Answer. In my experience it is.

Question. If conditions warranted it, the operating companies could set aside necessary reserves for depreciation, could they not? Answer. Yes, sir.

Question. But the Cities Service Power & Light Co. set this amount up on its books as a liability, did it not?

Answer. Yes, sir.

Question. And the subsidiaries set up a larger amount than required by the indenture, did they not?

Answer. Yes, sir.

Question. And the holding company carried this larger amount as an asset, did it not?

Answer. Yes, sir.

Question. And the excess was carried to the holding company's surplus, was it not?

Answer. That is correct.

Question. And this amounted in total to over $12,000,000?

Answer. Yes, sir.

Question. After December 31, 1927, how were the reserves calculated on the books of the subsidiaries?

Answer. They were calculated on the basis of the holding company's indenture. Both were calculated on the same basis after December 31, 1927.

Question. After December 31, 1927, how were the excess reserves treated?

Answer. After this date the amount charged to earnings receivable reserve were equal to the amounts charged to the surplus reserve. The difference of over $12,000,000 outstanding was reduced by adjustments of approximately $3,000,000 to over $9,000,000 as of December 31, 1929, and in the year 1930 this difference was transferred to earnings receivable accrued, so that as of December 31, 1930, earnings receivable reserve and its contra-account, surplus reserve, were in balance.

In this year also, the replacement reserves of the subsidiaries were reduced over $9,000,000 and this amount set up on the respective subsidiary company's books as special surplus reserve, thus bringing the replacement reserves of the subsidiaries in line with the surplus reserves of the holding company as of December 31, 1930. Question. The subsidiaries did not restore the excess amount you have referred to to their earned surplus, did they?

Answer. No, sir.

Question. What did they do with it?

Answer. They included it in an account entitled, "Special surplus reserve."

Question. What advice has the Commission received from the company as to its use of the accounts and the balances that referred to?

you have Answer. The company advises that they discontinued the reflection of these reserves on the books of the holding company.

Question. Now, in addition to the common capital stock of various public-utility companies that was acquired by the Cities Service Power & Light Co. at organization, additional common stock was purchased from time to time, was it not?

Answer. Yes, sir.

Question. And that necessarily carried with it the equity in the surpluses of the companies acquired, did it not?

Answer. Yes, sir.

Question. And that would be reflected in the cost of the stock as carried in the plant and investment account?

Answer. Yes, sir.

Question. What did Cities Service Power & Light Co. do with respect to the equity in the surpluses of the subsidiary companies at the date of acquisition in its accounts?

Answer. Prior to the year 1930 the equity in the surpluses of the subsidiaries at date of acquisition was carried on the balance sheet as an asset under the caption "Earnings receivable, accrued, acquired-subsidiary companies." A contra-account on the liability side was entitled "Surplus acquired." In 1930 the balance in "Earnings receivable, accrued, acquired-subsidiary companies" was transferred to "Earnings receivable, accrued-subsidiary companies ", but the contra-account on the liability side continued to be carried as a separate account under the caption, " Surplus acquired."

Question. What did the account "Earnings receivable accrued, acquired-subsidiary companies" reflect?

Answer. That reflected the surpluses of the holding-it reflected the holding company's equity in the surpluses of subsidiaries at date of acquisition.

Question. How much did that account amount to as at December 31, 1930?

Answer. As of December 31, 1930-the balance in earnings receivable accrued, acquired-subsidiary companies, increased from $5,682,694 as of December 31, 1924, to $8,306,999 as at December 31, 1929. The balance in the account was then transferred to earnings receivable accrued-subsidiary companies, but the contra-account on the liability side continued to be carried as a separate account under the caption "Surplus acquired ", and as of December 31, 1930, amounted to $9,028,031.

Question. Turning to page 21 of your report, section 2, analysis of plant and investment, what have you to say as to the terms of acquisition from Cities Service Co. of the various securities acquired at the date of acquisition of Cities Service Power & Light Co.?

Answer. Under date of January 2, 1925, Cities Service Co. agreed to assign and transfer securities to Cities Service Power & Light Co.. which securities represented control in all of its electric and some of its gas utility companies. Cities Service Power & Light Co. also assumed the indebtedness due to Cities Service Co. from each of the companies. In consideration of this transfer, Cities Service Power & Light Co. agreed to issue to Cities Service Co. the following securities

Question. They are shown in the table at page 21 of your report, are they not?

Answer. No, sir; they are not shown on this table-the securities are shown; that is correct.

Question. What was the total face value of the securities involved? Answer. $99.999.000; and in further consideration, Cities Service Power & Light Co. agreed to assume the indebtedness of the Cities Service Co. to any of the companies and to pay $1,000 in cash.

Question. There was $1,000 cash involved?

Answer. Yes.

Question. What was that for?

Answer. The directors' shares, so that Cities Service Co. acquired $100,000,000 face value of securities.

Question. What was the effective date of transfer to be?

Answer. The agreement specified that the assignment and transfer of the securities and the assignment and assumption of indebtedness was to be made as of June 30, 1924. Cities Service Co. was to account to Cities Service Power & Light Co. for all dividends, interest, and other income to which the latter was entitled from June 30, 1924. Cities Service Power & Light Co. was to account to Cities Service Co. in an amount equal to interest on $20,000,000 principal amount of bonds from June 30, 1924, to November 1, 1924, at the rate of 6 percent per annum, plus an amount equal to dividends on $10,000,000 par value of first preferred stock, at the rate of 7 percent per annum from June 30, 1924, to the date of transfer, provided, however, that in no event should the total amount to be accounted for to Cities Service Co. exceed the amount to be accounted for to the Cities Service Power & Light Co.

Adjustment was to be made for all advances to or loans from subsidiaries, with interest thereon, that had occurred after June 30, 1924, to the end that Cities Service Power & Light Co. would be placed in the same position as if it had acquired all of the securities and the indebtedness and had owed the indebtedness on June 30, 1924.

Question. There were certain securities involved that had been acquired from Cities Service Co. subsequent to June 30, 1924, were there not?

Answer. Yes, sir.

Question. What was the provision made as to those?

Answer. These were to be transferred at actual cost to Cities Service Co.

Question. And what were they?

Answer. 1,640 shares of common stock of Ohio Public Service Co., 35 shares of preferred stock of Electric Bond Deposit Co., 346.15 shares of common stock of Toledo Traction, Light & Power Co., 28.55 shares of the preferred stock of Toledo Traction, Light & Power Co.

Question. Was there any conversion right as to the $5,000,000 par value of 7-percent cumulative second-preferred stock into bonds? Answer. There was. The Cities Service Co. was to have the right to convert, from time to time, the $5,000,000 par value of 7-percent cumulative second-preferred stock into an equal par amount of the 20-year 6-percent secured sinking fund gold bond, series A, but only if and when such $5,000,000 additional bonds should be issuable in accordance with the provisions of the indenture.

Question. And of course there was the usual provision that the various balance sheets and earning statements correctly reflected the respective financial positions of the various subsidiaries involved, was there not?

Answer. There was.

Question. Turning to page 24 of your report, that refers to a table appearing at page 25 of your report showing the number of

shares and the par value of preferred stock and the principal amount of bonds acquired, together with ledger value of the acquisition?

Answer. Yes, sir.

Question. And the additional stock acquired from Cities Service Co. for $39,660.48 referred to before is also included in that total? Answer. Correct.

Question. What comment have you to make on that table?

Answer. The table shows that Cities Service Power & Light Co. acquired $61,791,163 of par or stated value of the common stock of subsidiaries out of a par or stated value of $62,746,029 outstanding at date of transfer, and also $9,937,245 par or stated value of preferred stocks of subsidiaries and $2,751,783 principal amount of bonds and notes of subsidiaries. The numbers of shares acquired and the percentages of outstanding common stock owned, as shown in the table, are exclusive of directors' shares.

Question. Was any separate ledger value assigned to various issues of stocks or bonds of the individual companies acquired?

Answer. There was not.

Question. And the total ledger value, as shown by the table, was how much?

Answer. $98,175,544.44.

Question. There is a balance sheet appearing at page 26 of your report as of November 7, 1924, giving effect as at that date to the acquisition of the securities and accounts of the subsidiary_companies which were given for the securities of Cities Service Power & Light Co., is there not?

Answer. Yes, sir.

Question. What does the title "Securities of subsidiary companies" as shown in that balance sheet mean?

Answer. It is identical i investment."

meaning with the title Plant and

Question. Have you made any comparison of the cost to Cities Service Power & Light Co. with the cost to Cities Service Co. of the securities transferred by the latter to the former company? Answer. Yes, sir.

Question. What comment have you to make in that connection? Answer. As shown by the balance sheet dated November 7, 1924, the ledger value of the securities acquired by Cities Service Power & Light Co. was $98,135,883.96, based on the par value of securities it issued therefor. To this figure, however, there must be added an amount of $39,660.48, which represented the cost to Cities Service Power & Light Co. of additional securities which is not given effect to on this balance sheet. Therefore, the total ledger value as recorded on the books of Cities Service Power & Light Co. for all of the securities acquired from its parent company, Cities Service Co., under the agreement between them dated January 2, 1925, was $98,175,544.44.

Question. Therefore, the total ledger value as recorded on the books of Cities Service Power & Light Co. for all of the securities was $98,175,544.44, was it not?

Answer. Correct.

Question. What comment have you to make as to the cost of those securities to the Cities Service Co.?

Answer. As disclosed by the examination of the Cities Service Co. Commission's exhibit 5997, it was found that the actual investment by that company in all of the securities which were transferred to Cities Service Power & Light Co. under this agreement was $38,233,396.37, including the accrued earnings to June 30, 1924, of $9,187,644.64 applicable to the common stocks transferred to the new company. A comparison of these costs shows that Cities Service Power & Light Co. paid $59,942,148.07, or 157 percent more in the par value of its securities than the cost to Cities Service Co. of the acquired stocks, bonds, and notes.

Question. What further comment have you to make based on that comparison?

Answer. From this comparison it can be seen that if the preferred stocks and bonds of Cities Service Power & Light Co. are assumed to be worth their par value, then the $59,942,148.07 of appreciation would apply to the common stock which it also issued in part payment for the assets acquired.

Question. The company has made a statement in that connection, has it not?

Answer. It has.

Question. Where does that appear in your report?

Answer. At pages 27 and 28.

Question. Without reading that at length, will you state briefly what the basis of it is?

Answer. The company claims that these securities that were transferred to Cities Service Power & Light Co. were acquired by Cities Service Co. between the years 1910 and 1913, most of them, at least, which was 11 to 14 years prior to the formation of Cities Service Power & Light Co. in 1924, and they state that the World War had made a fundamental change in price levels so that Cities Service Co. cost represented pre-war prices, which are not comparable to the price levels existing in 1924, and in addition most of the subsidiary companies operated in communities that had experienced industrial expansion so that the business of the operating utilities in such communities, especially their industrial and commercial load, is not fairly comparable to the business in such communities before the war, and that these factors had a material effect upon the value of the properties represented by the securities which were originally acquired by Cities Service Co. and transferred to Cities Service Power & Light Co. in 1924.

Question. What comment have you to make with reference to that company statement?

Answer. Before I do that, I will state further that the company also states that none of the common stock of Cities Service Power & Light Co. having a par value of $65,000,000, an amount in excess of the claimed write-up, was marketed or sold to the public, but all of it was acquired by Cities Service Co. or its 100-percent-owned subsidiary, Central Ohio Gas & Electric Co., and is still so held. They further state that in the published financial statements of Cities Service Co. this $65,000,000 of common stock is automatically eliminated from the plant values shown on such statement, but that the cost to Cities Service Co. remains in the investment account. Question. That is in the company's statement?

Answer. Yes.