tion are purported to have been made substantially on such basis, we are not satisfied that the accruals and reserves fully reflect the amounts which would have been reported if a 4% sinking fund method had been properly followed.

The depreciation reserve per books as at December 31, 1945, was $3,250,582, or about 25% of the utility plant per books. The net utility plant per books amounted to $9,774,791.

DESCRIPTION OF AMENDED PLAN

The amended plan of recapitalization proposed by Seattle provides for the following transactions:

1. By amendment to its Articles of Incorporation, the authorized capital stock of Seattle of which 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 will be reclassified into 500,000 shares of new common stock, par value $10 per share, or an aggregate par value of $5,000,000.

2. Of the 500,000 shares of the new common stock to be authorized, Seattle will distribute 261,812 shares thereof to the holders of its presently outstanding preferred stocks in the following amounts:

(a) 52 shares of new common stock for each share of $5 first preferred stock and all accumulated and unpaid dividends thereon. The holders of the $5 first preferred stock will receive 259,078 shares of new common stock having an aggregate par value of $2,590,780, representing 98.96% of the new common stock to be outstanding;

(b) 1/10th of a share of new common stock for each share of second preferred stock. The holders of the second preferred stock will receive 2,734 shares of new common stock having an aggregate par value of $27,340 representing 1.04% of the new common stock to be outstanding. The existing common stock will be canceled and no new stock will be issued therefor.

3. Scrip certificates are to be issued for fractional interests in the new common shares and are to be exchangeable for full shares of new common stock within two years from the first day of the month in which the amendment to the Articles of Incorporation of Seattle shall become effective. Thereafter, shares of new common stock reserved for exchange are to be sold by the company and holders of the scrip certificates will be entitled for a period of three years to receive their pro rata share of the proceeds of sale, whereupon the scrip certificates are to become void for all purposes.

4. Holders of the presently outstanding $5 first perferred stock and second preferred stock who do not surrender their stock certificates within five years after the first day of the month in which the amendment to the Articles of Incorporation of Seattle becomes ef

fective, are not to be entitled or permitted thereafter to make such exchange, and the shares of the $5 first preferred stock and second preferred stock shall become void for all purposes.

5. In addition to the foregoing, the amended plan provides that capital surplus of the company created by consummation of the amended plan will not be utilized by the company for the payment of dividends upon shares of its capital stock and the plan further provides, in effect, for the transfer to capital of the balance of earned surplus as at December 31, 1945 and the dating of surplus subsequently earned.

The application filed by Seattle requests that we find the amended plan necessary to effectuate the provisions of Section 11 (b) of the Act and fair and equitable to the persons affected thereby, and that we issue an order approving such amended plan. The amended plan makes no provision for a stockholders' vote with respect to any of the transactions proposed therein. However, Seattle requests that upon issuing our order approving the amended plan, we apply to the District Court of the United States for the Western District of Washington, Northern Division, to enforce and carry out the terms and provisions of such amended plan. It is also proposed, as a condition to the effectiveness of the amended plan, that our order of approval contain appropriate findings and recitals as may be necessary to meet the requirements of Section 371 and Section 1808 (f) of the Internal Revenue Code, as amended.

APPLICABLE STATUTORY STANDARDS

The amended plan was filed by Seattle under Section 11 (e) to effect compliance with Section 11 (b) (2) of the Act. In order to approve such a plan, the Commission must find it (1) necessary to effectuate the provisions of Section 11 (b) and (2) fair and equitable to the persons affected thereby. Further, the transactions incident to the plan must conform to the applicable standards of the Act.

Necessity for the plan.-On the question whether the plan is "necessary to effectuate the provisions" of Section 11 (b), we have heretofore held that a plan need not be the sole means of effecting those provisions but that it is "necessary" within the meaning of Section 11 (e) if it is a suitable means of achieving results which are required by the provisions of Section 11 (b).12

12 See The Commonwealth & Southern Corporation, 19 S. E. C. 242 (1945), page 256 and cases cited in footnote 14 therein. See also North Continent Utilities Corp. 54 F. Supp. 527, 530 (D. C. Del. 1944) where the Court said: "Under Section 11 (e) the Commission is under no statutory duty to find that the plan is the only one which is necessary to effectuate the provisions of Section 11 (b) and the only plan which is fair and equitable to creditors and stockholders. It does its duty when it finds a plan which is reasonable and appropriate to effectuate compliance with Section 11 (b) and is fair and equitable to all security holders."

The president of the company has testified, and we find, that the present distribution of voting power among the security holders of the company is repugnant to the requirement of Section 11 (b) (2) which provides that voting power among security holders shall be distributed on a fair and equitable basis. In view of the position of the second preferred stock and the common stock not only with respect to assets but as discussed below with respect to earnings and further, in view of the fact that both these securities have, in the aggregate, a majority of the normal voting power, we find that a redistribution of voting power is necessary to comply with Section 11 (b) (2). The amended plan results in a shift in voting power as indicated in the following table:

We have previously held in similar proceedings that a plan filed under Section 11 (e) providing for the redistribution of voting power among security holders of an operating public utility company may entail a comprehensive reorganization of such company; and in such cases we have frequently held that repugnance to the statute cannot be cured by a mere transfer of voting power to the senior securities.13 We have found, on the other hand, that an appropriate remedy in such cases may be a recapitalization on a sound basis and a redistribution of new securities to existing security holders in substitution for their holdings in proportion to their interests in the enterprise.

"Jacksonville Gas Company, 11 S. E. C. 449 (1942) plan enforced, In the Matter of Jackson Gas Company, 46 F. Supp. 852 (S. D. Fla. 1942); Southern Colorado Power Company, 14 S. E. C. 115 (1943), plan enforced, In Re Southern Colorado Power Company, Civil Action No. 670 (D. C. Col. 1944), aff'd sub nom, Disman v. 8. E. C. 147 F. (2d) 679 (C. C. A. 10, 1945), cert. den. 325 U. S. 863; Puget Sound Power & Light Company, et al., 18 S. E. C. 226 (1943), plan enforced, in Re Puget Sound Power & Light Company, Civil Action No. 2308 (D. C. Mass. 1914); Georgia Power and Light Company, 18 S. E. C. 89 (1945), plan enforced In Re Georgia Power and Light Company, Civil Action No. 133 (D. C. M. D. Ga., 1945).

Upon consummation of the amended plan the proposed capital structure of Seattle, as at December 31, 1945, will be as follows:

It appears from the foregoing table that Seattle will have an appropriate structure. Moreover, voting power will be vested in a new class of common stock representing the real equity in the enterprise. Accordingly, subject to our finding that the new common stock is fairly and equitably distributed, it follows that voting power will be fairly and equitably distributed and, therefore, that the plan appropriately effectuates the provisions of Section 11 (b) and is necessary within the meaning of Section 11 (e).

Fairness of the Plan.-The Plan now before us affects the first preferred, second preferred and common stockholders of Seattle. Section 11 (e) requires that the plan be "fair and equitable" to stockholders whose interests are affected under a plan of recapitalization. We have pointed out in many earlier cases that the primary question of fairness to be determined in a plan filed under Section 11 (e) is whether the proposed allocation among different classes of security holders affected thereby affords adequate compensation to each class for its respective rights and priorities. A majority of the Commission has held, with judicial support, that the "fair and equitable" standard does not permit preferred claims to be treated as if liquidations preferences had been matured by operation of Section 11 but that liquidation preferences are significant only as one of the rights belonging to the preferred stock. We must measure the participation of each security affected by the plan for Seattle according to present investment values without regard to the consequences flowing from Section 11.14

The stated value of Seattle's first preferred stock is $3,297,350. The dividend arrearages on such stock as at December 31, 1945 amounted to $2,367,026 which is more than the equity per books applicable to the junior securities. Thus, it is obvious that, on a balance sheet basis, there is no equity for either the second preferred stock or the common

14 The United Light and Power Company, 13 S. E. C. 1 (1943), plan approved and enforced, 51 F. Supp. 217 (D. C. Del) aff'd sub nom. Otis & Co. v. 8. E. C. 142 F. 2nd 411 (C. C. A. 3), aff'd 323 U. S. 624; Southern Colorado Power Company, supra.

after giving effect to accumulated arrearages on the first preferred stock. However, our primary concern is to arrive at a determination of the prospective earnings of the company, giving due consideration to the relevant data concerning Seattle's earning power.15

The earnings history of Seattle since its reorganization under Section 77B of the Bankruptcy Act is shown in Appendix B, attached hereto, containing condensed statements of income for the years 1936 to 1945 inclusive and for the 12 months' period ending April 30, 1946. It appears on examination of the earnings of Seattle for the years 1936 to 1945 inclusive and for the 12 months' period ending April 30, 1946 that the company reported gross income ranging from $196,034 to $540,236. However, past earnings of Seattle are subject to several qualifying factors.

Prior to 1937 the company manufactured both coal and water gas. In 1937 there was installed the first of two oil-gas units and shortly thereafter, the company abandoned the manufacture of coal gas. The second oil-gas generator was installed in 1938 but considerable changes and adjustments had to be made in both oil-gas generators and it was not until 1939 that these two units were in proper operation. Therefore, we believe that for the purpose of determining a range of future earnings greater weight should be given to the earnings of the company in 1939 and subsequent years.

The earnings history of Seattle must also be considered in the light of the weight which should be given to the operations during the war years (1942 through 1945) as an indication of probable future earnings. We are of the opinion that the company's earnings during the war years are not by themselves a reliable criterion for determining prospective earnings of the company." It appears that if only the pre-war years of 1939 through 1941 were used as a guide in determining future earnings for the company, future gross income might be estimated at about $300,000. However, the record contains testimony to the effect that there has been a growth of population in the service area of the company subsequent to those pre-war years, some of which growth will probably be retained.

The most recent earning figures show that for the twelve months ending April 30, 1946 Seattle's gross income totaled approximately $515,000. In connection with the recent operations of the company, Gellert testified that he expected within the near future an increase in the price of oil and an increase in the cost of labor but that he felt

Group of Institutional Investors v. C., M., St. P. & P. R. Co., 318 U. S. 523. The average gross income of Seattle from 1942 to 1945 inclusive was $510,537. "Group of Institutional Investors v. C., M., St. P. & P. R. Co., supra. See also Southern Colorado Power Company, supra, and New England Power Association, 22 S. E. C. 343 (1946), app'd 66 F. Supp. 378 (D. C. Mass. 1946) for cases illustrating the weight given to war earnings of companies in reorganization under Section 11 (e).

25 S. E. C.