The above discussion makes it clear, and it is conceded by everyone, that there exists an unfair and inequitable distribution of voting power among the security holders of Nassau. It is also clear, in view of the above financial data, that the redistribution of voting power cannot be effected without a stock recapitalization whereby there will be outstanding only. a single class of stock, namely, common stock.

Furthermore, the inclusion in the company's capitalization of the open account liability to Queens in an amount which represents 28.2% of the total adjusted capitalization and surplus results in the company's having a total debt equal to 78.0% thereof. It should also be noted that the coverages for income deductions, including open account interest, have been meager, while in 1947 such income deductions exceeded gross income. Accordingly, it is obvious that, from both an asset and earnings viewpoint, the open account liability must be eliminated from Nassau's outstanding liabilities.

In view of the foregoing, we shall enter an order requiring that Long Island, Queens, and Nassau take such action as will cause Nassau to effect a stock recapitalization, whereby it will replace its outstanding preferred and common stocks with a single class of stock, common stock, to be distributed among the holders of its preferred and common stocks in a fair and equitable manner, and, in connection with such recapitalization, to eliminate its open account liability (including interest thereon) to Queens in a manner appropriate under the standards of the Act.

LONG BEACH GAS COMPANY, INC.

Long Beach is a public-utility corporation organized under the laws of the State of New York and has its principal office in Mineola, New York. It is engaged in the purchase, distribution and sale of manufactured gas for light, heat, or power to customers in Nassau County, State of New York. The gas distributed to its customers is purchased from Queens.

A. Balance Sheet and Capitalization

A condensed balance sheet of Long Beach, per books, as at December 31, 1947, appears below in Table XI.

As indicated above, the earned surplus deficit, per books, amounts to $681,486, or $258,986 in excess of the aggregate par value of the preferred and common stocks.

On the basis of straight-line depreciation studies and testimony submitted by an engineer for the New York Commission in certain proceedings before that Commission with respect to the accounts of Long Beach, there exists a substantial deficiency in the reserve for depreciation of utility plant. The company has brought the engineer's computations up to December 31, 1947, which indicate that removal of the reserve

Note:--The above balance sheet does not reflect accumulated dividend arrears on the preferred stock, which arrears amounted at December 31, 1947 to $474,075, or $147 per share.

deficiency would result in an increase of $303,497 in the earned surplus deficit.

An additional adjustment which the company considers appropriate in restating its accounts would reduce the accrued interest payable, included in open account due associated companies (principally to Queens), to the amounts shown on the books of such associated companies as owing from Long Beach.2 The reduction, which has the effect of eliminating all open account interest subsequent to December 31, 1937, amounts to $147,824, and serves to reduce the earned surplus deficit of Long Beach by such amount. 26

25

The effect of the two adjustments described above is to increase the earned surplus deficit by $155,673 to an adjusted amount of $837,159. In addition, at December 31, 1947, the

25 No interest on open account advances was accrued or charged to Long Beach by Queens subsequent to 1937, or by Long Island and Nassau subsequent to 1938. Subsequent to 1943, no interest has been accrued by Long Beach on open account advances due associated companies.

26 The interest adjustments of $147,824 consists of $144,910 shown as due Queens, $931 due Long Island, and $1,983 due Nassau.

accumulated dividend arrears on the preferred stock amounted to $474,075, or $147 per share.

The adjusted net utility plant of Long Beach as at December 31, 1947 amounted to $1,444,909. First mortgage bonds in the amount of $721,000 represent 49.9% of such net utility plant, and total long-term debt, including the adjusted open account balance of $1,062,040, amounting to $1,783,040, is equal to 123.4% thereof.

There is set forth below in Table XII the capitalization and earned surplus deficit of Long Beach as adjusted to give effect to the increase in the depreciation reserve and reduction in open account, and as further adjusted to provide for accumulated dividend arrears on the preferred stock.

As will be noted from the foregoing table, even without providing for accumulated preferred dividend arrears, the common stock is "under water" to the extent of 53.9% of the adjusted capitalization and deficit, while if provision be made for such arrears, the deficiency in the common stock equity would be increased to 88.5%.

B. Earnings

Appendix D attached contains comparative statements of income of Long Beach, per books, for the ten-year period, 1938 to 1947, inclusive. There is summarized below in Table XIII the gross and net income of Long Beach and the annual deficit in net income applicable to the common stock after deducting current preferred dividend requirements of $22,575 per year. There are also presented coverages of income deductions exclusive of interest on open account advances due associated companies, total income deductions, and total income deductions plus preferred dividend requirements.

Note:--Subsequent to 1943, Long Beach has not accrued any interest on open account advances due associated companies.

As indicated above, in only two of the ten years (i.e., in 1944 and 1945) was there any reported net income." In all other years, there was a net loss. Averages for the ten-year period and for the last five-year period indicate, respectively, deficits in net income for the common stock (after deducting current preferred dividend requirements) of $54,001 and $32,099.

As also indicated in Table XIII above, income deductions, exclusive of interest on debt held by associated companies,

27 Had Long Beach accrued or paid interest on open account advances in these two years there would have been a net loss in each such year.

have been earned an average of but 0.66 times for the ten-year period, 1938-1947, and an average of but 0.86 times for the second half of the ten-year period, while in 1947 such coverage was but 0.51 times. Inclusion of open account interest, of course, reduces these fractional coverages still further.

C. Distribution of Voting Power and Action Required to be Taken with Respect Thereto

The $100 par value 7% preferred stock of Long Beach has a preference over the common stock to cumulative dividends, and, in the event of liquidation or dissolution, whether voluntary or involuntary, has a preference over the common stock to the extent of its par value, plus accumulated and unpaid dividends. The preferred stock is redeemable, in whole or in part, at 112% of its par value, plus accumulated and unpaid dividends.

No dividends have ever been paid on the preferred stock of Long Beach since the date of its issuance in 1926, and no dividends have ever been paid on the common stock of Long Beach since the date of organization in 1916. Voting power in Long Beach is lodged exclusively in the common stock, despite the accumulation of dividend arrearages on the preferred stock, except as may be expressly provided by law.

The above discussion makes it clear that there exists an unfair and inequitable distribution of voting power among the security holders of Long Beach, and that a recapitalization must be effected whereby a single class of stock, common stock, will be substituted for the company's presently outstanding preferred and common stocks. Furthermore, the inclusion in the capitalization of the open account liability to Queens in an amount which represents 77.6% of the total adjusted capitalization and surplus (deficit) results in the company's having a total long-term debt greater than the total adjusted capitalization and surplus (deficit). The income deductions, other than interest to associated companies, have been covered in only two of the ten years 1938-1947, inclusive, and the average gross income for the ten-year period 1938-1947 and for the five-year period 1943-1947 has been less than the net of income deductions less interest to associated companies.

Accordingly, it is obvious that from the viewpoints of both assets and earnings, the open account liability must be eliminated. As in the case of our action with respect to Queens, we shall not at this time pass upon what steps may be required of Long Beach pursuant to Section 11 (b) (2) of the Act, other than the substitution of a new common stock for its existing preferred and common stocks and the elimination of the open account liability. Whether or not the amount of its first mortgage debt should be reduced will be considered in connection with any plan filed to conform to the terms of the order to be entered at the present time, or in further proceedings on our own motion, as may be deemed appropriate. At the present time, we shall enter an order requiring that