IN THE MATTER OF THE MIDDLE WEST CORPORATION File No. 70-1201. Promulgated February 12, 1946 (Public Utility Holding Company Act of 1935-Section 12 (d) and Rules U-44, U-50) SALE OF SECURITIES. Application and declaration filed by registered holding company pursuant to Section 12 (d) of the Public Utility Holding Company Act of 1935 and Rules U-44 and U-50 promulgated thereunder regarding the sale at competitive bidding of all its holdings of common stock of its registered holding company subsidiary granted and permitted to become effective, respectively, no adverse findings being necessary under the facts and circumstances of the case. APPEARANCES: Herbert David, of the Public Utilities Division of the Commission. FINDINGS AND OPINION OF THE COMMISSION The Middle West Corporation ("Middle West”), a registered holding company, has filed an application and declaration pursuant to Section 12 (d) of the Public Utility Holding Company Act of 1935 and Rules U-44 and U-50 of the General Rules and Regulations promulgated thereunder, proposing to sell at competitive bidding all its interest in its subsidiary, Midland Realization Company ("Realization Company"), consisting of 167,9561⁄2 shares (approximately 27 percent) of common stock of a par value of $1 per share.1 The price to be received and the underwriters' spread are to be determined by competitive bidding. After appropriate notice a public hearing was held. Having considered the record, we make the following findings. DESCRIPTION OF REALIZATION COMPANY AND SUBSIDIARIES Realization Company, successor in reorganization to Midland United Company, and its subsidiary, Midland Utilities Company ("Utilities"), both registered holding companies, were reorganized under Section 77B of the Bankruptcy Act pursuant to a plan approved by this Commission, and confirmed by a decree of the District Court of 1 The remaining 73 percent of such shares are held generally by the public. 22 S. E. C.-35-6406 the United States for the District of Delaware on April 7, 1945.2 The plan, as approved by this Commission and the court, contemplates the speedy liquidation of Realization Company and Utilities.3 REALIZATION COMPANY A balance sheet of Realization Company as at October 31, 1945, is attached hereto as Appendix A. The principal asset of Realization Company is represented by its holdings of 900,000 shares (60 percent) of the outstanding capital stock of Utilities." Liabilities of Realization Company aggregate $5,260,606 including current obligations of $2,760,606. The latter amount includes obligations amounting to $1,517,000 representing the balance due certain secured creditors of the estate of Midland United Company and/or Midland Utilities Company which amount was assumed by Realization Company pursuant to the plan of reorganization. Also included in the liabilities is an obligation to Utilities in the amount of $2,500,000 which is payable only after satisfaction of the claim of secured creditors mentioned above. While current assets of $1,019,602 are insufficient to meet these obligations, it should be considered that Realization has a 60 percent interest in Utilities and that the latter's assets, exclusive of its interest in NIPS, may be converted into cash or its equivalent and become available to Realization Company in proportion to its interest therein upon the ultimate merger of the two companies. It should be noted that under the terms of the plan of reorganization Realization Company must apply all of its cash receipts and cash resources, with certain specified exceptions, first to the payment of principal and interest on its obligations to the secured creditors and thereafter to the payment of the loan from Utilities. In addition, the plan provides that Realization Company cannot make any capital distribution, pay any dividends to its stockholders or purchase any shares of its capital stock prior to the merger of Realization Company and Utilities. The company's outstanding securities are represented by 618,707 shares of common stock, par value $1 per share, which together with 2 See In the Matter of Midland United Company, Debtor, 58 Fed. Supp. 667 (1944) for opinion entered December 11, 1944 approving plan of reorganization. See also Hugh N. Norris, trustee, 16 S. E. C. 718, 17 S. E. C. 770 (1944). The plan also provides that within 1 year after the effective date of the plan, the date of confirmation by the court, or within 90 days after the obligations of Realization Company to the secured creditors have been reduced to $1,500,000 or less, whichever occurs sooner, Realization Company and Utilities shall present a plan of merger to the Commission. In our order approving the plan of reorganization mentioned above, we reserved jurisdiction over the accounting entries to be made on the books of Realization Company and Utilities. Since we have not yet passed upon such entries, the balance sheets submitted herein are subject to such adjustments as may be required. The remaining 600,000 shares (40 percent) are held by the public. paid-in surplus and earned surplus (deficit), have a book value of $7,486,489. The principal source of earnings of Realization Company is from dividends it might receive on the common stock of Utilities. We turn, therefore, to a discussion of Utilities and its subsidiaries. UTILITIES Utilities has two subsidiaries, Northern Indiana Public Service Company ("NIPS") and Indiana Service Corporation ("Indiana"), both of which are public utility operating companies. Of these NIPS, the source of substantially all of Utilities' income, is the more important and is discussed hereinafter. The pertinent facts with respect to Utilities' investment in Indiana follow. Utilities also owns 98.77 percent of the outstanding common stock of Indiana and a note receivable from that company in the principal amount of $2,739,000 plus accrued interest of $1,620,665 to July 31, 1945. The outstanding preferred stocks of Indiana, all of which are held by the public, amount to $3,032,800 par value on which the dividend arrears total $2,633,446 as at July 31, 1945. Utilities's ultimate interest in Indiana may be affected by a plan of corporate simplification of Indiana filed with us pursuant to Section 11 (e) of the Act which in substance provides that Indiana shall be recapitalized on the basis of the presently outstanding bonds and a new issue of common stock. The new common stock would be sold to nonaffiliated interests for a base price of $4,500,000 in cash, plus certain adjustments, which appear to be substantial, and such cash would be distributed to Utilities and to the preferred stockholders of Indiana in full satisfaction of their respective interests. The plan further provides that Utilities shall receive out of such proceeds $3,000,000, plus certain adjustments, in settlement of its entire interest in Indiana. This interest is carried on Utilities' balance sheet at $3,200,000. It should be noted, however, that hearings have not been completed on the plan and our recital of certain of its provisions should not be construed as an expression of opinion of its merits. In this connection it may be further noted there is pending under Sections 11 (b) (2), 15 (f) and 20 (a) of the Act a proceeding in which an issue has been raised as to whether or not it is permissible, necessary, or appropriate that the demand notes of Indiana held by Utilities should be subordinated in whole or in part to the publicly held securities of Indiana.® Utilities also shows among its assets the sum of $2,500,000 due from its parent, Realization Company, which, as mentioned above, is pay *For a summary of a plan and the proceedings instituted by the Commission see Holding Company Act Releases Nos. 6221 and 3855. able only after satisfaction of all obligations of Realization Company to secured creditors. Other assets of Utilities, including $300,875 of net current assets, are set forth on the annexed balance sheet. The outstanding securities of Utilities consisting of 1,500,000 shares of capital stock, par value $1 per share, together with paid-in and earned surplus, are stated on the balance sheet at $19,992,559. As previously indicated, the major asset of Utilities is its investment in NIPS' common stock. It is necessary, therefore, in apprais ing the capital stock of Utilities, which underlies the capital stock of Realization Company proposed to be sold herein, to give consideration to the earnings and other financial attributes of NIPS. NIPS NIPS is an operating public utility company and supplies electric energy, gas and water in northern Indiana, including the city of Gary, in an area having a population of approximately 800,000. As of December 31, 1944, NIPS supplied approximately 153,000 customers with electricity, 178,000 with gas and 22,000 with water. Attached hereto as Appendix C is a balance sheet of NIPS as at October 31, 1945, per books. NIPS' capitalization as of the same date is given below in Table I: The utility plant account of NIPS, per books, as at October 31, 1945, and related reserves are shown below: TABLE II Utility plant (including intangibles) at original cost--. $100, 580, 800 776, 078 In May 1944 the utility plant account was reclassified in accordance with an original cost study approved by the Federal Power Commission and the Public Service Commission of Indiana at which time substantial adjustments were made. The portion of utility plant acquisition adjustments not already reserved for is being amortized by charges to income over a 15-year period ending November 30, 1958. A summary of the earnings of NIPS, per books, for the years 1940 to 1944 inclusive, together with the average for that period, and for the 12 months ended October 31, 1945 is as follows: It should be noted that in the years 1940 through 1944 NIPS effected substantial reductions in Federal income and excess profits taxes occasioned by nonrecurring deductions for tax purposes of call premium and related items in connection with refunding of debt securities and by the payment of dividend arrears on preferred stock, in the following amounts: |