Other..................................

Accrued liabilities:
Employees' leave (Note 3)........
Salaries and wages...............
Retirement benefits to certain
former employees................
Employees' repatriation .........
Other............................

OTHER LIABILITIES:
Retirement benefits to certain
former employees..................
Employees' repatriation ...........

TOTAL LIABILITIES .................

1977

$61,891,552
1,747,160

1,794,178

65,432,890

10.397,087

808,346

42,862

765 484

436,304

11,598,875

8,132,261
2,038,844

114,000
620,000
54.368

10,959,473

22,558,348

548,000
3,730.000

4.278,000

$92,269,238

Transition
quarter

$61,061,326
1,244,799

3.230,983

65P537,108

12,805.560

770,168

250,412

519,756

417,534

13.742,850

1976

$60,523,136
1,469,164
3,531,505
3,662,277

69,186,082

11.213,567

863,019

532,290

330,729

259,420

11,803.716

7,125,034 7,087,163
1,812,167 1,452,259

112,000
516,000
56,709

9,621,910

23,364,760

601,000
3,769,000

4,370,000

$93,271,868

117,000
476,000
51,425

9.183,847

20,987,563

625,000
3.718.000

4,343,000

$94,516 645

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3

Statement of Changes in the Investment of the United States
Fiscal Year Ended September 30, 1977

Investment at September 30,
1976.......................
Appropriation by the Con-
gress for Fiscal Year 1977

Invested Operating Capital
capital funds funds

$61,061,326 $ 303,055 $ 4,172,727

65,900,000 3,150,000

Investment at October 1, 1976 61,061,326 66,203,055 7,322,727

Total
investment

$ 65,537,108

69,050,000

134,587,108

Increases of investment:
Reimbursements from other
U.S. Government agencies
applied to operations
(Note 8)..................

Decreases of investment:
Funded costs...............
Unobligated operating funds
withdrawn by U.S. Treasury
(net of restorations $681)
Depreciation................
Miscellaneous plant adjust-
ments.....................

Transfer between funds:
Capital expenditures........
Increase in inventories....

Investment at September 30,
1977........................

- 11,800,000

- 73,169,942

4,522,996
3,120,347

140,933

3,261,280 77,692,938

4,045,778 (4,045,778)
-45,728 (45,728)

4.091,506

- 11800,000

73,169,942

4,522,996
3,120,347

140,933

80,954,218

(45,728) (4,045,778)

$61,891,552 $ 264,389 $ 3,276,949 $ 65,432,890

Investment by Commitment of Funds

Unobligated funds............ $
Obligated funds...............

- $ $ 1,747,160 $ 1,747,160
264,389 1,529,789 1,794,178

Invested capital:
Property, plant and equip-
ment (Note 4)............. 60,909,312
Inventories................. 982,240 -

60,909,312
982,240

$61,891,552 $ 264,389 $ 3,276,949 $ 65,432,890

The accompanying notes are an integral part of this statement.

SCHEDULE 10

SCHEDULE 10

CANAL ZONE GOVERNMENT

SCHEDULE 11

CANAL ZONE GOVERNMENT
Statement of Changes in the Investment of the United States
Transition Quarter Ended September 30, 1976

SCHEDULE 11

Invested Operating
capital funds

Capital Total
funds investment

Investment at June 30, 1976... $60,523,136
Appropriations by The Con-
gress for tra.sitir. quarter

$ 3,866,819 $ 4,796,127

16';200.000

560,000

Investment at July 1, 1976.... $60,523,136 $20.066.819 $ 5.356.127

Increases of investment:
Reimbursements from other
U.S. Government agencies
applied to operations (Note
8).........................
Transfer from other agencies

Decreases of investment:
Funded costs...............
Unobligated operating funds
withdrawn by U.S. Treasury
net of restorations $10,224
Depreciation ................
Miscellaneous plant adjust-
ments........ .-..........

Transfer between funds:
Capital expenditures........
Increase in inventories.....

Investment at September 30,
1976........................

$ $ 1,486,000
107,038__

$ 107.038 $ 1,486000

$ -

- $16,386,808

4,805,484
805,524

$ 809,720

$ 1,183,400
57.472

$ 1.240.872

$612.061 326

$21.192.292

$ -

$ 69,186,082

16.760,000

$ 85.946.082

- $ 1,486,000
- 107.038

$ 1,593,038

- $ 16,386,808

4,805,484
805,524

S.196

$ 22,002,012

$ $(1,183,400) $
t57.472)

$ (57.472) $(1.183.400) $S

$ 303.055 $ 4.172.727 $ 65.537.108

Investment by commitment of
funds:
Unobligated funds.......... $
Obligated funds..............

- $ $ 1,244,799 $ 1,244,799
303,055 2,927,928 3,230,983

Invested capital:
Property, plant and equip-
ment (Note 4)............
Inventories...............

60,124,814
936.512

$61,061.326

S 60,124,814
936.512

$ 303055 $ 4.172727 $ 65.537.108

The accompanying notes are an integral part of this statement.

SCHEDULE 12

CANAL ZONE GOVERNMENT
Statement of Changes in the Investment
of the United States
Fiscal Year Ended June 30, 1976

SCHEDULE 12

Invested Operating
capital funds

Capital Total
funds investment

Investment at June 30, 1975.... $58,119,708
Appropriations by The Congress
for Fiscal Year 1976........ -

Investment at July 1, 1975..... $58,119.708

$ 554,819 $ 7,910,997

60.150.000- 2.240.000

$60.704.819 $10.150.997

$.66,585,524

62.390.000

$128.975,524

Increases of investment:
Reimbursements from other
U.S. Government agencies
applied to operations (Note
8)..........................
Transfer from other agencies.

Decreases of investment:
*Funded costs.................
Depreciatio. ..................
Miscellaneous plant adjust-
mente........ ..............

Transfer between funds:
Capital expenditures.........
Increase in inventories......

$
21.485

$ 21.485

$
3,152,588

127.284

$ 3,279.872

$11,291,000' $ $ 11,291,000
21,485

$11.291.000 $___

$67,822,055 $

$67.822.055 $_

$ 11.312,485

- $ 67,822,055
- 3,152,588

S 127.284

$ 71,101,927

$ 5,354,870 $ $(5,354,870r$ -
306.945 (306.945) -

$ 5.661.815 $ (306.945) $(5.354.870) $ -

Investment at June 30, 1976.... $60 523 136 $ 3.866.819 $ 4796127 69186082
L 0 4,796,1271)~~

Investment by commitment of funds:
Unobligated funds........... $ $ 3,531,505
Obligated funds ............. 335,314

Invested capital:
Property, plant and
equipment (Note 4)........ 59,644,096
Inventories................ 879.040 .

$ 1,469,164 $ 5,000,669
3,326,963 3,662,277

S 59,644,096
_879,040

$0523.136. $ 3866819 $ 4.796127 $ 69,186.082

The accompanying notes are an integral part of this statement.

SCHEDULE 13 0 SCHEDULE 13
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CANAL ZONE GOVERNMENT

Notes to Financial Statements

1. Summary of Significant Accounting Policies.

a. Property, plant and equipment. Property, plant and equipment
are recorded at cost or, if acquired from another Government agency, at
original cost to such agency. Administrative and other general expenses
and the costs of funds used during construction are not capitalized. The
cost of minor items of property, plant and equipment is charged to expense.

b. Depreciation. Depreciation is provided using a straight-line
method applied on a composite basis. This method provides straight-line
depreciation plus additional annual depreciation, identified as composite,
to provide for premature plant retirements.

c. Retirement benefits. Employer payments to the contributory
Civil Service Retirement System covering substantially all employees are
charged to expense. The Canal Zone Government has no liability for future
payments to employees under this system.

Non-United States citizen employees who retired prior to
October 5, 1958 are not covered by the Civil Service Retirement System but
do receive benefits under a separate annuity plan. The amounts of the pay-
ments made under this annuity plan are recorded as a current-year expense.
The liability of the Canal Zone Government for future annuity payments to
these former employees or their eligible widows is reflected in the Balance
Sheet as "Retirement Benefits to Certain Former Employees" and an equal
amount is recorded in "Sums Due from Future Appropriations".

2. Transition Quarter.

The Budget and Impoundment Control Act, Public Law No. 93-344,
established a new fiscal year beginning October 1 and ending September 30
effective with fiscal year 1977 (October 1, 1976 through September 30, 1977).
The Act also established a transition quarter of July 1 through September 30,
1976 as a bridge between fiscal years 1976 and 1977. These statements report
the financial condition for-fiscal year 1977, the transition quarter, and
fiscal year 1976.

3. Accounting Change During Fiscal Year 1976.

Commencing in fiscal year 1976 the accounting for the accrued liabil-
ity for employees' leave was changed from an estimated to an actual obligation
basis. The change was made to more properly recognize and disclose the leave
liability and to provide a more accurate matching of revenues and expenses on a
fiscal year basis. The change resulted in a decrease of $623,831 in the net
cost of Canal Zone Government of which $311,933 was applicable.to operations
of prior years.

4. Plant Valuation Allowances.

Valuation allowances have been established at $1.8 million at
September 30, 1977, September 30, 1976, and June 30, 1976 to reduce to usable
value the cost of property, plant and equipment transferred to the Canal
Zone Government from the Panama Canal (agency) at July 1, 1951, and from
other U.S. Government agencies subsequent to that date.

Property, plant and equipment offset by valuation allowances, when
fully or partially reactivate, are reinstated by a reduction in the valua-
tion allowance and by an increase to the invested capital account..

5. Depreciation as Percent of Average Cost of Plant.

The provisions for depreciation, expressed as percentages of aver-
age cost of depreciable plant exclusive of valuation allowances, were 2.85%
for fiscal year 1977, 0.75% for the transition quarter ended September 30,
1976, and 3.037 for fiscal year 1976.

6. Accounts Receivable.

The doubtful Canal Zone Government accounts receivable were assumed
by the Panama Canal Company as guarantor at June 30, 1973, and recorded in
its accounts. The stated value of these receivables is shown in the Canal
Zone Government Balance Sheet as receivable from the Company.

7. Sums Due from Future Appropriations.

Sums due from future appropriations consist of the unfunded
portions of the employees' leave, repatriation and retirement benefits.to
former employees who do dot: qualify under the U.S. Civil Service retirement
system. Annual variation in the sums due from future appropriations results
from changes in these liabilities.

8. Reimbursements Applied to Operations.

Reimbursements received from other U.S. Government agencies for
Canal Zone Government services amounting to $11.8 million in fiscal year
1977, $1.5 million in the transition quarter, and $11.3 million in fiscal
year 1976 were utilized during the respective years to partially finance
operations, as authorized in the Department of Transportation and Related
Agencies Appropriations Bill, Public Law 94-387 for fiscal year 1977 and
Public Law 94-134 for the transition quarter and for fiscal year 1976.

9. Contingent Liabilities and Commitments.

Commitments under uncompleted construction contracts and unfilled
purchase orders amounted to $1.8 million at September 30, 1977. In addition,
the Cinal Zone Government is liable for an indeterminable amount with
respect to death and disability payments under the Federal Employees' Compensation
Act. The maximum liability which could result from outstanding claims and lawsuits
is estimated at $1.0 million at September 30, 1977.

10. Administrative Services.

Under the terms of an interagency agreement, the Panama Canal
Company provides certain general and administrative support to the Canal
Zone Government. As the cost of providing this support cannot be readily
determined, no reimbursement is made.

11. Uncertainties Which Impact on Financial Statements.

On September 7, 1977 the President of the United States and the
Chief of Government of the Republic of Panama signed the Panama Canal Treaty
of 1977 and a Treaty Con earning the Permanent Neutrality and Operation of
the Panama Canal. The treaties have been ratified in accordance with the
constitutional procedures of the United States and the Republic of Panama
ind will enter into force six calendar months from the date of the exchange
of the instruments of ratification which shall not be effective earlier
than March 31, 1979, unless legislation necessary to implement the provi-
sions of the Panama Canal Treaty shall have been enacted by the Congress
of the United States of America before March 31, 1979. These treaties will
terminate all existing treaties between the two countries pertaining to the
Panama Canal and produce major changes in the civil authority and the organi-
zation, scope of activities, and ownership of property of the Panama Canal
enterprise.

Until the treaties enter into force, the Canal Zone Government will
continue to operate without material changes in the scope of its activities.
These financial statements, therefore, do not purport to reflect the effect
of the treaties on the assets, liabilities, and investment of the United
States Government in the Canal Zone Government.

SCHEDULE 6A CANAL ZONE GOVEoMENT
General Price-Level Balance Sheet
September 30, 1977
(Unaudited)

A S SETS

PROPERTY, PIANT AND EQUIPMENT:
At cost........................................
Less accumulated depreciation and valuation
allowances.......................................

CURRENT ASSETS:
Fund balances and cash.............................

U.S. Treasury securities (at par)..................

Accounts receivable:
Panama Canal Company ...........................
Other................. ..........................

Inventories (at average cost)......................

Other current assets.............................

SUMS DUE FROM FUTURE APPROPRIATIONS..................

TOTAL ASSETS..........................................

Historical General Price-
Dollars Level Dollars
(Thousands of dollars)

$113,000

52,091

60,909

7,772

690

5.179
3.581

8 760

982

12

18,216

13.144

$ 92.269

$235,728

119.344

116.384

7.772

690

5,179
3.581

8,760

982

12

18,216

13.144

$147.744

The accompanying notes summarize the methods employed in the preparation of this
statement.

CANAL ZONE GOVERNMENT
General Price-Level Balance Sheet
September 30, 1977
(Unaudited)

SCHEDULE 6A

LIABILITIES

INVESTMENT OF THE UNITED STATES:.
Invested capital.................................
Unobligated capital fund.........................
Obligated funds..................................

CURRENT LIABILITIES:
Accounts payable:
U.S. Government agencies.......................

Postal money orders payable.....................
Less deposits with U.S. Postal Service.........

Other.......................... ................

Accrued liabilities:
Employees' leave .................................
Salaries and wages ............................
Retirement benefits to certain former employees
Employees' repatriation .......................
Other..........................................

OTHER LIABILITIES:
Retirement benefits to certain former employees..
Employees' repatriation ..........................

TOTAL LIABILITIES.................................

Historical
Dollars
(Thousands

$61,892
1,747
1 794

10.397

808
42

766

436

8,132
2,039
114
620
54

10,959

22.558

548
3.730

4.278

General Price-
Level Dollars
of dollars)

$117,367
1,747
1,794

120,908

10,397

808
42

766

436

11,599

8,132
2,039
114
620
54

548
3,730

4,278

$147,744

CANAL ZONE GOVERNMENT SCHEDULE 7A
- General Price-Level Income Statement for the Year Ended
September 30, 1977
(Unaudited)

Historical
Dollars
(Thousands

General Price-
Level Dollars
of dollars)

Recoveries ......................................
Operating expenses:
Funded costs..................................
Other non-fund charges and credits............
Depreciation. .................................

Operating revenue or (loss)......................
General price-level loss.........................

Net cost of Canal Zone Government..............

The accompanying notes summarize the methods employed
statement.,

$56448

73,170
1,195
3 120

77.,85

(21,037)

$(21,037)

$ 57,634

74,707
1,220
6.118

82,045

(24,411)
(86)

$(24,497)

in the preparation of this

SCHEDULE 7A

CANAL ZONE GOVERNMENT
Notes to Price Level Financial Statements

1. Methods employed in the preparation of the general price-level
financial statements:

a. Historical dollars are restated in terms of purchasing
power at the end of fiscal year 1977. The change in the value of money
has been measured by using the gross national product implicit price
deflators provided by the U.S. Department of Commerce.

b. The restatement of revenues and expenses, except for depre-
ciation, reflects the change in purchasing power of the dollar during the
current fiscal year. The restatement of depreciation expenses for the
year is based upon the investment in property, plant and equipment revalued
to reflect their ages. Property, plant and equipment and the investment of
the United States are restated from July 1, 1951, the date of reorganization
of the enterprise.

c. The net change in valuation of assets and liabilities, normally
an increase during a period of inflation, is credited to the investment.

d. Generally accepted accounting principles have been followed
except to reflect the change in the purchasing power of the dollar.

2. Price-level-adjusted cost of property, plant and equipment does
not purport to be replacement cost.

APPENDIX I

BOARD OF DIRECTORS, PANAMA CANAL COMPANY

Chairman of the Board:
The Honorable Clifford L. Alexander, Jr.
Secretary of the Army

APPOINTED

Aug. 1977

Members:

The Honorable Lucy Wilson Benson
Under Secretary of State for
Security Assistance

Aug. 1977

Mr. Michael Blumenfeld
Deputy Under Secretary of
the Army

April 1978

Honorable Robert Carswell
Deputy Secretary of the Treasury

The Honorable Richard N. Cooper
Under Secretary of State for
Economic Affairs

Mr. Charles R. Ford
Executive Assistant to the Administrator
Environmental Protection Agency

The Honorable David E. McGiffert
Assistant Secretary of Defense for
International Security Affairs

July 1978

Aug. 1977

Aug. 1977

Aug. 1977

April 1975

Aug. 1977

The Honorable H.R. Parfitt
Governor of the Canal Zone

The Honorable Ersa H. Poston
Commissioner,
U.S. Civil Service Commission

Admiral Owen W. Siler, (Retired)
Commandant,
U.S. Coast Guard

Honorable Viron P. Vaky
Assistant Secretary of State
for Inter-American Affairs

Aug. 1977

July 1978

APPENDIX I

	Front Cover
	Title Page
	Front Matter
	Digest
	Table of Contents
	Introduction
	Comments on financial statemen...
	Treaty impact on canal operating...
	Scope of examination and opinion...
	Financial statements
	Appendix
	Back Cover

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