However, in view of the liquidating position of the $3.50 prior preferred and of the $1.75 preferred, and in view of the fact that the deficit in the earned surplus account only recently appeared on the balance sheet as a result of the restatement of the accounts, the Commission is of the opinion that dividend payments should not be entirely stopped at this time. International is entitled to a reasonable time in which to effect any necessary readjustments, and meanwhile it does not appear that preferred stockholders should be denied. dividend payments. The Commission's approval of the dividend. payments allowed in this opinion and the accompanying order should not be construed as sanctioning a continuation of such payments without a reorganization involving the readjustments of relative rights. Since the hearing on this application, International has filed an application under Section 5 (d) for an order by the Commission that it has ceased to be a holding company under the Public Utility Holding Company Act. If the facts as to International's public utility holdings are such as to warrant an unconditional order under Section 5 (d), a reorganization subsequent to such an order would not be subject to the Commission's jurisdiction. THE PROPOSED DIVIDENDS AND ESTIMATED EARNINGS, 1939 The applicant's net income for the first 8 months ending August 31, 1939 was $215,802.87. The applicant now estimates its net income for the remaining 4 months of the year to be $269,717.78 or a total net income for 1939 of $485,520.65. Of this total net income, the applicant anticipates receiving gross income of $84,087.34 in interest and dividends from General Water, Gas & Electric Company as a result of the acquisition by that company of the common stock of California Water Service Company. During 1939 applicant paid a dividend on its $7 prior preferred stock (since retired) amounting to $6,654. In addition, total dividends paid during 1939 on the $3.50 prior preferred amount to $259,046.91. The payment of the fourth quarterly dividend on the $3.50 prior preferred will increase 1939 dividend payments on the $3.50 prior preferred by $86,597.88, to a total of $345,644.79. During 1939 applicant has paid dividends on the $1.75 preferred amounting to $49,798.25. Thus, total dividends paid during 1939 6 S. E. C. 8 ($315,499.16) plus the fourth quarterly dividend on the $3.50 prior preferred ($86,597.88) amount to $402,097.04. Since this amount is well within total estimated earnings of $485,520.65 and since the $3.50 prior preferred has the first claim to the assets of the applicant, after payment of current liabilities, we do not find the proposed payment of the fourth quarterly dividend on the $3.50 preferred unreasonable. The payment of $95,813.06 proposed to be made on account of accumulated arrears on the $1.75 preferred stock would bring dividend disbursements for the year 1939 to $497,910.10, an amount $12,389.45 in excess of estimated net income for the entire year 1939 of $485,520.65. 9 In view of the desirability of keeping current dividend payments within the limits of current income where no earned surplus exists and where the proposed dividends are to be charged to capital or unearned surplus,10 and in order to avoid exceeding current income should present estimates of future income prove unduly optimistic, this Commission is of the opinion that a dividend of only 5614¢ per share, or an aggregate of $37,492.07, should be permitted. Payment of 56¢ per share on the $1.75 preferred stock, in addition to the * International has paid during 1939 the following dividends: $7 prior preferred stock (since retired): (12, 389. 45) "This objective is particularly applicable in view of the fact that estimated income for 1939 is in excess of income for all years since 1933 with the exception of the year 1937. See the Commission's previous opinion on this application (In the matter of International Utilities Corporation, 5 S. E. C. 403 (1939)). 75¢ per share already paid this year, will bring total payments on the $1.75 preferred stock to $1.3125 per share, an amount equal to the total of three quarterly dividend payments. This payment, together with the fourth quarterly dividend on the $3.50 prior preferred, will result in total dividend disbursements during 1939 of $439,589.11, an amount only $45,931.54 less than the estimated earnings for the entire year 1939. It does not appear that this dividend payment on the $1.75 preferred will prejudice the $3.50 prior preferred. Total estimated earnings for 1939 are $139,125.82 in excess of the dividend requirements on the present outstanding shares of the $3.50 preferred and $22,483.84 in excess of the dividend requirements on the outstanding shares of both the $3.50 and $1.75 preferred. The liquidating values, as of August 31, 1939, of the $3.50 prior preferred and the $1.75 preferred, including dividend arrears of $649,862.46 on the $1.75 preferred, amounted to $4,948,497.50 and $2,316,176.46, respectively. The total net assets (per books) of International as of the same date amounted to $12,130,913.80. In view of the applicant's large cash funds " and the other circumstances of this case, we are of the opinion that the payment at this time of 8712¢ per share on the $3.50 prior preferred stock and the payment of 564 per share on the $1.75 preferred stock in the light of the standards of Section 12 (c) will not impair the financial integrity of any companies in the International holding company system or prejudice the working capital of public utility companies in the International system. Our approval of the declaration and payment of a dividend of 872¢ per share on the $3.50 prior preferred stock and a dividend of 5614¢ per share on the $1.75 preferred stock is subject, however, to the following conditions: (1) That the dividends allowed on the $3.50 prior preferred stock and the $1.75 preferred stock shall be charged to capital surplus, and that the amount of such dividends so charged shall be restored to capital surplus from the first available earnings after December 31, 1938; (2) That the applicant mail to the $3.50 prior preferred and $1.75 preferred stockholders, concurrently with the payment of the dividends, a copy of the Commission's findings and opinion in this 11 As of August 31, 1939, the applicant had on hand cash in the amount of $305,410.01. It is anticipated that cash resources will be increased by a further sum of $242,000, or a total of $547,410.01 when General Water, Gas & Electric Company repays to it that amount out of the proceeds derived from the sale of the first mortgage bonds of Winchester Water Works Company (File No. 43-227). The applicant states that minimum cash bank balance needs are $200,000; on this basis, the applicant has an "available" cash balance, including $242,000 due on call from General Water, of $347,410.01. In addition, the applicant's cash account will be further increased by approximately $168,000 in the event that an outstanding option on holdings of the applicant in American States Utilities Corporation is exercised. matter and notify them that the dividend payments are subject to the above conditions; and (3) That the applicant within 10 days after the payment of the dividends, file with the Commission a certificate of notification showing that such dividends were declared and paid in accordance with the terms and conditions and for the purposes represented by said application. An appropriate order will issue. By the Commission: Commissioner Henderson dissenting. Chairman Frank was absent at the time of the Commission's consideration of this case and did not participate therein. 6 8. E. C. [No. 891] IN THE MATTER OF DRESSER POWER CORPORATION PUBLIC SERVICE COMPANY OF INDIANA File No. 46–173. Promulgated October 14, 1939 EXEMPTION OF SECURITY ISSUE OF REGISTERED HOLDING COMPANY OR SUBSIDIARY. Issue Solely for Purpose of Financing Business of Subsidiary. Application, having been filed by a subsidiary 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 proposed issue and sale of $4,800,000 principal amount of first mortgage bonds and 15,990 additional shares of common stock, the bonds to be sold to certain insurance companies and the stock to its parent operating company, the proceeds of the sale of bonds and stocks to be used by the subsidiary for the construction of generating and transmission facilities, the bonds to be secured by lien on the new generating and transmission units and common stock of the subsidiary company, exemption granted, subject to certain conditions, the Commission finding that the proposed issue and sale of the bonds and stock are solely for the purpose of financing the business of the subsidiary and have been expressly authorized by the state commission of the state in which the subsidiary is organized and doing business. SALE OF PUBLIC UTILITY SECURITIES BY REGISTERED HOLDING COMPANY. Trustees of a registered holding company and a subsidiary operating company, having filed a joint application pursuant to Rule U-12D-1 promulgated under the Act, for approval of the pledge of 16,000 shares of common stock of a subsidiary of the operating company with the trustee under the mortgage securing $4,800,000 principal amount of first mortgage bonds to be issued and sold by the subsidiary company to certain insurance companies, approval granted, subject to certain conditions, the Commission observing no basis for making adverse findings with respect to the transaction. ACQUISITION OF UTILITY ASSETS BY REGISTERED HOLDING COMPANY OR SUBSIDIARY. Application, having been filed by a subsidiary of a registered holding company, pursuant to Sections 10 (a) (2) and 10 (a) (3) of the Act, for approval of the acquisitions from its parent operating company of real estate, easements and rights-of-way, on which will be constructed generating and transmission facilities, approval granted, subject to certain conditions, the Commission making no adverse findings under Section 10 (b) of the Act, and it appearing that all applicable state laws had been complied with. 6 S. E. C.-35-1785 |