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requirements of Rule 50 with respect to any subsequent sale by Blackstone of the first mortgage bonds and long term notes of Valley and reserved jurisdiction with respect to the prices to be received and the other terms and provisions of the first mortgage bonds and long-term promissory notes of Valley.19 During fiscal year 1962, the Commission released the jurisdiction formerly reserved and the securities were sold to institutional investors.20
During the period from May 7, 1941, the efective date of Rule 50, to June 30, 1962, a total of 839 issues of securities with aggregate sales value of $12,300 million were sold at competitive bidding under the rule. These totals compare with 231 issues of securities with an aggregate sales value of $2,371 million which have been sold pursuant to orders of the Commission granting exceptions from the competitive bidding requirements of the rule under paragraph (a)(5) thereof.21 Of the total amount of securities sold pursuant to orders granting exceptions under this paragraph, 126 issues with total sales value of $1,888 million were sold by the issuer and the balance of 105 issues with a value of $483 million were portfolio sales. Of the 126 issues sold by issuers, 70 were in amounts of from $1 million to $5 million and 2 bond issues were in excess of $100 million each.22
PROTECTIVE PROVISIONS OF FIRST MORTGAGE BONDS AND
PREFERRED STOCKS OF PUBLIC UTILITY COMPANIES
Statements of policy were adopted by the Commission in 1956, codifying the standards to which provisions covering first mortgage bonds and preferred stocks issued under the Act must conform for the protection of investors in such securities.23 Prior to 1956 these standards had been established by the Commission on a case-by-case basis. In passing upon the issuance of first mortgage bonds and preferred stocks under the Act, the Commission examines the applicable mortgage indentures and charter provisions to insure a continuing substantial conformity with the codified standards of the respective statements of policy. Such conformity has been uniformly required except where, in particular circumstances, deviations from the statements of policy are clearly justified.24
19 Holding Company Act Release No. 14266 (Aug. 10, 1960). 2 Holding Company Act Release No. 14485 (July 24, 1961).
* Paragraph (a)(5) of Rule 50 provides for exception from the competitive bidding requirements of the rule where the Commission finds such bidding is not necessary or appropriate under the particular circumstances of the individual case.
2 Ohio Valley Electric Corp., a $360 million issue of bonds, and United Gas Corp., a $116 million issue.
* Holding Company Act Releases Nos. 13105 (Feb. 16, 1956) and 13106 (Feb. 16, 1956) as to first mortgage bonds and preferred stocks, respectively.
2 The application of the statements of policy to filings through June 30, 1961, is discussed in the 23d, 24th, 25th, 26th and 27th Annual Reports at pp. 141-143, 128-131, 137-141, 148–151 and 123–126, respectively.
During the fiscal year, applications or declarations were filed by public utility companies subject to the Act with respect to nine first mortgage bond issues involving an aggregate principal amount of $153,000,000, and three preferred stock issues with a total par value of $23,000,000.
The statement of policy with respect to first mortgage bonds requires, among other things, that dividends or other distributions to common stockholders be limited so as to preserve an “equity cushion” beneath the claims of the bondholders. This requirement was adequately provided for in the existing indentures covering three of the nine bond issues filed by public utility companies. In the other six bond issues, additional restrictions were required, and were provided for either at the issuers' initiative or as a result of informal discussions between the Commission's staff and representatives of the issuer.
Since the bulk of bondholders' security consists of mortgaged depreciable plant and equipment, the statement of policy for bonds also requires the periodic renewal and replacement of such property so as to preserve the book value of the underlying security. This requirement, in substance, obligates the issuing company to provide for new property additions (or, alternatively, to deposit cash or outstanding bonds with the trustee) in an amount which over the estimated useful life of the mortgaged depreciable property, will maintain the original book cost of the mortgaged property. The statement of policy requires that the mortgage indenture express the periodic renewal and replacement obligation as a percentage of the book cost of the mortgaged depreciable property, but where existing indentures express the provision on some other basis (usually, as a percent of operating revenues) such alternate provision is permitted to remain unchanged if the issuer can satisfactorily demonstrate to the Commission that the existing provision affords substantially the same protection as that based on a percent-of-property basis. To insure observance of this standard of the statement of policy, the Commission's staff conducts a continuous study of the depreciation requirements of the various issuers subject to the Act.
Of the nine bond issues sold during the fiscal year, the indentures of six expressed the renewal and replacement provision as a percentage of depreciable property deemed adequate by the Commission. The indentures covering the other three bond issues expressed the provision as a percentage of revenues which the Commission found afforded no less protection to the bondholders than that which would be afforded on an appropriate percent-of-property basis.
With respect to the three preferred stock issues aggregating $23,000,000 as to which applications or declarations were filed during
the fiscal year, all had charter provisions in substantial conformity with the statement of policy for preferred stock.
The Commission has continued to require adherence to the provision contained in both the bond and the preferred stock statements of policy that the securities be freely refundable at the option of the issuer upon reasonable notice and payment of a reasonable redemption premium, if any.25 An exception was allowed in the case of Valley Gas Company, a new company organized for the purpose of facilitating the divestment by the Eastern Utilities Associates holdingcompany system of the gas utility properties owned by one of the public utility companies in that system. In light of the unusual circumstances present, the Commission in fiscal year 1961 had granted an exception from the competitive bidding requirements of Rule 50 under the Holding Company Act, and in fiscal year 1962, the Commission approved an indenture covenant negotiated by Valley Gas Company with the bond purchasers providing that if any of the bonds were redeemed during the first five years after issuance through the issuance of other debt securities bearing a lower interest rate, the company would be required to pay higher redemption premiums than customary under the Commission's usual standards, but that following such five-year period the bonds would be freely refundable by the company upon payment of the normal lower scale of redemption premiums.26
Continuing studies made by the Commission's staff for fiscal year 1962 with respect to electric and gas utility bond issues sold at competitive bidding, whether or not subject to the Act, 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. This finding coincides with that described in the 27th Annual Report, at pages 125-126, containing a summary of the results of an examination of all electric and gas utility bond issues (including debentures) sold at competitive bidding between May 14, 1957, and June 30, 1961, by companies subject to the Act as well as those not so subject. This study has been extended to include fiscal year 1962.
During the period from May 14, 1957, to June 30, 1962, a total of 361 electric and gas utility bond issues, aggregating $7,838.6 million principal amount, was offered at competitive bidding. The refundable issues numbered 273 and accounted for a total of $5,036.6 million, while the nonrefundable issues-all except one being nonrefundable
% 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 pp. 130-131.
* Holding Company Act Release No. 14485 (July 24, 1961).
for a period of five years, and that one being nonrefundable for a period of seven years—numbered 88 and totaled $2,802 million principal amount. The number of refundable issues thus represented 75.6 percent of the total number of issues, while, in terms of principal amount, the refundable issues accounted for 64.3 percent.27
The weighted average number of bids received on the refundable issues for the period was 4.57, while on the nonrefundable issues it was 4.20. The median number of bids was five on the refundable and four on the nonrefundable issues.28 With respect to the success of the marketing of the bond issues, an issue was considered to have been 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, 73.3 percent of the refundable issues were successful, while 67.0 percent of the nonrefundable ones were successful.29 In terms of principal amount, 70.8 percent of the refundable issues were successful, while 65.4 percent of the nonrefundable ones were successful.30 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 88.2 percent of the combined principal amount of all the refundable issues were so sold, as compared with 81.9 percent for the nonrefundable issues.31 These statistics developed in respect of the two groups of bond issues support the Commission's policy of requiring free refundability of utility bond issues subject to the Act.
In connection with this policy of the Commission, it may be noted that, on July 13, 1961, Brockton Edison Company, a public utility subsidiary of Eastern Utilities Associates, a registered holding company, issued and sold, at competitive bidding pursuant to the requirements of Rule 50, a total of 40,000 shares of its $100 par value 5.48% preferred stock at a dividend cost to the company of 5.44%. Approximately $3,264,000 of the net proceeds from the sale of this preferred stock was used by Brockton to redeem its outstanding $3,000,000 par
9 During fiscal year 1962, a total of 51 bond issues was offered, aggregating $1,275.5 million principal amount, consisting of 33 refundable issues totaling $602.5 million and 18 nonrefundable issues totaling $673 million. The number of refundable issues represented 64.7 percent of all the issues, while, in terms of principal amount, the refundable issues accounted for 47.2 percent.
28 During fiscal year 1962, the weighted average number of bids was 4.58 on the refund. ables and 4.11 on the nonrefundables, while the median number of bids was 4 on both the refundables and nonrefundables.
29 During fiscal year 1962, 69.7 percent of the refundable issues were successful, as against 55.6 percent for the nonrefundables.
30 During the fiscal year 1962, in terms of principal amount, 70.8 percent of the refundables were successful, as against 61.7 percent for the nonrefundables.
81 During fiscal year 1962, the applicable percentages were 92.1 percent for the refundables and 76.0 percent for the nonrefundables.
value 6.40% preferred stock at $108.80 per share and accrued dividends at a cost to call of 5.88% and which had been sold in December 1957. If the 6.40% preferred stock had been nonredeemable for a five-year period, the company would have been unable to effectuate the refinancing
In the 27th Annual Report, at page 126, reference was made to a comprehensive study of redemption provisions of corporate bonds being conducted at the Wharton School of Finance and Commerce of the University of Pennsylvania. The final results of this study were publicly released by the Wharton School during fiscal year 1962.32 The study, which covers the period 1926–1959 (including in certain respects data extending to June 30, 1960), indicates that it was not until the second half of the calendar year 1959 that some differences appeared in interest costs as between immediately refundable bonds and those carrying refunding restrictions. These differences, indicating somewhat lower interest costs on bonds having refunding restrictions, were found by the Wharton School not to have been materialat least when measured against the advantage to the issuer of being able to refund its bonds at any time. The Commission considers that the Wharton School study supports the position of the Commission that issuers of immediately refundable bonds have, on the whole, not been penalized in the market place as compared with those issuers which accepted a refunding restriction. In fact, the evidence appears to point to the contrary, namely, that a refunding restriction does not provide the issuer with a reduction in interest cost even approximating what one might reasonably expect as being the financial equivalent of a refunding restriction.33
Request for Declaratory Order
Pacific Northwest Power Company has pending an application filed pursuant to Section 5(d) of the Administrative Procedure Act for a declaratory order stating at what point in the construction of a hydro-electric plant it will become an electric utility company within the meaning of Section 2(a) (3) of the Act. Pacific Northwest's common stock is owned equally by Pacific Power and Light Company, Montana Power Company, Washington Water Power
32 See Arleigh P. Hess, Jr. and Willis J. Winn, THE VALUE OF THE CALL PRIVI. LEGE (University of Pennsylvania), 1962. Members of the Advisory Committee of the study included a staff member of the Commission, a staff member of the Federal Power Commission, representatives of insurance companies, banks which administer pension trusts funds, and investment banking firms, and several members of the faculty of the University of Pennsylvania.
32 Id., pp. 80-82.