• This decrease was due to the discontinuance by Mauch Chunk of power sales to a nonaffiliated utility company. Not available from the record.

The above table indicates a steady but rather slow growth of revenues which was not materially affected by the impact of the war.

Below is a tabulation showing the net operating income before Federal income taxes of Abington, the other six electric subsidiaries and the heating subsidiary for the years 1936 to 1944 and for the 12 months ended August 31, 1945:

The large decrease in earnings of Abington in recent years was due primarily to the lowered efficiency of its generating equipment and higher fuel cost. The record indicates that due to the anticipated abandonment of Abington's generating plant and purchase of its power requirements there will be a decrease in Abington's revenues and also a substantial reduction in power costs. The company has estimated that Abington's net operating income before Federal income taxes will rise to the level attained in the period 1936-42.

The company has filed earnings estimates for the years 1945-49 and for a typical year, on the basis of the present plant facilities, but taking into account the changes proposed in the operations of Abington. The figures for the typical year have been used by both the company and stockholder plans as a basis for projecting the proposed plans. The following table shows gross revenues and net operating income of Republic's subsidiaries estimated by the company for the typical year on the basis set forth above:

In the forecast revenues of $250,000, $690,000 and $22,000 are estimated for Abington, the other six electric subsidiaries and the heating subsidiary, respectively.

The typical year gross revenues estimated at $250,000 for Abington compares with gross revenues per books of $335,091 and $341,475 for the calendar year 1944 and the 12 months ended August 31, 1945, respectively. However, it should be noted that the actual gross revenues for these periods includes approximately $90,000 of annual sales to a nonaffiliate which will be lost to Abington, as indicated herein.

The typical year gross revenues estimated for the other subsidiaries at $712,000 compares with gross revenues per books for these companies of $699,000 and $724,000 respectively for the calendar year 1944 and for the 12 months ended August 31, 1945.

Typical year gross revenues estimated by Republic for all of its subsidiaries at $962,000 compares with $1,034,809 and $1,065,947 respectively received during the above periods. If sales to the nonaffiliate by Abington are deducted, the comparable amounts would be approximately $944,809 and $975,947 for the respective periods. For the typical year the company has estimated net operating income before Federal income taxes for Abington, the six other electric subsidiaries and the heating subsidiary at $89,000, $149,000 and $5,000, respectively, an aggregate of $243,000. These figures are only slightly higher than the level attained by the past steady growth and we find that they represent a reasonable estimate of the net operating income before Federal income taxes normally to be derived from the present plant investment.

STATUTORY COMPLIANCE

In order to approve either of the plans before us, we must find such plan necessary to effectuate the provisions of Section 11 (b) and fair and equitable to the persons affected. The transactions proposed in the plan must also satify the other applicable standards of the Act.

An issue common to both plans has been raised by counsel for the indebenture trustee. He urges that the bondholders be paid a redemption premium of 5 percent of the original principal amount of the bonds. Neither plan proposes such payment. Republic's indenture provides that "The Mortgager shall have the right to call for payment or redemption any or all of the outstanding bonds issued hereunder or secured hereby on any interest date at one hundred and five per centum (105%) of the principal amount thereof, together with accrued interest to said date . . ." It is clear that this premium is only payable in the event of voluntary redemption by the company. Where the retirement of indebtedness occurs because of the compulsion of Section 11, whether to meet a Section 11 (b) order or in anticipation thereof, the retirement cannot be considered voluntary and the redemption premium is accordingly not payable as such."

We find that retirement of Republic's bonds is required by Section 11 (b) and our order thereunder, and that the bondholders have no contract right to receive the redemption premium.

Both the stockholder plan in its proposed payment of the bonds and the company plan in its allocation of new common stock to the bondholders proceed on the theory that the bondholders are entitled to receive, in satisfaction of their claims, the unpaid principal amount of the bonds plus accrued interest. After consideration of all the available data in the record as to the asset and earnings coverage of the bonds, and all other factors bearing on their investment value, as referred to and summarized herein, including their early maturity, we are satisfied and we find that payment of Republic's bonds at principal

'The United Light and Power Company, American Light & Traction Company, et al., 22 S. E. C. 704 (1946), and cases therein cited. We made a similar observation in our findings and opinion approving Republic's sale of its Virginia subsidiaries. See footnote 3, supra.

In our findings and opinion ordering Republic to divest itself of the Virginia subsidiaries and to recapitalize, we pointed out that the extensive preferred stock dividend arrears, the extremely high proportion of debt to property and capitalization, the high proportion of the total of debt, preferred stock and preferred stock dividend arrears to property and capitalization, and the insufficiency of the system's earnings to support the capitalization, made it clear that Republic's corporate structure unfairly and inequitably distributed voting power among security holders in violation of Section 11 (b) (2) and that such inequitable distribution could be cured only by a readjustment of Republic's corporate structure, including debt. Republic Service Corporation and its Subsidiaries, 12 S. E. C. 852 (1943).

amount plus accrued interest would constitute fair and equitable treatment for the bondholders."

There has been no change in Republic's financial condition since our order of February 19, 1943, to invalidate the provision thereof denying the present common stock any participation in the reorganization. And indeed, neither the proponents of the plans or other participants in the proceedings have urged otherwise. The company's past earnings have been inadequate to meet the dividend requirements of the preferred stock, and arrearages amounted to $1,296,599 as of August 31, 1945. Nor is there any indication that future earnings would be sufficient to pay off these arrearages and to satisfy the current preferred dividend requirement of $105,486 per annum. Accordingly, we believe that both plans properly deny participation to the common stock.

We now turn to a consideration of the capital structures proposed in the company and stockholder plans. As noted above, the company plan is based on the issuance of one class of stock and an allocation thereof between Republic's bondholders and preferred stockholders. The stockholder plan involves the issuance of new debt securities and new common stock, and provides for payment of the bonds in cash and distribution of the residual equity, represented by common stock and 30-day warrants to subscribe for common stock, to the preferred stockholders.

Isaac strongly opposes the company plan, chiefly because it entails a loss of value which might be available to the preferred stockholders if the bonds were paid in cash and new debt securities sold to obtain part of the funds required. The company, on the other hand, vigorously objects to the stockholder plan, principally on the grounds of the high initial debt ratio and the proposed retention of earnings to reduce debt in the future. Republic contends that the stockholder plan is unfair in that it compels the preferred stockholder to make a further investment in the company to protect his "asset position" and "share of the voting power," or else to dispose of a portion of his equity by the sale of warrants for whatever they may bring in

• Cf. American Power & Light Company, 21 S. E. C. 191 (1946). The price range of Republic's bonds from 1935 through 1945 has been as follows:

the over-the-counter market during the 30-day period provided for their exercise. Republic also objects to the warrant proposal and to the underwriting by the Isaac group as permitting members of that group to obtain benefits at the expense of the less informed remaining preferred stockholders.

Subject to our comments below, it would appear that a plan which would provide for a recapitalization of Republic with debt in a limited amount and common stock, and for payment of the present bondholders in cash, has substantial advantages over an all common stock plan in meeting the problems of the system. Although we think, therefore, that the principle underlying the stockholder plan affords the most appropriate method for Republic's recapitalization, we feel that the stockholder plan as presently constituted provides for an excessive amount of debt which could not be approved under the standards of Section 7.

According to the estimate of earnings in the typical year discussed above, net operating income and gross income of the operating companies would amount to $173,000.10 The company has forecast its own expenses and taxes at $29,000. Thus the consolidated net income accruing to the 114,590 shares of new common stock to be issued under the company plan would amount to $144,000. Under the company plan, the bondholders would receive new common stock with 84.66 percent of such earnings applicable thereto, or approximately $122,000, and the preferred stockholders would receive stock representing 15.34 percent of the earnings, or approximately $22,000."1

In the stockholder plan, which is based upon the company estimate of $173,000 gross income for the operating companies in a typical year, expenses and taxes of the parent company are figured at $21,000, resulting in an estimated $152,000 of consolidated gross income. Annual interest requirements on the debt securities proposed under the stockholder plan, computed at the rates of 4 percent for the debentures and 22 percent for the notes, would amount to $54,500. The consolidated net income applicable to the 70,324 shares of new common stock to be issued is thus estimated at $97,500; one-half of such shares, proposed to be distributed to perferred stockholders, would have estimated applicable earnings of $48,750.

10 As indicated in Appendix C, Republic's estimates of net operating income and gross income of subsidiaries are identical.

"The holder of a $400 bond would receive stock with total earnings, as estimated by the company, of $27.72 in lieu of all his present rights, including an interest claim of $20. The company estimated that dividends amounting to $0.90 per share could be paid on the new common stock, indicating a potential income of $19.80 on the 22 shares of new common stock to be distributed for each $400 bond.

We do not deem it necessary, in the light of our conclusions herein, to determine whether the proposed allocation to bondholders would give them the "equitable equivalent" of the rights they would be relinquishing.