A hearing on the amended application was duly held after appropriate notice. The record in this matter having been considered, the Commission makes the following findings: Great Northern Utilities Company (hereinafter sometimes referred to as "Great Northern") is an electric and gas utility incorporated under the laws of Montana. It serves Shelby and several other small towns in northwestern Montana with electricity. Its gas business is conducted only in Shelby where, since 1922, it has distributed natural gas. It has about 2,630 electric customers and about 390 gas customers. The territory served with electricity or gas has a population of about 6,700. In 1928 Consolidated Gas Company (hereinafter sometimes referred to as "Consolidated") began to produce gas in a portion of the Shelby field about 6 miles from Shelby, and contracted to sell it to the Citizens Gas Company, a Montana corporation organized in 1927 (hereinafter sometimes referred to as "Citizens"). Thus, since 1928 Citizens has distributed natural gas in Shelby in competition with Great Northern. Citizens has about 345 customers all located in Shelby. All of the stock of Consolidated, except directors' qualifying shares, is owned by one J. W. Johnson, who is also a director and large stockholder of Citizens. In 1938 Great Northern discontinued its purchases from the Ohio Oil Company and a three-party contract, dated February 21, 1938. was entered into between Great Northern, Citizens, and Consolidated and is presently in force. Pursuant to this contract Consolidated sells gas to Citizens which resells a portion thereof to Great Northern at an advance in price." Thus, since 1928 there has existed in Shelby competition between two gas utilities, one of which purchases its supply of gas from its competitor at a price in excess of that paid by such competitor to the producer, which is a corporation wholly owned by a large shareholder of such competitor. During the continuance of the competition between Great Northern and Citizens each company has engaged in practices which have been severely criticized by the Public Service Commission of Mon Under the contract Citizens obtains its gas supply from Consolidated at a rate fixed at 4¢ per mcf for the first 4 years of the contract and 5¢ per mcf for the succeeding and last 6 years of the contract. The rates at which Great Northern obtains its gas supply from Citizens under this contract are as follows: February 21, 1938, to February 21, 1942, inclusive: 6¢ per mcf for gas used as fuel in electric plant. 7¢ per mcf for gas taken for other purposes. February 21, 1942, to February 21, 1948, inclusive: 7¢ per mcf for gas used as fuel in electric plant. 8¢ per mcf for gas taken for other purposes. tana, and there have occurred rate wars and extended rate litigation." The contemplated transaction would put an end to the existing competitive situation. The terms of the three-party contract are such that following the contemplated transaction, Great Northern would be able to obtain its gas requirements direct from Consolidated at the prices now available under the contract only to Citizens. The physical assets proposed to be acquired by Great Northern consist primarily of Citizens' distribution system in Shelby and a pipe line and gathering lines extending about 6 miles beyond the city limits to the gas field. The distribution system consists primarily of a small tract of land upon which a regulator station is located, approximately 365 meters, 365 services, and about 32,900 feet of mains, pipes, and conduits. The intangibles proposed to be acquired consist of the item shown on the Citizens' books as "contracts and franchises" and also Citizens' rights under the three-party contract. Citizens' books reflect no value for the latter. It is not included in the item "contracts and franchises." The assets proposed to be acquired are classified on Citizens' books as shown below in Table I. The values stated in the table are the book values, but we cannot determine from the record how they were arrived at. TABLE I Book Value of Assets of Citizens Gas Company Proposed to be Acquired by Great Northern From Citizens Gas Company as of August 31, 1989. For more detailed mention of the practices, rate wars, and litigation here referred to, see the Public Service Commission of Montana's Report and Order No. 1737 and its Report and Order No. 1738, each issued December 2, 1938. It appears that following consummation of the transaction Citizens intends to dissolve. Great Northern states, in one of the amendments to the applica tion filed with us, that based upon the information furnished by Citizens it appears that $90,554.14 is the original cost, when first devoted to public service, of the property of Citizens proposed to be acquired. In 1939 J. W. Sikes, an engineer in the employ of William A. Baehr Organization, Inc., an engineering organization which is part of the holding company system of which Great Northern is a part, appraised the physical assets shown in Table I as having a value of $69,895 on the basis of reproduction cost new and a value of $58,140 on the basis of reproduction cost new less depreciation. In 1938 the Public Service Commission of Montana, in the course of its opinion denying an application by Citizens for an increase in rates, said of Citizens: Taking into consideration all the facts in this case and the law applicable thereto, we doubt if the present value of the utility exceeds $40,000.* A. C. Winters, vice president and treasurer of Great Northern, testified, however, that subsequently to the inventory, upon which the Montana commission based its opinion, tangible assets costing approximately $20,000 and consisting principally of pipe line and connections thereto, have been added. Apparently this was, in part at least, in the nature of a replacement. The record does not justify us in ascribing any value whatever to the intangible assets mentioned in Table I and carried on the books at a value of $33,055. This item, formerly set up on the books at a higher figure and designated as "organization expense," was commented upon by the Montana commission as follows: It is interesting to note that the accountant for the utility stated that he could not figure from the records of the utility how the fictitious organization expense of $50,000.00 was arrived at, but he stated that it might be composed of good will, incorporation expense, and organization expense. To say the least this figure is purely hypothetical. There is every reason to believe, however, that Great Northern will benefit substantially by succeeding to the purchase rights of Citizens under the three-party contract, thereby being able to purchase its gas requirements direct from Consolidated at lower prices than presently compelled to pay to Citizens, the intermediate vendor. "In the matter of the application of the Citizens Gas Company." Public Service Commission of Montana, Report and Order No. 1738. • Idem. 6 S. E. C. Great Northern proposes to charge $58,140, the appraised value of the physical assets, to its tangible property account, and the balance of $31,860 to intangibles. The charge to intangibles will represent the value of the rights which Great Northern will acquire under the three-party contract and, it was testified, will be amortized over the remaining life of such contract. Being of the opinion that the earnings statements of Citizens were not prepared in accordance with accepted accounting principles, the applicant caused an analysis of the book records to be made for the purpose of adjusting the income statement for the 12 months ended August 31, 1939. In preparing such adjusted income statement the applicant also gave effect to estimated savings in operating expenses through combining the operations of Citizens with its own operations. The following table shows the income statement as per 'The accounting entries to be made by the applicant in connection with such acquisition are not passed upon and nothing herein shall be construed as approval thereof. • Citizens' earnings statements for the calendar years 1936, 1937, and 1938 are as follows: • The adjusted income statement also reflects elimination of interest, in the amount of $493, derived by Citizens from city warrants not included in the assets proposed to be purchased by the applicant. 6 S. E. C. books and as adjusted by the applicant: TABLE II CITIZENS GAS COMPANY Actual and adjusted income statement for the 12 months ending August 31, 1939 • Citizens Gas Company did not report any provision for income taxes or depreciation. The accounting adjustments made by applicant in the income statement reflect the applicant's opinion that the income as reported was understated in the amount of $1,889 by reason of the fact that mains and services costing that amount were installed by Citizens during the 12-month period under consideration and charged to operating expenses instead of to fixed capital. The accounting adjustments also reflect the applicant's opinion that the reported earnings were overstated in that no provision whatever was made for income tax liability or depreciation. The applicant estimates that proper provision for these items would amount to $1,670 and $3,200 respectively. The adjustment for savings in operating expenses amounts to $3,387.10 10 Such savings are estimated by the applicant as follows: Pay roll. Labor Travel Office rent.. Insurance_. Donations.. Directors' fees.. Legal expense.. Total savings_-_ $1,399 330 487 300 314 200 167 190 3,387 |