[No. 626] IN THE MATTER OF GREEN MOUNTAIN POWER CORPORATION File No. 43-162. Promulgated December 6, 1938 ALTERATION OF RIGHTS OF HOLDERS OF OUTSTANDING SECURITIES OF REGISTERED HOLDING COMPANY OR SUBSIDIARY. Par Value of Common Stock Reduced. Declaration filed by subsidiary of a registered holding company regarding the reduction of capital represented by its no par common stock by canceling some shares of such stock which are to be surrendered to it, without consideration, by the parent company for the purpose of creating additional capital surplus to absorb the probable deficit in its earned surplus account which will be caused by a proposed write-down of the declarant's fixed assets, ordered effective pursuant to Section 7 of the Public Utility Holding Company Act of 1935 where upon the facts as now presented the Commission does not find that such reduction will result in an unfair or inequitable distribution of voting power among the holders of the securities of the declarant or that it is otherwise detrimental to the public interest or the interest of investors or consumers. Condition Upon Approval. The Commission ordered effective a declaration regarding the reduction of the capital represented by its no par common capital stock for the purpose of creating additional capital surplus, subject to the conditions that: (1) Such corporate action and all matters connected therewith shall be performed in all respects in compliance with the terms and purposes represented by the declaration; (2) Except after application and order of this Commission, declarant shall not, while preferred shares are outstanding, make any distribution on its common stock unless the earned surplus, whether or not capitalized through a stock dividend, plus common capital paid into the company after January 1, 1939, shall, after such distribution, exceed the amount of reduction in common capital authorized by this order, provided, however, that this restriction shall not apply to dividends payable in common stock. SALE OF PUBLIC UTILITY SECURITIES BY REGISTERED HOLDING COMPANY. Condition. Application filed by registered holding company for an order permitting it to surrender, without consideration, certain no par common stock to its subsidiary which proposes to cancel such shares in order to create additional capital surplus, the Commission granted such application, it appearing that Section 12 (d) of Public Utility Holding Company Act of 1935 and Rule U-12D-1 promulgated thereunder are applicable to this transaction; however, the Commission reserved its jurisdiction as to the amount the applicant carries its investment in said common capital stock. FINDINGS AND OPINION OF THE COMMISSION Green Mountain Power Corporation, a subsidiary of New England Power Association, a registered holding company, has filed a declaration pursuant to Section 7 of the Public Utility Holding Company Act of 1935 regarding the reduction of the capital represented by its no par value common stock from $2,107,408 to $1,123,951. This reduction is to be effected by the cancelation by Green Mountain Power Corporation of 10,500 shares of its common stock which are to be surrendered to it without consideration by New England Power Association, the owner of all of its outstanding common stock. New England Power Association has filed an application for an order permitting such surrender if such surrender without consideration should be deemed to be a sale within the meaning of Section 12 (d) of the Public Utility Holding Company Act of 1935 or of Rule U-12D-1 thereunder. A hearing was held on the declaration, as amended, after appropriate notice. The declarant has, prior to the entry of the findings, opinion and order of the Commission, waived a trial examiner's report, submission of proposed findings of fact to the Commission or requested findings of fact by counsel for the Commission, the filing of briefs with the Commission, and oral argument before the Commission. The Commission having examined the record in this matter makes the following findings: Green Mountain Power Corporation is organized under the laws of the State of Vermont. It generates and sells electric energy at wholesale and retail, and manufactures and sells gas at retail within an area of approximately 2,000 square miles located in the north central part of Vermont, reaching from the Connecticut River to Lake Champlain. Green Mountain Power Corporation has outstanding an issue of $8,250,000 principal amount of first mortgage 5% gold bonds, series of 1948, which it proposes to refund in the immediate future through the issuance of a series of 34% bonds and 44% serial notes. The company has filed an application for exemption pursuant to Section 6 (b) of the Public Utility Holding Company Act of 1935 of the issue and sale of these securities, which matter is now pending before this Commission (infra, p. 175). In preparation for this refinancing program, the company proposes to write down its fixed assets. This will result in a deficit in its earned surplus account. For the purpose of creating additional capital surplus to absorb this deficit, New England Power Association, the sole common stockholder, proposes to donate for cancelation 10,500 shares of Green Mountain Power Corporation common stock. Green Mountain Power Corporation has outstanding 46,264 shares of no par value $6 cumulative preferred stock having a stated value of $4,339,718, or $93.80 per share; and 22,500 shares of no par value common stock having an aggregate stated value of $2,107,408, or $93.66 per share. Green Mountain Power Corporation proposes to write down the property account as shown on its books by an aggregate amount of $2,292,835 (of which $985,962 represents electric and gas plant to be retired, and $1,306,873 represents lands and rights to be written down). This is to be accomplished as follows: (1) The reserves for depreciation are to be reduced in the amount of $985,962 for electric and gas plant to be retired, and are to be increased by an appropriation of $425,000 from earned surplus, or a net reduction in the amount of____. (2) The common stock capital account will be reduced as a result of the cancelation of 10,500 shares of common stock to be donated by New England Power Association in the amount of (3) The capital surplus account will be increased in the amount of $983,457 by transfer from the common stock capital account as shown above, and will be reduced by the amount of $1,220,367, being the deficit created in the earned surplus account, as shown below, or a net reduction in the amount of-(4) The earned surplus account, presently amounting to $511,506, is to be reduced in the amount of $425,000 as an appropriation to reserves for depreciation, as shown in Item (1) above, and in the amount of $1,306,873, representing lands and rights to be written down, thereby creating a deficit in the amount of $1,220,367. This deficit will then be cleared to the capital surplus account as shown above. The effect, therefore, on the earned surplus account will be a net reduction in the amount of.. Total of above‒‒‒‒‒ $560, 962 983, 457 236, 910 511,506 2, 292, 835 The effects of these transactions on the capitalization and surplus of Green Mountain Power Corporation as shown on its balance sheet as of September 30, 1938, are indicated in the following tabulation: The balance sheet of Green Mountain Power Corporation as at September 30, 1938, showed property, plant, and equipment in the amount of $20,155,587, including intangibles in the amount of $1,127,656. During the years 1926 to 1936, inclusive, Green Mountain Power Corporation acquired certain properties which were ultimately recorded on its books in the net amount of $15,260,882. Of this amount, $14,959,892 was recorded on the basis of appraisals made by engineers employed by the Public Service Commission of Vermont. The aggregate net book value recorded at $15,260,882 was $273,436 in excess of the cash cost of these assets to Green Mountain Power Corporation, which excess was recorded in its capital surplus account. The cash cost, which amounted to $14,987,446, included $13,896,694 paid for the properties and other assets of affiliated predecessor companies. These properties and assets were recorded on the predecessor affiliates' books in the net amount of $11,219,124, and the cash cost of Green Mountain Power Corporation was, therefore, $2,677,570 in excess of the net book value on affiliated predecessors' books. Therefore, the sum of these upward revaluations amounted to $2,951,006. It should be noted that New England Power Association did not acquire control of Green Mountain Power Corporation until 1931, subsequent to the dates of substantially all of the above-described revaluations. Had adjustments then been made for such upward revaluations, the price paid in cash by New England Power Association to nonaffiliated interests for the common stock of Green Mountain Power Corporation would have exceeded the book value. of such common stock. Since that time New England Power Association has had to make cash advances to such subsidiary company, and previous to this present transaction had already made a common-stock donation of 5,968 shares. With respect to these acquired properties, the company states that the amount of the upward revaluations subsequently removed through retirements has not been determined. However, through the proposed transactions by which the property account is to be written down in the amount of $2,292,835, the company states that $1,306,873, representing a reduction in lands and rights, is definitely allocable to these upward revaluations. The balance sheet of the company as at September 30, 1938, indicates reserves for depreciation in the amount of $2,873,719, which is equivalent to 15.1 percent of the gross tangible property as at that date. These reserves for depreciation are to be reduced as a result of the proposed transaction by the amount of $560,962 to $2,312,756, which equals 13.8 percent of the reduced gross tangible property amounting to $16,735,096. Inasmuch as the property ap praisals heretofore described were based on current reproduction costs and accrued depreciation, the present depreciation reserves as of September 30, 1938, included $2,655,620 resulting from such appraisals. The common stock of Green Mountain Power Corporation carries one vote per share. The provisions with reference to the voting power of the company's preferred stock provide, among other things, that if dividends on the preferred stock shall at any time be in arrears or unpaid for 8 consecutive quarterly periods, then the holders of preferred stock, as well as the holders of common stock, have one vote for each share. As of September 30, 1938, the dividends in arrears on such preferred stock aggregate $208,188. As it has been customary to allocate dividend declarations to the earliest period then in arrears and unpaid, dividends are now in arrears for only 3 periods, totaling $4.50 per share. Dividends have been paid for the past 3 years at the rate of $6 per annum. If the preferred stock were in arrears in excess of 8 quarterly payments, the voting power of the common stock before the proposed transactions would be 32.7 percent, whereas such voting power after the proposed transactions would be 20.6 percent. Among the factors considered by the Commission in forming its opinion in this matter are the company's earnings, surplus accounts, and dividend arrearages on its preferred stock. It should also be pointed out that Section 12 (c) of the Act gives to the Commission general jurisdiction to control by rule or order the payment of dividends by registered holding companies and their subsidiaries. The Public Service Commission of Vermont has heretofore approved the reduction in common capital account. This Commission finds that the provisions of Section 7 (g) are satisfied. Upon the facts as now presented and subject to the conditions which will hereafter be stated the Commission does not feel warranted in finding, pursuant to Section 7 (e), that such reduction will result in an unfair or inequitable distribution of voting power |