$190,000,000 in general lien 150-year 3 per cent gold bonds, with a lien junior to the previous issue, but covering the same property, of which $130,000,000 were to be reserved to retire the $130,000,000 prior lien bonds when they should fall due.
$70,000,000 in 4 per cent non-cumulative preferred stock.
$80,000,000 in common stock.
Generally speaking, the new prior liens were to go for old first and second mortgage bonds, receivers, certificates, equipment trusts, collateral trust notes, St. Paul & Northern Pacific bonds, and for new construction; the new general liens for mortgages junior to the second mortgage; the new preferred stock as additional inducement to the exchanges mentioned above, and in part for the retirement of old preferred stock; and the common stock for old preferred stock (in part) and common stock. Existing first mortgage bondholders were not, however, to be forced to give up their old securities. “It is not sought in any way to enforce a conversion of the present general first mortgage bonds,” said the plan, “and this offer is made solely on the belief that on the terms proposed such conversion, while advantageous to the company, is also manifestly to the advantage of the bondholders so converting.” There were reserved $4,000,000 of the general liens for new construction, and $2,500,000 new preferred and an equal amount of common were set aside under the general head “to provide for reorganization purposes or available as a treasury asset.” None of the new bonds were to be subject to drawing or to compulsory redemption prior to their regular maturity. The proceeds from land sales to an amount not exceeding $500,000 in any year were to be devoted to the redemption by purchase and cancellation of the new bonds, purchases to be made of prior liens so long as these could be secured at not over 110, after which to continue of the securities next in rank. The preferred stock was to have a claim for 4 per cent before anything should be paid on the common stock, and was to participate equally with the common after 4 per cent had been paid on each. There was to be a voting trust until November 1, 1901, unless closed out earlier by the voting trustees, after the expiration of which the preferred stock was to have the right to elect a majority of the board of directors whenever for two successive years 4 per cent dividends on their holdings should not have been paid. No additional mortgage was to be put upon the property, and the amount of preferred stock was not to be increased, except, in each instance, after obtaining the consent of a majority of the whole amount of the preferred stock, given at a meeting of the stockholders called for that purpose, and the consent of a majority of such common stock as should be represented at such meeting, the holders of each class of stock voting separately. During the existence of the voting trust the consent of holders of like amounts of the respective classes of beneficial certificates was to be necessary. There was to be an assessment of $10 on preferred stock and of $15 on common. Branch lines were to be consolidated with the main line, but each case was to be dealt with separately, and a fair basis of adjustment arrived at, for which general lien 3 per cents and new preferred stock were reserved. There was to be an underwriting syndicate, formed by J. P. Morgan & Company, and the Deutsche Bank of Berlin, to the subscribed amount of $45,000,000, to provide amounts of cash estimated to be necessary to carry out the terms of the plan, and to furnish the new company with some $5,000,000 working capital for early use in betterments and enlargements of its property. The syndicate’s compensation was not stated in the plan, but was to be “reasonable,” and in addition to it the sum of ¼ per cent of the par value of all securities deposited was to be paid to J. P. Morgan & Company and the Deutsche Bank for their respective services as managers and depositaries. Finally, at the discretion of the managers, the various properties were to be sold under one of the several mortgages in default, and a successor company was to be organized.[630]
An examination of this plan shows that the total capitalization proposed, exclusive of bonds and stock reserved for new construction, etc., amounted to $311,000,000; of which $161,000,000 were 4 per cent and 3 per cent bonds and $150,000,000 stock. The reported capitalization of the Northern Pacific Railroad in 1893 had been $218,685,631, including the bonds of branch roads guaranteed; but comparison of this figure with that given by the plan is not fair, because in 1893 the Northern Pacific property had been owned by fifty-four distinct corporations, which the reorganization proposed to consolidate into one. A comparison of the total bonds and stock issued by the fifty-four corporations with the issue under the reorganization plan reveals an increase from $271,949,044 to $311,000,000, or 14.3 per cent. At the same time fixed charges were to be decreased, according to estimates, from $10,509,690 to $6,052,660; to cover which the managers reported net earnings of $6,015,846 for the year ending June 30, 1895, and of $7,801,645 for the average of the five years ending with that date. It will be observed, therefore, that the plan left no margin between net earnings in 1895 and fixed charges, but relied upon an increase in earnings for the future to preserve the solvency of the road. It is, however, only just to say that the net earnings in 1895 were less than they had been in any year since 1887, with the exception of 1894, and that a considerable increase was probable. The large reduction in fixed charges which was to take place was to be chiefly at the expense of holders of the consolidated mortgage bonds of 1889. These unfortunate investors received but 129 per cent in new securities, of which nearly one-half was stock, in return for a reduction in their fixed annual income from 5 to 2 per cent, the reason being the inferior character of their mortgage lien. That securityholders who had consented to exchange their prior securities in 1889 for the consols then issued in the hope of benefiting the road should have fared considerably worse than bondholders who had refused to make concessions is an example of the injustice sometimes occasioned by successive reorganizations and refundings. Of the other securities the second mortgage received prior liens and stock sufficient to bring its return over 6 per cent, providing the road should earn it, and the third mortgage and dividend certificates received general liens and stock sufficient to yield something over 5 per cent except in very prosperous times, when their income would be larger. The underlying principle in these cases was the union of a security with a fixed claim on earnings with a security with a conditional claim only. The first mortgage received no stock, and so was denied participation in future profits, but in recompense gave up only some .6 per cent in the annual income received. The collateral trust notes fared nearly as badly as the consolidated mortgage, but the northwest equipment stock was paid off in cash. In brief, all securities but the equipment stock yielded something, and the greatest sacrifices were demanded from the junior securities. On the other hand, the stock was far from escaping unscathed. On January 2, 1896, the quoted prices were 3½ for common and 12⅝ for preferred. As against this the plan made assessments of $15 on common and $10 on preferred;—sums which could obviously be demanded only because of the probable future appreciation of the shares. A point in favor of the stock was the fact that the reduction in fixed charges brought it nearer a dividend; although it must be remembered that the common stock had to divide any return above 4 per cent with the preferred.
The other salient points of the plan were the provision for paying the floating debt, for supplying fresh capital for future additions and improvements, for consolidation of branch lines with the main stem, and for a voting trust. The total floating debt in 1895 amounted to over $20,000,000, of which $4,900,000 consisted of outstanding receivers’ certificates and $8,329,205 of interest matured and unpaid.[631] The unpaid interest was provided for in the exchanges which have already been described; the receivers’ certificates were cancelled by prior lien bonds, and the balance was provided for by assessment. This method was a sound one. The provision for new construction, betterments, etc., was liberal, consisting of $25,000,000 prior lien bonds, of which no more than $1,500,000 were to be issued in any year, and $4,000,000 general lien bonds, presumably to be used as needed. One of the great difficulties in the history of the company had been the lack of necessary capital for needed work upon the line, and it was well that future requirements were provided for. The consolidation of the branch lines into the parent company was also wise. “As it [the Northern Pacific system] now stands,” the committee said, “the system, in its form of incorporation and capitalization, is a development without method or adequate preparation for growth. Scarcely any single security is complete in itself. The main line mortgages cover neither feeders nor terminals. The terminal mortgages may be bereft of their main line support. The branch lines are dependent on the main line for interchange of business and the main line owes a large part of its business to the branch lines.”[632] The plan contemplated separate bargains with each branch. Negotiations were carried on during 1896, and some of the arrangements arrived at were as follows: The bondholders of the Northern Pacific & Manitoba Terminal and of the James River Valley Railroad agreed to take 50 per cent in new Northern Pacific 3 per cent bonds and 50 per cent in preferred stock, and to allow the Northern Pacific to retain their property.[633] Bondholders of the Duluth & Manitoba were given 90 per cent in cash.[634] Bondholders of the Spokane & Palouse received 52½ per cent cash, 52½ per cent in general 3s, and 25 per cent in Northern Pacific preferred stock,[635] and Helena & Red Mountain bondholders agreed to accept 100 per cent in new preferred.[636] A number of the branches were foreclosed and bought in by the Northern Pacific reorganization committee, and the net result was an exceedingly beneficial unification of the system. Finally, the voting trust was designed to secure permanence in policy during the first years of the new company’s existence. The idea has been a common, and on the whole a wise one. In this case the membership represented fairly the interests which had been prominent throughout the receivership, and consisted of J. P. Morgan, George Siemans, representing the Deutsche Bank, August Belmont, Johnston Livingston, and Charles Lanier. The trustees were to fill their own vacancies, except that the successors of George Siemans were always to be nominated by the Deutsche Bank.
In the main the plan was a good one, following a sound principle, and reducing fixed charges to a point which, if not far below the danger-line, proved low enough in view of the subsequent development in business. Current opinion was generally favorable, and criticised only the amount of profits which the syndicate was to secure on the basis of its large subscribed capital. Mr. Hill of the Great Northern said: “I think the Northern Pacific reorganization plan will be successful. The promoters have adopted a conservative policy, and have marked the interest charges down. We are entirely satisfied to have the Northern Pacific securityholders run the road, pay its debts, and be charged with the responsibility of meeting all its proper obligations, rather than to have it operated by the officers of two or three courts which are continually contending as to jurisdiction.”[637] By April 23, when the time for deposits expired, the reorganization committee was able to announce that it held over 92½ per cent in amount of general, second, and third mortgage bonds, dividend certificates, consolidated mortgage bonds, collateral trust notes, preferred stock, common stock, northwest equipment stock, and Northern Pacific and Montana first mortgage bonds, and that the plan and agreement was therefore declared operative.[638] By June a majority of the first mortgage bonds had been secured, and it was announced that after June 30 the basis of conversion of this issue would be reduced from 135 to 132 per cent in new 4 per cent prior lien bonds. On July 24 the Northern Pacific Railway filed its articles of incorporation at St. Paul, Minnesota, and the next day the sale of the property took place, in spite of suits by the general creditors and the preferred stockholders. The sale was in three parcels, and the property was bid in for $12,500,000 by Mr. Winter, the newly elected president. After the first sale the company’s lands in Wisconsin were offered and bid in for $575,000, and two days later the lands west of the Missouri were bought in for sums aggregating $600,000. Finally, on August 4, the lands in Washington and Oregon were bought in for $1,705,200 and $558,000 respectively. The property of the company was turned over by the receivers to the reorganization committee at midnight, August 31, and on November 7 the final step in the reorganization plan was taken by the formal authorization by the stockholders of the issue of $190,000,000 of bonds.[639]
From 1896 to the present time the Northern Pacific has enjoyed a development scarcely less noteworthy than that of the Union Pacific. Gross earnings have increased from $23,679,718 in 1898, the first full year after the receivership, to $68,534,832 in 1907; net revenue from $13,471,544 to $33,208,840; and mileage from 4350 to 5444. Gross earnings per mile were $5443 in 1898; they were $12,590 in 1907. The retirement of the eastern terminus of the system from Chicago to St. Paul and Minneapolis was accomplished in the course of 1897 by arrangement for connection with the Chicago & Northwestern instead of with the Wisconsin Central, and the sale of the certificates of proprietary interest in the Chicago Terminal Transfer Railroad received by the Northern Pacific under the Chicago & Northern Pacific plan of reorganization; while the improvement of the position of the new mortgages has been vigorously prosecuted by the rapid drawing for redemption of old first mortgage bonds at 110, and by the calling of the entire issue of the Missouri division bonds at par and accrued interest.
In the years following 1897 large sums have been spent for betterments and enlargements. Some $68,500,000 have been invested from the proceeds of the sale of prior lien bonds and of miscellaneous assets, and over $18,000,000 have been temporarily withdrawn from income for the same purpose.[640] Grades have been reduced, lines straightened, new branches built, real estate acquired, track relaid and ballasted, bridges strengthened and renewed, equipment rebuilt and increased in amount, and other similar betterments undertaken. It is a work which all the great American systems have carried on, but the Northern Pacific has surpassed even the Union Pacific in the extent of its operations. Ordinary maintenance requirements have not meanwhile been neglected, and in 1906 and 1907 the Northern Pacific set aside $2,000,000 for depreciation of equipment, which is over and above the other sums which have been mentioned. The company owned 1255 locomotives on June 30, 1907, of an average weight of 174,000 pounds; in 1898 it had owned 542 of an average weight of 104,000 pounds. It had 42,000 freight cars in 1907 with an average capacity of over 33 tons; it had possessed 18,500 in 1898 of an average capacity of 22 tons. Seventy-five per cent of the main line was laid with track of 72 pounds or over in 1906, but only thirteen per cent in 1898. In consequence heavier trains are run,[641] at a less expense per ton, and the net revenue is correspondingly increased. Even the liberal expenditures which have hitherto been made are insufficient, however, for present conditions, and the stockholders have approved a proposal to issue $93,000,000 of new common stock at par for the purpose of extending the Northern Pacific’s mileage and facilities.[642]
The endeavor to stimulate traffic to fill the trains has led to important developments. In order to increase the exchange of commodities between their territory and the Middle West, to establish stable conditions on transcontinental business and thereby to secure back loading for their cars, the Great Northern and Northern Pacific in 1901 arranged for the purchase of the Burlington system which connected both their lines with Chicago. The refusal to share their purchase with Mr. Harriman led to the competitive purchase of Northern Pacific stock by rival interests, and to the retirement of the Northern Pacific preferred, but did not prevent the consummation of the deal.[643] This purchase has been a profitable one. The Burlington has paid in dividends upon its stock almost enough to cover the interest on the bonds issued to acquire it, and the indirect effects of its control have satisfied expectations. Indeed, the east-bound lumber traffic has so developed that the Great Northern has recently raised its lumber rates in order once more to equalize east- and west-bound shipments.