EXHIBIT A.-Northern Natural Gas Company. Estimated effect of proposed rates 12 months ended Nov. 30, 1942-Continued

EXHIBIT A.-Northern Natural Gas Company. Estimated effect of proposed rates 12 months ended Nov. 30, 1942-Continued

EXHIBIT A.-Northern Natural Gas Company. Estimated effect of proposed rates 12 months ended Nov. 30, 1942-Continued

IN THE MATTER OF

MINNESOTA POWER & LIGHT COMPANY

Reclassification of the Electric Plant Accounts of a Public Utility

IT-5769

(Decided March 2, 1943)

Syllabus

1. Discount on stock issued by parent holding company in the acquisition of property, representing the difference between the par and market values of the stock, recorded as part of the cost of assets acquired, inflated its plant accounts to that extent. P. 391.

2. Dividends received by parent holding company from certain subsidiary companies in excess of their net income represent the return of capital and should be credited to investment, and not to income account of parent company. P. 391.

3. Interest received by parent company from subsidiary which had accrued on note of subsidiary prior to its acquisition by the parent company, should be credited to investment and not to income account of parent company. P. 391.

4. To the extent that the aggregate amount and par value of securities issued to parent company in exchange for property was in excess of the book cost to the parent company of the properties transferred, the transactions resulted in a "write-up" of plant account on the books of the acquiring company. P. 392.

5. An arbitrary charge to plant account (offset by a credit to a reserve for contingencies) upon the transfer of properties from parent to its subsidiary, the accounting "public utility," is a write-up of plant account. P. 392.

6. The total amount of inflation on the books of subsidiary, the accounting "public utility," resulting from inter-company transactions accompanied by a complete absence of arm's-length bargaining, in which property accounts were inflated on the books of parent company and again on transfer to subsidiary, should not be classified in Account 100.5, electric plant acquisition adjustments, on the theory that it represents actual bona fide cost, but should be classified in Account 107, electric plant adjustments, as a write-up, pending disposition in accordance with the requirements of the Commission's Uniform System of Accounts. P. 393. 7. Items representing expenses in connection with the sale of preferred stock, improperly included in Account 100.6, electric plant in process of reclassification, should be transferred, pending disposition, to Account 107. P. 393.

8. Rate investigation costs and charter expenses incurred by accounting utility, improperly charged to its plant Account 100.6, should be classified in Account 107, pending disposition. P. 393.

9. The balance of accounting subsidiary company's "Contingency Reserve" created by a charge to plant, should be disposed of by a charge in that amount to its "Contingency Reserve," thereby extinguishing the latter. P. 394.

10. The amount of the write-up representing bond discount and expense on bonds delivered to parent company on acquisition of properties, although a proper charge to surplus since the bonds were refunded in 1928, was disposed of by an immediate charge-off of part to Account 271, earned surplus, with transfer of the balance to Account 140, unamortized debt discount, from which account it was directed to be amortized over a period not to exceed 100 months from June 30, 1942, the remaining original life of the refunded bonds, by equal monthly charges to Account 531, amortization of debt discount and expenses, provided that amortization might be accelerated by charges to Account 414, miscellaneous debits to surplus. P. 394.

11. The amount of the write-up representing discount on preferred stock delivered by accounting "public utility" to its parent company as a part of the consideration for assets transferred, should be transferred to Account 150, discount on capital stock, and thereafter accounted for as provided by the Uniform System of Accounts. P. 394.

12. Amount representing expenses incurred on sale of preferred stock delivered to parent company, ordered disposed of from Account 107 by a charge to Account 151, capital stock expense, and thereafter accounted for as provided in the Uniform System of Accounts. P. 395.

13. Inflation recorded in plant accounts which arose in connection with security issues by respondent to its company's parent ordered disposed of by a charge to earned surplus, with a condition that the company might charge a portion to a capital surplus created for such a purpose, leaving in earned surplus a balance equivalent to the requirements for one year's preferred stock dividends, instead of making a charge to the common stock or capital surplus account which would amount to compulsory reduction in the book or stated value of the stock without compliance with law, and, in case of charge to capital surplus, would create a "capital surplus 'deficit'" at the same time with an earned surplus smaller than the "capital surplus deficit." Section 305 (a) of the Federal Power Act makes it unlawful for any officer or director of a "public utility" "to participate in the making or paying of any dividends of such public utility from any funds properly included in capital account." P. 395. 14. Estimated original cost based upon conjecture and invalid, improper and unsupportable theories and assumptions which involved, among other things, reaccounting for general, and administrative expenses contrary to express prohibition in electric plant accounts instruction 2-B of the Commission's Uniform System of Accounts, cannot be accepted as a substitute for cost when records are available, for legitimate estimates where records are not available, or for overhead costs recorded in accordance with managerial discretion. P. 396.

A. C. Gillette, Donald Harries, and E. J. McMillan (Gillette, Nye, Harries & Montague), A. J. G. Priest and L. Byron Cherry (Reid & Priest) for Minnesota Power & Light Company.

A. J. G. Priest and L. Byron Cherry (Reid & Priest) for American Power & Light Company.

Charles V. Shannon, George Slaff, and Reuben Goldberg for the Federal Power Commission.