[No. 972]

IN THE MATTER OF

SECURITIES CORPORATION GENERAL

File No. 51-36. Promulgated January 30, 1940

DIVIDENDS.

Declarations and Payment Out of Capital or Unearned Surplus.

Application, having been filed by a subsidiary of a registered holding company pursuant to Section 12 (c) of the Public Utility Holding Company Act of 1935 and Rule U-12C-2 promulgated thereunder, for approval of the declaration and payment out of capital or unearned surplus of a regular quarterly dividend at the rate of $1.75 per share on its cumulative preferred stock, $7 series, and of a regular quarterly dividend at the rate of $1.50 per share on its cumulative preferred stock, $6 series, approved, subject to certain conditions, as not unreasonable under Rule U-12C-2, the Commission taking into consideration, among other factors, the fact that the applicant is neither an operating utility nor a utility holding company, that after the payment of the proposed dividend a substantial protective common equity will remain behind the preferred stock, that neither the $7 series nor the $6 series appears to be prejudiced by the payment of dividends on the other, and that the preferred stock, of both series, is held exclusively by the public.

Condition.

Application with respect to the declaration and payment out of capital or unearned surplus of dividends, approved, subject to the condition, among others, that the payment of the proposed dividends 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 net income after December 31, 1938.

APPEARANCES:

F. Arnold Daum, of the Public Utilities Division of the Commission.

FINDINGS AND OPINION OF THE COMMISSION

Securities Corporation General (hereinafter sometimes called the "applicant"), a subsidiary of International Utilities Corporation,1 a registered holding company, has filed an application pursuant to Rule

1 As at October 31, 1939, International Utilities Corporation held 27.98 percent of the 272,500 shares of common stock which the applicant had outstanding.

U12C-2 of the Public Utility Holding Company Act of 1935 for approval of the declaration and payment out of capital or unearned surplus (a) of a regular quarterly dividend at the rate of $1.75 per share on the 1,843 shares of its cumulative preferred stock, $7 series, now outstanding, and (b) of a regular quarterly dividend at the rate of $1.50 per share on the 4,731 shares of its cumulative preferred stock, $6 series, now outstanding. The payment of the proposed dividends on such preferred stocks will require a distribution of $3,225.25 and $7,096.50, respectively, or a total of $10,321.75.

After appropriate notice, a hearing on this application was held. The Commission, having considered the record in this matter, makes the following findings:

The applicant has previously filed applications with regard to the declaration and payment of similar dividends on the $7 and $6 series, cumulative preferred stocks, which were granted by the Commission." The problems involved in the previous applications and treated in our findings and opinions in those cases are similar to those here involved. The combined liquidating value of the $7 preferred and the $6 preferred amounts to $657,400, as compared with net assets (based almost entirely on market values of securities in applicant's portfolio) of $1,245,281.98, thus leaving a balance of net assets of $587,881.98* applicable to the common. After payment of the proposed dividend of $10,321.75 there would still remain total net assets of $577,560.23 applicable to the common and available to protect the preferred from any capital impairment resulting from a decline in the market value of applicant's portfolio. Applicant's total net assets of $1,245,281.98 are equivalent to 1.9 times the total liquidating value of the preferred stocks. Hence after the payment of the proposed dividend, a substantial protective common equity will remain behind the preferred stocks. The present preferred dividend requirements amount to $41,287 annually. This is slightly less than the average annual net income for

2 See In the matter of Securities Corporation General, 5 8. E. C. 859 (1939), and 6 S. E. C. 149 (1939).

• Applicant states that "all of the company's investments are carried at market prices as at December 31, 1939, with the exception of 15,000 shares of common stock of The Lehigh Coal and Navigation Company which are carried at the quoted market price as at December 31, 1938, of 3% per share. In view of the permanent nature of this investment and of the assets underlying it, no further adjustment has been made to reflect the quoted market price as at December 31, 1939, namely, 2% per share."

If the common stock of The Lehigh Coal and Navigation Company were reduced to market price as at December 31, 1939, net assets applicable to the common stock would be reduced by $20,625 to $567,256.98.

6 S. E. C.

the past 7 years, exclusive of losses on investments sold or written off." The present application covers the payment of the regular quarterly dividend on both the $7 and $6 series. As the payment is to be made on February 1, 1940, at which time the applicant will have received only 1 month's earnings for the year of 1940, such payment, in part, will be in anticipation of earnings to be received later in the year. In view of the applicant's past record, there appears little likelihood that such dividend will not be earned.

The application has presented many difficulties because it involves not only the payment of dividends out of capital or unearned surplus and in anticipation of future earnings, but also because we have for some time been concerned about various matters relating to the applicant including the continued existence of cross-holdings between the applicant and its parent, International Utilities Corporation. Were there no prospect that these matters would be remedied in the near future, we would be disposed to deny the present application. International Utilities Corporation has, however, indicated its intention of filing within the near future a plan for the simplification of its corporate structure, and that of the holding company system, which plan it is anticipated will terminate these relationships. Accordingly, we will approve the present application as not unreasonable under Rule

•Net losses on investments sold or written off during the period 1933–1939 were as follows:

U-12C-2. Among other factors taken into consideration in reaching this conclusion is the fact that the applicant is neither an operating utility nor a utility holding company, that after the payment of the proposed dividend a substantial protective common equity will remain behind the preferred stock, that neither the $7 series nor the $6 series appears to be prejudiced by the payment of dividends on the other, and that the preferred stock, of both series, is held exclusively by the public.

The approval of the declaration and payment of the proposed dividends on the cumulative preferred stocks, both $7 series and $6 series, is subject to the following conditions:

(1) That the payment of the proposed dividends on the cumulative preferred stock, $7 series, and on the cumulative preferred stock, $6 series, 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 net income after December 31, 1938;

(2) That the applicant shall, at the time such dividends are paid, notify the holders of the cumulative preferred stock, $7 series, and the holders of the cumulative preferred stock, $6 series, respectively, that the dividend payment is made subject to the above condition; and

(3) That the applicant within 10 days after the payment of such 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.

By the Commission: Commissioner Henderson dissenting, and Chairman Frank (who was absent at the time of Commission action herein) not participating.

Rule U-12C-2 provides as follows:

Except upon application to, and approval by order of, the Commission, no registered holding company nor subsidiary company thereof shall declare or pay any dividend on any security of such company out of capital or unearned surplus other than a dividend in liquidation of a subsidiary, all of whose securities are owned by the recipient of the dividend. This rule shall be and become effective on and after January 1, 1937.

6 S. E. C.

[No. 973]

IN THE MATTER OF

EASTERN SHORE PUBLIC SERVICE COMPANY (DEL.)

ET AL.

File No. 43-277. Promulgated February 2, 1940

ISSUE AND SALE OF SECURITIES OF REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Issue of Bonds.

Declaration, having been filed by a subsidiary of a registered holding company, pursuant to Section 7 of the Public Utility Holding Company Act of 1935, regarding the issue and sale of its 2-year 3% secured note in the face amount of $1,000,000 to a bank at par and the issuance and pledge as security therefor of declarant's first mortgage and first lien bonds 5% series C due 1946 in the principal amount of $1,100,000, the pledged bonds being secured by a first lien on the physical property of declarant and by a first lien on bonds of subsidiaries of declarant constituting a lien on the physical properties of such subsidiary companies, the proceeds of the sale to be used to finance the construction of additional generating facilities for a wholly owned subsidiary, permitted to become effective, subject to certain conditions, the Commission being of the opinion that the note comes within the meaning of the term "bond" as used in Section 7 (c) and that the assets pledged are of such character as to satisfy the requirements of Section 7 (c) (1) (B) (iii) of the Act.

EXEMPTION OF SECURITY ISSUE OF REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Issue Solely for Purpose of Financing Business of Subsidiary.

Applications, having been filed by three indirect subsidiaries of a registered holding company, pursuant to Section 6 (b) of the Act for exemption from the provisions of Section 6 (a) of the issue and sale of bonds and par value common stock, to their parent company, a direct subsidiary of the registered holding company, the net proceeds to be used to retire existing debt obligations, discharge open account obligations and for additions to property, exemption granted, subject to certain conditions, the security issues having been expressly approved by the state commissions of the states in which the subsidiaries are organized and doing business, the Commission finding that the requirements of Section 6 (b) have been met.

ACQUISITION OF SECURITIES BY REGISTERED HOLDING COMPANY OR SUBSIDIARY.

Development of Integrated Public Utility System.

Application, having been filed by a holding company subsidiary of a registered holding company, pursuant to Section 10 (a) (1) of the Act for approval of the acquisition by it of bonds and common stock to be issued by certain of its 6 S. E. C.- -35-1917