Operating proit before depreciation, depletion and income taxes:

Less-administrative expenses..

Depreciation and depletion..

Other income:

Prior preference dividends..

Provision for State taxes refundable to prior preference stockholders..

(e) Each estimate includes a provision of $50,000 for State income taxes.

and are not representative of the average long-term future, and that Eastern's earnings will soon return to near pre-war levels. In this connection, the Committee states that historically prices have risen during all major wars and dropped thereafter and that it is reasonable to conclude that this pattern will exist in the future. The Committee points out that Hills' long-term estimate is far in excess of Eastern's income in any of the war years and was exceeded only in the years 1946 through 1948.

Eastern characterizes the positions of both Koppers and the Committee as "extreme." It proposed an estimate of net income applicable to the present 6% preferred and common stocks of $5,550,000, representing an average for the 10-year period 19481957 of Bird's short-term estimates for 1948, 1949 and 1950 and his long-term forecast 30 for the years 1951 through 1957. Eastern states that its 1948 earnings, even when heavily discounted, demonstrate that future earnings will be at least as high as the upper limit of the range proposed by the Division, which Eastern finally urged that we adopt as an earnings estimate for purposes of testing the fairness of the amended plan.

The Division in its recommended findings reached the conclusion that net income applicable to the present 6% preferred and common stocks would range between $4,450,000 and $5,301,000, and it adopted $4,900,000, the approximate midpoint of the range, as its earnings figure for the purpose of testing the fairness of the amended plan."1

In considering these various estimates in order to arrive at an earnings figure which we may use for the purpose of testing the fairness of the plan, we turn first to an examination of the data bearing on the earnings derived from each of Eastern's operating divisions, from Virginian Corp. and other sources, and the provisions for depreciation and depletion, income taxes and income deductions.

Coal Mining and Selling Operations.

Coal mining and selling operations, including the resale of coal purchased from non-affiliates, are conducted by Eastern and two wholly-owned subsidiaries, New England Coal and Coke Company ("New England Coal"), which sells coal at wholesale and retail and operates coal docks, and Castner, Curran & Bullitt, Incorporated ("Castner"), which sells coal at wholesale for bunkers

20 Bird's average annual estimate of $5,045,000 for the 10-year period 1951-1960 was adjusted by Eastern to $5,000,000 to reflect changes in estimated taxes and interest charges.

31 Bates and Scattergood contend that the estimate suggested by the Division is excessive.

and export. Also included in Eastern's coal division is the operation on a fee basis of a mine on property it leased in March 1948 to a coal company subsidiary of Appalachian Electric Power Company, a non-affiliate, 32 and certain other miscellaneous operations.

Eastern, which is the second largest commercial producer of bituminous coal in the United States, operates 21 bituminous coal mines in West Virginia, Pennsylvania and Kentucky. These mines are highly mechanized, and in 1948 over 97% of the coal produced was cut mechanically and approximately 84% was loaded mechanically. They produce a large assortment of high grade coals including substantial amounts suitable for the production of coke and gas and for metallurgical operations. Based on Eastern's average annual output of 11,100,000 tons for the years 1944 through 1948 of mines currently operated,33 it is estimated that Eastern had coal reserves adequate for over fifty years.

The following table shows the annual coal production and purchases of Eastern and its subsidiaries, which averaged about 17,000,000 tons annually from 1937 through 1948; with purchases from non-affiliates accounting for about one-quarter of the coal distributed by Eastern:

32 Under the terms of the operating agreement, which expires March 31, 1953, Eastern will construct and operate a mine on the leased property for the Appalachian Electric Power Company system and will receive a fee for developing the mine and an operating fee for each ton of coal produced. In addition, for twenty years Eastern will receive a royalty on the coal produced.

The average annual output of all mines operated by Eastern for the period 1944 through 1948 was 12,000,000 tons.

Eastern sells coal to non-affiliates, to Koppers, and to its own by-product coke plants. Intercompany sales of coal by the coal division to the by-product coke plants are made at prices substantially equal to the prices at which comparable coal is sold by Eastern to non-affiliates. During the 12-year period from 1937 through 1948 such sales averaged 2,900,000 tons per year or 17% of the total coal distributed by Eastern. The sales of coal to Koppers are now made under a contract entered into on September 30, 1948, and extending for a period of ten years beginning April 1, 1949. Under the contract, Eastern agreed to furnish substantially all of the bituminous coal requirements of Koppers' plants at prices determined annually on the basis of current market prices. During the 1937-1948 period, sales of coal to Koppers averaged 2,300,000 tons per year, or 14% of the total coal distributed by Eastern. The sales to Koppers increased from 1,900,000 tons in 1937 to 2,900,000 tons in 1947 and 1948, while the amount of coal consumed by Eastern's coke plants has remained relatively stable. There is no indication in the record that the coal sales to Koppers or the terms on which they are made would be affected by Koppers' divestment of Eastern. The sales to non-affiliates, which represent about two-thirds of the total amount of coal distributed, are made to coal dealers, industrial companies, coke plants, public utilities and railroads, located principally along the eastern seaboard.

The selling prices of coal produced, coal revenues, and operating profits before depreciation, depletion and federal and state income taxes for Eastern's coal division in the years 1937 to 1948, inclusive, and averages for the period, are shown in Table 10.4

As indicated by Table 10, the weighted average selling price per net ton of coal produced, f.o.b. mines, increased from $2.00 or less in the years 1937-1940, to $3.71 in 1946 and to $4.41 in 1947. A further substantial rise occurred in 1948; in May, the average realization at the mine was $5.67 per net ton, and Eastern expected it would increase to $6.07. These increases were the basic cause for the rise in Eastern's total coal revenues from between $22,000,000 and $26,000,000 per year from 1937-1940 to about $70,000,000 in 1947 and $84,000,000 in 1948.

Coal production operating profits before depreciation also increased during the period shown in Table 10. Such profits were less than $1,000,000 per year during the years 1938 and 1939.

The phrase "operating profits before depreciation" as used hereinafter refers to operating profits before depreciation, depletion, and income taxes.

Where 1948 figures are available, averages cover the period 1987 to 1948, inclusive. Where such figures are not available, averages cover 1937 to 1947, inclusive.

From 1940 to 1946, they increased from approximately $2,100,000 to $3,700,000, and in 1947 they reached over $6,000,000. Similarly, on a net ton basis, operating profits before depreciation from coal produced increased from about 10¢ per ton in the period covered by Table 10 to about 33¢ per ton in 1946 and to 49¢ per ton in 1947. The profit per ton rose to $1.04 in May 1948. Subsequently, there were increases in labor and other costs which were not fully offset by increases in prices, and Bird stated that in October 1948 profits per ton were about 90¢.

On coal purchased, operating profits before depreciation have been erratic. From 1937 to 1945, they ranged from a low of $390,000 in 1939 to approximately $1,100,000 in 1943. Such profits, after the war, amounted to $356,000 in 1946 and $880,000 in 1947.

Total operating profits before depreciation on coal purchased and produced ranged from about $1,100,000 to $2,700,000 in the years 1937 through 1941. From 1942 to 1946 such profits remained fairly stable, ranging from about $4,100,000 to $4,700,000. However, in 1947 such profits rose sharply to over $7,000,000 and in 1948 to over $10,000,000.

The three witnesses who made earnings estimates recognized that historically there have been wide variations in Eastern's