“The depression in the South began in 1890–91. There would appear to be no reason why in a comparatively short time these properties should not very easily earn, gross, as much as and more than they earned in that fiscal year, viz., over $21,000,000. Operated at 70 per cent ... there would remain, say $6,600,000 net against an interest charge of $5,400,000.”[387]
The reduction in assessments was made possible by the decrease in mileage. Although the floating debt had increased $2,600,000 from January 1, 1893, and the equipment notes recorded were greater by $1,048,000,[388] yet the debt to be provided for by the modified plan of 1894 was estimated at only $12,200,000. Besides this the cash to be reserved for new construction was reduced $3,000,000, and the surplus for expenses and contingencies $1,380,000. Assessments were therefore set at $10 a share on Richmond Terminal common instead of $12.50; $7.20 on East Tennessee common instead of $9; and $3 and $6 on East Tennessee first and second preferred as before. The new securities to be sold were reduced correspondingly to $8,000,000 of bonds and $25,000,000 of common stock. Finally, the bonds to provide for new construction, betterments, and additions were reduced from $35,383,000 to about $19,000,000, of which not over $2,000,000 (instead of $2,500,000) were to be used in any calendar year. Other provisions of the earlier plan were to remain unchanged.
It was this modified plan which was carried to a successful conclusion. In principle it did not mend the weak spot in its predecessor of May. That plan had contemplated a surplus of $211,000 over fixed charges for 1893. This estimated charges at $4,100,000 for 1894 and net earnings at $4,250,000 on a somewhat reduced mileage. There was not to be more left for dividends and improvements than there had been before, while the cash and bond provisions for improvements were notably reduced. The concession of bonds to stockholders for one-quarter of their assessments was unsound financiering, as was, on the whole, the funding of coupons on the new mortgage bonds. The success which the modification had, nevertheless, in restoring the company to solvency, was due to the improvement in earnings which soon took place. The original plan had based its calculations on the first year of depression; the amended plan kept charges down till three years had elapsed. By that time business had begun to mend, and all danger of bankruptcy was past. Other points in either plan leave little to criticise.
The modifications to the original plan were issued on February 20, 1894. Over 75 per cent of the system bonds had assented by March 24. At one foreclosure sale after another the reorganization committee now bought in the portions of the old system covered by the plan. Suits against the Richmond Terminal had been brought under the two collateral mortgages, and on July 13, 1893, the reorganization committee bid in the pledged securities. On February 6, 1894, it bought the remaining assets of the Terminal Company; on June 15 it bought the Richmond & Danville, and on July 7 the East Tennessee, Virginia & Georgia. Two trustees’ sales, one receivers’ sale, ten foreclosure sales, and six conveyances without foreclosure had occurred by September, 1894, and more minor sales were in progress.[389] On June 15 the Southern Railway Company was organized with a charter from the state of Virginia, and took over in succession properties to the extent of 4607 miles.[390] Samuel Spencer was elected president. Some thirty corporations were swept away and thirty boards of directors abolished; for the Southern Railway was an operating company, and, unlike the Richmond Terminal and the Richmond & Danville, controlled but an inappreciable fraction of its mileage through the ownership of stock. The new securities were issued at the proper times, and according to the plan the common and preferred stock was turned over to three voting trustees,[391] who issued trust certificates in their stead.
This completed the reorganization of the Richmond Terminal Company so far as the principal part of its mileage was concerned. The portions of the system excluded from the plan have been to some extent bought back in later years. Control of the Alabama Great Southern was bought in 1895; the Memphis & Charleston was acquired in 1898; the Richmond & Mecklenburg was leased in 1898 and the Mobile & Birmingham in 1899; and the Northeastern of Georgia was bought in 1899. The system has not yet, however, fully regained its old position. The most important loss has undoubtedly been that of the Central of Georgia. We left this company engaged in active disputes with the Terminal management. During 1892 and 1893 efforts to reorganize it were made under the leadership of Hollins & Co. The principal difficulties were the large floating debt and the money required to put the property into good physical condition.[392] A plan was actually prepared at the beginning of 1893 and submitted to securityholders, but failed because of that same decline in earnings which had caused the modification of the Terminal reorganization plan. A second plan, prepared in 1894, had a better fate,[393] and in modified form was put into effect. The Railroad was sold at auction in 1895, the Central of Georgia Railway was organized to take its place,[394] and the corporation entered upon a new career which we have not space to follow.[395]
As for the Southern Railway, the years from 1895 to 1907 have brought it prosperity. It has extended considerably in mileage. Besides reacquiring lines which formerly were part of the Richmond Terminal system, it has grown south to Jacksonville and Palatka, east to Charleston and to a more direct connection with Norfolk, and west from Louisville to East St. Louis. It has further joined its Louisville-East St. Louis line to Chicago by acquiring a half-interest in the Monon, and to the rest of its system by a half-interest in the Cincinnati, New Orleans & Texas Pacific; and it has bought control of the Mobile & Ohio, which stretches through four states from East St. Louis to Mobile. Instead of 4392 miles as operated on June 30, 1895, it now reports 7546. The earnings of the system have increased more rapidly than its mileage. The revival of business after 1897 occurred with singular force in the South, and seems to have introduced there a new industrial era. As a result, the Southern’s gross earnings have trebled and its net earnings have been multiplied by two. Passenger receipts, which were $4,329,499 in 1895, have become $14,683,006 in 1907. Freight receipts have increased from $10,816,024 to $37,368,095.
It has been this increase in earnings which has at last allowed some of that margin for improvements which the reorganization plans weakly attempted to secure. And accordingly, large sums have been expended. Maintenance of way charges are now over $1000 per mile instead of $630. Expenses per locomotive mile have increased from 4.19 cents in 1895 to 7.54 cents in 1907; expenses per passenger car mile from .83 to 1.03 cents; and expenses per freight car mile from .47 to 2.18 cents. It is true that locomotives and cars are larger to-day and that rails are heavier, but this fact is far from accounting for the difference. Not only has the existing plant been kept in good repair from earnings alone, but distinct improvements have been made. New rail has been laid, additional ballast put in, wooden trestles filled or replaced with steel. It was estimated in 1906 that $5,000,000 had been spent in betterments and charged against income up to that time, besides some $15,000,000 more paid for equipment out of earnings. Meanwhile considerable sums had been spent from capital account. The reorganization plan allowed for some $19,000,000 of new bonds to be sold at the rate of $2,000,000 per year.[396] Of these the company had sold $13,000,000 for improvement of the property by February 1, 1906, besides disposing of some $23,000,000 of equipment obligations.
The appreciation of the need for still more liberal expenditure led in 1906 to a comprehensive plan for the issue of new capital. Under date of February 1, the company submitted to its voting trustees[397] a scheme for a $200,000,000 mortgage, of which $15,000,000 were to be issued at once and the rest were to be reserved. Of the immediate issue $4,962,774 were to refund payments for equipment hitherto made and charged to capital; $3,501,000 were to refund investments in securities of, and advances to, subordinate companies, as well as to be used for the acquisition of property not heretofore funded; and $6,536,226 were for double track, revision of grades, new yards, shops, etc. Of the securities reserved, $65,164,000 were for refunding purposes: $20,000,000 for certain subsidiary lines: and $99,834,000 to go, first, for betterments and improvements on the entire system and for new equipment in amounts not exceeding $5,000,000 in each year; and second, in exchange for first mortgage bonds not exceeding in amount the actual cost of railroads and terminals hereafter to be acquired. In other words, about one-half of the total issue is to go, sooner or later, for improvements, and the rest for refundings and for new acquisitions.[398] It was believed that the Southern could readily pay the interest on the increased immediate issue without endangering dividends on its preferred stock, and that the subsequent increases in earnings would more than provide for whatever additions to charges might occur. Negotiations for the placing of the new securities were concluded with J. P. Morgan & Co. at a reported price of 96½.
The results of the expenditures for improvements have been remarkable. In 1895 the Southern Railway had in use 623 locomotives; in 1907 the number was 1536. In the former year there were 487 passenger cars and 18,924 freight cars; in the latter there were respectively 995 and 56,225.[399] Only 370 miles of track in 1895 were over 65 pounds in weight per yard; more than 3100 surpassed that limit in 1907. It is nevertheless in its inability to handle the business offered it that the Southern has provoked sharpest criticism. Over 3600 miles of its system still have rails weighing 62 pounds or less to the yard;—that is, rails incapable of meeting modern operating conditions. Only 206 miles of double and 1981 of side track exist. Equipment appears to be still inadequate. Signals are imperfect, and speed and promptness seemingly impossible to attain. The late tragic death of Mr. Spencer was a forcible illustration of the deficiencies of the road which he had done so much to improve.
The earning power of the system cannot yet, therefore, be said to be secure. Moreover, the capitalization of almost $72,000 per mile,[400] as well as the less dense railroad business in the South, the slight construction of many of the Southern Railway lines, the lack of adequate facilities which compels an operating ratio of 76 per cent, and the absorption of minor roads less prosperous than the main stem,—all these factors have kept down the net surplus from operation. On the other hand, the management is making an earnest attempt to raise the standard of the property. Bonds and notes to the par value of over $32,000,000 have been sold to provide for additions and improvements during the past year, and a very great change for the better has taken place. Dividends on the preferred stock have been paid since 1897. As the country develops, and as the sums spent upon improvements come more and more to have their effects, a dividend upon the common stock will be paid. The near future is more likely to witness the cessation of dividends upon the preferred.