IN THE MATTER OF

SEATTLE GAS COMPANY

File Nos. 54-124, 59–79, 70-1197. Promulgated January 13, 1947

(Public Utility Holding Company Act of 1935)

SIMPLIFICATION OF HOLDING COMPANY SYSTEM AND REDISTRIBUTION OF VOTING POWER NECESSARY TO EFFECTUATE THE PROVISIONS OF SECTION 11 (B)

Where a plan of a public utility subsidiary of a registered holding company submitted pursuant to the provisions of Section 11 (e) of the Act provides for the equitable distribution of voting power and is a means reasonably adapted to the attainment of the ends required by the provisions of Section 11 (b) held that the plan is "necessary" to effectuate the provisions of Section 11 (b) within the meaning of Section 11 (e).

Fair and Equitable Standard of a Plan Filed Under Section 11 (e)

Where a plan submitted pursuant to Section 11 (e) of the Act provides for the issuance of one class of common stock in place of three classes of stock now outstanding, and for the distribution of the new common stock among the several classes of security holders according to their respective rights in the enterprise held that such plan is “fair and equitable" within the meaning of Section 11 (e).

APPEARANCES:

Drinker, Biddle and Reath, Philadelphia, Pa., by Thomas Reath and Stanley C. Snow, and Almon Ray Smith, Seattle, Wash., for Seattle Gas Company.

Bernard S. Kanton and Harlow B. Lester, for the Public Utilities Division of the Commission.

R. A. Moen, Olympia, Wash., for the Department of Public Utilities of the State of Washington.

Thos. W. Delzell, Independent Trustee of Portland Electric Power Company.

J. L. Holtzmann, New York, N. Y., by Daniel Delan, for Shea & Co. F. R. Bailey of C. D. Robbins and Co., Newark, N. J., pro se.

FINDINGS AND OPINION OF THE COMMISSION

On April 7, 1945, Seattle Gas Company (Seattle), a gas utility subsidiary of Portland Electric Power Company (PEPCO) and Port

25 S. E. C.-35-7128

land General Electric Company (PGE), registered holding companies under the Public Utility Holding Company Act of 1935, filed a plan of recapitalization (original plan) pursuant to Section 11 (e) of the Act to comply with Section 11 (b) (2) of the Act. On April 13, 1945, the Commission instituted proceedings with respect to Seattle under Sections 11 (b), 15 (f) and 20 (a) of the Act, and consolidated the proceedings with the Section 11 (e) proceedings.1

The original plan contemplated a recapitalization of Seattle wherein it was proposed that the presently outstanding shares of $5 first preferred stock, second preferred stock and common stock be reclassified into new 5% cumulative preferred stock, having an aggregate par value of $2,355,250, and new common stock, having an aggregate par value of $1,834,800. All of the new 5% cumulative preferred stock was to be allocated to the present $5 first preferred stockholders and the new common stock allocated to the $5 first preferred and second preferred stockholders in the proportions of 96.28% and 3.72%, respectively. The existing common stock was to be canceled and no new shares issued therefor. After appropriate notice, public hearings on the original plan were held in May 1945. Various interested security holders entered appearances and were granted limited participation and the Department of Public Utilities of the State of Washington entered an appearance and became a party to these proceedings. Subsequently, the management of Seattle requested that consideration of the original plan by the Commission be suspended pending completion of the then contemplated refinancing of the company's bonds. On November 28, 1945, the company filed an application pursuant to Section 6 (b) of the Act with respect to the issue and sale at competitive bidding of $4,800,000 principal amount of First Mortgage Bonds, due 1976, the net proceeds to be applied to redeem Seattle's First and Refunding Mortgage Bonds, 5% Series A, due October 1, 1954, in the aggregate principal amount of $4,678,250. Inasmuch as the issues arising in the application filed pursuant to Section 6 (b) of the Act (File No. 70-1197), in the original plan (File No. 54–124) and in the proceedings instituted by the Commission under Sections. 11 (b), 15 (f) and 20 (a) (File No. 59-79) involved certain common questions of law and fact, the matters were consolidated. After a public hearing, the Commission granted the application and Seattle sold the new bonds at competitive bidding for a price of 100.29 plus accrued interest with a coupon rate of 35%%, or at a cost of money to the company of about 3.61%.*

1 See Holding Company Act Release No. 5725. 'See Holding Company Act Release No. 6265. Seattle Gas Company, 21 S. E. C. 665 (1946). See Holding Company Act Release No. 6368.

Thereafter on April 17, 1946, Seattle filed an amended plan of recapitalization which in effect contemplates the same general program and embodies the same basic features as the original plan, except that Seattle will issue only new common stock which will all be allocated to its $5 first preferred and second preferred stockholders in the proportions of approximately 98.96% and 1.04%, respectively. As in the original plan, the existing common stock will be canceled and no new common stock issued therefor.

After appropriate notice, hearings were held on the amended plan. The filing of briefs and oral argument were waived. Having considered the record, we make the following findings:

DESCRIPTION OF SEATTLE

History.-Seattle is engaged in the manufacture and distribution of fuel gas in King County, Wash., and the manufacture and sale of residuals consisting principally of briquets, carbon black, benzol and toluol. The company manufactures gas through oil and water processes and distributes this product to approximately 44,800 customers out of an estimated population of 465,000 in its service area.

Seattle was incorporated under the laws of the State of Washington on March 17, 1904, under the name of Seattle Lighting Company the name having been duly changed in 1930 to Seattle Gas Company. In 1935 the company was reorganized under Section 77B of the Bankruptcy Act.

Capitalization.-Appendix A, attached hereto, is the condensed balance sheet of Seattle, as at December 31, 1945, actual, and adjusted to reflect the bond refinancing in January 1946, and further adjusted to give effect to consummation of the amended plan of recapitalization. Seattle's capital structure as at December 31, 1945, adjusted to reflect the refinancing of the company's bonds in January 1946, was as follows:

• This figure includes Reserve for Contingencies in the amount of $492,336. See discussion under Accounting Treatment, Infra.

The Seattle $5 first preferred stock is redeemable at $100 per share plus accrued dividends and is entitled to a preference in liquidation of $100 per share plus accrued dividends. In addition, a shareholder

of $5 first preferred stock is entitled to convert each share of preferred stock into two shares of common stock. No dividends were paid on this stock from the time of the Section 77B reorganization of Seattle in November 1935 until December 1942, at which later date a dividend of $1.00 per share was paid. Thereafter dividends of $2.50 per share per year have been paid. Arrearages on the $5 first preferred stock aggregated $2,367,026 or $50.25 per share, as at December 31, 1945. The second preferred stock is non-callable and in event of a liquidation has a preference of $75 per share. The second preferred stockholders have the right to convert each share of such stock into one share of common stock. Non-cumulative dividends of $5 per share per year are payable only to the extent earned in each calendar year and only in the event all accumulated dividends on the first preferred stock have been paid. No dividends have been paid on the second preferred stock since its issuance in November 1935.

The common stock of Seattle has no par value and has a stated value of $1 per share. No dividends have been paid on this security since its issuance in November 1935.

It should be noted that while the book equity for all three classes of stock aggregated $5,285,207 as at December 31, 1945, the stated value of the $5 first preferred stock ($3,297,350) and accumulated arrears ($2,367,026) as at this date aggregated $5,664,376."

Both preferred stocks and the common stock have unlimited and unrestricted voting rights share for share with one exception. Until all dividend arrearages shall have been paid on the $5 first preferred stock and dividends shall have been paid currently for at least a full calendar year, the $5 first preferred stockholders have the sole right to elect as a class a majority of the Board of Directors of Seattle. This right has been exercised by the $5 first preferred stockholders since November 1935. All three classes of stock have the right to participate in the election for the minority members of the Board of Directors.R There are presently outstanding 47,105 shares of $5 first preferred stock, 27,338 shares of second preferred stock and 23,739 shares of common stock. PEPCO, PGE and Cazadero Real Estate Company, a real estate company whose capital stock is entirely owned by PEPCO,

•The charter provides that the Board of Directors shall, out of the moneys available for payment of dividends on the second preferred and common stocks, or either one, set aside as a fund for the retirement of the $5 first preferred stock, 25% of the amount of cash dividends paid during any calendar year on the second preferred or common stocks, or both.

'The liquidation claim of this security is $100 per share plus accrued dividends. The aggregate liquidation claim, including accumulated arrears of $2,367,026, amounted to $7,077,526 as at December 31, 1945.

At the present time there are seven directors of which four are elected by the $5 first preferred stockholders and the remaining three by the combined votes of all three classes of stock. In this correction, it should be noted that provision for cumulative voting is mandatory under the laws of the State of Washington.

own in the aggregate 13,400 shares of second preferred and 2,800 shares of common stock of Seattle."

Plant and property.-As will be seen from the attached balance sheet, Appendix A, Seattle carried its plant and property at $13,025,373 as of December 31, 1945.

On November 5, 1935, when the Federal District Court approved and declared operative the reorganization plan filed pursuant to Section 77B of the Bankruptcy Act, the amounts in the plant and property accounts and the depreciation reserve account of Seattle were restated pursuant to determinations made by the Board of Directors of the company as of that date. This restatement of accounts arose as a result of a rate proceeding instituted by the Department of Public Utilities of the State of Washington in 1933 in which the Department held that the fair value of the used and useful operating property of Seattle for rate-making purposes was $7,900,000. On appeal by the company to the Superior Court of the State of Washington in and for Thurston County, the Department's ruling was reversed and the Court remanded the case for further review. While the Department was engaged in a further investigation, Seattle filed its petition in Federal district court for a Section 77B reorganization. The record indicates that in order to expedite such reorganization, a compromise was reached between the Department and the Seattle management wherein the prudent investment value of the plant and property as of November 30, 1935 was established at $11,412,355. This figure has not been segregated into primary and sub-accounts and does not reflect segregation between tangible property and intangible property.10 However, N. Henry Gellert, president of Seattle, testified that he recently conferred with the Director of the Department and it was agreed that the company would undertake the allocation of this amount of $11,412,355 into separate accounts at the earliest possible date. It was further agreed that the segregation would be made in accordance with the Uniform System of Accounts of the National Association of Railroad and Utilities Commissioners, as revised in 1939, rather than such system of accounts as published in 1922 which the company has been following.

Depreciation. The record indicates that the reserve for depreciation was restated on the books of the company as of January 1, 1935, on a 4% sinking fund basis applied to the estimated cost of construction of the company's properties." While provisions for deprecia

It is noted that James H. Polhemus, president of PGE, is presently a director of Seattle. 10 Additions to plant and property since November 30, 1935 have been recorded at cost and by classified accounts. Retirements are made on the basis of cost or estimated book

value.

11 The estimated cost of construction was arrived at as a result of a study made jointly by representatives of the Department of Public Utilities of the State of Washington and the

company.