herent in holding companies. On the contrary, I believe the record of my company shows that the benefits to investors, consumers, and the general public are inherent in the holding company and the abuses incidental. For the future, we feel that these abuses should be eliminated by regulation and the benefits thus conserved. The accompanying brief discusses how the company stands with respect to the more important abuses which have been charged against the holding companies, such as write-ups, inside profits, pyramiding control, upstream loans, accounting practices and reports to stockholders, financial jugglery, rates to consumers, economic integration for the benefit of the public served. This discussion begins on page 12 of the brief. There are two points among these subjects on which I will touch in passing. With respect to complication of financial structure, this company has an intermediate holding company in its structure which no longer serves a useful purpose and has not been removed simply because of the high cost of taxes required in the removal (see p. 16). The removal of such taxation has received consideration by the framers of this bill and will enable considerable simplification in our opinion. With respect to "integration", it is clear that this company has assisted its subsidiaries to accomplish the fullest economic development of the areas served (see p. 10), which is our interpretation of the meaning of this term. It is not defined in the act, but the lack of it is in the act made the basis for dissolution. It is assumed to mean that all of the subsidiaries of a given holding company must, on pain of dissolution, be physically interconnected. It means therefore that if all the subsidiaries of a holding company are in one interconnected area, it is a good holding company and can live, but if they are not capable of such interconnection economically, then it is a bad holding company and must dissolve. In common with other holding companies similarly circumstanced, we have pointed out that the electric business is essentially a local business (the average trip of a kilowatt-hour country-wide being only about 20 miles), that we have effected an extraordinary integration in the areas where we do serve and that the manifest investment value of geographic diversity ought to be an offset to the lack of complete physical integration of the system. From the proponents this has met with merely a barrage of ridicule to belittle the value claimed for the geographical diversity mentioned. Without attempting to evaluate diversity exactly, it is certainly better than none at all. As a matter of experience in our 10-year life, we have found the geographic diversity of the parts of our system of distinct advantage in maintaining an average flow of earnings. The diversity we enjoy is not merely geographical, it is also industrial. The Virginia company is in effect an investment in tobacco, paper, and miscellaneous manufacturing. The Gulf coast properties are an investment in oil, rice, and lumber. The El Paso properties represent copper, cotton, and cattle. The Puget Sound district has lumber, fisheries, fruit, and shipping to the Orient. The Nebraska group depends on sugar and corn. The two largest properties are 3,000 miles apart. Surely all this does not represent a merely chimerical diversity. Moreover, it is clear that the individual properties have fully discharged their social obligations to carry service widely through the area and to extend service to rural areas on a development basis before such extensions can be fully justified economically. In the Puget Sound district has been achieved a percent of farms electrified which is about five times as high as the national average. The proponents have dwelt at length on the evil said to arise from concentration of control of utilities. We have no desire to perpetuate any system which may be inimical to the public interest. We wish to point out two considerations, however. In the first place, the holding company plan was not the choice of the holding companies; they would infinitely prefer consolidation in one operating company. This has always been and is impossible because of the diverse requirements of State laws, franchise requirements, and existing financial setups. In the second place, while control may at first glance seem like a privilege, there is also the unavoidable responsibility that goes with ownership and it ought to be a question to be carefully weighted as to whether the public interest is really best served by removing from the owners of a public-utility property the responsibility which in all other kinds of property inheres with ownership. Based on over 30 years' experience in the public-utility business, I am convinced that the holding company is an inherently useful device for public service and that the abuses which have arisen are incidental excrescences which reason able regulation can remove, leaving the sound body to continue its beneficent public service. May I not suggest for your careful consideration that Federal regulation of holding companies has never even been tried. Is it not the part of wisdom and statesmanship to give it a trial first before definitely legislating to destroy the patient? There will be many future sessions of the Congress, and if the regulation (never before tried) proves efficacious the holding companies may be allowed to continue to perform their essential useful function in the public service; if the regulation after that trial period fails, then will be time enough to consider the death sentence. Most of the holding companies-and my own is one of them-are entirely solvent, not bery prosperous but solvent. If allowed to live, with regulation set up to curb possible abuses, most of the holding companies now surviving may expect to earn a return on the cash furnished by them and in turn invested by the holding companies in sound operating company property. Congress is in a position to help materially in the longed-for business recovery by withholding the hand of destruction for the holding companies and instead giving them the helping hand of firm regulation. Respectfully yours, C. W. KELLOGG, Chairman. BRIEF SETTING FORTH BENEFITS OF THE HOLDING COMPANY TO ITS OPERATING SUBSIDIARIES AND THEIR CUSTOMERS AND TO THE INVESTORS IN SECURITIES OF ITS SUBSIDIARIES SUBMITTED BY ENGINEERS PUBLIC SERVICE CO. FORMATION OF COMPANY Engineers Public Service Co., a public-utility holding company, was formed June 23, 1925, under the laws of Delaware. It was originally financed by the sale of 400,000 shares of no par common stock at $11.875 per share and 200,000 allotment certificates at $100 per certificate. Each of these certificates, when ully paid, was convertible into one share of $7 dividend preferred stock and onealf share of common stock. Warrants for the purchase of 200,000 additional shares of common stock at a price of $25 per share (scaling upward over a period of time and expiring in 71⁄2 years) were also included as part of the consideration n this original financing. FURTHER FINANCING AND ISSUANCE OF SECURITIES The company used the cash realized from the sale of the above-mentioned ecurities and other stocks subsequently sold, principally for the purchase of the tocks of utility companies, which companies became its subsidiaries, and for pans to these subsidiaries after acquisition and for additional cash investment in heir common stocks to strengthen their capital structures and enable them to btain senior financing at lower cost. In addition to those securities sold for cash, the company issued preferred and ommon stocks in direct exchange for common stocks of utility companies. Stocks were sold for cash in the total amount of $55,107,549 (excluding the efunding operation in 1928 mentioned hereafter) and were issued in exchange for ecurities of utility companies, now subsidiaries, in the total amount of $38,037,61. (For complete detail see exhibit A, p. 22.) Each time exchanges were made e securities issued in exchange were entered on the books of Engineers Public ervice Co. at somewhat less than their market value on the New York Stock xchange at the time of the particular exchange. ACQUISITION OF SUBSIDIARIES Over 99 percent of the total common stocks of the following subsidiaries was equired in the manner shown below. The subsequent investment by the parent ompany in the common stocks of these companies was for the purpose of broading their equity bases and improving their financial positions. 1 Excluding $5,263,498 write-up of this investment in 1928 described on p. 6. In addition, Eastern Texas Electric Co. purchased the preferred and common stocks of Nebraska Electric Power Co. for $445,741 in 1927. In order to simplify the corporate structure, the latter company in 1929 was, in effect, merged with the Western Public Service Co., another subsidiary, serving a contiguous area. With the exception of Virginia Electric & Power Co. and the Nebraska Electric Power Co., all the above companies were under the supervision of Stone & Webster Service Corporation prior to acquisition. OTHER SUBSIDIARIES Engineers Public Service Co. has two other direct subsidiaries which were not acquired but were formed by the company. In 1929 Louisiana Steam Generating Corporation was formed to construct and operate a steam and electric generating plant at Baton Rouge, La., to furnish steam and electricity to the Standard Oil Co. of Louisiana and electricity to Baton Rouge Electric Co. and Gulf States Utilities Co. (subsidiary of Eastern Texas Electric Co. (Delaware)). A description of this interesting example of cooperation between diverse industries for their mutual advantage is not pertinent in this statement but is included as a matter of interest in supporting data, exhibit B, page 23. In 1931, Engineers Securities Corporation was formed to hold securities owned by Engineers Public Service Co. of companies not controlled by the Engineers Co. The total investment of Engineers Public Service Co. in securities of these two companies, representing cash paid in, is as follows: Louisiana Steam Generating Corporation..... Engineers Securities Corporation... Total.... Common stock $3, 170, 000 3,936, 111 7, 106, 111 OTHER INVESTMENTS IN SUBSIDIARIES The company owns preferred stocks of its subsidiaries in the amount of $1,275,009 at cost. TOTAL PRESENT INVESTMENT IN SUBSIDIARIES In companies originally acquired from other owners. In preferred stocks.......... Total investment in subsidiaries______ 1 Includes $5,263,498 write-up of investment in Virginia Co. described on p. 6. 1 $85, 786, 083 7, 106, 111 1, 275, 009 94, 167, 203 LOANS AND OTHER ASSISTANCE TO SUBSIDIARIES The company has always considered that it was its duty, when possible, to support its subsidiaries when they were in need by furnishing funds to enable them to extend and improve their service and to make necessary additions to plant. Such loans have been exceedingly helpful, particularly to the smaller subsidiaries which at times have been unable to borrow sufficient amounts from the banks or to raise needed funds in the security markets. At no time has interest in excess of 6 percent per annum been charged on such loans. There are no "upstream" or "sidewise" loans or other improper financial support between the company and its subsidiaries or between subsidiaries. The company's "revolving" fund used for loans to subsidiaries at one time reached $19,490,000, and at present it has loans to subsidiaries totaling $9,830,000. In a number of cases, when it seemed desirable to increase the equity base of the subsidiary, the company has accepted common stock in exchange for the loan, thus making additional investment in the equity of the subsidiary. A list of subsidiaries to which loans have been made, the maximum loan and the present loan to each, follows: The effect of this financial support can best be understood by considering what it has accon.plished with respect to an individual subsidiary. At the time of acquisition in 1926, the Savannah Electric & Power Co. was operating generating equipment considerably less efficient than could then be constructed and, in addition, needed more capacity, but its financial condition was such that it could not raise economically the needed money. Its financial structure clearly shows this condition. This company's first and refunding mortgage bonds had coupon rates of 6 and 7%1⁄2 percent. It had debenture stocks carrying 7- to 8-percent dividend rate. These securities needed support by an increase in the common-stock investment. Immediately upon acquisition of this company from its former scattered owners, Engineers Public Service Co. advanced money for the building of an efficient addition to the Savannah Co.'s power plant. This loan, to the extent of about $600,000, was soon converted into equity by taking up the loan in common stock, after which the Savannah Co. was able to sell $1,700,000 of 3-year, unsecured 5-percent notes on an attractive basis to complete this construction. These short-term securities were sold with the idea of later completely refunding the company's debt to reduce its charges as soon as the economies from the new plant and earnings from new business should increase the net earnings to a point where such refunding could be done advantageously. Actually, when these notes came due in 1929, the security markets were not favorable for such refunding because interest rates were high, and the Engineers Co. again stepped into the breach and advanced money to pay off these notes at maturity. Some of this debt has been paid off from earnings, and the balance has been carried since that time by the Engineers Co., awaiting circumstances favorable for refunding. There can be no doubt that in the manner shown above the Engineers Co. has enabled the Savannah Co. to furnish better service to its customers on a more reasonable basis than would have been possible without this assistance. Another instance of benefit to the subsidiaries from holding-company ownership has arisen in connection with the filing of consolidated returns for Federal income tax purposes. By filing such a consolidated return for 1932 a proper saving of $219,308 was effected which saving was distributed to all those companies having taxable balances, which were included in the consolidated return. This proper saving in taxes could only be made by virtue of the common owner |