As a result of the proposed refinancing the ratio of long-term debt to total capitalization and surplus will be increased from 49.0 percent to 51.1 percent, while common stock equity will be reduced from 28.8 percent to 27.2 percent. PLANT AND PROPERTY The net utility plant, including construction work in progress, of Gulf States as at March 31, 1946, actual and as adjusted to give effect to the sale of the Jasper electric properties was $52,404,284 and $52,386,436 respectively, as shown in the following table: 2 Reserve for depreciation---- Reserve for amortization of plant acquisition adjust In 1943, the Federal Power Commission completed its review of the company's studies pertaining to the original cost of its electric plant, which studies indicated that such cost was $5,693,672 less than the recorded cost thereof to the company as at January 1, 1937. This excess over original cost was classified by Gulf States, with the approval of the Federal Power Commission, as follows: TABLE III Account 100.5, electric plant acquisition adjustments. Account 107, electric plant adjustments-▬▬▬ Account 108.15, common utility plant acquisition adjustments____ Total $750, 989 1,935, 151 2,479, 188 528, 344 5,693, 672 The property at Jasper, Tex., was sold in December. The sale will not finally be recorded on the books of the company until the accounting entries, in connection therewith, are approved by the Federal Power Commission. Pursuant to an order of the Federal Power Commission dated January 11, 1944, the company disposed of or made provision for the disposition of $2,786,524 of the $5,693,672, and is providing a reserve for the balance of $2,907,148 by monthly charges to income over a 15-year period beginning in January 1943. In providing for the $2,786,524, the company wrote off $2,463,495 or an amount equal to the electric plant adjustments (Account 107) plus the common utility plant adjustments (Account 108.17) by charging $1,497,392 to earned surplus and $966,103 to reserve for depreciation, and transferred $323,028 from the reserve for depreciation to a reserve for amortization of plant acquisition adjustments.3 At March 31, 1946, the company's reserve for depreciation amounted to $12,563,228 or approximately 21 percent of total depreciable property of $59,964,014. The company states that the reserve for depreciation and the accruals presently being made for depreciation are approximately equivalent to those that would result if a 6 percent compound interest method were followed. SECURITY RATIOS The following table sets forth pertinent ratios of senior securities to net property and other assets, as adjusted to give effect to the sale of the Jasper electric properties as of March 31, 1946, and pro forma to give effect to the proposed financing: • Does not include capital stock expense of $123,995 and unamortized premium on debt of $921,957. Does not include capital stock expense of $123,995 and unamortized debt discount and expense of $9,600 In March 1946, the company, with the approval of the Federal Power Commission, recorded at original cost electric distribution properties acquired in September 1945 and transferred $39,991 to electric plant acquisition adjustments account. Provision is being made for disposition of this amount by monthly charges to income over a five-year period beginning January 1946. EARNINGS A condensed income statement of Gulf States, actual and pro forma, for the twelve months ended March 31, 1946, is attached as Appendix B. Earnings coverages based on these figures are calculated below: • Federal income tax returns are filed on a corporate basis and the contemplated disposition by Engineers of its interest in the company will not of itself affect Gulf States' Federal income taxes. It will be noted from the foregoing table that as a result of the refunding program interest and amortization charges will be reduced by $173,560 per year or from $926,397 to $752,837. ACCOUNTING TREATMENT In connection with its refinancing, the company proposes to adjust its balance sheet by writing off to earned surplus the redemption premium to be paid on the presently outstanding bonds, and duplicate interest in the respective amounts of $1,911,000 and $62,000, or a total of $1,973,000. It also proposes to credit earned surplus with the unamortized premium on the bonds to be retired amounting to $921,957. Earned surplus will also be increased $399,396, representing the reduction in Federal income taxes for the year 1946 by reason of the refinancing. As a result of the foregoing, earned surplus will be reduced by the net amount of $651,647. When the actual transactions take place the reduction of $399,396 in taxes will be made through the income account and will be offset by charges of equivalent amounts of the premium paid on bonds being retired. This will result in a decrease of a like amount in the charge to be made to earned surplus for premium paid on the bonds being retired. Nothing contained herein shall be construed as affecting the authority of other regulatory bodies having jurisdiction over such accounting matters. DESCRIPTION OF NEW BONDS The new bonds are to be issued under and secured by an indenture of mortgage executed by Gulf States to the Central Hanover Bank and Trust Company, as successor trustee, dated September 1, 1926, as modified and supplemented by supplemental indentures, including a Seventh Supplemental Indenture to be dated as of May 1, 1946. The new bonds will, in the opinion of counsel for Gulf States, be secured by a first mortgage lien on substantially all of the properties of the company. The indenture, as supplemented and modified, provides for a maintenance and replacement fund which requires in effect that, so long as any of the new bonds shall remain outstanding, the company shall on or before April first of each year, beginning April 1, 1947, pay to the Trustee in cash or deliver bonds, or certify property additions in an amount equal to the amount by which expenditures for maintenance and repairs are less than 15 percent of the total operating revenues of the company after deducting from such operating revenues the cost of electricity and gas purchased for resale and rentals paid by the company. By the terms of a sinking fund provision the company agrees to pay to the Trustee semi-annually on March 31 and September 30 of each year, beginning on March 31, 1947, an amount in cash equal to 12 of 1 percent of the maximum principal amount of bonds outstanding at any one time. Deducted from the maximum principal amount of bonds to be used in determining the amount to be paid would be the amount of bonds retired with the proceeds, in excess of $1,000,000, of sales to or at order of governmental agencies or from proceeds of sales to cooperatives. The company may satisfy any sinking fund payment by the delivery of bonds or by applying up to 60 percent of certified net property additions. Up to $1,000,000 principal amount of new bonds may be issued on the basis of property owned at December 31, 1945, and further issues may be made up to 60 percent of net property acquired subsequent to December 31, 1945. However, before additional bonds can be issued, earnings available for interest on bonds outstanding, plus those to be issued, plus interest on prior lien indebtedness, must have been, for at least 12 consecutive months out of the preceding 15 months, at least twice the aggregate of such annual interest charges. For the purpose of this provision net earnings are before taxes on income but after depreciation which shall not be less than defined in the provision relating to the maintenance and renewal fund. Under the indenture dividends on the company's common stock may be paid only out of net income earned subsequent to December 31, 1945 plus $378,000. The new bonds will be subject to redemption as a whole or in part at any time or times, upon the giving of 30 days' notice, at “regular” or "special" redemption prices determined under a formula which will depend upon the offering price to the public. "Special" redemption prices are applicable to bonds redeemed for the sinking fund or the maintenance and replacement fund, or to absorb proceeds of sales made to or pursuant to order of governmental agencies or to absorb proceeds of sales made to cooperatives. As we have noted, the new bonds are to be sold pursuant to the competitive bidding requirements of Rule U-50. After the opening of the bids, the company will file an appropriate amendment to its declaration as required by paragraph (c) of Rule U-50. The invitation for bids will require that each proposal must be for the purchase of all of the bonds and must specify: (a) the coupon rate (which shall be in multiples of % percent and shall not exceed 3 percent to be borne by the bonds; and (b) the price to be paid to Gulf States which shall not be less than 100 percent nor more than 10234 percent of principal amount, plus accrued interest from May 1, 1946. We shall consider the price of the bonds, the redemption prices, and the underwriters' spread and its allocation when the necessary details are available. A further order will be entered concerning these matters as to which jurisdiction is reserved. DESCRIPTION OF SERIAL NOTES The $2,000,000 aggregate principal amount of 10-year unsecured promissory serial notes will bear interest at the rate of 14 per annum and will be payable in twenty equal semi-annual installments of $100,000 each, due June and December of each year beginning December 1, 1946. No public offering is to be made of the whole or any part of the notes. Gulf States will have the right to anticipate the payment of the principal and the interest accrued on such notes at any time, but prepayments must be made in the inverse order of |