Alum Rock and Dempseytown, whose facilities are interconnected, are engaged in the production and purchase of natural gas and the distribution of such gas in an area whose northern boundary is located about 30 miles south of the distribution system of the North Penn-Allegany properties. Alum Rock serves about 425 customers in Clarion and Venango counties, Pennsylvania, and Dempseytown serves about 360 customers in an area which includes those counties and, in addition, Forest County, Pennsylvania. Approximately 90% of Alum Rock's gross operating revenues are derived from sales to United Natural Gas Company, a non-affiliated company, and about the same percentage of Dempseytown's gross operating revenues are derived from sales to industrial customers. Dempseytown obtains a portion of its natural gas requirements from New York State Natural Gas Corporation which, as previously stated, supplies some of the gas requirements of North Penn and Allegany. The gas purchase contract between Dempseytown and New York State Natural Gas Corporation provides that gas not taken by Dempseytown under its contract may be purchased by North Penn or Allegany at any of their interconnections with New York State Natural Gas Corporation.

The offices of North Penn, Allegany, Dempseytown, and Alum Rock are located in the same building at Port Allegany, Pennsylvania, and the duties of virtually every member of the staff employed at such offices involve more than one of those companies. All maintenance work of these companies is directed from the office at Port Allegany and a central staff of employees operating from the office there actually engages in the major repair work in connection with all the New York-Pennsylvania properties.

In view of the foregoing and the other relevant data in the record, we conclude that the New York-Pennsylvania properties constitute an integrated gas utility system within the meaning of the Act.

Additional Systems

We now proceed to consider whether the properties of North Shore, Newport, or York may be retained as additional integrated systems under the standards of clauses (A), (B) and (C) of Section 11 (b) (1).

York is engaged in the production of manufactured gas, the purchase of natural gas, and the distribution of mixed gas in the City of York and adjacent territory in York County, Pennsylvania, and in the distribution of natural gas in small portions of York County and Adams County, all in southeastern Pennsylvania. The population of the company's service area is approximately 129,000 and the number of customers served aggregates about 29,000. All the company's requirements of natural gas are purchased from Manufacturers Light and Heat Company, a non-affiliate. The Commission has previously found

that the properties of York were managed and operated as a unit.'

Newport manufactures gas and distributes such gas to about 8,100 customers in Newport and Middletown, Rhode Island. The service area has a population of approximately 31,000.

North Shore manufactures gas and distributes gas to about 2,540 customers in Ipswich, Massachusetts, and several other neighboring communities with a total population of approximately 17,000.

The record shows that there are substantial distances between Penn Corp's principal system and the properties of York, Newport, and North Shore and that no operational relationship exists between the principal system and the properties of any of the other three companies. The record also shows that no operating economies would be lost by the severance of York, Newport, or North Shore from the principal system.

Clause (A) of Section 11 (b) (1) provides that the Commission may not permit a registered holding company to continue to control one or more additional integrated public -utility systems unless it finds that

"Each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control''

by the holding company.

Since the record shows that there is no operational relationship between the New York-Pennsylvania properties and those of York, Newport, or North Shore, and in view of the fact that it has not been shown that severance would result in the loss of substantial economies, we cannot find that the properties of York, Newport or North Shore may, under the standards of Clause (A) of Section 11 (b) (1), be retained in combination with the New York-Pennsylvania properties. Accordingly, we shall order divestiture of such properties."

Other Businesses

North Penn, Alum Rock, and Dempseytown derive small quantities of oil and gasoline from their gas producing wells, and from non-gas producing wells of which substantially all were formerly gas producing wells. The revenues from the sale of oil and gasoline in 1947 aggregated $58,775, and thus constituted a relatively minor portion of Penn Corp's consolidated operating revenues which were $4,578,911 for the same

'Pennsylvania Gas & Electric Corporation, 11 S. E. C. 918 (1942).

4Since the properties of Newport are located in Rhode Island, which is a State that does not adjoin either New York or Pennsylvania, retention of Newport is also not permissible under the standards of Clause (B) of Section 11 (b) (1).

period. We conclude that these oil and gasoline operations are reasonably incidental or economically necessary or appropriate to the operations of the New York-Pennsylvania properties and that they are therefore retainable therewith.

As noted heretofore, the record has not been completed as to New Penn Development and Penn-Western and, accordingly, we shall reserve jurisdiction as to those companies.

COMPLIANCE WITH SECTION 11 (b) (2)

An issue raised by our order instituting this proceeding is whether the corporate structure or continued existence of Penn Corp unduly or unnecessarily complicates the structure, or unfairly or inequitably distributes voting power among security holders, of such holding company system; and if so, what action is therefore required under Section 11 (b) (2) of the Act."

Corporate Structure of Penn Corp

Corporate and consolidated balance sheets of Penn Corp as of December 31, 1947, as submitted by the company, are attached hereto as Appendix B.

In Table II below are shown the corporate and consolidated capitalization and surplus of Penn Corp as of December 31, 1947 presented on the basis of Appendix B both per books and per books adjusted to restate capital stocks at liquidation preference (including preferred dividend arrearages):

s Section 11 (b) (2) directs the Commission to require each registered holding company and each subsidiary thereof to take such steps as the Commission shall find necessary to ensure that the corporate structure or continued existence of any company in the holdingcompany system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding company system."

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 to its 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 e stimated 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.

• 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).

Since the services of the various counsel are not completed, we shall reserve jurisdiction over the payment of their fees and expenses. The remaining fees and expenses enumerated above do not appear unreasonable and we make no adverse finding with respect thereto.

CONCLUSIONS

The proceeds of the issue and sale by Met Ed of the $3,500,000 principal amount of first mortgage bonds and 40,000 shares of $100 par value cumulative preferred stock are to be used to meet the construction requirements of the company and to repay short-term bank loans incurred for the same purpose. We therefore find the issue and sale are solely for the purpose of financing the business of the company. The Pennsylvania Public Utility Commission, the state commission in the state in which Met Ed is organized and doing business, has expressly approved such issue and sale. Accordingly, the proposed issue and sale are exempt from the provisions of Section 6 (a) of the Act by virtue of the third sentence of Section 6 (b) of the Act. We do not believe it to be necessary in the public interest or for the protection of investors or consumers to impose any terms or conditions in connection with the proposed issue and sale.

The solicitation of the consent of the preferred and common shareholders of Met Ed to (1) the issue and sale of the 40,000 additional shares of preferred stock and (2) the increase in the stated value applicable to the common stock have been filed pursuant to the provisions of Rule U-62 promulgated under Section 12 (e) of the Act. We have examined the material to be submitted to the shareholders of Met Ed in connection with the solicitation of their consents and make no adverse findings in that respect. To the extent that the increase in the stated value applicable to the common stock, the issuance of the 40,000 shares of additional preferred stock by Met Ed, and the amendment of its charter so as to restrict payment of dividends upon its common stock constitute an exercise of any privilege or right to alter the priorities, preferences, voting power, or other rights of the holders of Met Ed's stocks, and are thus subject to the provisions of Sections 6 (a)(2) and 7 (e) of the Act, we do not find that the exercise of such privilege or right will result in an unfair and inequitable distribution of voting power among the security holders of Met Ed or is otherwise detrimental to the public interest or the interest of investors

or consumers.

In reaching our determination that Met Ed may solicit its preferred and common stockholders for their consent to issue the additional 40,000 shares of preferred stock and increase the stated value applicable to the common stock, we are mindful of the fact that adoption of the proposals will result in there being outstanding 165,000 shares of $100 par value cumulative preferred stock which will have an involuntary liquidation preference of $16,500,000 while the stated capital applicable

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