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As indicated above the proposed issuance of bonds would result in an increase in the ratio of long term debt to total capitalization and surplus from 45.52%; per books adjusted, to 51.64%, pro forma, while the ratio of common stock equity to total capitalization and surplus would decline from 42.43%, per books adjusted, to 37.67%, pro forma. Consummation of the proposed transaction would also result in an increase in the ratio of long term debt to net plant exclusive of plant acquisition adjustments from 48.25%, per books adjusted, to 55.73%, pro forma.

The utility plant of West Texas, including $39,541 of intangibles, is carried on the balance sheet as at March 31, 1948 in the aggregate amount of $47,410,012. The balance sheet also reflects electric plant acquisition adjustments (Account No. 100.5) amounting to $1,604,662. The company presently has under review a study of the original cost of its plant and property. While the study has, as yet, not been finally passed upon by the Federal Power Commission, witnesses testifying on behalf of the company indicated their belief that the results of the study would not vary substantially from the plant accounts as they now exist. The depreciation reserve in the amount of $10,107,876 is equal to 21.34% of tangible property.

Annexed hereto as Appendix B is the income statement of West Texas for the twelve months ended March 31, 1948, per books adjusted, and pro forma giving effect to the proposed transactions. The pro forma statement reflects the company's assumptions for illustrative purposes that the new bonds will be sold at principal amount with an interest rate of 3-1/8%. Interest requirements on the mortgage debt were earned 4.89 times, per books, and would be earned 3.91 times, pro forma, while the coverage of the total income deductions and preferred stock dividend requirements was 3.00 times, per books adjusted, and would be 2.62 times, pro forma.

The proposed bonds are to be dated March 1, 1948, and are to be issued under and secured by the existing indenture dated as of August 1, 1943 and a proposed supplemental indenture to be dated as of March 1, 1948. In the opinion of counsel for the company the proposed bonds will constitute a first mortgage lien on all property owned by the company on said date and on all after-acquired property subject to certain exceptions. The existing indenture dated August 1, 1943 secures the presently outstanding First Mortgage Bonds Series A, 3-1/8%, due 1970, in the principal amount of $18,000,000. The supplemental indenture relating to Series B bonds contains protective provisions which we have heretofore deemed appropriate, including a sinking fund, beginning in the year 1949, of 1% of the greatest amount of bonds of Series B outstanding under the indenture at any time, and a restriction against the payment of cash dividends on the common stock or the purchase of shares of common stock, except out of earned surplus arising after January 31, 1947.

Additional bonds may be issued up to 60% of net expenditures for construction or acquisition of bondable property subsequent to May 1, 1939, provided specified earnings tests are met.

In this connection, it may be noted that as of February 29, 1948 the balance of net expenditures for bondable property amounted to approximately $5,070,000. West Texas proposes to draw down $3,000,000 of the proceed from the sale of proposed bonds against the certification of available bondable property. The record indicates that $1,000,000 of such amount will be used to discharge a bank loan of such amount maturing on July 12, 1948, and the balance of $2,000,000 will be made available to the company's treasury to meet scheduled construction requirements.3

Estimated fees and expenses of the company in connection with the proposed transaction aggregate approximately $32,000, of which $2,000 is payable to the company counsel. The only other legal fee is that payable to counsel for prospective underwriters in the amount of $6.500 (not included in the $32,000 payable by the company) and which is to be paid by the successful bidder. We find that the fees and expenses are not unreasonable and approve them if they do not exceed the

estimates.

While the proposed bonds qualify under the provisions of Section 7 (c) of the Act, we are required to determine whether adverse findings must be made under Section 7 (d) of the Act. In this connection it will be observed that the resulting ratios of West Texas on a corporate basis are satisfactory. Further, the record shows that no additional public sales of securities will be required by West Texas to meet the requirements of the company's presently contemplated construction program scheduled through 1950.

Under the provisions of Section 7 (d) (1) we must also look at the proposed financing by West Texas in its relation to the security structure of the Central holding company system. We have had prior occasion to comment on the necessity of improving the consolidated equity ratio of Central and subsidiaries through the issuance and sale by Central of additional common stock and the investment of the proceeds in the common stock of certain of its subsidiaries, namely, Central Power and Light Company and Southwestern Gas and Electric Company whose construction program will require additional financing. While the proposed issuance of bonds by West Texas leaves that company in an acceptable financial position, it has the tendency to adversely affect the consolidated financial ratios of the system. Under these circumstances, the issuance

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3It is proposed that $1,000,000 will be temporarily invested in U.S. Certificates of Indebtedness yielding approximately 1% per annum. The remainder of the proceeds, in the hands of the trustee, amounting to $2,000,000, will also be invested in such certificates with liquidation thereof during 1949 to provide funds for that year.

4 Section 7 (d) (1) reads as follows: "Sec. 7 ***

(d) If the requirements of sub-section (c) and (g) are satisfied, the Commission shall permit a declaration regarding the issue or sale of a security to become effective unless the Commission finds that-

(1) the security is not reasonably adapted to the security structure of the declarant and other companies in the same holding company system; ***"'

5 In the Matter of Southwestern Gas and Electric Company, 27 S. E. C. 675 (1948); In the Matter of Central Power & Light Company, 27 S. E. C. 185 (1947).

of additional senior securities by West Texas underscores the necessity, previously adverted to, for additional common stock financing by Central. While we might properly have made adverse findings with respect to the instant transaction pursuant to Section 7 (d) (1), we have been disposed to afford Central a further opportunity to take corrective steps in conformity with the views which we have earlier expressed.

In the light of the foregoing, we permit the declaration to become effective forthwith, subject to the terms and conditions prescribed by Rules U-24 and U-50.

By the Commission (Commissioners McConnaughey, Hanrahan, and McDonald), Commissioner McEntire being absent and not participating.

APPENDIX A

WEST TEXAS UTILITIES COMPANY

a

Condensed Balance Sheets, Per Books Adjusted, and Pro Forma Giving Effect to the Sale of $5,000,000 Principal Amount of--% First Mortgage Bonds

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a Adjusted to reflect the sale of 1,983 shares of reacquired $6 Cumulative Preferred Stock. See West Texas Utilities Company, Holding Company Act Release No. 8093.

bEarned surplus is restricted against the payment of all dividends in the amount of $1,809,473 which is equivalent to the cost to the company of reacquiring 25,643 shs. of $6 Cumulative Preferred Stock. The proposed supplemental indenture provides that so long as any Series B bonds are outstanding, the sum of $2,519,164, representing earned surplus at January 31, 1947, will not be available for payment of cash dividends on the common stock.

APPENDIX B

WEST TEXAS UTILITIES COMPANY

Condensed Income Statements, Per Books Adjusted,a and Pro Forma Giving Effect to the Sale of $5,000,000 Principal Amount of --% First Mortgage Bonds

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() Denotes deficit

a Adjusted to reflect the sale of 1,983 shares of reacquired $6 Cumulative Preferred Stock. See West Texas Utilities Company, Holding Company Act Release No. 8093.

b Gives effect to the company's assumption that the new bonds will be sold at principal amount and will bear interest at the rate of 3-1/8% per annum.

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