(4) all of the gas properties and gas property rights owned or operated by Central States Production Corporation, an associate company of Central States Power & Light Corporation (Del.), for a base price of $300,000 in cash1

All of said purchase prices are to be adjusted to provide for certain materials and supplies, accounts receivable, unbilled income, accounts payable, consumers' deposits and other current assets and liabilities being acquired or assumed. It is estimated that after giving effect to said adjustment, the aggregate price will equal or be in excess of $4,700,000.13 No commissions are to be paid.

Central States of Delaware has filed declarations pursuant to Rule U-12D--1 14 concerning the sale of its properties in Oklahoma and the indirect sale of the properties of Central States of Oklahoma, its wholly owned subsidiary.15

EFFECT OF SALE AND APPLICATION OF THE ACT

While the declarations filed pursuant to Rule U-12D-1 and now under consideration were received prior to the general revision of the Commission's rules under the Act, which became effective April

12 Central States Production Corporation is an affiliate of Central States of Delaware by reason of the fact that Central States Utilities Corporation owns all of the common stock of both companies. Central States of Delaware owns a past due purchase money note and mortgage of Central States Production in the principal amount of $610,008 and is also a creditor of Central States Production on an open account in the amount of $299,080 plus accrued interest, at November 30, 1940, in the sum of $48,504. In lieu of foreclosing on the mortgage in order to enable declarant to sell the assets of Central States Production Corporation, the declarant proposes, with the approval of the board of directors of Central States Production and the consent of The Chase National Bank of New York which is presently vested with full power to vote the stock of Central States Production, to direct that such assets as are contracted to be sold be transferred directly to Oklahoma Natural Gas Company in satisfaction for or on account of the past due note and mortgage and other indebtedness of Central States Production Corporation to declarant. The Chase Bank has power to vote this stock, as well as the common stock of Central States of Delaware, by reason of the fact that the common stock of both Central States Production and Central States of Delaware is pledged with The Chase Bank as trustee to secure the 10-year 6% secured bonds of Central States Utilities Corporation due January 1, 1938 and, the said bonds being in default, The Chase Bank, under the terms of the indenture, is empowered to vote and does vote the common stock of Central States Production and Central States of Delaware.

The Chase Bank is also trustee for the first mortgage and first lien gold bonds of Central States of Delaware, but an assistant trust officer of The Chase Bank testified that, in his opinion, there was no actual conflict of interest due to the fact that the common stock of Central States Production and the common stock of Central States of Delaware are valueless. Without expressing any opinion as to conflicts of interest which may exist as a result of this dual trusteeship, we agree that any such conflict is theoretical in the instant case.

13 Based on a November 30, 1940 closing date, the purchase price would have been $4,785,840.

14 File No. 70-254.

15 No declarations have been filed with respect to the transactions involving Utilities Production and Central States Production, but it appears that these transactions are either not within our jurisdiction or exempt from our consideration by reason of rules promulgated under the Act.

21, 1941, no material change is effected by the new Rule U-44 16 which replaces the former Rule U-12D-1. Both rules require the filing of a declaration, to be considered in the light of the pertinent sections of the Act.16

The declarations contain a statement that no state or federal commission, other than the Commission, has jurisdiction over the declarant with respect to the proposed transaction, and this appears to be the case.

An examination of the record makes it clear that negotiations between Central States of Delaware and the Oklahoma Natural Gas Company were carried on at arm's length and this fact plus other evidence adduced tends to show that the over-all price of $4,700,000 for the combined properties and securities proposed to be sold is not unreasonable. Testimony given at the hearing discloses that once the parties had agreed on the over-all price, J. S. Hartt, an independent valuation expert employed by the declarant, was called in and requested to determine what portion of the total purchase price should be allocated to the gas properties of Central States of Delaware, Central States of Oklahoma and Central States Production respectively and to the securities of Utilities Production. The figures which Hartt furnished were then incorporated in the contract. Our primary concern is as to that portion of the transaction which involves the gas properties of Central States of Delaware and Central States of Oklahoma. We shall now proceed to consider whether the amounts designated to be paid for these properties are reasonable.

As heretofore stated, the base price proposed to be paid for the fixed assets of Central States of Delaware located in Oklahoma is $1,900,000. As at November 30, 1940, such assets, less the applicable depreciation reserve, were carried on the books of declarant at $2,083,251.

Hartt made a reproduction cost appraisal of the above-mentioned properties as of December 31, 1937, which, adjusted by him to account for subsequent additions and retirements, indicates that the reproduction cost of the property new, less depreciation, as of November 30, 1940, was $1,746,524.

Based on the figure of $177,673, reported by declarant to be the gross income derived from its gas properties located in Oklahoma for the 12 months ending November 30, 1940, this property is being sold on a 9.3 percent basis.

Omitting certain exceptions which do not apply here, Rule U-44 reads as follows: "No registered holding company shall, directly or indirectly, sell to any person any security which it owns of any public-utility company, or any utility assets, except pur suant to a declaration notifying the Commission of the proposed transaction, which has become effective in accordance with the procedure specified in Rule U-23, and pursuant to the order of the Commission with respect to such declaration under the applicable provisions of the Act."

Hartt estimated the future gross income which could reasonably be expected from the Oklahoma properties of Central States of Delaware as $143,350.17 Capitalizing this figure at 72 percent and making deductions for materials and supplies and working capital he arrived at a figure of $1,895,383 as the value of property and plant.

The base price proposed to be paid for the gas fixed assets of Central States of Oklahoma is $1,500,000. As at November 30, 1940 such assets, less the applicable reserve for depreciation, were carried on the books of Central States of Oklahoma at $1,907,355.

In appraising the value of these properties, Hartt used a reproduction cost appraisal made by him as of December 31, 1937 and adjusting this figure to include subsequent net additions and additional depreciation, reached a figure of $1,603,982 as the reproduction cost new, less depreciation, at November 30, 1940.

Based on the figure of $117,064 which, according to an exhibit introduced in evidence by declarant, was the stated gross income of the gas properties of Central States of Oklahoma for the 12 months ending November 30, 1940, this property is being sold on a 7.8 percent basis.

Hartt estimated the reasonably expected future gross income which might be derived from this property at $102,762.18 Capitalizing this figure at 7 percent, he arrived at an amount, $1,395,529, as the value of property and plant.

If the sale proposed is consummated, substantially all of the proceeds from the sale of the Oklahoma gas properties of declarant and the securities of Utilities Production Corporation will be payable to The Chase National Bank of the City of New York as corporate trustee in accordance with provisions of the first mortgage and indenture of trust of declarant, dated January 1, 1928, and substantially all of the proceeds of the sale of the properties of Central States Power & Light Corporation of Oklahoma will be payable to The Chase National Bank of the City of New York as trustee under the first mortgage and deed of trust of said Oklahoma corporation, dated as of June 1, 1931. Declarant contemplates that Central States of Oklahoma will then request the trustee under its trust indenture, pursuant to Section 8.08 thereof, to apply such deposited funds to the redemption at par of bonds of said Oklahoma corporation secured by its trust indenture. These bonds are pledged with The Chase National Bank of the City of

17 In estimating the gross income which could reasonably be expected from this property Hartt made a deduction of $39,150 for the payment of federal income taxes. As Central States of Delaware has paid no federal income taxes for the past 5 years, this amount would have to be added to Hartt's estimate in order to make a proper comparison with the stated gross income.

18 As in the case of Central States of Delaware, Hartt made a deduction for federal income tax, where no such tax has been paid by Central States of Oklahoma for the past 5 years. Here the deduction amounted to $24,138.

New York as trustee under the first mortgage and indenture of trust of declarant. These proceeds from the sale of the properties of Central States of Oklahoma will thus be obtained and held by the corporate trustee in accordance with the provisions of declarant's trust indenture.

Declarant states that it will secure the funds derived from the sale of the properties of Central States Production free from the lien of its trust indenture and that it will not be necessary, therefore, to depósit such funds with the trustee.19

The following balance sheets indicate the effect which the proposed sale will have upon Central States of Delaware and Central States of Oklahoma:

CENTRAL STATES POWER & LIGHT CORPORATION (DEL.) (corporate only) Comparative pro forma balance sheet as at Nov. 30, 1940, (Before and after giving effect to the sale of the securities of Utilities Production Corporation, the natural gas properties of Central States Power & Light Corporation (Del.) in Oklahoma, Central States Power & Light Corporation of Oklahoma, and the Central States Production Corporation, an associate company and the acquisition of the Tidal Osage lease from the Utilities Production Corporation by Central States Power & Light Corporation of Delaware)

The purchase money note and mortgage of Central States Production owned by declarant is presently pledged with The Chase National Bank of New York as trustee for declarant's first mortgage bonds, but declarant states that it now has sufficient "additional property credits" with the trustee to permit it to take down said purchase money note and mortgage free and clear of the lien of its trust indenture securing said bonds. We wish to note, however, that, while the funds to be derived from the sale of Central States Production will, in the opinion of declarant, be free assets, a declaration is on file in this proceeding (File No. 70-267) pertaining to the proposed use of such funds to purchase declarant's first mortgage bonds.

Comparative pro forma balance sheet as at Nov. 30, 1940-Continued

Special cash deposited with corporate trustee under first mortgage inden

Deferred charges, including unamortized debt, discount and expense on bonds of $512,112..

Current liabilities-accounts payable, customers deposits and accrued items

• Includes $90,000 and $390,000 cash, respectively, with which declarant proposes to acquire a portion of its first mortgage bonds.

( ) Denotes negative amount.