Earned surplus in the amount of $7,745,166 is not presently available for dividends on common stock by reason of a provision in Consumers' charter restricting the payment of dividends which would reduce the percentage of common stock and surplus to total capitalization and surplus to less than 25%.

** Earned surplus in the amount of $5,608,410 would not be available for dividends on common stock by reason of a charter provision "equiring that no dividends be paid on common stock unless there remains in earned surplus an amount equal to at least $7.50 per share on all outstanding preferred stock.

It should be noted from the above table that the proposed transactions would result in increasing the percentage of common stock and surplus to total capitalization and surplus from 25.9% to 29.5%.

Attached hereto as Appendix B is a condensed income statement of Consumers for the twelve months ended June 30, 1948 per books which shows net income of $13,901,129 and a balance applicable to common stock of $11,435,937 or $2.78 per share of presently outstanding common stock. If adjustments were made to reflect the sale on July 1, 1948 of 200,000 shares of $4.52 preferred stock which was approved by this Commission on June 23, 1948 (Holding Company Act Release No. 8305), but without reflecting the use of proceeds from such sale, the balance applicable to common stock would be $10,531,937 or $2.55 per share of presently outstanding common stock. If further adjustment were made to reflect the proposed issuance of 458,158 shares of common stock but again not reflecting the use of proceeds, the balance of $10,531,937 applicable to common stock would amount to $2.30 per share.

The record indicates that the primary purpose of the proposed sale of common stock is to provide a portion of the funds required for construction of property additions. The company has made and proposes to make capital expenditures for property additions estimated at about $43,000,000 in 1948 and $48,000,000 in 1949 or a total of approximately $91,000,000 for those two years. The company expects to install approximately 410,000 kilowatts of additional steam-electric generating ca

pacity in 1948 and 1949 including a 50,000 kilowatt unit which went into operation in April of this year. The record indicates that such installation of generating capacity is essential in view of Consumers' increasing load. Sales of electric energy have increased at an average rate of about 9% per year during the three-year period from January 1, 1945 to December 31, 1947.

The management has estimated that, excluding proceeds from the proposed sale of common stock, available funds will fall short of the company's requirements during 1948 and 1949 by approximately $37,000,000. The management proposes to raise approximately $15,000,000 at this time by the sale of common stock and estimates that additional financing aggregating from $20,000,000 to $25,000,000, probably through the sale of bonds, will be necessary before the end of 1949.'

The record shows that Consumers is presently paying dividends on its outstanding common stock at the rate of $2 annually and that the management expects common stock dividends to continue at the $2 rate subsequent to the sale of the presently proposed additional shares.

In connection with Consumers' ability to maintain a $2 dividend on its common stock after the proposed sale of shares, Justin R. Whiting, president of Consumers and of Commonwealth, stated that the company "might well pay the $2" even though earnings did not increase. While it appears that increased operating expenses, in common with the trend in the utility industry, have affected the earnings of Consumers, causing a reduction from their 1947 level, Whiting testified, in effect, that such reduction would tend to be offset by the utilization of new low-cost generating plant capacity and by rate increases in effect or in prospect.

It appears that the proposed subscription price of $33 per share is slightly less than the current market price which on September 3, 1948 was $33-3/4 per share. Whiting testified that this price was fair to Consumers.

Fees and expenses in connection with the issuance of the new common stock have been estimated at $71,782, including counsel fees of $16,000. The record is not complete with respect to counsel fees and we shall reserve jurisdiction over such fees. The other fees and expenses do not appear unreasonable."

3A witness for the company testified that if the proposed sale of common stock were consummated, and bonds in the principal amount of $25,000,000 were sold in 1949, common stock equity would then be equivalent to approximately 28% of capitalization and surplus.

4 Our conclusions herein as to whether any of the financing applications considered in these Findings and Opinions should be granted do not assume the favorable outcome of any particular rate proceeding.

5 It was testified that the subscription price of $33 per share was determined in the light of a compromise proposal with respect to the overall plan of reorganization of Commonwealth, agreed to by representatives of holders of substantial amounts of Commonwealth's preferred and common stocks.

6 An application filed with the Michigan Public Service Commission for approval of the issuance and sale of the additional shares of Consumers common stock contemplated in the proposed financing has been granted and that Commission has issued its order approving the proposed transaction.

2. Ohio and Pennsylvania

Ohio proposes to issue $12,000,000 principal amount of First Mortgage Bonds, of a series bearing interest at a rate not to exceed 3-1/2% per annum and maturing in 30 years, and to sell the same at competitive bidding for the best price obtainable provided such price does not result in an interest cost to Ohio of more than 3-1/2%.

Ohio also proposes to amend its Articles of Incorporation so as to increase the authorized number of shares of its $8 par value common stock from 2,000,000 shares (all of which shares are presently issued and outstanding) to 4,000,000 shares and to issue and sell, for $27.50 per share, up to but not exceeding 285,713 shares of its then authorized but unissued common stock. Said shares of common stock would be offered to the holders of the outstanding common stock of Ohio for subscription at the rate of one share for each seven shares of common stock held. The right to subscribe for the shares of common stock would be evidenced by full share and fractional share subscription warrants in transferable form. No fractional shares of such common stock are to be issued and fractional share subscription warrants are to be exercisable only when combined with other warrants aggregating the right to subscribe for one or more full shares. Commonwealth, which is the holder of 1,795,847 shares of the issued and outstanding common stock of Ohio, proposes to subscribe for and to purchase the 256,549 shares to which it will be entitled.

Ohio, a registered holding company, is the holder of all to Pennsylvania's issued and outstanding common stock having a par value of $30 per share, and proposes to increase its investment in the common stock of Pennsylvania by the payment to Pennsylvania of $900,000 in cash. Upon receipt of such payment, Pennsylvania proposes to transfer $600,000 from earned surplus to common stock capital account and to issue to Ohio 50,000 shares of its common stock.

Ohio, an Ohio corporation, is engaged in the generation and purchase of electric energy and its distribution and sale in and around Akron, Youngstown and Springfield, Ohio, serving an estimated population of nearly 1,000,000. It also supplies steam heat in Akron, Youngstown and Springfield.

Pennsylvania, a Pennsylvania corporation, is engaged in the generation and purchase of electric energy and its distribution and sale in New Castle and Sharon, Pennsylvania, and contiguous areas in Western Pennsylvania. The properties of Pennsylvania are interconnected with those of Ohio in the Akron-Youngstown area, and Ohio supplies Pennslyvania with a portion of its electric energy requirements. For the twelve months ended June 30, 1948, consolidated gross operating revenues of Ohio and Pennsylvania were $43,989,883, of which 97.1% was derived from sale of electricity and the balance from heating and nonOperating sources.

The proceeds from the sale of securities of Ohio and Pennsylvania will be used to provide a portion of the funds required in connection with the substantial construction programs on which each of these companies has embarked, and in the case of Ohio, to prepay the balance of its installment notes payable to banks which were outstanding on June 30, 1948 in the principal amount of $3,125,000. The construction programs involve expenditures for plant additions in 1948 and 1949 estimated at about $35,300,000 for Ohio and $3,900,000 for Pennsylvania. Walter H. Sammis, president of Ohio and Pennsylvania, testified that the companies' business has grown steadily in past years and that the extensive additions and improvements to the companies' electric generating, transmission and distribution facilities and various additions to their other properties, which are included in the construction programs, are necessary to meet the increasing demands for service which the companies have been experiencing and which they anticipate will continue. Estimates prepared by the companies indicate the the total funds required for 1948 and 1949, including funds for construction, will exceed funds available by approximately $18,900,000 in the case of Ohio and $800,000 in the case of Pennsylvania. It is anticipated that based upon the present level of earnings and current expectations as to the probable progress of the contemplated construction programs, the proceeds from the sale of the new securities and cash on hand and estimated to be received from operations will be sufficient to meet the companies' cash requirements through the end of 1949.

Consolidating balance sheets of Ohio and its subsidiary, Pennsylvania, actual and pro forma giving effect to the proposed transactions, as of June 30, 1948, are attached as Appendix C. As shown therein, total assets of Ohio on a consolidated basis amount to $178,693,754, of which $157,573,038 represents utility plant. Plant accounts of both companies have been reclassified to reflect original cost and the combined plant account includes $11,956,725 classified in Account 100.5 as "plant acquisition adjustments." Of this amount $11,425,174 is applicable to Ohio and is being amortized by charges to operating expense of $966,720 per year, at which rate it will be completely amortized in about twelve years. The remaining $531,551 is applicable to Pennsylvania and is being amortized as an income deduction of $54,000 per year, at which rate it will be completely amortized in about ten years. Reserves for depreciation at June 30, 1948 aggregated $33,767,321 on a consolidated basis and represented 23.2% of consolidated tangible property of $145,442,613. The provision for depreciation for the year ended June 30, 1948 amounted to $3,494,934, equivalent to 2.4% of tangible property on a consolidated basis. The following table sets forth the capitalization and surplus of Ohio and Pennsylvania on a corporate basis and on a con

7 The reclassifications of the utility plant of each company have been reviewed by the Federal Power Commission and the respective state commissions.

solidated basis, actual and pro forma as of June 30, 1948, together with pertinent financial ratios, actual and pro forma giving effect to the proposed transactions:

(a) Consolidated common stock and surplus at June 30, 1948, after deducting plant acquisition adjustments aggregating $11,956,725, would be 22.9% actual and 25.9% pro forma of total consolidated capitalization and surplus (including $1,250,000 of installments due in one year on notes payable in actual column).

As shown by the above table, long-term debt as a percentage of total capitalization and surplus on a consolidated basis will increase from 53.0% to 53.4% as a result of the proposed transactions; however, common stock and surplus as a percentage