On the basis of voting power the preferred stockholders will receive 52.6 percent as against Standard's 46.6 percent and the 0.8 percent of the other common stockholders. The plan provides too that the members of the first board of directors of the corporation will be subject to approval by the preferred stockholders' committee.* We have considered the respective contentions and their probable disposition if brought to trial, and find that the proposed allocation of securities is not an unreasonable disposition of the controverted issues.5

C. THE COMMON STOCK

The plan provides for the issuance to common stockholders of the debtor other than Standard Gas, of one share of new common stock for each 20 shares of old common.

The estimated original historical cost of the properties of the debtor when first devoted to public use is $18,888,394; officials of the debtor testified that accrued depreciation on these properties aggregates $2,674,597, leaving a balance of $16,213,797; the estimated reproduction cost of the properties new is $22,379,219; reproduction cost less depreciation as calculated by officials of the debtor is $19,315,717. An expert testified for the bondholders' committee that the "sound value" of the properties is $15,780,000. Earnings available for interest for the year ending March 31, 1939, on a pro forma basis, were $1,148,062; capitalized at 7 percent or even 6 percent, this would indicate a valuation on an earnings basis of not more than $16,400,886 or $19,134,366. These valuations indicate that the common stock is without equity. However, there are possible implications of the Taylor case, involving the treatment of a vulnerable open account claim not merely as junior to preferred stock, but on bases of equality with or inferiority to common stock, from which it might be argued that there is a small amount of equity for the common stock. The plan provides that 2,699 shares or 1.08 percent of the new common stock shall be distributed to the old common stockholders exclusive of Standard. This percentage is so small as not to constitute an unfair infringement on such contract rights and priorities as Standard and the preferred stockholders may have. Accordingly,

we do not find that this provision of the plan is unfair.

Unlike what the Supreme Court found to be the fact in the Taylor case, the preferred stockholders' committee here does not appear to have been organized by interests affiliated with Standard Gas and Electric Company. Cf. Taylor v. Standard Gas and Electric Company, 59 Supreme Court 543, 545, 83 L. Ed. 669 at 674-675.

Cf. Stein v. McGrath, 98 F. (2d) 559 (1938) cert. den. Feb. 6, 1939.

•In the matter of United Telephone and Electric Co., 3 S. E. C. 653 (1938) and In the matter of West Ohio Gas Co., 3 S. E. C. 1014 (1938).

THE NEW SECURITIES

The indenture securing the new bonds will be open-end. It will provide for a restriction on dividends, under the terms of which dividends on preferred and common stocks would be payable only out of earned surplus accruing after September 30, 1938, computed after deducting from earned surplus as shown by the books of the company (1) any excess of the sinking fund over the net proceeds of any stock of the company sold to reimburse the treasury for sinking fund payments, and (2) the amount by which appropriations for maintenance and depreciation fall short of 15 percent of the company's gross operating revenues and income from plants leased to others.

Insofar as the above provision would enable the debtor to charge to depreciation an amount less than the difference between 15 percent of its gross operating revenues and income from leased plants, and its expenditures for maintenance, the income account of the debtor would not reflect the depreciation conceded by the parties to be fair. The debtor and preferred stockholders' committee state in their amended application that they would have no objection to our conditioning our order by requiring that the 15 percent of gross revenues and income from leased plants be spent for maintenance and/or credited to a depreciation reserve, subject to any rules, regulations or orders of state or federal governmental authorities having jurisdiction in the premises. Inasmuch as such a provision would insure for security holders a more accurate statement of the income of the debtor, and there is no opposition, we will so condition our order. For the 12 months ending September 30, 1938, this provision would have required an appropriation for depreciation in the amount of $482,848, considerably more than appropriations in past years.

The indenture will further require the debtor to expend an amount equal to not less than 15 percent of its gross operating revenues and income from plants leased to others for maintenance of and additions to the properties of the debtor, which may not be made the basis for the issuance of additional bonds, or for the retirement of bonds, in addition to bonds retired by operation of the sinking fund.

The property coverage of the new bonds and the earnings record of the debtor, as well as data with respect to the estimated capital requirements of the debtor to be found in the record, indicate that a sinking fund of 14 percent of the largest principal amount of the bonds at any time outstanding, plus savings of interest due to operation of the sinking fund, is fair.

The redemption price of the bonds merits special attention because of its novel provisions. When a 5% bond was agreed on, the

'The dividend restriction applies irrespective of any such rule, regulation or order of the state or federal authority with regard to depreciation.

Earlier plans provided for a 6% bond.

bondholders insisted upon a call premium of 5% for 10 years, diminishing thereafter at the rate of 1% per year. This call price was objected to by the staff and others as being too high." After consultation with the staff the call provisions were modified so that for a short time following confirmation of the plan, the new bonds may be callable at 101 and accrued interest. The provision as drawn assures the company of its permanent financing but gives it the opportunity to refund at a lower interest rate within a short period after the reorganization becomes effective.

We find that the provision of the plan permitting the bonds to be called in their entirety at 101 and accrued interest within 12 months after the expiration of the period for appeal from an order of the court confirming this plan, or until January 1, 1941, whichever is earlier, is fair and equitable to the bondholders and junior security holders of the debtor.

THE NEW CAPITAL STRUCTURE AND FEASIBILITY OF THE PLAN

The plan provides for the issuance of $8,182,250 of new 5% first mortgage bonds. On the basis of original historical cost depreciated, the ratio of these bonds to the property account will be approximately 50%. On the basis of pro forma earnings for the year ending March 31, 1939, the interest on the new bonds was earned 2.80 times. Thus, it appears that the properties and earnings of the debtor are adequate to support the new bonds.

Fifty-three thousand and forty-four shares of 5% preferred stock will be issued with a par value of $50 a share, aggregating $2,652,200. This preferred stock will represent 34 percent of the stock capital, and the ratio of the new bonds and preferred stock to estimated original historical cost of property depreciated will be 67 percent. On a pro forma basis for the 12 months ending March 31, 1939, the dividend requirements on the preferred stock were covered 5.37 times, and the fixed charges and preferred dividend requirements of the new bonds and preferred stock were covered 2.02 times.

Rule U-11F-1 provides that if a reorganization plan, for which approval is sought under Section 11 (f), proposes the issuance of securities, the Commission at the time when it issues its order approving or withholding approval of the plan, will determine whether or not the requirements of Section 7 are satisfied.

Since all the new securities are to be issued for the purpose of effecting a reorganization, and no state commission has informed us that

Among the objectors were the Public Utilities Commissioner of Oregon and the Department of Public Service of Washington. A member of the bondholders' committee testified on May 16, 1939, that the prospects for refunding the first mortgage bonds of the debtor at a rate lower than 5% sometime before January 1, 1941, are excellent.

any state law has not been complied with, the provisions of subsections (c) (2) and (g) of Section 7 are satisfied. We make no adverse findings with respect to any of the matters specified in subsection (d) of Section 7.

For the reasons stated and on the basis of the findings herein contained, both plans of reorganization are approved, subject to the following conditions:

(1) That 15 percent of the debtor's annual gross operating revenues, including revenues from plants leased to others, be expended for maintenance and / or credited to a depreciation reserve, subject to any rule, regulation or order of any federal or state regulatory commission or authority having jurisdiction in the premises;

(2) That the issuance of the new securities be appropriately authorized by the Public Utilities Commissioner of Oregon and the Department of Public Service of Washington;

(3) That the consummation of the plan be effected in substantial compliance with the terms and conditions and for the purposes represented by the applications and declarations.

The Commission reserves jurisdiction to approve the fees, expenses and remuneration payable in connection with this reorganization pursuant to Rule U-11F-2 adopted by the Commission under Section 11 (f) of the Act.

Nothing herein contained shall be construed as a finding that the operations of the company are limited to a single integrated public utility system and to such other businesses as are reasonably incidental or economically necessary or appropriate to its operations within the meaning of Section 11 (b) (1) of the Act, and the Commission reserves jurisdiction under that section.

An appropriate order will issue.

By the Commission: Commissioner Mathews not participating.

5 S. E. C.

[No. 758]

IN THE MATTER OF

WILLIAM C. A. HENRY, Trustee

for

THE UNITED TELEPHONE AND ELECTRIC COMPANY

File No. 30-93. Promulgated June 5, 1939

DECLARATION OF STATUS.

Declared to Have Ceased to be a Holding Company.

Where trustee transferred, assigned, and delivered all of the assets of debtor corporation held by him as trustee to new company pursuant to a plan of reorganization, and no longer owns, controls, or holds with power to vote 10 percent or more of the voting securities of a public utility company, trustee declared to have ceased to be a holding company, pursuant to Section 5 (d) of the Act.

FINDINGS AND OPINION OF THE COMMISSION

William C. A. Henry, as trustee for The United Telephone and Electric Company, a Delaware corporation in reorganization proceedings under the provisions of Section 77B of the Bankruptcy Act as amended, registered as a holding company on October 27, 1937, pursuant to the provisions of the Public Utility Holding Company Act of 1935. On January 13, 1939, an application pursuant to Section 5 (d) of the Act was filed requesting an order declaring that said trustee has ceased to be a holding company.

After appropriate public notice, a hearing on this matter was held and upon examination of the record the Commission makes the findings contained herein:

On August 3, 1938, this Commission approved a plan of reorganization for The United Telephone and Electric Company, which plan provided, among other things, that said trustee should transfer, assign, and deliver to a new company, all the assets and property held by him as such trustee. On November 2, 1938, the plan of reorganization was approved and confirmed by the District Court of the United States for the District of Delaware.

On December 31, 1938, pursuant to an order of the District Court of the United States for the District of Delaware, William C. A. Henry, as trustee, transferred, assigned, and delivered all of the