Financial Importance

That huge amounts of capital have gone into these projects occasions no surprise, nor is it strange that the public has shown such favor towards public service corporation securities, especially those of the more conservative type. Yet the evolution from one form of motive power to another has brought some strange changes in its train. In New York City, the old lines, already overcapitalized, were compelled, with each change or step forward in economy of operation, to increase their capital burden, with the result that in the end they collapsed, in spite of the fact that in a city like New York, where there is such a density in population, the revenues derived from carrying passengers from one part of the city to another should be exceedingly profitable. By adding obligation upon obligation to their capital, the New York traction financiers made it obligatory on some of the lines to earn profits on as much as $1,000,000 capital per mile and all on nickel fares. Small wonder that the end was bankruptcy and such a tangled state of affairs that a long period passed before the New York surface lines were successfully extricated from their financial embarrassment. Charles T. Yerkes brought about a similar state of affairs in the West Side and North Side lines in Chicago, which required years to readjust, and only after disastrous losses were sustained by thousands of shareholders. Philadelphia is similarly afflicted with an overcapitalized traction system.

Happily, these cases are only the direct results of the desire of the interests in control to fatten their fortunes at the expense of the public and investors. Where there is a normal capitalization and the properties are under the control of honest and conservative management, they have proved for their shareholders a more than satisfactory source of revenue, and the secured obligations, like the bonds, have shown themselves to be among the safest forms of investment.

Judging Public Utility Investments Franchises

But in judging this class of investments, there are a number of important factors which should be taken into consideration. First and foremost is the franchise under which the public service corporation operates. Especially is this of importance where the bonds are concerned. The franchise is the keynote of their success in business. We have seen how unfortunately it sometimes turns out for a public service corporation when its franchise expires, as in the case of the traction companies serving the cities of Chicago and Cleveland, and to a less degree in Toledo and Detroit. Public utility corporations unfortunately are in a position to become the shining target for ambitious politicians, who, when they find they cannot win votes by any other propaganda, as a last resort turn upon these corporations in their own community. By making it appear that the corporations are in business to oppress the people, they endeavor to arouse an agitation for public ownership and operation.

It is a good propaganda to win votes, but in many cities where this scheme has been tried it has proved a flat failure. And a failure it will continue to be until the average politician who feeds at the public crib develops capacity in business. As long as these clashes take place, the length of a company's franchise is an all-important question in properly appraising its securities for investment and speculative purposes.

If the franchise expires after a company's outstanding bonds mature, some authorities contend that it is a safe investment, providing the net earnings indicate a sufficient margin in excess of the fixed interest charges. In this contention they are partly correct, since, whether the corporation redeems its bonds or not, the expiring loan in some manner must be paid. In all cases it is safer to provide a sinking fund for the redemption of bonds issued on limited franchises.

Character Of Management

A corporation's management is, in my opinion, of equal importance. If that management follows a policy of catering to public opinion and bends every energy to supply its products to the community at a reasonable charge, after allowing for a fair profit, the probabilities are that the community and the corporation will exist in peace. It has been demonstrated in a number of instances that such wisely managed properties have had public opinion behind them when attacked by designing politicians.

Some public service corporations are very fortunate in owning perpetual franchises. This places them in an unassailable position. They do not face the danger of a possible contest over the renewal of their privileges. The only danger that may confront them is that the community may grant a rival company another franchise, but this does not always turn out to the public's advantage. This is at least true as far as concerns the use of the telephone. When it becomes necessary to use rival telephones to give a satisfactory service, it is very seldom profitable. There is no advantage where there are two charges without obtaining any additional benefit, when one service can do the work equally well. Generally speaking, this advantage affects equally all public service corporations.

There is one development in the recent financing of public service corporations which should not be overlooked - the tendency towards conservatism. In this, those directly concerned in promoting them have shown that they have absorbed a lesson from past experience. They now build their structures on firmer foundations. New bonds issued for improvements are on a more reasonable basis. In many cases it is stipulated that additional bonds shall not be sold above from 75 to 85 per cent of the actual cost of additions and extensions, thus creating from the very beginning a substantial equity above the bonded debt. Where it is possible, the builders of interurban trolley lines, secure private rights of ways to overcome difficulties regarding franchises.