In the following table is shown the pro forma capitalization and surplus of Peoples based upon the foregoing balance sheet:

In carrying out the plan, Peoples proposes to record the assets, liabilities and reserves of Texas Public, which it is to acquire or assume, at the same amounts as such items are stated on the books of Texas Public at the date the transactions are consummated.

PROPERTY ACCOUNT OF TEXAS PUBLIC

As shown in the balance sheet of Texas Public as of September 30, 1944 (Appendix A hereto), the utility plant account of the company per books aggregated $7,385,369. Pursuant to Rule U-27 of our General Rules and Regulations, Texas Public has completed and filed with this Commission original cost studies covering the utility properties at Austin, La Grange and Port Arthur, but has not yet completed such a study of its properties at Galveston. This Commission has not passed upon these original cost studies pending completion of its examination thereof, and is reserving jurisdiction with respect thereto.

In its original cost study covering the properties at Austin and La Grange, the company has proposed to classify amounts aggregating $252,464 as "utility plant acquisition adjustments", Account 100.5, and the balance of the book value thereof as original cost. Pending the recording of these properties at original cost the com

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The record indicates that Texas Public is not subject to the jurisdiction of the Federal Power Commission and that, with respect to accounting matters, no jurisdiction is exercised by the Texas Railroad Commission. Rule U-27 provides, inter alia, that every registered holding company, and subsidiary thereof, which is a public utility company and which is not required by either the Federal Power Commission or a State Commission to conform to a classification of accounts, shall keep its accounts insofar as it is an electric utility company in the manner currently prescribed for similar companies by the Federal Power Commission and insofar as it is a gas utility company in the manner recommended by the National Association of Railroad and Utilities Commissioners. Such systems of account require the utility plant be classified so as to show both the original cost and the cost to the utility of its plant.

Amounts classified in Account 100.5 represent, generally speaking, the amounts by which the arm's length cost of property to the company exceeds the original cost of such property.

pany has provided a "reserve for utility plant account adjustments" of $252,464.

The properties at Port Arthur were purchased by Texas Public from nonaffiliated interests on November 10, 1943, following authorization by this Commission. (See Peoples Light and Power Company and its Subsidiary Companies, et al., 14 S.E.C. 555 (1943)). In its original cost study covering these properties, the company classified an amount of $435,048 in Account 100.5 and the balance of the book value of such properties as original cost. The company subsequently recorded the Port Arthur properties on its books in accordance with its original cost study and, in connection therewith, wrote off $300,000 of the above acquisition adjustments by a charge to earned surplus. The balance of $135,048 is being amortized over a 10-year period and was reduced as of September 30, 1944 to $124,919.

The properties at Galveston were purchased by Texas Public from nonaffiliated interests on December 30, 1943.9 Such properties (as to which no original cost study has been completed) were recorded on the books of Texas Public in Account 391, "Gas Utility Plant Purchased," at their acquisition cost of $2,239,860. This cost was $387,932 greater than the carrying value of the properties on the books of the seller at the date of acquisition, less the reserve for depreciation and after adjustment to eliminate known inflationary items. To provide for the elimination of this excess, if required, the company has increased the reserve for utility plant account adjustments by the amount of $387,932. It is expected that the company will proceed with the original cost study of these properties and that such study, when completed, will be filed with this Commission for examination and review as required by Rule U-27. The amounts of $252,464 and $387,932 provided in such reserve, as well as the $300,000 reduction in the Port Arthur utility plant acquisition adjustments account, were charged to Texas Public's earned surplus account in the year 1943.

Following is a summary of the property account of Texas Public, per books, as of September 30, 1944, and its reserves for utility plant acquisition adjustments and for depreciation:

As previously stated, we are reserving jurisdiction with respect to the original cost studies and the recording of the properties on the company's books.

The acquisition of these properties was authorized by this Commission on December 28, 1943. See Peoples Light and Power Company and its Subsidiary Companies, et al., 15 S.E.C. 118 (1943).

• Properties at Austin and electric properties at LaGrange include $236,953 and $15,511, respectively' which Texas Public has proposed to classify in Account 100.5.

Includes $124,919 classified in Account 100.5 which is presently being amortized; balance represented to be original cost.

• Includes $2,239,860 recorded in Account 391, pending determination of original cost.

RESERVE FOR DEPRECIATION

The following table shows the depreciation reserves as of September 30, 1944 and their relationship to the company's property account:

As shown above, the reserve for depreciation aggregated $1,244,308 which is equivalent to 18.4 percent, of depreciable property and 16.9 percent of gross property.

This reserve relates chiefly to the properties other than those at Galveston, inasmuch as the latter properties at the time of acquisition were recorded in Account 391, utility plant purchased, without the concurrent recording of a depreciation reserve.10 The Galveston properties were therefore record as "net" property after depreciation, and the reserve shown is that which has accrued since the date of acquisition.

Since the original cost studies of the properties to be acquired by Peoples and our examination thereof, have not been completed, any order which may issue with respect to the plan shall be subject to the condition that our jurisdiction under Rule U-27 over the original cost studies and the recording of the accounting entries to reflect the results thereof shall continue in full force and effect.

ASSUMPTION OF BONDS BY PEOPLES

Based on the pro forma balance sheet as of September 30, 1944 (See Appendix B) the mortgage bonds, after consummation of the plan, will represent approximately 56 percent of the total capitalization and surplus, approximately the same percentage of total "net assets," and about 59 percent of net property plus cash deposited with the trustee.

On the basis of the pro forma income statements of Peoples, hereinafter discussed, annual interest requirements on these bonds were earned approximately 3 times in 1944, and an average of about 2.9 times for the years 1939-44 inclusive. Total income deductions were covered about 2.5 times both in 1944 and for the 6-year period.

PROVISIONS OF BOND INDENTURE

Texas Public's bonds were issued during 1938 (pursuant to the 1936 reorganization plan) under an indenture dated as of January 1, 1936 with the Provident Trust Company of Philadelphia (the corporate trustee) and Carl W. Fenninger of Philadelphia. Such indenture has been modified by several supplemental indentures. Under the proposed plan, a new supplemental indenture, dated as

When utility plant constituting an operating unit is acquired by purchase, the applicable system of accounts requires that the cost of acquisition be charged to Account 391, utility plant purchased. Thereafter, the original cost of such property is required to be credited to such account and concurrently charged to the appropriate property accounts, and the depreciation reserve applicable to the original cost of the properties purchased, if required by the Commission to be recorded, must be charged to Account 391 and concurrently credited to Account 250-1, reserve for depreciation of utility plant.

of January 1, 1945 is to be executed providing for the assumption of the bonds by Peoples. The original indenture and all indentures supplemental thereto are hereinafter referred to as the indenture.

The bonds will be secured by a first lien on substantially all of the property to be acquired from Texas Public and on substantially all property thereafter acquired by Peoples. The bonds will also be secured by all of the capital stock and the first mortgage note of Texas Farm, and by $750,000 in cash or United States Government obligations to be deposited with the trustee at the time the supplemental indenture is executed. Such cash or obligations may be withdrawn by Peoples to the extent of the cost of gross property additions certified to the trustee, or may be applied by the trustee to the purchase or redemption of bonds. Property so certified to the trustee may not be used for any other purpose under the indenture. The indenture also provides that the proceeds of sales of property subject to the lien of the mortgage, or of the securities or property of Texas Farm less certain specified credits, shall be deposited with the trustee.

The indenture further provides, in effect, that additional bonds may be issued up to 60 percent of unfunded net property additions subsequent to December 31, 1944 provided net earnings, as defined, are at least twice the annual interest charges on all bonds to be outstanding and on all prior lien debt.

The indenture also contains provisions for a sinking fund and an improvement fund and a covenant with respect to dividend payments on common stock. Sinking fund payments are to be made on or before December 31 of each year from 1947 to 1959 inclusive in an amount equal to 1 percent of the greatest principal amount of the 1961 bonds outstanding after January 1, 1945. Such payments may be made in cash or by delivery of bonds.

The improvement fund provisions require the company in each year beginning in 1946 to pay to the corporate trustee, in cash or by delivery of bonds, an amount equal to 212 percent of the gross book value of its depreciable property at the beginning of the preceding calendar year, less certain credits which may be utilized at the company's option. Such credits include (1) amounts expended for renewals and replacements of property and/or for new and additional property, and (2) bonds available as a basis for issuance of additional bonds.

The dividend covenant provides that the company shall not declare or pay any dividends on common stock, other than dividends payable in common stock, except out of net income (as defined) accumulated after December 31, 1944.