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January 27, 2023 Feature

“Fair Value” and “Fair Value to the Obligor—the Mysteries of TIA Section 314 (d) Under the Utility Mortgage Bond Indenture

J. Anthony Terrell

The typical mortgage bond indenture (herein called a “Mortgage”) under which many electric and gas utility companies issue debt securities contain complex provisions relating to, among other things (1) the release of property from the lien of the Mortgage and (2) the use of property held by the company as a basis for the issuance of bonds, the release of other property from the lien of the Mortgage, and the withdrawal of cash held by the trustee under the Mortgage. These provisions reflect specific requirements of the Trust Indenture Act of 1939 (the “TIA”). When property is to be released from the lien of a Mortgage, the obligor on the bonds is required to furnish a certificate or opinion of an expert as to the “fair value” of the property to be released. When property is being used as the basis for one of the operations listed in clause (2) above, the obligor is required to furnish a certificate or opinion of an expert as to the “fair value to [the] obligor” of such property. The TIA contains no definition of these terms and there is no legislative history on point. This paper, at the link in the below box, discusses the likely meanings of these terms (and the distinction between them), as applied to rate-regulated utilities, reflecting commentary of the SEC staff, as well as accounting guidance and regulatory principles.

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By J. Anthony Terrell

J. Anthony Terrell, [email protected], is of counsel to Bracewell LLP in its New York office. He is a member of the American Bar Association and the International Bar Association and various sections and committees of each.The views expressed herein are those of Terrell and not necessaily the firm, bar asssociation or any Sectons or committees. This note was prepared to keep clients and other interested parties informed of legal principles and developments that may affect or otherwise be of interest to them. Terrell does not profess to be expert in accounting principles or questions arising thereunder. As to such matters, Terrell consulted with members of the accounting profession whom he considers competent and reliable.