READJUSTMENT OF PUBLIC UTILITY 1

President F. G. Drum, of the Pacific Gas & Electric Co., San Fran cisco, in a circular of June 3, says in part (compare ann. report in V. 98, p.1773):

This plan is submitted after many months of deliberation, pursuant to an order of the California Railroad Commission requiring us to provide for existing short-term obligations and for future capital needs. The effect of its adoption will be as follows:

.$100,000,000

Reclassification (Without Increase) of Present Maximum Auth. Stock, Common Stock, no change, except the decrease of authorized maximum by $50,000,000 to..... First Pref. (p. & d.) Stock-6% cumulative, dividends quarterly, a new class of stock authorized in place of a like amount of unissued common stock. It is to be issued as fully paid with the express covenant that it shall not be subject to assessment for any purpose. Present issue ($12,500,000), and all future issues to be made only with authority of California Railroad Commission for extensions, additions, betterments and for refunding as provided in the P. U. Act of California. Taxexempt in California. Preferred Stock-(Present issue 6% cum.) now to be made 2nd pref, with the right of exchange after July 1, 1916, for the new first pref. at the rate of 1.025 shares of the new stock for each share of the old

50,000,000

10,000,000

Necessity of Plan.-The recent annual report (V. 98, p. 1773) clearly shows the extraordinary growth of our business, the gross reve nue having increased from $8,947,162 in 1906 to $16,202,337 in 1913, being an average annual increase for the seven years of $1,036,453, and for 1913 an increase of $1,457,686. The future promises a still more rapid growth, for which additional capital must necessarily be obtained.

The present capitalization limits the practicable means of raising new capital to the General and Refunding M. 5% bonds, and the major portion of new capital required within recent years has been obtained in this way. This policy has made it necessary to reinvest in the property an undue proportion of the earnings, thereby divert1 From The Commercial & Financial Chronicle, June 13, 1914.

ing from the holders of the common stock a substantial portion of the profits of the business to which they were legitimately entitled, and which, under the present plan, will for the future be available for distribution. The Railroad Commission has also indicated quite clearly that it views with disfavor the practice of raising new capital entirely from the sale of bonds.

Our stockholders are familiar with recent conditions which have rendered it difficult for even the most prosperous enterprises to secure new capital in large amounts at reasonable rates through the sale of bonds. Your company's experience in this respect, notwithstanding its constantly growing profits, has been no different from that of other corporations, and since March, 1913, it has been compelled to carry on the largest construction program in its history entirely from earnings and from the proceeds of money secured on short-term notes.

This condition is reflected in our balance sheet (V. 98, p. 1778) in the item of "uncapitalized advances to Construction Account," amounting to $11,586,662 at April 30, 1914. Short-term notes are an admittedly costly form of financing and the diversion of earnings for plant additions affords little satisfaction to the stockholders, who are thereby deprived of dividends, but the unquestioned necessity of completing the new hydro-electric plants on the South Yuba and Bear Rivers, and of making other extensions and additions to meet the growing demand for the company's products, left no desirable alternative. Current returns indicate a saving in operating expenses of at least $100,000 from the operation of the new Drum power house during 1914.

Object of Present Issue.-While the results amply justify the course pursued, the provision must now be made for the payment of $7,000,000 one-year notes maturing March 25, 1915, and of certain other obligations aggregating about $1,000,000. It is proposed to accomplish this by the sale to the stockholders of $12,500,000 of the new first preferred 6% stock at 821⁄2, a price which will yield approximately $10,300,000 in cash. This amount will be sufficient to pay the entire floating debt, and with other assets accruing on account of past construction will give the company a net working capital in excess of $3,000,000, and place its treasury in the strongest position it has occupied since organization.

Outlook as to Dividends.-Annual dividends on the new issue of $12,500,000 preferred stock will amount to $750,000. As the payment of the floating debt will, however, reduce annual interest charges by about $100,000, and as the money remaining from the proceeds

of the stock sale, after the payment of this debt, will be profitably employed, the additional dividend charges ahead of the present preferred and common stocks will be negligible. During the year 1913-14 net earnings after bond interest and discount were 4 times the amount necessary to pay the annual dividends on the new preferred issue and during the fiscal year 1915 such earnings will undoubtedly exceed five times the dividends on the new stock.

Contingent upon the new stock being subscribed for, your board, in view of the present earnings, will feel warranted in resuming dividends on the common stock on a permanent basis at the beginning of the year 1915 at the minimum rate of 1% quarterly. While our estimates for the year 1915 indicate that a higher rate might be paid, it is our desire to be as conservative as possible in naming this as the minimum disbursement.

Advantages of Plan to Preferred Stockholders-Right of Exchange for First Preferred after Two Years.-The existing floating debt precedes the equity of the present preferred shareholders and lays these open to the application of statutory remedies against stockholders; if funded by a junior bond issue it would place ahead of the present preferred stock a forecloseable interest-bearing obligation. The plan herein proposed avoids this and extends to the holders of the present preferred stock the right, after two years, of exchanging their present stock for the new stock at the rate of ten shares of the old stock for 104 shares of the new. This additional exchange value, at the present offering price of the new stock, is equivalent to $20.60 on each ten shares. This amount, added to the regular dividends, is equivalent to 7% return per annum on the par value of the old stock during the interim, pending exchange. [Under the plan the present common and preferred will retain their assessable feature.-ED.]

Subscriptions. Subject to the adoption of the. plan and to the approval of the Railroad Commission, your board has authorized the tender to the stockholders of the right to subscribe at $82.50 per share, for 125,000 shares of the new first preferred stock in the proportion of approximately 30% of their holdings of all existing stock, both common and preferred. Subscriptions must be received on or before July 15, 1914, and may be paid as follows: $5 per share July 15, 1914; $15 August 15, 1914; $12.50 October 1, 1914; $12.50 January 1, 1915; $12.50 April 1, 1915; $12.50 July 1, 1915; $12.50 October 1, 1915. Interest at 6% per annum will be paid by the company on all installments. Subscribers may pay any unmatured installments at any time. Upon the payment of all installments a full-paid certificate of stock

will be issued on the first day of the next succeeding dividend period and will bear dividends at 6% per annum from date of issuance.

Stockholders may increase their subscriptions beyond the amount allotted subject to allotment of any part of the $12,500,000 not taken as above.

If by August 15, 1914 the company shall not have received subscriptions for, or otherwise disposed of, at least 70% of the stock herein offered, the amounts paid on all subscriptions will be returned not later than September 1, 1914, with interest at 6% per annum.

At $82.50 per share this stock yields 7.27% per annum on the investment.-V. 98, pp. 1760, 1778.

READJUSTMENT OF DEBT OF HUDSON & MANHATTAN RAILROAD COMPANY

To the Holders of the First Mortgage Four and One-half Per Cent. Bonds and of Preferred and Common Shares (and Voting Trust Certificates) of the Hudson & Manhattan Railroad Company.

At the request of holders and representatives of a large majority of the above bonds and shares, the undersigned have caused to be made, by independent competent experts, an examination of the properties, earnings and financial condition of the Hudson & Manhattan Railroad Company. Summaries of the reports of this investigation are appended hereto. These reports show that the Hudson & Manhattan Railroad Company has not earned, and is not now earning, the full interest upon its outstanding First Mortgage Four and OneHalf Per Cent. Bonds. It, therefore, cannot market securities to provide funds to pay the cost of improvements and betterments, nor has it the funds to pay such of its car trust obligations as are approaching maturity, and, unless its fixed charges are reduced through the action of the bondholders and the needed funds are furnished by the stockholders, it will be impossible to avoid the foreclosure of the mortgage securing the First Mortgage Four and One-Half Per Cent. Bonds.

The undersigned have accordingly formulated the within plan for the readjustment of the debt of the Company, which has been approved by the holders and representatives of a majority of the First Mortgage Four and One-Half Per Cent. Bonds and of the Preferred and Common Shares of the Company. The undersigned have also agreed to form a Syndicate to purchase from the Hudson Companies the New First Mortgage Bonds and Adjustment Income Bonds which it will receive upon the consummation of the Readjustment, in order that it may be in a position to take up its outstanding collateral trust notes and participate in the Plan of Readjustment.

The undersigned believe that the within plan is fair to all interests. It should be promptly accepted with substantial unanimity by the holders of the First Mortgage Four and One-Half Per Cent. Bonds and of the Preferred and Common Shares of the Company in order to avoid a forced reorganization based upon the foreclosure of the First Mortgage.

Bondholders and stockholders, to assent to the plan and become parties to the Readjustment Agreement, must deposit their bonds or stock certificates or voting trust certificates, with Guaranty Trust Company of New York on or before February 14, 1913, after which