Reorganization-Conditions-Depreciation Provisions.

Where indenture securing new bonds to be issued under plan of reorganization, provided 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 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, found that insofar as the 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 accounts of the debtor would not reflect the depreciation conceded by the parties to be fair. Commission's order conditioned 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.

FEES, EXPENSES, AND REMUNERATION IN REORGANIZATION PROCEEDING. Jurisdiction Reserved.

In approving a plan of reorganization of a subsidiary of a registered holding company, the Commission reserved jurisdiction to approve the fees, expenses, and remuneration payable in connection with the reorganization pursuant to Rule U-11F-2 promulgated under Section 11 (f) of the Act.

FINDINGS AND OPINION OF THE COMMISSION

Mountain States Power Company (hereinafter called the "debtor"), is a subsidiary of Standard Gas and Electric Company, a registered holding company (hereinafter called "Standard"). Faced with a maturity of its funded debt, the debtor filed a petition under Section 77B of the Bankruptcy Act in the United States District Court for the District of Delaware on December 31, 1937. By order of the Court, the petition was approved and the debtor remained in possession of its properties.

An application has been filed (File No. 52-7) by a bondholders' committee and another application (File No. 52-8) jointly by the debtor and a committee representing preferred stockholders. Each application seeks our approval of and a report on a plan of reorganization pursuant to Section 11 (f) of the Public Utility Holding Company Act of 19351 and Rule U-12E-4. The bondholders' committee, as of May 16, 1939, represented approximately $3,223,600 of the debtor's 6% bonds and $442,750 of 5% bonds, aggregating approximately 45 percent of the principal amount of the outstanding bonds.

1 Section 11 (f) provides that—

a reorganization plan for a registered holding company or any subsidiary company thereof shall not become effective unless such plan shall have been approved by the Commission after opportunity for hearing prior to its submission to the court.

The preferred stockholders' committee, as of the same date represented $1,958,900 par value of the debtor's preferred stock, or approximately 37 percent of the outstanding preferred stock. Consolidated hearings were held on both applications. The Public Utilities Commissioner of Oregon and the Department of Public Service of Washington have intervened in these proceedings, Standard and Standard Power and Light Corporation, a registered holding company, of which Standard is a subsidiary, have appeared in the proceedings. From time to time the plans have been amended. The final amendments have resulted in making the plans filed identical in their terms.

THE DEBTOR

The debtor is engaged principally in the sale of electric power at retail to 109 communities and surrounding rural areas situated mostly in Oregon, Montana, Idaho, and Wyoming but including 1 small town in Washington and 1 isolated community in South Dakota. In addition, water, telephone, gas, and steam heating service are supplied in some communities. The population of the area served is approximately 215,000. Only 3 communities in the territory have a population in excess of 10,000, and none has a population as large as 20,000. The territory served is divided into 5 scattered operating divisions. Part of the properties of the debtor are within transmission range of the Bonneville, Seminoe, Grand Coulee and Fort Peck public power projects.

CAPITAL STRUCTURE

The capital structure of the debtor is as follows: First mortgage gold bonds, series A, 5% due Jan. 1, 1938_. First mortgage gold bonds, series B, 6% due Jan. 1, 1938_. Indebtedness to Standard Gas and Electric Company due on demand (as per company books, with interest to Jan. 1, 1938)__. 7% cumulative preferred stock ($100 par) ‒‒‒‒ Common stock, no par value (142,500 shares).

• Accrued unpaid dividends on these shares at September 30, 1938, amounted to $41 per share, aggregating $2,174,804.

Besides having an open account claim in the amount of almost seven million dollars, Standard Gas and Electric Company owns 88,530.38 shares or 62 percent of the debtor's common stock, while Standard Power and Light Corporation owns 25,353 shares or 18 percent.

Standard has filed with the Delaware Court its claim for advances to the debtor; the preferred stockholders' committee and the debtor have opposed allowance of the claim as filed on numerous grounds.

5 S. E. C.

THE PLAN

The plan provides for the issuance of $8,182,250 of 5% first mortgage bonds maturing January 1, 1953; 53,044 shares of 5% cumulative preferred stock with a par value of $50 per share; and 249,401 shares of common stock without par value.

The present bondholders would receive new bonds in equal principal amounts.2 The present preferred stockholders would receive for each share of preferred stock, one share of new preferred stock and two shares of new common stock, so that in the aggregate they would receive 100 percent of the new preferred stock issue and 106,088 shares, or 42.54 percent, of the new common stock. The open account claim of Standard would be surrendered and it would receive 140,614 shares of the new common stock, or 56.38 percent. Other common stockholders would receive 2,699 shares of the new common stock, or 1.08 percent.

The new preferred stock will be entitled to one vote per share for all corporate purposes, with the right of cumulative voting in the election of directors. If arrears equal 8 quarterly dividends, the new preferred stock as a class will be entitled to elect a majority of the board of directors.

The plan provides that the initial board of directors shall be designated by the debtor subject to the approval of the preferred stockholders' committee.

A. THE FIRST MORTGAGE BONDS

The plan provides for the issuance of new 5% bonds to the present 6% and 5% bondholders in the same principal amount. On the basis of earnings for the year ended September 30, 1938, interest on the new bonds will be earned 2.69 times; moreover, the ratio of bonds to property on the basis of estimated original historical cost depreciated will be approximately 50 percent. In view of the quality of the new bonds, we find that the bondholders are being fairly treated under the plan.

B. THE PREFERRED STOCK AND STANDARD

The central problem in the reorganization has been the treatment of the open account of Standard.

The Nature of the Claim

The claim represents the balance of an open account containing thousands of items. The debit items total $37,600,000, the credits, $30,700,000, resulting in a net balance of approximately $7,000,000.

Since the filing of the Section 77B petition, interest has been paid on the outstanding bonds pursuant to orders of the District Court, at the contract rates.

These amounts are undisputed. The debit items include cash advances; interest on funded debt; expenditures for properties and securities acquired from affiliates and third parties; management, engineering and supervision fees; preferred dividends; common dividends; and interest on the open account itself.

The Challenge to the Claim

The debtor and the preferred stockholders' committee challenged the claim, contending that (a) it is subject to substantial deductions, and (b) it should be subordinated to the claims of the preferred stockholders. On the first ground they have objected to the allowance of the following debit items:

$208,822 Profits on property purchased for and resold to the debtor, received by H. M. Byllesby & Co., an investment banker allegedly in control of Standard at the time of these transactions.

$861, 717 Estimated profit of Byllesby Engineering and Management Corp., a subsidiary of Standard, on fees for engineering, management, and general supervisory services furnished the debtor.

$285, 504 Miscellaneous profits received by Standard or affiliated companies. $1,356, 818 Allegedly excessive interest charges assessed against the debtor, including all interest on the contested items listed above. $3,896, 556 Dividends on preferred and common stock of the debtor, paid by Standard and debited to the debtor, it being alleged that these payments were made out of capital. Of the dividends so paid Standard received $841,996 and H. M. Byllesby & Co. $56,700.

The contentions that the open account claim should be subordinated rested on the so-called "instrumentality" doctrine and on the decision in Taylor v. Standard Gas and Electric Company, 59 Supreme Court 543, 83 L. Ed. 669.

In the Taylor case Standard had an open account claim against a subsidiary, Deep Rock Oil Company. The reorganization plan that had been approved in the lower courts compromised the claim by reducing the amount thereof, but treated it on a parity with unsecured creditors, giving it priority over preferred stockholders. The plan left Standard with complete control. The United States Supreme Court reversed the decision below (96 F. (2d) 693) and withheld approval of the plan. It recited "abuses in the management due to the paramount interest of interlocking officers and directors in the preservation of Standard's position as at once proprietor and creditor of Deep Rock" and held that "no plan ought to be approved which does not accord the preferred stockholders a right of participation in the equity in the company's assets prior to that of Standard and at least equal voice with Standard in the management."

The debtor and preferred stockholders' committee both state that if the material facts of this case were the same as those in the Taylor case the preferred stockholders would be entitled to full priority over the open account claim of Standard. Claims prior to the open account, including dividend arrears, would then aggregate $15,661,454. On the other hand, it is stated that if the Taylor case is inapplicable, Standard is entitled to full priority of so much of its claim as may be allowed. Both parties have submitted memoranda, which substantiate that there are points both of similarity and dissimilarity between this case and the Taylor case. Moreover, Standard contends that there are substantial defenses to any reduction of the claim.

The Compromise

Standard, the debtor, and the preferred stockholders' committee have agreed to a compromise of the open account claim of Standard, and of the priority over the open account claimed by the preferred stockholders on the basis of the Taylor case. In the compromise, Standard instead of receiving priority for its claim, is partially subordinated. The preferred stock, on the other hand, receives complete priority as to part of its claim for it gets 53,044 shares (the entire issue) of 5% cumulative preferred stock, par $50 a share. In addition, the preferred stockholders receive 106,088 shares (42.52 percent of the total issue) of new common stock on the basis of two shares of new common for each share of old preferred. Standard receives only common stock. It will get 140,614 shares, 56.38 percent of the total issue. The balance of the new common stock, 2,699 shares (1.08 percent of the total issue) will be distributed to the present common stockholders other than Standard on the basis of 1 share of new common for 20 shares of old common stock. Under the terms of the compromise Standard will receive securities with a stated value of $2,912,337 and the preferred stockholders will receive securities with par or stated values aggregating $4,849,625.

The parties have pointed out the following claimed similarities between the cases: The parent company was the same in both. It had control of the subsidiary in both cases. The open accounts in both cases cover roughly the same period. There are many debit items in both open accounts which are of questionable validity. On the other hand, the parties call attention to various points of claimed dissimilarity: In the Taylor case the Supreme Court severely criticized overreaching by Standard Gas with respect to a certain transaction-in a refinery lease-pervading the entire relationship (59 Sup. Ct. 543, 548, 83 L. Ed. 669 at 674–675, whereas it is contended that nothing in this case appears comparable. A substantial part of the open account in both cases represented payments by each debtor to the service company for the Standard system which presumably was expert in public utility matters but had no such expertness in the oil business. State commissions had some jurisdiction over the debtor and in one case expressly approved fees charged by the service company. There was no similar regulatory authority over Deep Rock Oil Company.