New Jersey Administrative Code › Title 14 - PUBLIC UTILITIES › Chapter 1 - RULES OF PRACTICE › Subchapter 5 - PETITIONS › Section 14:1-5.9A - Criteria for proposed security issues

Current through Register Vol. 56, No. 14, July 15, 2024
(a) The Board shall
				determine what security issues may be made by public utilities in the State of
				New Jersey (N.J.S.A. 48:3-9). The Board, after investigation, including a
				hearing at the Board's discretion, shall approve proposed security issues;
				provided, the Board is satisfied that proposed issues are in accordance with
				law, and provided the Board approves the purpose of said proposed
				issues.
(b) Various cases involving
				the approval of proposed security issues have been acted upon by the Board
				pursuant to law. An analysis of many of these cases discloses certain general
				principles upon which these applications should be determined. These general
				principles will control unless and until good reason can be shown for departing
				therefrom. For the information of public utilities petitioning or intending to
				petition for the approval of security issues, certain of these general
				principles are set forth, as follows:
1. The
				two conditions first named above must in all cases be met. These are that a
				proposed issue must be in accordance with the law, and that the purpose of a
				proposed issue must be approved by the Board.
2. The purpose of a proposed issue is not
				commendable and will not carry the Board's approval where the issue, if
				approved, would result in an evasion of mandatory statutory provisions
				governing the issue, sale, and delivery of securities.
3. Where approval of security issues is
				asked, and statement is made of the use to which proposed securities are to be
				put, the Board endeavors through its inspectors, engineers or other Board
				authorized representatives to determine that the proceeds of the securities
				whose issue is asked shall be reasonably commensurate with the property or
				services to be purchased therewith. Where the property whose acquisition is
				sought can be inventoried and appraised, such a course is followed with as much
				care and in such detail as under all the circumstances is possible. Where the
				property or services to be acquired cannot be physically inventoried, because
				not yet existent, such estimate is made on the basis of unit prices and
				otherwise, with as much care and in such detail as is possible under all the
				circumstances. Approval by the Board of such proposed issue of securities does
				not carry or imply any confirmation of the business or financial standing of
				the issuing corporation as a whole. It must be recognized that no care
				exercised in the way of approval by the Board at the time securities are issued
				can preclude the subsequent chance of poor management, dishonesty, or reckless
				and irresponsible ill-fortunate, by which the assets of a public utility may be
				lessened or impaired. The intent of the statute and the Board's action
				thereunder seek to preclude promotion or subsequent inflated issues. No statute
				and no administrative process, however, can relieve the investor of the
				obligations of prudence and vigilance. At the best they can but aid him in
				furnishing some grounds for the exercise of intelligent judgment.
4. Where petition is made for the approval of
				the issue of bonds or notes, where said bonds or notes are to be sold at a
				discount, the Board has adopted the general policy of approving such issues
				only upon the companies' undertaking to amortize the bond discount in
				accordance with certain stipulations inserted in the Board's order of approval
				or in accordance with the requirements of the applicable Uniform System of
				Accounts. Where, for example, five per cent debt securities are sold at a price
				below their face value, the result of the sale is as follows: First, an
				increase of the company's liabilities to the amount of the principal or face
				amount of the debt securities; Second, an increase of the company's assets to
				the amount of cash realized. The difference is commonly entered as an asset
				termed "Unamortized Debt Discount and Expense". This asset is practically a
				dummy asset. If the company is to make its real assets equal to its added
				liabilities, it must add to its property an amount equal to the amount recorded
				therein. The most effectual way would seem to be to lay aside from earnings an
				annual amount. The setting aside of this amount annually must be done before
				the company is entitled to declare or make any dividend. It is true that the
				process implies that the consumer must contribute in rates more than he would
				be required to pay if no amount were needed annually for this amortization. On
				the other hand, if the bond had been sold at par, a higher rate than the
				assumed five per cent would have been exacted by the lender to the company, and
				this higher rate of interest would have been included in the annual fixed
				charges. The higher fixed charges would have imposed a greater annual payment
				upon consumers. Practically, therefore, the burden which amortization imposes
				on the consumer is simply the necessary outcome of the process of issuing bonds
				at less than par. It would not disappear but only change its form, if the bonds
				were sold at par and the real rate of interest thereon were not disguised. It
				has been progressively acknowledged that bond discount is not properly
				chargeable to capital account, but should be amortized within the life of the
				obligation. In certain authorizations of bond issues by this Board, request has
				been made by the issuing corporation that a specific sum shall be named by the
				Board to be set aside annually for this purpose. It may be taken as the rule,
				therefore, that the Board's approval of bond issues will be contingent upon the
				petitioner's acceptance of a proper amortization provision where necessary. But
				the provision may vary in different cases, according to the life of the bond,
				the desire of the company to expedite the process, and the varying capacity of
				different utilities to provide expeditiously for proper amortization.
5. Where a petition for Board's approval of a
				security issue contains provision for calling the securities at a premium
				before maturity, it is realized that in certain instances refunding of
				securities at a premium before maturity might effect such a reduction of fixed
				charges as to be advantageous both to the company and the consumers.
				Accordingly, the Board in approving security issues will not sanction
				redemption before maturity at a premium at the company's sole option; should
				the issuing company, however, reserve such right of redemption at a fixed
				premium before maturity subject to future approval by the Board after due
				hearing or investigation, the Board will consider in any case the inclusion of
				such provision in its formal order of approval.
6. In acting upon petitions for the approval
				of proposed issues of debt securities, the Board will insist on adequate
				evidence of the probability that the fixed charges can be regularly met, and
				that the principal sum can be repaid at maturity. Where such debt securities
				are to be issued by a public utility now operating, the past and current
				earnings of the public utility will be a relevant consideration. Also worthy of
				consideration will be such probable changes in earnings as properly may be
				expected to result from the property to be acquired by the proposed issue:
i. Where the company is newly projected, and
				where past experience is not available to indicate the probable return in
				revenue to the company, debt security issues, if they are to be approved, must
				carry a reasonable probability that, with average good management, fixed
				charges may be regularly met and ultimate payment of the principal sum may be
				provided;
ii. Where approval of
				proposed stock issues is requested, the Board will endeavor to be assured that
				the stock issues will secure for the public utility additional property
				commensurate with the par value of the stock issue proposed. The investor in
				stock knowingly takes a chance of return which the investor in debt securities
				commutes for a specified return of fixed amount. For this reason the Board does
				not feel obliged to be assured of the probability of returns upon stock as it
				does in the case of proposed debt security issues.
7. Certain special cases of proposed security
				issues may arise under certain circumstances, some of which are set forth
				hereafter. In these special cases the general principles outlined above will be
				applied so far as seems equitable, and exceptions made only where the general
				principles enunciated therein would work inequitably. Among the special cases
				may be mentioned the following:
i. Where a
				bond issue has previously been sanctioned under a mortgage or deed of trust
				providing that all bonds issued thereunder shall be identical in tenor, and
				where some part of the authorized bonds has not yet been actually issued, in
				some cases the Board does not feel that it can impose, as a condition of
				authorizing a remaining and unissued part of the total issue authorized,
				requirements against redemption at a premium prior to maturity;
ii. Where petitions request authority to
				issue new securities in order to refund outstanding securities, the new
				securities, to issue, must conform to such requirements as would be imposed if
				the refunding securities were an original issue. The refunding debt and equity
				securities must be backed respectively by proportionate amounts of cash, or
				property of actual cash value. The refunding issues must afford the same
				likelihood of meeting their fixed charges and payment of the principal sum at
				maturity as is indicated in (c)6 above. Nor will agreements or contracts
				providing for refunding of security issues where such agreements or contracts
				were made prior to the enactment of Chapter 195 of the Laws of 1911, (now
				N.J.S.A. 48) be regarded by the Board as invalidating or overriding the
				authority over security issues vested in this Board by said Act. The power
				conferred upon this Board to disapprove proposed security issues not in
				accordance with law or whose purpose is not approved by the Board is expressly
				conferred by the Act of April 21, 1911 (Chapter 195, Laws of 1911) (now
				48:3-9), and this power is not
				restricted by any other provision of the law governing public utilities, or
				corporations generally. All such agreements or contracts, however binding upon
				the individual parties thereto they might have been, in default of the
				Legislature's subsequently vesting power over proposed security issues in this
				Board, are not controlling so as to delimit the Board's action upon proposed
				security issues. For such outstanding securities as may legally have come into
				existence prior to the passage of the Act of April 21, 1911, this Board has no
				responsibility. But its authority is not delimited by expectations that may
				have been created by reason of agreements or contracts between private parties
				made prior to the enactment of the statute in question. Where the provisions of
				such agreements or contracts involve issue of new securities, they must be
				submitted to this Board.
8. The declaration of dividends in the form
				of stock by public utilities is permissible only in such cases as this Board
				with or without hearing may authorize. To declare such a stock dividend without
				first obtaining the approval of the Board is a misdemeanor, and all such
				securities issued without the Board's approval are illegal. In general, the
				Board will approve the issue of stock dividends by public utilities only after
				hearing or investigation, and after being satisfied that as the outcome of such
				issues the property and other net assets of the company over and above other
				liabilities resting thereon shall be equal to the par or stated value of the
				total stock outstanding after such stock dividends have been made. Adequate
				depreciation reserves and surplus must also be provided by a public utility
				petitioning to issue a stock dividend, and a careful inquiry will be made by
				the Board into the methods by which were accumulated assets or property against
				which the additional stock dividend is to be justified. In addition, the
				petition must contain a reasonably detailed inventory of its property used or
				useful, or held for future use and priced at original cost, estimated if not
				known.
9. For the information of
				all public utilities intending to petition this Board for the approval of
				proposed security issues, reference should be made to the Board's rules. The
				requirements of this Order and the rules as to the form and content of
				petitions should be carefully observed. Petitions should be filed sufficiently
				in advance of the time at which approval of securities is desired to insure the
				Board reasonable time to make the relevant inquiries. The larger the proposed
				issue, and the more complex the conditions surrounding it, the earlier should
				the petition be filed with the Board. The petitions will be acted upon
				hereafter in the order of their filing as indicated by the dating stamp of the
				Secretary's office. Petitions essentially defective in form or content will not
				be listed for consideration until properly amended. Where such petitions
				involve the necessity of inventorying property or checking accounts, the public
				utility applying for such authorization is requested to give such assistance as
				is within its power by putting its engineers, managers, and accountants in
				touch with the Board's engineers or other Board authorized representatives.
				Where the annual reports required of public utilities have not been promptly
				filed as by the rules of this Board, or where such accounts, when filed,
				disclose failure upon the part of the public utility to comply with the
				requirements of law or with the terms upon which previous security issues of
				said utilities have been approved by this Board, any subsequent petition for
				the approval of securities by a public utility shown to be default may be
				postponed until the requisite and legal compliance with the law and the lawful
				rules of this Board has been made by said public utility.