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facts: The earnings were exceptionally high and the proper capitalization of reasonably foreseeable earnings, even allowing for pos sible rate reductions, substantially offset the write-ups. On the basis of the book figures, without deducting such write-ups, the result of the new financing was to reduce the debt ratio and the ratio of debt and preferred stock to total capitalization, and also to increase the ratio of common stock and surplus (the common stock "cushion") to total capitalization. This resulted in large part from the exchange of $2,190,000 of notes, held by the controlling holding company, for common stock-the equivalent of a purchase by that holding company of that amount of common stock. The increase in the face amount of debt-which, as above noted, did not increase the debt ratio—was merely temporary, since provision was made for prompt retirement of such increase.

Of course, foreseeable reductions in the rate base must be taken into account, since such reductions may reduce future earnings.

As to that and related questions, see my concurring opinion in In the matter of Central Illinois Electric and Gas Co., 5 S. E. C. 115 at p. 134 (1940). That was a Section 6 (b) case; the requirements of Section 7, therefore, were not, in terms, applicable. Com. missioner Healy filed a concurring opinion. Since I disagreed with his views, I also filed a concurring opinion, explaining my disagreement. The views there expressed by me are not unlike those recently expressed by Commissioner Mathews in his concurring memorandum in In the matter of Philadelphia Company, 6 S. E. C. 752 at 768 (1940).

6 S. E. C.

[No. 977]

IN THE MATTER OF

AMERICAN UTILITIES SERVICE CORPORATION

File No. 43–268. Promulgated February 14, 1940

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

Reduction of Interest Rate.

Declaration, having been filed by a registered holding company, pursuant to Section 7 of the Public Utility Holding Company Act of 1935, in regard to a reduction of the interest rate on certain outstanding notes of declarant, permitted to become effective, the Commission not making adverse findings under Section 7 (e), since the proposed change does not effect the voting powers, and the Commission, in light of the fact that the proposed transaction is regarded as an issue of a security within the meaning of Section 6 (a) (1), although new notes will not be executed, finding that the requirements of Section 7 (c) are satisfied and making no adverse findings with respect to the requirements of Section 7 (d).

APPEARANCES:

Harlow B. Lester and James Fischgrund, of the Public Utilities Division of the Commission.

A. Louis Flynn, by Helmer Hansen, for American Utilities Service Corporation.

FINDINGS AND OPINION OF THE COMMISSION

American Utilities Service Corporation, a registered holding company, has filed a declaration pursuant to Section 7 of the Public Utility Holding Company Act of 1935, in regard to a reduction of the interest rate on declarant's 6% serial notes outstanding in the aggregate principal amount of $330,000 as of August 31, 1939.1

American Utilities Service Corporation was organized under the laws of the State of Delaware in 1934 to acquire the assets of Federal Public Service Corporation, then in reorganization. In connection

1 Subsequently reduced to $315,000 as of November 7, 1939, the date the declaration was executed.

6 S. E. C.- -35-1935

825

therewith, the declarant issued, among other securities:

(1) 10-year, 6% serial notes (hereinafter referred to as "Empire notes") dated January 1, 1935, in the aggregate principal amount of $500,000, maturing in the principal amount of $50,000 per annum. On August 31, 1939, there was $240,000 aggregate principal amount of such notes outstanding.

(2) 10-year, 6% serial notes (hereinafter referred to as "Northwestern Wisconsin notes") dated January 1, 1935, in the aggregate principal amount of $150,000, maturing in the principal amount of $15,000 per annum. On August 31, 1939, there was $90,000 aggregate principal amount of such notes outstanding, of which $15,000 was subsequently paid.

The declarant is solely a holding company, owning securities of electric, gas, telephone, water, and ice operating companies. The declarant's balance sheet as at August 31, 1939, showed investments of $7,618,224 and amounts due from affiliates aggregating $4,285,668, or a total of $11,903,892; after subtracting reserves for investments of $1,616,954, the net investments amounted to $10,286,938. The capitalization and surplus of declarant as at August 31, 1939 follows:

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• Excluding $325,000 of bonds pledged to secure the Empire notes. Subsequently reduced to $75,000 principal amount.

Common stock, no par value----

• Excluding 6,500 shares of preferred stock pledged to secure the Empire notes. Represented by voting trust certificates for 1,112,658 shares. This excludes certif cates representing 1,566 shares of common stock held in treasury and 27,300 shares of common stock pledged to secure the Empire notes.

Declarant's corporate income statement for the 12 months ended August 31, 1939, shows a gross income of $420,632 or 1.25 times the interest requirements of $336,210 on declarant's total outstanding indebtedness. The declarant states that as of October 31, 1939, its cash balance was $208,804 and was an increase of $40,805 over the cash balance as of October 31, 1938. Declarant further states that its cash balance at the end of 1939, after providing for additional payments of $65,000 on the serial note indebtedness, would be in excess of its cash balance on December 31, 1938.

On March 29, 1939, declarant entered into an agreement in regard to the outstanding Empire notes, with Schroder Trust Company of

New York, owner of such notes, providing: (a) that upon the payment of $25,000 on account of the note due January 1, 1940, and $25,000 on account of the note due January 1, 1945, the rate of interest on the remaining amount of such indebtedness shall be reduced from 6 to 5 percent per annum; (b) that after January 1, 1940, and upon the payment of $5,000 of the principal amount on the note due on January 1, 1944, and the further payment of $20,000 on the principal amount of the note due on January 1, 1945, the interest rate on the remaining amount of such note indebtedness shall be further reduced from 5 to 4 percent per annum; and (c) that with the exception of such prepayments as described above, the declarant shall pay a premium of one-half of 1 percent on all prepayments on notes which mature 6 months or more thereafter.

In September 1939 declarant entered into an agreement with Schroder Trust Company of New York, owner of the outstanding Northwestern Wisconsin notes, providing that when the principal amount of such notes has been reduced to $50,000, the interest rate on the remaining amount of such notes outstanding shall be reduced from 6 to 5 percent per annum.

Declarant estimates that its expenses in connection with the transaction will approximate $500. The declaration states that no state commission or state securities commission has jurisdiction over the declarant in connection with the proposed transaction.

The declaration was filed on the basis that the proposed transaction constituted an "exercise of a privilege or right to alter the priorities, preferences, voting power, or other rights" of the holder of the notes, within the meaning of Section 6 (a) (2) of the Act. Since the proposed change will not affect the voting powers, the Commission makes no adverse findings under Section 7 (e); and since no state commission or state securities commission has informed this Commission that applicable state laws have not been complied with, the Commission further finds that the requirements of Section 7 (g) are satisfied.

However, in the light of the fact that the proposed transaction is regarded as an issue of a security within the meaning of Section 6 (a) (1), although new notes are not to be executed, the Commission has also considered the question of compliance with the remaining provisions of Section 7. Since the proposed transaction is "for the purpose of refunding, extending, exchanging, or discharging an outstanding security of the declarant" within the meaning of clause (A)

See Securities and Exchange Commission v. Associated Gas & Electric Co. et al., 99 F. (2d) 795, aff'g 24 F. Supp. 899; In the matter of Missouri Service Company, 3 S. E. C. 810 (1938); In the matter of Southern Natural Gas Company, 4 S. E. C. 653 (1939); and In the matter of Lone Star Gas Corporation, 5 S. E. C. 976 (1939).

of Section 7 (c) (2), the Commission finds the requirements of Section 7 (c) are satisfied. In view of the facts hereinabove set forth, the Commission makes no adverse findings with respect to the requirements of Section 7 (d).

An appropriate order will issue.

By the Commission: Commissioner Healy concurring in the result; Commissioner Henderson, being absent, not participating herein.

6 S. E. C.

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