gineers received $18,590 representing the redemption price of 169 shares of El Paso Electric Company (Texas) $6 dividend preferred stock and on January 29, 1941, $287,532 representing the proceeds from the sale of 2,520 shares of El Paso Electric Company (Delaware) series A 7% preferred stock. The company urges that having given up a high dividend preferred stock investment it should equalize by reducing the requirements on its own preferred stock.

Tenders at the lowest prices will be accepted, first taking into consideration the difference in yield in the three series of preferred stock. It is estimated that the saving in annual dividend requirements accruing to Engineers will be from $25,000 to $30,000, depending upon the number of shares of each class of preferred stock acquired and that it will cost from $385,000 to $422,500 to make such acquisitions, based upon April 1, 1940 prices, and here again depending upon the amount of each class of preferred stock acquired.

From an examination of the financial statements submitted by the company we are of the opinion that the proposed acquisitions will not be detrimental to the financial integrity of the companies in the Engineers holding company system, and that no adverse order is required to safeguard the working capital of public utility companies in the system.

Consequently, we conclude that the declaration should be permitted to become effective if the terms upon which the tender is invited are fair and reasonable. The stocks sought to be purchased by Engineers Public Service Company have been selling on the New York Stock Exchange for the past month at a range in prices of from 69 to 8014 for the $5 series, from 76 to 8314 for the $5.50 series, and from 77 to 8734 for the $6 series. The volume of trading has not been heavy but it is substantial enough to indicate that certain holders are willing to dispose of the stock. However, when the issuer of securities is in the open market as a purchaser or seeks to purchase directly from the holders on tender, it is important that information be made available to holders so that they may form an intelligent judgment of the worth of the securities in relation to the offer to buy. This matter of disclosure is particularly important when, as is here the case, the question of holding or selling is one which must be resolved against circumstances presently confronting the system as a whole.

There are presently pending Section 11 (b) (1) proceedings involving Engineers Public Service Company and its subsidiaries to determine what properties may be retained by Engineers Public Service Company under the standards of the statute. We have already indicated tentatively that Engineers Public Service Company

must dispose of a substantial portion of its properties.1 Naturally, security holders are quite interested in the outcome of the proceedings and with the consequences to them of compliance by the system with any order which this Commission might issue. No one can say what the outcome of the proceedings will be nor can anyone measure exactly the consequences to security holders of any order we may issue or any action the company may take. However, there are certain factors which security holders ought to bear in mind in this connection which will serve as a substantial guide to them in forming judgment on the merits of this tender program. Engineers Public Service Company in its annual report dated March 17, 1941, made the following statement with reference to the Public Utility Holding Company Act of 1935:

Public Utility Holding Company Act.-In February 1940 the Company and its subsidiaries were cited to file an answer as to compliance with Section 11 (b) (1) of the Public Utility Holding Company Act and such an answer was filed. The Company subsequently filed a motion to dismiss the proceedings which the Securities and Exchange Commission construed as a request to give its interpretation of the Section as applied to the Engineers system. On March 11, 1941, the Commission issued its statement of its tentative conclusions, and reconvened the hearing for March 25, 1941. The conclusions of the Commission are that the requirements of the geographical standards of the Section would be met with respect to the Engineers system only if it disposed of all of its subsidiaries except Virginia Electric and Power Company and Savannah Electric and Power Company or, in the alternative, except Gulf States Utilities Company and El Paso Electric Company and, in the case of the choice of either of these alternatives, it would be incumbent on the Company to prove that the other requirements of the Section were met as to Savannah or El Paso, as the case may be. The Company expects to present evidence to the Commission which it believes will show that the requirements of the Section, as construed by the Company, would be met if the Company continued to control the properties of Virginia Electric and Power Company, Gulf States Utilities Company and El Paso Electric Company (Delaware). There is the further question of the constitutionality of this Section. Until these matters have been determined, it is impossible to state what the ultimate effect of this action will be on the Company and its security holders. Considerable work has been done by the Company and its subsidiaries preparatory to presenting their case before the Commission.

The facts stated are correct. We doubt their value as a guide to security holders in enabling them to determine whether to sell out or retain their investment in the system. There are presently available statistical data which have been assembled and correlated by statistical houses of general repute. These statistics bear quite directly on the pure investment questions which security holders of Engineers Public Service Company face. Ordinarily, the availability

1 See Engineers Public Service Company, et al., Holding Company Act Release No. 2607; and see also The Report of the Public Utilities Division Concerning Application of Section 11 (b) (1) of the Public Utility Holding Company Act of 1935 to Engineers Public Service Company and Its Subsidiary Companies.

of data of this kind is known only to those who make a profession of securities marketing and trading. By and large the average investor does not have these matters called to his attention. We feel that under the circumstances of this case certain of the material published and the conclusions reached by these firms should be communicated to the security holders of Engineers Public Service Company. For instance, on February 17, 1941, Standard Statistics published in Standard Outlook for the Security Markets of that date an article entitled "Utility Holding Company Liquidating Values." Fourteen holding companies including Engineers Public Service Company were considered. It was there stated:

The strict interpretation of the integration provisions of the Utility Holding Company Act by the SEC, as we pointed out three weeks ago (page 955), would force liquidation of most of the leading utility holding companies. Regardless of the economic virtues or demerits of such a course, liquidation would apparently be beneficial to many holding company stockholders, and particularly preferred stockholders; in a number of cases, liquidating value is well above current quoted prices.

BASIS FOR ESTIMATES

The liquidating values in the accompanying table represent the latest Standard Statistics estimates, based on careful appraisal of the value of assets. A substantial proportion of such assets consist of subsidiary common stock 100%owned by the parent company. Probable market value of such stocks in liquidation has been calculated by a series of detailed comparisons with stock publicly traded.

Common stocks in the hands of the public were classified as to quality by the use of a number of statistical measurements, much in the same manner as quality ratings of bonds are determined by Standard Statistics and other recognized rating services; the actual tests, of course, differ from those used for bonds. Subsidiary common stocks which had no public market were then classified in the same manner, and their earning power was capitalized at the same ratio as for publicly-traded stocks of comparable quality. (The highest capitalization of earnings, for first-quality common stock, was on a 5.5% basis.)

Net current assets of holding companies were taken at book value, and investments with ascertainable market prices at market values. The resulting sum was applied to the common and preferred stocks of the parent holding company, on a per share basis.

It should be recognized, of course, that the indicated liquidating value for preferred stocks in the table represents the amount of assets available from which to pay the sum to which the preferred stock is entitled-no more than call price in any event, and in some cases only par value, because of special charter provisions.

ESTIMATES NOT FINAL

These indicated liquidating values are, of course, not final figures. They are based on a capitalization of the latest earnings of controlled subsidiaries, and increased taxes or other costs may change the earnings level. They are, furthermore, based on amounts presumably realizable in immediate liquidation on the basis of the present market. Hasty liquidation would, of course, tend to lower the market. Moreover, possible corporate simplification preceding liquida

tion might dilute the operating company common stocks, in cases where the operating company preferred is in arrears. To allow in part for these possibilities, we have been comparatively conservative in the capitalization of earnings. In view of the generous liquidating values in most instances, any move to liquidate the major assets of holding companies would presumably be a highly favorable development for preferred stockholders. Particularly benefitted by such a move would be the preferred stocks of American Power & Light, Commonwealth & Southern, Electric Bond & Share, Electric Power & Light, Engineers Public Service, National Power & Light, and United Light & Power.

The estimates given in this article in respect to Engineers are coverage of $169 for each of the shares of the three classes of preferred stock and $15 for the common.

In the March 13, 1941 issue of Public Utilities Fortnightly, pages 355-356, is the following comment with regard to Standard Statistics analysis:

Standard Statistics recently estimated the liquidating values of the principal holding company stocks, by making a series of detailed comparisons with stocks publicly traded. The highest capitalization of earnings, for first-quality common stocks, was on a 5.5 percent basis (18.2 times earnings). Such a multiplier is considerably higher than the maximum used in making similar calculations in this department (Fortnightly, March 28, 1940, p. 419) and the resulting values average somewhat higher. While from a practical viewpoint some of Standard's estimates seem overgenerous, the figures are of particular interest at this time owing to the SEC's suggestions that (1) the utilities should do more equity financing, and (2) that holding companies which need to raise money for system improvements may do so by selling outlying properties.

In the Moody's Stock Survey of March 31, 1941, Volume 33 No. 13, Pages 743–744, 746, a study was made of various holding companies including Engineers Public Service Company, and that publication stated in part as follows:

Many electric power holding company bonds and preferred stocks selling at large discounts have recently shown good price advances in an otherwise dull market. It is now apparent that many companies have decided that the best way out of the difficulties created by the Public Utility Holding Company Act is to break up their systems and distribute the assets to the holders of the parent company securities. In many cases the "Break up" or asset values of holding company securities, especially some of the bonds and preferred stocks, exceed recent and present market values; strength in the prices of these securities was, therefore, a logical result of the indications that several important systems were planning to proceed with disintegration.

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The prospect of disintegration of holdings companies suggests higher prices for a number of senior securities. The break up of properties will, in many instances, afford higher property values. Then, too, the very prospect of substituting actual possession for a mere right to certain assets will have the effect of making these assets more valuable. This will be especially true of those holding company bonds and preferred stocks selling at substantial discounts from their asset values. In this respect many utility securities are similar to many investment trust stocks that customarily sell 30 percent or more below their actual break up value.

Not all companies will proceed immediately to accomplish their own disintegration. Some may, in fact, as in the case of Engineers Public Service, decide to contest the matter further in the courts. But it appears that most companies will comply with the Holding Company Act and will do so by breaking up their system either completely or in large part. Even partial disintegration will in many cases result in partial or complete retirement of holding company bonds or/and preferred stocks.

It is probable, too, that security holders will be offered various parcels of stock ownership in the operating properties. This appears more probable than sale of the common stocks of subsidiary properties and distribution of the proceeds to security holders. The former method will permit savings in taxes and in financing costs and would avoid certain legal complications.

The estimates below are based on the assumption of complete liquidation without unpredictable complications. Where only partial liquidation is foreseen, the liquidating value assigned to the retained assets would be reflected in the value of the remaining issues of the holding company.

The estimates are necessarily broad approximations for a number of reasons. Essentially they are based on earning power capitalized as indicated by the present market for most nearly comparable securities now outstanding. As liquidation will occur over a protracted period, these estimates will be subject to constant revision in accordance with earnings and market fluctuations.

Of necessity no allowances have been made for (1) any selling expenses; (2) any taxes payable on sale of assets by a holding company; (3) minor but possibly valuable assets regarding which data are inadequate; (4) the effect upon the value of junior securities if assets are offered to senior security holders on terms more or less favorable than estimated values; and, (5) the effect upon estimates of possibly divergent policies concerning the payment of call prices, liquidating values or less on senior securities.

Engineers Public Service Company, according to a tentative advisory opinion, would have to dispose of all except one of its principal subsidiaries in order to comply with the integration provisions of the Holding Company Act. Moreover doubt was expressed that continued existence of Engineers would be justified on that basis. While liquidation may prove necessary, the company has taken preliminary steps to question the constitutionality of the integration provisions of the Utility Act.

The common stocks of two companies comprise almost 90% of the estimated liquidating value of assets owned by Engineers Public Service Company. Both of these operating units occupy a relatively satisfactory position and in all probability their common stocks could be disposed of publicly at favorable prices. The Engineers preferred shares are outstanding at $42.3 million and total assets have an estimated liquidating value (including net current assets of Engineers) of $58.6 million. After providing for the preferred stocks at par, the balance remaining would be equivalent to 81⁄2 on the 1.9 million shares of common stock outstanding. These estimates give no consideration to the investment in the common stock of Puget Sound Power & Light Company, the status of which is impossible to determine at this time.