The purposes for which companies wish to issue new securities are three: (1) The purchase of existing plants and properties; (2) The construction of new plants and construction of additions to present plant and facilities; (3) Refunding of bonds and floating in debtedness.
In the case of a petition for permission to is sue securities for any of these three purposes, the board follows the ironclad rule that the amount authorized shall in no instance be more than actually necessary to secure the exact amount of funds required.
This is well shown in the case of an applica tion of the Fall River Gas Works for the ap proval of an issue of new capital stock to the amount of $50,000. It wanted the funds to purchase the plant of the Manufacturer's Gas Light Company, and to enlarge its own plant. It was found that the purchase price was equivalent to 780 of the shares of the buyer. Upon investigation the board was satisfied that this price represented the fair structural value of the plant, not including the franchise and intangible assets. The board ruled that 1620 shares of stock were ample, the proceeds of 780 shares to be devoted to the purchase and 840 to improvements.
An illustration of an application of this principle in a petition on account of new con struction is found in the board's action upon a petition of the Brookline Electric Light Com pany (1897), for an issue of $200,000 of bonds in order to make additions and extensions to the company's plant. The board thoroughly investigated the company's plans, and exam ined its plant. Finding that the fair structural value of the plant equaled the outstanding stocks and bonds, and that the proposed ex tensions and additions were needed and would require the amount petitioned for, the board approved the issue.
The board applies at every opportunity the clause of the act demanding that if at the time of approval by the board of an issue of stocks or bonds the fair structural value of the com pany's plant is less than the outstanding stocks and bonds, the board may prescribe the requirements it considers best adapted to make good these impairments, and may de mand that the stock be reduced. Thus, in
1889, in the case of the application of the Dedham and Hyde Park Gas Company for ap proval of an issue of mortgage bonds to en large and reconstruct its plant, when it found that the stock exceeded the plant's value by about $20,000, it allowed the petition only upon condition that the company reduce its capital stock from $100,000 to $80,000.
In the treatment of petitions for the issue of stocks and bonds for refunding opera tions, the board exercises the greatest caution. Difficulty arises in the determination as to whether the debts have arisen from expendi tures for extensions or for repairs and renew als. The board constantly guards against cap italizing depreciation.
The petition of the Boston Electric Light Company for $50,000 of an issue of $250,000 to fund a part of the floating debt illustrates this situation. Though the company had an nually appropriated large sums out of income to depreciation, because of the rapid progress in electric lighting methods the sums applied had not been sufficient to make up for this loss. Recent legislation had compelled it to remove its overhead line in a part of the city and to place new conduits under ground. So the company found itself facing an extraor dinary rate of depreciation. Probably public convenience would demand still further im provements in the near future. The board ruled: " Clearly, this situation imposes on the corporation, in its own as well as the public's interest, the duty to apply from its income a sum much larger even than heretofore to the payment of its floating debt and toward the cost of new improvements." Denying the pe tition, the commission said: "The cost of re newals and reconstruction necessarily inci dent to the proper conduct of the business, and of replacing property no longer required, 'is fairly chargeable upon earnings, but only actual additions to the plant upon capital."