of the further fact that the loan agreement contains no provision for breaking up the note for sale to the public, the Commission is of the opinion that the assets pledged are of such character as to satisfy the requirements of Section 7 (c) (1) (B) (iii). Declaration pursuant to Section 7 of the Act regarding the issue and sale of a 6% promissory note, permitted to become effective, subject to certain conditions, the Commission finding that the obligation meets the requirements of the term "bond" as used in Section 7 (c) and is secured by assets of such character as are appropriate in the public interest and for the protection of investors, taking into consideration the fact that the only investor here concerned is the parent of the issuing company which has full knowledge of the situation and the risk to be assumed. Obligation Designated "Note" Considered a "Bond." Declaration pursuant to Section 7 regarding secured notes, permitted to become effective, where obligation, although designated a "note," comes within the meaning of the term "bond" as used in Section 7 (c) of the Act. Obligation Secured by Type of Asset Within Contemplation of Statute. Where collateral provision in note could be interpreted as either giving the purchaser a second lien on securities to be pledged for another note, or may merely give the purchaser a contract right to security in the future subject to certain stated conditions, the Commission, in permitting a declaration pursuant to Section 7 of the Act to become effective, is of the opinion that it makes no difference, as to the qualification of the note under Section 7 (c) (1) (B) (iii), which of these interpretations is adopted, inasmuch as the purchaser in either case is receiving a note that is presently secured-either by a second lien or by a contract to give security, either of which is an asset within the contemplation of the statute. ACQUISITION OF SECURITIES BY REGISTERED HOLDING COMPANY OR SUBSIDIARY. Approval. Application, having been filed by a registered holding company pursuant to Section 10 of the Act, regarding the acquisition by it of a 6% note not to exceed $1,100,000 face amount, approved, subject to certain conditions, the Commission finding that the acquisition of this note will tend toward the economical and efficient development of an integrated public utility system. FINDINGS AND OPINION OF THE COMMISSION Related applications and a declaration have been filed by International Utilities Corporation (hereinafter sometimes called "International"), a registered holding company, and by General Water, Gas & Electric Company (hereinafter sometimes called "General"), a subsidiary of International 1 and also a registered holding company, under Sections 7 and 10 of the Public Utility Holding Company Act of 1935. After appropriate notice a public hearing was held on such declaration and applications. No member of the public entered an appear 1 International owns 75.9 percent of the common stock of General. ance or requested an opportunity to be heard. The applicants have waived a trial examiner's report, the submission of requested findings of fact, the filing of briefs and oral argument. The Commission has examined the record and makes the following findings: SUMMARY OF PROPOSED TRANSACTIONS General proposes to acquire all of the issued and outstanding common stock of California Water Service Corporation (hereinafter called "California"), consisting of 24,142 shares with a par value of $100 per share, from Federal Water Service Corporation, a registered holding company, for a cash consideration of $3,202,000 as of June 1, 1939. General proposes to raise the funds necessary to consummate the proposed acquisition by (1) the issue and sale of a 3% note in the face amount of $1,200,000 to The Chase National Bank, (2) by the issue and sale of a 6% note of not to exceed $1,100,000 face amount, to International, and (3) the balance, a minimum of $902,000 will be supplied by General from its own treasury. DESCRIPTION OF CALIFORNIA WATER SERVICE COMPANY California Water Service Company is a California corporation supplying water at retail to 29 communities in the State of California. The company serves an estimated population of 362,000 and has 81,137 consumers on its lines. The plants and properties of California consist of waterworks systems devoted to the production, storage, purification, and distribution of water. The record discloses that the town of Redding, Calif., with the aid of a $162,000 Federal Public Works Administration grant duplicated California's water-distribution system there. The new plant, built by the city of Redding, was completed about the first of May 1939, and competition for consumers has ensued. The Railroad Comission of the State of California permitted California to put into effect a new schedule of flat rates for water service. The officers of California estimate that the application of this schedule will permit 2 General is to pay interest on the purchase price of $3,202,000 at the rate of 6 percent per annum from May 1, 1939, to July 31, 1939, and thereafter interest at the rate of 6 percent on the basic price of $3,202,000, plus accrued interest thereon to July 31, 1939, to the date of delivery. * The communities served by California include Los Altos in Santa Clara County; Atherton, Menlo Park, Woodside, Lomita Park, San Carlos, San Mateo, and South San Francisco in San Mateo County; Livermore in Alameda County; Concord, Crockett, Valona, Danville, Port Chicago, Port Costa, Martinez, and Walnut Creek in Contra Costa County; Petaluma in Sonoma County; Stockton in Joaquin County; Dixon in Yolo County; Marysville in Yuba County; Chico and Oroville in Butte County; Willows in Glenn County; Redding in Shasta County; Hanford and Visalia in Tulare County: and Bakersfield in Kern County; East Los Angeles, Hermosa Beach, and Redenda Beach in Los Angeles County. the company to meet its out-of-pocket expenses in Redding as long as it is able to retain approximately 800 consumers. As of June 14, 1939, the company had 857 consumers on its lines in Redding. CALIFORNIA PROPERTY ACCOUNT According to the balance sheet of California as of April 30, 1939, plant, property, rights, and franchises are carried on its books at $18,956,315.49, including intangibles of $1,156,833.23. The record indicates that such plant, property, rights, and franchises are stated at values prescribed by order of California Railroad Commission at the date of their acquisition, plus subsequent addition at cost, less retirements. The properties acquired directly from predecessors or through the purchase of securities of and subsequent dissolution of predecessors were recorded at net amounts (after deduction of accrued depreciation) which were $1,082,587.32 in the aggregate less than the cost thereof to California or to its parent. The Railroad Commission of California has jurisdiction to regulate public utility water properties in the State of California. The applicant has stated that the values prescribed by the railroad commission for the property acquired have been determined, during the years 1928 to 1939, inclusive, on the basis of actual or estimated historical cost, less depreciation, of the property other than lands and water rights. The applicant has further stated that the railroad commission usually permits lands to be carried at estimated current market value if that figure is in excess of historical cost. The railroad commission also permits water rights to be carried at either historical cost, or on the basis of estimated value, as it considers conservative in the individual case. The railroad commission, which also has jurisdiction over accounting practices, has found that the carrying value of the property of California, after deducting the amount of accrued depreciation, will be approximately the historical cost of such property less depreciation except as to certain A summary of the property account follows: Properties acquired_ Addition to April 30, 1939. Retirements to April 30, 1939. Adjustments (net) to April 30, 1939-- Balance April 30, 1939. 'The intangibles included in the property account are as follows: Water rights--- Organization expense-. Franchises___. Development costs, etc--- $12, 629, 984. 32 18, 956, 315. 49 $675,477.50 241, 679. 07 22, 625. 09 217, 051. 57 1, 156, 833. 23 lands and water rights which the railroad commission has permitted to be carried at values other than historical cost. The aggregate net amounts at which properties acquired (with the exception of property acquired from Pacific Gas and Electric Company) were recorded on the books of California was $517,988.65 less than the aggregate net amounts recorded in respect thereof on the books of predecessors. In the case of property acquired from Pacific Gas and Electric Company (net recorded value of $2,507,154.58), it is stated that it was not possible to determine the amount at which such property was recorded on the books of the predecessor because it was not possible to segregate from the gas and electric properties the amount at which the properties sold were recorded. DEPRECIATION POLICY OF CALIFORNIA As of April 30, 1939, the depreciation reserve of California amounted to $2,755,691.55, which amount is equivalent to 15.48 percent of the gross property (excluding intangibles) as of the same date. It is stated that "provision for depreciation is currently made on the 5% sinking fund method based on estimated lives of the various classes of depreciable property as determined by the Railroad Commission of the State of California." RATIOS OF OUTSTANDING SENIOR SECURITIES OF CALIFORNIA TO PROPERTY AS OF APRIL 30, 1939 The following table sets forth the ratio of long-term debt, and long-term debt plus par value of preferred stock to (a) gross property including intangibles, (b) gross property excluding intangibles, (c) depreciated property including intangibles, and (d) depreciated property excluding intangibles, as at April 30, 1939: Prior to January 1, 1933, California made provision for depreciation substantially on a basis of a composite annual rate of 1% applied to the ledger value of tangible depreciable property. Subsequently, California altered its depreciation policy in accordance with orders of the Railroad Commission of California to conform to the "sinking-fund" method prescribed by that Commission. As a result of this change, the reserve for depreciation was initially increased by transferring $283,152 from donated surplus, which was created by the donation of 5,000 shares of common stock by Federal. The reserve for depreciation was further increased in 1937 (as of December 31, 1936) by a charge to earned surplus in the amount of $245,355.28 in order to bring the amount of the reserve up to the figure set by the California Commission. CONSIDERATION TO BE PAID BY GENERAL FOR COMMON STOCK OF CALIFORNIA General proposes to pay $3,202,000, plus accrued interest estimated at $48,030 and plus estimated expenses of $26,250,7 or an aggregate amount of $3,276,280, for the 24,142 shares of common stock of California. These shares are to be sold as of June 1, 1939, and the net earnings, after all charges and after provision has been made for the preferred stock dividends of California subsequent to May 1, 1939, will accrue to the benefit of the purchaser. It appears from the record that the earnings of California from May 1, 1939 to July 31, 1939, applicable to the common stock will amount to approximately $140,000. The interest payable by General on the purchase price from May 1, 1939 to July 31, 1939 will amount to $48,030, or $91,970 less than the accumulated earnings as of that date.R RELATIONSHIP OF CONSIDERATION TO BE PAID TO UNDERLYING BOOK OR ASSET VALUE OF SECURITIES TO BE ACQUIRED The following tabulation indicates the excess of the total consideration proposed to be paid for the common stock of California over the estimated (by applicant) asset value of such stock, using closing date as of July 31, 1939: There are, however, certain other factors which should be taken into consideration in determining the value of the common stock of California and which indicate that the asset value of this common stock may be greater than its book value. These items follow: Deferred charges and expenses-($72,233.83); contributions for 'This estimate made by the applicant is composed of the following items: McCutchen, Olney, Mannon & Greene, California counsel Humes, Buck, Smith & Stowell, counsel. Peat, Marwick, Mitchell & Co., accountants and auditors------ $10, 000, 00 10, 000, 00 2,750.00 3, 500, 00 26, 250, 00 For the purposes of analysis we are assuming July 31, 1939, as the settlement date. |