by the latter as follows: (a) 3,079,671 shares will be delivered to the holders of its common stock in exchange for 3,879,900 shares of its own common stock, on the basis of 0.79375 of a Columbia share for each Gulf Interstate common share; and (b) 1,738,888 shares (estimated) will be delivered to the holders of its 62% and 534% preferred stock, having an aggregate par value of $31,300,000. Of the estimated 4,818,559 Columbia shares to be delivered to Gulf Interstate, 1,139,705 shares will then be returned to Columbia in exchange for the 225,000 shares of common and $17,300,000 par value 534% preferred stock of Gulf Interstate which Columbia now holds; an estimated 777,777 shares, assuming a fair market value of $18 at the closing date, will be delivered as the liquidation value of the $14,000,000 aggregate par value of Gulf Interstate preferred stock sold to the 9 investment bankers as aforesaid, and the remaining 2,901,077 shares will be distributed to the holders of Gulf Interstate common stock other than Columbia. Gulf Interstate will then complete its liquidation and dissolve. EFFECT OF PROPOSED TRANSACTIONS There is set forth below a table of the initial capitalization and surplus of Columbia Gulf as estimated at the date of closing of the proposed transactions. 6 The basis for exchanging the Columbia and Gulf Interstate shares is discussed below in connection with the issue of the reasonableness of the consideration. 7 The shares of its own common stock so to be reacquired by Columbia will be held by it as treasury stock. The $56,789,000 aggregate par value of the common stock of Columbia Gulf is equivalent to Columbia's investment in Columbia Gulf as measured by its $20,000,000 cash investment previously made in the common and preferred stock of Gulf Interstate, plus $36,789,000 representing the estimated aggregate par value of the shares of Columbia stock to be issued in payment for the publicly held preferred and common stocks of Gulf Interstate. The indebtedness of $141,400,000 shown in the above table is the indebtedness of Gulf Interstate which is to be assumed by Columbia Gulf. This will constitute 71.27% of total capitalization and surplus of Columbia Gulf. The indenture under which Columbia issued its senior debentures contains a covenant that Columbia will not permit, under penalty of default, any subsidiary to issue or incur publicly-held funded (long-term) debt and preferred stock exceeding 60% of such subsidiary's total capitalization and surplus. Columbia Gulf's assumption of the Gulf Interstate funded debt would violate such covenant. However, the indenture permits the default to be cured by the deposit of cash in an amount required to redeem a sufficient principal amount of the bonds of Gulf Interstate so as to reduce the funded debt to not exceeding 60% of Columbia Gulf's total capitalization and surplus. Columbia therefore proposes to cure the default on the closing date by depositing $24,245,000 with a trust company. The deposit agreement with the trust company will provide that the deposited funds will not be used to redeem bonds until after April 1, 1959, so as to afford Columbia, and as permitted by its indenture, opportunity to explore other possibilities of curing the default, including acquisition of bonds by negotiated purchase or exchange, and increasing the common stock equity of Columbia Gulf. 8 EFFECT OF PROPOSED TRANSACTIONS EFFECT ON CAPITALIZATION There appears below a table of consolidated capitalization and surplus of Columbia and its subsidiaries, (1) as at April 30, 1958, (2) after giving effect to the issuance and retirement of securities as scheduled for the last 8 months of 1958 but not related to the proposed acquisition, and (3) pro forma to reflect the changes related to the proposed transactions. 8 Of the $24,245,000 to be deposited, $22,000,000 will cover the principal amount of the bonds required to be retired to reduce Columbia Gulf's funded debt to 60% of its capitalization and surplus; $1,650,000 will cover the maximum gross redemption premium (72%) on the 5% series bonds; and $595,000 will represent interest on the principal amount for a period of 6 months at the rate of 5% per annum. The present redemption premium on the 4%% series is 4% % of principal amount. Reflects the conversion of $2,587,000 principal amount of convertible debentures to common stock, expected to occur by December 31, 1958. These debentures may not be converted after December 31, 1958. Conversions may be effected at the rate of 7% shares of common stock for each $100 principal amount of debentures, which is equivalent to $13.33 per share. Represents short-term notes authorized by order of the Commission dated September 5, 1958 (Holding Company Act Release No. 13821). These notes will be paid from the proceeds of a sale of common stock or debentures, or both, in such amounts as will limit funded debt to a maximum of 60% of consolidated net tangible assets. Reflects the recording of 194,025 shares of common stock to be issued by Columbia at $13.33 per share, in exchange for its convertible debentures. 4 Reflects the assumption of $141,400,000 of Gulf Interstate bonds and the subsequent retirement of $22,000,000 thereof. · Reflects the issue and sale by Columbia of $25,000,000 principal amount of Series K Debentures on November 6, 1958. For purposes of this table it is assumed that the proceeds from this sale will be used in part to effect the retirement of $22,000,000 principal amount of the Gulf Interstate bonds referred to in note d. Reflects the recording at par value of 3,678,854 shares of Columbia's $10 par value common stock to be issued to the public for preferred and common stocks of Gulf Interstate. Increase due to the inclusion of $215,000 of undistributed earned surplus of Gulf Interstate at date of pooling of interests. In addition to the other restrictions referred to above, Columbia's senior debenture indenture does not permit (a) Columbia or its subsidiaries to incur or sell funded debt (long-term debt) or the subsidiaries to sell preferred stock which, on a consolidated basis would exceed 60% of the consolidated net tangible assets as defined, or (b) the principal amount of outstanding funded debt and preferred stock of the subsidiaries to exceed 15% of such net tangible assets. As at April 30, 1958 such consolidated net tangible assets, adjusted to give effect to the proposed acquisition and the subsequent retirement of $22,000,000 of funded debt for indenture purposes are estimated by Columbia at $948,230,000. After giving effect to the proposed transaction, the consolidated long-term debt of $562,456,000 is 59.3% of such consolidated net tangible assets and subsidiary debt of $120,766,000 is 12.7% thereof. As noted in the above table, after consummation of the proposed transactions, the consolidated long-term debt will equal 57.1%, the short-term debt will equal 4.1%, and the common stock equity will represent 38.8% of the Columbia system's consolidated capitalization and surplus. Of the $602,456,000 principal amount of total debt, some $120,766,000 represents long-term debt of subsidiary companies of which $119,400,000 will consist of the mortgage debt of Columbia Gulf. EFFECT ON EARNINGS As previously described, the contract between Gulf Interstate and United Fuel provides that it will pay all the operating expenses, including depreciation and Federal income taxes, of Gulf Interstate, plus such return on its rate base as may be determined by the Federal Power Commission. Gulf Interstate is thus supported out of the revenues it receives from United Fuel except for some minor revenues received from other sources. There appears below a statement of income of the Columbia system and of Gulf Interstate for the 12 months ended April 30, 1958, and of the Columbia system pro forma giving effect to the proposed transactions upon the assumption that (a) Gulf Interstate had been owned by Columbia for the entire period and (b) that 3,678,854 shares of Columbia common stock had been issued as consideration for the preferred and common stock equities of Gulf Interstate. • Includes $149,000 of revenues and miscellaneous income from persons other than Columbia. $1.42 During the year 1958 Gulf Interstate was granted an increase in its allowed rate of return on its rate base from 6% to 64% per annum; and, at the request of Columbia, Gulf Interstate undertook a large expansion program. Columbia's financial vice president estimated the annual earnings of Gulf Interstate, after giving effect to the increased rate base, the increase in the rate of return, and the additional interest and dividend requirements on the securities to be issued and sold to finance the expansion program. On this basis, the witness estimated the consolidated net income of the Columbia system, after giving effect to the acquisition of Gulf Interstate, would be $1.46 for each share of the common stock of Columbia. This does not take into consideration any increase in system revenues as a result of the system having an increased supply of gas by reason of the recent expansion of the facilities of Gulf Interstate. However, as indicated in Table III above, the Commission has authorized the issuance by Columbia of $40,000,000 of short-term notes payable to banks. Columbia recognizes that these notes must be replaced by permanent securities. If the $10,000,000 were replaced by the issuance of debentures by Columbia, the limitation in the indenture, under which Columbia's senior debentures were issued, restricting total consolidated long-term debt to 60% of consolidated net tangible assets would be exceeded. Columbia's earnings estimates therefore assume that the notes will be refinanced by the issuance of $30,000,000 of common stock and $10,000,000 principal amount of its debentures. The witness for Columbia estimated that if such a program were consummated and if it were assumed the common stock could be sold at a net price to Columbia of $18 per share and the debentures could be sold at a net interest cost of 4.86%, the net income applicable to each share of Columbia common stock would be $1.43. APPLICATION OF STATUTORY STANDARDS (a) Acquisition of Pipeline Facilities and of Related Securities The acquisition by Columbia Gulf of the assets of Gulf Interstate and the acquisition by Columbia of the common stock of Columbia Gulf are subject to the provisions of Section 10 of the Act. Under that section we cannot approve the acquisition by Columbia of the common stock of Columbia Gulf if we find that it will unduly complicate the capital structure of the Columbia holding-company system, or if the consideration being paid is unreasonable; and, specifically, under Section 10 (c) (1), we cannot approve the acquisition by 9 Gulf Interstate Gas Company, F.P.C. Docket No. G-12863 (April 11, 1958). 511636-60- -50 |