[192a] In view of the large amounts transferred on the books of subsidiaries from replacement reserve to surplus, it is pertinent to examine the replacement reserves set up by the subsidiaries. With this end in view the following tabulation is presented. This statement shows the amount of the plant and investment account, the amount of the replacement reserve, and the annual provision charged to income for replacements for the four principal subsidiaries of Cities Service Power & Light Co., viz., the Empire District Electric Co., Ohio Public Service Co., Public Service Co. of Colorado and Toledo Edison Co., for the years 1926, 1928, and 1930. The amount of the plant and investment account of these subsidiaries was 80 percent of the total amount of this account as carried on the combined balance sheets of all subsidiaries as of December 31, 1930, and the amount of replacement reserve was 69 percent of the total of these reserves at the same date. The figure for the year 1926 are presented for the reason that this was the first full year prior to the reduction of the provision for replacement reserves by the subsidiaries to the basis as stipulated by the indenture under which the holding company's bonds were issued. The figures for the year 1928 show the effect of such reduction on the annual replacement charge and the figures for 1930 show the effect of the transfer of replacement reserves to special surplus reserve. This statement does not show the effect of the transfer of $3,806,128 of replacement reserves to surplus prior to acquisition of subsidiaries as shown above. The ratio of the replacement reserve to plant and investment and the annual provision for replacement reserve expressed in terms of the percentage to plant and investment is also shown on the statement. [192c] As may be seen by the table, the ratio of replacement reserve to plant and investment for the four subsidiaries for the year 1926 was 6.11 percent; for 1928, 7.18 percent; and for 1930, after application of the reduction, 3.58 percent. The ratio of the total replacement reserves of all subsidiaries to the total amount of plant and investment for 1930 was 4.18 percent. The annual charge for replacements compared to the plant and investment was, for the four subsidiaries, 2.32 percent for 1926, 1.16 percent in 1928, and 1.05 percent in 1930. The annual charge for replacements for all subsidiaries for 1930 was 1.21 percent of plant and investment. It will be noted that the ratio and the annual percentage rate for 1930 for the various subsidiaries exclusive of the four selected were greater than such ratio and percentage for the four selected subsidiaries. This is largely due to the fact that the other subsidiaries included electric-railway companies which took a higher rate for replacement reserves and hence accumulated larger reserves. [193] SECTION 8. RESERVE FOR INCOME TAXES Method of accounting for income taxes.-Federal income taxes based on its consolidated net income were paid by Cities Service Power & Light Co. to Cities Service Co., and were charged to each subsidiary company on the basis of the net income of such subsidiary. The total of amounts charged to subsidiaries was credited to an account entitled “Reserve for income taxes" and this account was charged with the amount paid to Cities Service Co. or that was transferred to income or surplus. Income taxes charged and paid 1925-30.-The following tabular statement shows the amounts charged and the amounts credited to reserve for income taxes for each of the years ended December 31, 1925, to 1930, inclusive: Except as noted, the amounts shown as debits were paid to Cities Service Co. The amounts shown as credits were charged to subsidiaries. It will be noted that in every year the income tax paid to Cities Service Co. was less than that charged to subsidiaries, resulting in an accumulated credit balance to reserve for income taxes. This [194] credit balance was reduced in 1927 by a charge to the account and a credit to earnings from companies of $235,020. In 1928, $50,000 was charged to the account and credited to income and in 1930, $787,097, which represented the balance as of December 31, 1928, was charged to the account and credited to surplus. From the foregoing table it may be seen that a total of $6,174,023 was charged to subsidiary companies for income taxes from 1925 to 1930, and of this amount $4,866,926 was paid to Cities Service Co. on the basis of consolidated tax return, and $1,072,117 was credited to surplus, either directly or through the income account, leaving a credit balance of $234,980 in reserve for income taxes as of December 31, 1930. By this method of separately calculating income taxes, the net income of the subsidiary companies are reduced by a greater amount than the amount paid by the parent company, and as the parent company takes up the net income of subsidiaries as its income, such income is also reduced. This reduction in the net income of the parent company to December 31, 1928, is compensated for by the credit to surplus in 1930 of the balance standing to the credit of reserve for income taxes, thus the surplus of the parent company is increased at the expense of the subsidiary companies. On the other hand, if the savings in taxes by the holding company through its consolidated return had been credited to the subsidiaries, it would have had the effect merely of increasing the earnings applicable to the common stocks of the holding company to the extent of the savings in taxes thus credited. The company states that in calculating its own tax liability it consolidated the earnings and deficits of all its subsidiaries and also made [195] other allowable deductions, such as expenses and interest. The company also contends that the subsidiaries which were operating on a profitable basis had no justifiable claim to any tax reduction by virtue of unprofitable operations of other subsidiaries owned by the same holding company, or on account of interest payable by the holding company. Federal income-tax adjustment suspense.-The foregoing tabulation shows that $50,000 of the excess income taxes were charged to income in 1929. From January 1930 to September 1930 the company credited $25,000 per month or 102777-35-PT 73-15 a total of $225,000 to income on account of the excess income tax to be charged to subsidiaries, and charged an account entitled "Federal income-tax adjustment suspense ", which account was carried as a deferred asset on the balance sheet of December 31, 1930, in amount of $225,000. By this means the income of the parent company was increased for the current year by this amount. This deferred debit is eliminated when the subsidiaries pay the amount of their income taxes to the holding company. [196] CHAPTER III. GROWTH OF CAPITAL LIABILITIES SECTION 1. GROWTH OF CAPITAL STOCK AND FUNDED DEBT OF CITIES SERVICE POWER & LIGHT CO. Classification of securities as of December 31, 1930.-The balance sheet of Cities Service Power & Light Co. presented as exhibit 4, within Commission's exhibit 6201, shows the capital liabilities as of December 31, 1930, to consist of the following securities: Increase of capital liabilities.-The following tabular statement shows the face or stated value of the capital securities that were outstanding as of December 31 of each of the years 1924 to 1930, inclusive. 185,000 17,477, 890. 74 65, 000, 000. 00 82,477, 890. 74 The above statement shows that the total amount of capital securities increased from $100,000,000 as of December 31, 1924, to $146,141,390.74 as of December 31, 1930. Funded debt increased from $20,000,000 face value at the end of 1924 to $63,663,500 at the end of 1930. The preferred capital stock was changed in July 1927 from stock of a par value of $100 per share to stock of no par value, therefore this stock is carried on the balance sheet after this date at values which represent the amount realized from its sale. The value of this stock outstanding increased from $15,000,000 par value at the end of 1924 to $17,477,890.74 no par value at the end of 1930. There was no change in the value of common stock issued during the period. As previously stated, common capital stock of an aggregate par value of $65,000,000 was issued to Cities Service Co. in November 1924 and no common stock has been issued since that date. Securities issued, reacquired, and outstanding.-The foregoing tabulation shows the amount of capital securities outstanding at the end of designated years. The change from year to year is "net." Some of the securities issued were reacquired, therefore the amount issued in any one year may have been considerably more than the net change shown at the end of the year. The following table shows the face or stated value of securities issued during the period from June 30, 1924, to December 31, 1930. It also shows the amount of discount on the securities issued, the proceeds in the sales transactions, the commissions and expenses paid or allowed, and the net proceeds realized. [198] The table also shows the amount of the securities reacquired, the premium at which they were reacquired, the total amount of consideration paid. in the purchase transactions, the expense incident to the reacquirements and the total cost of the reacquired securities. [199] TABLE 9.-Summary of face or stated value of securities issued and face or stated value of securities reacquired, with amount of premium or discount commissions, and expense for the period from June 30, 1924, to Dec. 31, 1930 Amount that was available for corporate purposes other than retirements of securities... Securities issued as above.. Less securities reacquired... Securities outstanding Dec. 31, 1930.. Less: Total discount, commissions, and expenses as above... Total discounts or premiums, commissions and expenses.. Amount that was available for corporate purposes other than retirement of securities... The foregoing table accounts for $182,622,500 of face or stated value of securities that were issued to December 31, 1930. The discounts, commissions, and expenses incident to their issue and sale amounted to $6,269,011, or 3.4 percent of their aggregate nominal amount. Securities were reacquired to the amount of $36,481,109. This amount includes at [200] cost the no-par-value preferred stock reacquired. The total cost of reacquirements amounted to $37,613,600. The amount of funds that was made available for corporate purposes other than retirement of securities was $138,739,889. This was the amount of funds that was represented by securities outstanding on December 31, 1930, to the aggregate nominal amount of $146,141,391, and is 94.9 percent of this amount. Discounts, premiums, commissions, and expenses consumed $7,401,502, or 5.1 percent of the total outstanding December 31, 1930. The percentages shown in the foregoing table as consumed by discounts, premiums, commissions, and expenses, viz, 3.4 percent of the nominal value of all securities issued and 5.1 percent of the nominal value of the securities outstanding at the end of 1930, do not really state the true proportions of such discounts, etc., to the nominal value of the securities to which they pertained. As previously described, securities were issued, at the formation of the company, to Cities Service Co., and in June 1927 to Cities Service Security Co., in payment for securities. There really may have been discounts pertaining to such issued securities that were covered by the nominal amounts of consideration stated in the offers that were accepted by the company. For example, the securities so issued to Cities Service Co. in part payment for securities were sold by that company at a discount of $3,775,000, so it may be said that this discount was absorbed in the investment account of Cities Service Power & Light Co. One class of securities was exchanged for another class at face value, as bonds for preferred stock, and the amounts of securities thus exchanged are components, both of the amount shown as issued and of the amount shown as reacquired. The no par value preferred stock was included in the issued account at the amount realized, and when repurchased was in treasury stock at cost; therefore, no premium appears in the table on this stock. If the amounts of securities [201] issued in these three classes of transactions were excluded from the table, so as to leave only the securities to which the discounts, premiums, commissions, and expenses shown pertained, the percentages of such discounts, etc., would be much higher. A subsequent table conveys this information. In connection with the issuance of securities and with their reacquisition an important feature is the kind of consideration given. The following table summarizes the consideration received by classes for securities issued and the consideration given, by classes, for securities that were reacquired: [202] TABLE 10.-Summary of securities issued and securities reacquired, with classifications of consideration received and given, for the period June 30, 1924, to Dec. 31, 1930 From the above table it will be seen that 38.6 percent of all consideration received for securities issued by Cities Service Power & Light Co. consisted of cash or its equivalent, 58.3 percent consisted of securities of subsidiaries, and 3.1 percent consisted of preferred stock that was reacquired. Of the total consideration given for securities that were reacquired, 85.4 percent consisted of |