[No. 1379] IN THE MATTER OF WISCONSIN POWER AND LIGHT COMPANY File No. 70-354. Promulgated August 15, 1941 (Public Utility Holding Company Act of 1935-Section 6 (b)) EXEMPTION OF SECURITY ISSUE OF REGISTERED HOLDING COMPANY OR SUBSIDIARY. Issue Solely for Purpose of Financing Business of Subsidiary. Application having been filed by a subsidiary of a registered holding company pursuant to Section 6 (b) of the Public Utility Holding Company Act of 1935, for exemption from the provisions of Section 6 (a) of the Act, of the issue and sale of securities, the proceeds to be used to redeem certain outstanding securities of applicant, granted, subject, however, to compliance with the Commission's Rules U-24 and U-50, the issue and sale being solely for the purpose of financing the business of the subsidiary and having been authorized by the state commission of the state in which the applicant is organized and doing business. RETIREMENT AND REDEMPTION OF SECURITIES BY ISSUER. Retirement and redemption by a subsidiary of a registered holding company of certain of its outstanding evidences of indebtedness for the consideration specifically designated therein, held to be exempted from the provisions of Sections 9 (a) and 12 (c) of the Act by virtue of the Commission's Rule U-42. APPEARANCES: Thomas J. Tingley and M. S. Smith, of the Public Utilities Division of the Commission. FINDINGS AND OPINION OF THE COMMISSION Wisconsin Power and Light Company, a subsidiary of North West Utilities Company, a registered holding company in The Middle West Corporation holding company system, has filed an application and amendments thereto pursuant to Section 6 (b) of the Public 1 North West Utilities Company owns 97.117 percent of applicant's common stock and 45.149 percent of its outstanding voting shares. The preferred stock of applicant has voting rights by reason of default in payment of dividends. The Middle West Corporation owns all of the common stock of North West Utilities Company, and 85.3 percent of all voting shares. 98. E. C.-35-2041 Utility Holding Company Act of 1935 (hereinafter referred to as the "Act") and Rules U-23 and U-50 thereunder, regarding the issue and sale of $30,000,000 principal amount of its first mortgage bonds, series A, 34%, due August 1, 1971, and $3,000,000 principal amount of 214%, 234% and 3% unsecured notes as follows: $337,500 of 214% notes and $162,500 of 234% notes to Continental Illinois Bank and Trust Company of Chicago; and $2,500,000 of 3% notes to The Northwestern Mutual Life Insurance Company. Applicant proposes to apply the proceeds, together with other moneys of the company, to the redemption, at 104 percent of the principal amount thereof and accrued interest, of $33,000,000 principal amount of its outstanding first mortgage bonds, series A, 4%, due June 1, 1966. The company will publicly invite proposals for the purchase of the bonds in accordance with the Commission's Rule U-50. The Public Service Commission of Wisconsin has issued its certificate of authority as to the proposed transaction, attaching certain appropriate conditions. Applicant has filed, pursuant to Rule U-62 under the Act, a declaration in the form of an amendment hereto regarding solicitations of authorizations of its stockholders for authority to consummate the subject transaction. The Commission by order dated August 14, 1941 has permitted such declaration to become effective. A public hearing was held after appropriate notice at which no member of the public requested to be heard. By stipulation of counsel the records in two related cases, Commission's Files No. 70-58 and No. 59-23, hereinafter described, were incorporated into and made a part of the record in this matter. The Commission having considered such record, makes its findings and opinion herein. Wisconsin Power and Light Company is a Wisconsin corporation the principal business of which as a public utility company is the production, transmission, distribution and sale of electric energy and manufactured gas in central and southern Wisconsin. The company also supplies water, central heating service and motor bus service. For the 12 months ended May 31, 1941, applicant derived 85.99 percent of its operating revenues of $10,800,278 from the sale of electricity, 8.03 percent from the sale of gas, 1.67 percent from the sale of water, and the balance from motor bus and central heating services. Applicant owns two small subsidiaries, Beloit Water Power Company, which owns a dam and water power rights on the Rock River at Beloit, and South Beloit Water, Gas & Electric Company, which supplies electricity, gas and water in southern Beloit and in adjacent territory in Illinois. The capitalization, surplus and reserves of Wisconsin Power and Light Company as of May 31, 1941 and pro forma are shown in the following table: Long-term debt: First mortgage bonds, series A, 4% due June 1, 1966. First mortgage bonds, series A, 34% due August 1, 1971. Unsecured notes: Serial notes, 24% ($337,500) and 24% Preferred stocks: " Cumulative $100 par value: 7%, 106,568 shares.. a Unpaid dividends on preferred stocks aggregate $2,696,338 or $16.92 per share on the 7% preferred and $14.50 per share on the 6% preferred. As of May 31, 1941 applicant's property account and reserve for depreciation were as follows: Property account including $4,874,018 of intangibles_-_- Net property account.. $63, 203, 128 5, 306, 856 57, 896, 272 Pro forma ratios of debt to net property and to capitalization are as follows: Mortgage debt to net property account and subsidiary investment__ • This ratio has been computed on the basis of gross property account plus estimated cost of additions to December 31, 1941 (for which funds have been provided) less reserve for depreciation plus investment in South Beloit Water, Gas & Electric Company, a wholly owned subsidiary. The depreciation reserve of $5,306,856 is equivalent to 8.40 percent of gross property account. Annual depreciation provision of $1,334,526 for the 12-month period ended May 31, 1941 is equivalent to 2.11 percent of the gross property account and to 12.36 percent of annual gross operating revenue. The indenture provides that during each calendar year so long as any of the bonds issued thereunder shall be outstanding applicant will expend and certify to the trustee amounts aggregating not less than 15 percent of gross operating revenues for maintenance, repairs, renewals or replacements and/or for the purchase, payment or redemption of any bonds issued under the indenture. The company agrees to file annually with the trustee, on or before April 1, a certificate showing gross operating revenues and expenditures for maintenance and renewals during the preceding calendar year. It is provided that any surplus shall be reflected in the next succeeding certificate, and that any deficiency must be made up on or before April 1 next succeeding the expiration of such calendar year. Based on pro forma income statements submitted by the applicant and on the assumption that the new bonds will be sold at 104 percent of the par value and the notes at par, the total annual savings in interest on the aggregate amount of debt will amount to $258,219. After estimated adjustments for additional charges in lieu of income taxes and amortization of debt discount and expense, the net annual saving as estimated by the applicant will be $215,629. Applicant proposes to amortize debt discount and expenses applicable to previously refunded issues after adjustment for income tax savings over a period of 5 years beginning August 1, 1941. It also proposes to amortize the balance of unamortized debt discount and expense, together with the redemption premium, duplicate interest, and expenses incurred in connection with the redemption thereof, applicable to the first mortgage bonds presently outstanding over the unexpired term of said issue or the lives of the refunding issues, whichever are shorter, and to amortize the premium received and the com missions and expenses paid in connection with the issue of the new bonds and the expense of issuing the serial notes over the lives of the respective issues. The indenture provides that the company will agree that, so long as any bonds of series A are outstanding, it will (a) retire (through purchase, payment or redemption) during the calendar year 1954, and during each calendar year thereafter, not less than 12 percent of the greatest principal amount of bonds outstanding at any time between the end of such calendar year and July 31, 1941, or (b) pay to the trustee, on or before April 1 following the close of such calendar year, cash sufficient to redeem a like amount of bonds. The indenture also provides for the issuance, from time to time, subject to certain provisions and restrictions, of additional bonds thereunder, of one or more series, having such dates, maturities, interest rates, etc., as may be determined by the board of directors of the company, without limitation as to aggregate amount, except that the aggregate amount of bonds of series A that may be outstanding at any one time will be limited to $40,000,000. Additional bonds may be issued in a principal amount equal to 60 percent of "net expenditures" made by the company on and after August 1, 1941, for the construction or acquisition of bondable property, with certain limitations, and bonds issued on account of "purchased" property shall not exceed in principal amount 60 percent of the "fair value to the company" of such property at date of acquisition; but only if net earnings for a period of 12 consecutive months within the 15 months immediately preceding shall have been equal to at least twice the annual interest charges on the bonded debt of the company. The company also agrees that it will not, so long as any of the series A bonds are outstanding, pay any dividends (other than stock dividends and dividends applied by the recipient to the purchase of additional shares of common stock), or make any other distribution, upon any shares of its common stock in an amount which in the aggregate would exceed the amount of the earned surplus of the company existing on July 31, 1941, plus the net income earned and accumulated after July 31, 1941, determined in accordance with accepted principles of accounting, after making deductions for all dividends paid or accrued at and after said date on any preferred stock of the company and after taking into consideration all proper charges and credits to such surplus made subsequent to July 31, 1941. On June 9, 1941 the Commission instituted proceedings against The Middle West Corporation, North West Utilities Company and Wisconsin Power and Light Company pursuant to Section 11 (b) (2) of |