pansions of their generating facilities. This was in the midst of the historic Florida real estate boom which lasted from 1923 to 1926. From March 24, 1924 to July 13, 1925 American acquired the securities or properties of some 14 companies, in addition to miscellaneous lands and rights-of-way. In the winter of 192526, American consolidated the Florida properties into one corporation, the Florida Power & Light Company.

American's investment in the properties which it transferred to Florida through a complicated series of paper transactions aggregated $30,372,733, and in addition American obligated itself to furnish $12,000,000 in cash to the new company. American's investment in the properties so transferred exceeded the original cost of such properties, on the basis of the record herein, by $5,617,103.

Certain of the properties so transferred to Florida were not owned outright by American and Florida acquired the minority interests in such properties by issuance of its preferred stock having a stated value of $2,159,020.

At organization Florida issued to American $30,000,000 principal amount of bonds, $12,841,000 stated value of preferred stock, and $30,000,000 stated value of common stock, and recorded surplus and surplus reserves pertaining to such common stock in the amount of $1,416,913 which aggregate securities and surplus, in the amount of $74,257,913, exceeded American's cost by $31,885,180. Florida's plant account was improperly charged with $3,675,000 of debt discount and expense which was included in such excess. Plant account was also written up an additional amount of $28,210,180 to balance stated value for the common stock in excess of American's investment therein. On the opening balance sheet the common stock was thus offset by sheer write-up plus a portion of the bond discount. American resold most of the senior securities thus acquired, reducing its original investment in Florida to $6,714,695 represented by 20,000 shares of second preferred and 2,500,000 shares of common stock.

At the date of organization of Florida there was already under way a program of constructing interconnections and expanding generating facilities which program was subsequently carried to completion. During the period 1926-43 Florida has constructed property additions aggregating approximately $65,600,000s and has purchased additional properties over this period for sums approximating $10,600,000. Net additions to plant and investment

7 Without reduction for intrasystem profit in commissions on the sale of securities, profit in construction and engineering fees, and profit in other fees collected by Bond and Share. American subsequently reduced the above carrying value to $6,376,654 and during the course of the proceedings conceded that it should be reduced an additional $83,209 or to $6,293,445.

8 Included in the amount of constructed property additions and in property under construction at Florida's date of organization are sums totaling $2,691,931 in construction and engineering fees collected by Bond and Share. As we note hereinafter, such fees represent capitalized system profit to the extent of $1,815,655.

9 Acquisition adjustments pertaining to the foregoing purchased property aggregated, according to data in the record, $4,881,014 and when added to $5,617,103 of acquisition adjustments incurred by American at organization, or by predecessor companies of Florida, the total for such adjustments aggregate $10,498,117. The treatment to be accorded these items is discussed hereinafter.

account from organization to date have amounted to approximately $64,500,000. 10

In the 2 years subsequent to its organization Florida issued to the public additional first mortgage bonds in the principal amount of $22,000,000. It issued to its parent, American, at the end of the first year of operation $22,000,000 principal amount of debentures in cancelation of open account indebtedness of that amount. 11 In the following year it issued to American 10,000 shares of $6 preferred stock for cash and subsequently has issued to the public either for cash or property an additional 30,000 shares of preferred stock.

The necessity for the issuance of bonds and debentures in the amount of $44,000,000 immediately subsequent to organization would of course have been obviated to a substantial degree had the common stock of Florida represented an investment commensurate with its stated value of $30,000,000. With respect particularly to the $22,000,000 of debentures which were issued in cancelation of open account indebtedness the circumstances surrounding their issuance raised serious questions as to the necessity for subordinating such debentures to the publicly held preferred stock and this question constituted one of the important issues in the proceedings instituted by us.

THE PROPOSED ACCOUNTING ADJUSTMENTS AND CAPITAL

CONTRIBUTIONS

The effect of the proposed accounting adjustments and capital contributions, which are discussed more fully below, upon the accounts of Florida at October 31, 1943 is shown by the following condensed actual and pro forma balance sheets. It should be noted that the following pro forma balance sheet does not reflect the effect of the proposed refinancing which is shown hereafter at page 96.

Assets and other debits

Contributions
to capital
and
accounting

Pro forma giving effect to contributions to capital and accounting adjustments 99, 405, 883 1,910, 008 9, 851, 353

Plant and property

----

$129, 023, 722

($29, 617, 839)

$

Investment and fund accounts

Total

145, 311, 372 ( 29, 113, 460) 116, 197, 912

20 Including $1,888,067 capitalized interest on excess capacity and $114,728 capitalized capital stock expense noted hereinafter.

The history of this open account indebtedness is summarized in the following paragraph from our notice and order of July 10, 1941 (Holding Company Act Release No. 2874), instituting these proceedings:

"In order to carry on its operations, Florida commenced borrowing from American at oranization, and by the end of the first full month of operation (January 31, 1926), Florida was indebted to American in the sum of $1,267,372. By the end of 1926, this indebtedness bad increased to $22,680,000 (after repayments aggregating $15,701,842). On such indebtedDe American caused Florida to pay interest at the rate of 7%."

ACCOUNTING ADJUSTMENTS PROPOSED BY FLORIDA

(1) Florida proposes to eliminate from its plant account, in connection with the refinancing program which it has submitted, the remaining balance ($27,615,044) of a $31,885,180 system write-up which, as we have noted, was recorded in its plant account at organization. Subsequent to organization $595,136 of this write-up was removed by charges to surplus or surplus reserves and in 1941 Florida removed an additional $3,675,000 of bond discount and expense (embraced in such write-up) by charge to earned surplus and to unamortized debt discount and expense, thus reducing such write-up to the balance of $27,615,044 as at October 31, 1943.

(2) Florida also proposes to eliminate from its plant account interest on excess capacity capitalized therein during the years 1926 to 1932 inclusive in the amount of $1,888,067.

Florida's initial construction program was undertaken in expectation of continued rapid population growth in the territory served. That growth was cut short by the collapse of the land boom, followed by the general depression, and the company found itself with capacity greatly in excess of that needed. The expected load did not materialize until many years after the completion of construction and in the interim period Florida capitalized $1,888,067 as interest on such excess capacity in an account called "Miscellaneous Tangible Capital." In our opinion such capitalization of interest on excess capacity was clearly improper and resulted in distortion of the plant and income accounts.

(3) The plant account improperly includes an item of $114,728 representing the capitalization of selling expense of Florida's $7 preferred stock in a customer-ownership campaign carried on early in Florida's history. It is obvious that such an item has

12 The transactions will actually be consummated in January and when recorded on the com. pany's books will take into account earned surplus from October 31, 1943, to the date of actual recording. There will be some change, as a result, as to the amount of capital surplu required to be transferred from stated value for common stock.

no place in the plant account. In connection with retiring its preferred stock Florida proposes to eliminate this amount by charge to earned surplus.

(4) Florida also proposes an increase in its reserve for property retirements in an amount of $2,400,000 by appropriation from earned surplus.

At October 31, 1943 Florida had depreciable property of $84,739,310 against which property it had a reserve of $8,957,183 or 10.6%. Recognizing the inadequacy of its present provision, Florida proposes the above increase so that the reserve, as adjusted, will total $11,357,183 and will represent 13.4% of depreciable property.

$842,424 of the foregoing increase in the reserve represents a transfer, through earned surplus, from a reserve for insurance presently carried by Florida. Such reserve is stated to be a reserve for insurance against storm loss. The record indicates that Florida now carries insurance against storm losses in excess of $300,000 and up to $2,500,000. McGregor Smith, president of Florida, testified that in his opinion, in the light of present insurance in effect, the reserve is no longer necessary since pole losses, which would figure largely in any storm damage, will be charged to retirement reserve, and since in any case losses up to $300,000 would normally be provided for by charges to maintenance expense.

In addition to the foregoing accounting adjustments which Florida has proposed to make and on the making of which we will condition approval of Florida's financing program, we will order that Florida make certain additional accounting adjustments pursuant to our powers under Sections 15 (f) and 20 (a) which are set forth hereinafter.

CAPITAL CONTRIBUTIONS BY AMERICAN

The effect on Florida's balance sheet of eliminating the writeups from the plant account and making certain other adjustments proposed by Florida will be to create an earned surplus deficit in the amount of $27,971,263 as of October 31, 1943. 13 As we have noted, American caused the original system write-ups to be recorded in Florida's plant account. American now proposes to make available by capital contributions an amount of capital surplus which, when added to presently existing capital surplus, will enable Florida immediately to eliminate such earned surplus deficit and in addition to provide a balance of capital surplus sufficient to absorb the call premium of $1,426,670 on Florida's publicly held preferred stock when such stock is retired in connection with the proposed financing.

American proposes to provide the major portion of such capital surplus through the surrender to Florida of $17,000,000 principal amount of Florida's present debentures out of a total of $22,000,000 of such debentures held by American, and all its holdings of Florida's preferred stock consisting of 13,477 shares

As we have noted, the entries will actually be made in January 1944, and this amount will be subject to some variation.

of $7 first preferred, 10,000 shares of $6 first preferred, and 20,000 shares of $7 second preferred. Florida assigns 14 $4,287,700 of its total stated capital stock value to the shares of stock to be acquired.

In addition American will transfer its interest in the Utilities Land Company to Florida, such interest consisting of notes and open account indebtedness aggregating $701,000 and all the shares of capital stock having a stated value of $600,000. The capital stock is stated to have had a system cost of $181,076 to American. Utilities Land Company has been, since the organization of Florida, a wholly owned subsidiary of American owning ice properties and certain real estate in Florida. The ice properties are presently under lease to a nonaffiliated company, under an agreement covering both such ice properties and the ice properties now owned by Florida, at an annual rental of $200,000 for the entire group. The ice property of Utilities Land represents ice-making capacity of 100 tons out of a total capacity for the group of properties of 1600 tons. In addition to the ice properties Utilities Land owns office buildings located in the cities of Lakeland and Palatka (which are leased to Florida), a cold storage plant, miscellaneous residential properties, and a substantial amount of urban real estate. Florida will record the foregoing interests in its investment account at American's stated cost in an aggregate amount of $882,076 and will increase capital surplus by a like amount.

It is proposed that the balance of capital surplus required be created by reducing the stated value for common stock by $6,398,476. 15

THE PROPOSED FINANCING

The refinancing proposal of Florida, as amended, contemplates that Florida will sell $45,000,000 principal amount of first mortgage bonds, 1974 series, $5,000,000 principal amount of serial notes, and $10,000,000 principal amount of sinking fund debentures, due 1979. Florida will invite proposals for the purchase of the bonds and debentures pursuant to the competitive bidding requirements of our Rule U-50. The invitation for bids will require that bids be submitted separately for the bonds and debentures, and the coupon rates applicable to such securities will be determined by the accepted bid or bids.

USE OF PROCEEDS

The net proceeds of the sale, estimated in the pro forma financial statements to aggregate $61,350,000, together with approximately $7,500,000 of treasury cash, will be applied to redeem $52,000,000 principal amount of presently outstanding first mortgage bonds, 5's, due 1954, at 1011⁄2 plus accrued interest,

14 The capital stock of Florida is now stated in an aggregate amount of $48,954,308. However, in connection with the transactions here the company has assigned stated values to the preferred stocks on the basis of liquidating preferences or actual stated value and has assigned, as the stated value for the common, the residual amount of the total figure above.

15 Capital surplus in the amount of $7,903 will result from cancelation of 3,856 shares of $7 preferred stock reacquired by Florida at a cost of $377,697.