ROOM 2033-B, FEDERAL TRADE COMMISSION,

Washington, D. C., Friday, September 28, 1934.

Met, pursuant to adjournment, at 10 a. m.

Before Charles F. Diggs, examiner.

Appearances: Col. William T. Chantland, counsel; Thomas J. Tingley, associate counsel; James A. Austin, associate counsel; Dr. Francis Walker, chief economist; and Col. William H. England, associate chief economist, on behalf of the Commission.

W. A. Hill and H. A. Stix, 60 State Street, Boston, Mass., for Associated Gas & Electric Securities Co., Inc. Bernard F. Weadock, New York City, William J. Hagenah, Chicago, Ill., and Martin V. Callagy, New York City.

Examiner DIGGS. You may proceed, gentlemen.

WILLIAM J. WARMACK resumed the stand on behalf of the Commission and testified further as follows:

Further direct examination by Mr. AUSTIN:

Question. Will you tell us, briefly, Mr. Warmack, the corporate history of the Florida Public Service Co.?

Answer. The Florida Public Service Co. was incorporated in May 1908, in the name of Deland Electric Light & Power & Ice Co., under the laws of the State of Florida.

Question. When did General Gas & Electric Co. of Delaware acquire control of this corporation?

Answer. In December 1925.

Question. Was that a part of the transactions involved in the reorganization of the Maine companies or a separate transaction? Answer. That was a part of the basket acquisition whereby the stocks of the two Maine companies were acquired by the Delaware Corporation.

Question. Will you discuss briefly the investments of the General Gas in the Florida Public Service Co. from time to time?

Answer. In December 1925 General Gas acquired 11,501 shares of Florida Public Service Co. common stock in a basket acquisition from General Gas & Electric Corporation, together with other securities from the two Maine companies, and during the year 1926 an additional 25,475 shares of this stock were acquired directly from the Florida Public Service Co. at $100 per share, or a total cost of $764,250.

Question. Was that acquisition for cash?
Answer. Either cash or open account.

Question. It does not appear?

Answer. They are practically the same thing.

Question. So that in 1929 there was shown a ledger value of what for the investment in this company

Answer. $926,954.68 was the ledger value of these stocks, the amount that was assigned to all of this stock. You will remember that 11,501 shares were acquired in the basket and was recorded in a lump sum, together with all of the other securities.

Question. You have a total ledger value assigned in 1929 of approximately $927,000, for a total of 36,976 shares of common; is that right?

Answer. That is correct.

Question. Was that after the acquisition and control or before the acquisition and control of General Gas & Electric Corporation by the Associated Group?

Answer. It was after the acquisition by Associated.

Question. Tell us about the new subholding company that was formed in that year.

Answer. A new subholding company was formed after the Associated obtained control of General Gas. The new subholding company was known as "Florida Public Service Corporation ", to which the common stock then held by General Gas in the Florida Public Service Company was transferred and exchanged for stock of the newly organized Florida Public Service Corporation on a sharefor-share basis in 1930. The same ledger value was attached to the new stock as had been assigned to the old stock.

Question. Was that ledger value retained?

Answer. Yes, sir.

Question. At what amount?

Answer. $926,954.68.

Question. Now, was this investment at any time revalued?
Answer. Yes, sir; it was written up in December 1930.
Question. In what amount, Mr. Warmack?

Answer. $6,204,000.

Question. What was the basis for that write-up as shown by the records of the company?

Answer. It was based upon the amount of income

Question. I do not think you understand my question. You say in your report the investment was written up $6,204,000. By what-a credit to what account?

Answer. A credit to capital surplus arising from revaluation of capital stock.

Question. So that this write-up increased the ledger value of the investment in the corporation's common stock to what amount? Answer. $7,130,954.68.

Question. Was that the amount at which this was carried at the date of the closing of your report, June 30, 1932?

-Answer. Yes, sir.

Question. General Gas also made investments from time to time. did it not, in the preferred stock of Florida Public Service Co.! Answer. Yes, sir.

Question. Will you trace those briefly, please?

Answer. During the years 1926 to 1931 investments were made in preferred stock of Florida Public Service Co., the first of which occurred in September 1926, at which time 6,500 shares of preferred stock were acquired directly from Florida Public Service Co. at a total cost of $585,000.

Question. That was at 90, was it?

Answer. Yes, sir.

Question. Was that a transaction for cash, do you know?
Answer. Cash or the equivalent of cash.

Question. When was the next acquisition of preferred?

Answer. In February 1927, at which time 3,500 shares of Florida. Public Service Co. 7-percent preferred stock were acquired from E. C. Stuart for cash at a total cost of $350,000.

Question. Part of this investment was sold to the public, was it not?

Answer. The entire investment was sold during the year 1927 to outside brokers, and General Gas & Electric Corporation received therefor the amount which the investment had cost it.

Question. After control of the General Gas had passed to the Associated group, additional of this $7 perferred stock of the Florida Public Service Co. was acquired, was it not?

Answer. Yes, sir.

Question. Will you describe how that was done?

Answer. That was acquired on open account from other holding companies of the Associated System. Practically all of the stock acquired was held as an investment until December 31, 1931.

Queston. December 1931?

Answer. Yes, sir. General Gas & Electric Corporation at that time held 20,383 shares of Florida Public Service Co. 7-percent preferred stock, which was carried as an investment with a ledger value of $2,072,707.65, for which amount it was transferred to Florida Public Service Corporation through open account.

Question. Now, were any of these investments in Florida Public Service Co. acquired by General Gas through affiliated companies during this period?

Answer. Yes, sir.

Question. Notably through what company in the Associated group?

Answer. Associated Gas & Electric Securities Co., Inc.

Question. Were there any intercompany profits taken by Associated General Electric Securities Co., Inc., as a result of these transactions?

Answer. Yes, sir.

Question. Will you cite an instance, please?

Answer. I was able to trace out certain of these transactions through the Securities Co.'s records. On one transaction General Gas acquired 5,509 shares of Florida Public Service Co. preferred stock from General Finance Corporation through open account. On the transaction, however, Associated Gas & Electric Securities Co. recorded a profit of $139,550.

Question. Now, there were transactions also involving bonds of the Florida Puble Service Co., were there not?

Answer. Yes, sir.

Question. What were the acquisitions of these bonds made by General Gas?

Answer. A considerable amount of these Florida Public Service Co. bonds were acquired from time to time between August 1929 and December 1931, largely through open account with other system companies. Of the total amount of bonds acquired, $4,081,200 principal amount of these securities held at December 31, 1931, represented a total acquisition, less a few sundry disposals

Question. What was the ultimate disposition of these holdings? Answer. They were transferred to Florida Public Service Corporation through open account at their investment ledger value and no profit or loss was recorded on the transaction. Certain of these securities were traced out through the other Associated companies' records, and on approximately $800,000 principal amount of the bonds acquired which I was able to trace out I found that the Associated Gas & Electric Securities Co., Inc., recorded a profit of $44,429.50; that is, an intercompany profit was recorded by an affiliated company and that intercompany profit, of course, was reflected in the investment of the securities of the General Gas & Electric Corporationthat is, the security investments of the General Gas & Electric Corporation.

Question. Now, of these three main subsidiaries of which General Gas was left in control, namely, Broad River Power Co., Lexington Water Power Co., and Florida Public Service Co., would you say that they were particularly profitable operating companies? Answer. No, sir.

Question. Have any records come to your attention which would indicate that fact-that is, that they were not profitable? Answer. Yes, sir.

Question. Notably, what records?

Answer. The published annual reports of General Gas & Electric Corporation indicates that these companies were not so profitable. Question. For what years?

Answer. The annual reports that I refer to are for the years 1931, 1932, and 1933.

Question. May I have them, please? (Witness hands paper to counsel.)

By Mr. AUSTIN:

Question. I think you also have there the annual reports for 1929 to 1930, have you not?

Answer. Yes; I also have

Question. You have 1928, 1929, and 1930?
Answer. Yes, sir.

Question. May I have all of those, please?

(Witness hands paper to counsel.)

Mr. AUSTIN. I ask that the annual reports of General Gas & Electric Corporation for the years ending 1928, 1929, 1930, 1931, 1932, and 1933 be placed in evidence.

Examiner DIGGS. They may be admitted as commission's exhibits 6135 to 6140, inclusive.

(The documents referred to were received in evidence and marked "Commission's Exhibits Nos. 6135, 6136, 6137, 6138, 6139, and 6140, Witness Warmack.")

By Mr. AUSTIN:

Question. Will you refer to commission's exhibit 6138, being the annual report of General Gas & Electric Corporation for the year 1931, and read from it the pertinent part concerning the earning situation of these operating subsidiaries?

Answer. As shown on page 6 [reading]:

A brief résumé of some of the situations which have adversely affected the current affairs of your corporation appears to be in order and is given below.

The corporation's principal investments in operating properties are: Lexington Water Power Co., Broad River Power Co., and Florida Public Service Co. Lexington Water Power Co. The operations for the year 1931, the first year of operation, resulted in a deficit of $584,432.50. This showing is largely attributable to the fact that during 1930 and 1931 the lowest water conditions in a decade have prevailed in this section of South Carolina. This necessitated the purchase of power, which meant added expense to the company. Since the first of the current year, however, there has been an increase in rainfall and a substantial rise in the level of Lake Murray.

The company's difficulties were increased during the year through the imposition by the State of South Carolina of a new tax of one-half mill on each kilowatt-hour of electrical energy generated

Question. Do not read it too much in detail; when you think you have covered the high lights we will go to the next report.

Answer. Another quotation from the report on page 6 states:

With a mounting deficit it has been necessary for this company to borrow increasing amounts in order to carry on its operations.

I want to read concerning the Broad River Power Co., where it is stated:

The net income of this company for the year 1931 was $46,300.62 as compared with $556,165.64 for 1930. This relatively poor showing for 1931 was due principally to the following circumstances:

During 1925, Broad River Power Co. acquired the electric and gas properties of Columbia Railway, Gas & Electric Co., leaving the latter sole owner of the railway property. Railway operations were discontinued in February 1927. Under a decision of the United States Supreme Court, however, the Broad River Power Co. and the Columbia Railway, Gas & Electric Co. were required to resume operations of the railway, which was done in January 1931. As the Columbia Co. had no funds, it was necessary for Broad River Power Co., owner of all of the former company's capital stock, to advance sufficient moneys to rehabilitate the tracks and railroad equipment.

We might read all of that, or it would probably be preferable to give a little résumé of it.

Question. Do as you think is appropriate.

Answer. It states that the Columbia Co. had no funds and it was necessary for the Broad River Power Co. as owner to advance sufficient money with which to rehabilitate the tracks and road equip

ment

Question. I want to say at this time that the possibility the Supreme Court would make such an order was an ever-present one,

was it not?

Answer. Yes, sir. It goes on to say on page 7:

As there was no hope of these advances being repaid by the Columbia Co. they were charged to operating expenses by Broad River Power Co.

Question. Is there any mention in that report of the Florida Public Service Co.?

Answer. Yes, sir. There is, however, one other thing about the Broad River which I would like to call attention to.

Question. All right.

Answer. It reads:

At the close of the year 1931 these advances and expenses aggregated $549,569.34, of which $411,839.61 was expended in 1931 and included in the operating expenses for that year.

It states further:

The above expenditures represent amounts considerably greater than the company will be called upon to provide in the future, but the railroad is being operated at a loss, and this loss must be absorbed by the Broad River Power Co.