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preferred stock, and $185 million common stock. No bonds were sold during the first half of the fiscal year; the three debenture issues aggregating $80 million were sold during that period.

Competitive Bidding

All but 3 of the 25 issues sold for cash and listed in table I were offered at competitive bidding pursuant to the requirements of rule 50.32 An order granting exception from competitive bidding was entered in only one of the three instances, the other two being automatically excepted by paragraph (a)(1) rule 50.33 General Public Utilities Corp., a registered holding company, issued and sold 530,000 shares of its $5 par value common stock for $20 million. This was a nonunderwritten rights offering in connection with which it was proposed that the unsubscribed shares would be sold through brokers on the New York Stock Exchange. Although it appeared that the sale of the unsubscribed shares would be exempt under paragraph (a) (4), the Commission granted the company an exception from the provisions of the rule to the extent it might become applicable to the transaction.35

Consolidated Natural Gas Company, also a registered holding company, sold 821,256 shares of its $10 par value common stock for $39 million. This was also a nonunderwritten rights offering to its stockholders and was automatically excepted from the competitive bidding requirements by the provisions of paragraph (a)(1) of the rule. It was not proposed that the unsubscribed shares be sold.

The remaining issue not sold through competitive bidding was the issuance of $15 million of common stock by Yankee Atomic Electric Company, a subsidiary of New England Power Company, which in turn is a subsidiary of New England Electric System, a registered holding company. New England Power Company purchased $4,800,000 of the issue and Montaup Electric Company, a subsidiary of Eastern Utilities Associates, a registered holding company, purchased $720,000 thereof. The remainder of $9,480,000 was purchased by the other nine owner companies of Yankee Atomic Electric Company. Since this stock was offered to existing stockholders, which had agreed to subscribe for their pro rata share the transaction was excepted from the rule pursuant to paragraph (a) (1) thereof.

During the period from May 7, 1941, the effective date of rule 50, to June 30, 1959, a total of 767 issues with a sales value of $10,957 million were sold at competitive bidding under the rule. Those totals

As noted above, the table does not include the issuance of Columbia Gas common stock in connection with an exchange offer which was excepted from the competitive bidding requirements of rule 50.

That paragraph excepts the issuance and sale of securities pro rata to existing holders of the company pursuant to preemptive rights.

That paragraph excepts the issuance and sale of securities the total proceeds whereof do not exceed $1 million.

85 Holding Company Act Release No. 13853.

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compare with 224 issues of securities with an aggregate sales value of $2,311 million which have been sold pursuant to orders of the Commission granting exception from the competitive bidding requirements of the rule under paragraph (a) (5) thereof. The numbers of issues and the amounts of various classes of securities which have been sold pursuant to exception granted under paragraph (a)(5) are set forth in the following table:

Sales by registered holding companies and their subsidiaries of securities excepted from competitive bidding requirements pursuant to the provisions of paragraph (a) (5) of rule 50 by orders of the Commission entered from May 7, 1941, to June 30, 1959 37 [Dollar amounts in millions]

[merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][subsumed][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small]

This is exclusive of Yankee Atomic bonds of $20,000,000 for which exception was granted in June 1959 but the sale of these securities did not occur until July.

Of the total amount of securities sold pursuant to orders of exception granted under paragraph (a) (5) of rule 50, 122 issues with a dollar value of $1,841 million were sold by the issuer and the balance of 102 issues with a dollar value of $470 million were portfolio sales. Of the 122 issues sold by the issuers, 68 were in amount of $1 million to $5 million and 2 bond issues were in excess of $100 million.38 Protective Provisions of First Mortgage Bonds and Preferred Stocks of Public Utility Companies

In passing upon issuances of first mortgage bonds and preferred stocks of public-utility companies, the Commission examines the mortgage indenture and charter provisions to determine whether or not there is substantial conformity with the applicable Statements of Policy which were adopted by it in 1956.39 These Statements of Policy represent substantially a codification of certain principles or

*Paragraph (a) (5) of rule 50 provides for exception from the competitive bidding requirement of the rule where the Commission finds such bidding is not necessary or appropriate under the particular circumstances of the individual case.

"The total number of issues in the table is 224 as compared with a total of 241 issues reported in the 23d Annual Report (page 137) for the period ending June 30, 1957. In preparing the earlier report an exception was counted as to each issue of securities. In some cases one order of exception was issued although the securities were sold from time to time in seperate issues. To eliminate such duplication, the above table is prepared on the basis of the number of exceptions granted from competitive bidding.

In addition, in the table in the 23d Annual Report there was a duplication in the number of exceptions granted for issues of preferred stock. As a result, the total figure of 38 in the above table is the same as in the earlier table although there was one exception granted for preferred stock (Brockton Edison Co.) during the fiscal year 1958 described at pages 127-128 of the 24th Annual Report.

Ohio Valley Electric Corporation, $360 million; and United Gas Corporation $116 million.

"Holding Company Act Release No. 13105 (Feb. 16, 1956) as to first mortgage bonds and Holding Company Act Release No. 13106 (Feb. 16, 1956) as to preferred stock.

policies prescribed for the protection of investors in these securities developed on a case-by-case basis over a period of years, as modified in the light of experience and comments received from interested persons who had been invited to submit their views. Conformity with the Statements of Policy is required except where deviations are clearly warranted by the circumstances of a particular case.1o

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During fiscal year 1959 applications or declarations with respect. to 17 first mortgage bond issues aggregating $248,950,000 principal amount, and three preferred stock issues with a total par value of $19 million, were filed by public-utility companies under the act.*1 The Statement of Policy with respect to first mortgage bond issues requires a restriction, under certain circumstances, on the distribution of earned surplus to common stockholders. In the case of 6 of the 17 bond issues with respect to which applications were filed during the fiscal year, existing indenture provisions adequately conformed with this requirement of the Statement of Policy. In the case of nine issues, an additional restriction was required and was either proposed by the issuer or evolved in informal discussions between the Commission's staff and representatives of the issuer. The two remaining bond issues were proposed by two newly-organized companies having no previous records of earnings or dividends. In both cases, the indenture contained certain restrictions against future distributions of earned surplus to holders of the common stock, all of which, in each instance, was jointly held by groups of other utility companies. To avoid unnecessary rigidity, the restrictive dividend provisions generally included the further provision that the restrictions could be modified upon application of the issuer to, and approval by, the Commission.

A further provision contained in the Statement of Policy regarding first mortgage bonds relates to the renewal and replacement of depreciable utility property which is subject to the lien of the mortgage. It requires, in essence, that the issuer construct additions to its property, or else deposit cash or bonds with the indenture trustee, in an amount which on a cumulative basis will provide for the replacement in cash or property of the dollar equivalent of the cost of the depreciable mortgaged property during its estimated useful life. The Statement of Policy provides that the requirement be expressed as a percentage of the book cost of depreciable property, except that if the existing indenture provision expresses the requirement on a different

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10 Application of the Statements of Policy to filings from the effective date thereof to June 30, 1958, are discussed in the 23d Annual Report (pages 141-43) and the 24th Annual Report (pages 128-31).

Of the 17 bond issues as to which applications or declarations were filed during the fiscal year, 12 were issued and sold to the public or financial institutions during the fiscal year as indicated in the table on p. 135, above: 3 were issued and sold after the close of the fiscal year; 1 issue was withdrawn after approval by the Commission; and 1 issue was sold to the issuer's holding companies and not to the public.

basis, as, for example, in terms of operating revenues, no change will be required if the company can demonstrate that the existing provision provides an amount at least equal to a requirement based on the book cost of depreciable property. As in the case of earned surplus restrictions, the Commission, in the interest of flexibility, has permited the issuer to insert a provision under which the issuer, upon application to, and approval by, the Commission may modify the percent of depreciable property requirement.

Of the 17 bond issues, the indentures of 12 expressed the renewal and replacement fund requirement as a percent of depreciable property which was deemed to be appropriate; the indentures of 4 expressed the requirement as a percent of revenues and were found acceptable by the Commission since they appeared to afford at least as much protection to the bondholders as would be afforded by an appropriate percent-of-property formula; and the indenture of the remaining 1 bond issue contained no renewal and replacement fund requirement in view of another requirement of the indenture-unusual for an electric utility company-for a 100 percent cash sinking fund repayment of the bonds by the maturity date thereof.42

During the fiscal year 1959, the Commission has continued to adhere to the principle, set forth in the Statements of Policy for both bonds and preferred stocks, that the securities be freely refundable at the option of the issuer upon reasonable notice and payment of a reasonable redemption premium, if any.43 An exception was made by the Commission in the case of Yankee Atomic Electric Company, a new company organized for the purpose of building and operating an experimental nuclear power plant in New England. In light of the unusual circumstances of the construction and financing of the plant, the Commission approved an indenture covenant providing that none of the company's proposed $20 million principal amount of first mortgage bonds could be redeemed for refunding purposes during the period of plant construction; that during a 5-year period thereafter the bonds could be refunded only upon payment of redemption premiums higher than customary under the Commission's usual standards; but that following such 5-year period the bonds would be freely refundable by the company upon payment of the normal lower scale of redemption premiums."

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Continuing studies made by the Commission's staff of electric and gas utility bond issues sold at competitive bidding indicate that restrictions on free refundability of bonds have had no significant bear

"The usual sinking fund provision for electric utility bonds, which generally have a 30-year maturity, provides for annual sinking fund payments aggregating, over the life of the issue, approximately 30 percent of the principal amount of the bonds.

"The significance of the refunding privilege, both as a matter of conformity with the standards of the act and as a matter of practical finance, was discussed at some length in the 24th Annual Report, at page 130.

"Holding Company Act Release No. 14025 (June 12, 1959).

ing upon the interest cost to the issuer.45 The staff's studies also indicate that the presence or absence of a restriction on free refundability has not affected the number of bids received by an issuer at competitive bidding or the ability of the winning bidder to market the bonds. These findings were based on an examination of all electric and gas utility bond issues (including debentures) sold at competitive bidding between May 14, 1957, and June 30, 1959, by companies subject to the Holding Company Act as well as those not so subject. It was on the former date that a public-utility company not subject to the Holding Company Act instituted a practice, which has been followed in competitive bidding by various other public-utility companies not subject to the Holding Company Act, of including a provision prohibiting the issuer, during a period of years, generally five, from refunding its outstanding bonds at lower interest rates. During the above period, there was a total of 178 electric and gas utility bond issues offered at competitive bidding, aggregating $3,763 million principal amount. The refundable issues numbered 137 and accounted for a total of $2,507 million, while the nonrefundable issues-all except 1 being nonrefundable for a period of 5 years, and the one being nonrefundable for a period of 7 years-numbered 41 and totaled $1,256 million principal amount. The number of refundable issues thus represented 77 percent of the total number of issues, while, in terms of principal amount, the refundable issues accounted for 66.6 percent.

The weighted average number of bids received on the refundable issues was 4.56, while on the nonrefundables it was 4.27. The median number of bids on both groups was the same-i.e., 4. With respect to the success of the marketing of the bond issues, an issue was considered to be successfully marketed if at least 95 percent of the issue was sold at the syndicate price up to the date of termination of the syndicate. On this basis, 75.2 percent of the refundable issues were successful, while 73. 2 percent of the nonrefundables were successful. In terms of principal amount, 73.0 percent of the refundables were successful, while 74.7 percent of the nonrefundables were successful. Extension of the comparison to include the aggregate principal amounts of all issues which were sold at the applicable syndicate prices up to the termination of the respective syndicates, regardless of whether a particular issue met the definition of a successful marketing, indicates that 89.2 percent of the combined principal amount of all the refundables were so sold, as compared with 89.1 percent for the nonrefundables. The substantially similar statistics developed in respect of the two groups of bond issues support the Commission's policy of requir

This finding has also been made by others who have made intensive studies of the problem. See W. J. Winn and A. Hess, Jr., "The Value of the Call Privilege," The Journal of Finance, May 1959, page 189.

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