N.J. Admin. Code § 14:1-5.9A

Current through Register Vol. 56, No. 11, June 3, 2024

Section 14:1-5.9A - Criteria for proposed security issues

(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.

N.J. Admin. Code § 14:1-5.9A

Recodified from N.J.A.C. 14:11-1.6 and amended by R.1998 d.84, effective 2/2/1998.
See: 29 New Jersey Register 4250(b), 30 New Jersey Register 563(a).

Amended by 55 N.J.R. 393(a), effective 3/6/2023