[No. 794] IN THE MATTER OF THE LITCHFIELD ELECTRIC LIGHT AND POWER COMPANY File No. 32-141. Promulgated July 10, 1939 EXEMPTION OF SECURITY ISSUE OF REGISTERED HOLDING COMPANY OR 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 issue and sale of $450,000 principal amount of first mortgage bonds, 4% series due 1964, proceeds to be applied in liquidating pro tanto an open-account indebtedness due to applicant's parent company, exemption granted, subject to certain conditions, the Commission finding that the proposed issue and sale have been expressly authorized by the state commission and that the transaction is solely for the purpose of financing the business of the applicant. Condition-Statement of Fees and Expenses. Exemption from the provisions of Section 6 (a) of the Act of the issue and sale of $450,000 principal amount of first mortgage bonds, 4% series due 1964, granted upon condition, among others, that when all fees and expenses in connection with the transaction have been finally determined, the applicant shall file with the Commission a certificate setting forth the actual amounts paid or to be paid, to whom, and the services rendered therefor, the commission reserving the right to reopen the matter with respect thereto, if the amount of such fees should appear unreasonable. FINDINGS AND OPINION OF THE COMMISSION The Litchfield Electric Light and Power Company (sometimes referred to as "Litchfield" hereinafter), a subsidiary of NY PA NJ Utilities Company (sometimes referred to as "NY PA NJ" hereinafter), a registered holding company, has filed an application and amendments thereto under Section 6 (b) of the Public Utility Holding Company Act of 1935 for exemption from the provisions of Section 6 (a) of that Act with respect to the issue and sale of $450,000 principal amount of first mortgage bonds, 4% series due 1964, the net proceeds of which will be applied in liquidating pro tanto an open account indebtedness due from the applicant to its parent company. Exemption is sought under that sentence of Section 6 (b) which provides that the Commission shall exempt from the provisions of Section 6 (a) of the Act ". . . subject to such terms and conditions as it deems appropriate in the public interest or for the protection of investors or consumers" the issue or sale of any security 5 S. E. C.- -35-1626 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. After appropriate notice, a public hearing on the application, as amended, was duly held. No member of the public appeared or requested an opportunity to be heard. The Commission has examined the record herein and makes the following findings: FINDINGS THE APPLICANT Corporate relations.-The applicant is a wholly owned subsidiary of NY PA NJ Utilities Company, which in turn is a wholly owned subsidiary of Associated Gas and Electric Corporation, which in turn is a wholly owned subsidiary of Associated Gas and Electric Company. All these holding companies are duly registered. The applicant itself has no subsidiaries. Control over the applicant was acquired by the Associated system in 1925. Organization and business.-The applicant, an electric utility company, was organized in 1897 under a special act of the General Assembly of the State of Connecticut. It is engaged in the generation, transmission, and distribution of electric energy for light, heat, and power, largely to residential consumers, in 9 towns and adjacent rural areas in the western part of said state. In 1928 the Litchfield Company acquired by merger the properties and facilities of The Washington Electric Light and Power Company, and in 1931 the properties and facilities of The Ridgefield Electric Company. About two-thirds of the applicant's energy requirements are purchased at wholesale from Connecticut Light and Power Company, a nonaffiliated company, and approximately one-third is supplied by the applicant's own hydroelectric plant. Assets and liabilities.—A condensed balance sheet of the applicant's business as of March 31, 1939, shows: Assets and other debits Fixed capital stated at estimated reproduction cost at Sept. 30, 1925 (including write-up of $116,046.44 resulting from engineering appraisal of E. J. Cheney, which includes going value and other intangibles), plus subsequent additions at cost-----Investment in common stock of The Utility Management Corporation_____ Current assets Deferred debits Total___ 5 S. E. C. $1,205, 254, 07 3,710. 00 46, 300. 78 5, 964. 08 1,261, 228. 93 (Continued on p. 278) Reserve for retirements, renewals, and replacements of fixed capital---- 73, 665. 44 10, 186. 96 34, 383. 11 116, 046. 44 47, 012. 15 1, 261, 228. 93 Other reserves_. Contributions for extensions (non-refundable) ---- Capital surplus (being the present amount of the write-ups result ing from the Cheney revaluation in 1925) Earned surplus. Total. Income. For the 12-month period ended March 31, 1939, which may be regarded as typical, the applicant's income was: Operating revenues (electric) -- Operating expenses and taxes: Operating expenses- Maintenance___ Retirement expense. Taxes--- Total Operating income.... Other income--- Gross income___. Deductions from income: Interest on open account to NY PA NJ.. Interest on customers' deposits and advances---- Net income $153, 229. 25 18, 912. 66 26, 284. 91 29, 680. 17 $300, 393. 10 228, 106.99 72, 286. 11 3, 541. 59 75, 827.70 $35, 708. 74 37, 704. 61 38, 123. 09 THE PROPOSED TRANSACTION Bonds.-The applicant proposes to issue and sell to John Hancock Mutual Life Insurance Company at a price of 104 its first mortgage bonds in the principal amount of $450,000, to be dated July 1, 1939, and to mature on July 1, 1964, with interest payable semiannually at the rate of 4 percent per annum. Mortgage indenture.-As security for the payment of said bonds, the applicant proposes to execute an open-end original indenture of even date therewith to The Marine-Midland Trust Company of New York, trustee, mortgaging its lands, plants, transmission and distribution lines, easements, franchises, and other facilities now owned or hereafter acquired, and a supplemental indenture to the same trustee, of the same date, securing the bonds now proposed to be issued. Among the provisions of the indenture are the following: Additional bonds may be issued up to 66% percent of the net amount of additional property; there shall be charged to operating expenses each year an amount not less than 15 percent of gross operating revenues, and such part thereof as is not expended for maintenance shall be credited to the retirement reserve; the bonds may be redeemed at call prices ranging downward from 108; a list of all registered bondholders shall be kept, and the obligor shall furnish to the trustee an annual statement of its financial condition showing full compliance with the terms of the indenture, which information shall be open for inspection by any bondholder; the trustee shall declare the entire indebtedness due and payable 30 days after default in payment to the bondholders or 60 days after other default, upon the request in writing of the holders of 25 percent in principal amount of the bonds, and the remedial steps to be taken by the trustee may be dictated by 55 percent in amount of the bondholders; the trustee is exonerated from all liability in the administration of the trust except for its own default or negligence. No sinking fund is provided. Fees and expenses.-The applicant proposes to pay the following fees and expenses in connection with the transaction: The Utility Management Corporation, for financial and accounting Travis, Brownback and Paxson, New York City, for legal services.... Total___ $2,700 750 800 6, 750 11,000 Considerable testimony was introduced with respect to the propriety of paying a finder's fee amounting to 1.5 percent of the proposed issue. It appears that the applicant consulted The First Boston Corporation over a period of several months with respect to the matter; that the applicant itself has no organization trained for the direct marketing of its securities; that The First Boston Corporation advised as to the principal amount, interest rate, and other terms of the proposed issue to the end that the securities should bring the most attractive price at the lowest expense to the issuer; that it canvassed the field of possible buyers and procured a commitment from the proposed purchaser on the terms above stated; and that the agreed fee, while apparently large in proportion to the amount of the issue, approximates the minimum fee for services of this character. Use of net proceeds.—The net proceeds of the issue, amounting to $457,000, will be applied as a payment on the open account balance owing to NY PA NJ, which at March 31, 1939, amounted to $614,453.54. of A critical study of this open account, which is a continuing account from 1925, shows that the parent company, during the early years its control over Litchfield, advanced considerable sums in cash to retire the then outstanding preferred stocks and bonds of Litchfield and its constituent companies, and to assist Litchfield in its rapid growth and expansion. Although the records indicate that Litchfield enjoyed a satisfactory net income each year, the parent company left its dividends on loan with the subsidiary, merely adding the amount thereof to the open account. During later years certain repayments were made, with a net balance as indicated. However, certain items of the account are open to challenge; and the interest rate charged on monthly balances, two-thirds of one percent per month until 1932 and one-half of one percent per month thereafter, appears excessive. The Public Utilities Commission of the State of Connecticut, to whom application was made on November 8, 1938, for approval of the pending transaction, undertook a detailed study of this open account, and also made a field inventory of the applicant's physical property as of October 1, 1938. That commission criticized certain items of the open account, as well as the rate of interest charged thereon. It also criticized certain overhead items charged by the parent company and incorporated into Litchfield's fixed capital account. The Connecticut commission, basing its calculations on Litchfield's unit costs for labor and materials, estimated the historical cost of the fixed property, less excluded overhead items, at $876,051 as of October 1, 1938; but it found that this estimated historical cost was adequate coverage for the principal amount of bonds proposed to be issued. An agreement was reached between NY PA NJ and the Connecticut commission whereby $135,503.45 of the open account, as of March 31, 1939, should be canceled, and the interest rate on the balance reduced to 4 percent per annum. An agreement was reached with Litchfield whereby the amount of this debt reduction should be applied, $50,000 to offset questionable items in the property account, $75,000 added to the retirement reserve, and the balance (representing interest in excess of 4 percent per annum from October 31, 1938, to March 31, 1939) credited to earned surplus. It was also agreed that the small balance of the open account remaining after the consummation of the proposed transaction (to wit, $21,950.09 as of March 31, 1939) shall be discharged before any further dividends are declared by Litchfield on its outstanding common stock. On this basis, the Connecticut commission approved the application, and it is submitted to this Commission on the same basis. |