the estimated value of the accounts receivable and materials and supplies which they received, but did not record the estimated value of the unbilled revenues. When that was determined or estimated the Southern Cities Public Service Co. took up that amount on its own books and created a donated surplus account and charged the amount to an account entitled "Accounts receivable-unbilled revenue.' Question. In connection with the facts that we have tried to develop concerning earned surplus account of this company, it is also well to bear in mind, is it not, that the earnings of this company had not borne the amortization charges on account of the discount which the company suffered on the bonds which it issued May 1, 1929, the same having been charged against the common stock account? Answer. That is correct. Question. If we view the bond discount as deferred interest, as some of the courts deem to, and if we view the annual amortization charges as annual interest charges, it follows, does it not, that the interest charges of this corporation have not been borne out of earnings but out of capital? Answer. Yes, sir. Question. That is so far as the amortization charges and discount are concerned? Answer. Yes, sir. Question. The annual interest payment has been charged against income, has it not? Answer. Yes, sir. Question. Now, we turn to the subject of management and engineering fees. On May 1, 1929, when the Southern Cities Public Service Co. acquired these operating subsidiaries from the parent company, Central Public Service Corporation, was there a contract made relating to management and engineering services? Answer. Yes, sir. Question. Did the Southern Cities Public Service Co. enter into contract with its subsidiary companies to furnish them management and engineering services? Answer. Yes, sir. Question. Were similar contracts made with subsidiaries acquired after May 1, 1929? Answer. Yes, sir. Question. Was such a contract made with the Georgia Natural Gas Corporation in which the Southern Cities held a one-half interest? Answer. Yes, sir. Question. What were the subsidiaries to pay for the management services? Answer. The subsidiaries paid 3 percent of gross operating revenue. Question. I do not recall that in our inquiry we have come across a larger fee than this. This fee is 3 percent of the gross operating revenue? Answer. Yes, sir. Question. At the same time there was a provision for the payment of an engineering fee, was there not? Answer. Yes, sir. Question. How was that to be computed? Answer. That was to be computed on 10 percent of construction costs. Question. On the same day, May 1, 1929, did Southern Cities Public Service Co. enter into a contract with Central Public Service Corporation on the subject of fees? Answer. Yes, sir. Question. Under this contract, what did Central Public Service Corporation agree to do? Answer. The Central Public Service Corporation agreed to furnish the management and engineering services. Question. For what consideration? Answer. It agreed to furnish the management services in consideration of one half of the management fees received by Southern Cities Public Service Co. from its subsidiaries and to furnish engineering services for all of the engineering fees collected by Southern Cities Public Service Co. Question. When the Southern Cities Public Service Co. collected an engineering fee did it pay it over forthwith to the Central Public Service Corporation? Answer. Yes, sir. Question. Can you tell me the total of management fees which were collected by the Southern Cities Public Service Co. from its subsidiaries from May 1, 1929, to December 31, 1931? Answer. $580,640.14. Question. How much of this did it turn over to the Central Public Service Corporation? Answer. $290,320.07. Question. What services by way of management did the Southern Cities Public Service Co. perform for its subsidiary companies? Answer. The Southern Cities Public Service Co. did not perform any management services. The management services under the contract were to be provided by the Central Public Service Corporation. Question. Yet the Southern Cities Public Service Co. received from its subsidiaries $290,320.07 which it retained for management fees? Answer. That is correct. Question. What did the Southern Cities Public Service Co. do for that amount of money? Answer. Evidently nothing. Question. Were these management fees charged by the subsidiary companies into operating expenses? Answer. I do not have the complete information, but I presume they were. Question. Is that the customary practice? Answer. It would be customary to charge them to operating expenses. It might be customary to capitalize part of them. Question. If charged to operating expenses they would be deducted before the computation of the fair rate of return that the operating utilities might be permitted by law to make; is that not true? Answer. Yes, sir. Question. And likewise they would be deducted before any dividends were paid on preferred stock, if there was any preferred? Answer. Yes, sir. Question. And before interest would be paid on bonds, debentures and other obligations of the subsidiary companies; is that correct? Answer. Yes, sir. Question. Taking the year 1931 as a sample, what management fees were collected in that year alone? Answer. $217,334.21. Question. Was half of this turned over to Central Public Service Corporation? Answer. Yes, sir. Question. During the same year what engineering fees were collected? Answer. $114,726.49. Question. What did Southern Cities Public Service Co. do with these fees? Answer. Turned the total amount over to Central Public Service Corporation. Question. Does your report show the companies which paid the management and engineering fees in the year 1931? Answer. Yes, sir. Question. Where does that appear? Answer. It appears on page 53. Question. Of exhibit 5340? Answer. Yes, sir. Question. That shows, for example, the Atlanta Gas Light Co. in the year 1931 paying how much per year of management fees? Answer. $68,727.51. Question. If we look back to page 51 we can learn what the net increase in the surplus account of Atlanta Gas Light Co. was in the same year, can we not? Answer. Yes, sir. Question. What was that net increase in surplus in 1931? Answer. $103,954.18. Question. It appears to me that the net increase in surplus in the case of the company in that year was not substantially in excess of the management fees paid by Atlanta Gas Light Co. to the Central Public Service Co. The net increase in surplus, as you said, was $103,000 and the management fee was $68,000, is that right? Answer. Yes, sir. Question. If the management fee was $68,727.51, and that was computed, as you have indicated, by taking 3 percent of the gross income of the company, what would that show as the gross income of the Atlanta Gas Light Co., for the year 1931? Answer. On the basis of $68,727.51 being 3 percent of the gross operating revenue of the Atlanta Gas Light Co., the gross revenue would be $2,290,917. Question. And yet the net increase in the surplus account of the Atlanta Gas Light Co. for the year 1931 appears at about $103,954.18? Answer. Yes, sir. Question. Of course, the $2,290,900 is the gross income of the Atlanta Gas Light Co.? Answer. Yes, sir. Question. Whereas, the $103,000 is only the net increase in surplus during the year 1931? Answer. Yes, sir. Question. Similar information appears at page 53 and similar comparisons can be made for other companies. I note that the Florida Public Utilities Co. in 1931 paid management fees of $20,290.74 and engineering fees of $13,976.14. Is it the usual practice to capitalize the engineering fees paid by charging them to the fixed capital account? Answer. Yes, sir. Question. I note that the Mobile Gas Co. in 1931 paid management fees of $12,497.50 and engineering fees of $13,064.20. The Peoples Gas Light Co. paid management fees of more than $14,800. The Roanoke Gas Light Co. paid more than $14,500 and South Carolina Public Service Co. $14,671. It is also noted that certain of the companies which in the year 1931 had a net decrease in the surplus account paid management fees; namely, Bluefield Gas & Power Co., Commonwealth Public Service Corporation, Huntsville Gas Co., Macon Gas Co., New Jersey Northern Gas Co., Tri-City Gas Co., and Washington County Gas Co. Now, you have computed some rates of return on the common stock investments, have you not? Answer. Yes, sir. Question. I wish you would explain the method you followed in making these computations. Answer. In computing the rate of return on the common stock investment the surplus at date of acquisition of the subsidiary was added to the ledger value of the investment in the common stock of the subsidiary. Question. Yes. Answer. The sum of the two was divided into the earnings of the subsidiary for the year before provision for Federal income taxes available for common stock dividend, to find the rate of return. Question. Why did you use the surplus at date of acquisition instead of the reinvested surplus as has been our usual practice? Answer. This was done because the Southern Cities Public Service Co. had reflected in its income through the account "Earnings of subsidiaries", changes in surplus since acquisition. It cannot be taken up as income and reinvested by the holding company at one and the same time. Question. Would it not have been more desirable if it could have been done to first state the actual cost to Southern Cities Public Service Co. of its investment in the common stock of the subsidiary companies and then add to that the undistributed surplus of those subsidiaries accumulated after acquisition by Southern Cities? Answer. I do not think so, in this case. Question. Well, the method I suggested is the one that we have usually followed. Answer. Yes, sir; I agree with you. Question. Why could it not have been followed in this case? Answer. Well, the Southern Cities Public Service Co., as I previously stated, reflected its so-called reinvested surplus in its income account. It did not seem equitable to allow them a credit for reinvesting in the surplus when it had already been taken up in their own surplus. Question. You could have taken the earnings of the subsidiaries that were allocable to the common stock, whether distributed or not, and you could have related those earnings to the investment of Southern Cities Public Service Co.in that common stock, could you not? Answer. Yes, sir; I could have done that. Question. Well, in this computation you have taken the earnings of the subsidiary companies available for the common stock as one of the elements of the computation? Answer. Yes, sir. Question. You have related those earnings to the investment in the common stock made by the Southern Cities Public Service Co. and to that you have added the surplus of the subsidairy at the date of acquisition? Answer. Yes, sir; that is correct. Question. All of this information appears in detail at page 57 of this report. In the case of the common stock of Atlanta Gas Light Co. at what have you computed the investment of Southern Cities Public Service Co. for the year 1930? Answer. $14,912,615.91. Question. What are the components of that total? Answer. It is made up of the ledger value of the investment in the common stock of the Atlanta Gas Light Co. and the surplus at date of acquisition of the Atlanta Gas Light Co. reflected on the books of Southern Cities Public Service Co. in the account "Due from subsidiaries' surplus account.' Question. In the case of Atlanta Gas Light Co. this method gives us a total investment or total average investment for 1930 of what amount? Answer. $14,912,615.91. Question. What earnings of the Atlanta Gas Light Co. were available in 1930 for the common stock? Answer. $475,525.16. Question. Which shows a rate of return, according to your method of computation, of what? Answer. 3.19 percent. Question. Did you make a similar computation for that company in 1931? Answer. Yes, sir. Question. With what result? Answer. A rate of return of 0.79 percent. Question. In 1931 the average investment was substantially as in 1930, was it not? Answer. Yes, sir. Question. But the earnings available for common stock had shrunk to what amount? Answer. To $117,317.78. Question. So that the rate of return dropped from 3.19 percent in 1930 to 0.79 percent in 1931. We will skip the Bluefield Gas & Power Co., the Commonwealth Public Service Corporation and take the case of the Concord & Kanapolis Gas Co. Did you make the computation up by the same method that you followed in the case of the Atlanta Gas Light Co.? Answer. Yes, sir. Question. You got a rate of return for 1930 of what amount? Question. For 1931? |