FINANCE DOCKET No. 41641

CONTROL OF EL PASO & SOUTHWESTERN SYSTEM AND SECURITIES ISSUE BY SOUTHERN PACIFIC

Submitted September 29, 1924. Decided September 30, 1924

1. Certificate issued authorizing the Arizona Eastern Railroad Company to construct, as extensions of its existing lines of railroad, a line of railroad in Maricopa and Yuma Counties, and a line of railroad in Pinal and Maricopa Counties, together with a branch in Pinal County, all in the State of Arizona.

2. Acquisition by the Southern Pacific Company of control of the carriers comprising the El Paso & Southwestern system by stock ownership through purchase of the interest of the El Paso & Southwestern Company therein and by lease approved and authorized, subject to certain conditions. 3. Authority granted to the Southern Pacific Company to issue not exceeding $28,000,000 of its common capital stock and not exceeding $29,400,000 of 5 per cent 20-year collateral-trust bonds in payment for the interest of the El Paso & Southwestern Company in the companies comprising the El Paso & Southwestern system and in the Nacozari Railroad Company. 4. Request of Arizona Eastern Railroad Company for permission to retain excess earnings denied.

J. P. Blair, William F. Herrin, Cravath, Henderson & de Gersdorff, L. J. Spence, and Fred II. Wood for Southern Pacific Company and Arizona Eastern Railroad Company, applicants.

Clark & LaRoe, William Church Osborn, W. A. Hawkins, and Edgar E. Clark for El Paso & Southwestern Railroad Company, applicant, and for El Paso & Southwestern Company.

D. F. Johnson and Amos A. Betts of Arizona Corporation Commission, for Arizona Corporation Commission, intervener.

Hugh II. Williams and E. R. Wright, of State Corporation Commission of New Mexico, for State Corporation of New Mexico, intervener.

Alexander B. Baker for Governor of Arizona.

Kirke T. Moore for Tucson Chamber of Commerce, Deming Chamber of Commerce, Lordsburg Chamber of Commerce, and Douglas Chamber of Commerce & Mines: Kirke T. Moore and F. A. Jones for Southern Arizona Traffic Association; F. A. Jones and H. B. Wilkinson for Tidewater Main Line Association, Chamber of Commerce of Phoenix, and town of Mesa; F. A. Jones for Ray

1 This report also embraces Finance Docket No. 4148, Construction of Extensions and Branch Line by Arizona Eastern Railroad Company.

Consolidated Copper Company; H. B. Wilkinson for town of Tempe; Alexander B. Baker and Louis B. Whitney for city of Phoenix; Alexander B. Baker for Salt River Valley Water Users Association; E. L. Green for Board of Supervisors of Pinal County, and Chamber of Commerce of Florence; Sam G. Bailie for town of Chandler, Chamber of Commerce of Chandler, and Gila Valley Unit of Main Line Association; J. L. B. Alexander for county of Maricopa; and P. G. Spilsbury for Arizona Industrial Congress, inter

veners.

F. A. Jones and H. B. Wilkinson for Mesa Chamber of Commerce; F. A. Jones for Ray & Gila Valley Railroad Company; and E. L. Green for Casa Grande Chamber of Commerce.

W. A. Keeling, Attorney General, Frank M. Kemp and R. E. Seagler, Assistant Attorneys General of Texas, for State of Texas and Railroad Commission of Texas; Walter W. Page for Gilbert Chamber of Commerce; Andrew M. McDearmott, in his own behalf, and Jos. U. Sweeney and Edward C. Wade, amici curiae, protestants. REPORT OF THE COMMISSION

DIVISION 4, COMMISSIONERS MEYER, EASTMAN, AND POTTER BY DIVISION 4:

By their joint application filed herein on July 1, 1924, the Southern Pacific Company and the El Paso & Southwestern Railroad Company, hereinafter called respectively the Southern Pacific and the Southwestern, carriers by railroad subject to the interstate commerce act, have applied under paragraph (2) of section 5 of the act for an order approving and authorizing acquisition by the Southern Pacific of control of the El Paso & Southwestern system, hereinafter called the Southwestern system, through stock ownership by purchase of the interest therein of the El Paso & Southwestern Company, hereinafter called the Southwestern Company, and by lease; and the Southern Pacific has applied under the provisions of section 20a of the act for authority to issue $28,000,000 of common capital stock and $29,400,000 of 5 per cent 20-year collateral-trust bonds. By a separate application filed on the same date the Arizona Eastern Railroad Company, hereinafter called the Arizona, a common carrier by railroad subject to the act, has requested a certificate that the present and future public convenience and necessity require the construction by it of (1) a line of railroad from a connection with the main line of the Southern Pacific Railroad Company at or near Picacho, Pinal County, northerly to a crossing of the Gila River, thence northwesterly to a connection with the Chandler branch of the Arizona at or near Chandler, Maricopa County, a distance of 50.5 miles, together with a branch connecting

with the proposed line near Gila River and extending easterly to the city of Florence, a distance of 7 miles; and (2) a line of railroad extending from Hassayampa, Maricopa County, at the terminus of a branch of the Arizona, southwesterly to a connection with the main line of the Southern Pacific Railroad Company at or near Dome, Yuma County, a distance of 115 miles, all in the State of Arizona, the lines to be constructed as extensions of the existing lines of the Arizona. Permission is also requested under paragraph (18) of section 15a of the act to retain the excess earnings from the proposed new lines of railroad for a period of 10 years.

The city of El Paso and the El Paso Freight Bureau filed an intervening petition protesting against acquisition by the Southern Pacific of control of the Southwestern system. This petition was subsequently withdrawn. The Attorney General of the State of Texas has filed a protest and certain representations with respect to the Texas companies embraced in the Southwestern system and has requested that any order entered by us be so conditioned as not to violate the provisions of the constitution and statutes of that State relating to consolidation of Texas companies with foreign corporations, the acquisition of control by one corporation of another corporation owning or having under its control a parallel or competing line, and the leasing of railroads of Texas corporations by foreign corporations. Protests were also filed by certain individuals. A hearing was held on September 8, 1924. None of the protestants was represented at the hearing, but intervening petitions in support of the applications were filed and appearances entered on behalf of the Arizona Corporation Commission, the State Corporation Commission of New Mexico, and a number of cities, towns, and commercial organizations of communities served by the applicants, and representations in favor of granting the authority sought were made on behalf of the Governor of Arizona. Due consideration has been given the representations of the protestants.

The Southwestern system embraces the following railroad companies: The El Paso & Southwestern Railroad Company, the El Paso & Southwestern Railroad Company of Texas, the Burro Mountain Railroad Company, the Arizona & New Mexico Railway Company, the Dawson Railway Company, the El Paso & Northeastern Railway Company, the El Paso & Rock Island Railway Company, the Alamogordo & Sacramento Mountain Railway Company, the El Paso & Northeastern Railroad Company, and the Tucson, Phoenix & Tidewater Railroad Company. All of the issued and outstanding capital stock and a portion of the outstanding bonds of the companies embraced in the system are owned directly or indirectly by the Southwestern Company. Of the railroad companies

of the system only the Southwestern is engaged in transportation of passengers and property in interstate commerce. This company in addition to operating its own lines, operates under lease all the existing railways of the other companies of the system.

The Tucson, Phoenix & Tidewater Railroad Company neither owns nor operates any line of railroad. Its property consists of certain real estate, franchises, and rights of way in the city of Phoenix, Ariz., and elsewhere. A description of the properties of the remaining companies embraced in the system, the interest of the Southwestern Company therein, and the intercorporate relations existing between the various carrier and noncarrier companies comprising the system are set forth in our report in Control and Securities of E. P. & S. W. Subsidiaries, 86 I. C. C. 122. By our order entered December 26, 1923, in that proceeding we authorized the Southwestern Company to acquire direct control of certain of its subsidiaries, at that time controlled indirectly, and authorized the Southwestern to acquire control of certain of the subsidiaries by purchase of stock and by lease and to issue securities in connection with such acquisition, in payment for certain equipment, and for the purpose of refunding obligations of other companies of the system.

The Southern Pacific proposes to acquire control of the Southwestern system (a) by stock ownership through purchase of the interest of the Southwestern Company therein pursuant to an agree ment dated June 20, 1924, between the Southern Pacific and the Southwestern Company, a copy of which was filed with the application, and (b) by lease from the Southwestern of the lines of railroad owned by it and by assignment from the Southwestern to the Southern Pacific of the leases whereby the Southwestern now operates the existing railways of the Southwestern system not owned by it, including in the assignment any and all trackage and operating rights of the Southwestern over other lines. The provisions of the lease from the Southwestern to the Southern Pacific will be substantially the same as those of the leases approved and authorized in Control and Securities of E. P. & S. W. Subsidiaries, supra. Under the agreement dated June 20, 1924, the Southern Pacific will also acquire control of the Nacozari Railroad Company. This company is now controlled through stock ownership by the Southwestern Company, and owns and controls by stock ownership a railroad beginning at Agua Prieta, and extending thence southwesterly to Nacozari, together with certain lands and franchises in Guaymas, all in Mexico.

In payment for the interest of the Southwestern Company in the Southwestern system and in the Nacozari Railroad Company the

Southern Pacific proposes to issue at par $28,000,000 of common capital stock, consisting of 280,000 shares of the par value of $100 each, and $29,400,000, principal amount, of collateral-trust bonds. The bonds are to be dated May 1, 1924, to mature May 1, 1944, to bear interest at the rate of 5 per cent per annum, payable semiannually on May 1 and November 1 in each year, to be redeemable on any semiannual interest date at par and accrued interest on 90 days' notice, to be issued under a trust indenture dated May 1, 1924, made by the Southern Pacific to the Hanover National Bank of the City of New York, trustee, and to be secured by pledge thereunder of the collateral securities described in the indenture. The common stock and collateral-trust bonds are to be issued directly to the Southwestern Company in payment for its interest in the properties to be acquired.

The book value of the railway properties and other assets of the Southwestern system companies as of April 30, 1924, was $71,086,202.39, and bonds of certain of the companies outstanding in the hands of the public amounted to $9,098,000, making the net book value of the Southwestern Company interest in the properties $61,988,202.39. The obligation to continue royalty payments to provide a sinking fund for retiring certain of the bonds is guaranteed by the Southwestern Company. The value of these royalty payments, said to be approximately $1,000,000, will reduce by that amount the funded indebtedness of the Southwestern system companies and increase the book value of the properties to be acquired to approximately $62,988,000. Upon the facts of record the consideration to be paid for the properties appears to be reasonable. Our tentative valuation of the properties has not been completed and nothing herein shall be construed as a determination of such value for rate-making purposes.

The lines of the Southwestern system are intermediate between the lines of the Southern Pacific and the lines of the Chicago, Rock Island & Pacific Railway system, hereinafter called the Rock Island. The lines of the three systems constitute one of the principal direct routes between southern California and the Missouri River and Chicago, and are included in the Southern Pacific-Rock Island system in the grouping of railroads under the tentative plan for consolidation of railroad properties promulgated by us under date of August 3, 1921. Consolidation of Railroad Properties, 63 I. C. C. 455. Acquisition of control of the Southwestern system by the Southern Pacific is in harmony with this plan. It will result in direct physical connection between the lines of the Southern Pacific and the Rock Island, will assure the continuance of this route, and will increase its competitive strength as compared with