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Brief statement regarding the American Gas & Electric Co.—Their financial structure
and policies In his testimony of February 22, 1935, Judge Robert Healy was kind enough to say of American Gas & Electric Co. system that it was integrated and coordinated, that it constituted a real contribution to the electric light and power business of the country, that it has been admired by engineers and that he would not want to see it broken up. This may not be quoting him verbatim, but at least the record will bear out that in effect he said these things.
The judge continued, however, to the effect that he could not say as much for our financial policies and structure.
It may be that the great amount of detail which he has reviewed in connection with these matters has confused him
as to the facts regarding our financial policies, particularly as our system was the first one reviewed by the Federal Trade Commission over 5 years ago.
In any event I would like to outline our financial policies and clear up all possible questions regarding them.
1. Our securities and those of our subsidiaries are backed by real values: Fixed capital of all subsidiary companies.--
$394, 932, 541. 28 Less for the purpose of this memorandum only all “write-ups". 42, 500, 000.00 Total.
352, 432, 541. 28 Other capital invested in business related to the principal business..
3, 657, 761. 10 Cash and cash items and other current assets.
28, 683, 488. 60 Prepaid items.
524, 418. 15 Unadjusted debits covered by reserves (restricted bank deposits, salvage, etc.)-
1, 067, 325. 36 Deferred interest in the form of unamortized bond discount.. 13, 279, 374. 04 Total...
399, 644, 908. 53 Now against this our subsidiary companies owe Bonds...
207, 131, 900.00 Current liabilities (accrued taxes, accounts payable, pay rolls, etc.)..
14, 720, OSO. 62 Other liabilities—not current.
1, 817, 228. 14 Unadjusted credits...
900, 819. 98 Total...
224, 570, 028. 74 Leaving applicable to reserves and surplus and capital-stock issues..
175, 074, 879. 79 The subsidiary companies have reserves set aside for depreciation, bad debts, etc.
43, 528, 839. 82 Leaving for capital and surplus..
131, 546, 039. 97 Of this preferred stock consisting of 783,644 shares would represent.--
78, 364, 400.00 Leaving to represent the common stock..
53, 181, 639. 97
Now briefly the foregoing shows after deducting every dollar of alleged "writeups” that there is real value back of all securities including the common stock, that cash and current assets are nearly twice current liabilities and that the conservative policy practiced has created fair and ample reserves.
Just a few words as to "write-ups” so-called. These “write-ups" are the result of a company stating on its books the value of property as of the date it acquired it, rather than stating it at the so-called "historical cost as shown by former owners.
I can see only two ways in which this could be harmful to investors or customers and these are based on write-ups" being unwarranted.
1. If securities were sold to investors based on these unwarranted "write-ups”, and
2. If such “write-ups" were used as a basis for determining rates.
We cannot be charged with either of these two things. The foregoing figures show over $53,000,000 left for common stock after deducting the “write-ups which is assuming that all these "write-ups" are unwarranted which in our case is not true. The record shows that we have never asserted these "written-up" values as a basis for determining rates.
In all fairness these points should be brought out in connection with our companies.
Now as to American Gas & Electric Co. itself.
1. Do its assets consists solely of some shares of common stock of operating companies for which the holding company had paid little or nothing?
The answer to this is most certainly not.
Here is a condensed list of its investments: 1. Bonds of operating companies (at cost).
$56, 491, 760. 00 2. Preferred stock of operating companies (at cost).
29, 447, 508. 67 3. Loans and advances and other accounts due from subsidiary companies (at cost)----
2, 968, 941. 30 4. Miscellaneous investments (at cost).
1, 946, 371. 70 5. Cash and curret assets (including $6,827,869.59 in Government securities)
21, 524, 343. 69 6. Miscellaneous accounts receivable.
1, 656. 32 7. Deferred items consisting of unamortized discount and expense on bonds.
5, 861, 491. 68 8. Common stock of subsidiary companies (at cost).
54, 342, 352. 51
Leaving for reserves
Capital stock and surplus.--
121, 708, 850. 96
2, 686, 307. 17
Leaving for surplus and capital stock.-
119, 022, 543. 79 There are 355,623 shares of preferred stock.
35, 562, 300.00 Leaving for common stock and surplus.---
83, 460, 243. 79 Note the company's current position. Current assets over 2142 million dollarsCurrent liabilities less than 1 million dollars.
Now the subsidiary company statement showed us unquestioned value (after deducting all “write-ups'') for their bonds and preferred stock with over 53 million dollars left for their common stocks. Let us see how the holding company shows its interest in these securities on its books.
pie The foregoing figures completely refute any suggestion of "pyramiding." Particular attention is again called to the fact that in their preparation all “writeups" are excluded.
2. Neither the holding company nor any of its operating subsidiaries has ever defaulted on a dollar of interest and they have not now nor have they had for many years any bank loans. Their earnings at all times have been sufficient to pay a normal return on the securities they have issued. These facts refute the suggestion of issuing securities in anticipation of revenues.
3. Services of an operating nature have always been furnished at cost and since July of 1932 all classes of services have been furnished at cost.
4. Our corporate chart fails to reveal a maze of intercorporate structures. There are no construction companies, no purchasing companies, no supply or appliance companies and we have never had any interest in any such companies. In our case, the only securities held by the public are those of our operating companies and our own three issues, one of bonds and one each of common and preferred stock.
5. The fact that the growth of our system has been due entirely to building up a coordinated system is admitted by the Federal Trade Commission. The only properties that we own today which we did not own in 1907 are properties that have been acquired to add to or to connect up with our integrated systems.
For those who prefer a graphic presentation, there is attached a chart which brings out clearly the statements made herein relative to security issues and values back of them.
I believe a study of the facts and figures presented in this brief memorandum should convince anyone that our financial policies have been as sound as the admittedly sound policies related to the physical side of our systems.
AMERICAN Gas & ELECTRIC Co.,
Geo. W. Tips, President. MARCH 9, 193.1.
ENGINEERING AND OPERATING ASPECTS FROM THE AMERICAN Gas & ELECTRIC
Co.'s OPERATING COMPANIES' VIEWPOINT OF CONTINUING AS UNITS OF A HOLDING COMPANY GROUP UNDER THE AMERICAN Gas & ELECTRIC Co.
1. THE AMERICAN GAS & ELECTRIC CO. PROPERTIES CAN BE CLASSIFIED INTO THREE
(a) Atlantic City Electric Co.—This consists of a thoroughly interconnected property serving the southern portion of New Jersey, with approximately 100,000 consumers. This property is interconnected through its Deepwater plant with the Deepwater Light & Power Co. and the latter is interconnected with the Philadelphia Electric Co.
(b) The Scranton Electric Co.--This, too, is a closely interconnected system serving approximately 78,500 consumers in the Lackawanna Valley between Carbondale and Pittston. This property is also interconnected through its Stanton plant with the Pennsylvania Power & Light Co. and other large systems throughout Pennsylvania.
(c) A group of properties consisting of the Wheeling Electric Co., the Ohio Power Co., Indiana General Service Co., Indiana & Michigan Electric Co., Appalachian Electric Power Co., Kentucky & West Virginia Power Co., Inc., and Kingsport Utilities, Inc. All these properties are closely interconnected not only among themselves, but wherever practicable and to advantage, with surrounding companies, and comprise for all practical purposes a single unit, at least insofar as the generation and transmission of power is concerned.
Referring particularly to the third group, this group of properties, whilețeach operated by its own corporate officers, has developed interconnection and centralized generation to a very remarkable state of perfection, so that today not only the primary generation requirements and their costs of production are obtained with less capital facilities (saving many millions of dollars), than could
AND ELECTRIC COMPANY AND SUBSIDIARLES SECURITIES IN THE HANDS OF THE PUBLIC
"WRITE UPS" BEFORE AND AFTER AMERICAN GAS
be possible otherwise, but also the day-to-day production of their electric energy is obtained at additional savings running into millions of dollars each year.
Thus, it is estimated that this group of properties whose combined load is peaking at the present time approximately 635,000 kilowatts, is meeting its demand with roughly 220,000 kilowatts less capacity than if they were not interconnected, first, as regards their own facilities; second, among themselves, and third, with foreign companies, and that this saving in capacity among this group of companies, even if each subsidiary company carried out interconnection on its own system to the fullest, still amounts to 110,000 kilowatts, because they are interconnected among themselves and with foreign companies.
If it is figured that the average cost per kilowatt of steam capacity is $100, a commonly found figure, then that saving amounts to, in capital expenditure, a reduction of $22,000,000 figured on the first basis, and $11,000,000 figured on the second basis. This, however, is not the only saving. The operation of the interconnected system has resulted in the building up of a very high load factor and a combined load which is being supplied in the most economical fashion possible utilizing: (a) The most economical steam generation facilities on the system (these furnish at present 77 percent of the load requirements); (b) the hydro facilities on the system (although these provide only 8 percent of the total requirements); and (c) the interconnections (which provide more than 15 percent of the requirements under the peak conditions).
This method of operation results in what may appear off-hand as very small savings in unit cost of power, and this is a fact, but collectively this amounts to several million dollars per year. Thus, it is apparent that since the output of this combined group of properties is in the neighborhood of 3,000,000,000 kilowatthours per year at the present time, a saving of only one-half mill (1-twentieth of & cent) per kilowatt-hour, results in a saving of $1,500,000 per year. Annual savings larger than that have actually been made in the last 5 years. These savings are distributed equitably between the operating companies.
2. THE AMERICAN GAS & ELECTRIC CO. CONTRIBUTION IN THE DEVELOPING OF
To make this possible it was necessary not only to work out over a period of 20 years, solutions to a series of very difficult engineering problems before the necessary technology for the successful and safe operation of wide-spread interconnected systems became a fact, but also to develop the technique of interconnecting with neighboring foreign companies. In this technique are included all of the phases, including those of a legal, engineering, and operating nature. Thus, the subsidiary companies in the third group of properties referred to on the first page of this memorandum have distributed over their systems 20 interconnections with foreign companies. These interconnections have been utilized to obtain more economically than could be obtained in any other way, proper and reliable service at a lower cost, not only in capital expenditures needed for facilities but also in cost of operation. Repairs, for example, that might without interconnections have to be handled at nighttime or on legal holidays on a very expensive and inefficient basis, are, through the aid of these interconnections, carried out whenever they can most economically and conveniently be carried out. These interconnections have in short made possible the rendering of a grade of service second to none to some 1,400 communities (with an average population of approximately 2,100) comprising the American Gas & Electric system.
In the carrying out of this interconnection the experience of the American Gas & Electric Co. management and of the American Gas & Electric Co. staffs, going back more than 25 years, had to be utilized. Each additional interconnection has been made not only on the basis of the experience gathered in previous interconnections, but has been utilized in turn in many cases to make those previous interconnections more operative and of greater benefit to the American Gas & Electric Co. subsidiaries and their customers.
The possibilities of interconnection have not altogether been exhausted and several interconnections are being worked on at the present time, but the technique of interconnections and their various ramifications are becoming more complex every day. If the subsidiary companies are to continue to reap the benefits of the present interconnections, as well as to develop those additional ones that can be economically justified, it is most vital that the experience and knowledge gathered in more than 25 years of operation of interconnection (i. e., the combined experience of all these interconnections), be kept available for the future. That is possible only under the present relationship between the American Gas & Electric Co. and its subsidiaries, developed over the last 28 years.
The discussion carried out above with regard to the group of properties in West Virginia, Ohio, Indiana, Michigan, Virginia, Kentucky, and Tennessee, applies in a smaller scale to the property located in southern New Jersey, mentioned in 1 (a) and in the Lackawanna Valley, mentioned in 1 (b). Thus, each of