ratios of Penelec will be improved as a result of the liquidation of the installment notes and the operation of the sinking fund provisions on the bonds.

DESCRIPTION OF NEW FIRST MORTGAGE BONDS

The $23,500,000 principal amount of 1976 series first mortgage bonds will be issued pursuant to a supplemental indenture, dated June 1, 1946, to the indenture now existing between Penelec and the Bankers Trust Company under which the $36,500,000 principal amount of outstanding first mortgage bonds were issued. In the opinion of counsel for Penelec, the 1976 series bonds will be secured, equally with the presently outstanding bonds, by a first lien on substantially all of Penelec's property (except the properties covered by the lien of the Erie County Electric Company Bonds) and upon after acquired property. The indenture, as supplemented, contains provisions with respect to a 1 percent sinking fund, a 15 percent maintenance and depreciation requirement, issuance of additional bonds, release and substitution of property, and limitations upon the payment of dividends on the common stock, all of which provisions have, in other proceedings, been deemed satisfactory by us.

INSTALLMENT NOTES

The $5,000,000 aggregate principal amount of installment notes is to be issued to the Union Trust Company of Pittsburgh and the Mellon National Bank. The loan agreement provides, in general, that each bank will receive an installment note in the principal amount of $2,500,000 upon which a payment of $250,000 will be made at the end of each of the first four years after issuance and the balance of $1,500,000 at the end of the fifth year. However, the company has the privilege of renewing the notes, at the end of the fifth year, for an additional five-year period, for an aggregate principal amount, as to each note, of $1,250,000, upon which an installment of $250,000 will be paid at the end of each year. Interest on the original notes will be at the annual rate of 12 percent, payable quarterly, and interest on the renewal notes, if the option of renewal is exercised, will be at the annual rate of 24 percent, payable quarterly.

DESCRIPTION OF NEW PREFERRED STOCK

The 101,000 shares of $100 par value cumulative preferred stock will be designated as Series C and will be additional to, and on a parity with, the 69,000 shares of 4.40 percent Series B $100 par value cumulative perferred stock now outstanding. The certificate of incorporation of Penelec has been amended so as to include provisions

with respect to the creation or authorization of additional preferred stock, the alteration or change of the express terms of the preferred stock, the issuance of additional shares of preferred stock, any merger or consolidation by the company with any other corporation, the vesting of voting control upon the preferred shareholders in the event of an aggregate of one year's accumulation of dividend arrears on the preferred stock, restrictions upon the aggregate amount of the company's unsecured indebtedness, and limitations upon the payment of dividends on the common stock, all of which provisions have, in other proceedings, been deemed satisfactory by us.

FEES AND EXPENSES

Applicants-declarants have estimated the fees and expenses will aggregate $145,000 as follows:

In addition, it may be noted that the plan provides that the proponents will pay such fees and reimburse such expenses incurred in connection with the plan, the proceedings relating thereto, and the consummation thereof, as may be approved, allocated, or awarded by the Commission.

The company has designated the firm of Davis, Polk, Wardwell, Sunderland & Kiendl as independent counsel for prospective underwriters. Their fees are estimated at $25,000, of which 70 percent will be allocated to the bonds and 30 percent to the preferred stock. Their expenses are estimated at $1,000 and will be allocated in the same proportion as the fee.

We shall reserve jurisdiction over the payment of all legal fees and expenses of all counsel. We note that the proposed purchase contract provides that any reduction in the fee to be paid to the independent counsel shall inure to the benefit of Penelec.

APPLICABILITY OF ACT TO TRANSACTIONS RELATED TO THE PLAN

The issue and sale by Penelec of the $23,500,000 principal amount of its new bonds, $5,000,000 principal amount of its installment notes,

101,000 shares of its percent series C preferred stock, and 68,843 shares of its $20 par value common stock are exempt from the requirements of Section 6 (a) of the Act by the provisions of Section 6 (b) since the issue and sale of such securities have been expressly authorized by the Pennsylvania Public Utility Commission and are solely for the purpose of financing the business of Penelec. The requirements of competitive bidding, pursuant to the provisions of Rule U-50 of the Rules and Regulations promulgated under the Act, are applicable to the issue and sale of the new bonds and new preferred stock, but are not applicable to the installment notes by virtue of the exception contained in paragraph (a) (2) thereof, nor to the issue and sale of the common stock by virtue of the provisions of paragraph (a) (3) thereof. In granting the exemptions pursuant to the provisions of Section 6 (b), we do not deem it appropriate in the public interest or the interest of investors or consumers to impose any terms or conditions other than those required by Rule U-50 with respect to the issue and sale of the new bonds and new preferred stock.

As previously noted, the acquisition by Penelec of the utility assets of Pen Ed is exempt from the requirements of Sections 9 (a) and 10 by virtue of Section 9 (b) (1), as such acquisitions have been approved by the Pennsylvania Public Utility Commission. We have examined the proposed transactions in the light of the standards of Section 12 (f) and the Rules and Regulations promulgated thereunder and we observe no basis for adverse findings in regard thereto. The acquisition by Aelec of the common stock of Penelec is subject to Sections 9 (a) and 10. We observe no basis in this regard for adverse findings under Section 10 (b) or 10 (c) (1), and we find that such acquisition has the tendency required by Section 10 (c) (2).

The redemption by Pen Ed of its outstanding first mortgage bonds is exempt from the requirements of 12 (c) and Rule U-42 by virtue of the provisions of paragraph (b) (2) of such rule.

Applicants-declarants have requested that our order recite, in conformity with the requirements of Sections 371 and 1808 (f) of the Internal Revenue Code, as amended, that the transactions proposed by the plan and related thereto are necessary or appropriate to effectuate the provisions of Section 11 (b) of the Act. Since we have determined that the liquidation of Pen Ed effectuates the provisions of Section 11 (b) and since the issuance by Penelec of its securities is required to permit it to generate funds to acquire the assets of Pen Ed, thereby placing Pen Ed in a position to enable it to be liquidated, we shall grant the request.

As stated, the definitive terms of the escrow agreement to be entered into between Aelec and the depositary have not been submitted. We shall therefore reserve jurisdiction with regard thereto.

We shall enter an order approving the plan, as amended, and approve the applications, as amended, and permit the declarations, as amended, to become effective subject to the requirements of Rule U-24 and to the reservation of jurisdiction over all fees and disbursements of all counsel. In addition, our order will contain a condition requiring Penelec to divest itself of its interest in the gas properties to be acquired from Pen Ed within one year after acquisition or within such additional period (not to exceed an additional year) as may be permitted pursuant to the provisions of Section 11 (c) of the Act. Our order will also contain a condition that Penelec report the results of competitive bidding pursuant to Rule U-50 and that the proposed issue and sale of the new bonds and new preferred stock shall not be consummated until the further order of this Commission shall have been issued in the light of the results of competitive bidding. Such order may contain such further terms and conditions as may then be deemed appropriate and jurisdiction will be reserved for this purpose. Applicants have requested that the 10-day bidding period be shortened to permit Penelec to open bids on June 26, 1946. This does not appear inappropriate and we shall grant such request.

In addition, as indicated, jurisdiction will be reserved over the issue of the appropriateness of the Pen Ed preferred shareholders to receive any amounts in excess of their liquidation preferences and our order will be conditioned to provide that the subsequent presentation and determination of such issue will in no way be affected by the prior consummation of the proposed transactions.

An appropriate order will issue.

By the Commission: (Chairman Purcell and Commissioners McConnaughey, Caffrey and McEntire) Commissioner Healy being absent and not participating.

23 S. E. C.