Public Service proposes to enter into a lease agreement with Generating Company covering a 20-year period beginning November 1, 1939. The lease is to embrace the real estate, easements, and rights-ofway owned by Generating Company and the generating plant to be constructed. The total rental fee sufficient to pay interest and amortization expenses on the bonds and to retire the notes is to be $2,388,576 to be paid semiannually, beginning with the first payment on April 30, 1940, and ending with the final payment on October 31, 1959. The semi-annual payments for rent will amount to $108,600 during the first year, $121,260 during the succeeding 3 years, $81,360 for the fifth and sixth years, and $39,942 for the balance of the rental period.

The lease agreement further provides that upon the happening of certain events Generating Company shall be merged into Public Service. These specific events are as follows:

(a) Generating Company shall have authorized the trustee, pursuant to the terms of the indenture securing said bonds, to redeem all of said outstanding bonds, the trustee having on deposit funds sufficient to effect such a redemption; or

(b) Generating Company "shall have outstanding bonds issued hereunder of an aggregate principal amount not exceeding One Million Dollars, and all bonds, debentures, and notes of Virginia Public Service Company maturing prior to January 1, 1951, shall have been paid or refunded and said Virginia Public Service Company shall have no mortgage bonds outstanding maturing prior to January 1, 1960."

CAPITALIZATION OF GENERATING COMPANY

The capitalization of Generating Company, together with the proposed changes due to retirements of indebtedness during the ensuing 20 years is to be as follows:

The changes in capitalization of Generating Company set forth above are provided for by the terms of the sinking fund set forth in the trust indenture entered into between Generating Company and First National Bank of Chicago to secure the first mortgage 4% sinking fund bonds and by the terms of the loan agreement to be entered

into between Harris Trust and Savings Bank and Generating Company, concerning the $300,000 face amount 4% serial notes.

THE LOAN AGREEMENT

The loan agreement with Harris Trust and Savings Bank provides, among other things, that the serial notes in the total amount of $300,000 are to be issued as eight separate notes maturing semi-annually beginning with May 1, 1940, and ending November 1, 1943. These notes are subject to prepayment by Generating Company as a whole or in part and any time on 30 days' notice to the holders thereof and upon payment of a premium of 14 of 1 percent of the principal amount so prepaid for each year or fraction thereof of the unexpired life of such notes, provided, however, that if less than all of the notes are prepaid the notes to be prepaid shall be selected in the inverse order of their maturities. There is to be no penalty for prepayment after June 1, 1942.

SIGNIFICANT PROVISIONS OF THE INDENTURE SECURING

GENERATING COMPANY BONDS

The indenture securing the bonds to be issued to Northwestern Mutual Life Insurance Company provides for a sinking fund which will retire by lot the entire issue of bonds during the 20-year period for which they are to run. These sinking fund payments are to be made semi-annually beginning with May 1, 1941, and ending November 1, 1959. The bonds may be called at the option of the company at any time, in whole or in part, upon giving proper notice at prices ranging downward from 106. In case of merger or conveyance of the trust estate to another, the bonds may be called at a premium of not more than 2%.

The indenture further provides for the merger of Generating Company into Public Service on the same terms as above discussed in connection with the lease agreement.

EFFECT OF TRANSACTIONS ON EARNINGS OF PUBLIC SERVICE

For the purpose of showing the effect of the proposed transactions on its earnings for the calendar year 1940, Public Service has sub

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mitted an estimated income statement for that period based upon expected sales, and economies arising from the use of the new plant.5

This estimate, which does not appear to be unreasonable, indicates that Public Service will be able to assume the rental of the new plant without materially affecting the earnings available for its bond interest. For the year ending July 31, 1939, Public Service earned its interest on funded debt 1.50 times; during the calendar year 1940 on the basis of the estimate the interest on funded debt will be earned 1.56 times; and for the calendar year 1941 this ratio becomes 1.61 times.

Included in the estimates are certain operating economies resulting from the added efficiency of the new plant. These will approximate $75,000 per year.

• A comparison of income statement for the 12 months ended July 31, 1939, actual with estimated income statement ended December 31, 1940 reflecting adjustments due to proposed lease with generating company:

•No account being given to dividends on the stock of Eastern Shore Public Service Company owned by Public Service.

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EFFECT OF PROPOSED TRANSACTIONS ON DEBT RATIO OF

PUBLIC SERVICE

The proposed financing does not alleviate the unsatisfactory debt ratio with which Public Service is now burdened." Upon the ultimate merger of the two companies, this condition will be slightly improved, however, by virtue of the retirement of debt through the sinking fund provisions.

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The present property account of $49,299,067 less retirement reserve of $6,753,212 gives a net property figure of $42,545,855 and a ratio of long-term debt thereto of approximately 84 percent. If the reported remaining net write-up of $4,117,744 of fixed property is eliminated, this ratio is further increased to approximately 93 percent. It is clear that such ratios are far in excess of what a sound capital structure would permit.

FEES AND COMMISSION

Generating Company proposes to pay First Boston Corporation a banker's commission of $10,500 for services rendered in placing the

'It should be noted that the problem is not directly before us since Section 7 is not applicable. 'Railroad properties in the aggregate amount of $4,275,420 are included in this item. $3,445,822 in the retirement reserve of $6,753,212 is applicable to these properties, reducIng the net carrying value of railroad properties to $829,598. The remaining $3,307,390 in the retirement reserve applicable to all the other properties of Public Service appears to be inadequate.

bonds and a fee approximating $5,000 to The Utility Management Corporation for services rendered by a member of its staff, F. S. Burroughs. We find it desirable to give further consideration to these two proposed fees and therefore presently reserve jurisdiction over said proposed fees. The remaining fees, approximately $14,500, also to be borne by Generating Company, do not appear to be excessive.

COMPLIANCE WITH GENERAL REQUIREMENTS OF THE ACT

The proposed transactions raise serious doubts concerning compliance with the standards of Section 10 of the Act. In order to raise the necessary funds, a new subsidiary is being added to an already overly complicated situation. (See footnote 1.) However, the imperative need of Public Service for additional energy has been clearly established by the record in this proceeding. It further appears that there exists no other satisfactory method by which the needed electric energy may presently be provided. Among our other duties, we are charged with the protection of the interest of consumers; it plainly appears that some provision for additional energy for Public Service must be speedily made, no opportunity being afforded for long-range planning. A delay at this time would seriously affect the consumers of Public Service.

In the case of Dresser Power Corporation (In the matter of Dresser Power Corporation, 6 S. E. C. 38 (1939)), we were faced with similar problems. There we had misgivings about the financing device used which took the same form as that employed in the case before us presently, but we were led to approve the applications largely because of the urgent need for generating facilities. As our order permitting the application to become effective was issued on October 14, and our findings were not released until November 10, 1939, it may well be that the caveat contained in those findings that our approval should not "be deemed an approval of a general practice of raising additional capital for subsidiaries of holding companies by the methods involved here" did not come to the attention of this applicant in time for it to effect any rearrangement of its program to meet its urgent construction schedule. It may well be, too, that the general statement made in that opinion was not sufficiently pointed to reflect the seriousness of the doubts regarding the proposed method of financing entertained by some of the members of the Commission. We are, therefore, reluctant to deny to this applicant, who may have acted in reliance upon our earlier decision, the same treatment as was accorded the Dresser Power Corporation. Accordingly, we will not enter adverse findings here but will not necessarily regard the Dresser decision as a precedent for the future.