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$100 per share, a far higher figure than any one would claim, the funded debt will be 71.3 per cent of the total and the ratio of funded debt to stock will be 2.5 to 1. I realize that the general-mortgage bonds are, in effect, to be income bonds for a period of five years, but in 1929 the interest upon these bonds will become a fixed charge, and by that time the underlying debt will have grown much larger.

For the past 10 years and more two things have been impressed upon us by the carriers and their financiers over and over again. One is the danger of a disproportionately large debt. The other is the desirability of financing the needs of the carriers in part by the issue of stock. I have no quarrel with either one of these propositions. Indeed I believe that ability to finance by issues of stock will ultimately prove essential if the railroads are to continue in private ownership. Nevertheless the railroad debt has increased by more than one billion of dollars since the termination of Federal control, while little new money has been procured through sale of stock. Nor does it appear that the financial advisers of the carriers have themselves kept in mind the precepts which they have urged upon us.

Railroads with financial structures particularly well adapted to future financing through stock issues have impaired these structures from this point of view by the declaration of huge stock dividends. Moreover the opportunities for improving the situation in this respect which have been presented by receiverships and reorganizations have for the most part been neglected.

This Denver & Rio Grande reorganization is an excellent illustration. The new company begins business with a ratio of funded debt to stock far beyond the limit which we have repeatedly been told is safe and sound. That it is not anticipated that stock will ever be used as a means of financing is shown by the fact that no additional preferred or common stock can be issued without an amendment of the charter. Even if the charter were amended, no additional preferred stock of equal standing could be issued without the consent of the holders of two-thirds of the initial issue, so that, as a practical matter, the only recourse would be to an issue of second preferred stock or to an issue of the nondescript common shares without par value, which certainly offer no appeal to conservative investors. It is plain that the expectation is that the sole means of financing, apart from earnings and equipment trusts, will be the refunding and improvement bonds, and it is equally plain that as more and more of these are issued the already disproportionate debt will become still more disproportionate.

I realize the difficulty that reorganization managers have in dealing with the holders of the various classes of securities of an insolvent company. But here is where the commission should bring its influence to bear. The only policy which it has adopted with respect to reorganizations is that a proposed new financial structure will be approved if it seems better than the old structure and if there is reason to believe that earnings will be sufficient to cover the new fixed charges. Such a policy seems to me negative and inadequate. The least that can be expected of reorganization managers is that the new financial structure will in some measure be an improvement upon the old and that a plausible showing of earnings can be made for the future. But the transportation act, 1920, introduced a new factor into the situation which should be made to count. That act recognized that the issue of securities is affected with a public interest and imposed upon us the duty of protecting that public interest. It can only be protected, in my judgment, by a positive and constructive policy on our part.

The capitalization of a carrier does not determine or limit its earnings, but may have a great deal to do with its ability to finance its needs and serve the public properly. Net earnings, whatever they may be, can be converted into interest or dividends regardless of the volume of the capitalization, but that volume and the ratio between stock and funded debt may determine whether the carrier is financially strong or financially weak. If a railroad becomes insolvent and its property is sold to satisfy its debts, we are subject to no other basic limitation than the public interest in determining the amount and character of the securities which the purchasing company may issue or assume for this purpose. It seems to me that we should at least insist, in the case of any such reorganization, that the new company shall start life with a reasonably sound financial structure. If this were our policy, reorganization managers would stand on firmer ground in dealing with the holders of the securities of insolvent companies than they now find under their feet.

For the reasons already indicated I am persuaded that the new company in this proceeding is not starting life with a reasonably sound financial structure and that we ought to withhold approval of the reorganization. And there are other reasons for this conclusion. To list three which come to mind:

1. Not only is the funded debt disproportionate to the stock, but of the very small amount of stock which it is proposed to issue the $16,445,600 of preferred stock is to have no voting power. The control of this great property, representing an investment of over $100,000,000, is to be concentrated in the shares without par value, which represent at best only an insignificant equity. In my judgment such concentrated control is contrary to sound public policy.

2. Such evidence as the record affords indicates that the new capitalization may be substantially in excess of the value of the property for rate-making purposes. Inasmuch as the right of the carrier to earnings is not determined or limited by capitalization, no sound reason can be offered for running any risk in this respect. A capitalization in excess of rate-making value is clearly contrary to the public interest, since it endangers the financial stability of the company.

3. Great stress is laid by the promoters of the reorganization plan upon the fact that the new company is to enjoy the benefit, under certain conditions, of dividends from the Utah Fuel Company. It strikes me that it is dangerous to rely to any great degree upon this arrangement. It depends upon the transfer of the stock of the Utah Fuel Company to trustees for the ultimate beneficial interest of the Missouri Pacific and the Western Pacific and for the immediate beneficial interest of the new company. Paragraph (8) of section 1 of the interstate commerce act, the so-called commodities clause, reads as follows:

From and after May first, nineteen hundred and eight, it shall be unlawful for any railroad company to transport from any State, Territory, or the District of Columbia, to any other State, Territory, or the District of Columbia, or to any foreign country, any article or commodity, other than timber and the manufactured products thereof, manufactured, mined or produced by it, or under its authority, or which it may own in whole or in part, or in which It may have an interest, direct or indirect, except such articles or commodities as may be necessary and intended for its use in the conduct of its business as a common carrier.

This language is broad and it has been broadly interpreted by the Supreme Court. Possibly the trust which has been created avoids its application, but in the event of any vigorous administration of the "commodities clause" it would not be well to bank too heavily upon that fact.

Summing up the matter, it seems to me that this reorganization plan has not been worked out with any intent to give the Denver & Rio Grande Western a financial structure under which it can, as an independent carrier, face the future with equanimity, but that it has been designed with the expectation that this carrier would be controlled by some other carrier or carriers and with a view to accommodating and facilitating such control. In a separate expression of opinion in Denver & Rio Grande Western Reorganization, supra, I said at page 766:

I can not escape the conclusion that the arrangement is unsound and that the public interest would be better served if the reorganization of the Denver

& Rio Grande property were postponed until such time as it can be reorganized in the interests of its security holders and the population which it serves, rather than in the interests of connecting lines, and upon a financial plan which will enable it to face the future with a greater degree of confidence.

I adhere to this opinion.

I am authorized to say that COMMISSIONERS AITCHISON and McMANAMY concur in this expression of dissent.

ORDER MODIFYING AND AFFIRMING ORIGINAL ORDER

Entered June 9, 1924

Rehearing and reargument having been had under the order of January 19, 1924, reopening this proceeding, and the commission having, on the date hereof, made and filed a report containing its findings of fact and conclusions thereon, which report is hereby referred to and made a part hereof:

It is ordered, That the original order by division 4 entered in this proceeding on December 12, 1923, be, and it is hereby, modified so as to authorize the issue of the $29,808,000, principal amount, of general-mortgage bonds as cumulative income bonds for the period from February 1, 1924, to February 1, 1929, and the issue of the $16,445,600, par value, of preferred stock with changes in terms, as set forth in the amended application, and as thus modified said order of December 12, 1923, is hereby affirmed.

90 I. C. C.

FINANCE DOCKET No. 3515 ACQUISITION BY MISSOURI PACIFIC OF D. & R. G. W.

COMMON STOCK

Submitted May 21, 1924. Decided June 9, 1924

Acquisition by the Missouri Pacific Railroad Company of one-half of the com

mon stock, without nominal or par value, of the Denver & Rio Grande Western Railroad Company, approved and authorized. Carl A. de Gersdorff, Edward J. White, and Leonard D. Adkins for applicant.

Carl Taylor for Denver & Rio Grande Western Railroad Company. Cotton & Franklin and Boykin Wright for protective committees.

Harvey H. Cluff, attorney general, for State of Utah; James H. De Cousey and W. W. Gordon for State of Kansas; Wayne C. Williams, attorney general, and James A. Marsh, special counsel, for State of Colorado and Public Utilities Commission of Colorado. Daniel Bartlett for city of St. Louis, Mo.

REPORT OF THE COMMISSION BY THE COMMISSION :

The Missouri Pacific Railroad Company, a carrier by railroad subject to the interstate commerce act, on March 19, 1924, filed an application under paragraph (2) of section 5 of the interstate commerce act for an order approving and authorizing the acquisition by it of 150,000 shares, or one-half, of the common stock, without nominal or par value, of the Denver & Rio Grande Western Railroad Company from the Western Pacific Railroad Corporation, which now has the entire outstanding 300,000 shares of such stock, for a consideration of $9,000,000, with interest thereon at 6 per cent per annum from January 1, 1923. The 300,000 shares of stock were issued pursuant to the authority contained in our order of July 11, 1921, in Stock of Denver & Rio Grande Western R. R., 70 I. C. C. 102, 108; and the application does not involve questions as to the propriety of the issue of the stock under section 20a of the interstate commerce act.

Answers containing representations in opposition to the granting of the application were filed by the State of Colorado and by the public utilities commission of that State. A hearing was held for the purpose of taking testimony at Washington, D. C., on April 21

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