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I have a table here which shows the break-down and overall expenses, which I ask permission to insert in the record at this point. A comparison of the expenses is interesting.

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1 Edison Electric Co. stated that preparing of the registration statement, accounting and other expenses in connection therewith totaled $20,000 in $35,000,000 issue and $12,000 in $20,000,000 issue. 2 Not segregated.

Stated simply, this means that registration expense in the Edison Electric was only $1 for each $1,750 of securities. This means 6 cents for each $100. The American Water Works System expense is estimated in the table to be 19 cents per $100.

Comparison of the estimates in the American Water Works' table with the actual expense of another company is of interest. We found, for example, that in 1936 American Telephone & Telegraph Co. registered an issue of $160,000,000 at 314-percent debentures of which $140,000,000 were offered to the public through underwriters. The underwriting commissions were $2,800,000 and other expenses were $372,000. The $372,000 was broken down as follows, and shows very interestingly only $13,000 for accounting fees. This accounting expense is only one-fifth as much as the $72,000 accounting expense in the American Water Works statement and yet the American Telephone & Telegraph Co.'s consolidated assets were more than 10 times as large as the American Water Works' consolidated assets, and its gross consolidated revenues almost 20 times as large.

The telephone company's break-down shows:

Federal stamp taxes_.

Fees for registration and listing debentures_

Expense of printing registration statement, prospectus, indenture, etc. (estimated).

$160,000

Expense of preparation, execution, and authentication of temporary and definitive debentures (estimated) __

36,000

140,000

Accountants' fees and expenses (estimated).

18, 000

13, 000

5, 000

372, 000

Miscellaneous expenses (estimated).

Total_.

Incidentally, that total of $372,000 was contained in a report to the Federal Communications Commission which the company made in 1936 and shows the total expenses turned out to be $346,827, which means approximately 22 cents for each $100 of securities, compared with the 92-cent estimate per $100 by American Water Works.

Now, I realize that the comparison between one company and another company is not conclusive, and I only point out the difference between the American Water Works and the Edison Electric Illuminating Co. of Boston, and the American Telephone & Telegraph Co., because the Water Works issues were smaller and yet the expenses, particularly accounting and legal, were so much greater.

I should like, however, to make a brief comparison between the estimated expenses of American Water Works System of securities and the experience of all utility companies filing with the Commission during the past 3 years. For example, in the year 1940, 26. utility issues were registered under the Securities Act for the sale of securities to the public for cash. The average flotation costs were $2.32 for each $100 of securities. That is shown in the last or fourth column of the chart which I have handed up.

The $2.32 utilities is divided as follows: $1.79 to the underwriters and 53 cents for other costs.

It should be remembered at this point that the American Water Works System had $1.97 underwriting costs as compared to $1.79 shown here, and 59 cents of other expenses, as compared to 53 cents for other expenses by the entire utility industry.

The estimates in the American Water Works table depart even further from the over-all experience of utility companies. The table shows 92 cents for other expenses compared with 53 cents for the over-all experiences of the industry. Stated in terms of the total amount of the offerings shown on the table, namely, $101,439,000, an estimated expense, exclusive of underwriting commissions, based on the 1940 experience of other utility companies, would be $537,627 as compared with the Water Works System's estimate of $937,283.

Also, in order to show the discrepancy between the Company's estimates and actual experience of utility companies in other years, I should like to briefly refer to the years 1939 and 1938. We find, for example, the 1939 over-all expense of flotation of all utility companies was $2.68 for each $100 of securities, divided into two categories, that is $2.04 for underwriting fees, and 64 cents for other expenses. The 64 cents is still considerably lower than American Water Works estimates of 92 cents. The year 1938 also shows the same higher estimated cost in American Water Works. For example, the over-all flotation cost for utilities in 1938 was $2.52 per hundred, of which $1.89 was underwriting cost, and 63 cents other costs.

I would like to say one more thing about the reasons advanced by the American Water Works system for private placements.

In July 1939, while a registration statement of the West Penn Power Co. was on file with us covering a public offering, the West Penn Power Co. sold privately $3,220,000 of notes maturing from 1940 to 1949, bearing interest from 112 to 334 percent. Since there was a public offering of $32,678,470 of $100 par preferred stock at the same time, it would have been possible for the company to include

the $3,200,000 of notes in the registration statement with practically no expense at all. We were advised that the notes were not included because of the low interest rate and because their money needs were best met by a security of that type sold privately. The company simply did not want to sell the notes publicly. The cost factor in this case had nothing to do with the company's decision to sell privately.

Now, the Commission has long been interested in determining why companies place privately rather than seeking the public market, especially with bond issues. In the course of conferences with various representatives of issuers, our staff members have asked those representatives why they seek a private placement rather than a public offering.

In October 1940, one such interview was held with a financial executive of the American Water Works System. He was advised, our representative was advised, that the reason for placing securities privately in the case of the American Water Works System rather than publicly was simply that the system felt that the same price could be obtained from an insurance company as could be obtained in a public offering, thereby saving underwriting fees and other costs, which, of course, include such costs as are attributable to registration.

We were told that the Water Works System had filed registration statements in the past and would continue to do so. They stated, however, that having already prepared a registration statement, the preparation of subsequent issues was much simpler and involved merely bringing up to date the material and they said that this would be necessary whether public or private sales were made.

They also told us even if there were no requirement or experience involved in a public offering that insurance companies would have been the purchasers in the issues which were privately placed because of the interest rates and because nothing would be gained by making a public offering of such securities.

The system then, they tell us, has sold and will continue to sell publicly when they feel it is desirable in order to keep a public market open or where better prices or other advantages will be obtained through public offerings.

So, it comes down to this, as we analyze the Water Works Co.'s figures, that the most that can be attributed to the registration process under the Securities Act by way of additional expense is about 912 cents for every $100 of securities sold.

I have a chart here which shows graphically the amount that would represent out of each thousand dollars of securities sold. I also have smaller charts which I can furnish to members of the committee.

The line or rather the piece of the pie which represents that additional expense is so small that it was rather difficult to get it all clearly into the chart.

We have also attempted to reduce this to a smaller chart, which I will hand to the committee, and I should like to have this one also included in the record.

The CHAIRMAN. Very well.

(The chart referred to is as follows:)

FLOTATION COSTS ATTRIBUTABLE TO S.E.C. PER $1000 PUBLICLY RAISED

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Mr. YOUNGDAHL. Mr. Chairman.

The CHAIRMAN. Mr. Youngdahl.

Mr. YOUNGDAHL. Is this one-tenth of 1 percent, or $1 per $1,000 the cost of registration based upon an average of all-sized issues?

Commissioner PURCELL. No, sir; that is the figure which, on the basis of figures presented to Congressman Wadsworth, which he let us have, in this table, by the American Water Works System, by their whole figures, will be attributable to the increased cost of placing the securities which they did place privately by placing them publicly, which would possibly result from registration under the Securities Act.

Mr. YOUNGDAHL. This particular testimony would not throw any light as to the probable cost or percentage of cost on the smaller issues? Commissioner PURCELL. Oh, I think so; yes, sir. I do not know how many smaller issues are included in the average figures, which I show on the other chart. Those are all utility issues.

Mr. YOUNGDAHL. Would you be able to state the average size upon which this percentage is based?

Commissioner PURCELL. Just a moment.

The figures, of course, in the average would be smaller than the figures that we have on the chart there for the American Water Works. In the case of these particular issues, Mr. Youngdahl, as to which that one-tenth of 1 percent applies, they range, according to column 4 of the cost schedule from $50,000, which is quite a small issue, up through various issues; there is one for $100,000; $420,000; $300,000; $200,000; up to larger issues, the largest of which appears to be $17,000,000; but if you will glance at the schedule-have you a copy of it, sir?

Mr. YOUNGDAHL. Yes.

Commissioner PURCELL. You will see that there are a great many quite small issues involved in the cost figures.

As to small issues, generally speaking, Mr. Youngdahl, when we come to the next topic, as I told you previously, we will give you a break-down solely relating to smaller issues.

Mr. YOUNGDAHL. All right.

Commissioner PURCELL. Just summarizing, briefly, the American Water Works table shows that by the system's own estimate, the additional costs which would be incurred in a public offering amount to slightly less than 20 cents for each $100 raised by public sale. This estimate exceeds its own actual experience, which was 13 cents, and is quite high when compared with the experiences of other particular companies and the experiences of utility companies generally.

Assuming that the American Water Works estimates are correct and that the system would have an extra cost of 20 cents for each $100 raised by public sale, we think it is fair to state that that is a very, very small amount, in order to give to the public the information which the act intended to give the public purchaser.

74947-42-pt. 2- -15

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