APPENDIX 1 AMERICAN UTILITIES ASSOCIATES Condensed balance sheet at September 30, 1943 Assets Investment in common stock of Lowell Gas Light Company (96.55 APPENDIX 2 LOWELL GAS LIGHT COMPANY Condensed balance sheet at September 30, 1943 Assets Property, plant and equipment Current assets: Cash Other Special deposits Long-term range and heater contracts receivable Deferred charges: Unamortized debt discount and expense Other Total assets Liabilities and capital Long-term debt, 41⁄2 percent bonds due 1966 Serial noninterest bearing obligations Current and accrued liabilities (including cus tomers' deposits $58,296) Deferred credits Reserves: Reserve for depreciation Other Contributions in aid of construction Capital and surplus: Common stock Earned surplus Total liabilities and capital The liability for the annual installment principal payments on the serial noninterest bearing obligations is contingent upon earnings being available therefor and consequently the sum of the unpaid installments is not recognized as a liability on the published balance sheet of the company. For purposes of this balance sheet, however, the unpaid balance is recognized and earned surplus adjusted accordingly. Includes the sum of $62,585 of accrued Federal income taxes which it is believed are not actually owing. It appears that the company will pay no Federal income or excess profits taxes so long as it is permitted to consolidate its income tax return with that of Associates. 15 S. E. C. [No. 2023] IN THE MATTER OF COMMUNITY GAS AND POWER COMPANY AMERICAN GAS AND POWER COMPANY and the SUBSIDIARY COMPANIES THEREOF Respondents ALPHA ASSOCIATION File Nos. 54-68, 59–55, and 70-806. Promulgated March 6, 1944 (Public Utility Holding Company Act of 1935-Section 11 (g)) REPORT OF THE COMMISSION (To Security Holders Pursuant to Section 11 (g) of the Public Utility Holding Company Act of 1935) TO THE HOLDERS OF THE SECURED DEBENTURES, 5% AND 6% SERIES, OF AMERICAN GAS AND POWER COMPANY This report is addressed to you as holders of the secured debentures, 5% and 6% series, of American Gas and Power Company by the Securities and Exchange Commission. This Commission is a Federal agency created by Congress in 1934. The Public Utility Holding Company Act of 1935 requires it to submit a report to you to assist you in determining whether or not to sign the consents being solicited from you regarding the proposed release from the lien of the debenture agreement of American Gas and Power Company of certain securities of American Utilities Associates and Lowell Gas Light Company. On March 2, 1944 we issued our findings and opinion approving a plan filed by American Gas and Power Company to effect partial compliance with Section 11 (b) (1) of the Public Utility Holding Company Act of 1935, whereby American Gas and Power Company proposes to sell to Alpha Association all the securities of and interest in American Utilities Associates and Lowell Gas Light Company held by American Gas and Power Company for the sum of $900,000 cash, subject to certain adjustments as provided in the contract of sale. It is felt that the following parts of our opinion will be helpful to debenture holders in connection with the present solicitation: (a) Proposed Sale by American American proposes to sell to Alpha all its interests in Associates, consisting of $5,910,000 principal amount of notes (of which a note in the principal amount of $4,950,000 is secured by pledge of 58,199 shares of the capital stock of Lowell, owned by Associates) with unpaid interest amounting to $3,866,475 at September 30, 1943; accounts receivable from Associates in the amount of $110,065 at that date; and the outstanding shares of beneficial interest of Associates (20,000 shares, par value $1 per share), all for the sum of $900,000 pursuant to a contract dated September 28, 1943. Associates owns $1,997 unpaid face amount of serial noninterest bearing obligations and 58,861.6 shares (96.55 percent) of the outstanding capital stock (par value $25 per share) of Lowell. The remaining serial obligations ($176,241) and shares of capital stock (2,100.4 shares) of Lowell are held by the public. The $4,950,000 note of Associates referred to above, together with 58,199 shares of the capital stock of Lowell pledged as security therefore, are held in pledge by The New York Trust Company as successor trustee under the debenture agreement of American and supplements thereto. Since the proposed sale involves the disposition by Community and American of their entire interests in Associates and in Lowell, it would effect compliance with the provisions of our order dated July 2, 1943, requiring such disposition. We therefore find that the separate plan for such disposition is necessary to effectuate the provisions of Section 11 (b) of the Act. At the present time the securities of Associates, which American proposes to sell, represent a 96.55 percent interest in the common stock of Lowell, plus 1.1 percent of the noninterest bearing obligations of Lowell. The proposed price of $900,000 is equivalent to a price of approximately $930,000 for the entire common stock of Lowell, or of $1,057,700 for the combined common stock and serial noninterest bearing obligations of Lowell. This is equivalent to 11.1 times the reported net income of Lowell for the 12 months ended September 30, 1943, and to 12.2 times the average of reported annual net income during the 9-year period 1934 to 1942 inclusive, and the 12 months ended September 30, 1943. The value of $1,057,700 for the common stock and noninterest bearing obligations of Lowell, derived as shown above from the $900,000 purchase price, plus $950,000 principal amount of long-term debt of Lowell, is equal to 13.9 times the reported gross income of Lowell for the 12 months ended September 30, 1943, and 14.3 times the average reported gross income of Lowell during the 9-year period 1934 to 1942 inclusive, and the 12 months ended September 30, 1943. So tested against earnings, the purchase price appears relatively high in comparison with current quotations on manufactured gas companies. It was testified that the purchaser was paying this price, in part, because of the fact that under the Revenue Act of 1942 the income of Lowell is consolidated with the loss of Associates for tax purposes. It appears that so long as such privilege of consolidation remains Lowell will pay no Federal income or excess profits taxes. Such taxes accrued on the books of Lowell and deducted from gross and net income for the year 1942 and for the 12 months ended September 30, 1943, amounted to $33,750 and $34,256 respectively, and the balance sheet of Lowell includes as a current liability an aggregate of $62,585 of accrued taxes which it is believed are not actually owing and may never have to be paid. On the other hand, it was estimated by witnesses both for the seller and for the purchaser that future gross and net income would be reduced by $20,000 as a re sult of cancelation of certain war contracts in the city of Lowell, and it is, of course, possible that under future Revenue Acts the privilege of consolidating returns may be withdrawn or modified. On the whole, we find that the consideration to be paid is adequate, and that the proposed sale at that price is fair and equitable to security holders of American. In addition to the above, it is believed that the following part of the Commission's opinion dealing with a proposed modification of American's debenture agreement may be of some benefit to the debenture holders even though the question of such modification is not being submitted for their approval: (b) Proposed Modification of Debenture Agreement The debenture agreement of American, as heretofore amended, provides that the securities of Associates and Lowell held by The New York Trust Company may be released only upon receipt by the trustee, among other things, of certain certificates and of written consents to the proposed releases executed by or on behalf of the registered holders of at least 66% percent in principal amount of the debentures then outstanding. The proposed supplemental agreement would require the trustee to release from the lien of the debenture agreements and supplements thereto and to deliver to American, at any time, or from time to time, all or on any part of the pledged securities of and interest in Birmingham Gas Company, Savannah Gas Company, St. Augustine Gas Company, Bangor Gas Company, Lowell and Associates upon receipt by the trustee of: (a) A written request of American signed by its president or a vice president for such release and delivery; (b) A certified copy of an order of this Commission issued under the Holding Company Act authorizing or approving the sale or other dispositions of the securities, or interest with respect to which the release is requested; (c) The money, securities or interest constituting the consideration to be received by American (which would thereupon become and be a part of the trust estate) upon the sale or disposition of the released securities or interest, in the event and to the extent that the transaction authorized or approved by such order of this Commission provides or contemplates receipt by American of consideration and for the deposit of such consideration with the trustee. Since we have previously ordered Community and American to dispose of their interest in these subsidiaries, the proposed modification of the debenture agreement is necessary to facilitate compliance with such order. The new release conditions can be applicable only if the Commission determines with respect to the sale of any of the specified pledged securities that such sale is consistent with the interest of investors and, among other things, that the consideration is not unreasonable. The Commission must also determine in each instance whether the proceeds of the particular sale shall be deposited with the indenture trustee. As applied to the securities of Associates and Lowell, the Commission has found (and the trustee does not contest the finding) that a fair consideration is being received, and such consideration is to be deposited with the indenture trustee. In the event of any future sale falling within the proposed modification, the indenture trustee has of course a standing to challenge the Commission's findings as to the reasonableness of the consideration and as to whether the proceeds should be deposited with the trustee. Accord |