future changing economic conditions. This is especially so when a more desirable alternative, such as common stock financing, is available.

In considering refunding issues, the Commission has taken into consideration the fact that if too restrictive provisions are required the financing may not be consummated and the company will not secure the benefits of lower interest rates, extended maturities, and simplified debt structure. The Commission, however, has always insisted that the minimum standards of the Act be adhered to. Where this is impossible, recapitalization is recommended.60 The Commission is presently engaged in reexamining the extent to which it may properly differentiate between refunding issues and new issues.

61

In February 1940, the Kentucky Utilities Company, a subsidiary of The Middle West Corporation, filed a declaration to issue $26,000,000 of first mortgage bonds and $6,000,000 of serial notes. This plan was amended to cover an issue of $20,000,000 of first mortgage bonds, $6,000,000 of second mortgage sinking fund bonds, and $6,000,000 of serial notes. The bonded indebtedness amounted to 64 percent while the common stock equity equaled only 10 percent of the total capitalization. At the suggestion of the Commission, The Middle West Corporation agreed to contribute $500,000 to the company to retire debt. The Commission then approved this refunding program, because the heavy sinking fund provisions and serial retirements would rapidly improve the financial structure of the company. All savings due to lower interest rates were also to be applied to debt retirement.

In February 1940, the West Penn Power Company, a registered holding company and an indirect subsidiary of American Water Works and Electric Company, filed an application for exemption, under Section 6 (b), of the issue and sale of $5,000,000 of bonds and 24,923 shares of

60 In his concurring opinion in Southwestern Gas and Electric Company, Holding Company Act Release No. 1931, Chairman Frank said:

"This Commission has consistently differentiated between (a) the sale of bonds, the proceeds of which are to be used to refund or retire existing debt with a resultant decrease of fixed charges, and (b) new issues of bonds which will add substantially to the existing corporate debt. The Commission has accordingly permitted refunding bond issues to be sold where the ratio of debt to total capitalization was relatively high and where the ratio of common stock and surplus (the common stock "cushion") to total capitalization was relatively low. See, e. g., Republic Service Corporation, 2 S. E. C. 44 (1937). In some few of such cases the debt was increased by a relatively small amount in order to enable the company to meet the expenses attendant on the refunding operations; but in those cases the increase was temporary, provision having been made for a rapid retirement of the increased debt. See, e. g., Pennsylvania Power & Light Company, Holding Company Act Release No. 1678 (1939). Of course, there may be circumstances in which we could not permit bonds to be issued even for purposes of refunding. Our decisions are not to be taken to mean, there fore, that refunding bond issues will always be authorized, if debt ratios are dangerously high, or if other conditions exist which clearly transgress the applicable standards of the Act; indeed, adverse findings might be required even if, in such cases, the company is unable to procure funds for refunding through the sale of junior securities." Chairman Frank also observed: "Many cases of refunding issues have arisen under the express statutory exemption created by Section 6 (b). Accordingly, the requirements of Section 7, includ ing, of course, Section 7 (d) (3), were inapplicable. See Public Service Company of Indiana, Holding Com pany Act Release No. 1826 (1939); Central Illinois Electric and Gas Company, Holding Company Act Release No. 1591 (1939); Northern Indiana Public Service Company, Holding Company Act Release No. 1836 (1939).” 61 Holding Company Act Release No. 1965.

4 percent preferred stock.62 Subsequently, the applicant withdrew its application and filed a declaration, under Section 7, to issue and sell $3,500,000 of bonds and 160,000 shares of no par common stock at an offering price of $27 per share. The proceeds of the sale were to be used for the acquisition of improvements, additions, and betterments to its plant and property. Bonds and common stock equity represented 48 and 29 percent, respectively, of total capitalization. The ratio of debt and preferred stock to depreciated property and investments on a pro forma basis was equal to 75 percent. But, after eliminating large inflationary items, the ratio rose to 84 percent. The company, however, has been earning its interest and preferred dividends by a wide margin and has regularly paid common stock dividends for the past 20 years.

The Commission considered the small amount of common stock equity and the presence of inflationary items undesirable. It indicated that a program of financing entirely with senior securities, when equity financing was available, would fall short of statutory standards. Since the altered plan cut down the amount of bonds, eliminated the preferred stock, and raised over half of its immediate capital requirements by the public issue of common stock, no adverse findings were made as in the earlier case of Consumers Power Company. Because of the possible detriment to uninformed investors and the fact that there were no quoted prices to guide them, the Commission required that the offering prospectus include those parts of the opinion. which discussed investment and property write-ups, equity and bond ratios, depreciation policies, and possibility of rate reductions. On the basis of its earnings for the year 1939, the proposed offering price of $27 per share amounted to 17.3 times the earnings applicable to the common stock. Since the common stock was to be sold to the public, the charter was amended to give it preemptive rights and to require that prejudicial changes in the rights of common stockholders must be approved by at least two-thirds of the outstanding shares. Because the two parent companies, which owned all the outstanding common stock, were not in a position to subscribe for 160,000 additional shares, they were offered to the public. This is one of the first cases, since the passage of the Act, in which new money has been secured from the public by means of the sale of common stock. Other cases have been concerned principally with already outstanding shares or with stock issued to the parent or issued for the exchange of property or other securities. Pursuant to an approved plan of reorganization which called for a partial liquidation of the portfolio of the Utilities

Holding Company Act Release No. 2009.

Commissioner Healy expressed the view that since the company, though a registered holding company itself, was a subsidiary of a registered holding company it was entitled to have the matter treated under Section 6 (b) rather than under Section 7 of the Act, and pointed out certain problems which would be presented were the case considered under Section 7.

Power & Light Corporation, a registered holding company, and its conversion into an investment trust, the trustee offered to the public, through underwriters, 645,980 shares of the common stock of its operating subsidiary, the Indianapolis Power & Light Company, at $24 per share or 11.7 times earnings. At the same time, the operating company sold, through these underwriters, 68,855 new shares, to raise capital for plant expansion. Also in furtherance of this reorganization plan, the 11,910 one hundred dollar par value shares of the Newport Electric Corporation were split 5 for 1 and offered to the public at $29.50 per share, or 9.4 times earnings, by the trustee. Pursuant to a plan to liquidate the Washington and Suburban Companies, 362,588 shares of its subsidiary, Washington Gas Light Company, were offered to the public at $29.50, or 11.0 times earnings. This block included 35,000 new shares which were being sold to raise additional capital for the operating company.

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65

One of the objectives of the Act is to prevent an unfair or inequitable distribution of voting power. In the Southwestern Gas and Electric Company case, the Commission approved the alteration of the voting power of the common stock which resulted from giving the right to vote to the new preferred stock issued to replace one paying a higher dividend. The new preferred stock had the following voting rights:

1. One vote per share for the election of directors and upon all other matters.

2. When one year's cumulative preferred dividends have accrued, two additional directors elected by the preferred stock shall be added to the board of directors, while the remaining directors shall be elected by the common stock.

3. When three years' cumulative preferred dividends have accrued and until all dividends in default shall have been paid, the preferred stock, voting as a class, shall be entitled to elect a bare majority of the full board of directors.

4. Without the affirmative vote of a majority of the outstanding shares of preferred stock, or if one-third of the outstanding shares of such stock shall vote negatively, the company shall not

(a) authorize any prior or parity stock; or

(b) change any of the terms or provisions of outstanding shares of preferred stock so as to affect adversely the holders thereof; or

(c) issue any shares of preferred stock in excess of 75,000 shares of 5 percent preferred stock or any shares of any class of stock ranking prior to or on a parity with the preferred stock, unless net earnings available for dividends

Holding Company Act Releases Nos. 2001, 2087.

65 Holding Company Act Releases Nos. 1545, 1552.

60 Holding Company Act Release No. 1670.

shall for a preceding twelve-month period have been at least equal to twice the annual dividend requirement on all shares of preferred stock which would then be outstanding, and unless gross income for said period available for payment of interest shall have been at least one and one-half times the sum of funded debt charges and dividend requirements on all preferred stock then outstanding; or

(d) issue any shares of preferred stock if thereafter the aggregate par and stated value of all such outstanding shares would exceed the sum of $15,000,000 and would also exceed an amount equal to twice the sum of (i) the capital of the company represented by stock junior to the preferred stock and (ii) earned and capital surplus of the company; or

(e) reacquire, or declare any dividends, or make any other distribution, upon shares of common stock or any other class of stock junior to the preferred stock, unless immediately thereafter the sum of (i) the capital represented by all stock junior to the preferred stock and (ii) earned and capital surplus, shall be not less than the sum of $5,800,000 plus an amount equal to twice the annual dividend requirement on outstanding preferred stock; or

(f) issue any unsecured form of debt other than for the refunding of outstanding unsecured securities, or the redemption of the preferred stock, if immediately after such issue the total principal amount of all such unsecured securities then outstanding would exceed 10 percent of the aggregate of (i) the total secured debt and (ii) the capital and surplus of the company; or

(g) merge or consolidate with or into any other corporation unless such merger or consolidation, or the issuance and assumption of all securities to be issued or assumed in connection therewith be ordered, approved, or permitted by the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935.67 Frequently the companies with high dividend preferred stocks have redeemed or exchanged them for new issues carrying lower dividend rates. In carrying out this refinancing, it has been found to be a convenient means of distribution to offer the old preferred shareholders the opportunity to subscribe to the new shares. To this end, they have been notified of the general plan several weeks in advance but have been informed of the final terms, such as price and dividend rate, only two or three days before exchanged documents must be in the "Holding Company Act Release No. 1931.

hands of the company or its underwriting agents.68 After investigation and observation of several cases, the Commission concluded that this length of time was insufficient and in the Kansas Power and Light Company opinion gave notice that thereafter any such exchange period ought to be not less than five days.69 Immediately thereafter, the Wisconsin Electric Power Company 70 provided a ten-day exchange period for its old preferred stockholders.

The Commission has been giving increasing attention to the provisions of trust indentures securing mortgage bonds of public utility companies. The terms of these indentures relating to the obligations and activities of the trustee must now conform to the standards of the Trust Indenture Act of 1939. Other provisions of trust indentures also require examination to see that they in turn provide adequate protection for the investor. The Commission is making a general study of indenture procedures and provisions with a view to developing appropriate standards for the future.

In addition to its other regulatory duties relative to the issuance or sale of utility securities subject to its jursidiction, the Commission is called upon to supervise the exercise of any privilege or right to alter the priorities, preferences, voting power, or other rights of the holders of outstanding securities. Under Section 7 (e), the Commission may not permit the exercise of any such privilege or right where it would result in unfair or inequitable distribution of the voting power or would be otherwise detrimental to the public interest or the interest of investors or consumers.

An important case illustrating the difficult problems that may arise in connection with this phase of the Commission's work involved the Philadelphia Company, a subsidiary of Standard Gas and Electric Company and principal source of income of that company. The Philadelphia Company filed a declaration with the Commission pursuant to Section 6 (a) (2) regarding a reduction in the stated value of its common stock from approximately $48,000,000 to approximately $34,800,000. The major investment of the Philadelphia Company is its ownership of the entire common stock of Duquesne Light Company. which operates in Pittsburgh, Pennsylvania. The Philadelphia Company, however, also has a substantial investment in the street railway system of Pittsburgh, carried on its books at more than $52,000,000. The Philadelphia Company sought to create a reserve of $23,000,000 to absorb an anticipated loss on its investment in the street railway system which was being reorganized. The reserve was to be set up

* West Penn Power Company, Holding Company Act Release No. 1639. American Gas and Electric Company, Holding Company Act Release No. 1870. Southwestern Gas and Electric Company, Holding Company Act Release No. 1931. Kansas Power and Light Company, Holding Company Act Release No

2024.

69 Holding Company Act Release No. 2024. 70 Holding Company Act Release No. 2026.