plus and, as we have observed, is equal to 64.5 percent of net property including Plant Replacement Fund Assets, funds in escrow for construction, and collateral investments pledged. These ratios are to be compared with the existing ratios in which debt is nearly 94 percent of net property and 70 percent of total capitalization as adjusted to eliminate excess of investment of parent company in its subsidiaries over its equity in net assets thereof. It is significant to note, in connection with the ratio of debt to net property, that testimony has been given to the effect that properties of the New England system are carried on the books at an amount approximating original cost.

In considering the debt of the holding company it should be noted that the debt of the operating companies represents only 17.56 percent of the total consolidated capitalization and that there is no publicly held preferred stock of the operating companies.

B. Earnings

Table VI below, prepared by the management of New England, sets forth consolidated earnings statements on a pro forma basis for each of the five years ended December 31, 1941-1945, the annual average thereof and for the year ending December 31, 1946 as estimated by the management, together with pertinent ratios and earnings per share. The management has assumed for the purpose of its pro forma statements that the new collateral debenture bonds will bear an interest rate of 3 percent on the total principal amount of $22,500,000 proposed to be issued.

23 S. E. C.

Times parent and subsidiaries fixed charges earned.

NOTE A. These statements reflect:

$200,000 annually.

NOTE B:

After sinking fund requirements estimated at $225,000 per year.

• Estimated.

There is extensive testimony in the record as to the effect of the war on the earnings of the individual companies in the New England system from which it appears that loss of vacation business and the dim-out, among other factors, have offset in substantial measure the favorable effect on earnings of war business. Moreover, the hurricane in 1944 had the effect of interrupting the upward trend of earnings, and reducing the annual average earnings shown in Table VI. It will be noted that the range of pro forma consolidated net income before provision for sinking fund in respect of the parent company's bonds to be issued, varies from a low of $1,577,364 in 1941 to a high of $1,990,644 in 1945.

The record includes an estimate of reasonably expected future earnings of the New England system prepared by Jay Samuel Hartt, a consulting engineer, called as a witness by the Associated Trustees. This estimate was made late in the summer of 1945 and Hartt has testified that his figures look to the future about three years. His computations were based upon the then existing capital structure rather than the structure proposed in the amended plan. For these reasons, Hartt's statement of reasonably expected future earnings is not comparable with the statements in Table VI below the point of determination of operating income. For purposes of comparison, Table VII below furnishes condensed consolidated statements of operating income of the New England system averaged for the five years ended December 31, 1945, estimated by the management for 1946, and estimated by Hartt, together with percentages of operating expenses to gross revenue.

• Hartt's figures include operating data for St. Croix Electric Co. and International Power Co., neither of which are reflected in the first 2 columns. The effect of such inclusion in the last column is too small to make any material difference in the comparisons or percentages.

It will be noted from the above tabulation that Hartt's calculations provide for depreciation equal to 7 percent of gross revenue as compared with 9 percent in the average and 1946 columns, and that this decrease in the provision accounts for a substantial part of the excess of operating income, as determined by Hartt, over the first two columns. A representative of the Department of Public Utilities of the Commonwealth of Massachusetts testified that the regulatory body which he represented regarded the present depreciation reserve and methods of accruals thereto as based upon sound and conservative practices. Accordingly, in the light of such testimony, we cannot give much weight to Hartt's assumption of a reduction in rate of provision for retirements.

In preparing its estimated consolidated pro forma statement for 1946, the management testified that an attempt was made to reflect all factors known at the date of the compilation.1 Since preparing the estimate the treasurer of New England has testified that actual operations for the first quarter of 1946 have been about 12 percent more favorable than the estimate contemplated, but he pointed out that increased costs of fuel and labor in later months of the year may cancel the unanticipated increase in January, February and March 1946. The estimate, being for only one year, does not attempt to reflect the cumulative results of the operation of the sinking fund. However, we are concerned with the long-term earning-power prospects. The sinking fund contemplates the annual retirement of $225,000 principal amount of bonds which will effect a savings in interest of approximately $4,000, after taxes. As each year of operation of the sinking fund will produce a net saving of like amount, the cumulative effect is substantial enough to require consideration in a long-term forecast.

Our conclusion as to earnings, taking all of the above factors into consideration, is that the new common shares of New England may be estimated, for the purpose of measuring the fairness of the plan, to have an earning power of approximately $1,700,000 per annum, before provision for sinking fund.

Fairness to Debenture Holders

As previously stated, the plan provides that the outstanding debentures of New England in the amount of $34,998,500 will be retired at par and accrued interest. Under the provisions of the indenture securing the debentures, New England may, at its "option," redeem all or any part of the debentures. As noted previously, the call premiums applicable to such optional redemption, which range

See last column Table VI, pp. 204-205.