extensions -$339,386.98; earned but unbilled revenue 10-$107,000.00; estimated earnings applicable to common stock from May 1, 1939, to July 31, 1939-$140,000.00. RELATIONSHIP OF INVESTMENT TO EARNING POWER OF SECURITIES TO BE ACQUIRED COMPARATIVE INCOME STATEMENTS OF CALIFORNIA Following are income statements of California for the years ended December 31, 1936, 1937, 1938, and for the year ended April 30, 1939: Contributions for extensions: This item of $339,386.98, as shown on California's balance sheet of April 30, 1939, represents extensions of the lines of that company which have been contributed or donated, or the cost of which has been contributed or donated, to California. This item represents property which belongs to California but was not paid for by that company. Although the California commission requires that this item be segregated on the liability side of the balance sheet, no actual liability exists in the opinion of the officers of California. 10 Earned but unbilled revenue: As of July 31, 1939, the officers of California estimated that the amount of earned but unbilled revenue amounted to $107,000. California has never carried earned but unbilled revenues on its books of account as an asset and the amount of $107,000 does not appear on the balance sheet of California as of April 30, 1939. 5 S. E. C. RETURN ON INVESTMENT BY GENERAL It is estimated that earnings available for dividends on the common stock of California for the calendar year 1939 will amount to $325,886. According to the record, General may expect to receive an annual cash dividend of not less than $249,869 from said common stock. The annual return on the total purchase price" of $3,228,250 (base price of $3,202,000 plus estimated expenses of $26,250) based on the above annual estimated dividend will be 7.74 percent. STATUTORY FINDINGS UNDER SECTION 10 In view of the facts as heretofore set forth, we are of the opinion that no finding need be made that the consideration to be paid for the securities to be acquired, including all fees and commissions, is unreasonable or does not bear a fair relation to the sums invested in or the earning capacity of the securities to be acquired. Section 10 (c) (2) is therefore satisfied. The applicant has filed an opinion by its counsel to the effect that no state commission or state securities commission has jurisdiction over the transaction in question and such opinion further states that all applicable state laws have been complied with. It, therefore, appears that the requirements of Section 10 (f) have been satisfied. We are further of the opinion that in view of the fact that General is primarily a water holding company, the acquisition of another water property is not detrimental to the carrying out of the provisions of Section 11. Because of the nature of the properties being acquired, the other standards of Section 10 are inapplicable. The application of General will therefore be approved subject to the following conditions: (1) That the acquisition shall be effected in accordance with the terms and conditions of and for the purposes represented by said application; and (2) That within 10 days after such acquisition the applicant shall file with this Commission a certificate of notification showing that such acquisition has been effected in accordance with the terms and conditions of said application. DECLARATION OF GENERAL WATER, GAS & ELECTRIC COMPANY General, as hereinbefore stated, has filed a declaration pursuant to Section 7 of the Act with regard to the issue and sale of a 3% secured 12 serial promissory note in the face amount of $1,200,000 to The Chase National Bank of the City of New York 13 and a 6% promissory note in a maximum face amount of $1,100,000 to International due 3 years after date and subordinated to and secured by what amounts to a second lien on the assets pledged for the Chase note. The proceeds from these notes, together with certain funds to be furnished by General, are to be used for the purchase of 24,142 shares of the common stock of California as hereinbefore stated. ASSETS OF GENERAL General owns directly or indirectly a substantial portion of the funded debt and substantially all of the common stock of 13 scattered water companies and one gas company. These subsidiary water companies service 24 communities with a total estimated population of 250,000 in the States of California, Florida, Idaho, Indiana, Kentucky, Michigan, Missouri, and Pennsylvania. Following is a summary of the assets of General Water as reflected in its balance sheet as of April 30, 1939: Investments in and advances to subsidiaries, less reserve of $5,719,789.90_ Other investments " Cash---- Other assets____ Total $9, 394, 961. 97 1, 437, 773. 75 1, 323, 059. 10 146, 512. 04 12, 302, 306. 86 • Such other investments consist principally of collateral notes in the amount of $1,328,782 and series B common stock of Walnut Electric and Gas Corporation (formerly States Electric and Gas Corporation), which are carried at their total cost of $1,428,782. See In the matter of States Electric and Gas Corporation, 2 S. E. C. 392 (1937). The following is a list of assets pledged as security for the note to Chase: 24,142 shares of California Water Service Company common stock, $385,700 face amount of Rockland Gas Company, Inc., first mortgage, 20-year, 5% bonds, due October 1, 1955, $68,300 face amount of Rockland Gas Company, Inc., promissory notes, and all other promissory notes, if any, of Rockland owned at the time of making the loan, $1,000,000 face amount of Pinellas Water Company 6%% income notes, dated January 2, 1935, due September 1, 1960. 13 The note to Chase has serial maturity of $125,000 every 6 months, with the balance of $575,000 payable 3 years after the date of the note. The applicant has stated that the item "investments in and advances to subsidiaries" is carried after the deduction of a single reserve, which reserve was initially set up on the books of General to reduce, as of the dates of acquisition, the carrying values of such assets to values as determined by the board of directors. The net carrying values were then not segregated. No profits or losses have been recorded on the sale or realization by the company of its investments in such subsidiaries. Upon sale or realization, the net proceeds derived therefrom were credited to the aggregate net investments in subsidiaries. Since the date of the original acquisition of such assets, additional appropriations amounting to $1,300,000 have been credited to the reserve for investment in subsidiaries and charged to capital surplus. The amount at which General carries its investments in subsidiary companies is as of April 30, 1939, $1,274,496 less than the adjusted net assets of such subsidiaries at their respective dates of acquisition. The officers of General have placed an estimated value of $8,933,000 on its investments in subsidiaries. This estimate was stated to have been based on prices which, in the opinion of such officers, the company might reasonably expect to realize from the sale of such investments. The value thus placed on the investments in subsidiary companies is $461,962 less than the net carrying value of such investments as shown by the balance sheet as of April 30, 1939. Following is a summary of the assets of General and its subsidiary companies as reflected in the consolidated balance sheet as at April 30, 1939: Property, plant, and equipment less reserve for depreciation The total combined property accounts of subsidiary companies as at April 30, 1939, amounted to $17,775,379.38. In the consolidated balance sheet General has deducted from such combined property account (a) the depreciation reserve of $2,536,728.42 as indicated above, and (b) the excess of adjusted net assets of such subsidiaries at their respective dates of acquisition, over the net amount at which the investments in such subsidiaries are carried on the books of General Water. Such deduction amounts to $1,274,495.58. The record indicates that as a result of various revaluations and changes which have been made from time to time in the accounts of the subsidiaries of General, there is a net write-up in the property accounts of such subsidiaries in the amount of $430,432.27. An officer of General testified that in his opinion the net property of $13,964,155.38 as reflected in the consolidated balance sheet as at April 30, 1939, represents the fair book value of the company's physical property. CAPITAL STRUCTURE OF GENERAL The capitalization, including surplus, of General Water as of April 30, 1939, on an actual and pro forma basis follows: Excess of recorded value of assets received over par or stated value of securities issued $3,243, 580 Excess of stated value over cost of $3 preferred stock reacquired.. 1,069, 667 Miscellaneous credits consisting principally of adjustments of investment reserves, 270, 500 |