In re Jacksonville Gas Co.

• Decision Date: 22 September 1942
• Docket Number: No. 483.,483.
• Citation: 46 F. Supp. 852
• Parties: In re JACKSONVILLE GAS CO. et al.
• Court: U.S. District Court — Southern District of Florida

46 F. Supp. 852

In re JACKSONVILLE GAS CO. et al.

No. 483.

District Court, S. D. Florida, Jacksonville Division.

September 22, 1942.

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Chester T. Lane, Gen. Counsel, of Washington, D. C., Homer Kripke, Sp. Counsel, Myron S. Isaacs, and David Ferber, all of Philadelphia, Pa., for Securities & Exchange Commission.

Humes, Buck, Smith & Stowell (Albridge C. Smith) of New York City, and Elliott Adams, of Jacksonville, Fla., for Gas Companies.

Davis, Polk, Wardwell, Gardiner & Reed (Edgar G. Crossman) of New York City, for debenture trustee.

Pam, Hurd & Reichmann, of Chicago, Ill., for mortgage trustees.

Lawrence E. Fleischman, of Chicago, Ill., Charles Cook Howell, of Jacksonville, Fla., and Joseph A. Varon, of Hollywood, Fla., for certain debenture holders.

STRUM, District Judge.

This is an application by the Securities & Exchange Commission, at the request of Jacksonville Gas Company, for an order pursuant to § 11(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79k (e), to enforce and carry out a plan of reorganization heretofore promulgated by the Commission to eliminate existing inequity and unfairness in the present distribution of voting power amongst the security holders of said company. The Commission has found said plan to be fair and equitable, and necessary to effectuate the provisions of § 11(b) of the Act.

Jacksonville Gas Company is an operating utility, serving Jacksonville and vicinity. It is not a holding company. 50% of its voting capital stock is owned by American Gas & Power Company, a registered public utility holding company. The Jacksonville Gas Company is therefore a subsidiary of American Gas & Power Company. § 2(a) (8) (A), 15 U.S.C.A. § 79b(a) (8) (A).

As of December 31, 1941, the company's total long term debt aggregated $5,498,231;¹ there was outstanding capital stock aggregating $50,196 par value; and the company carried a book surplus (capital and earnings) of $613,130. This produces a total capitalization and book surplus of $6,161,557.

As of December 31, 1941, the book value of plant and equipment was $6,207,250, but that figure far exceeds actual value. The present value of the company's assets ($2,625,000), hereinafter discussed, demonstrates that in fact its fixed liabilities (exclusive of capital stock) greatly exceed the fair value of its assets. Its present debt structure, originally created on the basis of a greatly inflated plant valuation, now imposes interest requirements far in excess of the company's earning power. In 1935 the company underwent a 77B reorganization, 11 U.S.C.A. § 207, the primary result of which was to reduce the fixed interest rate on its then outstanding bonds, and to make part of its interest requirements upon said bonds, and all the interest upon its debentures and income notes, conditional upon earnings. Principal of these obligations was not reduced. Since that time the company's earnings² have been sufficient to meet fixed interest charges on the bonds, but relatively little has been available for conditional interest after providing for sinking fund requirements and essential plant extensions in accordance with the 1935 reorganization plan. Fixed interest on bonds at 3% has been paid to December 31, 1941, but only $90,000 (approximately) has been paid on, or available for, conditional interest since 1935.³ No interest has been paid upon debentures or income notes, and of course there have been no stock dividends.

The present capital stock obviously has no equity in the company. Yet the holders of this stock now exercise the entire voting power — an obvious inequity within the meaning of § 11(b) (2) of the Act. The voting power should be vested in the creditors, who are now the real owners.

Certain debenture holders contend that since the Jacksonville Gas Company is an operating utility, not a holding company, the Commission has no power to alter its corporate structure as proposed in the plan under consideration, involving as it does a comprehensive internal reorganization, affecting all classes of security holders.

Section 1(b) (1) of the Act, 15 U.S.C.A. § 79a(b) (1), declares that the national public interest, and the interests of investors in securities of holding companies "and their subsidiary companies," are or may be adversely affected when "such securities are issued upon the basis of fictitious or unsound asset values having no fair relation to the sums invested in or the earning capacity of the properties," and when securities are issued "by a subsidiary public-utility company under circumstances which subject such company to the burden of supporting an overcapitalized structure * * *." Section 1(c) declares it to be the policy of the Act, in accordance with which all the provisions of the Act shall be interpreted, "to meet the problems and eliminate the evils" above stated.

Section 11(a) of the Act makes it a duty of the Commission to examine the corporate structure "of every registered holding company and subsidiary company thereof" (italics supplied) to determine "the extent to which the corporate structure of such holding-company system and the companies therein may be simplified * * * and voting power fairly and equitably distributed among the holders of securities thereof, * * * appropriate to the operations of an integrated public-utility system." This language "registered holding company, and each subsidiary company thereof" follows through several provisions of § 11(b), and finally in § 11(b) (2) is found this provision: "Except for the purpose of fairly and equitably distributing voting power among the security holders of such company, nothing in this paragraph shall authorize the Commission to require any change in the corporate structure or existence of any company which is not a holding company, or of any company whose principal business is that of a public-utility company."

When the Act says that the Commission is not authorized to require any change in the corporate structure of an operating utility, "except for the purpose of fairly and equitably distributing voting power among the security holders of such company," it clearly implies that the Commission may require such change if it be for that purpose. Else, why was the quoted exception included in the Act? If Congress intended to withhold such power, that intent would have been evidenced beyond debate by simply omitting the quoted exception. Its inclusion in the Act must be given appropriate significance and weight.

The Act contemplates that ordinarily the fair and equitable distribution of voting power in a holding company system may be accomplished by adjustments in the corporate structure of the holding companies themselves, rather than in the operating companies. But where, as here, intrinsic inequity in the distribution of voting power is found in the structure of an operating company, and the purpose of a proposed plan is to remedy that inequity, the above quoted language, when given its proper perspective in the whole Act, authorizes the Commission to appropriately readjust the corporate structure of that particular operating utility, even though a comprehensive internal reorganization, affecting all classes of security holders, is necessary to accomplish that end.

That this is so becomes clearly apparent here. Under its present corporate structure, the company's voting power is inequitably distributed because exercised by capital stock having no equity in the company. This, in turn, is due to the fact that the company is now burdened with excessive fixed obligations, thus subjecting the company "to the burden of supporting an overcapitalized structure," defined in § 1 (b) (1) of the Act as one of the evils which may be eliminated thereunder. It is obvious that fixed obligations must be reduced in order to inject value into the stock. It therefore seems not only desirable, but essential, that both problems be solved by one comprehensive plan of reorganization which includes a reduction in fixed obligations, which will in turn restore value to the capital stock. Otherwise, the voting power would still be exercised by stock which represents no equity in the company. To merely distribute the old stock among present bond, debenture and note holders would not effect an adequate cure, as this old stock might pass on to other ownership, thus perpetuating the present inequity of distribution.

Moreover, enforcement of the proposed plan will deprive the holding company, American Gas & Power Company, of its present control of Jacksonville Gas Company, and thus the ultimate effect of the proposed plan will extend into and affect the holding company itself.

The plan contemplates that a new corporation be formed, to acquire all the assets of the present company and to assume all its obligations except the presently outstanding first mortgage bonds, income debentures, and income notes. As consideration for the assets so acquired, the new corporation will issue to the present company new first mortgage 5% bonds in the principal amount of $1,745,000 (50% of the present principal) plus 36,448 shares of common stock (par value $25.00 per share) carrying the voting power of the new corporation. These new securities would be distributed by the present company to its security holders, in satisfaction of their present claim against the old company, as follows:

All the new bonds and 34,900 shares (95.76%) of the new stock to the present first mortgage bondholders at the rate of $500 principal amount of new bonds, and 10 shares of new stock, plus $12.50 in cash,⁴ for each principal amount of old first mortgage bonds. The remaining 1,548 shares (4.24%) of the new stock would be distributed to the present holders of debentures and income notes at the rate of one share of stock for each $1,000 principal amount of present debentures and notes. Nothing to the old stockholders, who would be...