Commission, which provide for depreciation accounting and in connection with such uniform system is making studies with reference to such requirements. Declarant states that such studies involve a detailed examination of its records for many years in the past and careful consideration of the effects of the new system of accounts on its past policies relating to maintenance and retirement accounting will of necessity extend over a considerable period. Pending the determination of such study the company is continuing to provide a reserve for renewals and retirements as in previous years.

For the year 1938 the company's provision for depreciation was $1,732,000 or 59.7 percent of the deduction for depreciation claimed for federal income tax purposes. For the years 1937 and 1936 a similar comparison indicates that the ratios were 55.5 percent and 47.2 percent, respectively. The retirement reserve of $15,578,246 (after deducting retirement work in progress of $542,329) as of March 31, 1939, represented 14.3 percent of the company's gross utility plant account (excluding construction work in progress).

EARNINGS

For the 12 months ended March 31, 1939, the company had gross income available for fixed charges of $8,184,156. This was equivalent to 3.97 times interest on long-term debt and covered all fixed charges and preferred dividend requirements 1.88 times. Common stock earnings were equivalent to $1.38 per share. Operating expenses include maintenance charges and provision for renewals and retirements equivalent to 16.6 percent of gross revenue. After giving effect to the proposed financing, which results in over-all savings of $534,822 due to the reduction in the preferred dividend rate from 7% and 6% to 42%, the ratios for preferred dividend requirements and earnings per common share will be materially improved, being equivalent to 2.14 times and $1.57 per share, respectively."

THE TERMS OF THE ISSUANCE

The company has now outstanding 127,077 shares of 7% cumulative preferred stock and 170,000 shares of 6% cumulative preferred stock

'Pro forma ratios necessarily cannot give effect at this time to any possible increase in amortization of capital stock expense which may be required by the Pennsylvania Public Utility Commission's order.

which are callable on 6 months' notice at the redemption price of $115 and $110 per share, respectively.

As hereinbefore mentioned, the company proposes to offer to the holders of the 6% cumulative preferred stock and the 7% cumulative preferred stock now outstanding, the right to exchange each share of such outstanding stock held by them for one share of the new 42% preferred stock. Upon each such share exchanged, appropriate cash adjustment will be made so as to pay the holders of such outstanding stock an amount per share equal to the difference between the redemption price of such outstanding stock and the price at which the 42% preferred stock is to be initially offered for sale to the public together with accrued dividends to the date of the redemption of such outstanding stock less any accrued dividends on the 42% preferred stock to the date of such exchange. It is proposed that such right of exchange will commence at 11 a. m. (E. D. S. T.) on Monday, July 17, 1939, and will expire at 3 p. m. on July 20, 1939 (E. D. S. T.).

The company itself (and not through underwriters) proposes to solicit the exchange of the outstanding preferred stock for the new preferred stock, by mailing or delivering subscription forms and prospectuses, using the services of certain of its own employees, who will receive no special compensation therefor.

The proceeds of the issue of the preferred stock not so exchanged will be expended for the purpose of redeeming, on February 1, 1940, all the then outstanding shares of the 7% cumulative preferred stock and 6% cumulative preferred stock of the applicant at the hereinabove-mentioned redemption prices. The shares of the outstanding preferred stock surrendered on such exchange or redemption will be retired.

The shares of the 42% preferred stock not so exchanged will be sold to a syndicate of 43 underwriters. The underwriters are to receive a commission of $1 per share, as a stand-by charge for each share of the 297,077 shares of 42% cumulative preferred stock, whether or not issued pursuant to the exchange offer, and will purchase each share of 42% cumulative preferred stock not so exchanged at $108 and will resell to the public at an initial offering price of $110 per share.

As heretofore mentioned, the underwriting syndicate is to be jointly headed by W. C. Langley & Company, Bonbright & Company, Incorporated, and The First Boston Corporation.

Due to certain past affiliations between West Penn Power Company and W. C. Langley & Company, and present relationships between that firm and the American Water Works and Electric Company, Incorporated, holding company system, which might have necessi

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tated a proceeding to determine whether or not "there is liable to be or to have been an absence of arm's length bargaining" within the meaning of Rule U-12F-2 (a) (3), W. C. Langley & Company has agreed to participate in the management of the underwriting syndicate of the above issue, subject to the limitations of subparagraph (d) of the said rule which provides that the term "underwriter's fee" shall not be considered to "include any fee paid to an underwriter whose participation does not exceed 5 percent of the total offering, if such underwriter does not receive any commission or remuneration (whether for originating the issue or otherwise) in addition to the fee computed at the rate applicable to other underwriters who may take the same or similar participation in the offering." Likewise W. C. Langley & Company has agreed to forego any management fee. The First Boston Corporation and Bonbright & Company, Incorporated, will each receive a management fee of 5¢ for each share underwritten, and an additional 7/2¢ for each share purchased by the underwriters for public distribution. Under the circumstances of the case, it does not appear that the underwriting commission is unreasonable.

THE NEW PREFERRED STOCK

The 42% preferred stock will be one class of newly created preferred stock issuable from time to time in one or more classes, all of which will be of equal rank. However, the shares of preferred stock of different classes may vary as to the dividend rate, the date from which dividends shall be cumulative, the redemption price, amount payable on liquidation, sinking fund provisions, the conversion, participation, or other special rights. The initial authorized amount of the preferred stock will be $50,000,000, of which $30,000,000 will be classified initially as 42% preferred stock. The 42% preferred stock will be entitled to receive cash dividends, cumulative from July 15, 1939, at the rate of 42% per annum (and no more) in priority to dividends upon the common stock.

Rule U-12F-2. Payment of fees to associates and affiliates in connection with an acquisition or sale of securities :

(a) In connection with an issue, sale, or acquisition of any security with respect to which an application or declaration is required by Sections 6, 7, 9, 10, or 12 (d) (f), or (g) of the Act, no underwriter's finder's fee shall be paid to: (3) Any person who the Commission finds stands in such relation to the declarant or applicant, or to the person by whom the fee is to be paid, that there is liable to be or to have been an absence of arm's length bargaining with respect to the transaction. . .

(b) Paragraph (a) of this rule shall not apply in respect to any underwriter's fee if it appears to the Commission that

(1) Appropriate and diligent effort was made to obtain competitive bids for the securities which are the subject of the application or declaration, by publication or otherwise, and the affiliate's bid was not less favorable than that of any other bidders'; or

(2) Such effort was not practicable and (a) the fee to be paid does not exceed customary fees for similar services where the parties are dealing at arm's length, (b) the service rendered is necessary, and (c) the remuneration is reasonable in view of the cost of rendering the service, the time spent therein, and other relevant factors.

The holders of the 42% preferred stock will be entitled, upon voluntary liquidation, dissolution, or winding up, to be paid the sum of $110 per share plus accrued and unpaid dividends, or upon voluntary liquidation, dissolution, or winding up approved by the vote of a majority of the shares of the 42% preferred stockholders, or involuntary liquidation, dissolution, or winding up, to be paid the sum of $100 per share plus accrued and unpaid dividends, before any distribution will be made to the common stockholders.

The 42% preferred stock is to be subject to redemption at any time at the option of the company, upon notice at least 30 days, and not more than 90 days, prior to the redemption date, at the following prices: $115 per share, if redeemed on or before July 14, 1944; a reduction of $1 per share there from each year thereafter, to and including July 14, 1948, and at $110 per share thereafter, plus accrued and unpaid dividends.

The charter provides that so long as any of the shares of the preferred stock of any class are outstanding, without the consent of the holders of at least two-thirds of the shares of the preferred stock then outstanding, no class of stock (other than a class of the preferred stock) ranking prior to or on a parity with the preferred stock may be created or authorized; no prejudicial change may be made in the express terms of the preferred stock; and no additional shares of any class of preferred stock may be issued, unless net earnings (as defined in the charter) shall be at least three times the dividend requirements on the preferred stock then outstanding and any additional preferred stock to be issued. In addition, the authorized amount of preferred stock of all classes may not be increased without the consent of the majority of the total number of shares of the preferred stock.

The charter as amended will also contain a special provision to the effect that so long as any shares of the preferred stock are outstanding the corporation shall not, without the consent (given by a vote at a meeting called for that purpose) of the holders of a majority of the total number of shares of the preferred stock of all classes present or represented by proxy at such meeting, at which meeting a quorum. (as hereafter defined) shall be present or represented:

(a) Issue any unsecured notes, debentures, or other securities representing unsecured indebtedness, or assume any such unsecured securities, for purposes other than the refunding of outstanding unsecured securities theretofore issued or assumed by the Corporation or the redemption or other retirement of all outstanding shares of one or more classes of the preferred stock, if, immediately after such issue or assumption, the total principal amount of all unsecured notes, debentures, or other securities representing unsecured indebtedness issued or assumed by the corporation and then outstanding (including the unsecured securities then to be issued or assumed) would exceed ten per centum (10%) of

the aggregate of (i) the total principal amount of all bonds or other securities representing secured indebtedness issued or assumed by the corporation and then to be outstanding and (ii) the capital and surplus of the corporation as then to be stated on the books of account of the corporation; or

(b) Merge or consolidate with or into any other corporation or corporations, unless such merger or consolidation, or the issuance and assumption of all securities to be issued or assumed in connection with any such merger or consolidation, shall have been ordered, approved, or permitted by the Securities and Exchange Commission under the provisions of the Public Utility Holding Company Act of 1935 or by any successor commission or regulatory authority of the United States of America having jurisdiction in the premises; provided that the provisions of this clause (b) shall not apply to a purchase or other acquisition by the corporation of franchises or assets of another corporation pursuant to the provisions of Section 23 of the Act of the General Assembly of the Commonwealth of Pennsylvania, approved April 29, 1874, P. L. 73, as amended, or other similar Act, or otherwise in any manner which does not involve a merger or consolidation.

In connection with (a) and (b) above, it is provided that a majority of the preferred shares is necessary to constitute a quorum at the meeting, except that if a majority quorum is not then present, and is not obtained at any adjournment within 30 days after the initial meeting date, then and in such event, one-third of the preferred shares shall be sufficient to constitute a quorum.

The charter will further provide that every holder of the preferred stock will have one vote for each share, and every holder of the common stock shall have one vote for each share of stock for the election of directors and upon all other matters, except that if four quarter-yearly dividends on the preferred stock outstanding shall be in default, the number of directors shall thereupon be increased by two, and until such default shall have been remedied, the holders of the preferred stock, voting as a class, shall be entitled to elect two members of the board; if 12 quarter-yearly dividends on the preferred stock outstanding shall be in default, and until such default shall have been remedied, the holders of the preferred stock, voting as a class, shall be entitled to elect a majority of the directors; when all dividends then in default on the preferred stock outstanding shall be paid, the preferred stock will be divested of the above rights with respect to the election of directors, and the right to the election of directors shall revert to the status existing before such default, subject to the same provisions for vesting such rights in the preferred stock in the case of further like default in the dividends thereon.

The foregoing provisions afford some protection for the preferred stockholders, and we think it wise to include them in the charter. Moreover, in the interest of additional protection, the company has consented that the Commission's order contain a condition to the effect that, until further order of the Commission, so long as the company shall remain subject to the jurisdiction of the Commission, if any