earned, on a consolidated basis per books for the 12 months ended May 31, 1939, which is to say before the transaction with McCurdy. It also shows the number of times charges were earned on two pro forma bases: one giving effect to the sale to McCurdy and the acquisition of the $1,264,000 principal amount of bonds acquired from him, and the other giving effect to both that transaction and the acquisition now contemplated of $2,576,900 additional bonds pursuant to tenders.

TABLE I

CENTRAL STATES POWER & LIGHT CORPORATION AND SUBSIDIARY COMPANIES Times charges earned per books for 12 months ended May 31, 1939

It will be observed that the table indicates that the acquisition of the $2,576,900 principal amount of bonds pursuant to tenders as contemplated would affect the coverage favorably.

Table II, in our above-mentioned findings and opinion, (reprinted for convenience and reference on page 10, infra) gave a comparative statement of the property coverage for funded debt, both before and after the transaction with McCurdy, taking the value of the property and plant on three bases, viz., book value, value based on reproduction cost new less depreciation, and value based on capitalization of reasonably expected future gross income; the values last mentioned being as estimated by J. Samuel Hartt. The portion of such table showing coverage after giving effect to the transaction with McCurdy is of course no longer pro forma and

• In the matter of Charles True Adams, Trustee of the Estate of Utilities Power & Light Corporation, Debtor, et al., 5 S. E. C. 868 (1939).

is indicative of the situation as it now exists." It may be compared with the following Table II which is pro forma and gives effect to the acquisition of $2,576,900 principal amount of bonds pursuant to tenders at 72 and accrued interest.

TABLE II

CENTRAL STATES POWER & LIGHT CORPORATION AND SUBSIDIARIES AS OF MAY 31, 1939

Comparative statement of property coverage of funded debt after acquisition of $2,576,900 principal amount of bonds pursuant to tenders at 72

Comparing the foregoing Table II with Table II contained in our previous findings and opinion, it will be observed that the acquisition of $2,576,900 principal amount of bonds at 72 and the change in earnings due to the sale of the Canadian subsidiaries will result in improved property coverage of the remaining bonds on all three bases. It also will be observed that coverage of the debentures, after providing for the bonds, improves on the basis of book value and on the basis of value based on reproduction cost new less depreciation. It further appears that, on the basis of capitalization of earnings, no part of property and plant is available for the debentures either before or after the contemplated acquisition of the bonds. It is noted that the coverage of total long-term debt (bonds and debentures) improves on the basis of book value and also on the basis of reproduction cost less depreciation, but that the opposite is true 10 on the basis of capitalization of earnings.

It will be observed by reference to Table II in our previous findings and opinion, that, on the basis of capitalization of earnings, the bonds are presently in principal amount 133.67 percent of property value and that the contemplated transaction would improve this percentage, but

• Subject to unimportant changes in the figures on account of sundry closing adjustments and the exclusion, if it be excluded, of the disputed item of approximately $41,000 mentioned in footnote 2 hereof.

Because $6,000,000 principal amount of debentures, having no value on the basis of capitalization of earnings, becomes a greater proportion of the total long-term debt. 6 S. E. C.

only to 132.61 percent. In other words, property, on such basis of valuation, presently amounts to only 74.69 percent of the aggregate principal amount of the bonds, and after the now contemplated transaction will amount to only 75.41 percent thereof. Theoretically, at least, bondholders by deficiency judgment might be entitled to participate with debenture holders and general creditors in unmortgaged assets, and this circumstance may possibly be considered as relieving to a slight extent the apparent deficiency in property coverage of the bonds on the basis of capitalization of earnings.

We are fully cognizant of the uncertainties and difficulties involved in estimating future earnings and in the subject of valuation generally. It is entirely possible that the above estimate of coverage of 75.41 percent is in error to an extent which would reduce the coverage to, or below, the 72 percent of principal amount which, with accrued interest, is proposed to be paid for the bonds. However, we are unable to say that such error, if any, as exists, is in the nature of an overestimate of value. So far as we can perceive, it is likely that it is in the nature of an underestimate," and in view of the differential between the 75.41 percent indicated coverage and the 72 percent proposed to be paid, we do not feel justified in finding that the contemplated purchases would in themselves be detrimental to the holders of the remaining bonds; and, indeed, it appears more likely that they will be benefited.

Assuming that $2,576,900 principal amount of bonds will be acquired, the ratio of outstanding bonds to total consolidated capitalization will be reduced from about 44.12 percent to about 36.57 percent and the ratio of total long-term debt (bonds and debentures) to total consolidated capitalization will be reduced from about 65.76 percent to about 60.90 percent.

"On account of the uncertainties of valuation. As for Hartt's opinion of value, he gave no "final judgment figure" applicable now; viz., after the sale to McCurdy, but merely estimates of value based on three separate bases which were (a) book value, (b) reproduction cost new less depreciation and (c) capitalization of reasonable expected gross income. It may fairly be inferred from his testimony in this and other proceedings before this Commission that had he proceeded to his customary next step; viz., of arriv ing at a "final judgment figure" indicative of his own opinion as to the value it would have been somewhere in between the value based on reproduction cost new less depreciation and that based on capitalization of earnings. In other words, it may fairly be inferred that had Hartt given a "final judgment figure" with respect to the present asset coverage of the bonds it would have been higher than the 75.41 percent above mentioned. See our previous findings and opinion herein In the matter of Charles True Adams, Trustee, et al., 5 S. E. C. 868 (1939). See also In the matter of Utilities Power & Light Corporation et al., 5 S. E. C. 483 (1939).

In the estimate of future earnings made by Hartt, part of the Oklahoma property owned by Central States was not considered. This property, known as the Quinton field, is a proven gas reserve supplying the Oklahoma Natural Gas Company. Due to the fact that the contract rights of the parties are being litigated, approximately half of the production of this field is not being sold, and the income presently received by the property from Oklahoma Natural Gas Company is smaller than anticipated. In view of the foregoing, applicants state that a potentially large source of earnings does not show in the capitalized earnings valuation now in the record.

The proposed acquisitions will not materially affect the working capital of Central States unless bonds acquired and not surrendered in order to withdraw the purchase price are used to transfer cash from the hands of the trustee to Central States' general treasury; or, in connection with further releases of mortgaged or pledged property, are used in lieu of cash that might otherwise have to be transferred from Central States' treasury into the hands of the trustee. In either case, so far as effect on working capital is concerned, the effect would be favorable.

Such possible use of such excess bonds, although in the opinion of counsel to Central States permitted by the mortgage, gives us some concern in view of the situation as to property coverage.

As we have seen, the bonds have at the present time a property coverage of 74.69 percent based on Hartt's capitalization of reasonably expected future gross income. In the event that $2,576,900 principal amount of bonds is acquired at 72 and accrued interest as contemplated, this figure would improve to 75.41 percent.12 However, as we have seen, it would not be necessary, and Central States does not intend, to surrender for cancelation all of such $2,576,900 principal amount of bonds in order to withdraw their purchase price exclusive of accrued interest. Of such bonds, $721,500 principal amount would remain in the treasury of Central States and under the terms of the mortgage could be used later to the extent of their full principal amount to withdraw or release cash or property. Should this occur the above-mentioned figures of 75.41 percent would be reduced to 70.17 percent, which is lower than the now applicable figure of 74.69 percent.

Apart from the above-described possibility of ultimate reduction in the property coverage of the bonds which remain outstanding after the tenders, we see no reason for withholding our approval of the contemplated acquisitions. However, it seems to us that, in view of the dubious situation as to property coverage, unfairness might result if, as a consequence of the transaction, the coverage became less than it now is.

Central States is electing to proceed under clause (3) of Section 8.08 of the mortgage which provides for the paying out of cash equal to the principal amount of bonds surrendered for cancelation. Central States might have elected to proceed under clause (2) of Section 8.08 which provides as follows:

(2) Such cash may be applied by the Corporate Trustee to the ... purchase... of bonds... at the lowest prices reasonably obtainable but not in excess of the respective redemption prices thereof and accrued interest.

"Or, as stated in Table II herein, bonds would comprise 132.61 percent of net property and plant.

It will be noted that under this clause of the mortgage, equally available to Central States, so far as the provisions of the mortgage are concerned,1 the full benefit of any savings resulting from the acquisition of bonds at a discount would accrue to the remaining bonds outstanding. We believe that a like result should also be attained even though Central States is electing to proceed under clause (3) and not clause (2).

The application as amended will be granted on condition that:

(a) The offer to accept tenders shall expire 20 days from the date of the mailing of the literature in which the offer to accept tenders and solicitation of acceptance thereof is made; or in lieu thereof, in the case of bondholders living in foreign countries, within 20 days of publication of notice thereof in such foreign country;

(b) The offer to accept tenders shall prescribe that tenders shall be made in the names of the actual holders of the bonds;

(c) Where physical delivery of the bonds is not possible within the tender period, such delivery may be guaranteed by any bank or trust company in the United States;

(d) Charles True Adams and Central States Power & Light Corporation shall mail notice to every known holder of Central States Power & Light Corporation's first mortgage and first lien gold bonds, 512% series due 1953, and may cause such notice to be published in this or foreign countries, advising of the offer to accept tender and simultaneously shall make, or cause to be made to such bondholders, such disclosures as may be necessary or desirable for the purpose of enabling the bondholders to determine whether or not to tender at the price of 72 plus accrued interest: Provided, however, that Charles True Adams and Central States Power & Light Corporation shall submit to the Commission, at least 3 days prior to mailing or publication of notice, true copies of all the literature and advertisements used in connection with the making of the offer and solicitation of acceptances thereof, and within such period the Commission reserves the right to order Charles True Adams and Central States Power & Light Corporation to make such changes as it considers necessary in the public interest and the interest of investors;

(e) In the event the applicants consider it necessary or desirable to solicit acceptances of the tender offer by the holders of Central States' bonds who do not respond to the written literature, they may employ representatives for the purpose of soliciting in person such

13 In view of the indefiniteness of the above-quoted clause (2) as to price and the feature of competitive tenders (if the clause be construed as requiring that feature), the application now before us would or might present somewhat different issues, if Central States were electing to proceed under clause (2), than are presented by the application in its present form. Whether we could approve the application in such case need not now be determined.