Storage Company was incorporated on June 4, 1946 for the purpose of holding certain of the gas storage properties and transmission lines of Consumers and for the development of the business of purchasing, receiving, producing, storing, transmitting, and selling natural gas for resale in Michigan. Storage Company has an authorized capitalization of 200,000 shares of common stock with a par value of $100 per share. Ten (10) of such shares have been issued to its incorporators, who are nominees of Consumers, for $1,000 in cash. Consumers proposes, among other things, to acquire the shares held by its nomi

nees.

Storage Company seeks authorization to issue and sell the remaining 199,990 authorized but unissued shares. Of such shares, 79,990 shares are to be issued initially, as follows: (a) 20,000 to Panhandle Eastern Pipe Line Company ("Panhandle"), a nonaffiliate of Consumers, for $2,000,000 cash, and (b) 59,990 shares to Consumers for cash and certain gas properties (stated at net book amount) aggregating $5,999,000. The remaining 120,000 shares are to be issued from time to time thereafter for cash at $100 per share as additional funds are required to carry out the proposed plan of development and operation of Storage Company set forth in an agreement between Consumers and Panhandle dated May 3, 1946 and described more fully hereinafter.

When and as all or part of such 120,000 of additional shares is issued it will be subject to preemptive rights for 30 days. Under the agreement between Consumers and Panhandle, Consumers is obligated to subscribe to the remaining authorized capital stock not subscribed to by Panhandle. It is further provided in such contract that by mutual agreement of the parties thereto, participation in Storage Company may be offered to other public utilities in the State of Michigan, as such participation is desired by such utilities and as appears advisable. However, the present application-declaration does not seek authorization for the issue and sale of common stock of Storage Company to parties other than Panhandle and Consumers.1

1

Issuance and sale of the 10 incorporators' shares and the additional 199,990 shares of common stock of Storage Company have been expressly authorized by the Michigan Public Service Commission, the state commission of the state in which Storage Company was organized. The Federal Power Commission and the Michigan Public Service Commission have issued certificates of convenience and necessity to Storage Company.

After appropriate notice a public hearing was held. Having considered the record, the Commission makes the following findings.

1 Both Consumers and Panhandle have indicated their intention to retain the common stock of Storage Company which they acquire.

DESCRIPTION OF CONSUMERS AND STORAGE COMPANY

Consumers, organized in 1910 under the laws of the State of Maine, is engaged, entirely in the State of Michigan, in the generation and purchase of electricity and its distribution and sale to approximately 534,000 customers in 1,253 communities and townships as well as in rural areas, in the production and purchase of natural gas and its distribution and sale in 246 communities and townships, and in the production of manufactured gas and its distribution and sale in one community, serving in all an aggregate of approximately 257,000 gas customers. In addition the company supplies steam heat in five communities, operates water properties in two communities, and sells appliances incident to its gas and electric business. The population of the territory served is estimated to be in excess of 2,255,000.

Storage Company will operate entirely within the State of Michigan. It will acquire from Consumers the latter's rights and equipment in the Winterfield and Cranberry Lake gas fields, certain gas transmission lines, gas wells and compressor stations, and miscellaneous items. Subsequent to this acquisition, Storage Company proposes to construct additional transmission lines and compressor stations, relocate certain compressors, and drill and connect 160 new wells in its storage fields. Most of this work is expected to be done in 1947, and it is anticipated that practically all of it will be completed by the end of 1948.

CONSUMERS' GAS SUPPLY AND THE DEVELOPMENT OF STORAGE

COMPANY

Consumers presently has two sources of natural gas supply. It obtains up to 25,000,000 cubic feet of gas per day under a 15-year contract with Panhandle expiring in 1956 and has a limited additional supply of gas in its Michigan gas fields. The record indicates that at the present rate of withdrawal the Michigan gas fields will be exhausted in about five years.

The proposed plan of development of Storage Company, as set forth in an agreement between Consumers and Panhandle, is designed to make available to Consumers on a long-term basis an increased supply of natural gas. Under the plan Storage Company will receive from Panhandle and store natural gas during the summer season in Michigan gas fields to be adapted for that purpose; and will withdraw from storage and sell such natural gas in the winter months. Panhandle has agreed to enter into a 25-year contract for the sale of gas to Stor

age Company, and Storage Company has agreed to a 25-year contract for the sale of gas to Consumers.2

It is anticipated that the aforementioned plan of development will require an investment in the common stock of Storage Company of approximately $20,000,000 by December 31, 1950, of which $8,000,000 is to be provided initially and approximately $8,500,000 and $2,300,000 are to be supplied in 1947 and 1948, respectively.

BALANCE SHEET AND PROPERTY ACCOUNT

A condensed consolidating balance sheet of Consumers and Storage Company per books and pro forma as at November 30, 1946, reflecting the proposed initial transactions are attached hereto as Appendix I. The following table shows the estimated depreciable and depletable property to be acquired initially by Storage Company from Consumers and the reserves for depreciation and depletion applicable thereto :

The properties and related reserves will be placed on the books of Storage Company at amounts carried on the books of Consumers at date of transfer. Such properties are recorded on the books of Consumers at original cost as determined by the company. In addition

2 The agreement between Storage Company and Consumers provides that Storage Company will supply enough gas to meet Consumers' requirements through 1950, as estimated in a schedule annexed to the agreement. The schedule indicates that such requirements will increase from approximately 19,500,000 Mcf in 1947 to approximately 24,500,000 Mef in 1950. For each of the years subsequent to 1950, Storage Company agrees to increase its supply to Consumers up to 2,000,000 Mcf a year above the estimated gas purchase requirements for the previous year, subject, however, to the right of Storage Company to restrict its supply to a maximum of 33,000,000 Mcf a year. Storage Company's contract with Panhandle is such as to assure a supply of gas to Storage Company sufficient to permit Storage Company to meet its commitments to Consumers.

The utility plant account of Consumers has been reclassified on the basis of a study of original cost as of January 1, 1938, prepared by the company in accordance with the uniform system of accounts for electric and gas utilities prescribed by the Michigan Public Service Commission. On October 29, 1941, the Michigan Commission entered an order approving the reclassification and authorizing the restatement of the utility plant account as proposed by Consumers, subject to further audit and review. A review of the reclassification was initiated by the Michigan Commission in 1946.

to the properties to be acquired from Consumers, the property account of Storage Company will include $34,500 of organization expense.

A witness testified that the depreciation reserve has been accrued in accordance with rates allowed by the Bureau of Internal Revenue of the Treasury Department. Accruals to such reserve have been based, in the case of facilities relating to the Michigan gas fields, on the life of such fields, and in the case of facilities used in connection with the present gas supply contract between Panhandle and Consumers, on the 15-year term of such contract which expires in 1956. When the properties are received by Storage Company from Consumers, the rates of depreciation will be reduced since the net property acquired will be depreciated over approximately the 25-year term of the new gas supply contract between Storage Company and Panhandle.

CAPITAL STRUCTURE

The following table shows the capitalization and surplus of Consumers per books on a corporate basis and pro forma for Consumers and Storage Company on a consolidated basis, as of November 30, 1946:

Attached hereto as Appendix II is a condensed consolidating income statement of Consumers for the twelve months ending November 30, 1946 adjusted to reflect the estimated operations of Storage Company for the calendar year 1947.

The record indicates that the Federal Power Commission has ordered, pending further consideration and possible further hearings, that Storage Company may demand and receive from Consumers rates and charges calculated to permit a return of not more than 6% on Storage Company's depreciated investment. It is the present intent of Storage Company to pay dividends on its common stock to the full extent of its earnings.

The record shows that at current withdrawal rates the supply of gas in the properties to be conveyed by Consumers to Storage Company will be exhausted in about five years. Through use of such properties in a storage program, it appears that the productive life of such properties will be extended. According to the testimony and exhibits, the corporate and consolidated earnings of Consumers will be somewhat improved by the proposed development of Storage Company.

FEES AND EXPENSES

Estimated fees and expenses in connection with the proposed transactions are as follows:

Federal original issue tax on 80,000 shares__

Transfer stamps on conveyance of property from consumers to Storage

Company

Fees of counsel__

Miscellaneous expenses..

$8, 800

5,500

17,500

2,500

34, 300

• As additional shares are issued, additional Federal original issue taxes of up to $13,200 may be incurred.

All fees and expenses will be paid by Storage Company. The fees and expenses enumerated above, if they do not exceed the estimates, do not appear unreasonable and we make no adverse findings with respect thereto.

CONCLUSIONS

The record reveals that the proposed transactions are the result of protracted arm's-length negotiations between Consumers and Panhandle. Each, according to the testimony, will benefit from the proposed arrangements and contracts. Both claim that their respective interests are promoted by mutual participation in Storage Company. Having considered all the circumstances we find that the price at which property is to be transferred from Consumers to Storage Company and the price at which common stock of Storage Company is to be sold to Consumers and Panhandle are not unreasonable.

On the basis of the record, we find, pursuant to Section 6 (b) of the Act, that the proposed issue and sale by Storage Company, from time to time as previously described, of 199,990 shares of its common stock are solely for the purpose of financing the business of such subsidiary company which is not a holding company, a public-utility company, an investment company, or a fiscal or financial agency of a holding company, a public utility company, or an investment company. Accordingly, we hold that an exemption from the provisions