with these proceedings Charles True Adams was appointed trustee of its assets. Among such assets are all of the common stock of Central States Utilities Corporation and the latter corporation owns all of the common stock of Central States Power & Light Corporation (hereinafter sometimes referred to as "Central States"), which is one of the applicants herein. Atlas Corporation, owner of a large amount of the securities of the debtor and certain of its subsidiaries, was permitted to intervene as a party herein and took the position that the application should be granted. After appropriate notice a public hearing was held. Having examined the record, the Commission renders the findings and opinion set out below: Central States Power & Light Corporation, a Delaware corporation, is both an operating and a holding company. It supplies electricity to certain small and scattered communities in the States of Iowa, Kentucky, and Minnesota and serves three communities in Texas with natural gas. It has certain subsidiaries which provide electric service to small communities in North Dakota, Oklahoma, and Missouri, and natural gas to certain communities in Oklahoma and Missouri. It also has three subsidiaries incorporated under Canadian laws. They are Canada Electric Company, Limited, The Eastern Electric and Development Company, Limited, and Moncton Electricity and Gas Company, Limited. Two of these Canadian subsidiaries of Central States serve small communities in Nova Scotia and New Brunswick with electricity, and the third supplies electricity and natural gas to certain other communities in New Brunswick. PROPOSED TRANSACTION AND JURISDICTION OF THE COMMISSION Central States Power & Light Corporation has agreed to sell to one F. B. McCurdy, of Halifax, Nova Scotia, and the latter has agreed to purchase, Central States' holdings in the three Canadian subsidiaries above mentioned. Such holdings are as follows: Canada Electric Company, Limited 5,000 shares of common stock of the par value of $100 each, being all of the common stock of said company outstanding. $1,068,900 principal amount of first mortgage gold bonds, 52% series, dated March 1, 1930, due March 1, 1931, and being all of such bonds outstanding. Note in the amount of $629,773.82 and interest, payable on demand. $1,511.65 account payable. The Eastern Electric and Development Company, Limited 400 shares of capital stock of the par value of $100 each, being all of the capital stock of said company outstanding. $83,400 principal amount of first mortgage gold bonds, 5% series, dated March 1, 1930, due March 1, 1931, and being all of such bonds outstanding. Note in the amount of $24,980.50 and interest, payable on demand. $11,194.32 account payable. Moncton Electricity and Gas Company, Limited 11,221 shares of capital stock of the par value of $100 each, being all of the capital stock of said company outstanding except 33 shares which are held by the public." 3 Central States has also agreed to sell to McCurdy, and the latter has agreed to purchase, $39,550 aggregate principal amount of notes, 2,718 shares of preferred stock of the par value of $10 each and 19,886 shares of common stock of the par value of $22 each, all issued by Maritime Coal, Railway and Power Company, Limited, which is also a Canadian corporation and a subsidiary of the debtor. Also included in this transaction are open accounts of Maritime of $60.54 due Utilities Power & Light Operating Corporation and $124,506.24 due the debtor. These securities and open accounts are not presently owned by Central States, but are to be procured by it from the present owners, viz, the estate of the debtor and Utilities Power & Light Corporation, Limited, the second being also a Canadian corporation and a subsidiary of the debtor. Maritime Coal, Railway and Power Company, Limited, owns a coal mine not now operating and a short line railway, both located in Nova Scotia. The purchase price for the securities which Central States has agreed to sell and McCurdy to purchase is to consist (subject to certain adjustments after January 31, 1939, to date of closing) of $1,963,355 in cash and $1,264,000 principal amount of now outstanding bonds of Central States. The securities (bonds, stocks, and notes, excepting open accounts) which Central States now owns and proposes to sell to McCurdy are presently pledged under the indenture securing the Central States * Utilities Power & Light Corporation, Limited, also owns an open account of $185.51 of Moncton Electricity and Gas Company, Limited, which is to be sold. It is to be se quired by Central States along with certain other securities to be acquired from the debtor and Utilities Power & Light Corporation, Limited. See note 4 infra. This company has been dissolved and its assets acquired by the debtor. See In the matter of Utilities Power & Light Corporation, et al., 5 S. E. C. 483 (1939). The purchase price for the Maritime securities is $38,200, the value of the net quick assets at February 28, 1939. The price is to be adjusted, however, for the results of operations between February 28, 1939, and the closing date of the agreement. The open account of $1,511.65 due Central States from Canada Electric Company. Limited is not pledged under the trust indenture. Of the $11,194.32 open account due Central States from the Eastern Electric and Development Company, Limited, Central States is under the obligation to pledge with the indenture trustee a note in the amount of $5,871.59. bonds. All of the pledged securities are to be released from the lien of the indenture pursuant to its terms upon deposit with the trustee thereunder of the net proceeds of this sale. Of the estimated gross cash receipts of the sale of approximately $1,902,053,7 $1,870,219 is to be deposited with the indenture trustee. The difference of $31,534, represents $25,000 estimated expenses and $6,834 which is the amount of the purchase price applicable to the open account due Central States from Canada Electric Company, Limited ($1,511.65) and to that portion of the open account due Central States from The Eastern Electric and Development Company ($11,194.32) which is not subject to pledge under the trust indenture. $5,871.97 of the latter open account should be pledged under the terms of the trust indenture and therefore that amount of the purchase price applicable to these two open accounts is to be deposited with the indenture trustee. By virtue of the exemption afforded by our Rule U-12D-1 (d) (3) it is ordinarily unnecessary to make application to us in connection with the sale of securities of public utility companies, which, as is the case here, do not operate or have any subsidiary which operates in the United States. The circumstance, however, that the transaction involves the acquisition by Central States of certain of its own bonds makes it necessary for us to pass upon such acquisition under Section 12 (c) of the Public Utility Holding Company Act and our Rule U-12C-1 (b). Such section of the act provides as follows (italics supplied): It shall be unlawful for any registered holding company or any subsidiary company thereof. . . to . . . acquire, retire, or redeem any security of such company, in contravention of such rules and regulations or orders as the Commission deems necessary or appropriate to protect the financial integrity of companies in holding company systems, to safeguard the working capital of public utility companies, . . . or to prevent the circumvention of the provisions of this title or the rules, regulations, or orders thereunder. ... VALUE OF SECURITIES PROPOSED TO BE SOLD Jay Samuel Hartt, an independent valuation expert, testified on behalf of the applicants that the securities being sold in each of the The securities and open accounts of Maritime Coal, Railway and Power Company, Limited, are not pledged, nor are the open accounts now owned by the debtor and Utilities Power & Light Corporation, Limited, in Moncton Electricity and Gas Company, Limited. The $1,902,053 of estimated gross cash proceeds from the sale represents the contract amount of $1,963,355 adjusted according to the terms and conditions of the contract based on a September 30, 1939 closing and after deducting the estimated amount to be paid to the debtor and Utilities Power & Light Corporation Limited for the securities being sold in Maritime Coal, Railway and Power Company, Limited. No application under Section 10 is necessary in view of Rule U-9C-1 (b). Canadian companies were worth as at January 31, 1939, approximately the following: Canada Electric Company, Limited___. The Eastern Electric and Development Company, Limited....... Total value of Central States' Canadian subsidiaries____ Maritime Coal, Railway and Power Company, Limited__ Total value of securities being sold---- $1,775,000 125,000 1,200,000 3, 100, 000 32,000 3, 132, 000 In connection with the proceedings for the reorganization of the debtor, Hartt made a detailed study of and testified with respect to the value of all of the assets of the debtor. His testimony in the present case was based on substantially the same method of valuation and amplified and brought down to date his former testimony with respect to the securities being sold. 9 Cash offers were received by Adams from two competing potential purchasers, F. B. McCurdy, with whom the contract now under consideration was ultimately entered into, and Royal Securities Corporation. They were logical competitors for such purchase for each owned other utilities in the adjoining territory. McCurdy first became interested in the possibility of purchasing these properties in 1935. Subsequently thereto and prior to the appointment of the trustee, R. R. Monroe, at that time vice president of the debtor, had discussions with Royal Securities Corporation which made an offer of $2,400,000. In the spring, summer and fall of 1938, Adams continued these conversations with Royal Securities Corporation and in the fall of 1938 commenced negotiations with McCurdy. McCurdy offered $2,500,000 and shortly thereafter raised his offer to $2,650,000. Royal Securities Corporation thereupon increased their cash offer to $2,900,000 with earnings after January 31, 1939, accruing to benefit of purchaser who, in turn was to pay interest at the rate of 3% per annum on the amount of the purchase price. McCurdy immediately matched this offer. McCurdy was in possession of a block of $250,000 of Central States bonds and was willing to attempt to get more. Royal Securities Corporation, on the other hand, did not own any bonds and was unwilling to attempt to acquire any. Therefore, the negotiations with McCurdy were continued, and resulted in the before mentioned contract. Our approval of the sale price does not require us to reject Hartt's estimate of the value of the securities. Value is essentially a matter of judgment and a difference of approximately $200,000 between the appraised value and the cash offers received is not surprising. The combined book value of the securities proposed to be sold, other than For a discussion of Hartt's method of valuation see In the matter of Utilities Power á Light Corporation et al., 5 S. E. C. 483 (1939). those of Maritime Coal, Railway and Power Company, Limited, was recorded on the books of the subsidiary companies at May 31, 1939, at approximately $3,745,256. The investment by Central States in these securities was recorded on the books of Central States at $4,508,653, whereas the record shows that their cost to Central States was $4,557,566.71. Hartt's estimate of the value of the securities of Maritime Coal, Railway and Power Company, Limited, proposed to be sold, represents merely the net quick assets, although the properties have both a substantial book value and a substantial value based on reproduction cost new less depreciation. However, the company has been unable to show a profit since 1934 and the circumstances peculiar to it are such that Hartt's valuation of its securities does not seem to us unduly low. ADEQUACY OF CONSIDERATION FOR SECURITIES PROPOSED TO BE SOLD As previously stated, the purchase price for the Canadian securities is to consist of $1,963,355 cash and $1,264,000 principal amount of Central States' bonds. These bonds were purchased by McCurdy from former holders and cost him about $842,247. Thus he will be acquiring securities estimated by Hartt to have a value of $3,132,000 at a cost to him of about $2,805,602.10 If, however, the bonds to be surrendered by McCurdy are taken at their principal amounts, then the proposed purchase price is to be approximately $3,227,556, somewhat in excess of Hartt's estimate of value. The theory that debt is worth a hundred cents on the dollar to the debtor is hardly applicable for the purpose of determining the adequacy of a purchase price, where, as here, the debtor could probably purchase in the market an equal amount of the debt at a discount. The bonds were quoted at about 67 at January 31, 1939,11 and recently have been selling on the market at about 70.12 Ascribing to the $1,264,000 10 The apparent discrepancy between $2,805,602 and the two cash offers of $2,900,000 made by Royal Securities Corporation and McCurdy is explained as follows: The offers provided that earnings were to accrue to the purchaser after January 31, 1939. The final agreement was changed to provide that earnings after January 31, 1939, were to accrue to the benefit of the seller rather than to the purchaser. The figure $2,805,602 is substantially the original $2,900,000 purchase price as adjusted to make allowance for such change, except that in addition to such adjustment, McCurdy was allowed a profit of 7% points or $18,750 on the $250,000 principal amount of bonds he had acquired prior to the acceptance of his original $2,900,000 offer. 11 See footnote 18, infra, for a table of market ranges from 1934 to date. 12 During August 1939 the volume of trading on the New York Curb Exchange in the bonds of Central States was as follows: |