the amount payable upon involuntary dissolution to the holders of the preferred stock to be outstanding immediately after the proposed issue of such additional preferred stock. The issue and sale by Met Ed of the additional 40,000 shares of cumulative preferred stock would increase the amount payable upon involuntary dissolution to the holders of the preferred stock to be outstanding immediately after such issuance to an amount greater than the aggregate of the capital of the company applicable to its common stock plus surplus. Accordingly, the company proposes to solicit its preferred shareholders to obtain their requisite consent to the issue of the additional 40,000 shares of new preferred stock.

The provisions of the Constitution of the Commonwealth of Pennsylvania provide, in substance, that the stock of a corporation may not be increased without the consent of the persons holding the larger amount in value of all the outstanding capital stock of the company. Accordingly, the company proposes to solicit the consent of its existing preferred and common stockholders to the proposed increase in the stated capital applicable to the presently issued and outstanding common stock. Each holder of the company's preferred and common stocks is entitled to one vote per share of stock.

Met Ed will amend its charter, by a vote of its common stock, all the shares of which are held by GPU, so as to limit the payment of dividends on its common stock under certain circumstances as described hereinafter.

The Pennsylvania Public Utility Commission has approved the issue and sale by Met Ed of the $3,500,000 principal amount of first mortgage bonds and the 40,000 shares of preferred stock.

FINANCIAL STATEMENTS

Attached here to as Appendices A and B are, respectively, a balance sheet and statement of income of Met Ed on a corporate basis as at and for the twelve months ended June 30, 1948. Appendices C and D present, respectively, a balance sheet and statement of income of Met Ed and subsidiary on a consolidated basis as at and for the same periods. The data are presented both per books and pro forma giving estimated effect to the proposed transactions."

As indicated in the balance sheets, the utility plant of Met Ed is carried at original cost, while that of its subsidiary, Edison, is stated at original cost with respect to its electric plant and at actual cost, which is substantially the original cost thereof, with respect to its steam plant. The reserve for depreciation on a consolidated basis is equal to 27.9% of the consolidated utility plant. In this connection, it may be noted that since

5 For purposes of preparing pro forma financial statements, the company has assumed an interest rate of 3-1/4% on the new bonds, with proceeds to the company of 100% of principal amount, and a dividend rate of 4% on the new preferred stock, with proceeds to the company $100 per share the par value.

January 1, 1943, Met Ed's provisions for depreciation have been approximately the same as the depreciation deductions claimed or to be claimed for Federal income tax purposes.

Capitalization

Table I below presents the capitalization and surplus of Met Ed on a corporate basis as at June 30, 1948, per books, and pro forma giving estimated effect to the proposed transactions. There is also shown the effect of the financing program on a consolidated basis.

As will be noted from the above table, as a result of the proposed transactions the common stock equity, both on a corporate and a consolidated basis will be reduced to less than 25% of the capitalization and surplus.

Earnings

As indicated in the statements of income appended hereto as Appendices B and D, net income will be reduced by an estimated $76,687 per annum as a result of the issuance of the bonds, after allowing for a reduction in Federal income taxes attributable to interest requirements on the bonds. In addition, on the basis of estimated dividend requirements of $160,000 on the new preferred stock, net income applicable to the common stock will be reduced by an estimated $236,687 per annum. These estimates, of course, give no consideration to any eventual increase in net income which may be realized as the result of the increased sales and revenues coincident with the expansion of the company's facilities.

Table II below shows the coverages for interest on longterm debt, income deductions, and income deductions plus preferred dividend requirements for the three calendar years 1945 to 1947, inclusive, and for the twelve months ended June 30, 1948.

DESCRIPTION OF SECURITIES

The $3,500,000 principal amount of 30-year first mortgage bonds of Met Ed are to be issued under an indenture to be dated September 1, 1948, which is to be supplemental to the original indenture dated November 1, 1944, as supplemented. The 40,000 shares of preferred stock of Met Ed will constitute a new series of preferred stock. The terms of the new series of preferred stock will be similar in all respects, except as to the dividend rate and redemption price, to the outstanding 125,000 shares of the company's 3.90% preferred stock. The terms of the outstanding first mortgage bonds and outstanding preferred stock were reviewed by us when they were issued in 1944.'

The present charter of Met Ed contains many of the protective provisions that are now customarily required in connection with the issuance of preferred stock. It does not, however, contain a limitation on the payment of dividends on the common stock when the common stock equity is reduced to below 25% of capitalization and surplus. In connection with the proposed transaction, Met Ed will amend its charter so as to include a limitation, to be effective so long as the new series of preferred stock is outstanding, restricting the payment of common

6 In the latter part of 1944, Met Ed reduced the aggregate amount of its senior securities and refinanced the remainder. As a result, coverages for periods prior to 1945 are not comparable with those of later periods.

7 Metropolitan Edison Company et al., 17 S. E. C. 116 (1944).

b

Consolidated data are not presented for 1945, since Met Ed acquired its investment in Edison at January 1, 1946.

stock dividends to not more than 50% of current net income if the ratio of common stock equity to total capitalization and surplus is less than 20%, and to not more than 75% of current net income if the common stock equity is in excess of 20% but less than 25% of total capitalization and surplus. As indicated in Table I, if effect be given to the proposed transactions, the ratio of common stock equity to total consolidated capitalization and surplus, as at June 30, 1948, would be 24.5% whereas it now amounts to 25.7%. In this connection, it may be noted that as at June 30, 1948, the earned surplus of Met Ed amounted to $3,659,782 on a corporate basis and $4,164,223 on a consolidated basis. Except for the limitation contained in the amendment to be made toits charter, Met Ed would be free to declare any or all of its existing earned surplus plus available future net income as dividends on the common stock. Any such declaration would further reduce the proportion of capitalization and surplus represented by common stock equity. The amendment to the charter will have the effect of restricting the company's earned surplus against the payment of dividends on its common stock in an amount equal to the existing earned surplus, and will have the further effect of causing the common stock equity to reach a level of at least 25% of total capitalization and surplus.

FEES AND EXPENSES

GPU will not incur any special expenses in connection with its donation of $1,500,000 to Met Ed, all legal work in connection therewith being done by members of its legal staff or by its regularly retained counsel, whose over-all compensation will include compensation for services rendered in this matter. The fees and expenses to be paid by Met Ed have been estimated by it as follows:

Met Ed has designated the firm of Beekman & Bogue as independent counsel for prospective underwriters. Their fee and expenses are estimated at from $7,500 to $8,500. Of the fee to be received 8/15ths will be applicable to the bonds and 7/15ths to the preferred stock.

8 When the outstanding 125,000 shares of 3.90% preferred stock were issued, the ratio of common stock equity to total capitalization was 26.1%. See Metropolitan Edison Company et al., 17 S. E. C. 116 (1944).