Mexico - Mexican Light And Power Company, Ltd. : Loan 0024 - Explanatory Circular on Plan of Arrangement - Conformed

THE MEXICAN LIGHT AND POWER COMPANY, LIMITED THE MEXICAN ELECTRIC LIGHT COMPANY, LIMITED COMPANIA DE LUZ Y FUERZA DE PACHUCA, S.A. (PACHUCA LIGHT AND POWER COMPANY) EXPLANATORY CIRCULAR relating to PLAN OF ARRANGEMENT Dated December 1, 1949 together with Financial Statements and Other Information TABLE OF CONTENTS PAGE Schedule of Meetings of Securityholders.... ................. i Short Statement of Exchanges..... ........................... ii Explanatory Circular Introduction ...................................................... 1 Necessity for the Plan.............................................. I The Plan ........................................................ 3 Canadian Non-resident Taxes ...................................... 5 Outlook for the Company ................................... ......5 Recommendation ................................................ 6 Letter of The First Boston Corporation............................ 8 Statement by Trustee ............................................ 9 Arrangements for Proposed Long-Term Credits D ollar Credit .................................................... 9 P eso Credit ...................................................... 13 Certain Information Regarding the Company and Its Subsidiaries Business and Property ............................................. 14 Construction Programme ........................................... 15 E arnings ......................................................... 16 Peso Exchange ................................................... 18 R egulation ....................................................... 18 R ates ............................................................ 18 Concessions ...................................................... 19 E m ployees ....................................................... 19 M anagement and Control .......................................... 20 Legal M atters ..................................................... 21 Trustees, Registrars and Transfer Agents ............................ 21 Operating Statistics ............................................. 22 Financial Statements Consolidated Balance Sheet as at 31st December, 1948.................. 24 Statement of Consolidated Earnings for the 15 Years Ended 31st December, 1948 ...................................................... 26 Pro Forma Consolidated Balance Sheet as at 31st December, 1948......... 28 Pro Forma Statement of General Reserve........................... 30 Reference is made to the Plan of Arrangement accompanying this circular for detailed information as to the treatment to be accorded to the different classes of existing securities, the principal provisions of the proposed new securities, the manner in which it is proposed to consummate the Plan and issue the new securities, and for other important information. SCHEDULE OF MEETINGS OF SECURITYHOLDERS To be held at the office of National Trust Company, Limited, 20 King Street East, Toronto, Canada THE MEXICAN LIGHT AND POWER COMPANY, LIMITED 5% First Mortgage Bonds - Tuesday, February 14, 1950 - 10:00 A.M. 5% Second Mortgage 50- Year Bonds and Deben- ture Stock - Wednesday, February 15, 1950 - 2:30 P.M. 6% Cumulative Income Debenture Stock - Thursday, February 16, 1950 - 10:00 A.M. 7% Cumulative Preference Shares - Thursday, February 16, 1950 - 2:30 P.M. 4% Cumulative Redeem- able Second Preference Shares - Friday, February 17, 1950 - 10:00 A.M. Ordinary Shares - Friday, February 17, 1950 - 2:30 P.M. THE MEXICAN ELECTRIC LIGHT COMPANY, LIMITED 5% First Mortgage Bonds - Tuesday, February 14, 1950 - 2:30 P.M. COMPAIuA DE Luz Y FUERZA DE PACHUCA, S.A. (Pachuca Light and Power Company) 5% 50-Year First Mort- gage Bonds - Wednesday, February 15, 1950 - 10:00 A.M. Eastern Standard Time 1 SHORT STATEMENT OF EXCHANGES "Upon the Plan becoming effective all the existing securities of Mexlight, Mexelectric and Pachuca in the hands of the public will be exchanged for or converted into new securities of Mex- light on the basis shown in the table below. A more detailed statement, with a brief summary of the terms of the new securities, will be found on pages 4 and 5 of this circular. For full particulars reference must be made to the Plan of Arrangement accompanying this circular. ExISTINC SECURITIES NEw SECURITIES The Mexican Light and Power Company, The Mexican Light and Power Company, Limited: Limited: $1,000-5% First Mortgage Bonds, due $1,000(U.S.)-57o First Mortgage and 1950 Collateral Trust Bonds, Series A, due 1975 The Mexican Electric Light Conpany, Limited: $1,000-5o First Mortgage Bonds, due $1,000(U.S.)-5%o First Mortgage and 1950 Collateral Trust Bonds, Series A, due 1975 Compailia de LuZ y Fuerza de Pachuca, S.A. (Pachuca Light and Power Company): 1100 ($486.67 Can.)-5% 50-Year First $450(U.S.)-5co First Mortgage and Mortgage Bonds, due 1967 Collateral Trust Bonds, Series A, due 1975 (which includes capitalization of Pachuca interest Oct. 1, 1949 to Feb. 1, 1950) [for Canadian currency option see page 4] The Mexican Light and Power Company, Limited: 1100-5% Second Mortgage 50-Year $280(U.S.)-5Y_% Cumulative Income Bonds (or Debenture Stock), due 1968 Debenture Stock $100-6% Cumulative Income Debenture 7.2 Preferred Shares ($1 dividend cu- Stock mulative from Jan 1, 1953--par value $13.50 each-entitled on re- demption or liquidation to $16.50 per share and accrued dividends) 6 Common Shares (no par value) 1 Share (par value $100)-7%o Cumu- 10.4 Common Shares (no par value) lative Preference Stock 20 Shares (par value $5 each)--4o 4.6 Common Shares (no par value) Cumulative Redeemable Second Pref- erence Stock 1 Ordinary Share (no par value) 1 Common Share (no par value) The foregoing is subject to the terms and conditions set forth in the Plan of Arrangement. The Company proposes to apply for the listing on the London Stock Exchange of the First Mortgage and Collateral Trust Bonds of Series A, the 51 o Cumulative Income Debenture Stock, the Preferred Shares and the Common Shares and for the listing upon the Toronto Stock Exchange of the Preferred Shares and the Common Shares. THE MEXICAN LIGHT AND POWER COMPANY, LIMITED THE MEXICAN ELECTRIC LIGHT COMPANY, LIMITED COMPANIA DE LUZ Y FUERZA DE PACHUCA, S.A. (PACHUCA LIGHT AND POWER COMPANY) ToRoNTo, CANADA December 19, 1949 To the holders of the following securities: The Mexican Light and Power Company, The Mexican Electric Light Company, Limited Limited 5%/o First Mortgage Bonds 5% First Mortgage Bonds 50 Second Mortgage 50-Year Bonds Compahfia de Luz y Fuerza de Pachuca, S.A. and Debenture Stock (Pachuca Light and Power Company) 6o Cumulative Income Debenture Stock 5%1 50-Year First Mortgage Bonds 7% Cumulative Preference Shares 4%o Cumulative Redeemable Second Preference Shares Ordinary Shares This circular accompanies the proposed Plan of Arrangement, dated December 1, 1949, affecting the holders of the above securities, being all the loan and share capital outstanding in the hands of the public of The Mexican Light and Power Company, Limited (Mex1ight) and of The Mexican Electric Light Company, Limited (Mexelectric) and Compafiia de Luz y Fuerza de Pachuca, S.A. (Pachuca), commonly called Pachuca Light and Power Company, which are sub- sidiaries of Mexlight. For the Plan of Arrangement to become effective it is necessary that, at separate meetings and by the required votes, each class of securityholders affected approve the Plan in the form submitted herewith or as amended, altered or modified with the approval of all classes. Rejection by any one class of securityholders will require the abandonment of the Plan. Notices of the meetings of the securityholders, which will be held at the office of National Trust Company, Limited, Toronto, Canada, from February 14 to 17, 1950, are being published in the press. Notices are also being mailed to the registered holders of the respective securities with forms of proxy and instructions as to voting, copies of which may be obtained at the places listed on the inside back cover of this circular. Necessity for the Plan In recent years, and especially during and following World War II, there has been a very sub- -;tantial increase in industrial and commercial activity in Mexico, particularly in the central area served by the Mexlight group of companies. This has caused a steadily increasing demand for electric power and has imposed upon your companies the absolute necessity of substantially in- creasing their facilities for generation and distribution, which have become heavily overburdened. During certain periods rationing of power has been necessary, with consequent inconvenience to industry and to the public. It will be appreciated at once that the failure of an important public utility to meet the demands for an essential service such as that rendered by Mexlight, and one which so 1 vitally affects the economy of Mexico, would place in jeopardy the position of the enterprise and the interests of its securityholders. Accordingly, plans for a comprehensive construction programme, for completion by the end of 1952, were developed by Mexlight in co-operation with the Federal Power Commission of Mexico and, to meet in the meantime the immediately pressing need for additional power, a diesel generating plant was constructed at Tacubaya by one of the Company's subsidiaries .at a total cost of about $8,000,000, of which $5,860,000 (U. S.) was provided by a credit from the Commission and the balance supplied from funds of the Mexlight group. This construction programme, which was commenced late in 1947, represents the absolute minimum of new facilities which the studies of Mexlight and the Commission demonstrated as neces- sary to meet the needs of the territory served by the Mexlight group. The total cost of the pro- gramme, as presently estimated, will be approximately $26,000,000 (U. S.) and 136,000,000 pesos, or an aggregate, at the existing rate of exchange, of approximately $42,000,000 (U. S.). This does not include the additional dollar and peso expenditures which will be required for certain construc- tion work ancillary to the programme and for normal renewals, replacements and extensions of exist- ing installations. For the years 1950-1952, inclusive, this additional work is estimated to require an average annual expenditure of the equivalent of approximately $2,750,000 (U. S.). It was evident that a programme of this scope and cost would necessitate the borrowing of substantial sums. Accordingly, Mexlight applied for a loan from the International Bank for Re- construction and Development (World Bank), that Bank being the only source from which could be obtained the substantial sums needed to finance the foreign exchange costs (principally U. S. dollars) of the programme. The World Bank, after making a thorough study of the demands of the Mexican economy for electric energy, of the Mexlight companies and their properties, and of the proposed construction programme, indicated its willingness, on certain stated conditions, to make available to Mexlight a credit of $26,000,000 (U.S.) for materials and equipment to be purchased outside Mexico. Such conditions are set forth in a letter dated December 19, 1949 which the World Bank has written to the Company and which is reproduced at page 9 of this circular. It will be seen that one indispensable condition to the making of the loan is that a recapitalization of the Mexlight companies be completed along certain basic lines laid down by the Bank. Since it was of vital importance to the Mexican economy that there be no delay in the carrying forward of the construction programme and all available funds of the Company having already been committed, the World Bank in January 1949 granted an interim credit of $10,000,000 (U.S.). In view of Mexlight's inability, pending the completion of the recapitalization, to give security for this credit, it was extended by the World Bank to Nacional Financiera, S. A. and the Federal Power Commission, agencies of the Mexican Government, which then extended a like credit to the Company. The local currency costs of the construction programme, as well as the additional dollar and peso expenditures referred to above, must be met mainly from the Company's annual appropriations for depreciation and operating revenues since only a limited amount can be borrowed locally. In this con- nection Nacional Financiera, S. A., despite the many other demands on its resources, has expressed its willingness, subject to completion of the recapitalization, to advance to the Company on a long- term basis up to 44,000,000 pesos for the construction programme, of which approximately 4,000,000 pesos have already been made available as an interim credit. The dollar and peso interim credits above mentioned were to mature on December 31, 1949, but, in order to allow time for the Plan to become effective, arrangements have been made for their extension to January 20, 1950 and to any date thereafter, not later than July 1, 1950, to which the ma- turity of the 5%/ First Mortgage Bonds of Mexlight and Mexelectric may be extended. The Com- pany convened separate meetings of the holders of these bonds, to be held on December 14, 1949, for the purpose of taking appropriate action to extend the maturity of their bonds from February 1, 1950 to July 1, 1950. Each of these meetings, in the absence of the required quorum, was adjourned to January 11, 1950. 2 The dollar and peso interim credits are to be repaid, to the extent 1rawn on, from the long- term credits above mentioned. The long-term credits are to mature in semi-annual instalments from 1953 to 1.975 and, as set forth in the Plan, new First Mortgage and Collateral Trust Bonds are to be issued in respect thereof. While it is not expected that the local borrowing will exceed 44,000,000 pesos, it is proposed to authorize Bonds for this purpose to the extent of 90,000,000 pesos in order to provide for contingencies. Recapitalization of the Mexlight companies on terms satisfactory to the World Bank is es- sential in order to secure the long-term credits required for the completion of the construction programme and to refund the interim credits. Such recapitalization will also effect the refunding of the First Mortgage Bonds of Mexlight and Mexelectric maturing in 1950. Rejection of the Plan by any class of securityholders will require its abandonment and prevent the Company from obtain- ing the long-term credits from the World Bank and Nacional Financiera, S. A. The difficulties inherent in the financing of so large a programme will be appreciated, partic- ularly since it must be completed in a relatively short period and at a time when the development of Mexico makes financing also necessary for industry, communications, irrigation and essential public works. The financing of the programme, without new money from the present security- holders, will only have been made possible through the assistance which the Mexican Govern- ment and the World Bank are willing to give because of their recognition of the imperative necessity of the programme for the economy of Mexico. The remaining step to successfully complete the financing is the collaboration of the securityholders in accepting the Plan of Arrangement now proposed. The Plan The requirements of the World Bank with respect to the proposed recapitalization have the following objectives: (1) the refunding of all the outstanding first mortgage indebtedness of the Mexlight companies by bonds issued by Mexlight under a single indenture constituting a first mortgage on the major portion of the properties of Mexlight and subsidiaries, under which there will also be issued and secured pari passu bonds evidencing the loans made and to be made to Mex- light for the purposes of its construction programme; (2) the elimination of mandatory interest and sinking fund charges other than on first mortgage indebtedness; (3) the simplification of the financial structure of the Mexlight group, including elimination of interest and dividend accumu- lations; and (4) the conservation of the Company's cash resources for construction purposes by deferment of sinking funds and dividends during the construction period. Having in mind the complexity and diversity of interests involved in reorganizing the finan- cial structure of the Mexlight group and to ensure that the treatment of such interests be on the most equitable basis, the Company retained The First Boston 'orporation, one of the lead- ing investment banking houses in the United States, to formulate plan of arrangement within the requirements of the World Bank and to recommend the allocation of the equity stock among existing securityholders. The Plan of Arrangement now presented for the approval of the securitvholders has been so formulated by The First Boston Corporation and is unanimously recommend,d by the Boards of Directors of the three companies whose securities are affected. Attention is directed to the letter of The First Boston Corporation which appears on page 8 of this circular. There also appears at page 9 a statement by National Trust Company, Limited, Trustee for the bond and debenture stock issues of the three companies, recommending the Plan for the con- sideration of the securityholders for whom it is acting as Trustee. The World Bank has informed the Company that the Plan, if consummated, will satisfy its requirements with respect to recapitalization as indicated in its letter to Aleslight previously referred to (see page 9). The issuance of the securities as proposed in th Plan of Arrangement has been authorized by the Electric Tariff Commission of Mexico in accordance with the Law of the Electric Industry. 3 The Plan of Arrangement sets forth in detail the treatment to be accorded to the differe- . classes of existing securities and the principal provisions of the new securities to be issued, and includes, at pages 3 and 5, tables showing the existing capitalization of the Mexlight group and of the securities to be oULtstanding after consummation of the Plan. The following is a summary of the Plan, which does not purport to be complete: The existing 5% First Mortgage Bonds of Mexlight and Mexelectric will be ex- changed, dollar for dollar, for new 5% First Mortgage and Collateral Trust Bonds, Series A, of Mexlight, payable in United States currency. (See Clauses 8 and 9 of the Plan.) The existing 5% First Mortgage Bonds of Pachuca, which are issued in sterling but payable at the option of the holders in Canadian dollars at the fixed rate of $4.863 to 11, will be ex- changeable on the basis of $4.50 to L1 for Series A Bonds of Mexlight payable in United States currency or, at the option of the Pachuca Bondholder, on the basis of $4.95 to 11 for Series A Bonds of Mexlight payable in Canadian currency. This option may only be exercised at the time of surrendering Pachuca Bonds for exchange under the Plan and prior to Decem- ber 30, 1950. Pachuca Bonds surrendered for exchange thereafter will be exchangeable only for Series A Bonds payable in United States currency. After issuance Series A Bonds of the two currencies will not be interchangeable. $4.50 U. S. is equivalent at the present official rate of exchange to $4.95 Canadian, being $4.86%3 Canadian and interest thereon at 5% per annum from October 1, 1949 to February 1, 1950. (See Clause 10 of the Plan.) For the form in which the Series A Bonds will be issued, reference is made to page 15 of the Plan. The new Series A Bonds will bear interest from February 1, 1950 and will be secured by a first specific mortgage under Mexican law on properties of the Mexlight group and a first floating charge under the law of Ontario, Canada, on the undertaking of Mexlight, as more particularly specified in the plan, pari passu with Bonds of Series B (not exceeding $26,000,000 U. S. or equivalent in other currencies), Series C (not exceeding $5,860,000 U. S.) and Series D (not exceeding 90,000,000 pesos) which are to be issued to finance the cost of the construction programme, including the refunding of the several loans mentioned above. Provision will be made, subject to restrictions to be contained in the Indenture secur- ing the Bonds, for the issue of further series of Bonds to supply additional funds, if any, required to complete the construction programme and also for future requirements from time to time. The Indenture will provide for retirement of all the Bonds of the four initial series above mentioned by February 1, 1975; in the case of Series A and Series C Bonds through semi-annual sinking fund payments commencing on August 1, 1953 and in the case of Series B and Series D Bonds by semi-annual serial maturities commencing on the same date. (See Clause 6 and Appendix "A" of the Plan.) The existing 5% Second Mortgage Bonds and Debenture Stock of Mexlight, which are payable solely in sterling, will be exchanged on the basis of $2.80 (U. S.) to f1 for new 52% Cumulative Income Debenture Stock of Mexlight, payable in United States currency. Interest will be cumulative from January 1, 1950 and the unpaid interest accrued to the end of each calendar year, to the extent earned in such year, will be payable on the next July 1. The holders of the existing 5% Second Mortgage Bonds and Debenture Stock will also be entitled to receive, on surrender thereof for exchange, the .i :erest thereon to December' 31, 1949, whether or not earned. The new Income Dtbenture Stock will be issued under a Trust Deed constituting, under Ontario law, a second floating charge on the undertaking of Mexlight and providing for a non-cumulative sinking fund, commencing August 1, 1953, of up to 2% per annum, dependent on earnings. (See Clauses 7 and 11 and Appendix "B" of the Plan.) Each $100 principal amount of existing 6% Cumulative Income Debenture Stock of Mexlight will be exchanged for 7.2 new Preferred Shares of Mexlight (par value $13.50 each) and 6 new Common Shares (no par value) of Mexlight. The Preferred Shares will carry a preferential dividend of $1 per share per annum in Canadian currency, cumulative from January 1, 1953. and will be entitled on redemption or liquidation to $16.50 per share and accrued dividends. Interest accumulated on the existing 6% Cumulative Income Debenture Stock will be cancelled. (See Clause 12 and Appendix "C" of the Plan.) 4 The existing 7% Preference Shares, 4% Preference Shares and Ordinary Shares of Mexlight will be converted into new Common Shares of Mexlight on the basis shown in the table below. Dividend arrears on such Preference Shares will be cancelled. (See Clause 17 of the Plan.) The distribution of the new Preferred and Common Shares among existing securityholders will be as shown in the following table. Both classes will carry the right to one vote per share. Total Existing Class Basis of Exchange New Shares r7.2 new Preferred per $100.. . ..& 83,244 Income Debenture Stock..............-.. f-e f-pr 0-8, L 6 new Common per $100..... .711,036 70o Preference .........................10.4 new Common per share..... 624,000 4% Preference ......................... 4.6 new Common per 20 shares.. 262,200 Ordinary .............................. 1 new Common per share..... 179,600 Total Common Shares ..... 1,776,836 The World Bank Loan Agreement will prohibit the payment of dividends during the con- struction period or out of earnings accumulated prior to January 1, 1950. Canadian Non-resident Taxes In the opinion of Canadian counsel, interest on the new Series A Bonds payable in United States currency and on the 5/2o Cumulative Income Debenture Stock will not be subject to Canadian non-resident income tax as at present in force. Canadian non-resident income tax, which is now at the rate of 15%, will be required to be withheld from interest on the new Series A Bonds payable in Canadian currency (issuable to Pachuca bondholders who exercise the option referred to on page 4) and from dividends on the new Preferred and Common Shares, when such interest or dividends are paid to non-residents of Canada. It is understood that residents of the United King- dom and certain other countries are entitled, in computing their domestic income taxes, to relief in respect of the Canadian tax so withheld. Outlook for the Company Reference is made on page 16 to the factors that have in the past adversely affected the earnings of the Mexlight group and the steps that have been and are being taken to overcome or mitigate these disadvantages. In addition to adequate generating and distributing capacity, the chief requisites for the profitable operation of the enterprise are, firstly, adequate rates and, secondly, a stable exchange value for the peso and a free exchange of peso earnings into dollars, since the revenues are received in pesos and the obligations to securityholders have been in the past, and will continue to be under the Plan, payable mainly in other currencies. The definitive rates for the Mexlight group, under the Law of the Electric Industry of Mexico and the Regulations thereof, have been fixed by the Electric Tariff Commission and approved by the Ministry of Economy and became effective as from their publication in the Official Gazette of the Federation of the 14th day of December, 1949. Those rates represent an average increase over the previously existing provisional rates of 17.63o. The definitive rates contain an adjustment clause which makes applicable thereto the regulatory provisions of the Law providing for the adjustment of rates in the event of variations in certain basic expenses. While, in the opinion of the Mexlight management, these new rates still do not give the Mex- light group the desirable return, it must be borne in mind that the Company has suffered for years from inadequate tariffs and it is difficult to correct this situation wholly at one time or during a limited period. It must also be appreciated that the present increase of 17.637o, together with the last previ- ous increase of 18% granted in 1945 and the subsequent applications of the adjustment clause to compensate for variations in wages and price of fuel, results in a total average increase of approxi- mately 887o over the rates in force in 1945. On the other hand, from the viewpoint of the Company, which must service dollar obligations and purchase equipment abroad, the benefit of these past increases has been considerably lessened by the depreciation in the value of the peso during the same period and by increased operating expenses. The Board of Directors of Mexlight considers that, under all the circumstances, the increase in rates which has just been establishd represents the minimum provided for under the Law of the Electric Industry and will place the Company on a reasonable operating basis. On the other hand, the size of the construction programme which must be carried out and which must be financed, as to the peso expenditures, largely from the Company's earnings, will make the cash position of the Company difficult during the construction years. It is therefore provided in the Plan, in accordance with the requirements of the lenders, that the sinking funds and serial maturities on all classes of the new First Mortgage Bonds and of the new Income Debenture Stock will be deferred until Au- gust 1, 1953 and that no dividends will be paid or accumulated during the construction period. In short, it is essential, in order that the construction programme be completed and the Company placed in a sound position, that payments to securityholders during the construction period be restricted to interest on the new First Mortgage Bonds and earned interest on the new Income Debenture Stock. While it is obviously impossible to express any categorical opinions as to the future, the Board con- siders it reasonable to expect that, upon completion of the construction programme, the earnings of the Company should permit the initiation of a regular dividend policy. With respect to the rate of exchange, the Mexican Government in June 1949 stabilized the peso at 8.65 pesos to the United States dollar and this rate has since been maintained. There is no indica- tion that the Mexican Government will depart from its traditional policy of free transfers from pesos into foreign currencies. Recomrmiendation The Company has placed before the securityholders, in this circular and its appendices, pertinent information on the situation of the Company, the imperative necessity of the construction programme and the steps it has taken and proposes to take to conserve and protect their interests, and to assure the future of the Company. In determining the attitude which they will adopt towards the Plan all the holders of the existing securities will consider this information and the consequences for the future of the enterprise and of their securities if the Plan fails for lack of their support. On the other hand, if the Plan is supported and is carried through, it should result in placing the Com- pany in a sound position and, with a continuance of the co-operative attitude of the Mexican Gov- ernment towards the Company which has been most evident in the solving of the difficult problems encountered in the financing of the construction programme, there should be an all-around betterment in the position of the Company's securityholders. Accordingly, the Boards of Directors of the three companies whose securities are affected strongly urge the respective securityholders to support the Plan of Arrangement as submitted, bear- ing in mind that the Plan has been formulated and is recommended by The First Boston Corpora- tion, an independent adviser, as being equitable to the various classes of securityholders, that the Plan satisfactorily meets the requirements of the World Bank, and that National Trust Company, Limited, Trustee for the bond and debenture stock issues of the three companies, believes that it is in the interests of the securit,.holders that theI Plan should become elYective prior to the maturity of the interim loans. 6 In view of the vital importance to the securityholders and to the companies of con- suinmating the Plan of Arrangement, your Directors urge that you take action promptly by obtaining and forwarding your proxy, whether or not you plan to attend the meetings in person. If subsequently you decide to attend the meetings, your personal vote will super- sede your proxy. To facilitate the work of scrutineers it is desirable that an instrument of proxy from a corporation should have the corporate seal affixed and that in any event the offices held by those signing on behalf of the corporation be designated. By ORDER OF THE RESPECTIVE BOARDS OF DIRECTORS: GEORGE S. MESSERSMITTI Chairman, The Mexican Light and Power Company, Limited. President, Compaiia de Luz y Fuerza de Pachuca, S.A. E. A. GRAYDON President, The Mexican Electric Light Company, Limited. For the convenience of British and Continental securityholders, Messrs. Binder, Hamlyn & Co., River Plate House, 12 & 13 South Place, London, E. C. 2, Etnglandl,who are the Company's regis- trars in Great Britain and are familiar with its afairs, have been authorized by the Company to answer inquiries concerning the Plan and such securityholders are invited to communicate with them. 7 LETTER OF THE FIRST BOSTON CORPORATION THE FIRST BOSTON CORPORATION One Hundred Broadway New York 5, N. Y. December 19, 1949. The Boards of Directors of: The Mexican Light and Power Company, Limited The Mexican Electric Light Company, Limited Compafiia de Luz y 7 uerza de Pachuca, S. A. Dear Sirs: In accordance with your request we have prepared and submitted a Plan of Arrange- ment of the securities representing the debt and equity capital of your companies, including the allocation of the proposed new equity securities among your existing securityholders. This Plan has been formulated subject to certain basic requirements imposed by the International Bank for Recon- struction and Development as a condition to the extension of a dollar credit to The Mexican Light and Power Company, Limited. We have not caused any independent engineering study or audit to be made but we have been supplied with all information relative to the affairs of yci-r companies which we have considered necessary for the formulation of the Plan. Taking into consideration the past experience and record of the companies, their present circumstances and various factors which may influence their future condition, the location of the companies' properties, the international character of ownership of the companies' outstanding securities, and the complex and diverse interests involved, and in reliance upon the information fur- nished by you to us, it is our belief that the Plan of Arrangement proposed, including the allocation of the equity securities, is fair and equitable. From our study of the companies and the economic and political factors affecting them, we are of the opinion that it is to the best interests of all classes of securityholders to join in the con- summation of the Plan of Arrangement as proposed. Very truly yours, THE FIRST BOSTON CORPORATION NEVIL FoR.D Vice-President 8 STATEMENT BY TRUSTEE National Trust Company, Limited, Toronto, as Trustee under the several trust deeds securing the bonds and debenture stock issues of Mexlight, Mexelectric and Pachuca, has for many years been in close touch with the affairs of such companies, including all prior reorganizations. It has care- fully considered the Plan of Arrangement prepared by The First Boston Corporation, at the request of Mexlight, and the various factors bearing thereon from the point of view of the securityholders for whom it is acting as Trustee, and has had discussions with officers of The First Boston Corpora- tion and of Mexlight. It considers that the expansion of facilities referred to in the circular, the procuring of the long-term credit from the World Bank and the establishment of definitive rates under the Law of the Electric Industry of Mexico collectively represent a necessary step for the Mexlight enterprise. National Trust Company is advised that consummation of this Plan of Arrangement will satisfy the requirements of the World Bank in regard to recapitalization. Therefore National Trust Company believes it is in the interest of the securityholders that the Plan of Arrangement should become effective prior to the maturity of the interim loans referred to in the Plan. Accordingly, it recommends the Plan for the consideration of the securityholders for whom it is acting as Trustee. NATIONATL TRUST COMPANY, LIMITED. Toronto, December 19, 1949 ARRANGEMENTS FOR PROPOSED LONG-TERM CREDITS Dollar Credit The Company has received the following letter from the World Bank: "INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington 25, D. C. December 19, 1949 Mr. George S. Messersmith, Chairman of the Board, The Mexican Light and Power Company, Limited, 25 King Street, West, Toronto 1, Canada. Dear Mr. Messersmith: After some earlier exploratory conversations, you approached the International Bank in the spring of 1948 with a view to applying for a loan to finance the forcign exchange costs of your Company's program for the expansion of its generation and distribution facilities in Mexico during the period 1948-52. The Mexican Government informed us that it would support the application and would be willing to guarantee the proposed loan, as required bN the U'nk's Articles of Agree- ment. -U After further discussions we informed you, in June, 1948, that we would not be prepared to consider the long-term financing of your expansion program until a recapitalization of your Com- pany bad been carried out in accordance with certain general principles which we outlined to you. 9 We indicated, however, that in view of the importance of the expansion program to the Mexican economy, we would be prepared, on receiving your assurance that such a recapitalization would be promptly undertaken and carried forward, to consider the provision of interim financing during the period in which the recapitalization was being put into effect. 1Ye further informed you that, in the light of the Company's situation as we then saw it, this interim financing would have to take the form of a short-term loan to a Mexican governmental agency, to be guaranteed by the Govern- ment itself, and a reloan by that agency to your Company. As a result, on January 6, 1949, the Bank entered into a loan agreement (herein called the Interim Loan Agreement) with Nacional Financiera, S. A., and Comision Federal de Electricidad, providing for a short-term loan (herein called the Interim Loan) in the amount of $10,000,000, guaranteed by the United Mexican States, for the purpose of financing certain expenditures made and to be made during the period of the short-term loan in connection with your Company's ex- pansion program. This Agreement was supplemented by an agreement (herein called the Sub- sidiary Loan Agreement) between Nacional Financiera, S. A., Comision Federal de Electricidad and your Company by which those agencies agreed to relend to your Company the proceeds of the Interim Loan. Under these Agreements, your Company has been able to proceed with its expansion program during the current year. In late December, 1948, you asked for an expression of the Bank's intentions regarding long- term financing. We inforied you when the Interim Loan arrangements were concluded that it was the Bank's intention to negotiate a long-term I oan in the approximate amount of $26,000,000 for the benefit of your Company, to be guaranteed by the United Mexican States and to be used to refund the Interim Loan and to finance further foreign exchange expenditures in connection with your expansion program; provided that (a) the recapitalization of your Company was effected in accordance with the general principles we had outlined to you and in other respects on terms acceptable to us, (b) the necessary local financing could be obtained on reasonable terms, and (c) the definitive rate structure, when approved by the appropriate Mexican authorities for your Company and its subsidiaries, afforded reasonable prospects for their successful operation. We pointed out that the Bank could not give any definite commitment as to this long-term loan or its terms and that the Bank's final decision would have to depend not only on circumstances directly relating to your Company, such as those mentioned above, but also upon the condition of the Mexican economy, the world situation and other considerations which might be relevant at the time. The definitive rate structure of your Company and its subsidiaries has now been approved by the appropriate Mexican authorities. You have advised us of the new rates and their probable effect on your revenues and that these rates afford reasonable prospects for the successful opera- tion of the enterprise. You have also advised us of the Company's cash requirements during the construction period. In view of these cash requirements and for the better assurance of the com- pletion of the construction program and successful operation of the enterprise, it is essential that the provisions of the Plan of Arrangement be such as to conserve to the utmost your Company's cash resources during the construction period by deferring, during that period, the operation of the sinking funds on the new proposed debt securities, and the payment of dividends on the share capital of the Company. The Bank's requirements with respect to the recapitalization of your Company have the follow- ing objectives: (1) the refunding of all the outstanding First Mortgage indebtedness of your Com- pany and its subsidiaries by Bonds to be issued by your Company under a single indenture con- stituting a first mortgage on the major portion of the properties of your Company and subsidiaries under -which there would also be issued and secured pari passit the Bonds to be issued in respect of the loans made and to be made for the purposes of your construction program; (2) the elimination of mandatory charges other than on first mortgage indebtedness; (3) the simplification of the financial structure of your companies, including elimination of interest and dividend arrears; and (4) the conservation of your Company's cash resources for construction purposes. You have submitted to us a Plan of Arrangement, dated December 1, 1949 of your Company and two of its subsidiary companies which you propose to distribute to securityholders. You have 10 also submitted to us a draft of Indenture of Mortgage to be executed by your Company and its sub- sidiaries in favor of National Trust Company, Limited, as Trustec, for the purpose cf securing the proposed First Mortgage and Collateral Trust Bonds of your Company and a draft of Trust Deed to be executed by your Company in favor of National Trust Company, Limited, as Trustee, for the purpose of securing the proposed 52o Cumulative Income Debenture Stock of your Company. These documents appear to us to conform to the principles which we have previously outlined to you and are therefore acceptable to us in substance as a basis for the requested loan. Since we have no direct interest in the allocation of the equity among holders of existing securities, we have not made any independent study of, and express no opinion with respect to, that part of the Plan. We have prepared and discussed with you (a) a draft of Loan Agreement between this Bank and your Company providing for a loan (herein called the Long-Term Loan) in the principal amount of $26,000,000, or the equivalent in currencies other than United States dollars as therein provided, for the purpose of financing the foreign exchange costs of your expansion program and of refunding the Interim Loan, (b) a draft of Guarantee Agreement between the United Mexican States and this Bank providing for the guarantee of the Long-Term Loan and (c) a draft of Nova- tion Agreement between this Bank, Nacional Financiera, S.A., Comision Federal de Electricidad, the United Mexican States, your Company and certain subsidiaries providing for the cancellation of the Interim Loan Agreement and the Subsidiary Loan Agreement. You have asked that the Bank express to you its intentions with regard to the proposed Long- Term Loan in order that you may make these intentions known to the holders of securities of your Company at the time when you distribute to them the proposed Circular and Plan of Arrangement. I am glad to be able to inform you of the present intention of the Bank to enter into a loan agreement with your Company substantially in accordance with the form of Loan Agreement en- closed with this letter subject, however, to the following conditions: (1) that prior to July 1, 1950 or such later date as we may agree upon, the Plan of Arrange- ment shall have received the necessary approvals of securityholders and the other action required by paragraphs (a) and (b) of Clause 5 of the Plan (except the confirmation by Supplementary Letters Patent under the Companies Act, 1934, Canada) shall have been taken and evidence there- of satisfactory to the Bank shall have been furnished to the Bank; (2) that contemporaneously with the execution of the Loan Agreement, the United Mexican States shall execute a guarantee agreement with the Bank substantially in accordance with the form of Guarantee Agreement enclosed with this letter; and the United Mexican States, Nacional Finan- ciera, S.A., Comision Federal de Electricidad, your Company and its subsidiaries shall execute a novation agreement with the Bank substantially in accordance with the form of Novation Agreement enclosed with this letter; (3) that between the date of this letter and the time when the securityholders referred to in Clause 5 of the Plan of Arrangement take the action therein provided for, there shall have occurred no adverse change in the circumstances of your Company and its subsidiaries, in the condition of the Mexican economy, in the relationship of the United Mexican states with the International Bank or the International Monetary Fund or in the world situation sufficiently serious in our opinion to pre- clude the granting of the Long-Term Loan. Yours sincerely, EUGENE R. BLACK President" 11 The proposed Loan Agreement referred to in the above letter, which will not be effective unless the Plan of Arrangement is consummated, will provide for the repayment of the advances made under the interim credit of $10,000,000 made available to the Company, the mechanics for the withdrawal of the remaining sums under the long-term credit and the issuance of Bonds of Series B under the Indenture from time to time as requested to represent amounts withdrawn; will define the construc- tion programme for which the proceeds of the loan must be used; will provide for a commitment charge (of not less than 142% per annum and not exceeding in most cases 2%% per annum) on amounts not withdrawn until withdrawn or cancelled and for interest (including the 1%0 commission which the World Bank is required to charge by its Articles of Agreement) on amounts withdrawn at the rate of 42% per annum, Repayment of the loan in semi-annual instalments commencing on August 1, 1953 and ending on February 1, 1975, will be provided for in accordance with a schedule of maturities based upon level debt service, the Bonds of Serie B being issuable in serial maturities in accordance with this schedule. In certain cases where purchases of equipment are made in curren- cies other than U. S. dollars, withdrawals for these purchases will be repayable in such currencies; in this connection the Company will be subject to the currency regulations of the World Bank, which impose upon the borrower the risk of certain currency fluctuations. It is not expected that Iorrow- ings under the Agreement in currencies other than U. S. dolla-s will be of important amount. The Agreement will provide that, upon the request of the World Bank, Bonds of Series B bearing inter- est at one rate may be surrendered in exchange for Bonds of such Series B bearing interest at any other rate not iii excess of 42%o per annum; but the Company will be obligated to pay to the World Bank as a service charge on the loan the difference between 4/2 per annum and the inter- est rate carried by the Bonds, so that the cost to the Company will remain unchanged. The Company's right to make withdrawals under the Loan Agreement will be subject to suspen- sion or cancellation in certain events including: the existence of an extraordinary situation which shall make it improbable that the Company will be able to perform its obligations under the Agree- ment; a failure by the Mexican Government to carry out any of its obligations under its Guarantee Agreement; if the Mexican Government shall cease to be a member in good standing of the Inter- national Monetary Fund; the suspension or withdrawal of the Mexican Government from member- ship in the World Bank; and the failure of the Company to carry out any part of the construction programme. In the Agreement the Qompany will covenant that until the loan has been satisfied in full it will not without the consent of the World Bank: (a) Issue any Bonds of Series D in excess of 50,000,000 pesos; (b) Until the project is completed, issue any Bonds of any series under the Indenture other than Bonds of the Four Initial Series; (c) After the completion of the project, issue any Bonds under the Indenture except (1) against property additions or upon application of the proceeds to property additions, (2) upon the deposit of cash with the Trustee as provided in the indenture or, (3) in the case of refundings as provided in the Indenture; (d) Request the release under the Indenture or otherwise dispose of (1) any subsidiary, or (2) substantially all of the assets of the Company or any subsidiary, or (3) substantially all of the property included in the construction programme or any plant included therein; (e) Voluntarily redeem or purchase any Bonds of any series other than Series B or D, except upon at least a pro rata redemption or purchase of Bonds of Series B; (f) Redeem or purchase capital stock of the Company or 5)o/o% Cumulative Income Deben- ture Stock of the Company (except as such 5T27 Cumulative Income Debenture Stock shall be retired through the operation of the sinking fund to be provided therefor), except out of the proceeds of the sale of capital stock and, in the case of the 5% fo Income Debenture Stock, the proceeds of the sale of income debenture stock; (g) Consent to an, action taken at any meeting of bondholders held pursuant to the pro- visions of the Indenture which would change the terms of Bonds of Series B or adversely affect the holders thereof. 12 The Company will covenant in the Agreement that it will not pay dividends on the shares of capital stock of any class except to the extent of consolidated net income earned subsequent to December 31, 1949. In addition the Company will undertake that it will not pay dividends or make other distributions on its preferred or common stock until the construction programme has been completed and the local currency costs thereof and any indebtedness in excess of 50,000,000 pesos contracted for the purpose of paying such local currency costs shall have been paid or provided for out of gross operating receipts. The Bonds of Series B will contain a provision for the payment of principal, interest and pre- mium, if any, without deduction for and free from any taxes imposed by the United Mexican States or any taxing authority therein. No such taxes are presently exigible in respect of these Bonds. The Bonds of Series B will also contain a provision that if an event of default under the Loan Agreement shall occur and be continuing the principal of all the Bonds of Series B may, at the option of the World Bank, be declared due and payable immediately. It will be a condition to withdrawals under the Loan Agreement that the repayment of principal and interest (including the repayment of principal, interest and premium, if any, on the Bonds of Series B) be guaranteed by the Mexican Government and the Company will pay to such Government a commission of 4 of 1% per annum on the pincipal amount outstanding from time to time. It is contemplated that an appropriate guarantee agreement will be entered into between the United Mexican States and the World Bank and that the guarantee of the Mexican Government will be endorsed upon the Bonds of Series B. Legislation has been enacted at the present session of the Mexican Congress enabling the United Mexican States to meet the requirements of the World Bank with respect to such guarantee. Peso Credit The Company proposes to enter into an agreement with Nacional Financiera, S. A,, providing for a credit to the Company of up to 44,000,000 pesos (which includes the interim credit obtained in January, 1949) for local expenditures in Mexico in connection with the construction programi. The cornmitment of Nacional Financiera, S. A., to make advances under the credit will be limited to 14,000,000 pesos (less amounts previously withdrawn under the interim credit) in 1950, 20,000,000 pesos in 1951 and 10,000,00 pesos in 1952; provided, however, that if in either of the years 1950 or 1951 the full amount available for such year is not withdrawn, the balance thereof may be withdrawn in a subsequent year but not later than December 31, 1952. The Agreement will provide for the delivery of Series D Bonds in respect of advances made under the credit. 13 CERTAIN INFORMATION REGARDING THE COMPANY AND ITS SUBSIDIARIES Business and Property The Company is an operating public utility organized under the laws of Canada in 1902. Since its organization the Company has acquired or formed, and now owns (except qualifying shares) 100o of the capital stock of The Mexican Electric Light Company, Limited, incorporated in Canada, and the following companies incorporated in Mexico: Compailia de Luz y Fuerza de Pachuca, S.A.; Compafiia de Fuerza del Suroeste de Mexico, S.A.; Compafiia Mexicana Meridional de Fuerza, S.A.; Compafiia de Luz y Fuerza Electrica de Toluca, S.A.; Compaffia Mexicana Hidro- electrica y de Terrenos, S.A. and Edificio de Luz y Fuerza, S.A. The Company and a subsidiary are the sole partners of L. M. Guibara, Sucesores, S. en C., a Mexican partnership. The Mexlight group forms an integrated public utility system all of the companies of which are operating companies with the exception of Terrenos, Edificio and Guibara which hold title to cer- tain lands and buildings used by the group. The Mexlight group is engaged in the business of generating, purchasing, transmitting, distri- buting and selling electric energy for light and power purposes in the Federal District of Mexico, which includes Mexico City, and in parts of the neighbouring states of Mexico, Hidalgo, Puebla, Morelos, Guerrero and Michoacan. The area served comprises about 12,000 square miles with an estimated population of 2,200,000 persons and is the most densely populated and industrialized part of the country. The largest manufacturing industries in Mexico are located in the regions served by the Mexlight group, with the exception of foundries and rolling mills, glass industries and pos- sibly textiles, so that an adequate power supply in this zone is of great importance to the country's general economy. Although the population served is only approximately 10% of the total popula- tion of the country, the Mexlight group furnished in 1948 to their 435,036 customers 1,217,470,036 KWH, which is only slightly below 50%o of the total energy supplied in Mexico to ultimate con- sumers. Within the area served, the Mexlight group distributes almost all of the power consumed, and generates all such power except for that generated at the Ixtapantongo plant of the Federal Power Commission of Mexico, substantially all of the output of which is purchased and distributed by the Company. The Mexlight group owns and operates seventeen plants under Federal concessions, in addition to distributing the power generated by the Ixtapantongo Plant. The present total installed capacity of the group's seventeen plants is 334,550 KW and that of the Ixtapantongo is 55,800 KW. As discussed below, the Company's construction programme calls for the development by 1953 of 155,000 KW of additional generating capacity. During the same period the Federal Power Commission expects to place in operation approximately 170,000 KW of additional capacity in its Miguel Aleman System and the Company expects to purchase and distribute substantially all the additional power to be generated. 14 The following tabulation indicates the principal plants of the Mexlight group: Date of installation or last major Number Installed Name of Plant modernization of Units capacity KW Necaxa (hydro) All turbines and governors replaced in 1937 9 99,000 Tepexic (hydro) 2 units installed in 1923 and modernized in 1937, 1 unit installed in 19Q27 a 45,000 Tezcapa (hydro) 1928 2 5,367 Nonoalco (steam) I unit installed in 1923 and modernized in 1941, 2 units installed in 1929, 1 unit installed in 1943, 1 unit installed in 1947 5 80,000 Fernandez Leal (hydro) Turbines, generator and auxiliary equipment re- placed in 1929 1, 1,280 Tlilan (hydro) c 680 Villada (hydro) 1 1,280 Cafiada (hydro) Turbine, generator and auxiliary equipment re- placed in 1937 1 1,215 Juando (hydro) 2 3,600 Alameda (hydro) 1924 3 8,880 Las Fuentes (hydro) 1 unit installed in 1932, 1 unit installed in 1939 2* 264 Tacubaya (diesel) 6 units installed in 1948 and 1949 6 "A900 Lerma (or Tepuxtepec) (hydro) 1931 2 52,000 San Pedro Zictepec Turbine, generator and auxiliary equipment (hydro) replaced in 1939 1. 384 San Simon (hydro) I unit installed in 1925, 1 unit installed in 1940 Zepayautla (hydro) Turbine, generator and auxiliary equipment replaced in 1939 1 664 Temascaltepec (hydro) 3 units installed in 1926, 1 unit installed in 1928 4 2,336 T o tal i 334,550 1The capacity indicated corresponds to only one mit, the other being considered as spare. The map enclosed herewith showNs the location of the generating plants and principal trans- mission lines of the Mexlight group and the communities served as of December 31, 1948. Construction Programme The important industrial, agricultural and com iercial development which has taken place in the area served by the Melight group, more particularly since 1939, has imposed upon the group the necessity for a heavy programme of expansion of the existing production, transmission and distribu- tion facilities in order that the increasing demand for electric energy mia be met. In view of this constantly growing demand and as it is the policy of the Mexican Govern- ment, through the Federal Power Commission, not to compete wvith existing private electric companies, the Company and the Commission have coordinated their studies for the construction of new power plants, and established a carefully planned joint programme, in order to avoid retarding the economic development of Mexico by an inadequae supply of electric power. Studies made by the Company and the Commission in 1947 for the period 1948 to 1953 showed that an additional cagacity of 40,000 to 50,000 W, without any allowance for reserve 15 capacity, would be required each year in this period in the area served at present by the Mexlight group. The Company put into operation at the end of 1947 an additional 25,000 KW steam turbo-gener- ator unit in the Nonoalco steam plant and in the course of the period November 1948 to April 1949, put successively into operation the 6 units of the diesel plant at Tacubaya, which added 30,900 KW to the installed capacity of the Mexlight group. The dollar financing for this diesel plant which cost approximately $8,000,000 was made possible through a loan of $5,860,000 granted by the Federal Power Commission of Mexico to a subsidiary of the Company while the local expenditures were financed from the companies' own resources. The present construction programme of the Mexlight group includes the following major items: (1) An additional unit of 16,000 KW, scheduled to come into operation by the end of 1949, to supplement the 9 existing units at the hydro-electric power plant of Necaxa. (2) An additional 28,000 KW unit, scheduled to come into operation by the end of 1949, to sup- plement the 2 existing units at the hydro-electric plant of Lerma. (3) A new 45,000 KW hydro-electric plant at Patla, to be built down stream from the present Necaxa and Tepexic plants, and which will utilize the waters discharged from the latter plant and therefore use the water-collecting and storage facilities of the Necaxa hydro-electric system. (4) A new 66,000 KW steam plant to be built at Lecheria, near Mexico City, in the centre of an important and rapidly developing industrial area. (5) A new 220 KV transmission line between Necaxa and a point near Mexico City, which will be needed because of the overloading of the present lines and the installation of the tenth unit at the Necaxa plant and the erection of the Patla plant. The construction programme also involves the increase of the capacity of the transmission and distribution systems and substations of the Mexlight group and other essential miscellaneous works. The Company is informed that the construction programme of the Federal Power Commission with respect to the above-mentioned central area of Mex-ico involves the installation of a third unit at the Ixtapantongo power plant with an installed capacity of 62,000 KW and the completion of the Santa Barbara and El Durazno power plants with respective capacities of 69,000 KW and 21,600 KW. In addition the Commission intends to build a hydro-electric plant at San Bartolo with an installed capacity of 24,200 KW. It may be pointed out that the present demand for electric power in the area served by the Mexlight group is such that every plant of the group as well as the Ixtapantongo plant of the Federal Power Commission is operating at full capacity. The studies made by the World Bank have led it to the conclusion that the construction pro- gramme of the Company is fully justified by the needs of the Mexican economy and that the execution of this programme together with that of the Federal Power Commission, as planned for the central area of Mexico, is essential to meet the estimated power demand. Earnings At page 26 of the circular will be found a statement of the consolidated earnings of the Company and its subsidiaries for the fifteen years ended December 31, 1948. Apart from depreciation in the value of the peso, to which reference is made below, the chief factors which have in the past adversely affected the earnings of the Mexlight group-and the present position with respect thereto-are as follows: (a) Inadequate rates for the sale of electric energy.-A definitive rate increase has re- cently been approved for the Company and subsidiaries under the Law of the Electric Industry (see page 5). 16 (b) Necessary restrictions on the consumption of energy due to shortage of power caused from time to time by insufficient rainfall combined with inadequate reserve capacity.-It is expected that power shortages will be overcome and demands adequately met through 1953 by the additional facilities being provided under the construction programme previously referred to. (c) Constantly increasing costs of labour and workers' benefits.-Under the Law of the Electric Industry the tariffs of the Mexlight group include an adjustment clause under which, in the case of variations in labour costs and certain other basic expenses, compensatory rate in- creases are obtainable (see page 19). (d) Increase in system losses of current, caused by overloading, and in energy unac- counted for.-It is expected that system losses will be reduced as the capacity of transmission and distribution lines is increased as provided for in the construction programme. The energy unaccounted for is attributable to the differences between the real and billed consumption of unmetered services and to theft of current. The large number of consumers connected with- out meters has resulted from the impossibility during and following the last war of obtaining meters in sufficient quantity. In 1948, despite an increase of about 19,000 customers, fie number of unmetered customers declined by 8,550 but at the end of that year there still remained 73,850 customers without meters. The loss of energy resulting from unmetered services will be elimi- nated as soon as the necessary meters are received; currently there are about 142,000 meters on order. Losses from theft of current have been reduced in recent years as a result of technical improvements by the Company and the enforcement of stricter measures by the authorities and further progress is anticipated. (e) Losses on collection of Government accounts for light and power.-These losses occurred in earlier years; in recent years the accounts due from the Federal District have been paid promptly. Regarding the earnings of 1949, present estimates indicate that the consolidated gross revenue in Mexican currency will be substantially higher than in 1948. This is chiefly attributable to the up- ward adjustment in rates in November, 1948 under the adjustment clause of the Company's tariffs and to the sales of power produced at the Tacubaya diesel plant, the six units of which came into operation between November, 1948 and April, 1949. However there are also material increases in the operat- ing expenses for 1949, important among which are the rise in wages and other employees' benefits and in the cost of fuel, which occurret in 1948 and were in effect throughout the entire year 1949, and also, of course, the fuel and other operating costs of the new Tacubaya plant. In the final result, the net income from operations for 1949, in Mexican currency, will be materially better than in 1948 but, owing to the depreciation in the value of the peso during 1949, this income, when expressed in Canadian currency, will probably show little, if any, improvement over 1948. Unfortunately the new definitive rates for the companies, recently approved, will have been in force for such a short time in 1949 that they will not have any effect on the earnings for that year. Capital expenditure disbursements during 1949 have been financed to the extent of $2,678,000 (U. S.) by withdrawal from the interim credit granted by the World Bank and the balance from the funds of the Mexlight group. As a result, the aggregate amount of the companies' cash balances and marketable securities has been reduced from $3,069,000 at the end of 1948 to approximately $2,000,000 at November 30, 1949. Hydrological conditions during 1949 have been very unsatisfactory. Rainfall in the months of July and August, usually rainy months, was less than during the driest July and August on record during the last 40 or 50 years and, while there were some quite heavy rains in October, the storage of water at the end of the rainy season in November was very much below normal. With the steam and diesel plants already operating at maximum capacity during 1949, some restrictions on the con- sumption of power will be unavoidable before the next rainy season which should normally coin- mence in Jun2, 1950. As the degree of these restrictions is extremely important in the mainte- 17 nance of the Mexican economy, the Company has made arrangements to lease in the United States and transport to Mexico some emergency mobile equipment for thermal generation of power in order to keep such restrictions to a minimum. Peso Exchange Owing to an unfavorable trend in its international balance of payments, resulting in a heavy demand for dollars, the Mexican Government found during 1948 that it could no longer support the rate of the peso which since 1940 had been 4.86 pesos to the United States dollar. The Bank of Mexico withdrew from the exchange market on July 22, 1948, leaving supply and demand to fix the value of the peso with respect to foreign currencies. The peso closed on December 31, 1948, at 6.88 pesos to the United States dollar and further depreciated during the first half of 1949 until, on June 17, 1949, by agreement with the International Monetary Fund, Mexico established a new parity for the Mexican peso of 8.65 pesos to the United States dollar. In a press release dated the same day the International Monetary Fund stated that it "con- siders that the new par value is a suitable rate of exchange for assisting Mexico to restore and maintain a strong balance of payments position." On the same date the United States Government made vailable a stabilization credit of $25,000,000 for the purpose of supporting the new parity value of the peso. Although stringent import controls have been established by the Mexican Government, it has not exercised and does not now exercise foreign exchange control. Currently, as in the past, trans- fers of pesos into other currencies can be made freely. Regulation The Mexlight group, as an electric utility operating in the United Mexican States, is subject to the jurisdiction of the Department of Economy and to regulation under the Law of the Electric Industry of Mexico, enacted in 1939, and regulations issued thereunder. Regulation and super- vision extends to a wide variety of matters such as services and facilities, rates, valuations, issues of securities, accounting and classification of accounts. The Department of Economy through the Central Electricity Bureau supervises engineering and services rendered, inspects electric installations and supervises the application of tariffs. The Electric Tariff Commission, an autonomous body consisting of five members (a civil en- gineer, an electrical engineer, a lawyer, an economist and a public accountant), has jurisdiction over such matters as rates, valuations, accounting and issuance of securities. The Secretary of Economy reviews the decisions of the Electric Tariff Commission. The Federal Power Commission, established in 1937, builds and operates its own generating plants, transmission lines, and distribution facilities and also cooperates with private utilities in con- nection with expansion programmes. Rates The Law of the Electric Industry stipulates that utilities shall receive a fair return on their invest- ment. Under that law it has been necessary for the Government, for the purpose of fixing definitive rates, to place valuations on all of the private utility properties in the country. Valuations of prop- erty acquired prior to December 31, 1941, have been based on unit values for various classifications of property in order to avoid the difficulty of valuing specific properties. Acquisitions since 1941 are valued for rate purposes at cost. The Mexlight group is considered as a single system for rate purposes. At the end of 1948 the rate base, subject to formal approval in respect of recent addi- tions, was approximately 550,000,000 pesos of which 471,000,000 pesos corresponds to physical properties. The rate base is subject to annual adjustment to reflect changes in the assets of the Mexlight group, the most important factor being additions to and retirements of physical proper- 18 ties. It is estimated that as the result of the construction programme and normal additions and retirements during the period, the rate base at the end of 1952 will have increased to over 1,000,000,000 pesos. Under the Law definitive rates are fixed for a period not exceeding five years. However, the Electric Tariff Commission, on application of a utility or on the initiative of the Government, may revise rates and special contracts whenever there has been a fundamental change in the economic factors which were taken into consideration in fixing the rates. The rates are also subject to adjust- ment from time to time pursuant to prescribed procedures to take care of increases or decreases in wages and workers' benefits, cost of fuel, energy purchased and taxes (other than income tax), the Electric Tariff Commission having jurisdiction to approve any adjustments proposed to be put into effect by the utility for such causes. In determining rates for the five-year period an annual provision for retirements and replace- ments is taken into account based upon the estimated expenditure for actual retirements and replace- ments over the five-year period, but this does not provide in full for depreciation requirements in accordance with sound accounting practice, and therefore the Company makes an additional provi- sion in its books. Concessions The Mexlight group holds numerous Federal concessions for the use of Federal waters and other purposes relating to its electric business. The Law of the Electric Industry provides that concessions may be granted for a period of fifty years and can be extended, upon application of the concessionaires, for an additional period not exceeding fifty years, provided that the concessionaires have complied with all their obliga- tions during the first fifty-year period. In the case of concessions in force at the time the Law of the Electric Industry was published, the first period of fifty years cormences to run as from the date of publication of the definitive tariffs which, in the case of the Mexlight group, was December 14, 1949. Concessionaires may dispose of their properties (other than permanent hydraulic works) at the expiration of the first fifty-year period if they choose not to ask for an extension of their conces- sions and in such case the Government has the first option to purchase them at the valuation fixed by experts appointed as provided for in the law, while the permanent hydraulic works pass to the nation free of compensation. If, on the other hand, concessionaires ask for and are granted an extension of their concessions, the tariffs must be sufficient during the second period to enable amor- tization of the permanent hydraulic works and depreciation of the other properties; at the expiration of the second period the various properties are subject to the same conditions as would have obtained at the end of the first fifty-year period had the concessions not been extended. Employees The Mexlight group has a collective contract with the Mexican Syndicate of Electricians dated May 1, 1948 and which will expire on April 30, 1950. This contract provides that all employees and workers must belong to the Syndicate, with the exception of the Company's representatives and those holding posts of confidence. At the present time there are in Mexico about 4,000 permanent employees and workers, includ- ing officials. There are also approximately 2,500 provisional employees, but the number of such em- ployees varies considerably from time to time in accordance with the amount of construction work to be carried out. The Labour Law provides that collective contracts may be revised totally or partially every two years, at the request of either of the parties. 19 Management and Control The names and addresses of the directors of the Company are as follows: Name Address Office GEORGE S. MESSERSMITII. . . Mexico City, Mexico ..... .*Chairman of the Board G. MARYSSAEL ...........Mexico City, Mexico.......President and General Manager PAUL VAN ZEELAND....... Brussels, Belgium ........ *Vice-President E. A. GRAYDON...........Toronto, Canada ..........Secretary G. R. G. CoNwAY.........Mexico City, Mexico.......Director W. D. DAWES............London, England .........Director J. DONALD DUNCAN .......New York, N. Y... ......*Director C. E. FINLEY ........... Toronto, Canada .........Director ALLAN GRAYDON .........Toronto, Canada .........Director DAVID G. GUEST ......... Toronto, Canada .........Director D. N. HEINEMAN......... Charlotte, North Carolina. .*Director J. S. HOLMESTED ......... .Toronto, Canada ..........Director HENRY S. HOOKER ........ New York, N. Y...........Director W. MENSCHAERT ......... Brussels, Belgium ......... Director BARON RIcHARD ..........Brussels, Belgium........*Director *Also a director of Sidro or of Sofina or one of the latter's associated companies which own or control securities of the Company. Upon information available to it, the Company believes that Societe Internationale d'Energie Hydro-Electrique (Sidro), S.A., in which Societe Financiere de Transports et d'Entreprises In- dustrielles (Sofina), S.A., holds an important interest, and other companies associated with Sofina, are the only holders of 10% or more of any class of the Company's securities. Sidro first acquired securities of the Company in 1924. As of November 15, 1949, Sidro, Sofina and the com- panies associated with the latter, held 50.7%0 of the voting interest in the Company and will hold 36.4% of such voting interest fter giving effect to the Plan of Arrangement. The Company is advised by Sidro that it, and Sofina and the companies associated with the latter, held in the aggre- gate the following securities of the Company and subsidiaries as of November 15, 1949: Securities Owned of Record or Beneficially Class Amount % of Class Mexlight: 5o First Mortgage Bonds ......................... $17,000 0.3 5% Second Mortgage Bonds and Debenture Stock .... 1722,443 43.7 6o Income Debenture Stock ......................$4,611,665 38.9 70 Preference Shares .............................12,954 shs. 21.6 4o Sccond Preference Shares ......................427,528 shs. 37.5 Ordin,ary Shares ................................. 116,149 shs. 64.7 Mexelectric 5%0 First Mortgage Bonds ................. $2,000 0.1 Pachuca 5o First Mortgage Bonds .................... none none Mexlight has for many years had the benefit of consulting, engineering and other services provided by Sofina. The present contract setting forth the terms under which such services are rendered is effective from January 1, 1949 and extends for a period of five years from that date, after which it continues from year to year subject to termination on 6 months' notice by either party. Sidro, as a holder of substantial amounts of securities of several classes, has advised the Com- pany that it will cast its votes in favor of the Plan. Sofina and the other companies associated with it have also advised the Company that they will cast their votes in favor of the Plan. 20 Legal Matters Legal matters in connection with the consummation of the Plan of Arrangement and the new proposed securities will be passed upon for the Company as to matters of Canadian law by Messrs. Blake, Anglin, Osler & Cassels, 25 King Street West, Toronto 1, Canada, as to matters of United States law by Messrs. Sullivan & Cromwell, 48 Wall Street, New York 5, N. Y., and as to matters of Mexican law by Licenciado Luis R. Lagos, Mexico, D. F., Mexico. Trustees, Registrars and Transfer Agents The Company proposes to make the following appointments in connection with the securities to be issued under the Plan: First Mortgage and Collateral Trust Bonds; Trustee and Registrar in Toronto-National Trust Company, Limited Registrar in London (Series A Bonds) -Binder, Hamlyn & Co. 532,7 Cumulative Income Debenture Stock; Trustee and Registrar in Toronto-National Trust Company, Limited Registrar in London-Binder, Hamlyn & Co. Preferred and Common Shares; Registrar and Transfer Agent-National Trust Company, Limited, Toronto Operating Statistics See pages 22-23. Financial Statements See pages 24-30. 21 bM _-I I _ . - 1 -- OPERATING STATISTICS The following tabulation shows certain information concerning the bu,iness of the Company and Subsidiaries consolidated: Energy Generated and Purchased (KWH) 1944 2945 1946 1947 1948 Generated: Hydroelectric ........................... 880,419,492 1,0454317,804 1,033,270,472 889,398.832 952,454.034 Steam ................................. . 191,042,690 61,285,000 233,303,200 434,575,960 531,560.090 D iesel ................................. - 3,195,600 Total ............................. . 1,071,462,182 1,106,602,804 1,266,573,672 1,323,974,792 1,487,209,724 Purchased: Ixtapantongo .......................... ...59,981,000 182,910,000 206,137,000 219,759,000 276,403,000 Other ................................. 14,969,880 1,869,120 - 4,873,500 4,269,750 Total .............................. 74.950,880 184,779,120 206,137,000 224,632,500 280,672,750 Total Generated and Purchased .............. . 1,146,413,062 1,291,381,924 1,472,710,672 1,548,607,292 1,767,882,474 Company Use ............................... 26,215,375 18,236,711 32,727,913 44,377,785 54,350,008 System Losses and Energy Unaccounted for... 254,250,580 302,417,142 386,802,544 424,627,856 496,062,430 Total Energy Sold ................... 865,947,107 970,728,071 1,053,180,215 1,079,601,651 1,217,470,036 Energy Sales (KWH) Government Departments (federal and local) 97,697,807 117,133,921 129,053,531 121,852,862 135,153,091 Tramways ................................. 78,118,642 78,147,345 79,676,954 79,034,888 79,647,108 Mines (over 2,000 HP Contracted Load) ...... 156,387,988 153,956,377 137,370,337 128,382,754 132,185,421 Other: Flat Rate Lighting ...................... .. 14,192,472 14,402,816 13,044,415 12,085,617 10,780,612 Low Tension Services......................237,874,641 287,551,127 328,007,166 344,245,633 393,607,776 High Tension Industrial ................ 281,675,557 319,536,485 366,027,812 393,999,897 466,096,028 Total Energy Sold .................. 865,947,107 970,728,071 1,053,180,215 1,079,601,651 1,217,470,036 --No OPERATING STATISTICS (Cont'd) Operating Revenue-(Pesos) 1944 1945 1946 1947 1948 Government Departments (federal and local) .... 4,169,695 5,078,862 6,108,530 6,657,489 7,801,797 Tramways .................................. 1,598,833 1,652,094 1,753,409 2,046,207 2,171,604 Mines (over 2,000 HP Contracted Load) ........ 5,314,682 5,529,210 5,476,669 5,760,677 7,328,556 Other: Flat Rate Lighting ....................... ... 2,370,954 2,528,753 2,521,453 2,454,230 2,299,887 Low Tension Services ................... ... 30,337,739 39,339,412 49,944,098 57,294,526 66,668,089 High Tension Industrial .................. ... 11,895,344 14,808,464 18,556,058 22,481,325 27,797,064 Total Revenue from Electric Sales ..... 55,687,247 68,936,795 84,360,217 96,694,454 1 14,066,997 Number of Customers (at end of period) Government Departments (federal and local) .... 1,690 1,650 1,767 1,789 1,797 Tramways ................................. 2 1 1 1 1 Mines (over 2,000 HP Contracted Load)....... 4 4 4 4 4 Other: Flat Rate Lighting ....................... .. 113,725 107,561 100,056 91,594 83,187 Low Tension Services .................... .. 241,545 269,222 296,730 322,046 349,352 High Tension Industrial .................. 435 458 520 604 695 Total Customers ..................... 357,401 378,896 399,078 416,038 435,036 Contracted Load (KW) Light, Heat, and Small Power .................. .. 288,892 314,610 344,213 384,801 409,438 Power, Industrial ............................ ... 240,066 260,768 282,106 318,815 358,173 Total .............................. 528,958 575,378 626,319 703,616 767,611 *Highest System Peak (1 hr.) (KW) .......... 229,338 253,827 283,211 311,601 338.565 *Yearly System Load Factor .................. .. . . 56.91% 58.08% 59.36% 56.73% 59.45% * Treating the interconnected Ixtapantongo plant (owned by the Federal Power Commission) as a part of the System. Substantially all the power generated at this plant is sold to and distributed by the Comj',ay. THE MEXICAN LIGHT -T AND ITS SU CONSOLIDATED BALANCIL ASSETS CAPiTAx. AccouNT: Properties, Easements, Plant and Equipment, Construction Expenditure, at Cost, including Interest during Construction, etc.......................... $98,059,213.83 Rights, Franchises, Contracts and Goodwill ................................ 19,442,674.09 Cost of Investments in Other Companies ..................................... 49,262.87 $117,551,150.79 INVENTORY Or STORES, INCLUDING CONSTRUCTION MATERIAL. 5141,893.86 CURRENT ASSETS: Accounts Receivable less Reserve .......................................$ 3,657,058.16 Dominion Government and other Securities at Market value (cost $1,411,486.84) 1,406,423.87 Cash on Hand and in Banks General'Funds ......................................$1,662,574.97 Funds held in Coupon and Interest accounts ...................314,727.03 1,977,302.00 7,040,784.13 RECEIVABLE FROM THE DEPARTMENT OF THE FEDERAL DISTRICT OF Axico, in 3 equal annual instalments commencing in 1949, in settlement of past indebtedness for light and power services (6,000,000 pesos) 2.............................. DEFERRED CHARGES AND SUNDRY DEPOSITS .*.....................................473,612.19 SINKING FUNDS .............................................................2,752.95 N%O TES. 1. Under successive Collective Contracts with the Syndicate of its workers, the Company is obligated to grant retirement pensions to employees who retire during the period of the Contract and to make certain annual provisions with respect to pensions. The Company has made the necessary provisions in its accounts for pcnsions to retired employees and for the annuol amounts required under the Contract. In the opinion of the Board of Directors of the Company no additional provision is required since the tariffs to which the Company is entitled under the Lac of the Electric Industry of Mexico should provide for the recovery of the cost of future pensions out of future revenues. 2. There are important commitments in respect of capital expenditures. 3. A Plan of Arrangement modifying the rights of the holders of the bonds and debenture stock of The Mexican Light and Power Company, Limited and The Mexican Electric Light Company, Limited, was approved at meetings of the bondholders held during 1941 and became effective on 22nd October, 1941. The provisions of the Plan were given effect to in Supplemental Trust Derds dated 14th November, 1941 and included, inter alia, the extension of the maturity of the First Mortgage Bonds of both compaties to 1st February, 1950 and increased sinking funds for these issues, part of which, as well as the interest and sinking fund on the Second Mortgage and Income issues, and any unpaid accumulations thereof, is payable to the extent of available earmnings in accordance with the terms of the Trust Deeds. Payment of interest on the Income Debenture Stock is, however, limited under the Plan of Arrangement to 6%'o in any one year as long as any of the First Mortgage Bonds of either company remain outstanding. $131,082,286.94 AUDIrORS' REPORT T We have audited the head office accounts in Toronto of The Mexican Light and Power Company, Limited and The Mexican Electric Light Company, Limited and have examined the report of Messrs. Price, Waterhouse & Co., Public Accountants, covering the capital and revenue accounts in Mexico of The Mexican Light and Power Company, Limited and its subsidiaries for the year ended 31st December, 1948, No provision has been made for the amortization of rights, franchises, contracts and goodwill. Subject to the foregoing we report that, in our opinion, the accompanying consolidated balance sheet is properly drawn up so as to exhibit a true and correct view of the state of the combined companies' affairs at 31st December, 24 TR COMPANY, LIMITED APANIES -s AT 31st DECEMBER, 1948 Canadian Currency LIAB3ILITIES CAPITAL STocK: Ordinary Shares- Authorized 250,000 shares-no par value Issued 179,600 shares ..........................................$17,085,000.00 7% Cumulative Preference Shares- Authorized and Issued 60,000 shares-par value $100 each (Dividend paid to 1st May, 1931) ......................6,000,000.00 4% Cumulative Redeemable Second Preference Shares- Authorized and Issued 1,140,000 shares-par value $5 each (Dividend paid to 1st May, 1931) ......................5,700,000.00 $28,785,.00 GENERAL RESERVE (transferred from Sinking Fund Reserves at 31st December, 1948). .....................................$14,521,642.15 Less: DEFICIT IN PROFIT AND Loss AccoUr ..........8,095,64216 6,425,999.99 FUNDED DEBT (see note 3) at par of exchange The Mexican Light and Power Company, Limited 5% First Mortgage Bonds, due 1950 Authorized and Issued ............................. $12,000,000.00 Less: Redeemed through Sinking Fund, etc. ............ 5,694,000.00 $ 6,306,000.00 5% Second Mortgage 50-Year Bonds and Debenture Stock, due 1968 Authorized and Issued ...................13,000,000 $14,600,000.00 Less: Redeemed through Sinking Fund...... 1,348,450 6,562,456.67 i1,651,550 8,037,543.33 6% Cumulative Income Debenture Stock Authorized and Issued .............................. $11,850,757.74 Less: Redeemed through Sinking Fund................. 157.74 11,850,600.00 The Mexican Electric Light Company, Limited 5% First Mortgage Bonds, due 1950 Authorized and Issued .............................. $ 6,000,000.00 Less: Redeemed through Sinking Fund ................ 3,244,900.00 2,755,100.00 Pachuca Light and Power Company 5% 50-Year First Mortgage Bonds, due 1967 Authorized .. L1,200,000 - Issued ..........£ 800,000 $ 3,893,333.33 Less: Held in Sinking Fund...............393,740 1,916,201.33 i 406,260 1,977,132.00 Cia. Mexicana Meridional de Fuerza, S.A. 6% loan from Comision Federal de Electricidad, Secured by Mortgage-payable in 20 equal annual instalments of principal and interest Authorized ........................ $5,860,000.00 Advances to date ($109,315.28 repayable 31st December, 1949) $ 4,021,227.00 Owing for vot.tipment to be funded b additional advances 1,062,790.40 5,084,017.40 36,010,392.73 INTEREST ON elI- CUMULATIVE INCOME DEBENTURE STocK- (see note 3) Interest accumulated to 31st December, 1948 (60%%) .......7,169,613.00 CURRENT LIABILITIES: Interest on 5% Second Mortgage Bonds and Debenture Stock for the year ended 1st December, 1948 (payable 1st July, 1949) ......................................... Accrued Interest on Bonds and Second Mortgage Debenture Stock ........ .........................................252,767.75 Accounts Payable, Accrued Charges and Provision for Taxes 3,600,581.64 4,186,962.49 DEFERRED AND CONTINGENT LIABILITIES, including employees' benefit provisions .....................6,868,582.82 REsERvE FOR DEPRr_C1ArioN or CAPITAL ASSETS .........41,635,735.91 On behalf of the Board, GEORGE S. MESSERSMITH Directors. $131,082,286.94 E. A. GRAYDON E SHAREHOLDERS 1948, according to the best of our information and the explanations given us, and as shown by the books and the report referred to. We have received all the information and explanations we have required. Toronto, Canada, CLARKSON, GORDON & CO., 2nd June, 1949. Chartered Accontants. 25 THE MEXICAN LIGHT A AND ITS SU" STATEMENT OF CONSOLIDATED EARNINaco Consolidated earnings before providing Consolidated Interest on for depreciation, Provision for Provision f6r earnings beforj first mortgage taxes on income depreciation Mexican taxes providing for bonds of the or interest on of fixed on income interest on company and funded debt assets (Note 5) funded debt subsidiaries 1934...........$4,209,411.46 $1,574,600.00 $ 517,200.37 $2,117,611.09 $ 941,649.04 1935..........4,167,705.79 1,582,392.0S 395,673.83 2,189,639.88 916,805.35 1936..........3,811,366.44 1,585,629.72 427,749.59 1,797,987.13 890,166.96 1937...........3,814,646.25 1,585,571.31 348,152.83 1,880,922.11 864,264.88 1938..........2,920,219.04 1,584,855.10 350837.04 984,526.90 833,512.77 1939..........2,820,777.00 1,584,492.50 322,595.77 913,688.73 833,960.68 1940..........3,039,777.78 1,584,558.30 339,969.10 1,115,250.38 854,094.54 1941..........3,867,510.68 1,584,859.76 514,540.09 1,768,110.83 835,340.62 1942..........5,669,255.23 1,584,864.08 1,241,016.15 2,843,375.00 790,124.04 1943..........5,797,917.83 1,635,000.00 11187298.01 2,975,619.82 741,786.08 1944..........4167,878.87 1,616,000.00 821,519.73 1,730,359.14 711,144.16 1945..........6,225,033.44 1,782,000.00 1,623,002.40 2,820,031.04 691,342.53 1946..........6,412,033.14 1813,000.00 1,741,120.50 2,857,912.64 621,939.01 1947..........6,894,239.39 1Y44,000,00 1,904,217.67 3,146,021.72 58534.47 1948..........5,038,594.92 2035,000.00 1,665,933.70 1,337,661.22 562,659.18 NOTES: 1. No provision has been made to amortize the cost of rights, franchises, contracts and goodwill over the term of the concessions or any prospective extension thereof. 2. Discount on the issue of bonds of the company and its subsidiaries, $5,173,733, and bond and share issue ex- penses, $1,082,941, were charged against sinking fund reserves in the year ended 31st December 1943. No part of these amounts or bond discount wvritten off prior to 1st January 1934 is deducted in arriving at the above consolidated net earnings. 3. The earnings shown above do not include- (a) The discount, totalling $5,444,723 in the 15-year period, on the purchase for sinking fund of bonds of the company and its subsidiaries which wvas credited in the accounts to sinking fund reserves. (b) Profits of $70,341 realized by a subsidiary on the sale of its investment in bonds of The Mexican Light and Power Company, Limited. 4. The amount included in earnings each year in respect of revenue for power supplied to Mexican Governments (Federal, State and Municipal) is the amount collected during such years for power supplied to them. 5. The amount of income subject to Mexican income tax on profits is substantially greater than the consolidated earnings before tax, as deduction is not permitted in arriving at taxable icome for accrued but unpaid in- terest on debt, certain exchange losses, head office expenses and other items. Minor adjustments have been made in the provisions for taxes in the respective years to reflect the actual taxes payable where these have subsequently been determined. THE DIRECTORS, THE MEXICAN Ll We have examined the statement of consolidated earnings of The Mexican Light and Power Company, Lim- ited and subsidiaries for the 15 years ended 31tDeceinber, 1948. In connection therewithi We 1-wec andited the head office accounts in Toronto of the company and The Mexican Electric Light Company, Limited and have ex- amined the reports of Messrs. Price, Waterhouse & Co., Public Accountants, covering the capital and revenue accounts in Mexico of The Mexican Light and Power Company, Limited and its subsidiaries for those years. No provision has been made for the amortization of rights, franchises, contracts and goodwill and subject thereto we report that in our opinion the above statement when read with the footnotes thereto, fairly presents, 26 T COMPANY, LIMITED ~1WPANIES T 15 YEARS ENDED 31ST DECEMBER, 1948 Canadian Currency Consolidated earnings before Interest on providing for % C ulative interest on 5% Consolidated Income Debenture 2nd Mortgage ear or Stock of the Bonds and (los) before company and, in Debenture Stock for the year 1934, and 6% interest on 6% interest on the Cumulative Income Cumulativo Income 6% Cumulative Debenture Stock Interest on 5% Debenture Stock Income Bonds and, in 1934, Second Mortgage and, in 1934, and the General interest on certain Bondsand interest on certain Unsecured Bonds Consolidated securities formerly Debenture securities formerly formerly net earnings outstanding Stock outstanding outstanding or (los) $1,175,962.05 $ 655,375.42 $ 520,586.63 $ 947,362.73 $ (426,776.10) ............1934 1,272,834.53 627,816.60 645)017.93 711,036.00 (66,018.07) ............1935 907,820.17 588,798.45 319,021.72 711,036.00 (392,014.28) ............1936 1,016,657.23 569,829.07 446,828.16 711,036.00 (264.,207.84) ............1937 151,014.13 520,330.28 (369,316.15) 711,036.00 (1,080,352.15) ............1938 79,728.05 465,295.58 (385,567.53) 711,036.00 (1,096,603.53) ............1939 261,155.84 455,288.48 (194,132.64) 711,036.00 (905,168.64) ............1940 932,770.21 460,856.07 471,914.14 711,036.00 (239,121.86) ............1941 2,053,250.96 460,879.35 1,592,371.61 711,036.00 881,335.61............1942 2,233,833.74 460,879.35 1,772,954.39 711,036.00 1,061,918.39............1943 1,019,214.98 410,011.83 609,203.15 711,036.00 (101,832.85)............1944 2,128,688.51 409,745.84 1,718,942.67 711,036.00 1,007,906.67 ........... 1945 2,235,973.63 352,044.34 1,883,929.29 711,036.00 1,172,893.29............1946 2,556,487.25 342,707.25 2,213,780.00 711,036.00 1,502,744.00............1947 775,002.04 332,597.18 442,404.86 711,036.00 (268,631.14) ............1948 NOTES (contined): 6. Under successive Collective Contracts with the Syndicate of its workers, the company is obligated to grant retirement pensions to employees who retire during the period of the contract and to make certain annual provisions with respect to pensions. The company has made the necessary provisions in its accounts each year for pensions to retired employees and for the annual amounts required under the contract. In the opinion of the Board of Directors of the company no additional' provision is required since the tariffs to which the company is entitled uinder the Law of the Electric Induistry of Mexico should provide for the recovery of the cost of future pensions out of future revenues. 7. The amounts shown in the last column of the above statement are the consolidatedI net earnings or losses for each of the 15 years and therefore differ from the balances of the consolidated profit and loss account for these years shown in the annual financial statements submitted to shareholders which represented net earn- ings less amounts appropriated and paid during the year for sinking fund on funded debt. 8. Interest dwing construction was capitalized only in respect of major projects. Where no borrowings were incurred for construction parposes, the interest capitalized was credited to the reserve for depreciation, viz.: $42,366.52 in 1944 and $177,296.54 in 1948. Accordingly these amounts are not included in the earnings shown above. 9. Revenues and expenses from operations in Mexico and from transactions in other currencies have been con- verted into Canadian r-urrency at exchange rates prevailing in the respective years. AND POWER COMPANY, LIMITED: the consolidated earnings of The Mexican Light and Power Company, Limited and its subsidiaries for the 15 years ended 31st December, 1948. Toronto, Canada, 5th December, 1949. CLARKSON, GORDON & CO. Chartered Accountants. 27 THE MEXICAN LIGHT AN AND ITS ST" PRO FORMA CONSOLIDATED P Prepared to show the effect on the position of the Company and its subsidiiLles 1. The proposed Plan of Arrangement dated 1st December, 1949, affecting securities of the Company and its subsidiaries (which Plan would become effee shown in the attached pro forna statement of General Reserve. 2. Provision of $1,500,000 for the estimated expenses and possible taxes it ance therewith. AS SECTS CAPITAL ACCOUNT: Properties, Easements, Plant and Equipment, Construction expenditure, at Cost, including Interest during construction, etc.............................. $98,059,213.83 Rights, Franchises, Contracts and Goodwill................................ 19,442,674.09 Cost of Investments in other Companies................................... 49,262.87 $117,551,150.79 INVENTORY OF STORLS, INCLUDING CONSTRUCTION MATERIAL.....................................5,141,893.86 CURRENT ASSETS: Accounts Receivable less Reserve .......................................... $ 3,657,058.26 Dominion Government and other Securities at Market Value (cost $1,411,486.84) 1,406,423,87 Cash on Hand and in Banks General Funds ............. ......................... $1,662,574.97 Funds held in Coupon and Interest accounts.................. 314,727.03 1,977,302.00 7,040,784.13 RECEIVABLE FROM THE DEPARTMENT OF TiE FEDERAL DISTRICT OF MIxico in 3 equal annual instalments commencing in 1949 in settlement of past indebtedness for light and power services (6,000,000 pesos)........... .............................................872,093.02 DEFERRED CHARGES AND SUNDRY DEPOSITS........................................................ 506,564.39 SINKING FUNDS............................................................................... 2,752.95 NOTES: 1. Under successive Collective Contracts with the Syndicate of its workers, the Company is obligated to grant retirement pensions to employees who retire during the period of the Con- tract and to make certain annual provisions with respect to pensions. The Comipany has made the necessary provisions in its accounts for pensions to retired employees and for the annual amounts required under the Contract. In the opinion of the Board of Directors of the Company no additional provision is required since the tariffs to which the Coinpany is entitled under the Law of the Electric Industry of Me.xico should provide for the recovery of the cost of future pensions out of future revenues. 2. There are important commitments in respect of capital expenditures. 3. The amounts shown in this balance sheet of the First 1fortgage and Collateral Trust Bonds to be authorized and issued under the Plan are subject to altcration, in the case of the Series A Bonds, through the operation of sinking funds on the existing funded debt and, in the case of the Series C Bonds, by the receipt of additional advances from and repayments to Comision Federal de Electricidad in the period from 31st December, 1948 to the effective date of the Plan. 4. In the above statement, peso current assets, deferred charges and sundry deposits and the amount receivable from the Department of the Federal District are converted into Canadian currency at the rate of exchange current at 31st December, 19418 (6.88 pesos to $1). The exchange value of the peso has since declined*and now stands at 7.86 pesos to $1 but no loss in respect of the above mentioned current and other assets held at 31st December, 1948 results fran such decline as the liabilities payable in pesos exceed such peso assets. Current assets and liabilities in United States and sterling currencies are converted in the above statement at the official rates of exchange in force at 31st December, 1948. The subsequent devaluation of sterling and Canadian currencies in September, 1949 does not materially affect the net valuation of these current assets and liabilities. Expenditures on capital account and inventories of stores in currencies other than Canadian are converted into Canadian currency at the rates of exchange in effect when the expenditures were inade. 5. Under the provisions of the proposed World Bank Loan Agreement the Company will under- take among other things that, except with the consent of the Bank- (a) dividends on the shares of any class will be paid only out of consolidated not inconie earned subsequent to 31st December, 1949, and (b) it will not pay dividends or wnake other distributions on its preferred or common stock until the construction programme has been completed and the local currency costs there f and any indebtedness in excess of 50,000,000 pesos contracted for the purpose of paying such local currency costs shall have been paid or provided for out of gross operating receipts. The Company's right to redeem or purchase 5Y2% Cumulative Income Debenture Stock and Capital Stock will also be restricted under the World Bank Loan Agreement as referred to on page 12 of the circular. $131,115,239.14 THE DIRECTORS, THE MEXICAN We have audited the head office accounts in Toronto Of the Mexican Light and Power Company, Limited and The Mexican Electric Light Company, Limited and have examined the report of Messrs. Price, Waterhouse & Co., Public Accountants, covering the accounts in Mexico of The Mexican Light and Power Company, Limited and its subsidiaries as at 31st December, 1948. No provision has been made for the amortization of rights, franchises, contracts and goodwill. Subject to the foregoing we report that in our opinion the above pro forma consolidated balance sheet is properly drawn up so as to exhibit a true and correct view of the state of the combined companies' affairs as at 31st December, 28 )WER COMPANY, LIMITED _ OMPANIES -EET AS AT 31ST DECEMBER, 1948 -- of the following: holders of the share capital of the Company and all the holders of the funded debt fulfillment of the conditions set out in Clause 5 of the Plan) and the adjustments to the Plan of Arrangement and the issue and exchange of securities in accord- Caadian Currency LIABILITIES CAPITAL STOCK: See note 5 Pr.ferred Shares, carrying a preferential dividend' of $1 per share per annum cumulative from 1st January, 1953, entitled on redemption or liquidation to $16.50 per share- Authorized and Issued 853,244 shares at par value of $13.50...............$11,518,794.00 Common Shares Authorized and Issued 1,776,836 shares of no par value.....................29,116,806.00 $ 40,635,600.00 GENERAL RESERVE (per statement attached)-see note 5....................................... 13,630,967.78 $ 54,266,567.78 FUNDED DEBT: First Mortgage and Collateral Trust Bonds- 5% Series A Sinking Fund Bonds due 1975-see note 3 Authorized ......................................$10,889,270.00 Issuable in U. S. currency in exchange for Mexlight and Mexelectric First Mortgage Bonds ...... ...................................$ 9,061,100.00 Issuable in U. S. currency in exchange for Pachuca Bonds ............... 1,828.170.00 (or prior to 30th December, 1950 at the option of the Pachuca bond- holder in Canadian currency at the rate of $1.10 Canadian to $1 U. S.) Series B Serial Bonds due 1953-1975 (U. S. and other currencies)-Interest to be fixed by Vorld Bank Loan Agreement, not exceeding 4%'o; Com- mission of 4 of 1% per annum also payable to United Mexican States as guarantor. Authorized ........................................... $26,000,000.00 (Issuable to refund advances under interim credit obtained since 31st De- cember, 1948 and to finance construction programme) 5% Series C Sinking Fund Bonds, due 1975 (U. S. currency); Commission of 1% also payable to Comision Federal de Elcctricidad Authorized .....................................$ 5,860,000.00 Issued-see note 3. ................................5,084,017.40 Series D Serial Bonds, due 1953-1975 (Mexican currency)-Interest not to ex- ceed 7% Authorized ..................................Pesos 90,000,000 (Issuable to refund advances under interim credit obtained since 31st De- cember, 1948 and to finance construction programme) $15,973,287.40 5y2% Cumulative Income Debenture Stock (U. S. currency)-see note 5 Authorized and Issued .............................................. 4,624,340.00 $20,597,627.40 Amount required to adjust the face value of funded debt payable in U. S. currency to Canadian currency equivalent at the date of issue ...............2,059,762.74 22,657,390.14 CURRENT LIABILITIES: Interest on 5% Second Mortgage Bonds and Debenture Stock for the year ended 1st December, 1948 (payable 1st July, 1949)............................. $ 333,613.10 Accrued Interest on existing Bonds and Second Mortgage Debenture Stock... 252,767.75 Accounts Payable, Accrued Charges and Provision for Taxes.................. 5,100,581.64 5,686,962.49 DEFERRED AND CONTd7ENT LIABILITIEs, including employees' benefit provisions......6,86,582.82 REsE,RvE FOR DEPRMcATION oF. CAPITAL AsSETS ...............................................41,635,735,91 $131,115,239.14 'OWER COMPANY, LIMITED: 1948 after giving effect at that date to the proposed changes set out above, according to the best of our- information and the explanations gven to us. Toronto, Canada, CI.ARiso.N, GORnON & CO. 5th December, 1949. Chartered Acr-ountants. 29 THE MEXICAN LIGHT AND POWER CO,1PANY, LIMITED AND ITS SUBSIDIARY COMPANIES PRO FORMA STATEMENT OF GENERAL RESERVE (Referred to in Item 1 in the heading of the attached Pro Forma Consolidated Balance Sheet) AS AT 31ST DECEMBER, 1948 Canadian Currency Balance of general reserve at 31st December, 1948 $14,521,642.15 Add: Interest accumulated to 31st December, 1948 (60Y21%) on the 6% Cumulative Income Debenture Stock, which would be can- celled under the Plan ....................................$7,169,613.00 Excess of the amounts at which the existing First Mortgage Bonds of the Company and its subsidiaries and the Second Mortgage Bonds and Debenture Stock of the Company are stated in their accounts over the Canadian currency equivalent of the principal amount of the new securities to be issued in exchange......... ..1,535,354.79 8,704,967.79 $23,226,609.94 Deduct: Balance of deficit in profit and loss account as at 31st December, 1948 ................................................... $8,095,642.16 Provision for estimated expenses and possible taxes incidental to the Plan of Arrangement and the issue and exchange of securities in accordance therevith .................................. 1,500,000.00 9,595,642.16 Balance of general reserve after giving effect to the proposed addi- tions and deductions shown above .............................$13,630,967.78 30 Copies of this circular, of the Plan of Arrangement and of the notices of meetings, forms of proxies and instructions as to voting may be obtained on application to any of the following offices: The Mexican Light and Power Company, Comptoir National d'Escompte de Paris Limited 14, rue Bergere 25 King Street West Paris, France Toronto 1, Canada or Banque de Bruxelles 2a, Calle de Gante 20 2, rue de la Regence Mexico, D.F., Mexico Brussels, Belgium National Trust Company, Limited Banque Internationale 'a Luxembourg 20 King Street East 2 bis, Boulevard Royal Toronto 1, Canada Luxemburg, Luxemburg Binder, Hamlyn & Co. River Plate House 12 & 13, South Place London E.C.2, England There are available for inspection at the above-mentioned offices drafts (which are subject to revision) of the agreements relating to the World Bank loan, of the Indenture under which the new First Mortgage and Collateral Trust Bonds will be issued and of the Trust Deed under which the new 5Y/2% Cumulative Income Debenture Stock will be issued.