Light Co. eliminated as an intermediary. The open-account indebtedness and the earnings accumulated during the ownership of Cities Service Power & Light Co. are included in the investment, but the examiner eliminated the equity in the replacement reserves of subsidiaries.

Question. What comment have you to make on that tabulation? Answer. The common stocks shown as transferred to Gas Service Co. in this tabulation are identical with those transferred by Cities Service Power & Light Co. under the agreement of October 31, 1927, with the exception of 588 shares of Kansas City Gas Co. and 127 shares of Wyandotte County Gas Co. common stocks, which were purchased by Cities Service Co. from other sources for $196,856.60 and $42,518.40, respectively.

The tabulation shows that the investment of Cities Service Co. in these stocks, plus accrued earnings and open-account indebtedness to October 1927 amounted to $3,534,013.35.

Question. Now, in consideration for the stocks and open-account indebtedness transferred, what did Gas Service Co. pay Cities Service Power & Light Co.?

Answer. They paid $5,000,000 in par value of preferred stock and $6,778,854 in face value of notes, a total of $11,778,854, in consideration of stocks and open-account indebtedness transferred. To this figure should be added $587,677.04 paid by Gas Service Co. directly to Cities Service Co., making a total of $12,366,531.04, as the purchase price of the securities and accounts to Gas Service Co., representing an appreciation in value of $8,832,517.69, or 250 percent on the books of Gas Service Co.

Question. Turning to page 77 of your report, Mr. Ogle, what have you to say with reference to surplus reserves accumulated on the books of Cities Service Power & Light Co. applicable to common stocks disposed of the Gas Service Co.?

Answer. As previously described, the holding company, calculating surplus reserves at a lesser amount than that set aside as replacement reserves by the subsidaries, and carrying the excess to surplus, resulted in a deficit reserve of $360,709.01 having been accumulated on the books of the holding company, applicable to the common stocks sold to Gas Service Co.

Question. Now that the common stocks were disposed of, it was necessary to write this deficit reserve off, was it not?

Answer. It was.

Question. How was that done?

Answer. The company set up a deferred asset account entitled Surplus Reserve Deficits Suspended ", to which was charged the amount of $360,709.01. On the journal entry recording this transaction it was stated that this account would be amortized over a period of 10 years, against the income received on the 10-year notes and preferred stock of Gas Service Co. The company states that this account has been amortized as planned, leaving an unamortized balance as of September 30, 1934, of $111,709.01.

Question. Now, there were certain securities acquired from Cities Service Securities Co., were there not?

Answer. There were.

UTILITY CORPORATIONS

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Question. As of what date?

Answer. June 3, 1927.

Question. What was Cities Service Securities Co. ?

Answer. A wholly owned subsidiary of the Cities Service Co. Question. And the property which it offered to sell, assign, and transfer to Cities Service Power & Light Co. is set forth in a table at page 78 of your report, is it not?

Answer. It is.

Question. And what was that property?

Answer. Buchanan County Power Transmission Co., common stock, 5,000 shares, no-par value; Electric Utilities Co. common stock, 2,000 shares, no-par value; Lake Shore Power Co., common stock, 10,000 shares, no-par value; preferred stock, 2,399 shares, par value $100; Taney Light & Water Co. common stock, 250 shares, $100 par value; Benton County Utilities Co., 300 shares common stock, $100 par value; Electric Power Co., common stock, 647 shares, $100 par value; Bluff City Light & Power Co., common stock, 60 shares, $50 par value; Lawrence County Water, Light & Cold Storage Co., common stock, 2,500 shares, $100 par value; Cities Service Power & Light Co., 7 percent preferred stock, 5,000 shares, $100 par value; and Butler Light & Power Co., at Garrettsville, Ohio, physical property

Question. You mean instead of purchasing stock, physical property was acquired?

Answer. That is correct; the Garrettsville, Ohio, Electric Distribution System was acquired; also, cash, $3,660,000.

Question. What was given in consideration for that?

Answer. Cities Service Power & Light Co. issued $7,500,000 par value of $6 dividend cumulative preferred stock.

Question. How was this acquisition set up on the books of Cities Service Power & Light Co.?

Answer. It was set up by debiting investment account, $3,072,799.80; a debit to notes receivable, Buchanan County Power Transmission Co., $267,200.20; a debit to Henry L. Doherty & Co., suspense account, $3,660,000; a debit to treasury stock, 7-percent preferred, $500,000; and a credit of 6-percent cumulative preferred stock outstanding, $7,500,000.

Question. Now, the property covered by that offer, except for the $3,660,000 cash and 5,000 shares of Cities Service Power & Light Co. 7-percent preferred stock, was purchased from Cities Service Co. by the Securities Co. June 3, 1927, was it not?

Answer. It was.

Question. For what price?

Answer. It was purchased for $2,008,096.96.

Question. What was this figure?

Answer. That was the ledger value on Cities Service Co.'s books. Question. How did that compare with the price paid and charged to investment account by Cities Service Power & Light Co.?

Answer. This is $1,064,702.84 less than the price paid and charged to investment account by Cities Service Power & Light Co.

Question. How much did the surpluses inhering to the capital stock. sold amount to?

Answer. $27,180.23.

Question. Therefore, on the basis of Cities Service Co.'s ledger value, the investment account of Cities Service Power & Light Co. was appreciated $1,037,522.61 in this transaction, was it not?

Answer. That is correct.

Question. The excess amount paid probably represents the capitalization of the discount on the $7,500,000 par value of 6-percent preferred stock given in exchange for both the securities and properties purchased and the cash and 7-percent preferred stock, does it not?

Answer. Correct.

Question. This ledger value of Cities Service Co. did not represent the actual cost to that company, did it?

Answer. It did not.

Question. What did it include besides that?

Answer. It included capitalized discounts and refunds on the purchase price by Henry L. Doherty & Co., fiscal agent.

Question. The cost of the securities and property transferred to the Securities Co. and the ledger value thereof as determined by the Commission's examiner in the examination of the books of Cities Service Co. and as shown in the report on that company, Commission's exhibit 5997, is also shown in a statement appearing at page 80 of your report, is it not?

Answer. It is.

Question. What does that show?

Answer. That shows that the cost to Cities Service Co. was $1,828,167.56; discount on Cities Service Co. preferred stock amounted to $348,387.99; and the unexpended proceeds amounted to $98,741.61. These amounts made a net ledger value which is recorded on the books of Cities Service Co. as $2,275,297.16.

Question. What comment have you to make on that tabulation? Answer. This tabulation, in the column headed "Cost to Cities Service Co.", represents the amounts expended by Henry L. Doherty & Co., fiscal agents, in the purchase of the securities or property. They were reimbursed by payments in preferred stock of Cities Service Co., and the investment account was charged with this stock at par value. When the preferred stock was sold by Doherty at a discount, but at a price in excess of the amount expended, the unexpended proceeds were credited to Cities Service Co., and that company in turn credited surplus account, instead of treating the amount returned as a reduction of cost, and, therefore, a reduction of the investment account. Cities Service Co.'s investment, consequently, was overstated by the amount of the discount and unexpended proceeds shown in the table, totaling $447,129.60. As Cities Service Co. transferred the securities and properties to the Securities Co. at ledger value, this amount was included in the amount of $2,008,096.96 charged that company. In addition, therefore, to the amount of $1,037,522.61 appreciation in the investment account of Cities Service Power & Light Co., as previously shown, the account is inflated by this $447,129.60, or a total of $1,484,652.21, based on the cost to Cities Service Co. The company states that the capitalized discount and unexpended proceeds were offset, in part at least, by sales expenses incurred in disposing of this stock.

The investment account was further increased with respect to this acquisition by an additional charge which was made to the Lake

Shore Power Co. on account of payment to Henry L. Doherty & Co., fiscal agents, of $1,250 for legal expense.

Question. At page 83 of your report you state that some of the securities which were acquired by Cities Service Power & Light Co. on June 3, 1927, were disposed of; is that correct?

Answer. That is correct.

Question. And in particular you refer to a sale on June 30, 1929, of the properties of Electric Utility Co. and Taney Light & Water Co. which were sold to Empire District Electric Co., a subsidiary; is that correct?

Answer. Yes.

Question. What was the amount secured for them in that sale? Answer. They were sold for $236,866.96, and the two companies were dissolved.

Question. What comment have you to make on that transaction? Answer. Deficit earnings of $24,683.73 had accumulated on account of the Electric Utility Co. and earnings of $4,123.47 on account of Taney Light & Water Co. Earnings receivable accrued was accordingly charged, and investment account credited with $20,256.26, the net of these amounts. In October 1929 the balance standing in the open account in favor of Electric Utility Co. in the amount of $65,000 was written off and deducted from the investment account.

Question. Those transactions are illustrated by a table appearing at page 84 of your report, are they not?

Answer. They are.

Question. What does that table show?

Answer. It shows that by reason of these transactions the investment account of Cities Service Power & Light Co. was reduced a total of $595,825.87 composed of $510,265.61 realized from the sale and $65,000 of open-account indebetedness and $20,560.26 accrued deficit written off.

Question. This property which you have just referred to was purchased along with other securities as of June 3, 1927, was it not? Answer. Yes.

Question. For a total consideration of what?

Answer. $3,072,799.80.

Question. No values were assigned to the seecurities of the individual companies when acquired, were they?

Answer. They were not.

Question. Therefore, when the stock was sold the investment account was not reduced by the cost, but by the amount realized from the sale of the property; is that correct?

Answer. Correct.

Question. These individual properties, however, had been carried at a ledger value on the books of Cities Service Co. before the transfer to Cities Service Power & Light Co., had they not?

Answer. That is correct.

Question. You have prepared a table which appears at page 85 of your report showing the ledger value so carried on the books of Cities Service Co. and the amount of appreciation above cost included in the total of these values, have you not?

Answer. That is correct.

Question. And this amount is deducted on the statement and the resulting figure represents the total cost of the securities to Cities Service Co., does it not?

Answer. That is correct.

Question. The total ledger value of the securities as carried on the books of the Cities Service Power & Light Co. and the amount of appreciated value over the cost to Cities Service Co. is also shown, is it not?

Answer. It is.

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

Answer. In view of the fact when securities or property were sold it was impossible to charge off such property at cost, the sales realization was credited to the investment account. The effect of the disposal of this investment account is that the cost at acquisition was carried on Cities Service Co.'s books at $1,588,148, and the ledger value on the books of Cities Service Power & Light Co. was $3,072,800, and the amount of the appreciation therefore was $1,484,652, or 93 percent.

These values quoted were on the original acquisition of the securities. As some of them were disposed of, these values were affected as follows:

The cost to Cities Service Co. was, on those disposals, $459,875, and the ledger value on the books of Cities Service Power & Light Co. was reduced by reason of that disposal, $510,266, and the amount of appreciation was reduced $50,391, or 11 percent. Therefore, the securities, remaining at a cost to the Cities Service Co. of $1,128,273 and carried at a ledger value on the books of Cities Service Power & Light Co. of $2,562,534, as to those the amount of depreciation was $1,434.261. Therefore it will be seen that while the amount of appreciation was reduced $50,391, the percentage of appreciation on the remaining property was raised from 93 percent to 127 percent.

Question. That is all set forth in the table appearing at page 86 of your report, is it not?

Answer. That is correct.

Question. In addition to the securities acquired in a block from Cities Service Co. and Cities Service Securities Co. as heretofore described, Cities Service Power & Light Co. acquired from time to time various other securities, did it not?

Answer. It did.

Question. And securities also were disposed of from time to time in addition to those specifically described, were they not? Answer. That is correct.

Question. There is a table appearing at page 88 of your report showing the number of shares of common and preferred stocks and the ledger value thereof acquired and the number of shares disposed of during the years 1925 to 1930, inclusive, otherwise than as previously described, is there not?

Answer. That is correct.

Question. And some of the stock shown as disposed of was acquired from Cities Service Co. under the agreement of January 2, 1925, and therefore is shown without ledger value, is it not? Answer. Yes.

Question. That is because it was impossible to segregate ledger value to the individual securities, is it not?