The evidence contained in the stipulation of facts and in the various exhibits plainly shows that each of the proprietary companies exercises a controlling influence over the management and the policies of the applicant as to all important matters. Indeed, any other conclusion would disregard the actualities of the intercorporate relationships presented by this record. In our opinion, this influence makes it necessary in the public interest, and for the protection of investors and consumers, that the applicant be subject to the obligations, duties, and liabilities imposed by the Act upon subsidiaries of registered holding companies.1

As heretofore pointed out an application pursuant to Section 2 (a) (8) cannot be granted unless the Commission is able to find that the conditions prescribed in clauses (i), (ii), and (iii) are satisfied. Failure to establish that any of these three conditions exist requires us to deny the application. Since we are unable to make the finding required by clause (iii), we must perforce deny the applications, and it becomes unnecessary to discuss the applicability of clauses (i) and (ii).

Accordingly, each of the three applications under Section 2 (a) (8) must be denied.

An appropriate order will issue.

By the Commission: Commissioner Healy was absent at the time of the Commission's consideration of this case and did not participate therein.

1 Although in the present case the applicant and each of the three proprietary companies are registered holding companies and therefore already subject to many of the provisions of the Act, the statute likewise regulates the relationship between holding companies and their subsidiaries. For example, loans by a subsidiary to a parent company are forbidden by Section 12 (a) of the Act, and transactions between companies in the same holding company system are regulated by Section 12 (f). The controlling influence exerted by each of the proprietary companies over the applicant makes it essential that the parent subsidiary relationship be subjected to these and other regulatory provisions of the statute.

5 S. E. C.

[No. 788]

IN THE MATTER OF

NORTHWESTERN ILLINOIS UTILITIES

AMERICAN UTILITIES SERVICE CORPORATION

File No. 32-133. Promulgated June 30, 1939

EXEMPTION OF SECURITY ISSUE OF REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Issue Solely for Purpose of Financing Business of Subsidiary. Application, having been filed by a subsidiary of a registered holding company pursuant to Section 6 (b) of the Public Utility Holding Company Act of 1935, for exemption from the provisions of Section 6 (a) of the Act of the issuance of its 6% unsecured note in the principal amount of $500,000 to be delivered to the parent company in exchange for a similar note of applicant outstanding in like principal amount, exemption granted subject to certain conditions, the Commission finding that the issue is solely for the purpose of financing the business of the applicant and has been expressly authorized by the state commission.

ACQUISITION OF SECURITIES BY REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Development of Integrated Utility System.

Application, filed by a registered holding company, pursuant to Section 10 of the Act, for approval of the acquisition of a 6% unsecured note in the principal amount of $500,000, issued by a subsidiary company in exchange for a similar note of the subsidiary held by the registered holding company in like principal amount, approved, subject to certain conditions, the Commission finding that the acquisition will serve the public interest by tending towards the economical and efficient development of an integrated public utility system.

SALE OF PUBLIC UTILITY SECURITIES BY REGISTERED HOLDING COMPANY. Approval.

Application, having been filed by a registered holding company, pursuant to Section 12 (d) of the Act and Rule U-12D-1 promulgated thereunder for approval of the pledge of a 6% unsecured note in the principal amount of $500,000 issued by a subsidiary in exchange for an outstanding note in like principal amount held by the holding company, as a part of the collateral securing the holding company's outstanding collateral trust 6% bonds, series A, due November 1, 1964, approved subject to certain conditions.

FINDINGS AND OPINION OF THE COMMISSION

Northwestern Illinois Utilities (hereinafter referred to as "Northwestern"), a subsidiary of American Utilities Service Corporation (hereinafter referred to as "American"), a registered holding company,

5 S. E. C.-35-1617

has filed an application, pursuant to Section 6 (b) of the Public Utility Holding Company Act of 1935, for exemption from the provisions of Section 6 (a) of the Act of the issuance of its 6% unsecured note, or notes, in the principal amount of $500,000, to be dated as of November 1, 1938, and to mature November 1, 1964. The proposed note is to be delivered to Northwestern's parent, American, in exchange for a similar note of Northwestern outstanding in like principal amount which matured November 1, 1935. American has filed an application pursuant to Section 10 of the Act for approval of the acquisition of such note.

The outstanding note is pledged with Continental Illinois National Bank and Trust Company (Chicago), as trustee, as a part of the collateral securing American's outstanding collateral trust 6% bonds, series A, due November 1, 1964. The proposed note will be pledged with such trustee to replace the outstanding note. American has filed an application pursuant to Section 12 (d) of the Act and Rule U-12D-1 promulgated thereunder for approval of such pledge.

After appropriate public notice, a hearing was held upon such applications as amended. The Commission, having examined the record in this matter, makes the following findings:

Northwestern is a corporation organized under the laws of the State of Illinois. It is engaged in the generation and distribution of electric energy in the cities of Savanna, Mt. Carroll, Chadwick, Thomson, and the adjacent area, all in Carroll County, Illinois; the manufacture and distribution of gas in the city of Savanna, and the furnishing of telephone service to the cities of Savanna, Mt. Carroll, Lanark, and the adjacent area, all in Carroll County, Illinois. It also sells, at wholesale, a small amount of electric energy to the city of Sabula, Iowa. The following tabulation shows the amounts and respective percentages of securities and surplus to total capitalization including surplus, as of December 31, 1938:

6% unsecured promissory note, due 1935, payable to American $500,000 Common stock, $5 par----

Earned surplus---

Total capitalization----

Amount Percent

31.3

619, 310

38.8

The above amounts and percentages of securities will not be changed as a result of the proposed financing.

Northwestern's income statement for the 12-month period ended December 31, 1938, shows gross income (after provision for retirements) of $57,308 or 1.91 times the interest requirements on the note and 1.84 times total interest charges.

The plant and property account of Northwestern as shown on its books as at December 31, 1938, amounted to $1,685,833, including intangibles of $10,964. After deducting retirement reserve of $195,891, a net book value of $1,489,942 is obtained. The proposed note amounts to 33.6 percent of such net book value of plant and property.

The record shows that Northwestern, incorporated in December 1925, acquired, as of March 1, 1926, the assets of Peoples Gas and Electric Company, Carroll County Independent Telephone Company, and Mt. Carroll Electric Company, in exchange for $567,013 in cash, $44,900 par value of 7% preferred stock, and $619,310 par value of common stock.1

The purchase price of the assets so acquired amounted to the value of such assets as shown in an inventory and appraisal (reproduction cost basis) made by E. P. Smith, an engineer, dated October 31, 1925. The record indicates that the property purchased from Peoples Gas and Electric Company was recorded at values $290,131 in excess of the predecessor company's book values and that with respect to the Carroll County Independent Telephone Company property, the recorded values were $115,034 in excess of the predecessor company's book values. Northwestern states that the books of Mt. Carroll Electric Company are not available for examination.2

If adjustment is made to the net book value of Northwestern's plant and property by deducting the excess of appraisal value over predecessor companies' book values ($405,165) an adjusted net book value of $1,084,777 is obtained. The proposed note amounts to 46 percent

of such adjusted net book value.

The record shows that the appropriation for retirement reserve for the year ended December 31, 1938, amounted to $47,794 (15.9 percent of gross operating revenues), based upon 3% percent of depreciable electric property, 2.8 percent of depreciable gas property, and 4 percent of depreciable telephone property.

All of Northwestern's capital stock, together with the outstanding note, are owned by American and pledged by American with Continental Illinois National Bank and Trust Company, as trustee, as a part of the collateral securing American's collateral trust 6% bonds. As stated above, the proposed note will be issued to American for the purpose of discharging Northwestern's outstanding note and will be pledged by American with said trustee to replace such outstanding

note.

1 Northwestern states that to the best of its knowledge such predecessor companies were not affiliated with it in any way.

The acquisition of the assets of the three predecessor companies was approved by the Illinois Commerce Commission by its order dated February 23, 1926, in case No. 1810.

It is not possible, however, to determine how much of such excess may have been reduced in connection with retirements since 1926 from plant and property account.

THE APPLICATION PURSUANT TO SECTION 6 (b)

Section 6 (b) of the Act provides that the Commission shall exempt from the provisions of Section 6 (a) "subject to such terms and conditions as it deems appropriate in the public interest or for the protection of investors or consumers" the issue and sale of any security

by any subsidiary company of a registered holding company, if the issue and sale of such security are solely for the purpose of financing the business of such subsidiary company and have been expressly authorized by the state commission of the state in which such subsidiary company is organized and doing business.

The issue of the proposed note has been expressly authorized by the Illinois Commerce Commission by its order dated January 12, 1939.

In view of the facts above set forth the Commission finds that the proposed issue qualifies under the provisions of Section 6 (b) quoted above.

THE APPLICATION PURSUANT TO SECTION 10

In connection with the acquisition by American of the proposed note, Section 10 (b) of the Act provides that if the requirements of subsection (f) are satisfied, the Commission shall approve the acquisition unless the Commission makes adverse findings with respect to certain matters set out therein. The Illinois Commerce Commission by its order dated January 12, 1939, expressly authorized the delivery of the proposed note to American. The requirements of subsection (f) appear to be satisfied. The Commission observes no basis for making adverse findings under Section 10 (b). Section 10 (c) provides, in effect, that the Commission shall not approve an acquisition of securities which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11; nor shall the Commission approve an acquisition of securities unless the Commission finds that such acquisition will serve the public interest by tending toward the economical and efficient development of an integrated public utility system. The provisions of Section 8 are inapplicable. The Commission does not feel that such acquisition will be detrimental to the carrying out of the provisions of Section 11 and finds that the requirements of Section 10 (c) have been met. The question of compliance with Section 11 by American is not before the Commission in this matter.

THE APPLICATION PURSUANT TO RULE U-12D-1

Section 12 (d) of the Act and Rule U-12D-1, promulgated thereunder, provide in effect that the Commission shall approve the sale