[250] The components of the operating expense for the year 1930 are as follows: The taxes shown are principally the payment of the 2-percent normal Federal income tax on bond interest. Following is an analysis of the amount of general expense shown above. National Electric Light Association dues and National Utility Association_ $32, 001 12, 605 2, 320 2, 400 5, 385 Total general expenses-- 54, 711 The expense of advertising shown above was the only advertising expense incurred during the entire period of operations and was paid to the Denver Post. Net revenue for the years 1924 to 1930.-The deduction of expense from the gross revenue leaves the net revenue for the period as shown on the table. Had this been correctly presented, as explained on page 248, the figures would have represented the net revenue of the holding company plus its proportion of the net income of the subsidiaries. [251] Additions and deductions from income.-The one item classified as an addition to income on the statement consists of the greater portion of the excess of income tax charged to subsidiaries in excess of that actually paid to Cities Service Co. for the years 1929 and 1930, as previously explained.26 The deductions from income consist principally of interest on the funded debt of the holding company and the amortization of bond discount and expense. The item shown under the caption of Reserve for amortization expense is the amortization of the amount of surplus reserve deficit suspended, which has previously been described.27 Analysis of surplus.-The surplus, as shown on the foregoing condensed statement, consists of the net income for the respective years after surplus adjustments and the deduction from this total of the dividends payable on the capital stock of the holding company. Exhibit 6 within Commission's exhibit 6201 shows the analysis of surplus by years. The following tabular statement shows the components of surplus for the entire period June 30, 1924, to December 31, 1930, as carried on this exhibit: Federal income tax. Corporation franchise tax....... Adjustment to surplus made by subsidiary companies.. Profit on sale of securities... Transfer of special surplus reserve to surplus.. Excess accruals: For State tax refunds... 2-percent Federal normal tax. Adjustment of income taxes... Adjustment account revaluation of bonds owned. Total... See p. 193. 7, 534 152 1, 248, 981 39, 420 676, 023 2, 433 2, 852 787, 097 9,498 40, 761, 903 See p. 78. Reversal of accrual of dividend of Spokane Gas & Fuel Co...-- Additional 2-percent bond tax. Excess accrual of preferred dividends.... Total deductions___ Surplus as at Dec. 31, 1930---- 387, 912 34, 375 206, 862 32, 604 17, 259 7 2, 259 7 31 31, 074, 637 9, 687, 266 From the foregoing tabulation it will be seen that net income, as computed by the company, amounted to $37,492,397 for the period, to which was added adjustments of $3,269,506. Surplus was diminished by dividends declared of $5,901,792 on preferred stock, and $24,591,667 on common stock, a total of $30,493,459 in dividends, [253] and by adjustments totaling $581,178, leaving surplus as at December 31, 1930, of $9,687,266. Rate of dividends declared on capital stock.-Dividends were declared on the preferred stocks monthly, at the rate of 58% cents on the $7, 50 cents on the $6 and 41% cents on the $5 preferred stock. Dividends were passed in July 1932. Dividends were first declared on the common stock April 16, 1925, when 3 percent was declared payable May 1, 1925. Thereafter, until 1928, dividends were declared at the rate of one-third of 1 percent per month, except that a dividend of one-half of 1 percent was declared payable March 15, 1926. In the years 1928, 1929, and 1930 dividends were declared at the rate of two-thirds of 1 percent per month, or on the basis of 8 percent per annum. Adjustments of surplus, 1925 to 1930, inclusive. The net increase in surplus, arising from adjustments, during the years 1925 to 1930, inclusive, was $2,688, 328. These adjustments fall into two classes, (1) those arising from transactions of the holding company and (2) those reflecting on the books of the holding company the adjustments made in the surplus of subsidiaries. It was impossible to determine in all cases to which class an adjustment belonged. The principal adjustment in the first-named class was the transfer in 1930 of $787,097, representing the balance of income-tax reserve as of December 31, 1928, from the latter account to surplus. [254] The adjustments of the second class have been previously described, as well as they could be described from the information available, in the analysis of earnings receivable accrued. It will be noted that the principal adjustment in this class consists of adjustments to surplus made by subsidiaries, which results in an addition of $1,248,981 and a deduction of $387,912, or a net addition of $861,069. As shown in the analysis of earnings receivable accrued, these adjustments are composed in part as follows: Additions: Adjustments of surplus of subsidiaries. - Capitalization of overhead expense of subsidiaries.. Amount $2,010, 771 Total... Deductions: Unamortized bond discount and premium on preferred stock of Amortization of loss on sale of property of subsidiaries.. Total... Net addition to surplus... ' Denotes deduction. 1, 689, 128 3, 699, 899 1, 303, 215 1, 549, 712 2,852, 927 846, 972 [255] SECTION 2. REVISION OF NET INCOME AND SURPLUS Introduction. In the revision of the net income and surplus as computed in the preceding table, the method of the company of taking up the net income of the subsidiaries as income has been followed, except that the proportion of reserves so taken up has been eliminated, thus reducing the income taken up to the actual net income of the subsidiaries. The use of the word "revision" is not meant to imply that the method is endorsed or that all the entries to surplus are approved, but it is felt that a revised statement, based on the method used by the company, should be presented. In the revision the holding company's proportion of the provision for replacement reserves charged to income by the subsidiaries has been treated as a deduction from the earnings of such subsidiaries, and the amount deducted by the holding company for surplus reserves has been eliminated. In other words, the charge by the subsidiaries has been substituted for the calculated reserves of the holding company. The amount charged to the asset account, "Earnings receivable reserve", is, therefore, equal to the amount credited to the liability account, "Surplus reserve." These accounts are maintained in equilibrium, and any adjustments that were made to the replacement reserves of subsidiaries are reflected equally in each. The so-called "excess reserves" having been eliminated, the adjustments made by the company to surplus, or to other accounts by reason of this excess, must be reversed. This necessitates a revision of the surplus adjustments. In addition to changes made incident to the elimination of the excess reserves, the amount charged as income tax has been adjusted. Cities Service Power & Light Co. was not consistent in its method [256] of accounting for this tax. Its books are supposed to reflect the holding company's proportion of consolidated net income of the subsidiaries and the holding company, yet the holding company acted in its corporate capacity in charging to the subsidiaries as individual corporations a greater amount of income tax than was paid to Cities Service Co. The following table shows the net income as revised and the items changed in effecting the revision. The changes in surplus are also shown. [257] 1929 1930 TABLE 13.-Statement of examiner's revised net income and surplus of Cities Service Power & Light Co. for the last 6 months of 1924 and for each of the years 1925-30, inclusive $7,991, 464 $6,962, 919 REVISION Deduct: Provision for reserves by subsidiaries in excess of calculated reserves. Miscellaneous earnings from companies.. 1,870, 387 3,651, 766 3,661, 562 3,708, 020 577,894 NOTE. The above statement is based on replacement reserves carried on subsidiaries' books until 1930 instead of computing reserves at percentages in company's indenture and isregarding as income the excess reserves of $9,070,783 transferred from replacement reserves to special surplus reserves by subsidiaries. [258] It will be noted that the foregoing statement starts with the net income as shown on the former income statement. The principal revision of this netincome figure consists of the deduction of the excess of susbidiary reserves over calculated reserves which amounts for the entire period to $12,891,735. In addition to this, miscellaneous earnings from companies, amounting to $577,894, has been transferred from income to surplus. These changes result in a net income which includes the amount of income tax charged to earnings from companies. By adding to this net income the amount so charged and deducting from it the amount of income tax included as income in 1929 and 1930, the resulting figure is the net income before the deduction of income taxes. From this figure is deducted the income tax paid Cities Service Co., and the resulting figure is the revised net income. The adjustment for income taxes increased the net income $787,097 from 1925 to 1928, inclusive. This amount was credited to surplus in 1930 by the company and, as surplus has been increased in the revision by the increase in income, this adjustment is offset by a deduction from surplus of this amount. In 1929 and 1930, the difference between the amount charged and the amount paid was $284,980, but as $275,000 had already been taken up as income by the holding company the net increase was only $9,980. [259] Surplus adjustments due to revision of income.--It will be noted on the foregoing statement that adjustments have been made to surplus for the years 1925 to 1928, inclusive, due to the correction of the amount of surplus reserves charged to income. These adjustments amount to $3,460,243 increase in surplus for the period. It will be recalled that under the analysis of earnings receivable reserve and surplus reserve, various adjustments were enumerated that had been made by the company in eliminating the excess reserves, which constituted the difference between these two accounts. These adjustments are shown by years on exhibit 12 within Commission's exhibit 6201. As the revised income statement takes up the subsidiaries' original charge for replacement reserves and thus eliminates the excess reserves, and consequently the difference between earnings receivable reserve and surplus reserve, the adjustments made, arising from this cause, must also be eliminated. Following are the totals to December 31, 1930, of the adjustments effecting this result. Surplus.... Special surplus reserve.. Total of adjustments Charge to surplus through income for excess reserves- $3,820, 952 9, 070, 783 12, 891, 735 12, 891, 735 9, 070, 783 The purpose of this revision is to arrive at the examiner's computation of the actual earned surplus of Cities Service Power & Light Co. and subsidiaries, by following the method as adopted by the company in including their proportion of the net income of [260] subsidiaries as income, but by deducting from the company's statement of earned surplus the difference between the replacement reserves and special surplus reserves on the subsidiaries' books and the reserves computed by the company at the percentages set forth on the company's indenture and, in so doing, disregarding, as income, transfer of $9,070,783 from replacement reserves to special surplus reserves which was made on the subsidiary companies' books in 1930. With this end in view, what may be termed "appreciation" has not been eliminated. Thus the transfer in the year 1927 of the $800,000 from replacement reserves to surplus on the books of Public Service Co. of Colorado, while considered as appreciation of the property account, has been included in the surplus, as it was so carried on that company's books. The $1,381,730, which reflects the transfer on the books of various subsidiaries of replacement reserves to surplus in the year 1928, is also included in surplus. In the sale of stock of various companies to Gas Service Co., in the year 1927, as previously described, the latter company was charged $956,776 for accumulated reserves, and in the sale of stock of Kansas City Gas Co. to Cities Service Co., in the year 1928, the latter company was charged $110,814 for reserves, which charge was eventually passed on to Gas Service Co. These two amount totaling $1,067,590 are included in the credit to surplus because Cities Service Power & Light Co. received value which was reflected in the investment account by notes receivable in one instance and by a credit in open account in the other. In these cases the excess reserves were passed on to Gas Service Co., and the inflation occurs on the books of that company and not on the books of Cities Service Power & Light Co. [261] Thus, of the amount of $3,820,952 credited to surplus, $3,249,320 arises from the above-described adjustments while other net credits to surplus amount to $571,632. |