File No. 70-9069
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
AMENDMENT NO. 1 TO
FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
---------------------------------
Conectiv, Inc.
800 King Street
Wilmington, Delaware 19899
----------------------------------
(Name of company filing this statement
and address of principal executive offices)
None
----------------------------------
(Name of top registered holding company parent)
Barbara S. Graham Michael J. Barron
President Vice President
Conectiv, Inc. Conectiv, Inc.
800 King Street 6801 Black Horse Pike
Wilmington, Delaware 19899 Egg Harbor Township,
New Jersey 08234
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application- Declaration to:
Joanne C. Rutkowski, Esq. James M. Cotter, Esq.
William S. Lamb, Esq. Vincent Pagano, Jr., Esq.
H. Liza Moses, Esq. Simpson Thacher &
LeBoeuf, Lamb, Greene & Bartlett
MacRae, L.L.P. 425 Lexington Avenue
125 West 55th Street New York, New York 10017
New York, New York 10019
Dale Stoodley, Esq.
Delmarva Power & Light Company James E. Franklin II, Esq.
800 King Street Atlantic Energy, Inc.
Wilmington, Delaware 19899 6801 Black Horse Pike
Egg Harbor Township,
New Jersey 08234
TABLE OF CONTENTS
Page
Item 1. Description of Proposed Mergers...................................1
A. Introduction......................................................1
1. General Request..........................................2
2. Overview of the Mergers..................................2
B. Description of the Parties to the Mergers.........................3
1. General Description......................................3
a. Delmarva........................................3
b. Atlantic........................................4
c. Conectiv and its Subsidiaries...................6
i. Conectiv (6);
ii. Delmarva (7);
iii. Delmarva's Subsidiaries (7);
iv. ACE (7);
v. AEE (7);
vi. AEII (7);
vii. Support Conectiv (8);
viii. DS Sub (8)
2. Description of Facilities................................9
a. Delmarva........................................9
i. General (9);
ii. Electric Generating Facilities and
Resources (9);
iii. Electric Transmission and Other
Facilities (10);
iv. Gas Facilities (11);
v. Other (11)
b. Atlantic.......................................12
i. General (12);
ii. Electric Generating Facilities and
Resources (12);
iii. Electric Transmission and Other
Facilities (13);
iv. Other (13)
3. Nonutility Subsidiaries.................................14
a. Delmarva.......................................14
b. Atlantic.......................................17
C. Description of the Mergers.......................................21
1. Background and Negotiations Leading to the
Proposed Mergers........................................21
2. Merger Agreement........................................26
D. Benefit Plans....................................................27
E. Management and Operations of Conectiv Following the
Mergers..........................................................27
F. Industry Restructuring Initiatives...............................29
Item 2. Fees, Commissions and Expenses...................................31
Item 3. Applicable Statutory Provisions..................................32
A. Legal Analysis...................................................33
1. Section 10(b)...........................................35
a. Section 10(b)(1)...............................36
i. Interlocking Relationships (36);
ii. Concentration of Control (36)
b. Section 10(b)(2) -- Fairness of Consideration..39
c. Section 10(b)(2) -- Reasonableness of Fees.....40
d. Section 10(b)(3)...............................41
2. Section 10(c)...........................................48
a. Section 10(c)(1)...............................49
i. Acquisition of Gas Operations (50);
ii. Direct and Indirect Nonutility
Subsidiaries of Conectiv (59)
b. Section 10(c)(2)...............................68
i. Efficiencies and Economies (68);
ii. Integrated Public Utility System (72)
3. Section 10(f)...........................................78
4. Other Applicable Provisions -- Section 9(a)(1)..........78
B. Intra-System Provision of Services...............................79
1. Support Conectiv........................................80
2. Other Services..........................................82
Item 4. Regulatory Approvals.............................................83
A. Antitrust........................................................83
B. Federal Power Act................................................84
C. Atomic Energy Act................................................84
D. State Public Utility Regulation..................................84
Item 5. Procedure........................................................86
Item 6. Exhibits and Financial Statements................................86
A. Exhibits.........................................................86
B. Financial Statements.............................................88
Item 7. Information as to Environmental Effects..........................88
Item 1. Description of Proposed Mergers
A. Introduction
This Application/Declaration seeks approvals relating to the proposed
combination of Delmarva Power & Light Company ("Delmarva") and Atlantic Energy,
Inc. ("Atlantic"), pursuant to which Delmarva and its direct subsidiaries and
the direct subsidiaries of Atlantic will become direct subsidiaries of Conectiv,
Inc. ("Conectiv"), a new Delaware holding company (the "Mergers").1 Following
the consummation of the Mergers, Conectiv will register with the Securities and
Exchange Commission (the "SEC" or "Commission") as a holding company under the
Public Utility Holding Company Act of 1935 (the "Act").
- - --------
1 Following consummation of the Mergers, Conectiv, Inc. will
change its name to Conectiv.
The Mergers are expected to produce substantial benefits to the public,
investors and consumers, and meet all applicable standards of the Act. Among
other things, Delmarva and Atlantic believe that the Mergers will allow the
shareholders of each of the companies to participate in a larger, financially
stronger company that, through a combination of the equity, management, human
resources and technical expertise of each company, will be able to achieve
increased financial stability and strength, greater opportunities for earnings
growth, reduction of operating costs, efficiencies of operation, better use of
facilities for the benefit of customers, improved ability to use new
technologies, greater retail and industrial sales diversity and improved
capability to make wholesale power purchases and sales. In this regard, Delmarva
and Atlantic believe that synergies created by the Mergers will generate
substantial cost savings which would not have been available absent the Mergers.
Delmarva and Atlantic have estimated the dollar value of certain synergies
resulting from the Mergers to be in excess of $500 million over a ten-year
period. The expected benefits of the Mergers are discussed in further detail in
Item 3.A.2.b.i. below.
The shareholders of Delmarva and Atlantic approved the Mergers at their
respective meetings held on January 30, 1997. Delmarva and Atlantic have
submitted their applications requesting approval of the Mergers and/or related
matters to their various state and federal regulators. Orders approving the
mergers have been received from the Maryland Public Service Commission (the
"MPSC") and the Federal Energy Regulatory Commission (the "FERC"). Applications
are pending before the Delaware Public Service Commission (the "DPSC"), the
Virginia State Corporation Commission (the "VSCC"), the New Jersey Board of
Public Utilities (the "NJBPU"), the Pennsylvania Public Utility Commission (the
"PPUC"), and the Nuclear Regulatory Commission (the "NRC"). Finally, both
companies have made the required filings with the Antitrust Division of the U.S.
Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC")
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"). See Item 4 below for additional detail regarding these regulatory
approvals. It is anticipated that favorable responses will be received from
these regulators in the near future.
Conectiv seeks to consummate the Mergers by year-end. In order to permit
timely consummation of the Mergers and the realization of the substantial
benefits they are expected to produce, Conectiv requests that the Commission's
review of this Application/Declaration commence and proceed as expeditiously as
practicable, and that the Commission order be issued in no event later than
November 30, 1997. To the extent that all of the state and other approvals have
not been received by that time, Conectiv asks the Commission to condition the
effectiveness of its order upon receipt of all necessary state and other
regulatory approvals.
1. General Request
Pursuant to Sections 9(a)(2) and 10 of the Act, Conectiv hereby requests
authorization and approval of the Commission to acquire, by means of the Mergers
described below, all of the issued and outstanding common stock of Delmarva and
Atlantic. Conectiv also hereby requests that the Commission approve:
(i) the designation of Support Conectiv ("Support Conectiv") as a
subsidiary service company in accordance with the provisions of Rule 88 of
the Act and the Service Agreement as a basis for Support Conectiv to comply
with Section 13 of the Act and the Commission's rules thereunder;
(ii) the acquisition by Conectiv of the gas properties of Delmarva and the
continued operation of Delmarva as a combination utility;
(iii) the acquisition by Conectiv of the nonutility activities, businesses
and investments of Delmarva and Atlantic; and
(iv) the continuation of all outstanding intrasystem financing
arrangements.
2. Overview of the Mergers
Pursuant to an Agreement and Plan of Merger, dated as of August 9, 1996, as
amended and restated as of December 26, 1996 (the "Merger Agreement"), DS Sub,
Inc., a Delaware corporation and a direct subsidiary of Conectiv ("DS Sub"),
will be merged with and into Delmarva, with Delmarva continuing as the surviving
corporation (the "Delmarva Merger"), and Atlantic will be merged with and into
Conectiv, with Conectiv as the surviving corporation (the "Atlantic Merger"). As
a result of the Delmarva Merger and the Atlantic Merger, Delmarva and its direct
subsidiaries and certain direct subsidiaries of Atlantic will become direct
subsidiaries of Conectiv, and Conectiv will be a holding company within the
meaning of the Act. A chart of the proposed corporate structure of Conectiv
following consummation of the Mergers is attached hereto as Exhibit E-4.
The common shareholders of Delmarva will receive for each issued and
outstanding share of common stock, par value $2.25 per share, of Delmarva (the
"Delmarva Common Stock"), one share of common stock of Conectiv, par value $.01
per share ("Conectiv Common Stock"). The common shareholders of Atlantic will
receive for each issued and outstanding share of common stock, no par value per
share, of Atlantic (the "Atlantic Common Stock"), 0.75 shares of Conectiv Common
Stock and 0.125 shares of Class A common stock of Conectiv, par value $.01 per
share ("Conectiv Class A Common Stock"). Following the Mergers the common
shareholders of Delmarva and Atlantic will become common shareholders of
Conectiv. (See Item 1.C.2 below). The Mergers will have no effect on the shares
of preferred stock of Delmarva issued and outstanding at the time of the
consummation of the Mergers, each series of which and each share of which will
remain unchanged. Atlantic has no shares of preferred stock outstanding. A copy
of the Merger Agreement is incorporated by reference as Exhibit B-1 hereto.
B. Description of the Parties to the Mergers
1. General Description
a. Delmarva
Delmarva was incorporated under the laws of the State of Delaware in 1909
and in Virginia in 1979 and is a public utility company engaged in providing
electric service in Delaware, Maryland and Virginia and gas service in Delaware.
As of December 31, 1996, Delmarva provided electric utility service to
approximately 442,000 customers in an area encompassing about 6,000 square miles
in Delaware (253,000 customers), Maryland (169,000 customers) and Virginia
(20,000 customers), and gas utility service to approximately 100,000 customers
in an area consisting of about 275 square miles in northern Delaware. A map of
Delmarva's service territory is attached as Exhibit E-1.
Delmarva is subject to regulation as a public utility under the Delaware
Public Utilities Act as to retail electric and gas rates and other matters by
the DPSC. Delmarva is also subject to regulation by the VSCC and MPSC as to
retail electric rates and other matters and to regulation by the PPUC with
respect to ownership of generating facilities in Pennsylvania. Delmarva is also
subject to regulation by the FERC with respect to the classification of
accounts, rates for any wholesale sales of electricity, the interstate
transmission of electric power and energy, interconnection agreements,
borrowings and issuances of securities not regulated by state commissions and
acquisitions and sales of certain utility properties under the Federal Power
Act. In addition, Delmarva is subject to limited regulation by the FERC under
the Natural Gas Act of 1938, as amended with respect to its ownership of a
4-mile pipeline that crosses state lines and sales for resale made pursuant to
FERC blanket marketing certificates. Delmarva is also currently subject to
regulation by the NRC in connection with its ownership interests in the Salem
Nuclear Generating Station and the Peach Bottom Nuclear Generating Station.
The Delmarva Common Stock is listed on the New York Stock Exchange (the
"NYSE") and the Philadelphia Stock Exchange and has unlisted trading privileges
on the Cincinnati, Midwest and Pacific Stock Exchanges. As of December 31, 1996,
there were 60,682,719 shares of Delmarva Common Stock and 1,253,548 shares of
Delmarva preferred stock outstanding. Delmarva's principal executive office is
located at 800 King Street, Wilmington, Delaware 19899. A copy of the Restated
Certificate and Articles of Incorporation, as amended, of Delmarva is
incorporated by reference as Exhibit A-3.
Delmarva has a nonutility subsidiary trust, Delmarva Power Financing I
("DPF I"), a Delaware trust, which was formed in 1996 in connection with the
issuance by Delmarva of Cumulative Quarterly Income Preferred Securities.
For the year ended December 31, 1996, Delmarva's operating revenues on a
consolidated basis were approximately $1,160 million, of which approximately
$981 million were derived from electric operations, $114 million from gas
operations and $65 million from other operations. Consolidated assets of
Delmarva and its subsidiaries at December 31, 1996 were approximately $2,979
million, consisting of approximately $2,536 million in identifiable electric
utility property, plant and equipment; approximately $219 million in
identifiable gas utility property, plant and equipment; and approximately $224
million in other corporate assets.
A more detailed summary of information concerning Delmarva and its
subsidiaries is contained in Delmarva's Annual Report on Form 10-K for the year
ended December 31, 1996, a copy of which is incorporated by reference as Exhibit
H-1.
b. Atlantic
Atlantic was incorporated under the laws of the State of New Jersey in 1986
and is a public utility holding company exempt from regulation by the Commission
under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1)
of the Act and Rule 2 thereunder. Pursuant to Rule 2, Atlantic has filed a
statement with the Commission on Form U-3A-2 for the year ended December 31,
1996, which is incorporated by reference as Exhibit H-3 hereto.
The principal subsidiary of Atlantic is Atlantic City Electric Company
("ACE"). ACE is a public utility company organized under the laws of the State
of New Jersey in 1924 by merger and consolidation of several utility companies.
It is a holding company exempt from regulation by the Commission under the Act
(except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act and
Rule 2 thereunder, and is engaged in the generation, transmission, distribution
and sale of electric energy. ACE serves a population of approximately 476,000
customers in a 2,700 square-mile area of Southern New Jersey. A map of ACE's
service area is attached as Exhibit E-1 hereto.
ACE currently has one utility subsidiary, Deepwater Operating Company
("Deepwater"), a New Jersey corporation, that operates generating facilities in
New Jersey for ACE. Deepwater owns no physical assets. Prior to the closing of
the Mergers, the employees of Deepwater will become employees of ACE.
ACE has a nonutility subsidiary trust, Atlantic Capital I ("ACI"), a
Delaware trust, which was formed in 1996 in connection with the issuance by ACE
of Cumulative Quarterly Income Preferred Securities.
As a public utility under the laws of the State of New Jersey, ACE is
regulated by the NJBPU as to its retail rates, services, accounts, depreciation,
and acquisitions and sales of utility properties, and in other respects. ACE is
also subject to regulation by the FERC the classification of accounts, rates for
any wholesale sales of electricity, the interstate transmission of electric
power and energy, interconnection agreements, borrowings and issuances of
securities not regulated by state commissions and acquisitions and sales of
certain utility properties under the Federal Power Act. In addition, Atlantic is
currently subject to regulation by the NRC in connection with its ownership
interest in the Salem, Peach Bottom and Hope Creek Nuclear Generating Stations.
The Atlantic Common Stock is listed on the New York, Philadelphia and
Pacific Stock Exchanges. As of December 31, 1996, there were 52,502,479 shares
of Atlantic Common Stock outstanding and no shares of preferred stock.
Atlantic's principal executive office is located at 6801 Black Horse Pike, Egg
Harbor Township, New Jersey 08234. A copy of the Atlantic Restated Certificate
of Incorporation is incorporated by reference as Exhibit A-4.
On a consolidated basis, Atlantic's operating revenues for the calendar
year ended December 31, 1996 were approximately $980 million, and its total
assets as of December 31, 1996 were approximately $2,671 million.
More detailed information concerning Atlantic is contained in the Annual
Reports of Atlantic and ACE on Form 10-K for the year ended December 31, 1996,
which is incorporated by reference as Exhibit H-2.
c. Conectiv and its Subsidiaries
i. Conectiv
Conectiv was incorporated under the laws of the State of Delaware on August
8, 1996 to become a holding company for Delmarva and its direct subsidiaries and
certain direct subsidiaries of Atlantic following the Mergers and for the
purpose of facilitating the Mergers. Conectiv filed a Restated Certificate of
Incorporation on December 24, 1996. Conectiv has, and prior to the consummation
of the Mergers will have, no operations other than those contemplated by the
Merger Agreement to accomplish the Mergers. Upon consummation of the Mergers,
Conectiv will be a public utility holding company and will own directly all of
the issued and outstanding common stock of Delmarva, certain of Delmarva's
direct subsidiaries, ACE, Atlantic Energy Enterprises, Inc. ("AEE"), Atlantic
Energy International, Inc. ("AEII") and Support Conectiv. At present and until
consummation of the Mergers, the common stock of Conectiv, which consists of
1,000 issued and outstanding shares, is owned by Delmarva and Atlantic, each of
which owns 500 shares. A copy of the Restated Certificate of Incorporation of
Conectiv is attached as Exhibit A-1.
Following consummation of the Mergers, the common equity of the Company
will be divided into two classes: the Conectiv Common Stock and the Conectiv
Class A Common Stock. The use of two classes of common stock is designed to
address the difference in Delmarva's and Atlantic's evaluations of the growth
prospects of, and uncertainties associated with deregulation of, the regulated
electric utility business of Atlantic. Upon the consummation of the Mergers, the
Conectiv Common Stock will be issued both to the holders of the Delmarva Common
Stock and to the holders of the Atlantic Common Stock while the Conectiv Class A
Common Stock will be issued only to the holders of the Atlantic Common Stock,
thereby giving the current holders of Atlantic Common Stock a proportionately
greater opportunity to share in the growth prospects of, and a proportionately
greater exposure to the uncertainties associated with deregulation of, the
regulated electric utility business of Atlantic.
As discussed below, upon consummation of the Mergers, and after some
additional organizational changes immediately after the Mergers, it is
contemplated that Conectiv will have two direct utility subsidiaries, Delmarva
and ACE, whose only nonutilty subsidiaries would be DPF I and ACI, respectively.
The system's other nonutility interests will be held by various direct and
indirect subsidiaries of Conectiv. The precise structure of the system's
nonutility operations will be determined, in part, by any consolidation,
dissolution and or divestiture of the existing interests of Delmarva and ACE
in nonutility businesses prior to the Mergers.
ii. Delmarva
Following the consummation of the Mergers, Delmarva will become a direct
subsidiary of Conectiv. Delmarva's utility operations and facilities are
described in Item 1.B.2.a. below and its nonutility subsidiaries and operations
are described in Item 1.B.3.a. below.
iii. Delmarva's Subsidiaries
In conjunction with the Mergers, Delmarva's existing subsidiaries will be
reorganized. Several direct subsidiaries of Delmarva, including Conectiv
Services, Inc. and Conectiv Communications, Inc., are expected to become direct
subsidiaries of Conectiv. Delmarva's direct subsidiaries, except DPF I, are
expected to become direct subsidiaries of Conectiv. At present, these direct
subsidiaries of Delmarva are Conectiv Services, Inc., Conectiv Communications,
Inc., Delmarva Capital Investments, Inc. ("DCI"), Delmarva Service Company,
Delmarva Energy Company, Delmarva Industries, Inc. and East Coast Natural Gas
Cooperative, L.L.C. ("ECNG"). As described below, DCI is a holding company for a
variety of non-utility interests.
iv. ACE
Following the consummation of the Mergers, ACE will become a direct
subsidiary of Conectiv. ACE's utility operations and facilities are described in
Item 1.B.2.b. below. ACE does not currently own any interest in any nonutility
subsidiaries other than ACI.
v. AEE
Following the consummation of the Mergers, AEE will become a direct
subsidiary of Conectiv. AEE is a holding company for Atlantic's nonutility
subsidiaries, including Atlantic Generation, Inc. ("AGI"), Atlantic Southern
Properties, Inc. ("ASP"), ATE Investment, Inc. ("ATE"), Atlantic Thermal
Systems, Inc. ("ATS"), CoastalComm, Inc. ("CCI") and Atlantic Energy Technology,
Inc. ("AET").
vi. AEII
Following the consummation of the Mergers, AEII will become a direct
subsidiary of Conectiv. AEII was formed in July, 1996 to provide utility
consulting services and equipment sales to international markets. The business
activities of AEII are being concluded with the expectation that AEII will be
inactive by December 31, 1997.
vii. Support Conectiv
Prior to the consummation of the Mergers, Support Conectiv will be
incorporated in Delaware to serve as the service company for the Conectiv
system. Support Conectiv will provide Delmarva, ACE and the other companies of
the Conectiv system with a variety of administrative, management, engineering,
construction, environmental and support services, either directly or through
agreements with associate or nonassociate companies, as needed.
Support Conectiv will enter into a service agreement with most, if not all,
companies in the Conectiv system (the "Service Agreement"). (A copy of the form
of Service Agreement as well as an appendix entitled "Description of Services
and Determination of Charges for Services" will be filed as Exhibit B-2).
The authorized capital stock of Support Conectiv will consist of up to
3,000 shares of common stock, $1 par value per share. Upon consummation of the
Mergers, all issued and outstanding shares of Support Conectiv common stock will
be held by Conectiv.
viii. DS Sub
Solely for the purpose of facilitating the Mergers proposed herein, DS Sub
has been incorporated under the laws of the State of Delaware as a direct
transitory subsidiary of Conectiv established to effectuate the Delmarva Merger.
The authorized capital stock of DS Sub consists of 1000 shares of common stock,
$0.01 par value ("DS Sub Common Stock"), all of which is held by Conectiv. DS
Sub has not had, and prior to the closing of the Mergers will not have, any
operations other than the activities contemplated by the Merger Agreement
necessary to accomplish the combination of DS Sub and Delmarva as herein
described.
2. Description of Facilities
a. Delmarva
i. General
For the year ended December 31, 1996, Delmarva sold the following amount of
electric energy (retail and wholesale) and sold and transported the following
amount of natural gas:
Electric sales....................15,780,826 Mwh
Gas sold and transported..........24,157,866 Mcf
ii. Electric Generating Facilities and Resources
As of December 31, 1996, Delmarva had a total net installed generating
capacity of approximately 2,738 MW available from the following power plants:
Edge Moor is located in Wilmington, DE. Delmarva's ownership interest
results in a net installed capacity of 696 MW. The major fuel source for
251 MW is coal and the major fuel source for 445 MW is oil.
Indian River is located in Millsboro, DE. Delmarva's ownership
interest results in a net installed capacity of 743 MW. Its major fuel
source is coal.
Conemaugh is located in New Florence, PA. Delmarva's ownership
interest results in a net installed capacity of 63 MW. Its major fuel
source is coal.
Keystone is located in Shelocta, PA. Delmarva's ownership interest
results in a net installed capacity of 63 MW. Its major fuel source is
coal.
Vienna is located in Vienna, MD. Delmarva's ownership interest results
in a net installed capacity of 151 MW. Its major fuel source is oil.
Peach Bottom Nuclear Generating Station is located in Peach Bottom
Township, PA. Delmarva owns 7.51 percent of Peach Bottom which results in a
net installed capacity of 164 MW. Its fuel source is nuclear.
Salem Nuclear Generating Station is located in Lower Alloways Creek
Township, NJ. Delmarva owns 7.41 percent of Salem which results in a net
installed capacity of 164 MW. Its fuel source is nuclear.
Hay Road is located in Wilmington, DE. It is a combustion
turbine/combined cycle power plant. Delmarva's ownership interest results
in a net installed capacity of 511 MW. Its major fuel source is gas.
Delmarva owns (or partially owns) fourteen peaking units, ranging in
size from 0.1 MW to 26 MW. These units are located in Delaware, Maryland,
Virginia, New Jersey, and Pennsylvania and are fueled with gas, oil, or
diesel fuel. Delmarva's ownership interest results in a net installed
capacity of 183 MW.
In addition to the power plants owned or partially owned by Delmarva
listed above, Delmarva purchases capacity from three utilities. At year end
1996, Delmarva's purchased capacity totaled 390 MW. Delmarva's total
capacity available at year end 1996 to serve customers is 3128 MW.
Delmarva's 1996 summer peak load, which occurred on July 9, 1996, was
2,569 MW and its 1996 winter peak load, which occurred on January 17, 1997,
was 2,587 MW.
iii. Electric Transmission and Other Facilities
As of December 31, 1996, Delmarva's transmission system consisted of
approximately 16 circuit miles of 500 kV lines; 326 circuit miles of 230 kV
lines; 453 circuit miles of 138 kV lines; 711 circuit miles of 69 kV lines; 618
circuit miles of 34 kV lines and 5,261 circuit miles of 25 kV lines. As of
December 31, 1996, Delmarva's distribution system consisted of 6,706 circuit
miles of 12 kV and 4 kV lines. As of December 31, 1996, Delmarva's electric
transmission and distribution system includes 1,391 transmission poleline miles
of overhead lines, 5 transmission cable miles of underground cables, 6,927
distribution poleline miles of overhead lines and 5,416 distribution cable miles
of underground cables.
Delmarva is a member of the Pennsylvania-New Jersey- Maryland
Interconnection ("PJM" or the "PJM Pool")2. The members of PJM have worked
together voluntarily for almost seventy years to create the Nation's largest
"tight" power pool with free-flowing ties. With the backing of their regulatory
commissions, the members have built an efficient wholesale energy market based
on a "split-the-savings" energy exchange, the reciprocal sharing of capacity
resources, and a competitive market in transmission entitlements to import
energy. Estimates of the savings realized by the PJM Pool range upwards of $1
billion per year. Delmarva's generation and bulk transmission facilities have
been operated on an integrated basis with those of other PJM members. Delmarva
estimates that its fuels savings associated with energy transactions within the
PJM Pool amounted to $9.8 million during 1996.
- - --------
2 Atlantic is also a member of the PJM Interconnection, as described in Item
b.iii below. Historically, the other members have been Baltimore Gas and
Electric Company, Jersey Central Power & Light Company, Metropolitan Edison
Company, Pennsylvania Electric Company, PECO Energy Company, Pennsylvania
Power & Light Company, Potomac Electric Power Company and Public Service
Electric and Gas Company. Recent changes in FERC policy have resulted in a
restructuring of the PJM Interconnection into a limited liability
corporation and expanded membership including nonutility power marketers
and brokers, and utilities whose retail service territories are outside the
PJM Pool geographic boundaries.
Many of the rules governing the use of the nation's transmission system are
changing. In FERC Order No. 888, FERC directed all transmission-owning public
utilities to file tariffs that offer comparable open transmission service to
others.
As a member of PJM, Delmarva submitted a filing on December 31, 1996 to
comply with the requirements of FERC's Order No. 888 applicable to tight power
pools. This included a Transmission Owners Agreement, the pool-wide PJM Open
Access Transmission Tariff, and an amended PJM Interconnection Agreement. FERC
issued an order in this case on February 28, 1997. Delmarva has been, and will
continue to be, involved with the restructuring of PJM and the related filings
before FERC.
The PJM Interconnection's installed capacity as of December 31, 1996 was
57,283 MW. The PJM Interconnection peak demand during 1996 was 44,302 MW on
August 23, 1996, which resulted in a summer reserve margin of 24% (based on
installed capacity of 56,865 MW on that date).
iv. Gas Facilities
The gas property of Delmarva as of December 31, 1996 consisted of a
liquefied natural gas plant located in Wilmington, Delaware with a storage
capacity of 3.045 million gallons and a maximum daily sendout capacity of 49,898
Mcf per day. This facility is used primarily as a peak-shaving facility for
Delmarva's gas customers. Delmarva also owns four natural gas city gate stations
at various locations in its gas service territory. These stations have a total
contract sendout capacity of 125,000 Mcf per day. Delmarva has 111 miles of
transmission mains (including 11 miles of joint-use gas pipelines that are used
10% for gas distribution and 90% for electricity production), 1,539 miles of
distribution mains and 1,091 miles of service lines. The Delmarva gas facilities
are located exclusively in New Castle County, Delaware.
v. Other
Delmarva and its subsidiaries own and occupy office buildings in Wilmington
and Christiana, Delaware and Salisbury, Maryland and also own a number of other
properties located elsewhere in its service area that are used for office,
service and other purposes.
In addition, Delmarva owns other property, plant and equipment supporting
its electric and gas utility functions.
b. Atlantic
i. General
For the year ended December 31, 1996, ACE sold 8.347 billion
kwh of electric energy (at retail and wholesale).
ii. Electric Generating Facilities and Resources
As of December 31, 1996, ACE had a total net capability of approximately
1679 MW available from the following units:
Deepwater is located in Penns Grove, NJ. ACE's ownership interest
results in a net installed capacity of 220 MW. Its major fuel sources
are oil, coal and gas.
B.L. England is located in Beesley Point, NJ. ACE's ownership interest
results in a net installed capacity of 439 MW. Its major fuel sources
are coal and oil.
Keystone is located in Shelocta, PA. ACE's ownership interest results
in a net installed capacity of 42 MW. Its major fuel source is coal.
Conemaugh is located in New Florence, PA. ACE's ownership interest
results in a net installed capacity of 65 MW. Its major fuel source is
coal.
Peach Bottom Nuclear Generating Station is located in Peach Bottom
Township, PA. ACE owns 7.51 percent of Peach Bottom which results in a
net installed capacity of 164 MW. Its fuel source is nuclear.
Salem Nuclear Generating Station is located in Lower Alloways Creek
Township, NJ. ACE owns 7.41 percent of Salem which results in a net
installed capacity of 164 MW. Its fuel source is nuclear.
Hope Creek Nuclear Generating Station is located in Lower Alloways
Creek Township, NJ. ACE's 5% ownership interest results in a net
installed capacity of 52 MW. Its fuel source is nuclear.
Combustion Turbine Units are located in various locations. ACE's
ownership interest results in a net installed capacity of 524 MW.
Their major fuel sources are oil and gas.
Diesel Units are located in various locations. ACE's ownership
interest results in a net installed capacity of 8.7 MW. Their major
fuel source is oil.
In addition, ACE had firm capacity purchases with a net total, as of December
31, 1996, of 707 MW.
ACE's summer peak load for the calendar year 1996, which occurred on August
23, 1996, was 1774 MW and its 1996 winter peak load, which occurred on January
17, 1997 was 1,431 MW.
iii. Electric Transmission and Other Facilities
As of December 31, 1996, ACE's transmission system consisted of
approximately 22 circuit miles of 500 kV lines; 127 circuit miles of 230 kV
lines; 209 circuit miles of 138 kV lines; 590 circuit miles of 69 kV lines; 113
circuit miles of 34 kV lines and 197 circuit miles of 23 kV lines. As of
December 31, 1996, ACE's distribution system consisted of 10,398 circuit miles
of 12 kV and 4 kV lines. ACE's electric transmission and distribution system
includes 1,215 transmission poleline miles of overhead lines, 46 transmission
cable miles of underground cables, 9,252 distribution poleline miles of overhead
lines and 1,146 distribution cable miles of underground cables.
ACE is also a member of the PJM Interconnection. ACE's generation and
transmission facilities are operated on an integrated basis with those of seven
other utilities, including Delmarva, in Pennsylvania, New Jersey, Maryland and
the District of Columbia. ACE estimates that its fuel savings associated with
energy transactions within the pool amounted to $3.8 million (includes savings
for Vineland Municipal Electric Utility) during 1996.
iv. Other
ACE owns and occupies an office building and a number of operating centers
located throughout southern New Jersey.
In addition, ACE owns property, plant and equipment supporting its electric
utility functions.
3. Nonutility Subsidiaries
Both Delmarva and Atlantic engage indirectly, through subsidiaries and
affiliates, in various nonutility activities related to the systems' core
utility businesses.
a. Delmarva
Delmarva has seven direct nonutility subsidiaries: Delmarva Industries,
Inc., Delmarva Services Company, Delmarva Energy Company, Conectiv Services,
Inc., Conectiv Communications, Inc., DCI and ECNG.
Delmarva Industries, Inc., a Delaware corporation and a direct
subsidiary of Delmarva, was formed in 1981 to be a partner in a joint
venture oil and gas exploration and development program in New York,
Ohio and Pennsylvania. This subsidiary is winding down its business.
Delmarva Services Company, a Delaware corporation and a direct
subsidiary of Delmarva, was formed in 1986 to own and finance an
office building that it leases to Delmarva and/or its affiliates.
Delmarva Services Company also owns approximately 2.9% of the common
stock of Chesapeake Utilities Corporation, a publicly-traded gas
utility company with gas utility operations in Delaware, Maryland and
Florida.
Delmarva Energy Company, a Delaware corporation and a direct
subsidiary of Delmarva, was formed in 1975 to participate in gas and
oil exploration and development opportunities. This subsidiary is
currently dormant but is expected to be the vehicle for Rule 58
marketing activities.
Conectiv Services, Inc., a Delaware corporation and a direct
subsidiary of Delmarva, was formed in 1996 to acquire and operate
service businesses primarily involving heating, ventilation and air
conditioning ("HVAC") sales, installation and servicing, and other
energy-related activities.
Conectiv Communications, Inc., a Delaware corporation and a direct
subsidiary of Delmarva, was formed in 1996 to provide a full-range of
retail and wholesale telecommunications services.
ECNG, a Delaware limited liability company in which Delmarva holds a
1/7 th interest, is engaged in gas related activities. Delmarva is a
member of ECNG to do bulk purchasing of gas in order to improve the
efficiency of its natural gas local distribution operations.
Delmarva Capital Investments, Inc. ("DCI"), a Delaware corporation and
a direct subsidiary of Delmarva, was formed in 1985 to be a holding
company for a variety of unregulated investments.
DCI's subsidiaries are:
DCI I, Inc., a Delaware corporation and a wholly-owned subsidiary of
DCI formed in 1985 to be involved in equity investments in leveraged
leases of aircraft.
DCI II, Inc., a Virgin Islands corporation and a wholly-owned foreign
sales subsidiary of DCI formed in 1985 to be involved in lease
investments.
Delmarva Capital Technology Company ("DCTC"), a Delaware corporation
and a wholly-owned subsidiary of DCI formed in 1986 to be involved in
projects related to the development of new technologies and
alternative energy resources.
DCTC's subsidiaries are:
Pine Grove, Inc., a Delaware corporation and a wholly-owned subsidiary
formed in 1988 to hold interests in municipal solid waste landfill and
hauling businesses.
Pine Grove, Inc.'s subsidiaries are:
Pine Grove Landfill, Inc., a Pennsylvania corporation and a
wholly-owned subsidiary formed in 1985 that owns and operates a
municipal solid waste landfill in Pine Grove, PA.
Pine Grove Hauling Company, a Pennsylvania corporation and a
wholly-owned subsidiary that owns and operates a waste hauling and
recycling business.
DCTC-Glendon, Inc., a Delaware corporation and a wholly-owned subsidiary of
DCTC formed in 1987 to invest in a waste-to-energy business that was
proposed to be located in Glendon, PA. The facility was never built.
DCTC-Burney, Inc., a Delaware corporation and a wholly-owned subsidiary of
DCTC formed in 1987 to invest in Burney Forest Products, A Joint Venture,
as a general partner.
DCTC-Burney, Inc.'s subsidiaries are:
Pine Grove Gas Development, L.L.C., a limited liability company formed
in 1995 to develop a use for methane gas produced at the municipal
solid waste landfill owned and operated by Pine Grove Landfill, Inc.
DCTC- Burney owns a 49% interest in the limited liability company.
DelBurney Corporation, a Delaware corporation and a wholly-owned
subsidiary of DCTC-Burney, Inc. formed in 1989 to act as the sole 1%
general partner of Forest Products, L.P., which is a partner in Burney
Forest Products, A Joint Venture.
Forest Products, L.P., a Delaware limited partnership which is a
general partner in Burney Forest Products, A Joint Venture.
Burney Forest Products, A Joint Venture, a California general
partnership which is owned by DCTC-Burney, Inc. and Forest Products,
L.P. The partnership constructed and owns a power plant and sawmill in
Burney, CA. DCTC-Burney, Inc.'s total direct and indirect ownership
interest is 45%.
DCTC is a limited partner in:
Luz Solar Partners, Ltd. IV, a California limited partnership which
owns a solar-powered generating station in Southern California in
which DCTC owns a 4.7% limited partnership interest.
UAH-Hydro Kennebec, L.P., a New York limited partnership which owns a
hydro-electric project in which DCTC owns a 27.5% limited partnership
interest.
Delmarva Capital Realty Company ("DCRC"), a Delaware corporation and a
wholly-owned subsidiary of DCI formed in 1986 to invest in real estate
projects. It is a vehicle for the sale of properties not used or useful for
the utility business.
DCRC's Subsidiaries are:
Christiana Capital Management, Inc., a Delaware corporation and a
wholly-owned subsidiary formed in 1987, which owns an office building
leased to affiliates.
Post and Rail Farms, Inc., a Delaware corporation and a wholly-owned
subsidiary formed in 1987 to develop and sell a residential housing
development.
Delmarva Operating Services Company, a Delaware corporation and a
wholly-owned subsidiary of DCI formed in 1987, which acts as a holding
company for utility operation and maintenance companies.
Delmarva Operating Service Company's subsidiaries are:
DelStar Operating Company, a Delaware corporation and a wholly-owned
subsidiary formed in 1992 to operate and maintain the Delaware City
Power Plant in Delaware City, DE, a qualifying facility, under a
contract with the plant's current owner.
DelWest Operating Company, a Delaware corporation and a wholly-owned
subsidiary formed in 1993 to operate and maintain a power plant in
Burney, CA, a qualifying facility under a contract with the plant's
owner, Burney Forest Products, A Joint Venture (an investment of
DCTC-Burney, Inc.).
DelCal Operating Company, a Delaware corporation and a wholly-owned
subsidiary formed in 1996 to operate and maintain a power plant in
Sacramento, California, a qualifying facility owned by the Sacramento
Power Authority under a subcontract with Siemens Power Corporation.
Together, at December 31, 1996, Delmarva's nonutility subsidiaries and
investments constituted approximately 4 percent of the consolidated assets of
Delmarva and its subsidiaries. In connection with the Mergers, one or more of
the direct and indirect subsidiaries of Delmarva may be merged with and into, or
become a subsidiary of, one or more existing direct or indirect subsidiaries of
Atlantic or vice versa. A corporate chart of Delmarva and its subsidiaries,
showing their nonutility interests, is filed as Exhibit E-2.
b. Atlantic
Atlantic has two direct nonutility subsidiaries, AEII and AEE.
AEII, a Delaware corporation, is a direct subsidiary of Atlantic
formed in 1996 to broker used utility equipment to developing
countries and to provide utility consulting services related to the
design of sub-stations and other utility infrastructure. This
subsidiary is winding down its business.
AEE, a New Jersey corporation, is a direct subsidiary of Atlantic
formed in 1995 to be a holding company for Atlantic's non-regulated
subsidiaries. Through its 6 wholly-owned subsidiaries, and 50% equity
interest in Enerval, L.L.C., a natural gas marketing venture, AEE has
consolidated assets totaling $217 million. These 7 subsidiaries pursue
growth opportunities in energy-related fields, particularly those that
will complement Atlantic's existing businesses and customer
relationships.
AEE's active subsidiaries are:
ATE, a New Jersey corporation and a wholly-owned subsidiary of AEE
formed in 1986. ATE holds and manages capital resources for AEE. ATE's
primary investments are equity investments in leveraged leases of
three commercial aircraft and two container ships. In August, 1996,
ATE joined with an unaffiliated company to create EnerTech Capital
Partners, L.P., an equity limited partnership that will invest in and
support a variety of energy-related technology growth companies. ATE
also owns 94% of EnerTech Capital Partners L.P. At December 31, 1996,
ATE had invested $7.3 million in this partnership. At December 31,
1996, ATE's total equity amounted to $11.1 million. It has outstanding
financing arrangements of $10.0 million with ASP and $14.1 million
with AEE.
AGI, a New Jersey corporation and a wholly-owned subsidiary of AEE
formed in 1986. AGI develops, owns and operates independent power
production projects.
AGI's investments in power projects consist of the following:
Pedrick Ltd., Inc., a New Jersey corporation and a wholly-owned
subsidiary of AGI, formed in 1989 to hold a 35% limited
partnership interest in Pedricktown Cogeneration Limited
Partnership.
Pedrick Gen., Inc., a New Jersey corporation and a wholly-owned
subsidiary of AGI, formed in 1989 to hold a 15% general
partnership interest in Pedricktown Cogeneration Limited
Partnership.
Vineland Limited, Inc., a Delaware corporation and a wholly-owned
subsidiary of AGI, formed in 1990 to hold a 45% limited
partnership interest in Vineland Cogeneration Limited
Partnership.
Vineland General, Inc., a Delaware corporation and a wholly-owned
subsidiary of AGI, formed in 1990 to hold a 5% general
partnership interest in Vineland Cogeneration Limited
Partnership.
ATS, a Delaware corporation and a wholly-owned subsidiary of AEE,
formed in 1994. ATS and its wholly-owned subsidiaries develop, own and
operate thermal heating and cooling systems. ATS also provides other
energy-related services to business and institutional energy users.
ATS plans to make an investment in capital expenditures related to
district heating and cooling systems to serve the business and casino
district in Atlantic City, NJ. ATS is also pursuing the development of
thermal projects in other regions of the U.S.
ATS's subsidiaries are:
Atlantic Jersey Thermal Systems, Inc., a Delaware corporation
and wholly-owned subsidiary formed in 1994, that owns a 10% general
partnership interest in TELP I (as defined below).
ATS Operating Systems, Inc., a Delaware corporation and a wholly-owned
subsidiary formed in 1995 that provides thermal energy operating
services.
Thermal Energy Limited Partnership I ("TELPI"), a Delaware limited
partnership wholly-owned by Atlantic Thermal and Atlantic Jersey
Thermal Systems, that holds an investment in the Midtown Energy
Center. The Midtown Energy Center, which produces steam and chilled
water, will represent the initial principal operations of ATS. It is
expected to be commercial by mid-1997. Currently, TELPI is operating
the heating and cooling equipment of several businesses in Atlantic
City, NJ. Some of these businesses will be served by the ATS district
system once it is in commercial operations and others will continue to
be served independently by ATS.
Atlantic Paxton Cogeneration, Inc., a wholly-owned subsidiary formed
in 1977, that holds a 5% general partnership interest in ATS-EPC, L.P.
ATS-EPC, L.P., a limited partnership formed in 1977 with a 5%
general partnership interest held by Atlantic Paxton
Cogeneration, Inc. and a 45% limited partnership interest held
by ATS, owns a cogeneration qualifying facility which sells
steam to Harrisburg Steam Works Limited and electric energy
to Pennsylvania Power & Light Company.
Harrisburg Steam Works Limited, a Pennsylvania corporation owned
50% by ATS, provides thermal energy services to the city of
Harrisburg, Pennsylvania.
CCI, a Delaware corporation and a wholly-owned subsidiary of AEE formed in
1995 to pursue investments and business opportunities in the
telecommunications industry.
ASP, a New Jersey corporation and a wholly-owned subsidiary of AEE formed
in 1970 that owns and manages a 280,000 square-foot commercial office and
warehouse facility in southern New Jersey. Approximately fifty percent of
the space is presently leased to system companies and fifty percent is
leased to nonaffiliates.
AET, a Delaware corporation and a wholly-owned subsidiary of AEE formed in
1991. AET is currently winding up its sole investment which is nominal.
There are no future plans for investment activity at this time by AET.
Enerval, L.L.C. ("Enerval"), a Delaware limited liability company. In 1995,
AEE and Cenerprise, Inc., a subsidiary of Northern States Power established
Enerval, formerly known as Atlantic CNRG Services, L.L.C.. AEE and
Cenerprise each own 50 percent of Enerval. Enerval provides energy
management services, including natural gas procurement, transportation and
marketing.
At December 31, 1996, Atlantic's nonutility subsidiaries and investments
constituted approximately 8.2 percent of the consolidated book value of the
assets of Atlantic and its subsidiaries.
A corporate chart of Atlantic and its subsidiaries, showing their
nonutility interests, is filed as Exhibit E-3. In connection with the Mergers,
one or more of the direct and indirect subsidiaries of Atlantic may be merged
with and into, or become a subsidiary of, one or more existing direct or
indirect subsidiaries of Delmarva or vice versa.
C. Description of the Mergers
1. Background and Negotiations Leading to the Proposed Mergers
Atlantic and Delmarva are neighboring utilities that have had a variety of
working relationships on a wide range of matters over many years. These included
joint minority ownership in a number of electric production facilities and
membership in the PJM Interconnection.
The Energy Policy Act of 1992 (the "1992 Act"), which enhanced the
authority of the FERC to order electric utilities to provide transmission
service, has prompted new developments in the electric utility industry. The
1992 Act also created a new class of power producers, exempt wholesale
generators, which are exempt from regulation under the Act. This exemption has
increased the number of entrants into the wholesale electric generation market
and increased competition in the wholesale segment of the electric utility
industry. Pursuant to its authority under the 1992 Act, the FERC issued a number
of orders in specific cases commencing in December 1993 directing utilities to
provide transmission services. The FERC's actions have increased the
availability of transmission services, thus creating significant competition in
the wholesale power market. Other developments have resulted from policies at
the SEC, which has liberalized its interpretation and administration of the Act
in ways that have made mergers between utility companies less burdensome,
thereby facilitating the creation of larger industry competitors.
In the fall of 1995, following a number of general discussions between
Atlantic's senior management and its financial advisors and legal counsel, among
others, regarding the potential strategic value of acquisitions, alliances and
mergers in the restructuring utility and energy services industry, Atlantic
began investigations of strategic alternatives. Atlantic's long-term advisors,
corporate counsel at Simpson Thacher & Bartlett ("Simpson Thacher") and
financial advisors at Morgan Stanley & Co. Incorporated ("Morgan Stanley"), were
alerted to Atlantic's interest in pursuing discussions with individual target
companies.
During 1995, Delmarva's senior management team participated in a series of
retreats focused on the future direction of the industry and its implications
for the company. Over the course of the last 12-18 months Delmarva consulted
with various advisors, including its long-term legal advisor, LeBoeuf, Lamb,
Greene & MacRae, L.L.P. ("LeBoeuf"), regarding strategic opportunities
including, among other things, alliances, joint ventures and acquisitions.
Over the course of their long business relationship, Mr. Howard E.
Cosgrove, Chairman, President and Chief Executive Officer of Delmarva, and Mr.
Jerrold L. Jacobs, Chairman of the Board and Chief Executive Officer of
Atlantic, regularly met to discuss industry issues. At one such meeting, on
February 21, 1996, Mr. Cosgrove raised the possibility of a merger of the two
companies. At the time, Mr. Jacobs declined to pursue the discussions, primarily
because Atlantic was in the process of investigating other alternatives. Later,
Atlantic decided not to continue to consider these alternatives.
On March 4, 1996, Mr. Jacobs called Mr. Cosgrove to indicate his interest
in commencing discussions that could lead to a merger or other business
combination of the two companies. They met on March 7, 1996 to conduct
exploratory discussions.
At a regularly scheduled Atlantic Board meeting on March 14, 1996, Mr.
Jacobs advised the Atlantic Board of the possibility of a merger or other
business combination with Delmarva.
At a regularly scheduled Delmarva Board meeting on March 28, 1996, Mr.
Cosgrove advised the Delmarva Board of his discussions with Mr. Jacobs and
interest in pursuing a possible merger or other business combination.
On April 4, 1996, Messrs. Jacobs and Cosgrove met with the Delmarva and
Atlantic working groups, representatives of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Morgan Stanley to commence preliminary
discussions of benefits at a conceptual level and the identification of issues
that would need to be resolved before proceeding with a merger of the two
companies.
After multiple meetings between Delmarva and Atlantic and their respective
advisors, including Delmarva's long-term legal advisor Potter Anderson & Corroon
("Potter Anderson"), there was a consensus that discussions of a potential
business combination between Delmarva and Atlantic should continue but that
there was need for further study of issues requiring resolution, including the
emerging regulatory environment and general valuation issues.
A joint regulatory subgroup of the Delmarva and Atlantic working groups met
on May 2, 1996 to hear a presentation from The NorthBridge Group
("NorthBridge"), an economic consulting firm specializing in the utility
industry, about the scope of a stranded cost review. The companies decided after
the presentation to have their counsel jointly engage NorthBridge to do an
evaluation of potential stranded costs arising in each of the companies.
NorthBridge presented its preliminary stranded costs review to the joint working
group on May 15, 1996.
Following this period of intense review of the potential obstacles to a
merger of Atlantic and Delmarva, representatives of the two companies met with
Merrill Lynch and Morgan Stanley on May 29, 1996. Discussions were held on the
status of the regulatory analysis, the analysis of general stand-alone valuation
issues and the likely reaction of the capital markets to an announcement of a
combination of the two companies. The companies' working groups and advisors
laid out a number of options, including having as a component of the merger
consideration a "second security" (i.e., a security in addition to the
conventional common stock of the new company) that would be distributed to the
shareholders of Atlantic to reflect the growth prospects of, and uncertainties
associated with deregulation of, the regulated electric utility business of
Atlantic. The parties were considering the use of such a second security as a
mechanism to address the difference in Delmarva's and Atlantic's evaluations of
the overall impact of these growth prospects and uncertainties on the regulated
electric utility business of Atlantic. The parties considered that the second
security could take the form either of a "letter stock," i.e., a common stock to
be issued by the holding company that, following the Mergers, would own the
businesses of both Delmarva and Atlantic, the performance of which would be tied
in some manner to that of the regulated New Jersey electric utility business of
Atlantic, or of a preferred stock that was in some way tied to the performance
of such business.
On July 3, 1996, members of both working groups and Morgan Stanley, LeBoeuf
and Potter Anderson held a teleconference. Teams were formed to address a range
of due diligence issues; accounting, tax and financial systems; asset evaluation
and operations; communication and information systems; human resources;
marketing, communications and public relations; litigation; corporate documents;
and environmental and real estate. During the July 3, 1996 teleconference, a
decision was made to have counsel for Delmarva and Atlantic jointly engage
Deloitte & Touche Consulting Group ("D&T Consulting Group"), a nationally
recognized consulting firm with experience in utility mergers and acquisitions
that is a division of Deloitte & Touche LLP, to assist Delmarva and Atlantic
management in identifying and quantifying the potential cost savings that could
result from a business combination between the two companies.
During July and in early August, intensive due diligence activities,
including the exchange of documents between Delmarva and Atlantic and a series
of meetings, were conducted by Delmarva and Atlantic.
Through a series of conference calls held July 15 through July 18, 1996
that included representatives of Delmarva and Atlantic and representatives of
Merrill Lynch, Morgan Stanley, LeBoeuf, Potter Anderson and Simpson Thacher,
agreement was reached that the second security would take the form of a letter
stock, i.e., a common equity security, rather than a preferred stock.
During a joint meeting of the communications subgroups of the Delmarva and
Atlantic teams on July 16, 1996, a decision was made that it was timely to
engage Abernathy MacGregor & Associates ("Abernathy"), a communications advisor
knowledgeable in merger-related communications. On July 23, 1996, Abernathy was
jointly engaged to assist the communication subgroup in the development of a
communication plan and in the preparation of communication materials in
connection with the potential transaction.
On July 25, 1996, Messrs. Jacobs and Michael J. Chesser, President and
Chief Operating Officer of Atlantic were invited to a segment of the Delmarva
Board meeting at which D&T Consulting Group, as a part of its assistance to the
joint working group, discussed the joint analysis of potential synergies with
the Delmarva Board, including the basic structure, process and content of a
synergy analysis, generally described the type of synergies identified in other
mergers, then explained the results to date of the joint synergies analysis. The
evaluation included preliminary estimates of synergies, net of costs to achieve
them, in excess of $500 million over a 10-year period that might be obtained
from a business combination of the two companies.
On July 26, 1996, Messrs. Jacobs and Michael J. Barron, Vice President and
Chief Financial Officer, of Atlantic and Mr. Cosgrove and Mrs. Barbara S.
Graham, Senior Vice President, Treasurer and Chief Financial Officer, of
Delmarva met to conclude the negotiation of management structure issues and to
begin to make progress on the parameters of the potential transaction, including
the extent to which the merger consideration distributed to Atlantic's
shareholders would include letter stock.
On August 2, 1996, members of the Delmarva and Atlantic working groups met
with D&T Consulting Group to review the final results of the analysis prepared
by Delmarva and Atlantic with the assistance of D&T Consulting Group on
potential synergies that could result in connection with a business combination
of Delmarva and Atlantic.
During discussions regarding the proposed merger at the August 5, 1996
Atlantic Board meeting, D&T Consulting Group, as a part of its assistance to the
joint working group, discussed the joint analysis of potential synergies with
the Atlantic Board.
At the Atlantic Board meeting on August 8, the Atlantic Board was briefed
on the status of the negotiations and considered final presentations from
management on the rationale for a business combination of Delmarva and Atlantic,
including the potential benefits and the similarity of vision and strategy
between the two companies. Morgan Stanley made a presentation which included a
description of the letter stock and the results of their valuation analysis.
At the Atlantic Board meeting of August 9, 1996, detailed presentations
were made by Morgan Stanley and management on the status of pricing
negotiations. Simpson Thacher reviewed in detail with the Atlantic Board the
terms of the Merger Agreement. The joint communication plan that would be put in
place upon an approved merger was presented to the Atlantic Board by management
and a representative of Abernathy. Morgan Stanley made a presentation which
included a summary of the terms of the transaction, a further description of the
letter stock and the results of their valuation analysis. Morgan Stanley
rendered to the Atlantic Board its oral opinion, which was subsequently
confirmed in writing, to the effect that as of the date of such meeting the
Atlantic Conversion Ratio taking into account the Delmarva Conversion Ratio
(each, as hereinafter defined), was fair from a financial point of view to the
holders of Atlantic Common Stock. The Atlantic Board then approved the terms of
the Merger Agreement, which was subsequently executed.
At the Delmarva Board meeting on the same day, management noted that due
diligence had been concluded and that no issues had been identified that would
preclude management's recommending that Delmarva proceed with the proposed
merger; management further noted that the synergies analysis was finalized.
Representatives of Merrill Lynch reviewed various financial and other
information and rendered to the Delmarva Board its opinion that, as of such date
and based upon and subject to the matters discussed therein, the Delmarva
Conversion Ratio was fair to Delmarva and its shareholders from a financial
point of view. The Delmarva Board approved the terms of the Merger Agreement and
the Merger Agreement was subsequently executed.
Additional information regarding the background of the Mergers is set forth
in the Conectiv Registration Statement on Form S-4 (Exhibit C-1 hereto).
On January 30, 1997, at a special meeting of stockholders of Delmarva, the
holders of Delmarva Common Stock voted to approve the Mergers. Out of 60,754,568
shares of Delmarva Common Stock issued and outstanding and entitled to vote,
51,621,008.553 shares (84.97%) were represented in person or by proxy at the
special meeting. 49,681,023.314 shares (81.77%) of Delmarva Common Stock voted
for, 1,399,949.695 shares (2.30%) of Delmarva Common Stock voted against, and
540,035.544 (.89%) shares of Delmarva Common Stock abstained from voting on the
approval of the Mergers.
On January 30, 1997, at a special meeting of stockholders of Atlantic, the
holders of Atlantic Common Stock, voted to approve the Mergers. Out of
52,704,052 shares of Atlantic Common Stock issued and outstanding and entitled
to vote, 39,648,046 shares (75.23%) were represented in person or by proxy at
the special meeting. 37,843,067 shares (71.80%) of Atlantic Common Stock voted
for, 1,539,886 shares (2.92%) of Atlantic Common Stock voted against, and
265,093 (0.50%) shares of Atlantic Common Stock abstained from voting on the
approval of the Mergers.
2. Merger Agreement
The Merger Agreement provides for Atlantic to be merged with and into
Conectiv and DS Sub to be merged with and into Delmarva. The Merger Agreement is
incorporated by reference as Exhibit B-1.
Under the terms of the Merger Agreement, upon consummation of the Mergers:
- each issued and outstanding share of Delmarva Common Stock3 shall be
converted into the right to receive one share of Conectiv Common Stock
(the "Delmarva Conversion Ratio");
- each issued and outstanding share of Atlantic Common Stock4 shall be
converted into the right to receive 0.75 of one share of Conectiv
Common Stock and 0.125 of one share of Conectiv Class A Common Stock
(the "Atlantic Conversion Ratio"); and
- all shares of capital stock of Conectiv issued and outstanding
immediately prior to the Mergers will be cancelled without
consideration and cease to exist.
Based on the capitalization and the Delmarva Conversion Ratio and the Atlantic
Conversion Ratio the shareholders of Delmarva and Atlantic would own
approximately 60.6% and 39.4%, respectively, of the outstanding shares of the
Conectiv Common Stock and the shareholders of Atlantic would own 100% of the
outstanding shares of Conectiv Class A Common Stock.
- - --------
3 Other than shares owned by Delmarva as treasury stock or by Atlantic or by
any direct subsidiary of Delmarva or Atlantic. Such shares will be
cancelled and cease to exist and no consideration will be delivered in
exchange therefor.
4 Other than shares owned by Atlantic as treasury stock or by Delmarva or by
any direct subsidiary of Atlantic or Delmarva. Such shares will be
cancelled and cease to exist and no consideration will be delivered in
exchange therefor.
The Mergers are subject to customary closing conditions, including all
necessary governmental approvals, including the approval of the Commission.
D. Benefit Plans
Delmarva currently has a long-term incentive plan and Atlantic currently
has an equity incentive plan. On January 30, 1997, the shareholders of Delmarva
and Atlantic approved the Conectiv Incentive Compensation Plan, a comprehensive
cash and stock compensation plan providing for the grant of annual incentive
awards as well as long-term incentive awards such as restricted stock, stock
options, stock appreciation rights, performance units, dividend equivalents and
any other types of awards as the committee of the board of directors of Conectiv
which will administer the plan deems appropriate. Upon the consummation of the
Mergers, it is intended that the Conectiv Incentive Compensation Plan will
replace the Delmarva long-term incentive plan and the Atlantic equity incentive
plan. The maximum number of shares of Conectiv Common Stock available for
issuance under the plan is five million. Conectiv will seek approval from the
Commission for the issuance of shares in connection with the Conectiv Incentive
Compensation Plan in another application/declaration.
E. Management and Operations of Conectiv Following the Mergers
Pursuant to the Merger Agreement, the Delmarva Board will be entitled to
nominate ten members and the Atlantic Board will be entitled to nominate eight
members to serve on the Conectiv Board upon consummation of the Mergers.
The Delmarva Board and the Atlantic Board will each take all action
necessary to cause each member of the Delmarva Board and each member of the
Atlantic Board serving in such capacity immediately prior to the consummation of
the Mergers to have the opportunity to serve as a member of the Conectiv Board.
The Conectiv Board will be divided into three classes so that each class, to the
extent possible, has the same proportion of directors nominated by each of the
Delmarva Board and the Atlantic Board. In addition, at the consummation of the
Mergers, the Conectiv Board will establish an Audit Committee consisting of an
equal number of directors nominated by the Delmarva Board and the Atlantic
Board.
At the consummation of the Mergers, Howard E. Cosgrove will be the Chief
Executive Officer of Conectiv and Chairman of the Conectiv Board, Jerrold L.
Jacobs (who will retire from active employment after the consummation of the
Mergers) will be Vice Chairman of the Conectiv Board and Michael J. Chesser will
be the President and Chief Operating Officer of Conectiv. Jerrold L. Jacobs will
serve as Vice Chairman of the Conectiv Board until the second anniversary of the
consummation of the Mergers and, during his term as Vice Chairman, will be a
member of the Executive Committee of the Conectiv Board.
The Audit Committee of the Conectiv Board will be charged with the
responsibility of advising the Conectiv Board with respect to certain
intercompany transactions and other fiduciary matters that may relate to the
Conectiv Class A Common Stock.
Conectiv and its subsidiaries and affiliates will be subject to extensive
federal and state regulation governing dealings among their utility and
nonutility operations. Accordingly, any management policies adopted by the
Conectiv Board must adhere to any procedural, substantive, record-keeping,
accounting and other requirements imposed by such regulations.
Conectiv and its subsidiaries will honor all prior contracts, agreements,
collective bargaining agreements and commitments with current or former
employees or current or former directors of Delmarva or Atlantic and their
respective subsidiaries, in accordance with the respective terms of such
contracts, agreements and commitments, subject to Conectiv's right to enforce
them in accordance with their terms (including any reserved right to amend,
modify, suspend, revoke or terminate them).
Conectiv will provide charitable contributions and community support within
the service areas of Delmarva and Atlantic and each of their respective
subsidiaries at levels substantially comparable to the historical levels of
charitable contribution and community support provided by Delmarva, Atlantic and
their respective subsidiaries within their service areas.
Both the holders of Conectiv Common Stock and the holders of Conectiv Class
A Common Stock will receive the consolidated financial statements of Conectiv.
Since upon consummation of the Mergers, the financial results of ACE will be
substantially identical to the financial results for the Targeted Business, the
notes to the consolidated financial statements of Conectiv will at such time
include condensed financial information of ACE, including a reconciliation of
ACE's income available to common shareholders to earnings applicable for
Conectiv Class A Common Stock. Complete financial statements of ACE will
continue to be filed under the Exchange Act and will be available to
shareholders upon request.
The Merger Agreement provides that Conectiv shall maintain (i) its
corporate headquarters and principal executive offices in Wilmington, DE and
(ii) a significant presence in New Jersey.
Following consummation of the Mergers, the activities of Conectiv will be
governed by its Restated Certificate of Incorporation and Restated Bylaws,
attached hereto as Exhibits A-1 and A-2 respectively.
F. Industry Restructuring Initiatives
On April 30, 1997, the NJBPU issued its findings and recommendations on
restructuring the electric industry in New Jersey (the "Plan"). In the Plan, the
NJBPU recommended that retail customers in New Jersey should have the ability to
choose their electric energy supplier beginning in October 1998 using a phase-in
plan that will include all retail customers by July 2000. Customers would be
able to sign an agreement with a third-party energy supplier and each electric
utility, including ACE, would continue to be responsible for providing
distribution service. Price and service quality for such distribution service
would continue to be regulated by the NJBPU.
Under the proposed Plan, beginning in October 1998, costs for electric
service, which consist of power generation, transmission, distribution, metering
and billing will need to be unbundled. Transmission service would be provided by
an independent system operator which would be responsible for maintaining a
regional power grid that would continue to be regulated by FERC.
The Plan states that the NJBPU is committed to assuring that a fully
competitive marketplace exists prior to the ending of its economic regulation of
power supply. At a minimum, utility generating assets and functions must be
separated and operate at arms length from the transmission, distribution and
customer service functions of the electric utility. The NJBPU reserves final
judgment on the issue of requiring divestiture of utility generating assets
until detailed analyses of the potential for market power abuses by utilities
have been performed.
The Plan addresses the issue of "stranded" costs related to the generating
capacity currently in utility rates. High costs of construction and operations
incurred by the jointly-owned nuclear power plants and the long-term high cost
supply contracts with independent power producers are two significant
contributing factors. The report proposes recovery of stranded costs over a four
to eight year period, through a specific market transition charge which will be
a separate component of a customer's bill. Determination of the recoverability
of costs will be on a case by case basis with no guarantee for 100% recovery of
eligible stranded costs.
The Plan provides that the opportunity for full recovery of such eligible
costs is contingent upon and may be constrained by the utility meeting a number
of conditions, including achievement of a NJBPU goal of delivering a near term
rate reduction to customers of five to ten percent. The Plan states that the
costs of contracts with independent power producers must be eligible for
stranded cost recovery.
The Plan further states that utilities are obligated to take all reasonably
available measures to mitigate stranded costs caused by the introduction of
retail competition. The Plan further notes that New Jersey is studying the
securitization of stranded costs as a means of financing these costs at interest
rates lower than the utility cost of capital, thereby helping to mitigate the
rate impact of stranded cost recovery. Recovery through securitization may occur
over a different period of time. The Plan also suggests that a cap may be
imposed on the level of the charge as a mechanism to achieve the goal of overall
rate reduction.
ACE filed a restructuring plan, stranded cost estimates and unbundled
rates, with the NJBPU on July 15, 1997. Exhibit D-8.
Based on Delmarva's initiative, a formal process has been established in
Delaware and an informal forum has been established in Maryland through which
the commissions and other interested parties are addressing changes in the
regulation of the electric utility industry. During 1996, Delaware and Maryland
forum meetings addressed issues such as retail wheeling, stranded costs,
environmental matters, social programs, rate redesign, and alternative forms of
regulation.
In October 1996, the MPSC issued an order instituting a proceeding to
continue its review of regulatory and competitive issues affecting the electric
industry in Maryland. In consultation with Maryland's electric utilities and
other stakeholders, the MPSC staff has been directed to evaluate regulatory and
competitive issues facing the electric utility industry, including electric
retail competition, developments in federal and state regulation, and the
interests of Maryland's customers and utilities. The MPSC instructed its staff
to submit their recommendations by May 31, 1997.
In December 1996, the forum participants issued to the DPSC and MPSC
reports which discussed the issues and the positions of stakeholders, but did
not reach any conclusions. While there was consensus on some issues, such as the
need for unbundled costs and tariffs, there were many issues where consensus was
not reached, such as the need for and benefits of retail wheeling, recovery of
stranded costs, environmental and social program issues, franchise and property
rights, rate design, and performance-based ratemaking.
The issues mentioned above continue to be discussed by Delmarva, the DPSC
Staff, and other interested parties. Delmarva expects to develop formal
proposals on deregulation which are expected to be filed in mid-1997 with the
DPSC. In Maryland, the participants decided in January 1997 to suspend the
collaborative process until the MPSC Staff files its report.
In response to a directive from the VSCC, the VSCC Staff issued in July
1996 a report on restructuring the electric industry, which included, among
other recommendations, a recommendation for a "go slow" approach to
restructuring. In November 1996, the VSCC issued an order indicating that more
evaluation is necessary to determine what, if any, restructuring may best serve
the public interest in Virginia. The VSCC established a new docket and directed
its Staff to monitor and file separate studies in 1997 regarding the development
of a competitive wholesale market in Virginia, service quality standards, and
the results of retail wheeling experiments in other states. Also, several
utilities, excluding Delmarva, were directed to file unbundled cost studies and
tariffs.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Mergers, including the solicitation of
proxies, registration of securities of Conectiv under the Securities Act of
1933, and other related matters, are estimated as follows:
Commission filing fee for the
Registration Statement on Form S-4................ $653,004.84
Accountants' fees................................. *
Legal fees and expenses
LeBoeuf, Lamb, Greene &
MacRae, L.L.P................... *
Potter Anderson & Corroon................ *
Simpson Thacher & Bartlett............... *
Other legal fees and expenses..................... *
Shareholder communication and proxy
solicitation ................................ *
NYSE listing fee.................................. *
Exchanging, printing and engraving of
stock certificates................................ *
Investment bankers' fees and expenses
Merrill Lynch, Pierce, Fenner
& Smith Incorporated............ *
Morgan Stanley & Co. Incorporated........ *
Consulting fees relating to the
Mergers ................................ *
TOTAL
* To be filed by amendment.
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed transaction:
Section of the Act Transactions to which section or rule
is or may be applicable
4, 5 Registration of Conectiv as a holding
company following the consummation of
the Mergers
9(a)(2), 10 Acquisition by Conectiv of common stock
of Atlantic and by DS Sub of common
stock of Delmarva
9(a)(1), 10 Acquisition by Conectiv of stock of
Support Conectiv; authorization for
additional investments in Conectiv
Services, Inc.
8, 11(b), 21 Retention by Conectiv of gas operations
and other businesses of Delmarva and
Atlantic
13 Approval of the Service Agreement and
services provided to affiliates
thereunder by Support Conectiv;
approval of the performance of certain
services between other Conectiv system
companies
Rules
16 Exemption of certain subsidiaries
80-91 Pricing of affiliate transactions
88 Approval of Support Conectiv as a
subsidiary service company
93, 94 Accounts, records and annual reports by
Support Conectiv
To the extent that other sections of the Act or the Commission's rules
thereunder are deemed applicable to the Mergers, such sections and rules should
be considered to be set forth in this Item 3.
A. Legal Analysis
Section 9(a)(2) makes it unlawful, without approval of the Commission under
Section 10, "for any person . . . to acquire, directly or indirectly, any
security of any public utility company, if such person is an affiliate . . . of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Under the definition set
forth in Section 2(a)(11)(A), an "affiliate" of a specified company means "any
person that directly or indirectly owns, controls, or holds with power to vote,
5 per centum or more of the outstanding voting securities of such specified
company," and "any company 5 per centum or more of whose outstanding voting
securities are owned, controlled, or held with power to vote, directly or
indirectly, by such specified company."
Delmarva and ACE are public utility companies as defined in Section 2(a)(5)
of the Act. Because Conectiv, directly or indirectly, will acquire more than
five percent of the voting securities of each of Delmarva and Atlantic as a
result of the Mergers, and thus will become an "affiliate" as defined in Section
2(a)(11)(A) of the Act of both Delmarva and Atlantic as a result of the Mergers,
Conectiv must obtain the approval of the Commission for the Mergers under
Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by
the Commission in evaluating the proposed transaction are set forth in Sections
10(b), 10(c) and 10(f) of the Act.
As set forth more fully below, the Mergers comply with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission. Thus:
- the consideration to be paid in the Mergers is fair and reasonable;
- the Mergers will not create detrimental interlocking relations or
concentration of control;
- the Mergers will not result in an unduly complicated capital structure
for the Conectiv system;
- the Mergers are in the public interest and the interests of investors
and consumers;
- the Mergers are consistent with Sections 8 and 11 of the Act;
- the Mergers tend towards the economical and efficient development of
an integrated public utility system; and
- the Mergers will comply with all applicable state laws.
Furthermore, the Mergers provide an opportunity for the Commission to
follow certain of the interpretive recommendations made by the Division of
Investment Management (the "Division") in the report issued by the Division in
June 1995 entitled "THE REGULATION OF PUBLIC UTILITY HOLDING COMPANIES" (the
"1995 REPORT"). The Mergers and the requests contained in this
Application/Declaration are well within the precedent of transactions approved
by the Commission as consistent with the Act prior to the 1995 REPORT and thus
could be approved without any reference to the 1995 REPORT. However, a number of
the recommendations contained in the 1995 REPORT serve to strengthen the
Applicants' analysis and support certain requests that would facilitate the
creation of a new holding company better able to compete in the rapidly evolving
utility industry. The Division's overall recommendation that the Commission "act
administratively to modernize and simplify holding company regulation. . . and
minimize regulatory overlap, while protecting the interests of consumers and
investors,"5 should be used in reviewing this Application/Declaration since, as
demonstrated below, the Mergers will benefit both consumers and shareholders of
Conectiv and the other federal and state regulatory authorities with
jurisdiction over the Mergers will have approved the Mergers as in the public
interest. In addition, although discussed in more detail in each applicable item
below, the specific recommendations of the Division with regard to utility
ownership6 and diversification,7 in particular, are applicable to the Mergers.
- - --------
5 Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 REPORT.
6 The 1995 REPORT recommends that the Commission should apply a more flexible
interpretation of the integration requirements under the Act;
interconnection through power pools, reliability councils and wheeling
arrangements can satisfy the physical interconnection requirement of
section 2(a)(29); the geographic requirements of section 2(a)(29) should be
interpreted flexibly, recognizing technical advances consistent with the
purposes and provisions of the Act; the Commission's analysis should focus
on whether the resulting system will be subject to effective regulation;
the Commission should liberalize its interpretation of the "A-B-C" clauses
and permit combination systems where the affected states agree, and the
Commission should "watchfully defer" to the work of other regulators. 1995
REPORT at 71-7.
7 The 1995 REPORT recommended that, for example, the Commission should
promulgate rules to reduce the regulatory burdens associated with
energy-related diversification and the Commission should adopt a more
flexible approach in considering all other requests to enter into
diversified activities. 1995 REPORT at 88-90. The recommendations regarding
energy-related diversification were incorporated in Rule 58.
1. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an
extent detrimental to the public interest or the interests of investors or
consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with
such acquisition is not reasonable or does not bear a fair relation to the
sums invested in or the earning capacity of the utility assets to be
acquired or the utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the proper
functioning of such holding company system.
a. Section 10(b)(1)
i. Interlocking Relationships
By its nature, any merger results in new links between theretofore
unrelated companies. However, these links are not the types of interlocking
relationships targeted by Section 10(b)(1), which was primarily aimed at
preventing business combinations unrelated to operating synergies.
The Merger Agreement provides for the Board of Directors of Conectiv to be
composed of members drawn from the Boards of Directors of both Delmarva and
Atlantic. This is necessary to integrate Delmarva and Atlantic fully into the
Conectiv system and will therefore be in the public interest and the interests
of investors and consumers. Forging such relations is beneficial to the
protected interests under the Act and thus are not prohibited by Section
10(b)(1).
ii. Concentration of Control
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. AMERICAN ELECTRIC
POWER CO., 46 SEC 1299, 1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." VERMONT YANKEE NUCLEAR CORP., 43 SEC 693, 700 (1968). As discussed
below, the Mergers will not create a "huge, complex, and irrational system," but
rather will afford the opportunity to achieve economies of scale and
efficiencies which are expected to benefit investors and consumers. AMERICAN
ELECTRIC POWER CO., 46 SEC at 1307 (1978).
Size: If approved, the Conectiv system will serve approximately 915,000
electric customers in four states and 100,000 gas customers in Delaware. As of
and for the year ended December 31, 1996: (1) the combined assets of Delmarva
and Atlantic would have totaled approximately $5.65 billion; (2) combined
operating revenues of Delmarva and Atlantic would have totaled approximately
$2.1 billion; and (3) combined owned generating capacity totaled would have
totaled approximately 5514 MW.
By comparison, the Commission has approved a number of acquisitions
involving significantly larger operating utilities. SEE, E.G., CINERGY CORP.,
HCAR No. 26146 (Oct. 21, 1994) (combination of Cincinnati Gas & Electric Company
and PSI Resources; combined assets at time of acquisition of approximately $7.9
billion); ENTERGY CORP., 55 HCAR No. 25952 (Dec. 17, 1993) (acquisition of Gulf
States Utilities; combined assets at time of acquisition in excess of $21
billion); NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990) (acquisition of
Public Service of New Hampshire; combined assets at time of acquisition of
approximately $9 billion); CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29,
1986) (combination of Cleveland Electric Illuminating Company and Toledo Edison
Company; combined assets at time of acquisition of approximately $9.1 billion);
AMERICAN ELECTRIC POWER CO., 46 SEC 1299 (1978) (acquisition of Columbus and
Southern Ohio Electric Company combined assets at time of acquisition of close
to $9 billion).
As the following table demonstrates, nearly all of the registered electric,
or combination gas and electric, utility holding company systems are larger than
Conectiv will be following the Mergers in terms of assets, operating revenues,
customers and/or sales of electricity:8
- - --------
8 Amounts are as of December 31, 1996 or for the year ended December 31,
1996. [Bracketed numbers are 1995 figures.] The numbers for New Century
Energies, Inc. are taken from the Commission's order approving its formation.
NEW CENTURY ENERGIES, INC., HCAR No. 26748 (Aug. 1, 1997).
Total Operating Electric Sales in
System Assets Revenues Customers KWH
Total ($ Millions) ($ Millions) (Thousands) (Millions)
Southern 30,292 10,358 3,445 153,531
AEP 15,886 5,849 2,942 [120,653]
Entergy 22,966 7,163 2,426 106,909
CSW 13,332 5,155 1,704 62,425
GPU 10,941 3,918 1,997 44,448
Northeast 10,742 3,792 [1,695] [39,618]
CINergy 8,849 3,243 1,392 [54,220]
NCE 7,000 3,000 1,500 7,438(1)
Allegheny 6,618 1,013 1,388 59,961
NEES 5,223 2,350 [1,314] 25,194
Conectiv 5,650 2,075 920 21,272
- - --------
(1) This number is in MWH.
In addition, Conectiv will be smaller than the registered holding company
to be formed as a result of the merger of Union Electric Company and CIPSCO,
Inc. (combined 1994 year-end assets of approximately $8,402 million and
operating revenues of $2,850 million).
Conectiv will be a small registered holding company, and its operations
will not exceed the economies of scale of current electric generation and
transmission technology or provide undue power or control to Conectiv in the
region in which it will provide service.
Efficiencies and economies: As noted above, the Commission has rejected a
mechanical size analysis under Section 10(b)(1) in favor of assessing the size
of the resulting system with reference to the efficiencies and economies that
can be achieved through the integration and coordination of utility operations.
More recent pronouncements of the Commission confirm that size is not
determinative. Thus, in Centerior Energy Corp., HCAR No. 24073 (April 29, 1986),
the Commission stated flatly that a "determination of whether to prohibit
enlargement of a system by acquisition is to be made on the basis of all the
circumstances, not on the basis of size alone." In addition, in the 1995 REPORT,
the Division recommended that the Commission approach its analysis on merger and
acquisition transactions in a flexible manner with emphasis on whether the
Mergers creates an entity subject to effective regulation and is beneficial for
shareholders and customers as opposed to focusing on rigid, mechanical tests.9
- - --------
9 1995 REPORT at 73-4.
By virtue of the Mergers, Conectiv will be in a position to realize the
"opportunities for economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and reserves and generally
more efficient operations" described by the Commission in American Electric
Power Co. 46 SEC 1299, 1309. Among other things, the Mergers are expected to
yield significant capital expenditure savings through labor cost savings,
facilities consolidation, corporate and administrative programs, non-fuel
purchasing economies and combined fuel supply and purchased power. These
expected economies and efficiencies from the combined utility operations are
described in greater detail below and are projected to result in net savings of
more than $500 million over the first ten years alone.
Competitive Effects: In Northeast Utilities, HCAR No. 25221 (Dec. 21,
1990), the Commission stated that "antitrust ramifications of an acquisition
must be considered in light of the fact that public utilities are regulated
monopolies and that federal and state administrative agencies regulate the rates
charged consumers." Delmarva and Atlantic have filed Notification and Report
Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the
Mergers on competition in the relevant market and it is a condition to the
consummation of the Mergers that the applicable waiting periods under the HSR
Act shall have expired or been terminated.
In addition, the competitive impact of the Mergers has been fully
considered by the FERC pursuant to Section 203 of the Federal Power Act in its
review of the Mergers. A detailed explanation of the reasons why the Mergers
will not threaten competition in even the most narrowly drawn geographic and
product markets is set forth in the prepared testimony of John C. Dalton, filed
with the FERC on behalf of Delmarva and Atlantic, a copy of which is filed as
Exhibit D-1.2.1. As noted previously, the FERC issued an order on July 30, 1997,
approving the Mergers and concluding, among other things, that the Mergers would
not significantly affect competition in any relevant market. Exhibit D-1.3.
For these reasons, the Mergers will not "tend toward interlocking relations
or the concentration of control" of public utility companies, of a kind or to
the extent detrimental to the public interest or the interests of investors or
customers within the meaning of Section 10(b)(1).
b. Section 10(b)(2) -- Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by Conectiv to the holders of Delmarva Common Stock
and Atlantic Common Stock in connection with the Mergers is reasonable and
whether it bears a fair relation to investment in and earning capacity of the
utility assets underlying the securities being acquired. Market prices at which
securities are traded have always been strong indicators as to values. As shown
in the table below, most quarterly price data, high and low, for Delmarva and
Atlantic Common Stock provide support for this conversion ratio.
<TABLE>
<CAPTION>
Delmarva Atlantic
High ........ Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter .............. $23 5/8 $20 1/2 $0.38 1/2 $21 3/4 $19 7/8 $0.38 1/2
Second Quarter ............. 21 16 7/8 0.38 1/2 21 1/2 16 3/8 0.38 1/2
Third Quarter .............. 20 17 3/4 0.38 1/2 19 5/8 16 1/8 0.38 1/2
Fourth Quarter ............. 19 1/4 17 5/8 0.38 1/2 18 1/4 16 0.38 1/2
1995
First Quarter .............. 20 17 7/8 0.38 1/2 19 17 3/4 0.38 1/2
Second Quarter ............. 21 1/4 19 1/8 0.38 1/2 19 5/8 17 7/8 0.38 1/2
Third Quarter .............. 23 19 1/2 0.38 1/2 19 7/8 18 1/8 0.38 1/2
Fourth Quarter ............. 23 5/8 217/8 0.38 1/2 20 1/8 19 0.38 1/2
1996
First Quarter .............. 23 5/8 21 0.38 1/2 20 16 5/8 0.38 1/2
Second Quarter ............. 21 3/8 19 1/8 0.38 1/2 18 3/4 16 0.38 1/2
Third Quarter .............. 21 1/4 20 0.38 1/2 18 1/2 17 0.38 1/2
Fourth Quarter ............. 21 1/4 19 3/4 0.38 1/2 18 1/8 17 1/8 0.38 1/2
1997
First Quarter .............. 20 1/4 18 3/8 0.38 1/2 17 1/2 16 1/2 0.38 1/2
Second Quarter(1) .......... 18 5/8 16 7/8 0.38 1/2 16 7/8 16 0.38 1/2
- - --------------------
(1) Through the close of business on June 27, 1997.
</TABLE>
On August 9, 1996, the last full trading day before the public announcement
of the execution and delivery of the Merger Agreement, the closing price per
share as reported on the NYSE-- Composite Transaction of (i) Delmarva Common
Stock was $205/8 and (ii) Atlantic Common Stock was $171/8, a ratio of 1 to
0.83.
In addition, the conversion ratios are the product of extensive and
vigorous arms-length negotiations between Delmarva and Atlantic. These
negotiations were preceded by months of due diligence, analysis and evaluation
of the assets, liabilities and business prospects of the respective companies.
See Conectiv Registration Statement on Form S-4 (Exhibit C-1 hereto).
Finally, nationally-recognized investment bankers for both Delmarva and
Atlantic have reviewed extensive information concerning the companies and
analyzed the conversion ratios employing a variety of valuation methodologies,
and have opined that the conversion ratios are fair, from a financial point of
view, to the respective holders of Delmarva Common Stock and Atlantic Common
Stock. The investment bankers' analyses and opinions are attached as Annexes II
and III to Conectiv's Registration Statement on Form S-4 and are described on
pages 33-43 of the Form S-4 (Exhibit C-1 hereto).
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Mergers, Conectiv
believes that the conversion ratios fall within the range of reasonableness, and
the consideration for the Mergers bears a fair relation to the sums invested in,
and the earning capacity of, the utility assets of Delmarva and Atlantic.
c. Section 10(b)(2) -- Reasonableness of Fees
Conectiv believes that the overall fees, commissions and expenses incurred
and to be incurred in connection with the Mergers are reasonable and fair in
light of the size and complexity of the Mergers relative to other transactions
and the anticipated benefits of the Mergers to the public, investors and
consumers; that they are consistent with recent precedent; and that they meet
the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, Delmarva and
Atlantic together expect to incur a combined total of approximately $18 million
in fees, commissions and expenses in connection with the Mergers. By contrast,
Cincinnati Gas & Electric Company and PSI Resources incurred $47.12 million in
fees in connection with their reorganization as subsidiaries of CINergy.
Northeast Utilities alone incurred $46.5 million in fees and expenses in
connection with its acquisition of Public Service of New Hampshire and Entergy
alone incurred $38 million in fees in connection with its recent acquisition of
Gulf States Utilities -- which amounts all were approved as reasonable by the
Commission. See CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994); NORTHEAST
UTILITIES, HCAR No. 25548 (June 3, 1992); ENTERGY CORP., HCAR No. 25952 (Dec.
17, 1993).
With respect to financial advisory fees, Delmarva and Atlantic believe that
the fees payable to their investment bankers are fair and reasonable for similar
reasons.
Pursuant to the terms of Merrill Lynch's engagement, Delmarva agreed to pay
Merrill Lynch for its services in connection with the Mergers: (i) a financial
advisory retainer fee of $150,000 and an additional fee of $1,125,000 upon the
execution of the Merger Agreement. In addition, Delmarva agreed to pay Merrill
Lynch a fee of $1,125,000 upon the approval of the Mergers by the stockholders
of Delmarva and a fee of $2,250,000 upon consummation of the Mergers, to which
the $150,000 retainer fee already paid will be credited. Delmarva also agreed to
reimburse Merrill Lynch for its reasonable out-of-pocket expenses, including all
reasonable fees and disbursements of its legal counsel, and to indemnify Merrill
Lynch and certain related persons against certain liabilities in connection with
its engagement, including certain liabilities under the federal securities laws.
Pursuant to the engagement letter between Atlantic and Morgan
Stanley, Morgan Stanley is entitled to the following amounts: (i) an advisory
fee for its time and efforts expended in connection with the engagement which is
estimated to be between $150,000 and $250,000 and which is payable in the event
the transaction is not consummated, (ii) an announcement fee of $1,000,000 and
(iii) a merger fee of $4,230,000 payable upon consummation of the transaction.
Any amounts paid or payable to Morgan Stanley as advisory or announcement fees
will be credited against the transaction fee. Atlantic agreed also to reimburse
Morgan Stanley for the expenses of its counsel and to indemnify Morgan Stanley
and its affiliates against certain liabilities and expenses, including
liabilities under the federal securities laws.
The investment banking fees of Delmarva and Atlantic reflect the
competition of the marketplace, in which investment banking firms actively
compete with each other to act as financial advisors to merger partners.
d. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the Mergers
will unduly complicate Conectiv's capital structure or will be detrimental to
the public interest, the interests of investors or consumers or the proper
functioning of Conectiv's system.
The capital structure of Conectiv will not be unduly complicated nor will
it be detrimental to the public interest, the interests of investors or
consumers or the proper functioning of Conectiv's system. As described in Item
1.A.2., Conectiv will have two classes of common stock. Delmarva stockholders
will receive one share of Conectiv Common Stock in exchange for each share of
Delmarva Common Stock. Atlantic stockholders will receive 0.75 shares of
Conectiv Common Stock and 0.125 shares of Conectiv Class A Common Stock in
exchange for each share of Atlantic Common Stock. Although it is not common for
registered holding companies to have more than one class of common stock, the
use of two classes of common stock in this case is consistent with the Act
because both securities will be publicly traded, will have full voting rights
and will be able to be evaluated through regular periodic filings under the
Securities Exchange Act of 1934.
The Conectiv Class A Common Stock has been created to track the performance
of a portion of Atlantic's existing businesses. The Conectiv Class A Common
Stock is specifically linked to the currently regulated businesses of ACE,
Atlantic's regulated electric utility company (the "Targeted Business"). In
general terms, after the Initial Period, the earnings attributable to the
Conectiv Class A Common Stock will be based on a 30 percent interest in the net
earnings of the Targeted Business in excess of $40 million per year. The first
$40 million of net earnings and the remaining 70 percent of the net earnings
above $40 million will be attributable to holders of Conectiv Common Stock.
Through the use of this tracking stock, the holders of Atlantic Common Stock
will retain more than half the benefits and risks relating to the Targeted
Business after the Mergers. The Targeted Business is described in greater detail
on pages 75 to 77 of the Joint Proxy (Exhibit C-2).
The Merger Agreement provides, subject to declaration by the Conectiv Board
and the obligation of the Conectiv Board to react to the financial condition and
regulatory environment of Conectiv and its results of operations, that the
dividends declared and paid on the Conectiv Class A Common Stock will be
maintained at a level of $3.20 per share per annum until the earlier of July 1,
2001, or the end of the twelfth calendar quarter in which the Mergers become
effective ("Initial Period"). After the Initial Period, it is the intention of
Conectiv to pay dividends to the holders of the Conectiv Class A Common Stock at
a rate equal to 90% of net earnings attributable to the Targeted Business in
excess of $40 million per year. The Merger Agreement further provides that if
and to the extent that the annual dividends paid on the Conectiv Class A Common
Stock during the Initial Period shall have exceeded 100% of Conectiv's earnings
attributable to the Targeted Business in excess of $40 million per year during
the Initial Period, the Conectiv Board may consider such fact in determining the
appropriate annual dividend rate on the Conectiv Class A Common Stock following
the Initial Period.
The Company Class A Common Stock, which is a "tracking stock," was proposed
during the merger negotiations as a mechanism to address the difference in
Delmarva's and Atlantic's evaluations of the overall impact of the growth
prospects and uncertainties of the regulated electric utility business of
Atlantic. Both the Atlantic Board and the Delmarva Board determined that the
Conectiv Class A Common Stock was necessary to bridge a difference in view
between Delmarva and Atlantic on the appropriate conversion ratio for a business
combination between the two companies. The tracking stock allocates
proportionately more of the risks associated with Atlantic's regulated electric
utility business to Atlantic's current stockholders and, at the same time,
provides them with the opportunity to participate in proportionately more of the
growth prospects of Atlantic's regulated electric utility business. Accordingly,
the issuance of tracking stock in connection with the Mergers addresses the
concerns of the managements of both Delmarva and Atlantic and allows the
respective stockholders of Delmarva and Atlantic to gain the level of exposure
to the growth prospects of, and uncertainties associated with deregulation of,
the regulated electric utility business of Atlantic that the respective
managements have deemed advisable.
The Conectiv Class A Common Stock will be a class of common stock of the
parent company, Conectiv, not of ACE. As common stockholders of Conectiv,
holders of the Conectiv Class A Common Stock will not have any specific rights
or claims against the businesses, assets and liabilities of the Targeted
Business, including upon liquidation of Conectiv, other than as common
stockholders of Conectiv, and will be subject to risks associated with an
investment in Conectiv and all of its businesses, assets and liabilities.
Holders of Conectiv Common Stock and holders of Conectiv Class A Common Stock
will each be entitled to one vote per share on all matters submitted to a vote
at any meetings of stockholders, subject to the rights, if any, of holders of
any outstanding class of preferred stock. The holders of Conectiv Common Stock
and the holders of Conectiv Class A Common Stock will vote as one class for all
purposes, except as may otherwise be required by the laws of the State of
Delaware. There are also special provisions governing the conversion and
redemption of the Conectiv Class A Common Stock either at the discretion of
Conectiv or in the event of a merger, tender offer or disposition of all or
substantially all of the assets of the Targeted Business. For a more complete
description of the Conectiv Class A Common Stock, see "Description of the
Company's Capital Stock" on pages 75 to 97 of the Joint Proxy (Exhibit C-2).
Risk factors associated with the dual class capital structure are also discussed
extensively in the Joint Proxy on pages 14 to 22 under the heading "Risk
Factors."
Both the holders of Conectiv Common Stock and the holders of Conectiv Class
A Common Stock will receive the consolidated financial statements of Conectiv.
The notes to the consolidated financial statements of Conectiv will include
condensed financial information of ACE, including a reconciliation of ACE's
total income available to common stockholders to the income of the Targeted
Business. In conjunction with the Mergers and the NJ Plan, ACE expects to move
all of its presently non-regulated operations out of ACE, resulting in only the
Targeted Business remaining in ACE. When the non-regulated businesses of ACE are
transferred out of ACE, the financial results of ACE will be identical to the
financial results for the Targeted Business, making any reconciliation
unnecessary. Complete financial statements of ACE will continue to be filed
under the Securities Exchange Act of 1934 and will be available to Conectiv
stockholders upon request.
The issuance of tracking stocks such as the Conectiv Class A Common Stock
is not a new phenomenon. The first prominent tracking stock was issued in 1984
by General Motors Corp. when it issued shares of General Motors Class E shares
in connection with its acquisition of Electronic Data Systems Corp. Since 1984,
tracking stocks have been used by companies in several industries. USX Corp. has
created several tracking stocks tied to separate businesses, including steel,
oil and natural gas. US West Communications Group and TeleCommunications Inc.
have also issued tracking stocks. In the utility area, CMS Energy issued a
tracking stock in July 1995. The CMS Class G stock is tied to a 25 percent
interest in its natural gas division, Consumers Power Gas Group.
Although the corporate capital structure of Conectiv after the Mergers will
be slightly more complex than the capital structures of existing registered
holding companies because of the issuance of Conectiv Class A Common Stock to
the current Atlantic stockholders in connection with the Mergers, the use of
tracking stock in this case is consistent with the standards of Section 10(b)(3)
and Section 11(b)(2) of the Act. The tracking stock will not unduly complicate
the capital structure of Conectiv, and will not be detrimental to the public
interest, the interests of investors or consumers or the proper functioning of
the holding company system. In particular, the Conectiv Class A Common Stock
will also not unfairly or inequitably distribute voting power among security
holders.
The primary objective of Section 10(b)(3) and Section 11(b)(2) is to
prevent an unfair allocation of actual voting power in utility holding companies
through an unduly complicated capital structure. Indeed, earlier decisions of
the Commission interpreting the standards of Section 10(b)(3) and Section
11(b)(2) focused primarily on publicly-held minority stock interests.10 Conectiv
does not believe that the Conectiv Class A Common Stock constitutes a minority
interest for purposes of the Act. However, even if it were, the existence of the
Conectiv Class A Common Stock would not constitute an undue complication of
Conectiv's capital structure. In its 1992 amendments to Rule 52, the Commission
eliminated its traditional limitation on the issuance of common stock to the
public by public utility company subsidiaries of registered holding companies,
noting that such a prohibition, "while appropriate in 1935 when minority
shareholders had little ability to assess their investment, is no longer
necessary to protect investors and shareholders."11
- - --------
10 SEE UTAH POWER & LIGHT COMPANY, HCAR No. 13748 (May 6, 1958) and ILLINOIS
POWER COMPANY, HCAR No. 16574 (January 2, 1970).
11 EXEMPTION OF ISSUANCE AND SALE OF CERTAIN SECURITIES BY PUBLIC-UTILITY
SUBSIDIARY COMPANIES OF REGISTERED PUBLIC- UTILITY HOLDING COMPANIES, HCAR
No. 25573 (July 7, 1992).
The 1995 REPORT discusses the greater access to information and advances
in accounting and recordkeeping requirements that have developed since the
adoption of the Securities Act of 1933 and the Securities Exchange Act of
1934.12 In addition to federal law protections, under Delaware law the
Conectiv Board has a duty to act with due care and in the best interests of all
of Conectiv's stockholders, including the holders of Conectiv Common Stock and
Conectiv Class A Common Stock. The management of Conectiv is aware that the
existence of the Conectiv Common Stock and the Conectiv Class A Common Stock may
give rise to occasions when the interests of the holders of Conectiv Common
Stock and Conectiv Class A Common Stock may diverge or appear to diverge, just
as the Commission has recognized that potential conflicts of interest exist
within all registered holding company systems.13 In such instances, the Conectiv
Board will be required to act on behalf of Conectiv and its stockholders taken
as a whole. The existence of, and risks that may be associated with, such
potential conflict have been fully disclosed. For a detailed discussion of this
issue, see "The Company Following the Mergers" on page 145 of the Joint Proxy
(Exhibit C-2).
- - --------
12 1995 REPORT at 34-38.
13 SEE ILLINOIS POWER COMPANY, HCAR No. 16574 (January 2, 1970).
It is anticipated that the regulatory environment in which Delmarva and ACE
will be conducting their respective utility operations following the
consummation of the Mergers will help to ensure that dealings between ACE's
regulated electric utility business and the remainder of Conectiv's businesses
will be appropriate under the foregoing standard. In addition, the Audit
Committee of the Conectiv Board will advise the Conectiv Board with respect to
certain intercompany transactions and other fiduciary matters that may relate to
the Conectiv Class A Common Stock. The Conectiv Board will exercise from time to
time its judgment as to how best to obtain information regarding the divergence
(or potential divergence) of interests, under what circumstances to seek the
assistance of outside advisers and how to assess which available alternative is
in the best interests of Conectiv and all of its stockholders.
The Conectiv Class A Common Stock will have full voting rights with the
Conectiv Common Stock, which will avoid the creation of an inequitable
distribution of power. In addition, the Conectiv Class A Common Stock will be
publicly traded on the NYSE and the information necessary to evaluate the
performance of the Targeted Business will be publicly available in the quarterly
filings of Conectiv and ACE under the Securities Exchange Act of 1934.14
Finally, there are safeguards in place, including regulatory protections and the
involvement of the Audit Committee of the Conectiv Board, to mitigate potential
conflicts of interest.
- - --------
14 As discussed above, the notes to the consolidated financial statements of
Conectiv will include condensed financial information for ACE. Complete
financial statements of ACE will continue to be filed under the Securities
Exchange Act of 1934 and will be available to Conectiv stockholders upon
request.
The use of tracking stock in this instance does not create an unduly
complicated capital structure making it difficult for investors to discern the
value or prospects of the Targeted Business. Rather, it has been designed
specifically to create a firm linkage between the performance of the Targeted
Business and shareholder earnings. Thus, while the proposed issuance of tracking
stock by Conectiv is, to our knowledge, a question of first impression for the
Commission, there is no basis for a negative finding under Section 10(b)(3) of
the Act.
In the 1995 REPORT, the Staff noted that the Commission has historically
"responded to change by flexible interpretation and rulemaking."15 The tracking
stock is a mechanism whereby Delmarva and Atlantic addressed the difference in
their evaluations of the overall impact of the growth prospects of, and
uncertainties associated with deregulation of, the regulated electric utility
business of Atlantic. The issuance of tracking stock in connection with the
Mergers addresses the concerns of the managements of both Delmarva and Atlantic
and allows the respective stockholders of Delmarva and Atlantic to gain the
level of exposure to the growth prospects of, and uncertainties associated with
deregulation of, the regulated utility business of Atlantic that the respective
managements have deemed advisable. Given the purpose for issuing the Conectiv
Class A Common Stock and its favorable attributes, especially the direct link to
the performance of the Targeted Business, full voting rights and proposed NYSE
listing, the Applicants hereby seek Commission approval for the inclusion of the
tracking stock in the Conectiv capital structure as a flexible response to
changes in the utility industry.
- - ----------
15 1995 REPORT at 46.
The only voting securities of Conectiv which will be publicly held after
the transaction will be Conectiv Common Stock and Conectiv Class A Common Stock.
Conectiv will have the ability to issue, subject to the approval of the
Commission, preferred stock, the terms of which, including any voting rights,
may be set by Conectiv's Board of Directors as has been authorized by the
Commission with regard to other registered holding companies. SEE, E.G., THE
COLUMBIA GAS SYSTEM, INC., HCAR No. 26361 (Aug. 25, 1995) (approving restated
charter, including preferred stock whose terms, including voting rights, can be
established by the board of directors). In addition to common stock of Delmarva,
all of which will be held by Conectiv, Delmarva will continue to have 1,253,548
shares (not including 2.8 million shares of Quarterly Income Preferred
Securities) of outstanding voting preferred stock. The only class of voting
securities of Conectiv's direct and indirect nonutility subsidiaries will be
common stock.
Set forth below are summaries of the historical capital structure of
Delmarva and Atlantic as of December 31, 1996 and the pro forma consolidated
capital structure of Conectiv as of December 31, 1996:
Delmarva and Atlantic Historical Consolidated Capital Structures
(dollars in thousands)
Delmarva Atlantic
Common Stock Equity $934,913 $787,394
Preferred stock not subject to 89,703 30,000
mandatory redemption
Preferred stock subject to 70,000 113,950
mandatory redemption
Long-term Debt 904,033 829,745
--------- ---------
Total $1,998,649 $1,761,089
Conectiv Pro Forma Consolidated Capital Structure*
(dollars in thousands)
(unaudited)
Conectiv
Common Stock (incl. additional $1,449,158
paid in capital)
Class A Common Stock 136,835
Retained Earnings 285,337
Preferred stock not subject to 119,703
mandatory redemption (of
subsidiaries)
Preferred stock subject to 183,950
mandatory redemption (of
subsidiaries)
Long-term Debt 1,733,778
----------
Total $3,908,761
* The pro forma consolidated capital structure of Conectiv has been adjusted
to reflect future nonrecurring charges directly related to the Mergers,
which result in, among other things, the recognition of additional current
liabilities and a reduction in retained earnings.
Conectiv's pro forma consolidated common equity to total capitalization ratio of
48% comfortably exceeds the "traditionally acceptable 30% level." NORTHEAST
UTILITIES, HCAR No. 25221 (Dec. 21, 1990), MODIFIED, HCAR No. 25273 (Mar. 15,
1991), AFF'D SUB NOM. CITY OF HOLYOKE V. SEC, 972 F.2d 358 (D.C. Cir. 1992).
Protected interests: As set forth more fully in Item 3.A.2.b.i
(Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System)
and elsewhere in this Application/Declaration, the Mergers are expected to
result in substantial cost savings and synergies, and will integrate and improve
the efficiency of the Delmarva and Atlantic utility systems. The Mergers will
therefore be in the public interest and the interests of investors and
consumers, and will not be detrimental to the proper functioning of the
resulting holding company system.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11/16; or
(2) the acquisition of securities or utility assets of a public utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and the
efficient development of an integrated public utility system.
- - --------
16 By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to Conectiv, since it
is not now a registered holding company. The following discussion of
Sections 8 and 11 is included only because, under the present transaction
structure, Conectiv will register as a holding company after consummation
of the Mergers.
a. Section 10(c)(1)
Section 10(c)(1) requires that an acquisition be lawful under Section 8.
Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. As discussed below, the
Mergers do not raise any issue under Section 8 or, accordingly, the first clause
of Section 10(c)(1). Indeed, Section 8 indicates that a registered holding
company may own both gas and electric utilities where, as here, the relevant
state utility commissions support such an arrangement.
Section 10(c)(1) also requires that an acquisition not be detrimental to
carrying out the provisions of Section 11. Section 11(a) of the Act requires the
Commission to examine the corporate structure of registered holding companies to
ensure that unnecessary complexities are eliminated and voting powers are fairly
and equitably distributed. As described above, the Mergers will not result in
unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding company
system to limit its operations "to a single integrated public utility system,
and to such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public utility
system," a combination integrated gas and electric system within a registered
holding company is permissible under Section 8. Additionally, Section 11(b)(1)
provides that "one or more additional integrated public utility systems" may be
retained if, as here, certain criteria are met. Section 11(b)(2) directs the
Commission "to ensure that the corporate structure or continued existence of any
company in the holding company system does not unduly or unnecessarily
complicate the structure, or unfairly or inequitably distribute voting power
among security holders, of such holding company system."
As detailed below, the Mergers will not be detrimental to the carrying out
of the provisions of Section 11.
i. Acquisition of Gas Operations
Conectiv's acquisition of the gas operations of Delmarva is lawful under
Section 8 of the Act and would not be detrimental to the carrying out of Section
11 of the Act.
Section 8: Section 8 of the Act provides that
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single company of
the utility assets of an electric utility company and a gas utility
company serving substantially the same territory, it shall be unlawful
for a registered holding company, or any subsidiary company thereof .
. . (1) to take any step, without the express approval of the state
commission of such state, which results in its having a direct or
indirect interest in an electric utility company and a gas company
serving substantially the same territory; or (2) if it already has any
such interest, to acquire, without the express approval of the state
commission, any direct or indirect interest in an electric utility
company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest. (emphasis added).
A fair reading of this section indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both electric and gas utility systems.
In its recent order approving the formation of the New Century Energies,
Inc. registered system, the Commission largely ignored the legislative intent
expressed in Section 8. In its report, the Senate Committee on Interstate
Commerce noted that the provision in Section 8 concerning combination companies
"is concerned with competition in the field of distribution of gas and electric
energy -- a field which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extra-State device of a
holding company is used to circumvent state policy." THE REPORT OF THE COMMITTEE
ON INTERSTATE COMMERCE, S. Rep. No. 621, 74TH Cong., 1st Sess. at 31
(1935)("SENATE REPORT"). It appears that the Supreme Court's apparent rejection
of a Section 8 argument in the NEES case was based on a distinction drawn by the
statute between the divestiture of properties by a registered holding company in
the context of a Section 11 proceeding, and the acquisition of such properties
in other contexts. At issue in SEC v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176
(1966) was the continued retention of gas properties that the NEES system, a
registered electric system, had owned since its formation in 1926. The
Commission in the NEES decision below noted correctly that Section 8, which
concerns the acquisition of additional systems, "does not relate to the
divestment of properties under the policy embodied in Section 11(b)(1)." NEW
ENGLAND ELECTRIC SYSTEM, 41 SEC 888, 902 (1964). This matter, in contrast,
involves the acquisition of a combination system by a newly-formed registered
holding company. The policies and provisions of Section 8 should be considered
in the Commission's determinations in this area.
Conectiv believes that a reemphasis by the Commission on Section 8, which
would allow registered combination companies pending state support, is
consistent both with the Act and its policy objectives. Indeed, over time the
Commission has in fact emphasized different aspects of Section 8 and its
interplay with Section 11 -- initially allowing registered holding companies to
own both gas and electric systems under Section 8, then focusing on Section 11
as controlling determinations regarding combination companies, and requiring the
second system to meet a strict interpretation of the requirements set forth in
clauses A, B and C of Section 11(b)(1).
In its early decisions, the Commission adhered to the concept that the
decision as to whether or not to allow combination companies is one that states
should make (although the Commission might have to implement it in certain
cases) and, where such systems were permissible, the role of the Commission was
to ensure that both such systems are integrated as defined in the Act. The
Commission's most notable decision in this line is AMERICAN WATER WORKS AND
ELECTRIC COMPANY, INCORPORATED, 2 SEC 972 (1937). In this case, the Commission
approved the applicant's voluntary reorganization plan under Section 11(e) of
the Act and permitted the newly reorganized registered holding company to retain
its electric and its gas operations, specifically noting that while the Act does
not contain a definition of single integrated utility in the context of a
combination company:
We believe, however, that it is proper to regard such a combined
property as a single integrated system, provided that all of the
electric properties are integrated and all of the properties, both gas
and electric, are in fairly close geographic proximity and are so
related that substantial economies may be effectuated by their
coordination under common control. The question of public policy as to
the common ownership of gas and electric facilities in the same
territory is apparently left by the statute to the decision of the
states.17
- - --------
17 AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC at 983, n.3.
Thus, since the combination company did not violate state policy, there was no
need for the Commission to exercise jurisdiction to implement state policy.
By the early 1940's, however, the Commission switched its focus to Section
11 and adopted a narrow interpretation of the standards contained therein as the
controlling factor with regard to combination registered holding companies.18 In
connection with its analysis of combination companies under Section 11, the
Commission frequently noted a policy concern existing at that time which
advocated separating the management of gas and electric utilities based on the
belief that the gas utility business tended to be overlooked by combination
company management who focused on the electric utility business. Therefore, gas
utilities would benefit from having separate management focused entirely on the
gas utility business.19 However, both the legislative history of the Act and
recent changes in the utility industry indicate that it is a propitious time for
the Commission to reemphasize the provisions of Section 8 of the Act and allow
combination registered holding companies where, as in this case, they are
permitted under relevant state law.
- - --------
18 SEE, E.G., COLUMBIA GAS & ELECTRIC CORPORATION, 8 SEC 443 at 463 (1941);
UNITED GAS IMPROVEMENT COMPANY, HCAR No. 2692 (April 15, 1941); SECURITIES
AND EXCHANGE COMMISSION v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176
(1966). It should be noted that the Commission continued to give primacy to
state utility commission determinations in making decisions regarding
combination exempt holding companies. SEE, E.G., NORTHERN STATES POWER
COMPANY, HCAR No. 12655 (Sept. 16, 1954); DELMARVA POWER & LIGHT CO., 46
SEC 710 (1976); WPL HOLDINGS, HCAR No. 24590 (Feb. 26, 1988).
19 SEE, E.G., THE PHILADELPHIA COMPANY, 28 SEC 35, 48 (1948); THE NORTH
AMERICAN COMPANY, 11 SEC 169, 179-80 (195); ILLINOIS POWER COMPANY, HCAR
No. 16574 (Jan. 2, 1970).
A review of the legislative history of Section 8 clarifies this intent. As
noted above, in its report, the Senate Committee on Interstate Commerce noted
that the provision in Section 8 concerning combination companies "is concerned
with competition in the field of distribution of gas and electric energy -- a
field which is essentially a question of State policy, but which becomes a
proper subject of Federal action where the extra-State device of a holding
company is used to circumvent state policy." SENATE REPORT at 31. In addition,
attached to the above-referenced committee report is the Report of the National
Power Policy Committee on Public Utility Holding Companies, which sets forth a
recommended policy that: "Unless approval of a State commission can be obtained
the commission should not permit the use of the holding-company form to combine
a gas and electric utility serving the same territory where local law prohibits
their combination in a single entity." This recommendation emphasizes the
importance of the state determination in this area.
Much more recently, in the 1995 REPORT, the Division noted "it does not
appear that the SEC's precedent concerning additional systems precludes the SEC
from relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility
industry is evolving toward the creation of one-source energy companies that
will provide their customers with whatever type of energy supply they want,
whether electricity or gas," and recommended that the Commission interpret
Section 11(b)(1) of the Act to allow registered holding companies to hold both
gas and electric operations as long as each affected state utility regulatory
commission approves of the existence of such a company.20 This change in the
industry whereby, among other things, customers are increasingly seeking the
most economic means of meeting their energy needs, and not simply their gas
needs or their electric needs, is evidenced by the transformation of traditional
utilities into energy service companies as well as the growth of new energy
providers such as marketers, the increase in announced mergers between pure
electric and pure gas utilities and even the treatment of energy as a commodity
for arbitrage transactions. For example, Consolidated Natural Gas, Unitil
Corporation, Eastern Utilities Associates, New England Electric System, Southern
Company and Northeast Utilities, each a registered holding company, have been
authorized to offer customers multiple fuel options and related energy services
through subsidiaries.21 Furthermore, the recent merger of PanEnergy Corp., a
large pipeline and electric and gas marketer with Duke Power Company, an
electric utility holding company, and the acquisition of Portland General
Corporation, an electric utility holding company, by Enron Corporation, a large
gas pipeline and electric and gas marketer as well as the acquisition of ENSERCH
Corporation, a gas utility company, by Texas Utilities Company, an electric
utility holding company, and the acquisition of NorAm Energy, Inc., a gas
utility company, by Houston Industries, Inc., an electric utility holding
company, demonstrate that market forces are pushing for the convergence of
electric and gas operations into full service utility companies. Indeed, the
Commission has recently explicitly recognized that "the utility industry is
evolving towards a broadly based energy-related business,22 marked by "the
interchangeability of different forms of energy, particularly gas and
electricity.23
- - --------
20 1995 REPORT at 15-6.
21 CONSOLIDATED NATURAL GAS COMPANY, HCAR No. 26512 (April 30, 1994) (the "CNG
Order"); UNITIL CORPORATION, HCAR No. 26527 (May 31, 1996); NORTHEAST
UTILITIES, HCAR No. 26554 (Aug. 13, 1996); NEW ENGLAND ELECTRIC SYSTEM,
HCAR No. 26520 (May 23, 1996); and Supplemental Order Releasing
Jurisdiction For Certain Retail Electric Marketing Activities, HCAR No.
26519 (May 23, 1996); SEI HOLDINGS, HCAR No. 26581 (September 26, 1996).
22 CNG Order.
23 CNG Order at 11.
The legislative history of Section 11 offers additional support for
focusing on state commission determinations regarding combination companies. The
SENATE REPORT makes clear that "the purpose of section 11 is simply to provide a
mechanism to create conditions under which effective Federal and State
regulation will be possible." SENATE REPORT at 11. This statement underscores
the general policy of the Act that local regulators are in the best position to
assess the needs of their communities. The Act was never intended to supplant
local regulation but, rather, was intended to create conditions under which
local regulation was possible. Section 21 of the Act, which further codifies
this legislative intent, states: "Nothing in [the Act] shall affect . . . the
jurisdiction of any other commission, board, agency, or officer of . . . any
State, or political subdivision of any State, over any person, security, or
contract, insofar as such jurisdiction does not conflict with any provision of
[the Act] . . . ."
The legislative history reveals that Section 21 of the Act was further
intended "to insure the autonomy of state commissions [and] nothing in the [Act]
shall exempt any public utility from obedience to the requirements of state
regulatory law." The Report of the Committee on Interstate Commerce, S. Rep. No.
621 at 10 (1935). Thus, the Act should not be used as a tool to override state
policy, particularly when the holding company involved is subject to both state
and federal regulation and when the affected state regulatory commissions have
indicated their support for the combined electric and gas operations in one
holding company system.
Finally, this reemphasis on Section 8 fits within the overall regulatory
scheme of the Act. First, Section 11 of the Act is flexible and was designed to
change as the policy concerns over the regulation of utility holding companies
changed.24 As discussed below, the utility industry and the regulation of that
industry has changed dramatically in recent years and it is competitive forces
(the very thing that the Act was designed to promote) that are pushing holding
companies to offer alternative forms of energy. Second, a registered holding
company would still be required to demonstrate that any acquisition or
transaction by which it would become a combination company would not be
detrimental to the carrying out of the provisions of Section 11 of the Act. In
other words, its electric system would have to constitute an integrated electric
system and that its gas system would have to constitute an integrated gas system
and both systems must be capable of being operated efficiently. Thus, the
standards of Section 11 would still have to be met, but the construction of
those standards should take into account the fundamental policy of the Act and
allow local regulators to make the major determination with regard to
combination companies.
- - --------
24 MISSISSIPPI VALLEY GENERATING CO., 36 SEC 159 (1955) (noting that Congress
intended the concept of integration to be flexible); UNITIL CORPORATION,
HCAR No. 25524 (April 24, 1992) (noting that section 11 contains a flexible
standard designed to accommodate changes in the industry).
Conectiv as a combination company is permissible pursuant to the terms of
Section 8 of the Act and is in the public interest. First, the combination of
electric and gas operations in Delmarva is lawful under all applicable state
laws. Conectiv will not be using its holding company structure to circumvent any
state regulations. Moreover, earlier concerns that a holding company such as
Conectiv would be able to greatly emphasize one form of energy over the other
based on its own agenda have receded because of the competitive nature of the
energy market, which requires utilities to meet customer demand for energy above
all else, and because state regulators will have sufficient control over, and
would be unlikely to approve, a combination company that attempts to undertake
such practices.
Even if the Act were not interpreted as generally permitting combination
gas and electric systems, Section 11 contains additional provisions that permit
the retention by Delmarva of its gas system. Section 11(b)(1) of the Act permits
a registered holding company to control one or more additional integrated public
utility systems -- i.e., gas as well as electric -- if:
(A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can be
secured by the retention of control by such holding company of such system;
(B) all of such additional systems are located in one state, adjoining
states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of
such holding company is not so large (considering the state of the art and
the area or region affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation.
In the 1995 REPORT, the Division recommended that the Commission
"liberalize its interpretation of the 'A-B-C' clauses."25 Historically, as a
"guide" to determining whether lost economies are "substantial" under Section
11(b)(1)(A), under its previous narrow interpretation of this section, the
Commission has given consideration to four ratios, which measure the projected
loss of economies as a percentage of: (1) total gas operating revenues; (2)
total gas expense or "operating revenue deductions"; (3) gross gas income; and
(4) net gas income or net gas utility operating income. Although the Commission
has declined to draw a bright-line numerical test under Section 11(b)(1)(A),
under its previous narrow interpretation of this Section it indicated that cost
increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in
operating revenue deductions, a 25.44% loss of gross income and a 42.46% loss of
net income would afford an "impressive basis for finding a loss of substantial
economies." ENGINEERS PUBLIC SERVICE CO., 12 SEC 41, 59 (1942) (citation
omitted).
- - --------
25 1995 REPORT at 74.
Here, the lost economies that would be experienced if the gas properties of
Delmarva were to be operated on a stand-alone basis exceed these numbers,
without any increase in benefits to consumers. These lost economies result from
the need to replicate services, the loss of economies of scale, the costs of
reorganization, and other factors, and are described more fully in the Analysis
of the Economic Impact of a Divestiture of the Gas Business of DPL (the
"Divestiture Study") (Exhibit J-1 hereto).
As set forth in the Divestiture Study, divestiture of the gas operations of
Delmarva into a stand-alone company would result in lost economies of
$14,728,000. These lost economies compare with Delmarva's gas operating revenues
of $104,687,000, gas operating revenue deductions of $84,628,000, gas gross
income of $20,059,000 and gas net income of $13,910,000.
On a percentage basis, Delmarva's lost economies amount to 14.07% of gas
operating revenue, 17.40% of gas operating revenue deductions, 73.42% of gross
gas income and 105.88% of net gas income for Delmarva. The percent losses in net
gas income alone that will be suffered by the Delmarva gas system if operated on
a stand-alone basis exceed the 30% loss in the New England Electric System case
that the Commission has described as the highest loss of net income in any past
divestiture order.26 The percentage loss that would be suffered by Delmarva in
gas operating revenue and gross gas income exceeds the percentage loss in the
majority of divestiture orders issued by the Commission in the past. Delmarva's
lost economies also exceed the lost economies that would have resulted if the
divestiture of the gas operations of Public Service Company of Colorado and
Cheyenne Light, Fuel and Power Company had been required by the Commission in
connection with the approval of the formation of New Century Energies, Inc. The
applicable percentages here and in past cases are summarized in Exhibit J-3.
- - --------
26 NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888 (1964), AFF'D, 384 U.S. 176 (1966)
and 390 U.S. 207 (1968).
In order to recover these lost economies the Delmarva gas division would
need to increase its revenue from rates by $15,493,000 or 14.80%. This increase
in rate revenues would have a direct and immediate negative impact on the rates
charged to consumers for gas services. Moreover, it should be noted that the
divestiture of Delmarva's gas business would result in rate increases of 0.79%
for Delmarva electric customers.
Finally, divestiture of Delmarva's gas operations would cause a
significant, although difficult to quantify, amount of damage to Conectiv's
customers, Conectiv's regulators and Conectiv's ability to compete in the
marketplace. Such non-quantifiable costs to customers involve the additional
expenses of doing business with two utilities instead of one (i.e., additional
telephone calls for service and billing inquiries, and costs of providing access
to meters and other facilities for two utilities) and costs associated with
making the entities supply information to shareholders and publish the reports
required by the 1934 Act. Similarly, regulatory costs involve additional duties
for the staffs of the DPSC as a result of dealing with an additional utility.
These additional duties would largely be the result of duplicating existing
functions, such as separate requests for approval of financing. Conectiv's
competitive position in the market would also suffer because as the utility
industry moves toward a complete energy services concept, competitive companies
must be able to offer customers a range of options to meet their energy needs.
Divestiture of gas operations would render Conectiv unable to offer its
customers a significant and important option, namely gas services, and could
damage Conectiv's long-term competitive potential.
Most recently in the NEW CENTURY ENERGIES order, the Commission explained:
other factors operated to compound the loss of economies represented by
increased costs. The Commission has previously taken notice of developments
that have occurred in the electric and gas utility industry in recent
years, and has interpreted the Act and analyzed proposed transactions in
light of these changed and changing circumstances. In the Commission's
view, these developments should be considered in determining whether PSC's
and Cheyenne's gas system may be retained.
The gas and electric industries are converging, and, in these
circumstances, separation of gas and electric businesses may cause the
separated entities to be weaker competitors than they would be together.
This factor adds to the quantifiable loss of economies caused by increased
costs.
* * *
In the 1960s, when the NEES case was decided, utilities were primarily
franchised monopolies with captive ratepayers, and competition between
suppliers of gas and electricity, however limited, was virtually the only
source of customer choice and was thus deemed beneficial to energy
consumers. The fact that other gas utilities of comparable size could
operate successfully on an independent basis was evidence that a gas system
could operate on its own, a desirable result, without a substantial loss of
economies. The empirical basis for these assumptions, however, is rapidly
eroding. Although franchised monopolies are still the rule, competition is
increasing. Increased expenses of separate operations may no longer be
offset, as they were in NEW ENGLAND ELECTRIC SYSTEM, by a gain of
qualitative competitive benefits, but rather may be compounded by a loss of
such benefits, as the Commission finds in this matter. (footnotes omitted).
Accordingly, we urge the Commission to find Clause A satisfied for the reasons
set forth above, consistent with its conclusions in the NEW CENTURY ENERGIES
order.
(B) and (C) clauses: The remaining requirements of Section 11(b)(1) are met
because the gas operations of Delmarva are located in only one state (Delaware)
and because the continued gas operations under Conectiv are not so large
(considering the state of the art and the area or region affected) as to impair
the advantages of localized management, efficient operation or the effectiveness
of regulation. The gas system is confined to a small area. Finally, as detailed
above, the gas operations of Delmarva enjoy substantial economies as part of the
Delmarva system, and will realize additional economies as part of the Conectiv
System as a result of the Mergers. Far from impairing the advantages of
efficient operation, the continuation of the gas operations under Conectiv will
facilitate and enhance the efficiency of gas operations.
ii. Direct and Indirect Nonutility Subsidiaries of Conectiv
As a result of the Mergers, the nonutility businesses and interests of
Delmarva and Atlantic described in Item 1.B.3 above will become businesses and
interests of Conectiv. The total assets of all nonutility investments of
Delmarva and Atlantic at June 30, 1997 totaled $403 million.
Corporate charts showing the nonutility subsidiaries of Delmarva and
Atlantic are filed as Exhibits E-2 and E-3. A corporate chart showing the
projected arrangement of these subsidiaries under Conectiv is filed immediately
after consummation of the Mergers as Exhibit E-4.
Standard for acquisition: Section 11(b)(1) generally limits a registered
holding company to acquire "such other businesses as are reasonably incidental,
or economically necessary or appropriate, to the operations of [an] integrated
public utility system." Although the Commission has traditionally interpreted
this provision to require an operating or "functional" relationship between the
nonutility activity and the system's core nonutility business, in its recent
release promulgating Rule 58,27 the Commission stated that it "has sought to
respond to developments in the industry by expanding its concept of a functional
relationship." The Commission added "that various considerations, including
developments in the industry, the Commission's familiarity with the particular
nonutility activities at issue, the absence of significant risks inherent in the
particular venture, the specific protections provided for consumers and the
absence of objections by the relevant state regulators, made it unnecessary to
adhere rigidly to the types of administrative measures" used in the past.
Furthermore, in the 1995 REPORT, the Staff recommended that the Commission
replace the use of bright-line limitations with a more flexible standard that
would take into account the risks inherent in the particular venture and the
specific protections provided for consumers.28 As set forth more fully below,
the non-utility business interests that Conectiv will hold directly or
indirectly all meet the Commission's standards for retention.
- - --------
27 EXEMPTION OF ACQUISITION BY REGISTERED PUBLIC-UTILITY HOLDING COMPANIES OF
SECURITIES OF NONUTILITY COMPANIES ENGAGED IN CERTAIN ENERGY-RELATED AND
GAS-RELATED ACTIVITIES, HCAR No. 26667 (Feb. 14, 1997) ("RULE 58 RELEASE").
28 1995 REPORT at 81-87, 91-92.
The following is a description of the specific bases under which the
nonutility investments of Delmarva and Atlantic may be retained in the Conectiv
holding company system:
Development and commercialization of electrotechnologies:
The business activities of the following companies, either directly or
through subsidiaries, are energy-related activities within the meaning of Rule
58(b)(1)(ii), involving "the development and commercialization of
electrotechnologies related to energy conservation, storage and conversion,
energy efficiency, waste treatment, greenhouse gas reduction, and similar
innovations." SEE ALSO NEW CENTURY ENERGIES, HCAR No. 26748 (Aug. 1, 1997).
Accordingly, these interests are retainable under Section 11(b)(1) of the Act:29
DCTC-Glendon, Inc. was formed to invest in a waste-to- energy business
that was proposed to be located in Glendon, PA. The facility was never
built. The company is dormant and will be dissolved.
Pine Grove Gas Development, L.L.C. is involved in developing a use for
methane gas produced at the municipal solid waste landfill owned and
operated by Pine Grove Landfill, Inc.
ATE is an investor in EnerTech Capital Partners, L.P., a limited
partnership that will invest in and support a variety of energy
technology growth companies.
- - --------
29 Rule 58 explicitly permits indirect investment in energy- related companies
through project parents. Although Rule 58 was adopted pursuant to Section
9(c)(3) of the Act, businesses permissible under the rule are retainable
under Section 11. See Michigan Consolidated Gas Co., 44 S.E.C. 361 (1970),
aff'd, 444 F.2d 931 (D.C. Cir. 1971) (Section 9(c)(3) may not be used to
circumvent Section 11).
Brokering and marketing of energy commodities:
The business activities of the following company are energy-related
activities within the meaning of Rule 58(b)(1)(v), involving "the brokering and
marketing of energy commodities, including but not limited to electricity or
natural or manufactured gas or other combustible fuels." SEE ALSO NEW CENTURY
ENERGIES, INC., HCAR No. 26784 (Aug. 1, 1997); SEI HOLDINGS, INC., HCAR No.
26581 (Sept 26, 1996); NORTHEAST UTILITIES, HCAR No. 26654 (Aug. 13, 1996);
UNITIL CORP., HCAR No. 26257 (May 31, 1996); NEW ENGLAND ELECTRIC SYSTEM, HCAR
No. 26520 (May 23, 1996); and EASTERN UTILITIES ASSOCIATES, HCAR No. 26493
(March 14, 1996). Accordingly, these interests are retainable under Section
11(b)(1) of the Act:
Enerval, L.L.C. ("Enerval") provides energy management services,
including natural gas procurement, transportation and marketing.
Delmarva Energy Company is expected to provide marketing of energy.
Delmarva Industries, Inc., previously was involved in oil and gas
drilling ventures. It is dormant and will be dissolved.
Thermal energy products:
The business activities of the following companies (directly or through
subsidiaries) are energy-related activities within the meaning of Rule
58(b)(1)(vi), involving "the production, conversion, sale and distribution of
thermal energy products, such as process steam, heat, hot water, chilled water,
air conditioning, compressed air and similar products; alternative fuels; and
renewable energy resources; and the servicing of thermal energy facilities." SEE
ALSO NEW CENTURY ENERGIES, HCAR No. 26748 (Aug. 1, 1997); CINERGY CORP., HCAR
No. 26474 (Feb. 20, 1996). Accordingly, these interests are retainable under
Section 11(b)(1) of the Act:
ATS develops, owns and operates thermal heating and cooling systems.
It is also exempt as a holding company over the following companies
engaged in the same type of activities:
Atlantic Jersey Thermal Systems, Inc. provides operating services
for thermal heating and cooling systems.
ATS Operating Systems, Inc. provides thermal energy operating
services.
Thermal Energy Limited Partnership I holds an investment in the
Midtown Energy Center, which produces steam and chilled water
("TELPI").
Ownership and operation of QFs:
The business activities of the following companies, directly or through
subsidiaries, are energy-related activities within the meaning of Rule
58(b)(1)(viii), involving "the development, ownership or operation of
'qualifying facilities'..., and any integrated thermal, steam host, or other
necessary facility constructed, developed or acquired primarily to enable the
qualifying facility to satisfy the useful thermal output requirements under
PURPA." SEE ALSO NEW CENTURY ENERGIES, INC., HCAR No. 26748 (AUG. 1, 1997);
ENTERGY CORP., HCAR No. 26322 (June 30, 1995); SOUTHERN CO., HCAR No. 26212
(Dec. 30, 1994); CENTRAL AND SOUTH WEST CORP., HCAR No. 26156 (Nov. 3,
1994);CENTRAL AND SOUTH WEST CORP., HCAR No. 26155 (Nov. 2, 1994); and NORTHEAST
UTILITIES, HCAR No. 25977 (Jan. 24, 1994). Accordingly, these interests are
retainable under Section 11(b)(1) of the Act:
DCTC has partnership interests in Luz Solar Partners, Ltd. IV and
UAH-Hydro Kennebec, L.P., which own qualifying facilities located in
southern California and New York state, respectively.
Delmarva Operating Services Company ("DOSC") is retainable as a
holding company over the following companies engaged in the operation
and maintenance of qualifying facilities:
DelWest Operating Company will operate and maintain a qualifying
facility in Burney, CA, under a contract with the plant's owner,
Burney Forest Products, Joint Venture (an investment of
DCTC-Burney, Inc.).
DelCal Operating Company operates and maintains a qualifying
facility in Sacramento, California owned by the Sacramento Power
Authority under a subcontract with Siemens Power Corporation.
DelStar Operating Company operates and maintains the Delaware
City Power Plant, a qualifying facility in Delaware City,
Delaware under a contract with the plant's owner.
DCTC-Burney, Inc. is retainable as a holding company over investments
in Pine Grove Gas Development, L.L.C. (discussed above under
subsection 1) and, together with the following company or companies,
engaged in the operation and ownership of qualifying facilities:
DelBurney Corporation is an intermediate holding company over an
investment in a qualifying facility.
Forest Products, L.P. is a general partner in a joint venture
that owns a qualifying facility and related sawmill.
Burney Forest Products, Joint Venture owns a qualifying facility
and related sawmill in Burney, CA.
AGI is retainable as a holding company over the following companies
engaged in the operation and ownership of qualifying facilities:
Pedrick Ltd., Inc. holds a limited partnership interest in
Pedricktown Cogeneration Limited Partnership, a qualifying
facility.
Pedrick Gen., Inc. holds a general partnership interest in
Pedricktown Cogeneration Limited Partnership, a qualifying
facility.
Vineland Limited, Inc. holds a limited partnership interest in
Vineland Cogeneration Limited Partnership, a qualifying facility.
Vineland General, Inc. holds a general partnership interest in
Vineland Cogeneration Limited Partnership, a qualifying facility.
Telecommunications facilities:
Section 34 of the Act provides an exemption from the requirement of prior
Commission approval the acquisition and retention by a registered holding
company of interests in companies engaged in a broad range of telecommunications
activities and businesses. Section 34 permits ownership of interests in
telecommunications companies engaged exclusively in the business of providing
telecommunications service upon application to the Federal Communications
Commission for a determination of "exempt telecommunications company" status.
Conectiv Communications, Inc. and CCI will file for status as exempt
telecommunications companies under Section 34 of the Act prior to consummation
of the Mergers.
Real estate:
In prior orders, the Commission has approved the purchase of real estate
which is incidentally related to the operations of a registered holding company.
See UNITIL Corporation et al., Holding Co. Act Release No. 25524 (Apr. 24, 1992)
(Commission noted that UNITIL Realty Corporation, a subsidiary of the registered
holding company, UNITIL, which acquired real estate to support utility
operations, engaged in activities which were within the confines of the Act).
Consequently, since the real estate held by the following companies is
substantially similar to that owned by UNITIL Realty Corporation, the companies
are retainable subsidiaries of a registered holding company under Section
11(b)(1) of the Act:
Delmarva Services Company was formed to own and finance an office
building leased to Delmarva and/or affiliates.
Christiana Capital Management, Inc. was formed to own and finance an
office building leased to affiliates.
ASP owns and manages a commercial office and warehouse facility in
southern New Jersey. Fifty percent of the space is presently leased to
system companies and fifty percent is leased to a high school and a
day care center.
Delmarva Capital Realty Company ("DCRC") is a vehicle for the sale of
properties not used or useful for the utility business.
Post and Rail Farms, Inc. ("Post and Rail") is engaged in the
development and sale of a residential housing development.
With respect to DCRC and Post and Rail, these companies are managing real
estate that was acquired for an intended utility purpose which has ceased to
exist, or in order for the utility to obtain the necessary rights of way for
transmission lines and other utility operations. Unlike many other states,
Delaware does not provide a right of condemnation for a franchised electric
utility. Rather, the utility is often forced to acquire the underlying fee
simple for a larger parcel in order to obtain an easement or right of way. The
development of these properties is a means of recovering the costs associated
with their acquisition. Accordingly, we submit, such interests are retainable
either under Section 11(b)(1) or pursuant to Section 9(c)(3) "in the ordinary
course of business" of a registered system.
Leveraged leases:
The Commission has approved investments by registered holding companies in
leveraged leases under Section 9(c)(3), which exempts from Section 9(a) and
Section 10, "such commercial paper and other securities, within such
limitations, as the Commission may by rules and regulations or order prescribe
as appropriate in the ordinary course of business of a registered holding
company or subsidiary company thereof and as not detrimental to the public
interest or the interest of investors or consumers." Central and South West
Corporation, HCAR 23588 (Jan. 22, 1985). As the Commission noted in Central and
South West, title held by the lessor in such circumstances is insufficient to
make lessor an "owner" under Section 2(a)(3)(4) of the Act. Moreover, attempting
to reduce one's tax liability through leveraged lease investments is within the
ordinary course of business. Consequently, since the leveraged lease investments
held by the following companies and related activities of the companies are
substantially similar to those discussed above, the companies are retainable
subsidiaries of a registered holding company under 11(b)(1) of the Act:
DCI I, Inc. makes equity investments in leveraged leases of aircraft.
DCI II, Inc. is a foreign sales subsidiary formed to obtain certain
tax benefits from leveraged lease investments by DCI I, Inc.
ATE's primary investments are equity investments in leveraged leases
of three commercial aircraft and two container ships. The other
activities of ATE Investment, Inc. are (i) its investment in EnerTech
Capital Partners, L.P., which, as discussed above, is retainable
pursuant to Rule 58(b)(1)(ii) and (ii) certain financing arrangements
with affiliates.
Solid Waste Management:
The Applicants also seek approval to retain certain de minimis investments
in the solid waste management business. These companies were originally acquired
in connection with a proposed investment in a waste-to-energy facility that was
never constructed. These companies have total assets of less than $35 million.
Given the de minimis size of the investment and that the Applicants are seeking
only to retain, and maintain, the existing assets, the Commission should approve
retention of the following two companies:
Pine Grove, Inc. is a holding company over the following investments:
Pine Grove Landfill, Inc. owns and operates a municipal solid
waste landfill.
Pine Grove Hauling Company owns and operates a waste hauling
and recycling business.
Gas-related Activities:
Conectiv will hold an indirect ownership interest in ECNG, which is
engaged in gas-related activities. Delmarva participated in the
formation of ECNG in order to improve the efficiency of its natural
gas local distribution operations. ECNG members provide emergency
backup natural gas supplies to other members and jointly undertake the
bulk purchase and storage of natural gas for use in their local
distribution business. Because these activities are functionally
related to the operations of the gas utility business of Delmarva,
ECNG is retainable by Conectiv under Section 11(b)(1). Further, upon
Commission approval of the Mergers, ECNG will be exempt from all
obligations, duties or liabilities imposed upon it by the Act as a
subsidiary company or as an affiliate of a registered holding company
or of a subsidiary company thereof. SEE RULE 16.
Nonutility Holding Companies:
In addition to the companies discussed above which are engaged in a single
type of business activity, Conectiv will have several other direct and indirect
holding company subsidiaries, which are holding companies for subsidiaries
engaged in a variety of businesses. The following holding companies are
retainable because all of their investments are in companies which are
retainable, as outlined above:
DCI is the holding company over DCI I, Inc., DCI II, Inc., DOSC, DCRC
and Delmarva Capital Technology Company.
Delmarva Capital Technology Company ("DCTC") is the holding company
over Pine Grove, Inc., DCTC-Glendon, Inc. and DCTC-Burney, Inc.
AEE is holding company over ATE, AET, AGI, ATS, CCI, ASP and Enerval.
Home Security Business:
The home security business of ACE, which is located exclusively in its
service territory has annual revenues of less than $10,000. It is a small
operation that developed from utility operations and incurs very little cost at
this point. Accordingly, Conectiv seeks to retain this business under Section
11(b)(1). Although it is currently within ACE, it may be moved to a separate
subsidiary of Conectiv. Any such subsidiary will apply for exempt
telecommunications company status under Section 34.
Retail Services:
In the NEW CENTURY ENERGIES order, the Commission authorized the new
registered holding company to provide various retail services through one or
more nonutility subsidiaries. The order explained:
E prime provides demand side management services and proposes to
provide other consulting services to commercial and industrial customers.
These services and proposed services include energy analysis, project
management, design and construction, energy efficient equipment
installation and maintenance, facilities management services, environmental
services and compliance, fuel procurement, and other similar kinds of
managerial and technical services.
The NEW CENTURY ENERGIES order cited a number of orders, including CENTRAL AND
SOUTH WEST CORP., HCAR No. 26367 (Sept. 1, 1995) and AMERICAN ELECTRIC POWER
CO., HCAR No. 26267 (Apr. 5, 1995).
At present, Conectiv Services, Inc. provides heating, ventilation and air
conditioning ("HVAC") sales, installation and servicing, and other
energy-related services for residential, commercial and industrial customers.
The HVAC services provided by Conectiv Services, Inc. are energy-related
appliance sales activities that fall within the exemptive requirements of Rule
58. Because Conectiv Services, Inc. intends to engage in additional activities,
however, it does not appear that Conectiv Services, Inc. would be an
energy-related company for purposes of Rule 58. Nonetheless, these activities
are clearly retainable under Commission precedent.
Conectiv Services, Inc. also seeks approval to provide directly, or through
one or more subsidiaries, a variety of energy-related services and products to
residential, commercial and industrial customers ("Retail Services"). As in the
NEW CENTURY ENERGIES order, these services and proposed services include energy
analysis, project management, design and construction, energy efficient
equipment installation and maintenance, facilities management services,
environmental services and compliance, fuel procurement, and other similar kinds
of managerial and technical services. While the precise list of services is
still under consideration, it is anticipated that Retail Services may include:
(1) service lines repair/extended warranties - repair of underground utility
services lines owned by and located on the customer's property and extended
service warranties covering the cost of such repairs; (2) surge protection -
meter-based and plug-in equipment to protect customer household appliances and
electronic equipment from power surges, including due to lightning; (3)
appliance merchandising/repair/extended warranties - marketing of HVAC and other
energy-related household and office appliances and equipment and, in connection
therewith or separately, marketing of appliance and equipment inspection and
repair services and extended service warranties covering the cost of repairing
customers' appliances and equipment; (4) utility bill insurance utility bill
payment protection, for a monthly fee for a specified number of months, in the
event the customer becomes unemployed, disabled or dies; (5) plumbing services;
and (6) incidental and reasonably necessary products and services related to the
choice, purchase, provision or consumption of any such products and services.
Conectiv Services, Inc. also seeks approval to furnish its own financing or
to broker nonassociate third-party financing, directly or indirectly, to
commercial, industrial and residential customers to support purchases by its
customers of HVAC and Retail Services. Conectiv Services, Inc. may also provide
financing for goods and services sold by its affiliates. Customer financing may
take the form of direct loans, installment purchases, operating or finance lease
arrangements (including sublet arrangements) and loan guarantees. Interest on
loans and imputed interest on lease payments will be based on prevailing market
rates. The obligations will have terms of one to thirty years and will be
secured or unsecured. Conectiv Services, Inc. may also assign obligations
acquired from customers to banks, leasing companies or other financial
institutions, with or without recourse.
Rule 40(a)(4) provides an exemption from Section 9(a) with respect to the
acquisition:
In the ordinary course of the acquiring company's business (other than the
business of a holding company or investment company as such), [of] any
evidence of indebtedness executed by its customers in consideration of
utility or other services by such company or executed in connection with
the sale of goods or real property other than utility assets.
It appears that, to the extent that financing transactions support Conectiv
Services, Inc.'s sales activities, they would be exempt pursuant to Rule
40(a)(4). In the alternative, we note that the Commission has previously
approved customer financing activities by registered holding company systems.
SEE NEW CENTURY ENERGIES, INC., HCAR No. 26748 (Aug. 1, 1997); CINERGY CORP.,
HCAR No. 26662 (Feb. 7, 1997); CENTRAL AND SOUTH WEST CORP., HCAR No. 26367
(Sept. 1, 1995); CONSOLIDATED NATURAL GAS CO., HCAR No. 26234 (Feb. 23 1995);
and ENTERGY CORP., HCAR No. 25718 (Dec. 28, 1992).
As detailed above, many of the existing nonutility activities of Delmarva
and Atlantic, and their affiliates, fall within the ambit of newly adopted Rule
58. Consistent with the Commission's recent decision in NEW CENTURY ENERGIES,
INC., HCAR No. 26748 (Aug. 1, 1997), investments made by Delmarva and Atlantic
prior to the effective date of the Mergers, should not count in the calculation
of the 15% limit for purposes of Rule 58. All additional investments made in
energy-related companies subsequent to the effective date of the Mergers would,
of course, be included in the 15% test.
b. Section 10(c)(2)
The Mergers will tend toward the economical and efficient development of an
integrated public utility system, thereby serving the public interest, as
required by Section 10(c)(2) of the Act.
i. Efficiencies and Economies
The Mergers will produce economies and efficiencies more than sufficient to
satisfy the standards of Section 10(c)(2), described above. Although some of the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are properly considered in determining whether the standards
of Section 10(c)(2) have been met. SEE AMERICAN ELECTRIC POWER CO., 46 SEC 1299,
1320-1321 (1978). Some potential benefits cannot be precisely estimated;
nevertheless they too are entitled to be considered: "[S]pecific dollar
forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable." CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29, 1986) (citation
omitted).
Delmarva and Atlantic have estimated the nominal dollar net value of
synergies from the Mergers to be in excess of $500 million over the first
10-year period, from 1998 to 2007. The geographical locations of the respective
service territories of Delmarva and ACE, which operate in contiguous states
separated by the Delaware River and whose headquarters are within 90 miles of
one another, provide an opportunity to integrate efficiently their utility
operations. Delmarva's operating entities already have existing electrical
interconnections with Atlantic through 500kv transmission lines. The combined
system can be operated as a single, larger cohesive system, with virtually no
modification needed with respect to existing generating and transmission
facilities. There are five general areas where presently quantifiable savings
can be realized through the combination of the companies: (1) corporate,
operations and generation support labor; (2) facilities consolidation; (3)
corporate and administrative programs; (4) non-fuel purchasing economies; and
(5) fuel supply and purchased power. The amount of savings currently estimated
in each of these categories, on a nominal dollar basis, is summarized in the
table below:
Category Amount
(in millions)
Labor $346
Facilities Consolidation 26
Corporate and
Administrative Programs 125
Non-Fuel Purchasing Economies 56
Fuel Supply and Purchased Power 28
Less: Costs to Achieve 72
----
Net Total Estimated Savings $509
These expected savings far exceed the savings claimed in a number of recent
acquisitions approved by the Commission. SEE, E.G., KANSAS POWER AND LIGHT CO.,
HCAR No. 25465 (Feb. 5, 1992) (expected savings of $140 million over five
years); IE INDUSTRIES, HCAR No. 25325 (June 3, 1991) (expected savings of $91
million over ten years); MIDWEST RESOURCES, HCAR No. 25159 (Sept. 26, 1990)
(estimated savings of $25 million over five years). These savings categories are
described in greater detail below.
Corporate, Operations and Generation Support Labor: Savings will be
realized through labor reductions related to redundant positions. Many of
these reductions will be in areas where payroll costs are relatively fixed
and do not vary with an increase or decrease in the number of customers
served. These areas include legal services, finance, sales, support
services, transmission and distribution, customer service, accounting,
human resources and information services. Overall, Conectiv expects a
reduction of approximately 10% (or 400 positions) in the combined company's
workforce. Conectiv would also have the ability to consolidate certain
customer business offices and service centers in the eastern
Delaware/western New Jersey area where Delmarva and Atlantic have
contiguous or geographically close service territories.
Facilities Consolidation: Savings will be realized through the
combination of neighboring business offices or service centers.
Specifically, due to the workforce reductions, consolidation of operations
at the Delmarva headquarters in Wilmington, Delaware will allow for the
possible sale or lease of Atlantic's corporate headquarters in Egg Harbor
Township, N.J. and other potential consolidations.
Corporate and Administrative Programs: Savings will be realized
through economies of scale and cost avoidance in those areas where both
Delmarva and Atlantic incur many costs for items which relate to the
operation of each company, but which are not directly attributable to
customers. Ten such areas have been identified: administrative and general
overhead; benefits administration; insurance; information services;
professional services; shareholder services; advertising; association dues;
credit facilities; directors' fees; and vehicles. Achieving cost savings
through greater efficiencies and economies of scale will permit each of the
operating utilities to offer more competitively-priced electric service and
energy-related products and services than would otherwise be possible.
Non-Fuel Purchasing Economies: Savings will be realized through
increased order quantities and the enhanced utilization of inventory for
materials and supplies. Currently, Delmarva and Atlantic independently
maintain separate purchasing departments responsible for maintaining
materials and supplies used by employees at various storeroom locations. In
addition, both companies procure contract services independently. As a
direct result of the combination, savings can be realized through the
procurement of both materials and services, as well as in costs associated
with the maintenance of inventory levels.
Fuel Supply and Purchased Power: Savings will be realized through the
bundling of commodity fuels and bulk power purchases in the form of larger
quantities or volumes. Fuel supply savings were analyzed in the following
areas: coal, gas, oil and rail transportation. Conectiv will be able to
take advantage of commodity savings based on higher total volumes of coal
and natural gas acquisition. Rail transportation costs for coal could also
be renegotiated at a lower per ton cost. No savings were identified in oil
procurement because both companies are purchasing through commodity markets
under short term and spot contracts. This results in competitive market
prices for both entities and will not result in significant savings in
commodity or transportation. The total potential savings from fuel supply
and purchased power are estimated to be $28 million over the ten-year
period.
Savings from these sources are offset by the costs that must be
incurred for activities essential to achieving the savings.
Costs to Achieve: Costs to achieve the identified savings are
estimated at approximately $72 million for such items as relocation,
retraining and system consolidation.
Additional Expected Benefits: In addition to the benefits described above,
there are other benefits which, while presently difficult to quantify, are
nonetheless substantial. These other benefits include:
o Increased Scale-- As competition intensifies within the industry,
Atlantic and Delmarva believe scale will be one parameter that
will contribute to overall business success. Scale has importance
in many areas, including utility operations, product development,
advertising and corporate services. The Mergers are expected to
improve the profitability of the combined company by roughly
doubling the customer base and providing increased economies of
scale in all of these areas.
o Competitive Prices and Services-- Sales to industrial, large
commercial and wholesale customers are considered to be at
greatest near-term risk as a result of increased competition in
the electric utility industry. The Mergers will enable Conectiv
to meet the challenges of the increased competition and will
create operating efficiencies through which Conectiv will be able
to provide more competitive prices to customers.
o More Balanced Customer Base-- The Mergers will create a larger
company with less reliance on the chemical and financial services
industries, from Delmarva's perspective, and on casino gaming,
tourism and recreation, from Atlantic's perspective. The combined
service territories of Delmarva and Atlantic will be more diverse
than their individual service territories, reducing Conectiv's
exposure to adverse changes in any sector's economic and
competitive conditions.
o Financial Flexibility -- By roughly doubling the market
capitalization of Conectiv compared with the individual
companies, the Mergers should improve Conectiv's overall credit
quality and liquidity of the securities and therefore improve
Conectiv's ability to fund continued growth.
o Regional Platform for Growth-- The combination of Atlantic and
Delmarva will create a regional platform in the mid-Atlantic
corridor. The corridor is experiencing economic growth that is
led by the casino gaming industry in South Jersey and the
expansion of the financial services industry in Delaware.
Conectiv plans to expand relationships with existing customers
and to develop relationships with new customers in the region.
Conectiv will use its combined distribution channels to market a
portfolio of energy-related products throughout the region and
will follow regional relationships to other geographical areas.
ii. Integrated Public Utility System
I. Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operation to a
single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
public utility system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
ENVIRONMENTAL ACTION, INC. V. SECURITIES AND EXCHANGE COMMISSION, 895 F.2d 1255,
1263 (9th Cir. 1990), citing ELECTRIC ENERGY, INC., 38 SEC 658, 668 (1958). The
Mergers satisfy all four of these requirements. It should be noted that in the
1995 REPORT, the Division recommended that the Commission "respond realistically
to the changes in the utility industry and interpret more flexibly each piece of
the integration requirement."30
- - --------
30 1995 REPORT at 71.
Conectiv satisfies each of these requirements for an integrated system. The
Commission has determined that the first and second requirements are satisfied
when the merging companies jointly own generation and transmission facilities
and are members of the same tight power pool. UNITIL CORP., HCAR No. 25524
(April 24, 1992); NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990). In these
cases, the Commission found that the utilities in the holding company systems
were physically capable of supplying power to each other through wheeling or
power pool arrangements.
In addition, the companies are interconnected through their undivided
ownership interests in and/or rights to use the same regional generation
facilities and extra-high voltage transmission facilities, as well as through
their contractual rights to use the transmission facilities of other members of
the PJM regional power pool. Delmarva and ACE each have undivided ownership
interests in two nuclear plants: Peach Bottom Nuclear Generating Station located
in Pennsylvania, in which each company holds a 7.51 percent interest, and Salem
Nuclear Generating Station located in New Jersey, in which each company holds a
7.41 percent interest. Both companies also hold undivided ownership interests in
two coal-fired thermal units, the Keystone and Conemaugh generating stations
located in Pennsylvania. These four plants together account for a substantial
proportion of Conectiv's generation resources, though the plants are located
outside Conectiv's traditional service areas.
Delmarva and ACE both are members of the PJM Pool, which is the largest
single control area and tight power pool in the country.31 In order to achieve
economy and reliability in bulk power supply within the PJM region, PJM members
coordinate the planning and operation of their systems, share installed and
operating reserves to reduce installed generator requirements, and participate
in centralized unit commitment, coordinated bilateral transactions, and
instantaneous real-time dispatch of energy resources to meet customer load
requirements throughout the PJM Interconnection. Most of the electricity
produced by Delmarva's and ACE's generating facilities, other than generation
required to support local reliability, is committed to pool dispatch.
- - ---------
31 Comparable tight pools are the New York Power Pool ("NYPP") and the New
England Power Pool ("NEPOOL").
Delmarva and ACE, along with other PJM members, also are owners in common
or have joint rights to use certain 500 kv transmission facilities that are used
to import power from the west and to deliver power from jointly owned generating
plants to their owners' systems. These facilities include a transmission line
which provides an aerial crossing of the Delaware River and other extra-high
voltage lines that directly connect the jointly- owned power plants with lower
voltage lines of the PJM Interconnection. Thus, Conectiv is able to integrate
its generation resources to serve Delmarva's and ACE's customers pursuant to
ownership and contractual rights to use regional transmission facilities of the
PJM Interconnection.32
- - ---------
32 The fact that two facilities may be separated by other facilities that are
not owned by the holding company does not change the fact that they are
capable of physical connection and of supplying power to one another as
needed. CITY OF NEW ORLEANS V. SEC, 969 F.2d 1163, 1165 (D.C. Cir. 1992).
The Commission previously has found that the physical interconnection
requirement of the Act was satisfied on the basis of contractual rights to use
third-parties' transmission lines when the merging companies both were members
of the same tight power pool.33 In UNITIL, the companies, Unitil's public
utility subsidiary companies and Fitchburg Gas and Electric Light Company were
indirectly interconnected through New England Power Pool ("NEPOOL") designated
facilities and other nonaffiliate transmission facilities pursuant to the NEPOOL
Agreement. While there was no particular transmission line through which
transfers of power would be made among the Unitil companies, power would be
delivered through a nonaffiliate system and a transmission charge would be paid
to the owners of the facilities. The Commission found that the Unitil companies'
contractual arrangements for transmission service established that the Unitil
electric system would satisfy the physical interconnection requirement of the
Act. For the same reasons, Conectiv satisfies the physical interconnection
requirement of the Act.
- - ----------
33 SEE, E.G., NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990) at n. 85,
MODIFIED HCAR No. 25273 (March 15, 1991), AFF'D SUB NOM. CITY OF HOLYOKE V.
SEC, 972 F.2d 358 (D.C. Cir. 1992); CENTERIOR ENERGY CORP., HCAR No. 24073
(1986); CITIES SERVICES CO., 14 SEC 28, 53 n. 44. SEE ALSO YANKEE ATOMIC
ELECTRIC CO., 36 SEC 552, 563 (1955); CONNECTICUT YANKEE ATOMIC POWER CO.,
41 SEC 705, 710 (1963) (authorizing various New England companies to
acquire interests in a commonly-owned nuclear power company and finding the
interconnection requirement met because the New England transmission grid
already interconnected the companies).
While Delmarva and ACE now achieve integration comparable to that found in
UNITIL and NORTHEAST UTILITIES under the current PJM Interconnection Agreement,
PJM members are restructuring their organization in ways that will expand the
available mechanisms for integrating the Conectiv system. In compliance with
Order 888/34 issued by the FERC in 1996, the members of the PJM Pool filed a
pool-wide open access transmission tariff ("Tariff") and certain additional
agreements intended to implement a restructuring of the PJM Pool.35 Under the
Tariff, Delmarva and ACE (as well as other transmission- owning members of PJM
and non-members purchasing network transmission service) can obtain network
integration transmission service throughout the PJM control area to deliver
capacity and energy from designated generation resources to the utility's
electric customers. The PJM members also filed with the FERC an amended PJM
Interconnection Agreement, which, like the previous PJM Interconnection
Agreement, provides for coordination of electric system loads, electric
generating capacities and electric transmission facilities. The amended PJM
Interconnection Agreement provides that the members will establish a bid-based
wholesale energy market in which any participant may buy and sell energy, and
for the PJM control center to schedule and dispatch generation on the basis of
least-cost, security-constrained dispatch and the prices and operating
characteristics offered by sellers in order to serve the energy purchase
requirements of customers. Though there are differences of opinion among PJM
members as to the appropriate rules for governing the structure of the energy
market, there is substantial agreement that an energy exchange should be
implemented.
- - --------
34 PROMOTING WHOLESALE COMPETITION THROUGH OPEN ACCESS NON-DISCRIMINATORY
TRANSMISSION SERVICES BY PUBLIC UTILITIES AND RECOVERY OF STRANDED COSTS BY
PUBLIC UTILITIES AND TRANSMITTING UTILITIES, Order No. 888, 61 Fed. Reg.
21540 (May 10, 1996), III FERC Stats. & Regs., Regulations Preambles
1991-1996 P. 31,036 (1996) ("Order 888").
35 COMPLIANCE OF THE PENNSYLVANIA-NEW JERSEY-MARYLAND INTERCONNECTION WITH
ORDER No. 888, Docket No. OA97-261-000 (filed Dec. 31, 1996).
Conectiv also satisfies the second of the Commission's requirements, that
utility assets, under normal conditions, may be "economically operated as a
single interconnected and coordinated system."36 The Commission has interpreted
this language to refer, among other things, to the physical operation of utility
assets as a system in which the generation and/or flow of current within the
system may be centrally controlled and allocated as need or economy directs.37
The Commission has considered advances in technology and the particular
operating circumstances in applying the integration standards. In approving the
acquisition of Public Service Company of New Hampshire by Northeast Utilities,
the Commission noted that "the operation of generating and transmitting
facilities of PSNH and the Northeast operating companies is coordinated and
centrally dispatched under the NEPOOL Agreement." NORTHEAST UTILITIES CO., HCAR
No. 25221 at n. 85. Similarly, in UNITIL, the Commission concluded that the
combined electric utility assets of the companies may be operated as a single
interconnected and coordinated system through their participation in NEPOOL. For
the same reasons, Conectiv is able to operate its utility assets as a single
interconnected and coordinated system.
- - --------
36 SEE CITIES SERVICES CO., 14 SEC at 55 (Congress intended that the utility
properties be so connected and operated that there is coordination among
all parts, and that those parts bear an integral operating relationship to
each other).
37 NORTH AMERICAN CO., 11 SEC 194, 242 (1942) aff'd, 133 F.2d 148 (2d Cir.
1943), aff'd on constitutional issues, 327 U.S. 686 (1946) (evidence is
necessary to show that in fact isolated territories are or can be so
operated in conjunction with the remainder of the system that central
control is available for the routing of power within the system).
The Commission's third requirement is also satisfied. The Conectiv electric
system will operate in a single area or region. The system will operate in five
contiguous states in the mid-Atlantic region of the United States. It should be
noted that in the 1995 REPORT, the Division has stated that the evaluation of
the "single area or region" portion of the integration requirement "should be
made... in light of the effect of technological advances on the ability to
transmit electric energy economically over longer distance, and other
developments in the industry, such as brokers and marketers, that affect the
concept of geographic integration."38 The 1995 REPORT also recommends primacy be
given to "demonstrated economies and efficiencies to satisfy the integration
requirements."39 As set forth in Item 3.A.2.b.i, the Mergers will result in
economies and efficiencies for the utilities and, in turn, their customers.
- - --------
38 1995 REPORT at 72-74.
39 1995 REPORT at 73.
Finally, with respect to the Commission's fourth requirement, the Conectiv
electric system will not be so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation. After the
Mergers, Conectiv will maintain system headquarters in Wilmington, Delaware.
This structure will preserve all the benefits of localized management Delmarva
and Atlantic presently enjoy while simultaneously allowing for the efficiencies
and economies that will derive from their strategic alliance. Furthermore, as
described earlier, the system will facilitate efficient operation.
Additionally, the Conectiv system will not impair the effectiveness of
state regulation. Delmarva and ACE will continue their separate existence as
before and their utility operations will remain subject to the same regulatory
authorities by which they are presently regulated, namely the DPSC, VSCC, NJBPU,
PPUC, MPSC, the FERC and the NRC. Delmarva and Atlantic are working closely with
the DPSC, VSCC, NJBPU, PPUC and MPSC as well as the FERC and the NRC to ensure
they are well informed about these Mergers and these Mergers will not be
consummated unless all required regulatory approvals are obtained. Pursuant to
the recommendations contained in the 1995 REPORT, this last factor is
significant as the Division stated therein "when the affected state and local
regulators concur, the [Commission] should interpret the integration standard
flexibly to permit non-traditional systems if the standards of the Act are
otherwise met,"40 especially since these Mergers will result in a system similar
to the traditional registered holding company system.
- - --------
40 1995 REPORT at 74.
II. Gas Utility System
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies:
[A] system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its operation to a
single area or region, in one or more States, not so large as to impair
(considering the state of the art and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation: Provided, that gas utility companies deriving
natural gas from a common source of supply may be deemed to be included in
a single area or region.
The gas operations of Delmarva, which are very limited in size, currently
operate as a single, integrated public utility system in New Castle County,
Delaware. The Mergers will not affect that integrated operation. Thus, Conectiv
gas utility system will meet the standard set forth in Section 2(a)(29)(B) and,
therefore, will satisfy the requirements of Sections 10(c)(1) and (2) and should
be approved by the Commission. The Conectiv gas utility system will continue to
operate as a coordinated system confined in its operation to a single area or
region.
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect to such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to the carrying out of the
provisions of section 11.
As described in Item 4 of this Application/Declaration, and as evidenced by the
applications before the DPSC, VSCC, NJBPU, PPUC and MPSC all relating to the
Mergers, Conectiv intends to comply with all applicable state laws related to
the proposed transaction.
4. Other Applicable Provisions -- Section 9(a)(1)
Conectiv is also requesting authorization from the Commission under Section
9(a)(1) of the Act for the acquisition by it of the voting securities of Support
Conectiv as part of the Mergers. Section 9(a)(1) of the Act requires a
registered holding company or any subsidiary thereof to obtain authorization
from the Commission before acquiring "any securities or utility assets or any
other interest in any business." In order to approve an acquisition under
Section 9(a)(1), the Commission must find that such acquisition meets the
standards of Section 10 of the Act, which in turn requires compliance with
Sections 8 and 11 of the Act. Although Conectiv will not become a registered
holding company until consummation of the Mergers and thus Section 9(a)(1) is
not applicable to it until that time, because Conectiv will become subject to
Section 9(a)(1) and the exact chronology of the formation of Support Conectiv
has not been determined, Conectiv is requesting the Commission's authorization
for this transaction.
The acquisition by Conectiv of the common stock of Support Conectiv, making
it a direct subsidiary of Conectiv, will allow Conectiv to create a subsidiary
service company and capture economies of scale from the centralization of
administrative and general services to be provided to system companies. A
portion of the benefits realized as a result of Support Conectiv are expected to
be shared with Conectiv's ratepayers. Virtually every registered holding company
has a subsidiary service company performing many of the same functions that
Support Conectiv will perform. The acquisition of Support Conectiv is in the
public interest, will not unduly complicate the capital structure of Conectiv
and will not cause the Conectiv system to violate any other provision of the
Act. Support Conectiv's only class of authorized stock will be its common stock,
all of which will be owned by Conectiv. The operation of Support Conectiv, and
the allocation of cost for its operation, is discussed in detail in Item 3.B
below.
B. Intra-System Provision of Services
All services provided by Conectiv system companies to other Conectiv system
companies will be in accordance with the requirements of Section 13 of the Act
and the rules promulgated thereunder. Conectiv is aware that questions
concerning the FERC's policy in this area are likely to arise with respect to
affiliate transactions involving Atlantic, Delmarva and other companies which
are public utilities under the Federal Power Act. The FERC, in its order
authorizing the proposed mergers, noted that:
in response to the [FERC's] concern under the holding of OHIO POWER
CO. v. FERC, 954 F.2d 779 (D.C. Cir.), CERT. DENIED, 498 U.S. 73
(1992), Applicants commit as a condition that, for Commission
ratemaking purposes, they will follow the Commission's policy
regarding the treatment of costs and revenues associated with inter-
company services.
The FERC intra-corporate transactions policy, with respect to non-power
goods and services, requires that:
(1) affiliates or associates of a public utility not sell non-power
goods and services to the public utility at a price above market; and
(2) sales of non-power goods and services by a public utility to its
affiliates or associates be at the public utility's cost for such
goods and services or market value for such goods and services,
whichever is higher.
ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY, FERC Docket
No. EC-7-000 (slip op., July 30, 1997).
Conectiv recognizes that affiliate transactions among the member companies
of Conectiv will be subject of the jurisdiction of the SEC under section 13(b)
of the Act and the rules and regulations thereunder. Section 13(b) of the Act
generally provides that transactions between affiliates in a registered holding
company system be "at cost, fairly or equitably allocated among such companies."
Conectiv believes that as a practical matter there should not be any
irreconcilable inconsistency between the application of the SEC's "at cost"
standard and the FERC's policies with respect to intra-system transactions as
applied to Conectiv. For example, Support Conectiv will provide non-power goods
and services to associate companies within the Conectiv system at cost, but it
is anticipated that Support Conectiv will provide only those goods and services
where it can meet or better market prices for comparable quality goods and
services. In other words, they are anticipating that Support Conectiv "costs"
will be at or below the market.
On this basis, Conectiv will be able to comply with the requirements of
both the FERC and the "at cost" and fair and equitable allocation of cost
requirements of Section 13, including Rules 87, 90 and 91 thereunder, for all
services, sale and construction contracts between associate companies and with
the holding company parent unless otherwise permitted by the Commission by rule
or order.
1. Support Conectiv
As described in Item 1.B.1.c.vii, Support Conectiv will provide all system
companies, pursuant to the Service Agreement, with a variety of administrative,
management and support services, including services relating to electric power
planning, electric system operations, materials management, facilities and real
estate, accounting, budgeting and financial forecasting, finance and treasury,
rates and regulation, legal, internal audit, corporate communications,
environmental, fuel procurement, corporate planning, investor relations, human
resources, marketing and customer services, information systems and general
administrative and executive management services. In accordance with the Service
Agreement, Exhibit B-2, services provided by Support Conectiv will be directly
assigned, distributed or allocated by activity, project, program, work order or
other appropriate basis. To accomplish this, employees of Support Conectiv will
record transactions utilizing the existing data capture and accounting systems
of each client company. Costs of Support Conectiv will be accumulated in
accounts of Support Conectiv and directly assigned, distributed and allocated to
the appropriate client company in accordance with the guidelines set forth in
the Service Agreement. Atlantic and Delmarva are currently developing the system
and procedures necessary to implement the Service Agreement.
It is anticipated that Support Conectiv will be staffed by transfer of
personnel from Delmarva, Atlantic and their subsidiaries. Support Conectiv's
accounting and cost allocation methods and procedures are structured so as to
comply with the Commission's standards for service companies in registered
holding-company systems. Support Conectiv's billing system will use the "Uniform
System of Accounts for Mutual Service Companies and Subsidiary Service
Companies" established by the Commission for service companies of registered
holding-company systems, as may be adjusted to use the FERC uniform system of
accounts.
As compensation for services, the Service Agreement will provide for the
client companies to: "pay to Support Conectiv all costs which reasonably can be
identified and related to particular services performed by Support Conectiv for
or on its behalf." Where more than one company is involved in or has received
benefits from a service performed, the Service Agreement will provide that
"costs will be directly assigned, distributed or allocated, between or among
such companies on a basis reasonably related to the service performed to the
extent reasonably practicable," in accordance with the methods set forth in
Appendix A to the Service Agreement. Thus, for financial reporting purposes,
charges for all services provided by Support Conectiv to affiliates will be on
an "at cost" basis as determined under Rules 90 and 91 of the Act.
No change in the organization of Support Conectiv, the type and character
of the companies to be serviced, the methods of allocating costs to associate
companies, or in the scope or character of the services to be rendered subject
to Section 13 of the Act, or any rule, regulation or order thereunder, shall be
made unless and until Support Conectiv shall first have given the Commission
written notice of the proposed change not less than 60 days prior to the
proposed effectiveness of any such change. If, upon the receipt of any such
notice, the Commission shall notify Support Conectiv within the 60-day period
that a question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order
thereunder, then the proposed change shall not become effective unless and until
Support Conectiv shall have filed with the Commission an appropriate declaration
regarding such proposed change and the Commission shall have permitted such
declaration to become effective.
Conectiv believes that the Service Agreement is structured so as to comply
with Section 13 of the Act and the Commission's rules and regulations
thereunder.
Rule 88: Rule 88 provides that "[a] finding by the Commission that a
subsidiary company of a registered holding company . . . is so organized and
conducted, or to be conducted, as to meet the requirements of Section 13(b) of
the Act with respect to reasonable assurance of efficient and economical
performance of services or construction or sale of goods for the benefit of
associate companies, at cost fairly and equitably allocated among them (or as
permitted by Rule 90), will be made only pursuant to a declaration filed with
the Commission on Form U-13-1, as specified" in the instructions for that form,
by such company or the persons proposing to organize it. Notwithstanding the
foregoing language, the Commission has on at least two recent occasions made
findings under Section 13(b) based on information set forth in an
Application/Declaration on Form U-1, without requiring the formal filing of a
Form U-13-1. SEE CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994); UNITIL CORP.,
HCAR No. 25524 (April 24, 1992). In this Application/ Declaration, Conectiv has
submitted substantially the same applicable information as would have been
submitted in a Form U-13-1.
Accordingly, it is submitted that it is appropriate to find that Support
Conectiv is so organized and its business will be so conducted as to meet the
requirements of Section 13(b), and that the filing of a Form U-13-1 is
unnecessary, or, alternatively, that this Application/Declaration should be
deemed to constitute a filing on Form U-13-1 for purposes of Rule 88.
2. Other Services
Delmarva, ACE and other associate companies of Conectiv may, from time to
time, enter into leases of office or other space with other associate companies.
Any such lease will be in accordance with Rules 87, 90, and 91, except as may be
otherwise authorized by the Commission. To the extent necessary, Conectiv
requests authority from the Commission to enter into the business of leasing
such space between and among associate companies and third parties. The
Commission has permitted the leasing of excess office space. SEE, E.G., CENTRAL
POWER AND LIGHT COMPANY, HCAR No. 26408 (Nov. 13, 1995); NORTHEAST UTILITIES,
HCAR No. 24908 (June 22, 1989).
Delmarva and Atlantic may also provide to one another services incidental
to their utility businesses, such as power plant maintenance overhauls, power
plant and storm outage emergency repairs and services of personnel with
specialized expertise related to the operation of the utility (i.e., services by
an industrial lighting specialist or waste disposal specialist). These services
will be provided at cost in accordance with the standards of the Act and Rules
87, 90 and 91 thereunder.
In addition, it is expected that certain assets such as real property used
for administrative purposes and information technology equipment and software
may be transferred from Delmarva or ACE to Support Conectiv or other Conectiv
companies at cost in conjunction with the integration of the two companies after
consummation of the Mergers. For example, Delmarva currently owns the building
that is likely to be used by Support Conectiv and so may seek to transfer this
asset. These transfers may require approval by various public utility
commissions. The Applicant requests authorization to transfer assets with
remaining recorded value (assets less depreciation and amortization) totaling up
to $100 million. Any such transfers will be in accordance with Rules 87, 90, and
91, except as may be otherwise authorized by the Commission. It is also
requested that this authorization be for a period of 24 months from the
effective date of the Mergers.
Conectiv further requests authority to transfer at cost and/or combine real
property interests and real estate related activities which benefit more than
one member of the Conectiv group, and real property interests of Delmarva and
Atlantic currently intended for sale to third parties, into a single legal
entity through merger of subsidiaries engaged in real estate related activities
and transfers of assets and business activities from Delmarva, Atlantic and
their subsidiaries to such merged real estate subsidiary. Any such transfers
will be in accordance with Rules 87, 90, and 91, except as may be otherwise
authorized by the Commission.
* * * * *
Finally, pursuant to Rule 24 under the Act, Conectiv represents that the
transactions proposed in this filing shall be carried out in accordance with the
terms and conditions of, and for the purposes stated in, the
declaration-application no later than December 31, 2000.
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that Conectiv has
obtained or expects to obtain in connection with the Mergers.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Mergers) may not be consummated until certain
information has been submitted to the DOJ and FTC and specified HSR Act waiting
period requirements have been satisfied. Delmarva and Atlantic have submitted
Notification and Report Forms and all required information to the DOJ and FTC
and the Mergers will not be consummated unless the applicable waiting period has
expired or has been terminated.
The expiration of the HSR Act waiting period does not preclude the DOJ or
the FTC from challenging the Mergers on antitrust grounds; however, Conectiv
believes that the Mergers will not violate Federal antitrust laws. If the
Mergers are not consummated within twelve months after the expiration or earlier
termination of the initial HSR Act waiting period, Delmarva and Atlantic would
be required to submit new information to the DOJ and the FTC, and a new HSR Act
waiting period would have to expire or be earlier terminated before the Mergers
could be consummated.
B. Federal Power Act
Section 203 of the Federal Power Act as amended (the "Federal Power Act"),
provides that no public utility shall sell or otherwise dispose of its
jurisdictional facilities or directly or indirectly merge or consolidate such
facilities with those of any other person or acquire any security of any other
public utility, without first having obtained authorization from the FERC.
Delmarva and Atlantic submitted a joint application for approval of the Mergers
to the FERC on November 27, 1996. An order was issued approving the Mergers on
July 30, 1997. Exhibit D-1.3.
C. Atomic Energy Act
Delmarva and Atlantic hold Nuclear Regulatory Commission ("NRC") licenses
with respect to their ownership interests in certain nuclear units. Delmarva and
Atlantic each own a 7.41% interest in the Salem Nuclear Generating Station,
which consists of two nuclear units, and a 7.51% interest in the Peach Bottom
Nuclear Generating Station, which consists of two nuclear units. In addition,
Atlantic owns a 5% interest in the Hope Creek Nuclear Generating Station, which
consists of one nuclear unit. The Atomic Energy Act currently provides that
licenses may not be transferred or in any manner disposed of, directly or
indirectly, to any person unless the NRC finds that such transfer is in
accordance with the Atomic Energy Act and consents to the transfer. Pursuant to
the Atomic Energy Act, Delmarva and Atlantic submitted an application for
approval from the NRC on April 30, 1997. See Exhibit D-7.1.
D. State Public Utility Regulation
Delaware: Delmarva is incorporated in Delaware and subject to the
jurisdiction of the DPSC. Pursuant to Section 215 of the Public Utilities Act,
Delmarva must obtain the approval of the DPSC in order to directly or indirectly
merge or consolidate with any other person or company. Section 215 also provides
that no other entity shall acquire control, either directly or indirectly, of
any public utility doing business within Delaware without the prior approval of
the DPSC. The DPSC will approve the proposed Mergers when it finds them to be
made in accordance with law, for a proper purpose and are in the public
interest. Conectiv and Delmarva submitted an application with the DPSC
requesting approval of the Mergers on February 24, 1997. See Exhibit D-2.1.
Virginia: Delmarva is also incorporated in Virginia and subject to the
jurisdiction of the VSCC. Pursuant to the Utility Transfers Act, no person,
whether acting alone or in concert with others, shall, directly or indirectly,
acquire control of a public utility without the prior approval of the VSCC and
it is unlawful for any public utility, directly or indirectly, to dispose of any
utility assets situated within Virginia unless authorized by the VSCC. The VSCC
will approve a proposed transaction if satisfied that adequate service to the
public at just and reasonable rates will not be impaired or jeopardized by
granting an application for approval. Furthermore, except to the extent
preempted by the Securities Exchange Commission, the VSCC, pursuant to statutory
provisions under which the VSCC regulates relations with affiliated interests,
must approve certain contracts or arrangements for certain services, purchases,
sales, leases or exchanges, loans and guarantees between a public service
company and affiliates. The VSCC issued an order approving the Mergers on
August 8, 1997.
New Jersey: As the parent company of Atlantic City Electric Company, the
transfer of the ownership or control, or the merger of, Atlantic is subject to
the jurisdiction of the NJBPU which, pursuant to Title 48 of the New Jersey
Statutes Annotated, must give written approval before any person may acquire or
seek to acquire control of a public utility directly or indirectly through the
medium of an affiliated or parent corporation. In addition, the NJBPU must
authorize any transfer of stock to another public utility, or a transfer that
vests another corporation with a majority interest in the stock of a public
utility. Furthermore, the NJBPU regulates relations between public utilities and
affiliated interests, and must approve certain contracts or arrangements for
certain services, purchases or loans between a public utility and affiliates.
Conectiv and Atlantic submitted an application with the NJBPU requesting
approval of the Mergers on February 24, 1997. See Exhibit D-4.1.
Pennsylvania: Delmarva and Atlantic own fractional interests in the
Keystone, Conemaugh and Peach Bottom electric generating stations and related
transmission lines located in Pennsylvania. Pursuant to Pennsylvania statute,
the transfer to any person or corporation of the stock, including a transfer by
merger, of a public utility must be approved by the PPUC. The PPUC will approve
such transfers upon a showing that the merger will affirmatively promote the
service, accommodation, convenience or safety of the public in some substantial
way. Delmarva and Atlantic applied for PPUC approval of the Mergers on March 24,
1997. See Exhibit D-5.1.
Maryland: The MPSC has general authority to supervise and regulate public
utilities with operations in Maryland. Delmarva advised the MPSC of the
transactions contemplated by the Merger Agreement and that it does not believe
that the approval of the MPSC of the Mergers is required. However, the MPSC
ruled that it has jurisdiction over the Mergers to determine whether the Mergers
will have an adverse effect on the conduct of Delmarva's Maryland franchises and
any other matters that properly come before the MPSC at a hearing. The MPSC
issued an order approving the Mergers on July 16, 1997. See Exhibit D-6.1.
Item 5. Procedure
The Commission is respectfully requested to issue and publish not later
than September 1, 1997 the requisite notice under Rule 23 with respect to the
filing of this Application, such notice to specify a date not later than
September 26, 1997 by which comments may be entered and a date not later than
September 30, 1997 as the date after which an order of the Commission granting
and permitting this Application to become effective may be entered by the
Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Mergers. The Division of Investment Management may assist in the preparation of
the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements
A. Exhibits
A-1 Restated Certificate of Incorporation of Conectiv (filed as Annex IV to the
Registration Statement on Form S-4 on December 26, 1996 (Registration No.
333-18843), and incorporated herein by reference).
A-2 Restated Bylaws of Conectiv (filed as Annex V to the Registration Statement
on Form S-4 on December 26, 1996 (Registration No. 333-18843), and
incorporated herein by reference).
A-3 Restated Certificate and Articles of Incorporation of Delmarva (filed with
Registration No. 33-50453 and incorporated herein by reference).
A-4 Restated Certificate of Incorporation of Atlantic (filed as Exhibit 4(a) to
the Atlantic Form 10-Q dated September 30, 1987) and Certificate of
Amendment to the Restated Certificate of Incorporation of Atlantic (filed
as Exhibit 3(ii) to the Atlantic Form S-8 dated May 6, 1994), and both
incorporated herein by reference).
B-1 Agreement and Plan of Merger, as amended and restated (filed as Annex I to
the Registration Statement on Form S-4 on December 26, 1996 (Registration
No. 333-18843), and incorporated herein by reference).
B-2 Form of Service Agreement between Support Conectiv and all affiliates.
C-1 Registration Statement of Conectiv on Form S-4 (filed on December 26, 1996
(Registration No 333-18843) and incorporated herein by reference).
C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1).
D-1.1 Joint Application of Delmarva and Atlantic before the FERC, as amended.
D-1.2.1 Testimony of John C. Dalton to the FERC.
D-1.3 Order of the FERC.
D-2.1 Application of Delmarva to the DPSC.
D-2.2 DPSC Order. (to be filed by amendment)
D-3.1 Application of Delmarva to the VSCC.
D-3.2 VSCC Order. (to be filed by amendment)
D-4.1 Application of Atlantic to the NJBPU.
D-4.2 NJBPU Order. (to be filed by amendment)
D-5.1 Application of Delmarva to the PPUC.
D-5.2 PPUC Order. (to be filed by amendment)
D-6.1 Application of Delmarva to the MPSC.
D-6.2 MPSC Order.
D-7.1 Applications of Delmarva and Atlantic to the NRC.
D-7.2 Order of the NRC. (to be filed by amendment)
E-1 Map of service areas of Delmarva and Atlantic. (filed on Form S-E)
E-2 Delmarva corporate chart. (filed on Form S-E)
E-3 Atlantic corporate chart. (filed on Form S-E)
E-4 Conectiv corporate chart. (filed on Form S-E)
F-1 Opinion of counsel. (to be filed by amendment)
F-2 Past-tense opinion of counsel. (to be filed by amendment)
G-1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (filed as
Annex II to the Registration Statement on Form S-4 on December 26, 1996
(Registration No. 333-18843), and incorporated herein by reference).
G-2 Opinion of Morgan Stanley & Co. Incorporated (filed as Annex III to the
Registration Statement on Form S-4 on December 26, 1996 (Registration No.
333-18843), and incorporated herein by reference).
H-1 Quarterly Report of Delmarva on Form 10-Q for the quarter ended March 31,
1997 (filed on May 14, 1997) (File No. 1-01405) and incorporated herein by
reference).
H-2 Quarterly Report of Atlantic on Form 10-Q for the quarter ended March 31,
1997 (filed on May 13, 1997 (File No. 1-09760) and incorporated herein by
reference).
H-3 Form U-3A-2 by Atlantic (filed on February 28, 1997) (File No. 069-00337)
and incorporated herein by reference).
H-4 Schedule of Assets and Revenues of Nonutility Subsidiary Companies.
I-1 Proposed Form of Notice.
J-1 Analysis of the Economic Impact of a Divestiture of the Gas Business of
DPL.
J-2 (deleted)
J-3 Table of Estimated Losses of Economies in Prior Decisions on Divestiture
and Retention of Gas Operations.
B. Financial Statements
FS-1 Conectiv Unaudited Pro Forma Condensed Consolidated Balance Sheets as of
March 31, 1997.
FS-2 Conectiv Unaudited Pro Forma Condensed Consolidated Statements of Income
for the twelve months ended March 31, 1997.
FS-3 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
FS-4 Atlantic Consolidated Balance Sheet as of March 31, 1997.
FS-5 Atlantic Consolidated Statements of Income for the twelve months ended
March 31, 1997.
FS-6 Delmarva Consolidated Balance Sheet as of March 31, 1997.
FS-7 Delmarva Consolidated Statement of Income for the twelve months ended March
31, 1997.
Item 7. Information as to Environmental Effects
The Mergers neither involve a "major federal action" nor "significantly
affects the quality of the human environment" as those terms are used in Section
102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq.
The only federal actions related to the Mergers pertain to the Commission's
declaration of the effectiveness of Conectiv's Registration Statement on Form
S-4, the expiration of the applicable waiting period under the HSR Act, approval
of the application filed by Conectiv with the FERC under the Federal Power Act,
approval of the application filed by Conectiv with the NRC under the Atomic
Energy Act, and Commission approval of this Application/Declaration.
Consummation of the Mergers will not result in changes in the operations of
Delmarva or Atlantic that would have any impact on the environment. No federal
agency is preparing an environmental impact statement with respect to this
matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Amendment No. 1 to the
Application/Declaration of Conectiv, Inc. to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1997
Conectiv, Inc.
By: /s/ B.S. Graham
Barbara S. Graham
President
SERVICE AGREEMENT
This Service Agreement is executed this ___ day of _______, 199__, by and
between Support Conectiv, Inc., a Delaware corporation and a mutual service
company formed under the terms of the Public Utility Holding Company Act of 1935
("Service Company") and a corporation and an associate company of the Conectiv
system ("Client Company", and collectively with other associate companies that
have or may in the future execute this form of Service Agreement, the "Client
Companies").
WITNESSETH
WHEREAS, the Securities and Exchange Commission (hereinafter referred to as
the "SEC") has approved and authorized as meeting the requirements of Section
13(b) of the Public Utility Holding Company Act of 1935 (hereinafter referred to
as the "Act"), the organization and conduct of the business of the Service
Company in accordance herewith, as a wholly owned subsidiary service company of
Conectiv, Inc.; and
WHEREAS, the Service Company and certain Client Companies have entered into
this Service Agreement whereby the Service Company agrees to provide and the
Client Companies agree to accept and pay for various services as provided herein
determined in accordance with applicable rules and regulations under the Act,
which require the Service Company to fairly and equitably allocate costs among
all associate companies to which it renders services; and
WHEREAS, economies and efficiencies benefiting the Client Companies will
result from the performance by Service Company of the services as herein
provided:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agrees as
follows:
ARTICLE - SERVICES
Section 1.1 The Service Company shall furnish to a Client Company, as
requested by a Client Company, upon the terms and conditions hereinafter set
forth, such of the services described in Appendix A hereto (as such may be
amended from time to time) at such times, for such periods and in such manner as
the Client Company may from time to time request and which the Service Company
concludes it is equipped to perform. The Service Company shall also provide a
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by a Client Company and
which the Service Company concludes it is equipped to perform. In supplying such
services, the Service Company may arrange, where it deems appropriate, for the
services of such experts, consultants, advisers and other persons with necessary
qualifications as are required for or pertinent to the rendition of such
services.
Section 1.2 Each Client Company shall take from the Service Company such of
the services described in Section 1.1 and such additional general or special
services, whether or not now contemplated, as are required from time to time by
such Client Company and which the Service Company concludes it equipped to
perform.
Section 1.3 The services described herein shall be directly assigned,
distributed or allocated by activity, project, program, work order or other
appropriate basis. A Client Company shall have the right from time to time to
amend, alter or rescind any activity, project program or work order provided
that (i) any such amendment or alteration which results in a material change in
the scope of the services be performed or equipment to be provided is agreed to
by the Service Company (ii) the cost for the services covered by the activity,
project program or work order shall include any expense incurred by the Service
Company as a direct result of such amendment, alteration or rescission of the
activity, project, program or work order, and (iii) no amendment, alteration or
rescission of an activity, project, program or work order shall release a Client
Company from liability for all costs already incurred by the contracted for by
the Service Company pursuant to the activity, project, program or work order,
regardless of whether the services associated with such costs have been
completed.
ARTICLE II - COMPENSATION
Section 2.1. As compensation for the services to be rendered hereunder,
each Client Company shall pay to the Service Company all costs which reasonably
can be identified and related to particular services performed by the Service
Company for or on Client's behalf, such cost to be determined in accordance with
rule 90 and other applicable rules and regulations under the Act. Where more
than one Client Company is involved in or has received benefits from a service
performed, costs will be directly assigned, distributed or allocated, as set
forth in Appendix A hereto, between or among such companies on a basis
reasonably related to the service performed.
Section 2.2. It is the intent of this Service Agreement that the payment
for services rendered by the Service Company to the Client Companies under this
Service Agreement shall cover all the costs of its doing business (less the cost
of services provided to affiliated companies not a party to this Service
Agreement and other non-affiliated companies), including but not limited to,
salaries and wages, office supplies and expenses, outside services employed,
insurance, injuries and damages, employee benefits, miscellaneous general
expenses, rents, maintenance of structures and equipment, depreciation and
amortization, profit and compensation for use of capital as permitted by RULE 91
under the Act.
Section 2.3. The method of assignment, distribution or allocation of costs
described in Appendix A shall be subject to review annually, or more frequently
if appropriate. Such method of assignment, distribution or allocation of costs
may be modified or changed by the Service Company without the necessity of an
amendment to this Service Agreement provided that in each instance, costs of all
services rendered hereunder shall be fairly and equitable assigned distributed
or allocated, all in accordance with the requirements of the Act and any orders
promulgated thereunder.
Section 2.4. The Service Company shall render a monthly statement to each
Client Company which shall reflect the billing information necessary to identify
the costs charged for that month. By the tenth (10th) calendar day following
billing, each Client Company shall remit to the Service Company all charges.
Monthly charges may be billed on an estimated basis, but adjustments will be
made within ninety (90) days to assure that billings are in accord with
paragraphs 2.1 and 2.2 above.
ARTICLE III-TERM
Section 3.1 This Service Agreement shall become effective as of the day of
above written, and shall continue in force until terminated by either party upon
no less than ninety (90) days' prior written notice to the other party. This
Service Agreement shall also be subject to termination or modification at any
time, without notice, if and to the extent performance under this Service
Agreement may conflict with the Act or with any rule, regulation or order of the
SEC adopted before or after the date of this Service Agreement or any other
regulatory body.
ARTICLE IV - MISCELLANEOUS
Service 4.1. All accounts and records of the Service Company shall be kept
in accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies effect from and after the
date hereof, except as specifically approved by the SEC.
Section 4.2. Other existing subsidiaries and new direct or indirect
subsidiaries of Conectiv, which may come into existence after the effective date
of this Service Agreement, may become additional client Companies (collectively,
the "New Client Companies") subject to this Service Agreement by execution of
this form of agreement, as it may be amended at that time. In addition, the
parties hereto shall make such changes in the scope and character of the
services to be rendered and the method of assignment, distributing or allocating
costs of such services among the Client Companies and the New Client Companies
under this Service Agreement as may become necessary.
Section 4.3 The Service Company shall permit a Client Company access to its
accounts and records, including the basis and computation of allocations.
Section 4.4. This Service Agreement and any amendments hereto shall not be
effective until any necessary regulatory approvals have been obtained.
IN WITNESS WHEREOF, the parties hereto have caused this Service
Agreement to be executed as of the date and year first above written.
SUPPORT CONECTIV, INC.
By: /s/ _____________________
[title]
[Client Company]
By:/s/ _______________________
[title]
Appendix A
This appendix describes Service Company services and the direct assignment
and allocation of costs to the Client Companies that cannot practicably be
direct charged. Definitions of the ratios are provided in Appendix B. The
Service Company will provide to associate client Companies the following
services:
I. Information Resource Management Systems (IRMS)
a. The Information Resource Management Systems
function includes voice services; application systems
development and support; database administration and security;
computer operations; data entry; end user assistance;
consulting services; distributed computing including hardware
support and network operations; management and administration.
b. To the extent practicable services will be
directly charged using a standard rate per hour. Costs that
are not direct charged will be allocated as follows:
voice services - telephone ratio
application systems development and support - employee ratio
data administration and security - employee ratio
computer operations - CPU time ratio
consulting services - employee ratio
distributed computing - order cost ratio
management and administration - employee ratio
II. Legal
a. The legal function provides legal counsel related to
general corporate issues.
b. All costs will be direct charged to other Orders,
Projects or Cost Centers at a standard rate per hour. The
hourly rate will include charges for labor, occupancy, vehicle
costs, training, materials and contractors. Any residual
resulting from standard rates being different from actual
costs will be allocated to the Client Companies based on the
labor $ ratio.
III. Executive Services
a. The Executive Services function provides advice,
counsel and other services of executive management, excluding
business unit heads.
b. The total actual cost of services of each
executive and their direct support staff will be accumulated
in Cost Centers for each executive. Each Cost Center's
expenses will be allocated between client companies based on a
fixed distribution. The distribution will be developed based
on an analysis of how each executive's time is spent. The
distributions will be reevaluated annually.
IV. Administrative and Support
a. The Administrative and Support function provides
insurance and claims processing; insurance and claims
administration, including risk management; security,
including asset protection and investigative services;
purchasing and storeroom management; procurement and materials
management; vehicle resource management, including company
vehicle maintenance; general services including mail,
graphics, records management and other office services;
building services including facilities management, and
building maintenance; and real estate services, including
right-of-way.
b. To the extent practicable, services will be
directly charged using a standard rate per hour. The Services
that are not direct charged will be allocated based on the
following ratios:
insurance administration - labor $ ratio
claims administration - historical claims ratio
security - labor $ ratio
purchasing and storeroom management and procurement and materials
management- An overhead rate will be applied to all stock and non
stock issuances and returns. This rate will be developed by
dividing the total estimated costs of purchasing and storeroom
management by estimated stock issuances and returns. Any residual
amount will be allocated based on the materials stock expense
ratio.
vehicle resource management - A flat fee will be charged per
month or per hour for pool vehicles. The fees will be calculated
by dividing total estimated costs of vehicle resource management
including, maintenance and insurance claims by anticipated
vehicle usage. The fees will be recalculated annually. Any
residual amount will be allocated based on the vehicle $ ratio.
general services - employee ratio
building services (facilities cost) - square footage ratio for
office space and non-office space
real estate - land and building ratio
c. Insurance premiums and claims that are not direct charged
will be allocated as follows:
property insurance and miscellaneous insurance coverage - asset
cost ratio
general liability insurance - labor $ ratio
Director's and Officers insurance - asset cost ratio
nuclear insurance - installed capacity ratio
V. Human Resources
a. The Human Resources function provides
compensation and benefit services; personnel, employment and
staffing; employee/labor relations; skills training and
management development; organizational development; and safety
services.
b. To the extent practicable, services will be
directly charged using a standard rate per hour. Costs that
are not direct charged will be allocated as follows:
cost of benefits - Benefit costs will be directly charged based
on an overhead rate as a percent added to regular labor. The
residual will be allocated based on the regular wage ratio.
compensation and benefits services - employee ratio
personnel, employment and staffing - employee ratio
employee/labor relations - employee ratio
skills training and management development - Flat fees will be
charged for each training class attendee. The fees will be
calculated on an annual basis by dividing total estimated
training costs by the estimated number of attendees. Any
remainder will be allocated based on the employee ratio.
safety - employee ratio
VI. Finance, Accounting and Planning
a. The Finance, Accounting and Planning function
includes corporate planning; long range strategic planning;
strategic resources consulting; internal audit; budgeting;
treasury and finance including cash management, financing,
trust administration; investor relations; accounting services
including general ledger, corporate accounting, accounts
payable and receivable, payroll, plant/property accounting;
tax accounting services.
b. To the extent that services are directly
assignable, the services will be directly charged to a Client
Company. All Finance, Accounting and Planning services that
are not direct charged will be allocated based on the O&M
ratio.
VII. External Relations
a. The External Relations function includes general corporate
communications; governmental affairs; advertising services.
b. To the extent practicable, services will be
directly charged using a standard rate per hour. Costs that
are not direct charged will be allocated based on the
following ratios:
communications - employee ratio
governmental affairs - O&M ratio
advertising - O&M ratio
VIII. Customer Service, Marketing and Sales
a. The Customer Service, Marketing and Sales function
includes customer service centers and dispatch; sales and
marketing including market product and sales planning and
market and customer research, demand side management, load
forecasting, and economic development; utility billing and
payment, including revenue protection and customer contract
services; pricing and regulatory affairs; and meter reading
services.
b. To the extent practicable, services will be
directly charged using a standard rate per hour or per unit.
Costs that are not direct charged are allocated based on the
following ratios:
customer service centers and dispatch- Costs of the customer
service centers and dispatch are charged to the client companies
as flat fee per call, a flat fee per order and a flat fee per
dispatch. The flat fees are calculated by using the total
estimated call costs, order costs, or dispatch costs as the
numerator and dividing by the estimated number of calls, orders,
or dispatches. Any residuals will be allocated based on #
customer ratio.
regulated sales and marketing - # utility customers ratio
competitive sales and marketing - A predetermined ratio will be
developed based on time studies to determine the allocation of
costs between client companies. The ratio will be revised
annually.
utility billing & payment - Costs will be charged to client
companies as a flat fee per generated bill. The flat fee will be
calculated as total estimated costs of billing and payment
functions divided by the estimated number of bills. Separate fees
will be calculated for each type of bill. Any remainder will be
allocated based on the # bills ratio.
pricing and regulatory affairs - utility asset cost ratio
IX. Electric Transmission and Distribution
a. The Electric Transmission and Distribution function
includes engineering planning, overall T&D design; and T&D management
and administration.
b. To the extent practicable, services will be
directly charged using a standard rate per hour. All costs
that are not direct charged will be allocated based on the T&D
O&M ratio.
X. Supply
a. The Supply function includes fuel supply
including fuel procurement and management; production/support
staff services including engineering services for power plant
design and operations, chemistry and gas turbine/diesel power
supply; mechanical engineering and standards including plant
engineering, facilities construction and production services;
merchant functions; and management and administration.
b. To the extent practicable, services will be
directly charged using a standard rate per hour. Costs that
are not directly charged will be allocated as follows:
fuel supply - kwh generated ratio
production / support staff - kwh generated ratio
mechanical engineering and standards - kwh generated ratio
merchant functions - merchant cost ratio
management and administration - kwh generated ratio
XI. Electrical System Technical Support
a. The Electrical System Technical Support function
includes transmission system operations, including
interconnections and bulk power marketing, load management and
test lab; system planning; electric systems communications;
environmental affairs; and electric research and development.
b. To the extent practicable, services will be
directly charged using a standard rate per hour. Cost that are
not direct charged will be allocated as follows:
transmission systems operations - kwh output ratio
system planning - kwh output ratio
electric systems communications - kwh output ratio
environmental affairs - O&M ratio
electric research and development - O&M ratio
Appendix B
Definition of Service Company Allocation Methods
Ratio Title Ratio Description
Employee Ratio A ratio the numerator of which is the number
of employees of a Client Company, the denominator of
which is the number of employees in all the Client
Companies using the service. This ratio will be
calculated quarterly.
Square Footage Ratio
office space the denominator of which is the total number
of square feet of office space occupied by all
Client Companies using the service.
non-office space A ratio the numerator of which is the number
of square feet of non-office space occupied by a
Client Company, the denominator of which is the
total number of square feet of non-office space
occupied by all Client Companies using the service.
Telephone Ratio A ratio the numerator of which is the number of
telephones used by a Client Company, the
denominator of which is the number of telephones
used by all Client Companies using the service.
CPU Time Ratio A ratio the numerator of which is the number of
hours of CPU time used for a particular system
application, the denominator of which is the total
number of CPU hours used by all companies. Costs
are allocated to Orders based on this ratio. That
cost is then either included in the cost of other
Service Company services or directly routed to the
appropriate Client Company.
Order Cost Ratio A ratio the numerator of which is the total cost
accumulated in an Order, the denominator of which is
the total costs accumulated in all Orders for all
Client Companies using the service. Costs are
allocated to Orders based on this ratio. That cost
is then either included in the cost of other Service
Company services or directly routed to the
appropriate Client Company.
Labor $ Ratio A ratio the numerator of which is the amount of
labor of a specific client company, the denominator
of which is total labor for all Client Companies
using the service. This ratio will be calculated
monthly.
Historical Claims A ratio the numerator of which is the total claims
Ratio expense of a specific Client Company, the
denominator of which is the total claims expense
for all Client Companies using the service.
Asset Cost Ratio A ratio the numerator of which is the total
cost of assets in a specific Client Company, the
denominator of which is the total costs of
assets for all Client Companies using the service.
Regular Wage Ratio A ratio the numerator of which is the total
dollar cost of regular wages for a specific Client
Company, the denominator of which is the total
dollar cost of regular wages for all Client
Companies using the service.
O&M Ratio A ratio the numerator of which is the total direct
(i.e., excludes charges allocated by the service
company), operations and maintenance expense,
excluding depreciation and fuel costs, of a specific
Client Company, the denominator of which is total
direct operations and maintenance expense, excluding
depreciation and fuel costs, of all Client Companies
using the service.
# Customer Ratio A ratio the numerator of which is the number of
customers served by a specific Client Company,
the denominator of which is the total number of
customers for all the Client Companies using the
service.
# Utility Customers A ratio the numerator of which is the number of
Ratio utility customers served by a specific Client
Company, the denominator of which is the total
number of utility customers for all Client Companies
using the service.
Nuclear Installed A ratio the numerator of which is the nuclear
Capacity Ratio facility installed capacity of a specific Client
Company, the denominator of which is the total
nuclear facility installed capacity of all Client
Companies using the service.
Materials Stock A ratio the numerator of which is the materials
Expense Ratio stock expense of a specific Client Company, the
denominator of which is the total materials stock
expense of all Client Companies using the service.
Land & Building A ratio the numerator of which is the cost of land
Ratio and buildings owned by a specific Client Company,
the denominator of which is the total cost of land
and buildings for all Client Companies using the
service.
# Bills Ratio A ratio the numerator of which is the number of a
certain type of bill issued for a specific
Client Company cost center, the denominator of which
is the number total number of the same type of bills
issued for all Client Companies using the
service.
Utility Asset Cost A ratio the numerator of which is the total cost of
Ratio utility assets in a specific Client Company,
the denominator of which is the total costs of
utility assets for all Client Companies using the
service.
# Meters Ratio A ratio the numerator of which is the number of
meters for a specific Client Company, the
denominator of which is the total number of meters
for all Client Companies using the service.
T&D O&M Ratio A ratio the numerator of which is the total direct
(i.e., excludes charges allocated by the service
company), operations and maintenance expense,
excluding depreciation and fuel costs, of a specific
Transmission and Distribution Client Company, the
denominator of which is total direct operations and
maintenance expense, excluding depreciation and fuel
costs, of all Transmission and Distribution Client
Companies.
Kwh Generated Ratio A ratio the numerator of which is the number of
kilowatt hours generated by a specific Client
Company, the denominator of which is the total
number of kilowatt hours generated by all Client
Companies using the service.
Kwh Output Ratio A ratio the numerator of which is the number of
kilowatt hours purchased and generated by a
specific Client Company, the denominator of which
is the total number of kilowatt hours purchased and
generated by all Client Companies using the service.
Merchant Cost Ratio A ratio the numerator of which is this dollar
amount of direct charges of the merchant function
to a specific Client Company, the denominator
of which is the total dollar amount of direct
charges of the merchant function to all Client
Companies using the service.
Vehicle $ Ratio A ratio the numerator of which is this dollar amount
of flat fees for vehicles charged to a specific
Client Company, the denominator of which is the
total amount of flat fees charged to all Client
Companies using the service.
DOCKET NO. EC97-7-000
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
and Donald F. Santa, Jr.
Atlantic City Electric Company ) Docket No. EC97-7-000
Delmarva Power & Light Company )
ORDER APPROVING MERGER
(Issued July 30, 1997)
I. Introduction
On November 27, 1996, as supplemented on March 4, 1997, Atlantic City
Electric Company (Atlantic City Electric) and Delmarva Power & Light Company
(Delmarva) (jointly, Applicants) filed a joint application pursuant to section
203 of the Federal Power Act (FPA), 16 U.S.C. ss. 824b (1994), seeking
authorization to consolidate their jurisdictional facilities through a merger.
The merger is described as a merger of equals whereby both parties would retain
their corporate existence as wholly-owned operating utility subsidiaries of a
newly formed registered holding company, named Conectiv, under the Public
Utility Holding Company Act of 1935, 15 U.S.C. ss. 79, et seq. (PUHCA). The
projected closing date of the merger is December 31, 1997. We will approve the
merger, as proposed, without a hearing.
II. Background
A. Description of Applicants
Atlantic City Electric is incorporated in New Jersey and provides retail
electric service throughout the southern one-third of the state. It has 473,000
retail customers, and provides interconnection service to the City of Vineland,
New Jersey. Atlantic City Electric's annual peak load in 1995 was 2,042 MW. It
owns 1,679 MW of generation and contracts for another 670 MW, which represents
4.2 percent of the generating capability of the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM), of which both Atlantic City Electric and
Delmarva are members.1 It also owns approximately 963 miles of transmission line
facilities in New Jersey. Atlantic City Electric is a wholly-owned subsidiary of
Atlantic Energy, Inc. (Atlantic Energy), an exempt holding company under PUHCA,
whose stock is publicly held. Atlantic City Electric is subject to retail rate
regulation by the New Jersey Board of Public Utilities.2
- - --------
1 Other PJM members include: Public Service Electric & Gas Company, PECO
Energy Company, Pennsylvania Power & Light Company, Jersey Central Power &
Light Company, Metropolitan Edison Company, Pennsylvania Electric Company,
Baltimore Gas & Electric Company, and Potomac Electric Power Company.
2 Application at 2-3, 29.
Delmarva, incorporated in Delaware and Virginia, serves wholesale and
retail electric loads in Delaware, Maryland and Virginia. Delmarva also provides
natural gas sales and transportation service to approximately 100,000 natural
gas customers located in New Castle County, Delaware. Delmarva has 437,000
retail electric customers, 10 wholesale customers, and provides interconnection
service to two customers.3 Delmarva's annual peak load in 1995 was 2,364 MW. It
owns 2,700 MW of generation and contracts for another 105 MW, which represents 5
percent of the generation of PJM. It also owns approximately 1,508 miles of
transmission line facilities on the Delmarva Peninsula. Delmarva is subject to
retail regulation by the Public Service Commissions of Delaware and Maryland,
and the State Corporation Commission of Virginia.4
- - --------
3 Delmarva's wholesale customers are: Old Dominion Electric Cooperative,
Inc., the City of Berlin, Maryland, and the Delaware cities or towns of
Clayton, Lewes, Middletown, Milford, Newark, New Castle, Seaford, and
Smyrna. Delmarva's two interconnection customers are the City of Dover,
Delaware and the Town of Easton, Maryland.
4 Application at 3-4, 29.
The electric systems of Delmarva and Atlantic City Electric are not
interconnected except to the extent that they both are interconnected to 500 kV
transmission lines that are operated by PJM.
B. Description of the Proposed Merger
Pursuant to the Agreement and Plan of Merger (Merger Agreement) dated
August 9, 1996, as amended and restated as of December 26, 1996, the merger will
be achieved among four corporations: the two Applicants, Conectiv, and a new
corporation, DS Sub, Inc. (DS Sub).5 At the closing, Atlantic Energy will merge
into Conectiv, and DS Sub will merge into Delmarva. Applicants' preferred stock
will be unchanged and will remain outstanding after the merger. After the
merger, the shareholders of Atlantic Energy and Delmarva will become the common
stock shareholders of Conectiv with ownership shares of approximately 40 percent
and 60 percent, respectively, and Conectiv will become the shareholder of
Atlantic City Electric and Delmarva. The merger will not affect any long-term or
short-term debt securities of the Applicants or their affiliates.6
- - ----------
5 DS Sub's sole purpose is to effect the merger and it will not survive the
merger.
6 For accounting purposes, the merger will be treated as an acquisition of
Atlantic Energy by Delmarva.
According to the application, the registered holding company resulting from
the merger, Conectiv, will have five subsidiaries.7 Delmarva and Atlantic City
Electric will be separate, first-tier operating subsidiaries and will maintain
their individual corporate existence. The two non-utility subsidiaries of
Atlantic Energy will also be first-tier subsidiaries,8 and a Service Company
will be created as the fifth subsidiary.9
- - --------
7 Although the application filed with us states that the holding company will
have four subsidiaries, a more recent application filed with the Maryland
Commission indicates five subsidiaries.
8 Applicants indicate that Delmarva's non-utility subsidiaries would remain
subsidiaries of Delmarva initially. However, at some point, all non-utility
subsidiaries may be consolidated under a first-tier subsidiary of the
registered holding company.
9 The Service Company will provide management, accounting, financial, legal
and other support services to the Applicants, the holding company, and the
non-utility subsidiaries.
Applicants stated in their original filing that if a PJM- wide transmission
tariff became effective prior to the merger closing, the Applicants would use
that tariff for transmission services.10 On December 31, 1996, PJM filed an open
access transmission tariff, which the Commission accepted for filing, suspended
nominally, and made effective March 1, 1997, subject to refund and the issuance
of further orders.11
- - --------
10 Applicants submitted as an exhibit to their merger application a joint open
access transmission tariff that would have been applicable to their systems
as of the merger closing date if a PJM tariff were not then effective.
11 MidContinent Area Power Pool, et al., 78 FERCP. 61,203 (1997).
C. Procedural Background
Applicants originally filed their application on November 27, 1996. On
December 18, 1996, the Commission issued its Merger Policy Statement.12
Accordingly, by letter order dated January 15, 1997, our staff requested that
Applicants revise their competition analysis using the competitive screen
analysis described in Appendix A of the Merger Policy Statement. On March 4,
1997, Applicants made a supplemental filing in response to this request.
Applicants have also filed supplements to their Exhibit G consisting of copies
of filings related to the merger made to the States of Delaware, New Jersey,
Maryland, Virginia and Pennsylvania.
- - --------
12 Inquiry Concerning the Commission's Merger Policy under the Federal Power
Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC
Stats. & Regs. P. 31,044 (1996), reconsideration denied, Order No. 592-A,
62 Fed. Reg. 33341, 79 FERC P. 61,321 (1997) (Merger Policy Statement).
III. Notice of Filing and Responses
Notice of Applicants' original filing was published in the Federal
Register, 61 Fed. Reg. 65,379 (1996), with comments, protests, and motions to
intervene due on or before December 26, 1996. Notice of Applicants' supplemental
filing was published in the Federal Register, 62 Fed. Reg. 12,634 (1997), with
comments, protests, and motions to intervene due on or before May 5, 1997.
The Maryland Public Service Commission (Maryland Commission), the Delaware
Public Service Commission (Delaware Commission), and the New Jersey Board of
Public Utilities (New Jersey Commission) filed notices of intervention.13
- - --------
13 The New Jersey Commission actually filed a motion to intervene believing
that it missed the original deadline for state commission notices. As all
interventions on or before May 5, 1997 are timely, its intervention will be
considered as a timely notice of intervention.
Public Service Electric and Gas Company (PSE&G), Electric Clearinghouse,
Inc. (ECI), Eastern Power Distribution, Inc. and Eastern Energy Marketing, Inc.
(Eastern), U.S. Generating Company (USGen), PECO Energy Company (PECO), South
Jersey Gas Company (South Jersey), Delaware Office of the Public Advocate
(Delaware Advocate), New Jersey Division of the Ratepayer Advocate (New Jersey
Advocate), and the City of Wilmington, Delaware (Wilmington) filed motions to
intervene raising no substantive issues.
The Maryland Energy Administration and the Power Plant Research Program of
the Maryland Department of Natural Resources (Maryland Energy Agencies) filed a
joint motion to intervene. Maryland Energy Agencies state that they are
concerned with the implications of the continuing concentration of ownership or
control of generation assets in the PJM region, and urged the Commission to
apply the Merger Policy Statement to the merger. The PJM Industrial Customer
Coalition (PJM Industrials) filed a motion to intervene. PJM Industrials state
that the merger will affect the development of a competitive market for
electricity in the PJM control area, and that during periods of transmission
congestion, the merged companies will likely be able to influence the price of
electricity in the eastern portion of the PJM control area.
Commonwealth Chesapeake Corporation (Commonwealth Chesapeake) filed a
motion to intervene and protest, stating that there are transmission constraints
that may affect generation dominance on the Delmarva Peninsula, and urging the
Commission to adequately mitigate any increase in anticompetitive effects.
Duke/Louis Dreyfus L.L.C. (Duke/Louis) filed a motion to intervene and
provisional protest and also filed a supplemental protest. Duke/Louis states
that it is an energy marketer, and that it is the exclusive agent for the City
of Dover, Delaware (Dover), responsible for managing Dover's generating
resources, arranging bulk power purchases and sales, procuring necessary
transmission services, and ensuring Delmarva's performance under the
Delmarva-Dover Interconnection Agreement. Duke/Louis asserts that it is not
clear that Applicants' hold-harmless undertaking will protect Dover from
merger-related harm. Duke/Louis also expresses a concern about transmission
constraints for the Delmarva Peninsula and the eastern PJM interface, and urges
the Commission to determine whether to impose mitigation measures to ensure that
the merged company will not be able to exercise market power during constrained
periods.
Easton Utilities Commission (Easton) filed a motion to intervene and
protest and also filed a protest of Applicants' supplemental filing. Easton
states that there may be substantial concentration in eastern PJM as a result of
the merger for non-firm energy and intermediate peaking capacity, and that
eastern PJM is a relevant market even though the constraints on the eastern
interface occur for relatively short periods. Easton also contends that the
Supporting Company Group's (which includes Applicants) congestion proposal in
the PJM open access transmission tariff discriminates against network
transmission customers whose resources are located on the load side of the
customer's PJM interconnection. Easton further asserts that Applicants' hold
harmless commitment is vague, should not be treated as a supplement to existing
rate schedules, and its justness and reasonableness must be decided before
approving the merger.
The Mayor and Council of Berlin, Maryland (Berlin) filed a motion to
intervene and also filed a protest of Applicants' supplemental filing. Berlin
supports Easton's contention that the Supporting Company Group's congestion
proposal in the PJM open access transmission tariff discriminates against
transmission dependent utilities with "behind the meter" generation. Berlin also
argues that the Applicants' hold harmless commitment is vague and suffers other
infirmities.
Maryland People's Counsel (MPC) filed a motion to intervene, protest and
request for hearing, and also filed a supplemental protest and request for
hearing. MPC asserts that there exists a material issue of fact concerning the
effects of the merger on competition, and also states concerns about proposed
merger's impact on operating costs and rate levels. MPC believes that the
relevant geographic market is narrower than used by Applicants' witness. MPC
filed a letter on July 23, 1997, withdrawing its earlier request that the
Commission examine the merger's effect on retail competition.
The City of Vineland, New Jersey (Vineland) filed a motion to intervene, a
supplemental motion to intervene, protest, and comments. Vineland states that
the transmission constraints that exist into eastern PJM may not be alleviated
by Applicants' planned upgrades, and that Applicants should be required to
commit to upgrade or expand transmission facilities as needed to fully alleviate
constraints. Vineland also asserts that Applicants have not adequately
considered the effects of the merger on TDUs such as Vineland. Vineland calls
Applicants' hold harmless commitment inadequate, and states that Applicants
should commit not to use constrained transmission paths for off-system trades
when other transmission service requests are pending. Vineland also states that
the merger proceeding should be held in abeyance pending determination of
discrimination issues in the PJM open access transmission tariff proceeding.
Old Dominion Electric Cooperative, Inc. (Old Dominion) filed a motion to
intervene, protest, and request for evidentiary hearing, and also filed a
protest to Applicants' supplemental filing. Old Dominion states that Applicants'
hold harmless provision is inadequate and was not negotiated with customers, and
contends that the most reasonable ratepayer protection mechanism would be an
open season where wholesale customers could switch suppliers. Old Dominion also
expresses concern about competitive implications in the eastern PJM market due
to transmission constraints over the eastern interface, and questions whether
Applicants' proposed upgrade to the Red Lion substation will provide much
mitigation.
The Delaware Municipal Electric Corporation, Inc. (Delaware Municipal)
filed a motion to intervene and protest, and also filed a supplemental motion to
intervene, protest, and request for rejection of the merger application.
Delaware Municipal states that Applicants' competitive screen analysis is
deficient and does not satisfy the Merger Policy Statement in that it fails to
analyze all relevant products, relevant markets, and generating capacity.
Delaware Municipal also states that there are inconsistencies between what
Applicants have stated in their Application regarding transmission constraints
and what was stated in other proceedings. Delaware Municipal challenges
Applicants' assumptions that all wholesale customers are reachable through open
access transmission tariffs and about the amount of access to New York Power
Pool suppliers, and questions Applicants' calculation of interface transfer
capability. Delaware Municipal asks that the Commission evaluate issues related
to retail competition. Delaware Municipal further contends that Applicants have
overstated merger benefits and that Applicants' ratepayer protection commitment
is inadequate.
On May 22, 1997, the Electricity Consumers Resource Council (ELCON), the
American Iron and Steel Institute (AISI), and the Delaware Energy Users Group
(Delaware Users) filed a late motion to intervene and comments, urging the
Commission to consider the effects of the merger on retail competition.
On January 10, 1997, Applicants filed an answer to the motions to intervene
and other relief, and on May 20, 1997, Applicants filed an answer to motions to
reject and for other relief. Applicants also filed: answers opposing Vineland's
request for additional time to file a protest and its supplemental motion for
intervention; a letter stating that they did not oppose Berlin's motion to
intervene; and an answer opposing the late motion to intervene of ELCON, AISI,
and Delaware Users.
IV. Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and Procedure,
18 C.F.R. ss. 385.214 (1996), the notices of intervention of the Maryland
Commission, Delaware Commission, and New Jersey Commission, and the timely,
unopposed motions to intervene of PSE&G, ECI, Eastern, USGen, PECO, South
Jersey, Delaware Advocate, New Jersey Advocate, Wilmington, Maryland Energy
Agencies, PJM Industrials, Commonwealth Chesapeake, Duke/Louis, Dover, Easton,
Berlin, MPC, Vineland, Old Dominion, and Delaware Municipal serve to make them
parties to the instant proceeding.14 We will grant the late motion to intervene
of ELCON, AISI, and Delaware Users.
- - --------
14 Because a second notice of the filing was published after Applicants'
supplemental filing, all comments, protests, and motions to intervene filed
on or before May 5, 1997 are timely.
B. Standard of Review Under Section 203 and the Merger Policy Statement
Section 203(a) of the FPA provides, in relevant part, as follows:
No public utility shall sell, lease, or otherwise dispose of the whole of
its facilities subject to the jurisdiction of the Commission, or any part
thereof of a value in excess of $50,000, or by any means whatsoever,
directly or indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire, or take any
security of any other public utility, without first having secured an order
of the Commission authorizing it to do so.
16 U.S.C. ss. 824b(a) (1994). The Commission must approve a proposed merger if
it finds that the merger "will be consistent with the public interest." Id.
The Commission updated and clarified its procedures for reviewing public
utility mergers in light of the changes in the electric power industry by
issuing the Merger Policy Statement, in which the Commission determined to focus
its review on three issues: (1) the effect of the merger on competition; (2) the
effect of the merger on rates; and (3) the effect of the merger on regulation.
In this case, the Commission will apply this three-factor test.
C. Effect of the Merger on Competition
At the outset, we find that the merger does not raise concerns regarding
transmission market power. Both Applicants are members of PJM and will provide
transmission service pursuant to the PJM-wide open access transmission tariff
filed in compliance with Order No. 888.15 Accordingly, Applicants will not be
able to exercise market power with respect to transmission.
- - --------
15 Promoting Wholesale Competition Through Open Access Nondiscriminatory
Transmission Services by Public Utilities and Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed. Reg.
21,540 (May 10, 1996), FERC Stats. & Regs. P. 31,036 (1996), order on
reh'g, Order No. 888-A, 62 Fed. Reg. 12,274 (March 14, 1997), FERC Stats. &
Regs. P. 31,048 (1997), reh'g pending.
In addition, the proposed merger raises no vertical competitive concerns.
Atlantic City Electric provides no gas distribution services. Delmarva has a
small gas division that provides local gas distribution service in New Castle
County, Delaware. However, Delmarva's gas distribution subsidiary provides no
gas service to Atlantic City Electric's gas-fired generators. Consequently, any
incentives and ability of Delmarva pre-merger to disadvantage gas-fired electric
generators located within its gas distribution area do not change as a result of
the merger.
We decline Delaware Municipal's, Elcon's, AISI's and Delaware Users'
suggestion that we consider issues related to retail competition. We stated in
the Merger Policy Statement that we would consider a merger's effects on retail
markets if a state commission asks us to because it lacks adequate authority
under state law.16 Here, no state commission has requested that we examine the
merger's effect on retail competition, and we have no reason to believe that the
state commissions will not consider this issue to the extent they believe it is
necessary.
16 Merger Policy Statement, FERC Stats. & Regs. at 30,128. See Baltimore Gas &
Electric Company and Potomac Electric Power Company, 79 FERC P. 61,027 at
61,115-116 (1997).
In light of the above, we focus our attention in this case on
generation market power issues relating to wholesale electric power sales.
1. The Merger Policy Statement's Competition Analysis
In the Merger Policy Statement, we stated that, in analyzing the effect on
competition of a proposed horizontal merger, we would adopt the Department of
Justice/Federal Trade Commission Merger Guidelines (Guidelines) as our basic
framework.17 The Guidelines set out five steps for a merger analysis: (1) define
relevant product and geographic markets likely to be affected by the merger and
measure the concentration and the increase in concentration in those markets18;
(2) evaluate whether the extent of concentration and other factors that
characterize the markets raise concerns about potential adverse competitive
effects; (3) assess whether entry would be timely, likely, and sufficient to
deter or counteract any such concern; (4) assess any efficiency gains that
applicant cannot reasonably achieve by other means; and (5) assess whether
either party to the merger would be likely to fail without the merger, causing
its assets to exit the market.19
- - --------
17 Merger Policy Statement, FERC Stats. & Regs. at 30,117-18.
18 The Guidelines address three ranges of market concentration in merger
analysis that provide useful guidance on assessing market concentration
(using the Herfindahl-Hirschman Index (HHI)): (1) unconcentrated
post-merger market -- if the HHI is below 1000, regardless of the change in
HHI, the merger is unlikely to have adverse competitive effects and
ordinarily requires no further analysis; (2) moderately concentrated
post-merger market -- if the post-merger HHI ranges from 1000 to 1800 and
the change in HHI is greater than 100, the merger potentially raises
significant competitive concerns; and (3) highly concentrated postmerger
market -- if the post-merger HHI exceeds 1800 and the change in the HHI
exceeds 50, the merger potentially raises significant competitive concerns;
if the change in HHI exceeds 100, it is presumed that the merger is likely
to create or enhance market power.
19 Merger Policy Statement, FERC Stats. & Regs. at 30,118.
The Merger Policy Statement adopted an analytic screen, which focuses
primarily on the Guidelines' first step, for applicants to submit as part of
their application.20 The analytic screen requires the applicant to: (1) identify
the relevant products; (2) identify the customers who may be affected by the
merger (also referred to as destination markets)21; (3) identify the potential
suppliers who can compete to supply each Identified customer; and (4) analyze
market concentration before and after the merger.22 If an adequately supported
screen analysis shows that the merger would not significantly increase
concentration, and there are no interventions raising genuine issues of material
fact that the Commission cannot resolve on the basis of the written record, the
Commission will not set the competition issue for hearing.
- - --------
20 Id. at 30,118-20.
21 A "destination market" can be any potential wholesale customer of the
merging parties. If the same suppliers can profitably serve a group of
customers, it makes sense to aggregate those customers as a distinct
destination market for purposes of analysis. For example, a group of
customers who are served under the same transmission tariff and who are not
separated by any significant transmission constraint(s) should, in theory,
be able to buy power from the same group of potential suppliers. For
purposes of analyzing market concentration, it is necessary to establish
the relevant "geographic market" associated with each identified
destination market. The relevant geographic market is defined by the set of
suppliers that can physically and economically supply a relevant product to
a particular destination market.
22 Merger Policy Statement at 30,119. Appendix A of the Policy Statement
provides a detailed illustrative description of the analytic screen.
It market concentration as shown in the screen analysis exceeds the
Guideline's thresholds, then the application should present further analysis
consistent with the Guidelines.23 In the Merger Policy Statement, we stated that
we will set for hearing the competitive effects of merger proposals if they fail
the above screen analysis, if there are problems concerning the assumptions or
data used in the screen analysis, or if there are factors external to the screen
which put the screen analysis in doubt. We may also set for hearing applications
that have used an alternative analytic method without adequately supporting the
results of the analysis.24
- - --------
23 Id. at 30,120.
24 Id.
2. Applicants' Competition Analysis
Applicants submitted a competition analysis with their original application
filed on November 27, 1996, and supplemented that analysis on March 4, 1997 with
an analysis modeled on the Merger Policy Statement's analytic screen. We
evaluate Applicants' analysis in the context of the four-part analysis set forth
in Appendix A to the Merger Policy Statement, as discussed above.
a. Relevant Products
The Merger Policy Statement stated that in the past, the Commission has
analyzed three products, and that they remained reasonable products that merger
applicants should recognize, although other product definitions may be
acceptable.25 These are long-term capacity, short-term capacity, and non-firm
energy.
- - --------
25 Merger Policy Statement, FERC Stats. & Regs. at 30,130.
With respect to long-term capacity, Applicants provided an analysis showing
that there are no barriers to entry to the long-term capacity market, and that
Applicants would be unable to erect and maintain any barriers to entry.26 We
agree with Applicants' analysis and find that the merger will not affect
competition in the long-term capacity market.
- - --------
26 Application, Exh. No. ___ (JCD-1) at Appendix B. As stated in the Merger
Policy Statement, we believe the appropriate test for entry barriers is
whether there are any barriers, not whether there are barriers controlled
by the merging companies. Merger Policy Statement, FERC Stats. & Regs. at
30,135. Here, Applicants' evidence supports a finding that, in this case,
there are no barriers to entry into the long- term capacity market.
With respect to short-term capacity, Applicants analyzed uncommitted
capacity over the years 1998-2001 and found that neither company would have any
uncommitted capacity during this period, and therefore, the merger could not
effect competition in these markets.27 We agree with Applicants' appraisal of
their capacity situation and find that the merger will not affect competition in
the short-term capacity market.
- - --------
27 Application, Exh. No. ___ (JCD-1) at IV-3; Application, Exh. No. ___
(JCD-4) at 2.
Applicants have performed a market concentration analysis with respect to
non-firm energy. This analysis is discussed below.
b. Destination Markets
The Merger Policy Statement's analytic screen sets up a two-step process to
determine the size of the geographic market. The first step requires
identification of customers potentially affected by the merger, and must
include, at a minimum, those directly interconnected to the Applicants, and
additional entities should be included if historical transactions data indicates
that they have been trading partners with the merging parties.28
- - --------
28 Merger Policy Statement, FERC Stats. & Regs. at 30,130.
Applicants identify local transmission dependent utilities (TDUs), PECO
Energy, General Public Utilities (GPU), Baltimore Gas & Electric Company (BG&E),
and Public Service Electric and Gas (PSE&G) as customers affected by the
proposed merger. This was based upon an analysis of direct interconnections and
historical sales.29 Additionally, Applicants claim that the inclusion of BG&E as
a separate destination market reflects competitive alternatives available to
other PJM utilities (i.e., Potomac Electric Power Company (PEPCO) and
Pennsylvania Power & Light Company (PP&L)) located west of the eastern PJM
interface. Applicants therefore conclude that all prospective customers that are
located within PJM should be included in the relevant market. We believe that it
is reasonable to include as destination markets all potential customers located
in PJM as those who are potentially affected by the proposed merger.
- - --------
29 Application, Exh. No. ___ (JCD-4) at 3 & n.3.
Although the merging companies have transacted with Allegheny Power System
(APS), Consolidated Edison Company of New York, Inc. (Con Ed), and Northeast
Utilities (NU) during the 1994-95 period examined, Applicants assert that the
proposed merger will have no adverse effect on these utilities and exclude them
from their analysis.30 In addition, sales from the merging entities to APS, Con
Ed and NU were very small, relative to sales to other potentially affected
customers. We agree with Applicants' reasoning that APS, Con Ed and NU do not
merit inclusion as relevant destination markets.
- - --------
30 Applicants state that APS does not merit inclusion in the relevant
geographic market because it has a large number of potential suppliers, its
variable production costs are lower than the merging companies' and it is
on the opposite side of the prevailing flow across PJM (i.e., west to
east). Applicants argue that Con Ed is connected with other members of the
New York Power Pool and with PJM through the PJM extra-high voltage system.
In addition, the transfer capability of the tie line between eastern PJM
and NYPP is limited. Finally, transfer capability on the transmission paths
from the merging companies to NU is limited relative to the amount of
economic capacity that is interconnected with these transmission
facilities. As a result, Applicants conclude that the merging companies
could not adversely affect the competitiveness of the NU market.
Application, Exh. No. ___ (JCD-4) at 5.
Delaware Municipal contends that the Applicants should have included PSE&G,
Long Island Lighting Company (LILCO), and New York State Electric & Gas Company
(NYSEG) as destination markets. We find these concerns unwarranted. First, PSE&G
is included in the Applicants' analysis. With respect to LILCO and NYSEG, the
Applicants made no sales to LILCO or NYSEG in 1994, 1995, and 1996. Applicants'
decision not to include LILCO and NYSEG as destination markets is reasonable and
consistent with the Merger Policy Statement.31
- - --------
31 Merger Policy Statement, FERC Stats. & Regs. at 30,130.
While Applicants' primary position is that the PJM system is largely
unconstrained, they recognize that there are constraints on the PJM transmission
system that limit power flows into eastern PJM under certain conditions for very
limited periods throughout the year.32 In these circums tances, according to
Applicants, the eastern PJM subregion becomes a distinct geographic market.33
Therefore, Applicants perform a separate concentration analysis for eastern PJM.
This analysis will be discussed below.
- - --------
32 Applicants state that PJM, on average, is forced to dispatch generation out
of economic order (i.e., run off-cost generation in eastern PJM) 4.4
percent of the hours in a year to relieve constraints. They assert that, of
the f-cost generation dispatched, about one-fourth (or 1 percent of the
hours in a year) was due to the constraints on the eastern PJM interface.
Applicants also indicate that they will alleviate the one existing
transmission constraint located on their systems. The constraint occurs at
the Keeney substation where power is transferred into Delmarva's system and
into eastern PJM from the 500 kV system. The constraint will be alleviated
by adding a parallel 500/230 kV step-down transformer in an adjacent
substation (the Red Lion substation). Applicants have stated that this
transformer was energized on May 16, 1997. Applicants indicate that they
have no other significant constraints that affect wholesale or transmission
customers under normal operating conditions.
33 Application, Exh. No. ___ (JCD-3) at 10.
c. Geographic Markets
Under the Merger Policy Statement's screen analysis, the next step is to
identify those suppliers that can compete to serve a given destination market
and how much of a competitive presence they are in the market.34 This analysis
involves determining the economic capability of a supplier to reach a market by
using a delivered price test, which requires that suppliers be included in a
market if they can deliver the product to a customer at no greater than 5
percent above the competitive price to that customer. This analysis also
involves determining the physical capability of a supplier to reach a market by
examining available transmission capacity.
- - --------
34 Merger Policy Statement, FERC Stats. & Regs. at 30,130.
i. Delivered Price Test
Applicants' analysis approached the delivered price test by considering as
potential suppliers all generating units in PJM, and 1700 MW from the NYPP.35
Applicants listed all of these units in ascending cost order and refer to this
list as the supply curve. The ordering of plants along the supply curve is based
on delivered price, which includes the variable cost of each unit plus the cost
of transmission, ancillary services and losses.
- - --------
35 Due to transfer limitations between the NYPP and PJM, only 1700 MW of
capacity from the NYPP is included in the analysis. Applicants state that
they did not consider potential suppliers within the East Central Area
Reliability Coordinating Agreement (ECAR) area or the Southeastern Electric
Reliability Council because these suppliers are not directly interconnected
with the eastern PJM market in which the merging companies are likely to
have the greatest market presence, and excluding such suppliers would, if
anything, cause Applicants' analysis to overstate their market shares.
Application, Exh. No. ___ (JCD-4) at 13 n.17.
(a) Generation and Transmission Costs
We find that Applicants' list of potential supplying plants and their
delivered prices is generally reasonable, with several exceptions discussed
below. Delaware Municipal argues, however, that the transfer capability from the
NYPP to PJM is only 650 MW as opposed to the 1700 MW assumed by Applicants,
which would reduce the amount of capacity available from New York. We disagree.
A recent operating study published by several of the regional reliability
councils states that the total simultaneous transfer capability from NYPP to PJM
is in fact greater than what Applicants assumed.36
- - --------
36 The study was published by the Mid Atlantic Area Council, the ECAR, and the
Northeast Power Coordinating Council. It found a simultaneous transfer
capability from NYPP to PJM of 2250 MW.
In determining a potential suppliers' generating costs for purposes of a
merger screen analysis, the Merger Policy Statement allows consideration of
various measures of costs, including FERC Form No. 1 data, as long as such cost
data are verifiable and supported with reasoned analysis. Applicants used
operation and maintenance (O&M) expenses from FERC Form No. 1 for PJM and NYPP
generating plants.37 They assigned O&M expenses to either fixed or variable
costs and then divided the variable component by the annual energy output of
each plant. Applicants state that in cases where variable O&M expenses were
extraordinarily high, extraordinarily low, or simply not reported, they used the
average variable O&M expenses for that type of plant and fuel.38 We believe
Applicants' approach to developing generation costs is reasonable. Although
Delaware Municipal challenges the use of average annual variable generation
costs rather than marginal energy costs, we believe use of costs taken from FERC
Form No. 1 is reasonable and consistent with the Merger Policy Statement.
- - --------
37 PJM imports energy from NYPP plants. As such, Applicants calculate their
generation costs.
38 Applicants do not state the basis upon which they considered costs
"extraordinarily" high or low.
Another component of determining the delivered price for potential
suppliers is determining transmission costs. Applicants calculated a rate for
network integration service and ancillary services for each destination market
(e.g., TDUs, PECO, PSE&G and BGE) based on the July 1996 draft PJM transmission
tariff filed by the PJM Supporting Companies and tariffs filed by the individual
companies.39 They also include rates for sales from utilities in NYPP to PJM.
Although Applicants' approach to transmission costs for suppliers in PJM is
acceptable, their assumptions about transmission costs for NYPP suppliers is not
well supported. For example, they have not supported their assertion that
ancillary services are included in the delivered price of power from the NYPP,
nor have they supported their use of .5 cents/kWh as the transmission rate in
the NYPP. However, given the relatively small amount of New York capacity
included in the study, we find that Applicants' assumptions do not materially
affect the outcome of the market concentration analysis.40
- - --------
39 Rate components were calculated for scheduling, system control and
dispatch; reactive supply and voltage control; regulation and frequency
response service; operating reserve--spinning; and operating
reserve--supplemental. The rates for the first two services are based on
the PJM draft tariff and the rates for the last three services are based on
an average of eastern PJM individual utility tariffs (excluding PECO, due
to their use of a non-conforming methodology). Applicants note that
non-firm point to point service under the proposed PJM tariff is provided
at no cost to transmission customers. Therefore, it is appropriate to use
network integration service transmission costs.
40 Although Applicants did not fully explain how each component of the
transmission charge was determined, we note that the level of the
transmission charge does not affect the end result of the Applicants'
analysis. Under a worst case scenario (from the Applicants' viewpoint)
where no economic capacity will be supplied from NYPP (due to extremely
high transmission costs), the resulting market concentration does not
exceed the threshold of concern under the Merger Policy Statement.
Delaware Municipal argues that Applicants' approach fails to evaluate the
effect of the merger on individual customers or types of customers. Applicants
state that because a customer within a transmission zone in PJM pays a single
charge for transmission service based on the zone in which it is located,
transmission charges do not affect a customer's choice of suppliers. As a
result, they conclude that the relative ordering of suppliers based on the
delivered price will not change from one PJM customer to another, except to the
degree that transmission constraints limit the ability of suppliers to access
the market. Therefore, Applicants do not perform a separate analysis for each of
the different destination markets identified, but evaluate an eastern PJM market
(when the eastern PJM interface is constrained) and an entire PJM market (when
the eastern PJM interface is not constrained). We believe that this is a
reasonable approach because the effect of the merger on individual TDU customers
is adequately addressed in Applicants' analyses.
Another area of concern with Applicants' delivered price analysis relates
to congestion pricing. The transmission tariff submitted by the PJM Supporting
Companies contains locational marginal cost congestion pricing, and several
intervenors have faulted Applicants' analysis for not addressing this as part of
their delivered price analysis.41 We agree that, under a delivered price test
where there is congestion pricing, supplies from entities transacting along a
congested transmission path would become more expensive relative to supplies
from entities transacting along uncongested paths. A congestion charge could
conceivably alter the amount of energy that could be delivered at a price lower
than 5 percent above the market-clearing price. Simply limiting supplies from
all entities on the unconstrained side of the eastern PJM interface -- as
Applicants have done -- does not appropriately address the effect of congestion
charges in the delivered price of energy from those resources.
- - --------
41 The currently effective PJM transmission rate is based on a proposal by
PECO, which does not assign congestion costs to specific transactions.
However, the Commission, 78 FERC at 61,883, has indicated that it expects
to implement the Supporting Companies' congestion pricing proposal.
We are, however, aware that accounting for congestion prices in non-firm
energy markets for the purposes of a delivered price test is complex. Given the
specific facts of this case, we believe it is reasonable not to pursue the
congestion pricing issue further for several reasons. First, there were
competing transmission pricing proposals for PJM pending at the time Applicants
filed their analysis, and the currently effective tariff allocates congestion
costs evenly among all PJM participants and would not affect the delivered price
from any one particular supplier. Second, the PJM Supporting Companies' proposal
is complex, and until it becomes operational, it would be very difficult to
estimate the cost of congestion under that proposal. Third, the amount of time
that there are constraints on PJM is small, which means that the effect of
congestion pricing on the delivered price analysis would likely not be
significant.42 We note, however, that it is possible, in the context of other
mergers, that congestion may occur in more hours of the year and at times when
there are relatively few alternative economic generating resources. Under such
circumstances, congestion may be an important factor in delivered energy prices
and should be evaluated.
- - --------
42 Applicants' analysis indicates that generation has historically been run
off-cost in eastern PJM not at times of peak demand but at times of
intermediate peak demand. Therefore, regardless of the source of the
binding constraint, if Applicants attempted to withhold resources and raise
energy prices at intermediate peak times, the relatively larger
availability of economic generating resources would likely prevent a
"significant and nontransitory" price increase.
(b) Competitive Market Price
Our screen analysis requires determining a competitive market price for the
purpose of identifying which potential supplies are economic. We recognized in
the Merger Policy Statement that competitive market prices may be difficult to
determine because the reporting of actual transactions prices (in many
electricity markets) is still in the formative stages and electricity markets
are not sufficiently mature to exhibit single market clearing prices for various
products, and therefore, applicants may use surrogate measures as long as they
are supported. Applicants' approach to determining the market price involved
identifying fourteen points along its supply curve (in increments of at least
100 MW) where there is a generating plant owned by the merging companies. For
example, the first increment of supply examined was based on the minimum PJM
demand. Each subsequent point on the curve was established based on the next
lowest cost Atlantic City Electric or Delmarva plant or plants that had a total
capacity greater than 100 MW. Applicants refer to these points as the market
conditions under which to perform a separate delivered price test, and the
market price at that condition as 1.05 times the generation cost of their plant
at that increment.
By assuming that only the merging companies' plants will set the
market-clearing price, Applicants' approach will result in the greatest change
in HHIs and greatest market share for the merging company. However, by examining
supply and demand conditions only at the points where Applicants' plants enter
the market, Applicants' approach fails to evaluate the merger's effect on
post-merger market concentration at other points on the supply curve.
A better approach would evaluate both the pre-to-post merger changes in the
HHIs and the post-merger market concentrations under relevant market demand
conditions.43 In this case, Applicants' approach is not a problem because we
have considered the pre-to-post merger change in HHIs and post-merger market
concentration and find competitive concerns are not raised. The facts of other
mergers could, however, result in different conclusions. Accordingly, we
encourage future applicants to utilize an approach that appropriately addresses
changes in market concentrations under relevant market demand conditions.
- - --------
43 A delivered price test should be performed for each relevant market demand
condition. Although system lambda data may have certain limitations, see
Ohio Edison Company, et al., 80 FERC P. 61,039, slip op. at 25, n.63 and
accompanying text (1997), changes in system lambda data over a load cycle
can provide a good indicator of when-market demand conditions change.
System lambda during a distinct demand period can also be used as a proxy
for market clearing prices in the relevant market to determine what
capacity is economic during that period. We note that system lambda data
are available for both PJM and eastern PJM, the relevant markets analyzed
by Applicants. In this case, market concentration statistics based on PJM
system lambda data can better reflect the effect of the merger.
ii. Transmission Capability
The Merger Policy Statement's screen analysis requires a determination of
transmission capability to identify any restrictions on physically delivering
economic supplies to a market.44 Applicants acknowledge that there are
restrictions on the physical deliverability of power within PJM during
"infrequent" periods.45 These constraints occur, among other points, at the
eastern PJM interface which divides the eastern subregion of PJM from the
central and western zones. When they occur, the constraints limit the amount of
power that may be imported to eastern PJM utilities from central and western
PJM, and generation in eastern PJM is dispatched "off-cost" and/or energy from
the NYPP is imported to meet a limited part of the eastern PJM load.
- - --------
44 Merger Policy Statement, FERC Stats. & Regs. at 30,132.
45 Application, Exh. No.___ (JCD-3) at 10; Applicants contend that the eastern
interface constraints occur about 1 percent of the time and are at
intermediate load, rather than peak- load, conditions. Application, Exh.
No. ___ (MM-2) at 9-10.
A significant issue which intervenors and the Applicants have extensively
addressed is the amount of transfer capability that exists over the eastern
interface at various load levels. It is necessary to know this in order to
determine the extent to which suppliers west of the interface are available to
markets east of the interface during periods of constraints. Applicants
submitted several sets of data to support their analysis of transfer capability.
They relied primarily on a calculation using a regression analysis to estimate
the transfer capability of the eastern interface at various load levels within
PJM. The analysis produced two estimates for each load level - a "best
estimate", which represents Applicants' best estimate of transfer capability
applying a 1998 load forecast, and a "conservative estimate", which is based on
a 95 percent confidence level.46 To corroborate their results, the Applicants
included system operator estimates of transfer capability at various load
levels. They also included actual hourly metered flows over the eastern
interface for 1995.
- - --------
46 Application, Exh. No. ___ (JCD-3) at 11-15; Exh. No. ___ (JCD-4) at
Appendix 1.
We believe for purposes of our preliminary screen analysis that Applicants'
estimate of transfer capability across the eastern PJM interface is reasonable.
While we have concerns regarding the analysis Applicants used to estimate
transfer capability across the eastern PJM interface, we find their results
reasonable primarily because the results are corroborated by actual PJM operator
data.47 We note that there are a number of approaches to estimating transfer
capability. However, we caution future applicants that analyses relying on
regression and other estimating techniques should be fully explained. In
addition, the results of any such analyses should be corroborated with
independent data, to the extent available.
- - --------
47 Applicants state that transfer capability is a function of a number of
interacting factors such as load, available generation, location of
generation resources and use of certain capacitor banks. However,
Applicants' analysis uses only a single variable--load in eastern PJM--to
explain transfer capability on the eastern PJM interface. Therefore,
Applicants' assumption that load in eastern PJM adequately explains
transfer capability on the eastern PJM interface is questionable. Moreover,
Applicants' results do not confirm that there is a meaningful relationship
between the single variable of load in eastern PJM and transfer capability
on the eastern PJM interface.
We note one additional point here. Applicants' analysis of transmission
capability only examined eastern interface constraints. However, the evidence
submitted indicates that there may be other constraints. For example, Applicants
stated that eastern PJM generation was run "off-cost" in approximately four
percent of annual hours, but indicate that only one percent of this was
attributable to eastern interface constraints.48 Several intervenors are
concerned that Applicants' analysis ignores the Importance of constraints not
occurring on the eastern PJM interface, which could produce a narrower market
than eastern PJM and limit TDUs' options for energy purchases.
- - --------
48 Applicants state that part of the off-cost generation not due to the
eastern interface constraint was due to the Keeney constraint, which will
be alleviated by the Red Lion substation upgrade, and the rest was due to
local constraints not on Applicants' systems. Application, Exh. No. ___
(MM-2) at 9-10.
Constraints occurring on and off the merging companies' system can
potentially affect the dimensions of the relevant geographic market. As such,
all constraints merit identification. However, in this case, they do not merit
additional investigation. Further analysis of constraints would not alter the
Applicants' results. This conclusion is based on the infrequency of the
constraints and that they occur in intermediate peak periods.49
- - --------
49 Duke/Louis and Old Dominion raised concerns that Delmarva's upgrade to the
Red Lion substation will not adequately relieve constraints resulting from
a more active regional energy market and a restructured PJM. These concerns
are unrelated to the merger. If transmission capacity into the Delmarva
peninsula becomes constrained in the future, parties are free to seek
additional transmission facilities under the provisions of the PJM open
access tariff.
d. Concentration Analysis
The final step in the Merger Policy Statement's screen analysis is to
analyze the effect of the merger on market concentration and competition. This
should be done using HHI measures and single firm market share statistics.50
Applicants analyzed concentration for each of the fourteen increments on their
supply curve where they assumed their generating plants set the market clearing
price. They performed an analysis for economic capacity, available economic
capacity, and total capacity.
- - --------
50 Merger Policy Statement, FERC Stats. & Regs. at 30,133.
i. Economic Capacity
Applicants analyzed economic capacity under three scenarios: an eastern PJM
market with the "best estimate" of eastern interface transmission capability; an
eastern PJM market with a "conservative" (95 percent confidence) estimate of
eastern interface capability; and a total PJM market with no eastern interface
constraints. The worst case under both the "best estimate" scenario and the
total PJM scenario occurs at increment 8, where the merged companies' combined
market share is 8.7 percent, the post-merger HHI is 1021, and the HHI increase
is 32. The worst case under the "conservative" estimate scenario occurs at
increment 5, where the merged companies' combined market share is 15.7 percent,
the post-merger HHI is 835, and the HHI increase is 70.51 Applicants assert that
neither the HHI measures nor the market share measures, even in the worst case,
raise concerns under the DOJ Merger Guidelines.
- - --------
51 Application, Exh. No. ___ (JCD-4) at Tables 7-9.
We disagree with two aspects of Applicants' methodology for this analysis,
but even after we have made adjustments, we agree with Applicants that the
proposed merger raises no competitive concerns. The first aspect concerns the
treatment of non-utility generating (NUG) capacity. Applicants treat NUG
capacity as separate market shares when computing the HHIs at each load
increment. However, absent evidence demonstrating that some or all of the NUG
capacity is available to the market, we believe it should be considered
controlled by the purchasing utility.52 As discussed below, we performed an
analysis with an adjustment adding such committed NUG capacity to the
purchaser's other capacity resources in determining market concentration and
changes in such concentration. Although the adjustment is not significant enough
to change the result of the analysis here, because the assignment of committed
NUG capacity can affect market concentration, other merger applicants should
account for committed NUG capacity consistent with the above discussion.
- - --------
52 NUG capacity is generally supplied under long-term contract with the
purchasing utility.
The second aspect concerns the way Applicants calculated concentration when
an eastern interface constraint is assumed to occur. In that case, Applicants
first calculated market concentration using only the capacity within eastern PJM
(i.e., capacity on the other side of the constraint was excluded). The
Applicants then reduced the calculated HHI statistic by a percentage equal to
the ratio of the transmission transfer limit to the load. We believe that such a
calculation distorts the market concentration because it effectively (1) treats
all capacity on the other side of the constraint as having the same economic
value and (2) ignores the relative size of sellers with economic capacity on the
other side of the constraint.
Using data supplied by the Applicants, we considered the units on the other
side of the constraint that would be most economic to serve that portion of the
load within eastern PJM up to the point that transmission transfer limitations
were reached. From these data, we considered the market concentration and change
in such concentration due to the merger. We believe that this approach corrects
for the above-described shortcomings of Applicants' method.
However, incorporating these two adjustments does not change any
concentration measure so as to raise concern in either the "best estimate"
scenario or the total PJM scenario. In the "conservative" scenario, the
adjustments would cause post-merger HHI increases in excess of 100 in moderately
concentrated markets for three load increments. Given the context in which this
occurs, we do not believe it raises competition problems. The over-100 changes
in HHIs occur in only three of fourteen increments examined; they only occur in
the scenario which assumes a conservative estimate of eastern interface
capacity; they only occur when there is a constraint in PJM, which is infrequent
and, in PJM at this time, analysis of all economic capacity is less significant
than an analysis of available economic capacity, which as discussed below, shows
no competitive concerns.
ii. Available Economic Capacity
Applicants' analysis of available economic capacity assumed that the
lowest-cost units are used to serve native load and firm contractual
obligations, and that any remaining capacity would be available to make sales to
prospective purchasers.53 Applicants compared the amount of each supplier's
economic capacity with its firm native load and contractual load obligations at
each point on the supply curve where the merging companies had a generating
plant. The analysis also included in the suppliers' economic capacity any
capacity that had a cost no greater than 5 percent above the cost of the
Applicants' generating plant. If a supplier's total economic capacity at this
point on the supply curve is greater than its native load and firm contract
obligations, the supplier is assumed to have available economic capacity.
- - --------
53 Applicants performed two available economic capacity analyses: a market
concentration analysis, and a comparative revenue/cost analysis. Both
purport to show that Applicants do not possess significant amounts of
available economic capacity and, consequently, that Applicants do not have
market power in the non-firm energy market. We focussed on Applicants'
first approach, which follows the Merger Policy Statement preference for an
analysis of changes in market concentration (HHI analysis).
Applicants' concentration analysis for available economic capacity shows
that the post-merger HHIs do not exceed the relevant thresholds under the
Guidelines. For most load increments analyzed, the Applicants had no available
economic capacity, hence there is no post-merger increase in the HHI. For some
increments, Delmarva had available economic capacity, but Atlantic City Electric
was deficient. Therefore, for these increments, the post-merger HHI change was
negative. The highest market share for the merged companies was 3.1 percent.
However, Applicants did not include any of their owned capacity from
western sources in the analysis for any of the constrained increments, and
failure to do so biases the results in favor of the Applicants. We believe that
Applicants' western capacity should be considered in the analysis up to point
where the constraint occurs. However, an adjustment to Applicants' analysis that
includes all purchased NUG capacity and capacity owned by the Applicants at each
supply increment, regardless of its location in PJM, does not affect the end
result: Applicants have virtually no available economic capacity. Hence, the
concentration analysis for available economic capacity indicates that Applicants
do not possess market power in the non-firm energy market.
iii. Total Capacity
Applicants' analysis of total capacity examined a condition at peak load
for its "best estimate" scenario and its "conservative" scenario for eastern
interface capability. Under the "best estimate" scenario, the post-merger HHI
was 1616, the change in HHI was 68, and the merged companies' market share was
11.9 percent. Under the "conservative" scenario, the post-merger HHI was 1669,
the change in HHI was 73, and the merged companies' market share was 12.4
percent.
Similar to our adjustment to Applicants' economic capacity analysis, we
adjusted Applicants' total capacity analysis to include committed NUG capacity
in the market shares of the purchasing utility. Under both the "best estimate"
scenario and the "conservative" scenario, with our adjustments, Applicants'
post-merger market concentration does not exceed the thresholds established in
the merger guidelines for the total capacity measure.
3. Summary of Competition Analysis
While there are some flaws in Applicants' competition screen analysis, we
find that the flaws are not significant enough in the context of this merger to
warrant further analysis or hearing. We further find that the screen analysis
adequately supports the conclusion that the merger would not significantly
increase concentration in any relevant market.
D. Effect of the Merger on Rates
The Merger Policy Statement explains that the Commission's primary
focus regarding the effects of a merger proposal on rates is ratepayer
protection. The Merger Policy Statement also describes various commitments which
may, in particular cases, be an acceptable means of protecting ratepayers, such
as hold harmless provisions, open seasons for wholesale customers, rate freezes,
and/or rate reductions.54 Thus, we must evaluate whether Applicants' wholesale
requirements and transmission customers are adequately protected from any
potential adverse effects of the merger on rates.
- - --------
54 Merger Policy Statement, FERC Stats. & Regs. at 30,123-24.
Applicants estimate merger savings of approximately $581 million, which
will be off set by approximately $72 million of merger-related costs. In their
supplemental filing, Applicants included a Hold Harmless Agreement (Agreement)
that is applicable to all of their resale requirements and transmission
customers.55 The Agreement codifies the Applicants' commitment that they will
not charge any customer merger costs in excess of merger savings. The Agreement
provides details regarding: (1) the accounting treatment of merger costs and
savings, and customers audit rights; (2) the amortization periods for
merger-related costs; and (3) a dispute resolution procedure that the Applicants
and their customers can use to resolve disputes over the recovery of
merger-related costs.56 The ratepayer protection provided by the Agreement
extends for the duration of the individual customer contracts, which expire
between the years 2001 and 2004. Applicants maintain that the Agreement, which
is a unilateral commitment by each of the Applicants, is intended to satisfy the
Commission's requirement that hold harmless provisions be enforceable and
administratively manageable."57 Applicants maintain that any net savings that
result from the merger would remain to be reflected in the applicable rate
change mechanisms and in any Section 205 filing.
- - --------
55 In response to intervenor claims that certain parties were not covered by
the hold harmless provision, the Applicants clarify that the ratepayer
protection applies to all the existing customers, including "Vineland,
which is the only TDU in Atlantic's transmission service area, and all the
TDUs, including both interconnection customers and requirements customers
located in Delmarva's transmission service area." Application, Exh. No. ___
(PSG-5) at 4.
56 The Agreement provides that in the event a dispute occurs over the
calculation of reasonable merger costs, the burden of proof is on the
Applicants, regardless of how the dispute is raised (i.e., under the
dispute resolution procedures contained in the Agreement, or in a section
206 filing made by a customer).
57 In their application, the Applicants state that they intend to hold retail
customers harmless in the same manner. However, in their filing with the
Maryland Commission, the Applicants propose that one-third of the allocated
net merger savings be used to reduce Maryland electric rates, effective
when the merger closes.
Although a number of intervenors have challenged the Agreement, we believe
that Applicants' proposed ratepayer protection provision is adequate to protect
their wholesale and transmission customers from any merger-related cost
increases. Moreover, Applicants' proposal leaves open the possibility that
merger-related benefits could be passed through to customers in the future. In
the Merger Policy Statement, the Commission shifted its focus from attempting to
quantify merger-related benefits to insuring that ratepayers are protected from
adverse effects of the merger on costs. This was done to avoid disputes over the
quantification of merger-related benefits, an issue that has proven contentious
in the past.
While Applicants' approach relies on the quantification of merger benefits,
we believe that their approach is "enforceable and administratively manageable,"
and that it will function to hold customers harmless from merger-related cost
increases, even if the expected benefits do not materialize. We note that if a
dispute over reasonable merger costs occurs, section 7.1 of the Agreement places
the burden of proof in any proceeding (before the Commission or the Arbitrator)
on Applicants. Moreover, Applicants are hereby advised that in the event a
dispute over merger benefits arises which requires our resolution, the
Commission will place a heavy burden on the Applicants to demonstrate that the
disputed cost or benefit is a direct result of the merger, and that said benefit
is correctly quantified. For these reasons, we will reject Delaware Municipal's
and Old Dominion's suggestion that the Commission institute an open season. The
hold harmless provision recommended here maintains the status quo with respect
to wholesale rates found just and reasonable by this Commission, and is
therefore consistent with the public interest.
E. Effect of the Merger on Regulation
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange Commission
(SEC); and where a state does not have authority to act on a merger.58
- - --------
58 Merger Policy Statement, FERC Stats. & Regs. at 30,124-25.
Applicants assert that the merger will have no effect on state and federal
regulation.59 They maintain that because each company will continue under the
merger as separate utility operating companies, each of the states that
currently regulate their retail rates will continue to do so. Likewise, the
wholesale power sales and transmission services of each of the companies will
continue to be regulated by the Commission.
- - --------
59 Application at 24-25.
Applicants also note that the merger would add a new layer of regulation
because the SEC Bill have jurisdiction over Conectiv. However, in response to
the Commission's concern under the holding of Ohio Power Co. v. FERC, 954 F.2d
779 (D.C. Cir. 1992), cert. denied, 498 U.S. 73 (1992), Applicants commit as a
condition of approval of the merger that, for Commission ratemaking purposes,
they will follow the Commission's policy regarding the treatment of costs and
revenues associated with intra-company services.60
- - --------
60 Id. The Commission's intra-corporate transactions policy, with respect to
non-power goods and services, requires that: (1) affiliates or associates
of a public utility not sell non-power goods and services to the public
utility at a price above market price; and (2) sales of non-power goods and
services by a public utility to its affiliates or associates be at the
public utility's cost for such goods and services or the market value for
such goods and services, whichever is higher. See, e.g., Duke/Louis Dreyfus
L.L.C., 73 FERC P. 61,309 at 61,868-69 (1995), order on reh'g, 75 FERC P.
61,261 (1996).
We note that the state commissions that have intervened have not raised
concerns regarding the merger's effect on their regulation. Applicants have
represented that the merger required approval from at least three of the four
states in which retail operations are conducted.61 Accordingly, we are satisfied
that the proposed merger will not have an adverse impact on regulation.
- - --------
61 Application, Exh. No. ___ (PSG-5) at 2. Applicants acknowledge that
approval is needed from New Jersey, Delaware, and Virginia. They state that
the Maryland Commission has asserted that it has the power to review the
merger agreement, and has in fact issued an order approving the merger on
July 16, 1997.
F. Proposed Accounting Treatment
We stated in the Merger Policy Statement that proper accounting is a
requirement for all mergers.62 Applicants propose use of the purchase method of
accounting for the merger, since, according to Applicants, the merger fails to
qualify for pooling of interests treatment under Generally Accepted Accounting
Principles. Applicants state that the assets recorded by Atlantic City Electric
and Delmarva will remain at the same values as before the merger and each
company will continue to issue separate financial statements. Applicants propose
to account for any merger acquisition premium (goodwill) on the books of
Conectiv, and not "push down" any portion of it to the books of Atlantic City
Electric or Delmarva.63 We have no basis to dispute Applicants' claim that this
business combination qualifies for "purchase" accounting, and will therefore
approve its use. Applicants proposal to account for the acquisition premium on
the books of Conectiv is also acceptable and consistent with our action in
Entercv Services. Inc. and Gulf States Utilities Company, 65 FERC P. 61,332 at
62,532-540 (1993).
- - --------
62 Merger Policy Statement, FERC Stats. & Regs. at 30,126.
63 Applicants reserve the right to seek rate recovery of the acquisition
premium in future rate proceedings. No rate recovery is being sought in
this proceeding.
Applicants state that they will incur approximately $72 million of merger
related costs. Delmarva is deferring the direct merger transaction costs it
incurs in Account 186 (Miscellaneous Deferred Debits), and will transfer them to
Conectiv (as a component of the cost to acquire Atlantic City Electric) at the
time of the merger. Atlantic Energy is charging the direct merger transaction
costs it incurs to expense as incurred.64 None of the direct merger transaction
costs are being included in current utility operating expenses.65 Both Delmarva
and Atlantic City Electric are charging the indirect merger costs to operating
expense as incurred.66 We believe the proposed accounting for merger related
costs is reasonable.67
- - --------
64 Answer of Atlantic City Electric Company and Delmarva Power & Light Company
to Motions for Interventions and Other Relief at 37-38.
65 Old Dominion expressed concern that Delmarva's deferral of the direct
transaction costs will allow Delmarva to pass them on to Old Dominion under
its rate formula. Applicants correctly note, however, that none of the
direct transaction costs will be charged to ratepayers unless the
Commission subsequently grants Delmarva approval to recover the merger
acquisition premium.
66 Answer at 38.
67 The Applicants should submit their accounting to effect the merger to the
Commission in accordance with the requirements of Account 102 (Electric
Plant Purchased or Sold). 18 C.F.R. Part 101, Account 102 (1996).
We note that a separate service company subsidiary of Conectiv will be
established to provide common or shared services to the utility and other
subsidiaries of Conectiv. The Commission will require Applicants to maintain
records of service company billings in sufficient detail to ensure that such
charges are classified in the proper accounts and that the amounts of such
billings are fully supported and justified.68
- - --------
68 See General Instruction No. 14, Transactions with Associated Companies, 18
C.F.R. Part 101 (1997).
The Commission orders:
(A) The Applicants' proposed commitments are hereby accepted.
(B) The Applicants' proposed merger, disposition of jurisdictional
facilities and accounting treatment are hereby approved.
(C) The late motion to intervene of ELCON, AISI, and Delaware Users is
hereby granted.
(D) The Commission retains authority under section 203(b) of the FPA to
issue supplemental orders as appropriate.
(E) The foregoing authorization is without prejudice to the authority of
this Commission or any other regulatory body with respect to rates, service,
accounts, valuation, estimates, determinations of cost, or any other matter
whatsoever now pending or which may come before this Commission.
(F) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost or any valuation of property claimed or
asserted.
(G) The Applicants should promptly notify the Commission when the merger is
consummated.
By the Commission.
( S E A L )
/s/
Lois D. Cashell,
Secretary.
BEFORE THE PUBLIC SERVICE COMMISSION
OF THE STATE OF MARYLAND
IN THE MATTER OF THE INQUIRY INTO THE )
MERGER OF DELMARVA POWER & LIGHT ) Case No. 8744
COMPANY AND ATLANTIC ENERGY, INC. )
(Filed APRIL 18, 1997) )
EVIDENTIARY FILING OF
DELMARVA POWER & LIGHT COMPANY
Delmarva Power & Light Company ("Delmarva"), pursuant to Md. Ann. Code,
Art. 78 ss.24(b)(1) and the Commission's letter of December 11, 1996, hereby
submits the attached testimony and schedules to provide evidentiary support for
a Commission finding that the planned transaction with Atlantic Energy, Inc.
("AEI") will not have a material effect on Delmarva's Maryland retail
franchises or rights thereunder. In the event that the Commission determines
that the planned transaction will have such a material effect, Delmarva's filing
also addresses issues regarding the computation of merger-related savings, costs
to achieve the merger and a proposed sharing with Maryland-retail customers of
net merger-related savings and other issues that may be relevant to a
Commission determination that the planned transaction is consistent with the
public convenience and necessity pursuant to Md. Ann. Code, Art. 78, ss.24(c).
Delmarva requests expedited consideration of this inquiry and appropriate
Commission findings on or before October 22, 1997.
In support of this filing, Delmarva respectfully represents:
I. PARTIES AFFECTED BY THE PLANNED TRANSACTIONS
1. Delmarva is a corporation organized under the laws of the State of
Delaware and the Commonwealth of Virginia. Delmarva is engaged in the
generation, transmission, distribution and sale of electric energy to
approximately 437,500 residential, commercial and industrial customers in
Delaware, Maryland and Virginia. Delmarva's retail electric service rates are
established by the Delaware and Maryland Public Service Commissions and the
Virginia State Corporation Commission. Delmarva's service territory covers all
or portions of the State of Delaware, ten primarily Eastern Shore counties in
Maryland, and two counties which comprise the Eastern Shore of Virginia.
Delmarva also provides gas service to approximately 98,000 customers located in
northern New Castle County, Delaware. Delmarva's principal business office is
at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899.
2. Conectiv, Inc. ("Conectiv") is a corporation organized under the laws of
the State of Delaware. 50% of Conectiv's outstanding capital stock is currently
owned by Delmarva, and 50% of Conectiv's outstanding capital stock is currently
owned by AEI. Conectiv owns 100% of the outstanding capital stock of DS Sub,
Inc. ("DS Sub"). After consummation of the transactions described herein,
Conectiv will own 100% of the outstanding common stock of Delmarva and AEI's
wholly-owned subsidiary, Atlantic City Electric Company ("Atlantic Electric"),
and Conectiv will be a registered holding company under the Public Utility
Holding Company Act of 1935 ("PUHCA"). Conectiv's principal business office is
at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899.
3. Atlantic Electric is a corporation organized under the laws of the State
of New Jersey. Atlantic Electric is engaged in the generation, transmission,
distribution and sale of electric energy to approximately 473,000 residential,
commercial and industrial customers in the State of New Jersey. Atlantic
Electric's retail rates are established by the New Jersey Board of Public
Utilities. Atlantic Electric's service territory is principally the southern
third of New Jersey and covers all or portions of eight counties in New Jersey.
Atlantic Electric is a wholly-owned subsidiary of AEI. Atlantic Electric's
principal business office is at 6801 Black Horse Pike, Egg Harbor Township, New
Jersey 08234-4130.
4. AEI is a corporation organized under the laws of the State of New Jersey
and is an exempt holding company under PUHCA. The stock of AEI is publicly
held. AEI is the sole common shareholder of Atlantic Electric. AEI's principal
business office is at 6801 Black Horse Pike, Egg Harbor Township, New Jersey
08234-4130.
5. DS Sub is a corporation organized under the laws of the State of
Delaware. DS Sub was formed solely for the purpose of facilitating the planned
transactions. DS Sub will merge into Delmarva, with Delmarva as the surviving
corporation.
II. DESCRIPTION OF THE PLANNED TRANSACTIONS
6. AEI, Delmarva, Conectiv and DS Sub are parties to an Agreement and Plan
of Merger, dated August 9, 1996, as amended and restated as of December 26, 1996
(the "Merger Agreement" or the "Agreement"). The Merger Agreement is attached
hereto as Annex 1 to the Joint Proxy Statement of Delmarva Power & Light Company
and AEI, Inc., dated December 26, 1996, (the "Proxy Statement") (Exhibit A).
The Proxy Statement and the attached testimony of Barbara S. Graham provide a
more detailed description of the transactions summarized below.
7. The planned transactions are:
(i) AEI will merge with Conectiv, with Conectiv as the surviving
corporation;
(ii) DS Sub will merge with Delmarva, with Delmarva as the
surviving corporation; and
(iii) Together, these transactions result in Conectiv becoming the
parent company of Atlantic Electric and Delmarva.
(Collectively, the above transactions, are referred to herein and in testimony
as the "Merger".) Exhibit B compares the pre-and post-Merger corporate
structures of the entities involved in these transactions.
8. Upon consummation of the Merger, except for fractional, treasury, and
affiliate-owned shares (if any), each share of the common stock of Delmarva
will be converted into the right to receive one share of Conectiv common stock,
and each share of the common stock of AEI will be converted into the right to
receive 0.75 shares of Conectiv common stock and 0.125 shares of Conectiv Class
A common stock.
9. As a result of these share exchanges, the holders of Delmarva and AEI
common stock will hold approximately 60.6% and 39.4%, respectively, of
Conectiv's common stock (based on the capitalization of each company as of
September 30, 1996). Holders of AEI common stock will hold 100% of Conectiv
Class A common stock. Shares of Conectiv common stock will represent
approximately 94% of the voting power of the common stock, and shares of
Conectiv Class A common stock will represent approximately 6% of that voting
power.
10. The Merger will not affect the debt securities or preferred stock of
either Delmarva or Atlantic Electric.
11. The Merger Agreement required the approval of the holders of shares of
common stock in both Delmarva and AEI. The shareholders of Delmarva and AEI
approved the Merger Agreement on January 30, 1997.
12. Upon consummation of the Merger, Conectiv will have five first-tier
subsidiaries consisting of: two operating utilities (Delmarva and Atlantic
Electric); a service company that will provide services (including, for example,
accounting, financial, and legal services) to the operating utilities and other
affiliates; and two existing non-utility subsidiaries of AEI.
13. Delmarva and Conectiv request that the Commission make all necessary
findings and issue appropriate orders on or before October 22, 1997. The
target date for receiving all necessary regulatory approvals, fulfilling all
other conditions of the Merger Agreement, and closing on the Merger is December
31, 1997. Delays beyond that time would likely increase the total transaction
and transition costs, while delaying the realization of Merger-related benefits.
III. THE PLANNED MERGER WILL NOT HAVE A MATERIAL EFFECT ON DELMARVA'S
MARYLAND-RETAIL FRANCHISES OR RIGHTS THEREUNDER.
14. None of the corporate entities in the Merger are Maryland corporations.
Consequently, statutory power to approve or reject the Merger Agreement arises
only if there is a determination made under Md. Ann. Code, Art. 78, ss.24(b)(1)
that the Merger Agreement will have "a material effect on the franchise or
rights thereunder."
The requested finding of no material effect on the franchise or rights
thereunder is supported by the attached testimony and schedules, which, among
other matters discussed, explain and demonstrate that:
o The Merger will not result in the transfer or impairment of any
Delmarva's franchises, property rights, or rights to serve.
After closing, Delmarva will continue to exist as the utility
operating company providing retail electric utility service
in Maryland.
o The Merger will not have a material effect on Delmarva's
ability to exercise its franchise to provide electric service
safely and reliably to Delmarva's Maryland customers. Both
companies are committed to maintaining and potentially improving
their existing high standards of safety, reliability and customer
service.
o Because Delmarva will remain the Maryland operating utility,
the Merger will not affect the statutory and regulatory
requirements applicable to corporations providing utility
services in Maryland. In particular, the Maryland Commission's
requirements regarding demand-side management programs,
integrated resource planning and low income programs would
continue to apply to Delmarva to the same extent such
requirements are currently applied. This Commission has
experience as to how its regulatory policies are applicable to
Columbia Gas of Maryland and Potomac Edison Company, both of
which are Maryland operating utilities and are subsidiaries of
holding companies.
o The combined companies will continue to maintain a significant
local workforce in each of the States in which they operate.
Currently, Delmarva has approximately 480 Maryland employees.
Decisions have not yet been made as to the particular levels,
post-merger, of employment within each state, but, overall,
Conectiv expects a reduction of approximately 10% (or 400
positions) in the combined utilities' workforce.
15. As explained in the attached testimony of Mr. Howard E. Cosgrove,
the primary purpose of the Merger is to create a regional company from two
companies that share a common vision of the strategic path necessary to
succeed in the increasingly competitive utility and energy services
marketplace. As further explained by Mr. Cosgrove, the combined companies
recognize that a local workforce is necessary to maintain excellent customer
service levels and to respond to the particular needs within each of the States
that the operating utilities will serve. While cost savings are an expected
result of the Merger, cost savings were not a material factor driving the
decision to merge.
IV. THE MERGER AGREEMENT IS CONSISTENT WITH THE PUBLIC CONVENIENCE AND
NECESSITY.
16. It is Delmarva's sincere belief that, because the Merger
Agreement will not have a material effect on Delmarva's franchises and rights
thereunder, the Commission need not examine rate-related matters and other
issues that may be relevant in determining whether a proposed transaction is
consistent with the public convenience and necessity. Nevertheless, in a
good-faith effort to address any such issues that may be raised by other
participants in this proceeding, Delmarva hereby submits testimony and schedules
describing in detail matters including: how costs will be allocated from a
service company to Delmarva's Maryland-retail jurisdiction; how Merger-related
savings were estimated; and how costs to achieve the Merger were calculated.
Delmarva also has submitted a proposed sharing of expected net Merger-related
savings allocable to Maryland-retail customers.
In filing such information, Delmarva specifically reserves, and does not
waive, any rights it may have to assert its legal position before the Commission
or a court as to the proper scope of ss.24(b)(1) in the event that the
Commission determines that the Merger will have a material effect on the
franchise or rights thereunder.
The Merger is expected to save approximately $500 million (net of
transaction and transition costs) over the first ten years after the Merger is
consummated. In a combined company that will generate approximately $2 billion
in revenue each year, a $50 million annual average net savings does not
materially affect cash flow or the ability of the combined companies to provide
utility service. To the extent there may be any effect, the effect will be
positive i.e., utility services could be provided at slightly lower cost. The
estimated cost savings are supported by Mr. Thomas Flaherty of Deloitte & Touche
Consulting Group in his attached testimony and related exhibits. The
methodology for determining how merger-related costs and savings are assigned to
the Maryland-retail jurisdiction is supported by the testimony of Messrs. David
G. Dougher and William R. Moore, Jr.
17. Delmarva and Atlantic Electric are proposing in their applications
before their respective retail regulatory commissions that one-third of each
State's allocable share of estimated average annual net merger savings over the
first 10 years after consummation of the Merger be available for sharing with
customers. The precise method to implement this sharing should be established by
each regulatory agency, consistent with the goals and objectives of the
particular State. Delmarva further recognizes that it may be appropriate to
reopen the savings mechanism at a later date, if the Commission establishes
retail electric competition, in order to retain an equivalent customer benefit.
18. As described in more detail in the testimony of Mr. Paul S.
Gerritsen, Delmarva specifically proposes that one-third of the allocated
net merger savings be used to reduce Maryland retail electric rates, effective
when the Merger closes. Other alternative uses, instead of a rate decrease,
that would also be acceptable to Delmarva include: (i) using this amount to
reduce Delmarva's stranded costs; (ii) using this amount to fund societal
programs, such as demand-side management programs or low income weatherization
programs, or to fund economic development activities; or (iii) any combination
of any of the above or other uses that the Commission determines to be
appropriate.
19. Delmarva would be at risk to achieve the level of projected savings,
while customers would benefit as proposed even if the achieved savings are less
than the amounts projected. If, on the other hand, actually achieved savings
are greater than projected, with the result that Delmarva's actual earnings rise
above authorized levels, the Commission retains the authority to adjust base
rates accordingly, consistent with traditional statutory and regulatory
practices.
20. Delmarva commits that the transaction and transition costs of the
Merger, including the acquisition premium, will not be reflected in retail rates
except to the extent that those items are at least offset by Merger-related
savings.
21. Delmarva submits that the holding company structure is appropriate in
that it avoids further multiple incorporation in New Jersey, Delaware and
Virginia, simplifies contract and franchise issues, and facilitates the process
of maintaining separate utility base and fuel rates between Delmarva and
Atlantic Electric.
22. Within the holding company structure will be a Conectiv service company
subsidiary (the "Service Company"), which will include many employees who are
currently employed by Delmarva or Atlantic Electric. The Securities and
Exchange Commission ("SEC") has oversight over the arrangements by which
Service Company costs are charged and assigned to the related utilities and
affiliates for financial accounting and reporting purposes. When the Service
Company arrangements are finalized for filing with the SEC, copies will be
provided to this Commission. Mr. Gerritsen's testimony describes in greater
detail how service company costs will be allocated among jurisdictions.
Delmarva commits to submit to this Commission's jurisdiction any issues
regarding the ratemaking treatment of any Service Company costs assigned or
allocated to Delmarva's Maryland utility business. Because a significant
portion of the expected cost savings are in administrative-type functions that
will be performed by the Service Company, it is expected that these cost
assignment issues will involve how best to allocate a lower overall cost
structure.
23. Attached hereto are testimony and reports prepared by John C. Dalton
and filed with the Federal Energy Regulatory Commission ("FERC"). Mr. Dalton's
testimony and reports were prepared to address wholesale market power issues
that are of particular interest to the FERC. Delmarva submits that any issues
that may be raised in this proceeding regarding the potential effects of the
Merger in a retail-wheeling environment would be premature until the Commission
establishes a definite policy on retail wheeling. The attached testimony and
reports are submitted, however, to further understanding as to the size of the
combined companies relative to regional competitors and as to the lack of market
power that Conectiv will have in wholesale electric markets.
24. Attached hereto are the following Exhibits:
Exhibit A Proxy Statement of December 26, 1996, including: (1) at
pages 114 - 140 detailed financial statements of Delmarva,
AEI, and Conectiv; (2) as Annex I, the Agreement and Plan of
Merger, dated August 9, 1996, as amended and restated as
of December 26, 1996; and (3) as Annex IV and Annex V, the
Conectiv Certificate of Incorporation and Bylaws.
Exhibit B Corporate Structures Prior to and After Transaction.
Exhibit C Maps.
Exhibit D Maryland Franchises of Delmarva.
Exhibit E FERC Direct Testimony and Report of John C. Dalton
regarding market power in wholesale markets.
Exhibit F FERC Supplemental Testimony and Report of John C. Dalton
regarding market power in wholesale markets.
25. Attached hereto in support of this filing are the testimony and
exhibits of the following:
Howard E. Cosgrove
Barbara S. Graham
Thomas J. Flaherty
David G. Dougher
Paul S. Gerritsen
William R. Moore, Jr.
26. Communications and correspondence relating to the proceedings herein
should be sent to:
Paul S. Gerritsen
Delmarva Power & Light Company
800 King Street, P. O. Box 231
Wilmington, Delaware 19899
Randall V. Griffin, Esq.
Delmarva Power & Light Company
800 King Street, P. O. Box 231
Wilmington, Delaware 19899
James E. Franklin, II, Esq.
Atlantic City Electric Company
6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234
VII. REQUESTED APPROVALS
WHEREFORE, Delmarva Power & Light Company requests that the
Commission:
A. Find that the planned transaction does not materially affect
Delmarva's franchise or rights thereto; or, alternatively,
B. Find that the planned transaction is consistent with the public
convenience and necessity; and
C. Expedite review procedures so that a final Commission decision may
occur on or before October 22, 1997.
Respectfully submitted,
By: /s/______________________________
Delmarva Power & Light Company
Counsel for Delmarva:
Randall V. Griffin, Esq.
Delmarva Power & Light Company
P. O. Box 231
Wilmington, DE 19899
302/429-3757
Dated: April 18, 1997
STATE OF MARYLAND
PUBLIC SERVICE COMMISSION
ORDER NO. 73620
IN THE MATTER OF THE INQUIRY * BEFORE THE
INTO THE MERGER OF DELMARVA * PUBLIC SERVICE COMMISSION
POWER & LIGHT COMPANY AND * OF MARYLAND
ATLANTIC ENERGY, INC. * _____________
CASE NO. 8744
- - ---------------------------- -------------
Appearances:
Randall V. Griffin and Thomas P. Perkins, III, for
Delmarva Power & Light Company.
Kathryn L. Simpson, for the Staff of the Public Service
Commission of Maryland.
Michael J. Travieso, Sandra M. Guthorn, and John D.
Sayles, for the Maryland Office of People's Counsel.
M. Brent Hare, for the Maryland Department of Natural
Resources and the Maryland Energy Administration.
On October 25, 1996, Delmarva Power & Light Company ("Delmarva," "DPL," or
"Company") filed a letter requesting the Commission's concurrence with DPL's
position that it need not obtain the Commission's approval prior to Delmarva's
merger with Atlantic Energy, Inc. ("Atlantic" or "AEI"). After considering
responses filed by the Commission's Staff and the Office of People's Counsel
("OPC" or "People's Counsel"), at the December 11, 1996 Administrative Meeting
we decided to initiate this proceeding to determine whether the merger will
materially affect the Company's franchise or right.1 Notice of the proceeding
was given to Delmarva's customers by way of newspaper advertisements.
A prehearing conference was held on April 1, 1997, and a procedural
schedule was established. Then, on April 18, 1997, DPL filed direct testimony
and exhibits on the issue of whether the proposed merger would materially affect
the Company's retail franchises or rights thereunder. To plan for the
contingency of a Commission finding that the merger would materially affect
DPL's franchise or right, the filing also addressed issues relevant to a
determination of whether the transaction is consistent with the public
convenience and necessity pursuant to Md. Ann. Code art. 78, ss. 24(c).
After discovery, a hearing was held on May 27, 1997 for cross-examination
of Delmarva's witnesses. Following the hearing, the parties engaged in
discussions to determine if they could reach a negotiated settlement of the
issues presented in the proceeding.
- - --------
1 In this regard, Md. Ann. Code art. 78, ss. 24(b)(1) prohibits a public
service company such as Delmarva from entering into any agreement or contract
materially affecting its franchise or any right thereunder without prior
authorization of the Commission.
On July 1, 1997, the parties to the proceeding2 filed a Settlement
Agreement ("Agreement") with the Commission. We have attached the Agreement to
this Order as Appendix A. The parties request approval of the merger and the
Agreement, and specific findings with respect to the merger.3
As seen in the Agreement, the parties ask us to find that it is consistent
with the public convenience and necessity for DPL to merge with AEI in
accordance with the terms and conditions contained in the Merger Agreement, and
for a holding company4 to be established which will own 100 percent of
Delmarva's and Atlantic City Electric Company's ("Atlantic Electric")5 common
stock. The parties also request a finding that it is consistent with the public
convenience and necessity for a service company to be established that will be
an affiliate of Delmarva and provide various services to DPL.6
- - --------
2 In addition to DPL, Staff, and OPC, the parties are the Maryland Energy
Administration and the Maryland Department of Natural Resources.
3 Additionally, on July 8, 1997, Staff filed Comments supporting the
Agreement.
4 The holding company will be called Conectiv, Inc.
5 Atlantic Electric is a wholly-owned subsidiary of AEI.
6 The services are generally described in the Company's evidentiary filing,
and include such items as accounting, legal and financial services. As part of
the settlement, DPL agrees that it will not assert that "any authority preempts
this Commission's power to determine the Maryland-retail ratemaking treatment
for Delmarva's regulated utility operations of charges, asset transfers, or
benefits provided from such service company or other affiliate . . . to Delmarva
or . . . from Delmarva to the service company or any affiliate."
The Agreement further provides that upon merger closing, DPL will provide a
benefits package to its Maryland retail jurisdiction of $3.84 million. Of this
amount, $3.5 million will be applied to a base rate reduction for Maryland
retail customers, and $340,000 will fund annual contributions to certain
programs to be agreed upon by the parties. Such programs may include low-income
assistance, economic development, or low-income energy efficiency programs.
Program funding proposals will be submitted to the Commission for approval.
Program funding will continue for three years from the time the funding begins.
The base rate reductions will take effect with service rendered on and after the
date of the closing of the merger.
Additionally, the Agreement proposes treatments for merger-related
out-of-pocket costs, amortization of the acquisition premium associated with
DPL's purchase of Conowingo Power Company, depreciation of the Company's assets,
and the sale or auction of Clean Air Act SO2 allowances. The Agreement also
contains several "hold harmless" provisions aimed at protecting retail customers
from higher rates in the future, and agreements insuring Delmarva's cooperation
with and concurrence in the Commission's authority over aspects of the provision
of retail electric service in the State. Included among these covenants are
Delmarva's agreements to prepare and file a Code of Conduct and Cost Allocation
Manual applicable to Conectiv, Inc. and its affiliates, and a retail market
power study to be filed in Case No. 8738 7 or other case as determined by the
Commission.
- - --------
7 Case No. 8739 is a Commission inquiry into the provision and regulation
of electric service in Maryland.
The parties agree that the provisions of their Agreement are not severable,
and that the Agreement represents a compromise for the purposes of settlement
and shall not be regarded as precedent. The Agreement provides that no party
necessarily agrees or disagrees with any particular item in the Agreement, but
that the parties do agree that the resolution of the issues in the Agreement,
when taken as a whole, produce a result that is consistent with the public
convenience and necessity.
After considering the evidentiary record in this proceeding and the
Agreement of the parties, we find that the proposed merger as described in the
Agreement is consistent with the public convenience and necessity. Accordingly,
we adopt the Agreement in its entirety, without modification. We also make the
specific findings requested in Section A of the Agreement. Thus, we find that:
(1) It is consistent with the public convenience and
necessity for Delmarva Power & Light Company to merge
with Atlantic Energy, Inc., in accordance with the
terms and conditions set forth in the Merger
Agreement;
(2) It is consistent with the public convenience and
necessity for a holding company to be established
which will own 100 percent of Delmarva Power & Light
Company's and Atlantic City Electric Company's common
stock; and
(3) It is consistent with the public convenience and
necessity for a service company to be established
that will be an affiliate of Delmarva Power & Light
Company and will provide various services to Delmarva
Power & Light Company as described generally in the
evidentiary filing, according to the terms expressed
by the parties on Page 2 of their Agreement.
IT IS, THEREFORE, this 16th day of July, in the year Nineteen Hundred and
Ninety-Seven, by the Public Service Commission of Maryland,
ORDERED: (1) That the Commission adopts the Settlement Agreement filed by
the parties on July 1, 1997 in its entirety, without modification.
(2) That Delmarva Power & Light Company is authorized to
proceed with the merger according to the terms set forth in the Merger
Agreement and the Settlement Agreement.
(3) That Delmarva Power & Light Company shall conduct its
Maryland retail electric operations in accordance with the terms adopted in this
Order.
(4) That all motions not previously granted are hereby denied.
/s/-----------------------------
/s/-----------------------------
/s/-----------------------------
/s/-----------------------------
/s/-----------------------------
Commissioners
APPENDIX A
IN THE MATTER OF THE INQUIRY * BEFORE THE
INTO THE MERGER OF DELMARVA * PUBLIC SERVICE COMMISSION
POWER & LIGHT COMPANY AND * OF MARYLAND
ATLANTIC ENERGY, INC. * _____________
CASE NO. 8744
-------------
SETTLEMENT AGREEMENT
WHEREAS, the undersigned Parties (Delmarva Power & Light Company
("Delmarva"), Maryland Public Service Commission Staff ("Staff"), Office of
People's Counsel ("OPC"), Maryland Energy Administration and the Maryland
Department of Natural Resources (collectively referred to as "MEA/DNR")), have
reached a settlement under which they believe the proposed merger will be
consistent with the public convenience and necessity, and the Parties further
agree that the Public Service Commission of Maryland ("Commission") should grant
prompt regulatory approval of the merger as described in this settlement;
NOW THEREFORE, on this 1st day of July, 1997, the undersigned Parties agree
to recommend that the Commission approve this settlement and make the findings
specified herein.
A. Approval of the Merger Agreement and Specific Findings.
The Parties to this settlement agreement recommend that the Commission make
the following findings with respect to the merger as it will be implemented in
conjunction with this settlement agreement:
1. It is consistent with the public convenience and necessity for Delmarva
to merge with Atlantic Energy, Inc. ("AEI") in accordance with the terms and
conditions set forth in the Merger Agreement;
2. It is consistent with the public convenience and necessity for a holding
company to be established which will own 100% of Delmarva's and Atlantic City
Electric Company's ("Atlantic Electric") common stock; and
3. It is consistent with the public convenience and necessity for a service
company to be established that will be an affiliate of Delmarva and will provide
various services to Delmarva as described generally in Delmarva's evidentiary
filing. Delmarva agrees that it will not assert that any authority preempts this
Commission's power to determine the Maryland-retail ratemaking treatment for
Delmarva's regulated utility operations of charges, asset transfers, or benefits
provided from such service company or other affiliates to Delmarva or the
ratemaking treatment of any charges, asset transfers, or benefits provided from
Delmarva to the service company or any affiliate. Delmarva further agrees that
it will be subject to the Commission's jurisdiction regarding the ratemaking
treatment of costs allocated to Delmarva's Maryland-retail jurisdiction from the
service company.
B. Rate Reductions and Additional
Funding of Programs by Delmarva.
1. (a) Upon merger closing, Delmarva agrees to provide a benefits package
to its Maryland retail jurisdiction of $3.84 million. $3,500,000 of this amount
will be used to provide a base rate reduction for Maryland retail customers.
Annually, 340,000 of the total will be used for Delmarva's funding of annual
contributions to certain programs in Delmarva's Maryland service territory, to
be agreed upon by the Parties. Such programs may include low-income assistance,
economic development, low income energy efficiency or other programs. $170,000
of the $340,000 shall be used for economic development programs identified by
the MEA/DNR. $170,000 of the $340,000 shall be used for low-income qualifying
programs identified by OPC. The Parties shall make good faith efforts to
identify such programs by October 1, 1997, for funding and will submit them for
Commission review and approval. Such program funding shall continue for three
years from the time funding begins.
(b) Such base rate decrease shall be reflected in a compliance filing made
within 30 days after approval of this settlement. Such rate decrease shall
become effective for service rendered on and after the date of Closing of the
merger. To the extent mathematically feasible, the base rate decrease shall be
designed so that the base revenues of each rate class will be decreased by the
product of the ratio that each rate class' base revenues (excluding fuel related
expenses) bears to the total Delmarva Maryland-retail base revenues (excluding
fuel related expenses) multiplied by $3,500,000. For purposes of this
calculation, calendar year 1996 shall be used to determine Maryland retail total
and class base rate revenues. Nothing herein is intended to cause a change in
the Deferred Purchase Power Rate currently applicable to rates in the Conowingo,
District.
C. Amortization of Merger-Related "Out-of-Pocket" Costs.
The Parties agree that for purposes of Delmarva's quarterly rate of return
reports and future base rate cases, severance costs associated with the merger
shall be amortized over 5 years and other "out-of-pocket" costs to achieve the
merger shall be amortized over 10 years, commencing with the date of Closing of
the merger, with the unamortized balance reflected in rate base. Delmarva shall
file a report delineating final actual "out-of-pocket" costs with the
Commission, including the annual amortization amount based on the actual costs.
D. Stipulated Treatment of Other Costs.
1. In Case No. 8583, Order No. 71719, January 18, 1995, the Commission
authorized Delmarva to defer for future recovery in rates the amortization of
the acquisition premium associated with the purchase of Conowingo Power Company.
Effective on the first day of the month following Closing of the merger with
AEI, Delmarva shall, for Maryland-retail ratemaking purposes, start to amortize
that acquisition premium in accordance with the procedure's approved in Order
No. 71719.
2. In Case No. 8718, Order No. 726999 June 18, 1996, the Commission
approved a settlement agreement which established two sets of depreciation
rates, the first of which are currently in effect and the second of which were
to become effective at a later time. Effective on the first day of the month
following Closing of the merger with AEI, Delmarva shall, for Maryland
retail-ratemaking purposes, begin to depreciate its assets consistent with the
second set of depreciation rates approved in Order No. 72699.
3. For Maryland-retail ratemaking purposes, Delmarva shall reflect revenues
received from the sale or auctioning of Clean Air Act SO2 Allowances as a credit
to fuel expense; shall reflect the costs of acquiring Clean Air Act SO2
Allowances in fuel expense for the period during which such SO2 Allowances are
expensed; and shall, for purposes of future Maryland-retail base rate cases and
rate of return reports, adjust rate base for the cash cost of any such SO2
Allowances purchased for future use. The ratemaking treatment of any such SO2
Allowance transaction between Atlantic Electric and Delmarva shall be subject to
Commission review.
E. "Hold Harmless" Provisions.
1. Delmarva agrees not to seek to include in Maryland retail rates any
merger costs in excess of merger savings. In establishing compliance with this
commitment, Delmarva shall be obligated: a) to quantify in accordance with
Generally Accepted Accounting Principles the direct, indirect and internal
merger costs that are properly attributable to the relevant period used to
establish rates, and b) to demonstrate that merger-related savings for the same
time period exceed such merger costs.
2. Delmarva agrees not to seek to include in Maryland-retail rates any
costs attributable to AEI's above-market power supply costs and/or regulatory
assets, unless Delmarva can demonstrate in a rate or fuel proceeding that doing
so is beneficial to its Maryland customers.
3. Delmarva does not plan in the foreseeable future to blend or levelize
Delmarva's and Atlantic Electric's fuel rates. However, if Delmarva decides to
do so in the future, Delmarva agrees to seek specific Commission authorization
prior to any proposed blending or levelizing Delmarva's fuel rate with Atlantic
Electric's fuel rate. Delmarva further agrees that records will be maintained of
the costs and revenues associated with any joint purchases or sales of power or
fuel sufficient to permit an audit to verify that the appropriate level of costs
and revenues are assigned to the Maryland-retail jurisdiction. Upon a proper
evidentiary showing, the Commission has the authority to disallow such costs
found to be improper or to redetermine such sales revenues. The intent is to
avoid inappropriate power supply cost shifting to the Maryland retail
jurisdiction.
4. Delmarva agrees that in future base rate proceedings its allowed rate of
return (including cost of equity, debt and capital structure) should not reflect
any risk premium or increased capital costs resulting from the merger. This
determination of any risk premium or increased capital cost must be based on an
appropriate evidentiary record.
F. Agreements Regarding Future Proceedings.
1. Delmarva agrees that, to the extent the Commission currently has such
power and exercises such power based on an appropriate evidentiary record,
Delmarva will not assert that the Commission lacks authority for Maryland-retail
ratemaking purposes to disallow costs associated with purchase power contracts
between Delmarva and an affiliate or to review and disallow costs associated
with Federal Energy Regulatory Commission ("FERC") jurisdictional joint
dispatch, capacity equalization or other interconnection or power supply
agreements that are either solely between Delmarva and its affiliates or, in the
event such FERC jurisdictional agreement(s) involves parties in addition to
Delmarva and an affiliate, where a majority of the revenues involved are likely
to be paid by or to Delmarva.
2. Delmarva agrees that it will prepare and file a retail market power
study in Case No. 8738 (or other case as determined by the Commission). The
undersigned Parties agree to discuss in good faith and to develop jointly the
appropriate scope and parameters for such a retail market power study. Nothing
herein is intended to limit the Commission's authority to order appropriate and
lawful mitigation measures if the Commission finds in Case No. 8738 (or other
case as determined by the Commission), based on an appropriate evidentiary
record, that Delmarva and/or Conectiv would have retail market power and that
mitigation measures should be ordered prior to permitting retail customer
competition in Maryland.
3. Delmarva agrees that it will prepare and file a Code of Conduct and Cost
Allocation Manual that would be applicable to Conectiv and its affiliates. Such
filing shall be made the later of 6 months after Closing or 90 days after the
conclusion of Case No. 8747. Nothing herein is intended to limit the
Commission's authority to address affiliate-related issues involving Delmarva
and/or Conectiv in Case No. 8747.
4. The undersigned Parties agree that the earliest test period that shall
be used in adjusting or resetting Delmarva's base rates in a future base rate
proceeding shall be calendar year 1998.
5. The undersigned Parties agree that issues relating to the proper
ratemaking treatment of transmission revenues received and costs incurred by
Delmarva can be addressed in Case No. 8738 or such other case as the Commission
may find appropriate.
G. Other Commitments.
1. Delmarva agrees that it will not assert that the merger affects
Delmarva's obligation to comply with lawful Commission requirements regarding
demand-side management programs.
2. The OPC agrees that, within 10 days of the adoption of this settlement
by the Commission, it will make a filing with the FERC to withdraw its request
for a hearing on retail market power issues in FERC Docket No. EC97-7-000.
3. Commission Staff agrees that it will recommend to the Commission that,
within 10 days of the adoption of this settlement by the Commission, the
Commission should file a letter with FERC in FERC Docket No. EC97-7-000 stating
that the Commission has the authority to address retail market power issues,
will be addressing such issues in connection with Case No. 8738 and requesting
that the FERC not set for hearing any issue regarding Delmarva's, Atlantic
Electric's, or Conectiv's retail market power.
4. Subsequent to Closing the merger, Delmarva shall make good faith efforts
to obtain as expeditiously as practicable all necessary approvals, if any, to
adjust the Conectiv corporate structure to move Delmarva's current non-utility
subsidiaries into one or more affiliates that would not be subsidiaries of the
Delmarva utility operating company.
H. Miscellaneous.
1. The provisions of this settlement are not severable.
2. This settlement represents a compromise for the purposes of settlement
and shall not be regarded as a precedent with respect to any ratemaking or any
other principle in any future case. No Party to this settlement necessarily
agrees or disagrees with the treatment of any particular item, any procedure
followed, or the resolution of any particular issue in agreeing to this
settlement other than as specified herein, except that the Parties agree that
the resolution of the issues herein, taken as a whole, produce a result that is
consistent with the public convenience and necessity.
WHEREFORE, the undersigned Parties respectfully request that the
Commission:
1) Make the specific findings set forth in section A above;
2) Approve this settlement agreement without modification;
3) Make any additional findings and all other approvals that the
Commission may deem to be necessary to effectuate the proposed merger and to
implement this settlement.
IN WITNESS WHEREOF, intending to bind themselves and their successors and
assigns, the undersigned Parties have caused this Settlement to be signed by
their duly-authorized representatives.
DELMARVA POWER & LIGHT COMPANY MARYLAND PUBLIC SERVICE
COMMISSION STAFF
By: /s/______________________ By: /s/______________________
MARYLAND OFFICE OF MARYLAND ENERGY ADMINISTRATION
PEOPLE'S COUNSEL
By: /s/______________________ By: /s/______________________
MARYLAND DEPARTMENT
OF NATURAL RESOURCES
By: /s/______________________
EXHIBIT H-4
PAGE 1 OF 2
I. DELMARVA POWER & LIGHT NONUTILITY SUBSIDIARIES
TOTAL ASSETS IN $ MILLIONS AS OF JUNE 30, 1997 AND REVENUES
IN $ MILLIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C> <C>
TOTAL TOTAL
COMPANY ASSETS (1) REVENUES (1)
------- ---------- ------------
EAST COAST NATURAL GAS COOPERATIVE L.L.C. (2) - -
DELMARVA POWER FINANCING I - -
DELMARVA CAPITAL INVESTMENTS, INC. 2.8 4.0
DELMARVA ENERGY COMPANY 1.0 -
CONECTIV COMMUNICATIONS, INC. - 0.3
CONECTIV SERVICES, INC. 41.3 36.9
DELMARVA SERVICES COMPANY 15.0 -
DCI I, INC. 46.3 0.4
DCI II, INC. - -
DELMARVA CAPITAL TECHNOLOGY COMPANY 3.8 0.5
DELMARVA CAPITAL REALTY COMPANY 2.8 7.9
DELMARVA OPERATING SERVICES COMPANY 0.2 -
CHESAPEAKE UTILITIES CORPORATION (2) - -
PINE GROVE, INC. 3.7 -
DCTC-BURNEY, INC. 0.3 -
LUZ SOLAR PARTNERS, LTD. IV (2) - -
UAH-HYDRO KENNEBEC, L.P. (2) - -
CHRISTIANA CAPITAL MANAGEMENT, INC. 5.7 1.2
POST AND RAIL FARMS, INC. 0.5 0.2
DELSTAR OPERATING COMPANY 2.0 18.1
DELWEST OPERATING COMPANY 0.7 3.4
DELCAL OPERATING COMPANY 0.3 0.4
PINE GROVE LANDFILL, INC. 23.5 6.1
PINE GROVE HAULING COMPANY 5.8 8.5
DELBURNEY CORPORATION - -
PINE GROVE GAS DEVELOPMENT L.L.C. (2) - -
FORREST PRODUCTS, L.P. (2) - -
BURNEY FOREST PRODUCTS, A JOINT VENTURE (2) - -
--------------------- -------------------------
TOTAL 155.7 87.9
</TABLE>
(1) INTERCOMPANY ASSETS AND REVENUES HAVE BEEN ELIMINATED.
(2) UNCONSOLIDATED SUBSIDIARIES (LESS THAN 51% OWNED). SHOWN AS
INVESTMENTS IN THEIR PARENT OPERATIONS.
<PAGE>
EXHIBIT H-4
PAGE 2 OF 2
I. ATLANTIC ENERGY, INC. NONUTILITY SUBSIDIARIES
TOTAL ASSETS IN $ MILLIONS AS OF JUNE 30, 1997 AND REVENUES
IN $ MILLIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C> <C>
TOTAL TOTAL
COMPANY ASSETS (1) REVENUES (1)
------- ---------- ------------
ATLANTIC ENERGY INTERNATIONAL, INC. 0.3 0.3
ATLANTIC CAPITAL I - -
ATLANTIC ENERGY ENTERPRISES, INC. 7.2 0.1
ENERVAL, L.L.C. 2.6 -
ATLANTIC SOUTHERN PROPERTIES, INC. 8.9 0.8
ATE INVESTMENTS, INC. 85.1 0.7
ENERTECH, LP. 9.0 -
COASTALCOMM, INC. 0.7 0.1
ATLANTIC THERMAL SYSTEMS, INC. 6.9 -
ATLANTIC JERSEY THERMAL SYSTEMS, INC. 0.2 -
ATS OPERATING SERVICES, INC. - -
THERMAL ENERGY LIMITED PARTNERSHIP I 99.4 12.7
ATLANTIC GENERATION, INC. 7.5 1.7
BINGHAMPTON LIMITED, INC. - -
BINGHAMPTON GENERAL, INC. - -
BINGHAMPTON COGENERATION LIMITED PARTNERSHIP 1.2 -
PEDRICKTOWN LIMITED, INC. - -
PEDRICKTOWN GENERAL, INC. - -
PEDRICKTOWN COGENERATION LIMITED PARTNERSHIP 11.8 -
VINELAND LIMITED, INC. - -
VINELAND GENERAL, INC. - -
VINELAND COGENERATION LIMITED PARTNERSHIP 6.3 -
ATLANTIC ENERGY TECHNOLOGY, INC. 0.1 -
THE EARTH EXCHANGE, INC. - -
--------------------- -------------------------
TOTAL 247.2 16.4
</TABLE>
DELMARVA POWER & LIGHT COMPANY
ANALYSIS OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS BUSINESS OF
DPL
The management and staff of DELMARVA POWER & LIGHT COMPANY (DPL) conducted this
study. The objective of this study is to identify and quantify the economic
effects on shareholders and customers of divesting DPL of its natural gas assets
and business.
MAY 6, 1997
TABLE OF CONTENTS
PAGE
SECTION I. EXECUTIVE SUMMARY AND CONCLUSIONS 1
SECTION II. GENERAL STUDY ASSUMPTIONS 3
SECTION III.A. NEWGAS-CO. OVERVIEW 6
SECTION III.B. NEWGAS-CO. ANALYSIS 7
SECTION III.C. DPL-ELECTRIC OVERVIEW 11
SECTION IV NEWGAS-CO. SCHEDULE OF EXHIBITS 12
EXHIBIT 1 - INCOME STATEMENT 13
EXHIBIT 2 - ESTIMATED ADDITIONAL OPERATING EXPENSES 14
EXHIBIT 2a - ESTIMATED EXTERNAL AUDIT FEES 15
EXHIBIT 2b - ESTIMATED INFORMATION TECHNOLOGY COSTS 16
EXHIBIT 2c - ESTIMATED INCREASED COST OF INSURANCE COVERAGE 17
EXHIBIT 2d - ESTIMATED NET LABOR INCREASE, INCLUDING BENEFITS 18
EXHIBIT 2e - ESTIMATED OPERATING LEASE FACILITIES & FURN. COSTS 19
EXHIBIT 2f - ESTIMATED TRANSITION COSTS 20
EXHIBIT 2g - ESTIMATED NET INCREASE IN TRANSPORTATION &
MOTORIZED EQUIPMENT EXPENSE 21
EXHIBIT 2h - ESTIMATED SHAREHOLDER COSTS 22
EXHIBIT 2i - ESTIMATED POSTAGE & GENERAL SERVICES 23
EXHIBIT 2j - ESTIMATED GAS TRANSMISSION PIPELINE IMPACT 24
EXHIBIT 3 - RATE BASE 25
EXHIBIT 4 - STAND-ALONE COST OF CAPITAL 26
EXHIBIT 5 - ORGANIZATION CHART 27
EXHIBIT 6 - SALARIES & WAGES SUMMARY 28
EXHIBIT 7 - COMPARABLE LOCAL DISTRIBUTION COMPANIES 29
EXHIBIT 8 - ESTIMATED SALARIES 30
EXHIBIT 9 - DPL-ELECTRIC RATE BASE & RATE OF RETURN 31
EXHIBIT 10 - DPL-ELECTRIC ESTIMATED ADDITIONAL
OPERATING EXPENSES 32
SECTION I. EXECUTIVE SUMMARY AND CONCLUSIONS
The management and staff of DELMARVA POWER & LIGHT COMPANY (DPL) have conducted
this "Analysis of the Economic Impact of a Divestiture of the Gas Business of
DPL" (Study) to determine the effects of spinning off the Company's natural gas
assets and business into a separate and distinct entity. The Study analyzes the
additional costs (from lost economies) that would be necessary to operate an
independent gas company (called NEWGAS-CO. for the purpose of this Study), as
well as any potential benefits that would accrue. All estimates for NEWGAS-CO.
are based on DPL's operating experience. Where possible, estimates of the
operating costs were compared to similar investor-owned gas distribution
companies in the region.
The study evaluates the increased costs or "lost economies" associated with
divestiture of this business from two perspectives--shareholders and customers.
The effects on shareholders were calculated using the increased costs caused by
divestiture assuming no regulatory rate relief. The effects on customers were
calculated assuming recovery of additional costs through rate increases.
SHAREHOLDERS
The projected effects on the shareholders of the lost economies resulting from
the spin-off of DPL's gas business into NEWGAS-CO. are shown in Table I-1.
TABLE I-1
ANNUAL EFFECT OF LOST ECONOMIES ON SHAREHOLDERS
($000's)
NEWGAS-CO.
LOST ECONOMIES $14,728
LOST ECONOMIES AS A PERCENT OF:
TOTAL GAS OPERATING REVENUE 14.07%
TOTAL GAS OPERATING REVENUE DEDUCTIONS 17.40%
GROSS GAS INCOME 73.42%
NET GAS INCOME 105.88%
IN THE ABSENCE OF RATE RELIEF:
ESTIMATED RETURN ON RATE BASE 3.35%
ESTIMATED RETURN ON NET PLANT 3.39%
In Table I-1, Lost Economies represents the increased costs, excluding income
taxes, to operate as a stand-alone company. Total Gas Operating Revenue is the
sum of all gas revenues for the 12 months ended September 30, 1996. Total Gas
Operating Revenue Deductions include all purchased gas and gas withdrawn from
storage, operation and maintenance expenses, depreciation and taxes other than
income taxes. Gross Gas Income is the difference between Total Gas Operating
Revenue and Total Gas Operating Revenue Deductions. Net Gas Income is Gross Gas
Income minus Income Taxes. (See SECTION IV. NEWGAS-CO. Exhibit 1 for detailed
information).
GAS CUSTOMERS
The projected effect on gas customers, assuming NEWGAS-CO. is allowed rate
increases to recover lost economies and applicable income taxes, is shown in
Table I-2.
TABLE I-2
ANNUAL EFFECT OF LOST ECONOMIES ON GAS CUSTOMERS
($000's)
RATE REVENUE NEW GAS CO.
PRE SPIN-OFF $104,687
POST SPIN-OFF $120,180
DOLLAR INCREASE $ 15,493
PERCENT INCREASE 14.80%
(See Section IV. NEWGAS-CO. Exhibit 1 for detailed information.)
ELECTRIC CUSTOMERS
In addition to the forgoing impacts on gas business, divesting the gas business
would result in a rate increase of 0.79% for DPL electric customers. This impact
is primarily due to the company transferring all common property into the
electric rate base, requiring a rate increase to maintain the existing rate of
return (see Section III.C.).
CONCLUSIONS
The economies that DPL realizes from combined electric and gas operations
provide significant benefits to customers and shareholders. This Study
demonstrates that spinning off the gas business into a separate entity would be
inefficient due to lost economies, which would be passed on to gas customers,
electric customers and/or to shareholders. Without increased rates, the
immediate negative effect on shareholders' earnings would be substantial, making
ownership of shares in NEWGAS-CO. unattractive.
The pass-through of increased costs to gas customers would cause significant
increases in gas rates, with no increase in the level or quality of service. The
rate increase required to operate NEWGAS-CO. is estimated at $15.5M (Table I-2).
Such an increase would make NEWGAS-CO. less competitive at a time when
competition in the energy industry is rapidly increasing due to Federal Energy
Regulatory Commission (FERC) Order No.636 and other FERC and state regulatory
initiatives. In addition, NEWGAS-CO. would receive none of the $16.3M in
benefits expected to accrue to the existing gas business over a ten year period
from the proposed merger of DPL and Atlantic Energy.
It is estimated there would also be increased costs for electric customers from
the divestiture of the gas business. The transfer of common property to electric
offsets minimal savings from personal reductions. Reallocation of fixed
operating expenses for data processing and facility costs would outweigh
variable cost reductions if a spin-off occurred. These increased costs to
electric customers would cause increases in electric rates with no increase in
the level or quality of service.
SECTION II. GENERAL STUDY ASSUMPTIONS
The assumptions, information and data utilized for this Study are based on the
industry expertise and experience of the management and staff of DPL. Below are
the major assumptions employed for this Study.
1. ORGANIZATION: The NEWGAS-CO. would operate as an independent,
stand-alone, publicly held, regulated company. It would have all the
necessary management personnel, along with facilities, equipment,
materials, supplies, etc., required to operate as a stand-alone
company.
2. SYSTEM OPERATION & MAINTENANCE: The gas and electric systems would
continue to be operated and administered in the existing manner to
insure safe and reliable service. In addition, current system renewal
programs would be continued.
3. STAFFING: A sufficient number of employees would be included within
each spun-off company to ensure that customers receive the present
level and quality of service.
4. LABOR COSTS: Labor cost estimates were based upon assessments of work
assignments, using DPL wage structure. Executive salary estimates were
based on industry averages and DPL wage structure.
5. NON-LABOR COSTS: These costs were estimated based upon actual costs
incurred by DPL for the gas business assuming the customers of
NEWGAS-CO. would receive existing levels and quality of service.
6. COST PASS-THROUGH: Full pass-through to gas and electric customers of
increased costs due to lost economies would be allowed in formal rate
proceedings.
7. SPECIFIC LABOR ASSUMPTIONS:
a) Organization size and spans of control were estimated using
existing DPL structure, adjusted downward to recognize the
broader functional responsibilities that would exist in smaller
companies.
b) Pensions and benefits were estimated as a percent of direct labor
cost. The net costs include a credit from the actual return on
the pension plan's assets. A negotiated allocation of the pension
assets, including overfunding, would occur as part of the
spin-off. While it is not expected that net overfunding would
continue in NEWGAS-CO. and, thus, new pension costs could rise,
no attempt was made to estimate an increase.
c) Employee benefits would be similar to the existing combined
utility.
d) Negotiation of new union contracts are included in transition
costs.
8. CAPITAL EXPENDITURE AND COST ASSUMPTIONS:
a) The accounting for direct and indirect capital expenditures would
remain the same as that currently used in the combined utility.
b) The actual capital costs for the divested company and DPL may be
considerably higher than those of the combined utility. Since gas
purchases are highly seasonal, the stand-alone gas company would
experience greater volatility in cash positions. At the same
time, the book values of the assets of this stand alone gas
company would be much smaller than those of the combined utility
predecessor. As a result, the new company would be perceived as
riskier and would be subject to higher borrowing rates. Because
of the constraints of the mortgage indentures, the debt
associated with the spun-off facilities would have to be
refinanced at today's rates.
9. TRANSITION COST ASSUMPTIONS: Costs such as the legal, investment
banking, filing and printing fees associated with the public spin-off
of stock, costs associated with new indenture agreements, negotiation
of new service and union contracts, and costs to establish business
facilities and processes would be incurred and amortized
appropriately. Costs were based on an average of actual corporate
spin-offs.
10. TRANSACTIONS BETWEEN COMPANIES: All transactions and transfers between
NEWGAS-CO. and DPL would be arms-length transactions based upon fair
market values. Expected transactions include joint trench utility
installation contracts and joint venture pipeline operation,
maintenance and capacity agreements.
11. OTHER ASSUMPTIONS:
a) Facility costs would include separate headquarters, storerooms,
and office space for employees currently using facilities shared
by the electric and gas business.
b) To facilitate the assessment of financial effects, it was assumed
that the costs for outsourcing and performing work in-house would
be comparable.
c) Information Technology costs were estimated based on an industry
survey.
d) Additional equipment (e.g., vehicles) would be leased under an
operating lease.
e) External auditing costs were estimated based on an industry
survey and DPL's budgeted costs.
f) Insurance costs were estimates based on protecting a gas utility
against losses and damages to leased properties used in its
operations, as well as injuries and damage claims. Estimates from
similar gas divestiture studies were reviewed.
g) Regulatory commission expenses would be similar to those
currently incurred in connection with formal cases before
regulatory commissions involving gas business.
h) Estimated costs for the probable clean-up of environmental sites
(coal gasification plants) have been accrued and would be the
same whether or not the gas business is spun off. For this
reason, such costs were not considered in this Study.
i) Current growth projections for both gas and electric business
were assumed to be unaffected by the divestiture.
NOTE:TAX EXEMPT BONDS: The combined utility, DPL, has traditionally used tax
exempt financing for gas projects. Currently, $159 million of tax exempt
bonds issued to finance gas projects are outstanding and $93M of the bonds
are non-callable. In the event that DPL was to spin off its gas business,
DPL may be required to defease $93M of non-callable bonds. The defeased
bonds would represent 61% of gas rate base. DPL believes the Financing
Agreements of the $93M non-callable bonds would require that the impact of
the defeasance be borne by DPL electric.The remaining $66M tax-exempt bonds
would be immediately called. The impact of these additional costs have not
been quantified in this study.
SECTION III.A. NEWGAS-CO. OVERVIEW
Spinning off DPL's gas business into a separate stand-alone company (NEWGAS-CO.)
would result in the following:
o NEWGAS-CO. would need to establish service functions duplicating those
at DPL, such as treasury, financial planning, accounting, tax planning
and compliance, rates, risk management, employee benefits, marketing,
legal, customer service, regulatory, public affairs, communications, .
information technology, building services, and human resources.
o Annual operating revenue deductions, exclusive of income taxes, for
NEWGAS-CO. would be about 17.40% ($14.7M ) greater than DPL's gas
operating revenue deductions. (SECTION IV., NEWGAS-CO.,Exhibit 1).
o NEWGAS-CO.'s customers would experience a rate increase of about
14.80% ($15.5M) in order to provide a 9.36% rate of return for
stockholders (SECTION IV., NEWGAS-CO., Exhibit 1).
o NEWGAS-CO. would be at a competitive disadvantage because of higher
operating expenses.
o There would be no substantial benefits for gas or electric customers
or stockholders.
SECTION III.B. NEWGAS-CO. ANALYSIS
The DPL gas distribution system serves approximately 100,000 customers (as of
September 30, 1996) over a 275 square mile area in Northern Delaware. There are
1,550 miles of mains and 101,094 service lines in the system. Natural gas
revenue for 12 months ended September 30, 1996, was $105.7M on system throughput
of 22.4 billion cubic feet of gas.
DPL operates as a tightly integrated company with many employees supporting both
gas and electric operations. Of DPL's 2,521 employees (as of September 30,
1996), only 153 devote 100% of their time to gas operations. Shared operations
include customer service personnel who deal with service requests for gas and
electric customers, and meter readers who read both the electric and gas meters.
Additionally, DPL provides the gas business' required services in the areas of
treasury, financial planning, accounting, tax planning and compliance, rates,
risk management, employee benefits, marketing, legal, regulatory, public
affairs, communications, information technology, building services, and human
resources. Through approved accounting mechanisms, these costs are shared by gas
and electric operations. The shared gas/electric responsibilities of many of the
DPL employees have enabled DPL to provide quality service at a low cost.
ORGANIZATION STRUCTURE AND STAFFING IMPACT
The DPL organization as of September 30, 1996, was used as a pattern for
developing the NEWGAS-CO. organization structure. See SECTION IV., NEWGAS-CO.,
Exhibit 5 for the proposed organization. Divesting the gas business would
eliminate the effective use of shared staff to the detriment of both the gas and
electric business. To support a stand-alone corporate structure, 248 full-time
employees would be required to perform the previously shared duties. DPL could
expect minimal reductions in labor-related expenses as a result of a gas
divestiture. SECTION IV., NEWGAS-CO., Exhibit 6 shows the proposed staffing,
salaries, and wages summary, while Exhibit 2d shows that NEWGAS-CO. would incur
an estimated net annual labor increase, including benefits, of $5.2M or about a
30% increase. Exhibit 7 shows that with this proposed staffing, NEWGAS-CO.
compares favorably with other gas utilities in the number of customers per
employee. The following comments demonstrate some of the rationale behind
additional staffing.
Most DPL gas customers receive one bill for both gas and electric service
and pay with one check. When Customer Accounting and district office
personnel process the checks, automated equipment posts both electric and
gas payments to customers' accounts. NEWGAS-CO. would have to hire staff to
handle gas billing and payments that are now handled at essentially no
additional cost by DPL. Spinning off the gas business would only minimally
reduce the workload on DPL's cash processing personnel since most gas
customers, except those in the City of Newark and the Town of New Castle,
also have electric service and would still send a check monthly.
DPL's meter readers read gas and electric meters in the same routes.
NEWGAS-CO. would have to hire meter readers to follow similar routes to
read the gas meters.
Spinning off the gas business would not substantially reduce the number of
meter readers needed by DPL since electric routes would remain essentially
the same.
DPL's Finance, Accounting, and Corporate Services personnel maintain the
books of the Company and arrange for insurance. They arrange for long-term
financing and borrow short-term funds for operations. They oversee the
maintenance of stockholder records and perform various investor services.
NEWGAS-CO. would require personnel to provide the same services. Spinning
off the gas business would not provide any measurable savings for DPL in
the finance and accounting area, since all the existing books and records
of the Company would remain essentially unchanged, insurance needs would be
similar, and staff time devoted to financing activities would not be
significantly reduced.
DPL's Human Resources Department administers benefit and salary plans.
NEWGAS-CO. would need to hire personnel to perform the same duties.
Spinning off the gas business would not provide substantial savings to DPL
because each of DPL's existing benefit and salary plans, and the associated
reporting requirements, would remain.
DPL's Procurement & Materials Management and Vehicle Resource Management
Departments provide materials, supplies, transportation equipment, etc. to
operating divisions. NEWGAS-CO. would need to hire personnel to perform the
same duties. Spinning off the gas business would reduce the number of
purchase orders handled by DPL as well as the amount of material handled
and storage costs. However, the quantities involved are a small percentage
of the total; so few, if any, staffing reductions could be effected and no
facilities could be eliminated, making the actual savings for DPL minimal.
DPL's Legal, Pricing and Regulation, and Claims Departments provide legal,
regulatory, and claims services for DPL operating divisions. NEWGAS-CO.
would need to hire personnel to perform the same duties. Since many legal
issues are not divided into gas and electric considerations, the amount of
work performed by DPL's legal department would not decrease significantly,
and there would be no staffing reductions.
INDEPENDENT ACCOUNTANT IMPACT
DPL hires independent accountants to audit the financial statements of the
Company. NEWGAS-CO. would need to hire independent accountants to perform the
same duties. DPL would not achieve any savings, since the existing level of work
for the independent accountants would remain the same.
INFORMATION TECHNOLOGY IMPACT
DPL provides extensive information technology resources for its day-to-day
operations. These resources include acquiring, developing, managing, and
maintaining all PC and mainframe-based systems. To maintain the level of service
needed for hardware, software, and telecommunications, NEWGAS-CO. costs are
based on outsourcing to a third party the information technology function.
NEWGAS-CO. will maintain a staff of five employees to oversee various
outstanding contracts. See Section IV., NEWGAS-CO., Exhibit 2b, which identifies
a net increase in actual costs for information technology of $6.4M. Transition
costs include $2M for data conversion. These costs were based on a 1996 group
survey.
Divesting the gas business would eliminate opportunities for sharing information
technology resources to the detriment of both the gas and electric operations.
INSURANCE COSTS
DPL obtains property, liability, directors and officers, workers compensation,
and other insurance. NEWGAS-CO. would require similar policies, at similar
costs. See SECTION IV., NEW GAS-CO., Exhibit 2c, which shows an estimated
increase in insurance costs of $118K to NEWGAS-CO.. Since all coverage would
remain in effect, DPL would experience an increase of $122K for
insurance,representing the portion of premiums currently allocated to gas
operating expenses.
OFFICE AND CREW FACILITIES COSTS
DPL maintains combined electric and gas office and crew facilities at several
locations. NEWGAS-CO. would need facilities for office, crew, and service
personnel. See Section IV., NEW GAS-CO., Exhibit 2e, which identifies $621K in
additional office and crew facilities costs. Since DPL would still operate the
electric system, the existing office, crew, and service facilities would still
remain at each location, but the costs would no longer be shared by NEWGAS-CO.
Transition costs include $1.2M for the initial fit-out and moving costs
associated with providing equivalent facilities for NEWGAS-CO.
TRANSPORTATION AND MOTORIZED EQUIPMENT COSTS
DPL maintains transportation and motorized equipment used by both gas and
electric crew and support personnel. NEWGAS-CO. would need to obtain similar
equipment for gas operations. NEWGAS-CO.'s additional transportation cost would
be about $140K as identified in SECTION IV., NEWGAS-CO., Exhibit 2g. Since
vehicle needs correlate closely with personnel needs, it is estimated that the
reduction in equipment to be achieved by DPL would equal the additional
equipment required by NEWGAS-CO., except for vehicles used by meter readers to
read both electric and gas meters. DPL would still need about the same number of
meter reader vehicles currently used in the combination gas and electric
districts, but the costs currently allocated to the gas business would be
absorbed by the electric customers, resulting in increased annual meter reading
vehicle costs to DPL of about $14K.
TRANSITION COSTS
The divestiture of the gas business of DPL and the creation of a stand-alone gas
company would be a complex legal and financial transaction that would involve
substantial transition costs. These costs would include legal and financial
advisory fees, and the services of independent accountants, actuaries and other
consultants. Real estate services would be needed to procure facilities. Several
hundred personnel would have to be hired and trained. New services and union
contracts would need to be negotiated. Benefit plans would need to be
established. The estimated transition costs of $11M for NEWGAS-Co. were
developed by calculating the average of such costs incurred in several other
publicly reported business spin-offs. These costs would be amortized over a
period of ten years. See SECTION IV., NEWGAS-CO., Exhibit 2f.
COST OF CAPITAL
The effective cost of capital for the stand-alone gas business was based upon
capitalization ratios of DPL's capital structure as of September 30, 1996, and
estimated current costs of debt and equity, which average about 9.36%. The
annual increase in costs due to capitalizing NEWGAS-CO. at current market rates
is $477K. See SECTION IV., NEWGAS-CO., Exhibit 4 for detailed information.
SHAREHOLDER COSTS
DPL incurs costs to hold annual Shareholders' Meeting, compensate the transfer
agent for common and preferred stock, and provide shareholder services.
NEWGAS-CO. would have to incur similar costs. See Section IV., NEWGAS-CO.,
Exhibit 2h for detailed information.
POSTAGE AND GENERAL SERVICES
DPL allocates costs for postage and general services (including copier costs) to
the gas business. The postage costs are shared for joint bills in which the
customer is both a gas and electric customer. Both NEWGAS-CO. and DPL-Electric
would have to bear the entire cost. NEWGAS-CO. would incur costs for general
services and copier leases. Only the variable costs related to the copiers would
be eliminated for DPL-Electric. The shared general services costs are mostly
fixed and would remain with DPL-Electric. See SECTION IV., NEWGAS-CO., Exhibit
2i for detailed information.
GAS TRANSMISSION PIPELINE IMPACT
Currently, DPL Gas and Electric production own and operate a seven mile natural
gas transmission pipeline in Delaware. The costs would continue to be shared,
but a formal joint venture agreement would be put in place to replace the
current operating and accounting procedures. DPL Electric production also
currently owns a four mile natural gas transmission pipeline in Pennsylvania
from which DPL Gas purchases annual capacity. Since this pipeline is under FERC
jurisdiction, the existing approvals would require updating and modification.
The total cost of legal agreements and FERC filings to accomplish these two
changes are estimated at $100K and are included in the transition cost estimate.
If the Pennsylvania pipeline was also set up as a joint venture, then NEWGAS-CO.
could expect to incur capital costs of approximately $656K. This would reduce
annual gas transportation and GCR costs by $150K (See Exhibit 2j).
CONCLUSION
The Study concludes that a separate gas distribution company would require 401
full-time employees, an increase of approximately 30% in salary expense. Based
upon the assumptions set forth in SECTION II and the staffing requirements of
the organization structure, increased estimated annual costs (excluding Federal
and State income taxes) for NEWGAS-CO. are projected to be $14.7M. The exhibits
(SECTION IV.) that follow show the economic effects of operation of DPL's gas
business as a separate entity.
SECTION III.C. DPL-ELECTRIC OVERVIEW
Spinning off DPL's gas business into a separate stand-alone company (NEWGAS-CO.)
would have the following effect on DPL-Electric.
o All common property would be transferred into the electric rate base.
o Annual operating revenue deductions, exclusive of income taxes, for
DPL-ELECTRIC would be about .033% ($2.4M) greater than DPL's electric
operating revenue deductions when a combined utility (SECTION IV.,
NEWGAS-CO., Exhibit 1).
o The DPL-Electric customers would experience a total rate increase of
about 0.79% ($7.5M) in order to provide a 9.35% rate of return for
stockholders (SECTION IV., NEWGAS-CO., Exhibit 1).
o Estimated additional operating expenses for fixed costs related to
information technology, facility costs, and postage would remain with
DPL-Electric following the spin-off of the gas business (SECTION IV.,
NEWGAS-CO., Exhibit 10).
o The impact to DPL-Electric of the number of shared employees who
perform duties for gas and electric was diminimus and is not reflected
in this Study.
o There would be no substantial benefits for gas or electric customers
or stockholders.
CONCLUSION
The Study concludes that separating the combined electric and gas utility would
increase the electric customer rates and provide no net benefit to shareholders.
This impact is primarily due to the transfer of all common property to the
electric rate base. Other operating expenses of approximately $2.4M (See SECTION
IV., NEWGAS-CO., Exhibit 10) are fixed expenses that would remain with
DPL-Electric following the spin-off of the gas business. By divesting the gas
business, a rate increase of 0.79% would occur for electric customers.
SECTION IV. NEWGAS-CO. SCHEDULE OF EXHIBITS
EXHIBIT NO. EXHIBIT TITLE
1 Income Statement, Proforma Adjustments
& Revenue Requirement
2 Estimated Additional Operating Expenses
2a Estimated External Audit Fees Based on Survey Data
2b Estimated Information Technology Costs
2c Estimated Increased Cost of Insurance Coverage
2d Estimated Net Labor Increase, Including Benefits
2e Estimated Operating Lease Facilities and
Furniture Costs
2f Estimated Transition Costs
2g Estimated Net Increase in Transportation &
Motorized Equipment Expense
2h Estimated Shareholder Costs
2i Postage and General Services
2j Estimated Gas Transmission Pipeline Impact
3 Rate Base
4 Cost of Capital
5 Corporate Structure
6 Salaries and Wages Summary
7 Comparable Local Distribution Companies
(Customers Per Employee Ratios)
8 Estimated Executive Salaries
9 DPL's Electric Rate Base & Rate of Return
10 DPL-Electric's Estimated Additional Operating
Expenses
NEWGAS-CO. Exhibit 1
NEWGAS-CO. INCOME STATEMENT
PROFORMA ADJUSTMENTS & REVENUE REQUIREMENT
(In Thousands of Dollars)
<TABLE>
<S> <C> <C> <C> <C>
Existing
DPL Gas
Company Revenue
Year Ending Proforma Proformed Requirement
9/30/96 Adjustments (1) NEWGAS-CO. Increase (2)
Operating Revenue:
Sales Revenue $ 98,434 $ 98,434 $ 113,927
Other Revenue $ 6,253 $ 6,253 $ 6,253
Total Operating Revenue $ 104,687 $ 104,687 $ 120,180
Operating Revenue Deductions:
Gas Supply $ 56,524 $ 56,524 $ 56,524
O&M $ 18,153 $ 14,705 $ 32,858 $ 32,858
Depreciation $ 7,752 $ 23 $ 7,775 $ 7,775
Other Income & Deductions ($201) ($201) ($201)
Taxes Other Than Income $ 2,400 $ 2,400 $ 2,400
Total Operating Revenue Deductions $ 84,628 $ 14,728 $ 99,356 $ 99,356
Gross Gas Income $ 20,059 $ (14,728) $ 5,331 $ 20,824
Federal & State Income Taxes (3) $ 6,149 $ (5,988) $ 161 $ 6,364
Net Gas Income $ 13,910 $ (8,740) $ 5,170 $ 14,460
Rate Base (4) $ 161,209 $ (6,717) $ 154,492 $ 154,492(5)
Indicated Rate of Return 8.63% 3.35% 9.36%
</TABLE>
(1) See Exhibit 2 for a detailed summary of proforma adjustments
(2) An increase of $15.5M or 14.80% in Sales Revenue is required to achieve
a rate of return of 9.36%. For the purposes of this Study, gross
receipts taxes were not considered since both the resulting revenue and
taxes (revenue deduction) would nullify any impact from this
calculation.
(3) DPL's composite Federal & State Income Taxes is 40.66%. This composite
tax rate was used to calculate taxes for the adjustments and to develop
the Proformed NEWGAS-CO. and Revenue Requirement increase columns.
(4) See Exhibit 3.
(5) The effective rate of return is assumed to be the weighted costs of
capital per Exhibit 4.
NEWGAS-CO. Exhibit 2
NEWGAS-CO.
ESTIMATED ADDITIONAL OPERATING EXPENSES
PROFORMA ADJUSTMENTS
(In Thousands of Dollars)
Exhibit
Reference
Number Amount
External Auditing Costs 2a $ 78
Information Technology Costs (Outsourced) 2b $ 6,399
Insurance Premiums 2c $ 118
Labor & Benefits 2d $ 5,162
Leased Facilities/Furniture 2e $ 621
Transition Costs (Amortized) 2f $ 1,103
Transportation & Work Equipment 2g $ 141
Shareholder Costs 2h $ 533
Postage and General Services 2i $ 223
Gas Transmission Pipeline Impact 2j $ (127)
Cost of Capital 4 $ 477
TOTAL ADDITIONAL OPERATING EXPENSES $14,728
NEWGAS-CO. Exhibit 2a
NEWGAS-CO.
ESTIMATED EXTERNAL AUDIT FEES
PROFORMA ADJUSTMENT
Amount
NEWGAS-CO.:
Total Estimated Annual Audit Fees for External Audit $63,303
Total Estimated Annual Audit Fees for Pension Plans $32,000
-------
Total External Audit Fees $95,303
Less: External Audit Fees Allocated to Gas Operations in 1996 $16,896
Net Estimated Annual Audit Fees Increase for NEWGAS-CO. $78,407
=======
SOURCE:
American Gas Association/Edison Electric Institute External Audit
Fees - October, 1995 and DPL Audit Fees
NEWGAS-CO. Exhibit 2b
NEWGAS-CO.
ESTIMATED INFORMATION TECHNOLOGY COSTS
PROFORMA ADJUSTMENT
(In Thousands of Dollars)
Estimated Information Technology Outsource Costs $8,000
These costs include the following software and hardware:
General Ledger/Capital Projects/Asset Management/Accounts Payable
Payroll Distribution
Investor Services
Customer Information System (CIS)
Computer Telephone Integration System (CTI)
Procurement and Materials Management System
ICES/Work Management System
AM/FM (GRIDS and gas facilities database)
Pension Manager
Payroll/Human Resources
Time Reporting
Damage Tracking
Resource Management/Dispatch System
Local Area Network and Personal Computers
Vehicle Resource Management System
Less: Information Technology Expenses Allocated to Gas
Operation - 1996 $1,601
Net Increase in NEWGAS-CO. Cost for Information Technology $6,399
SOURCE
1995/1996 Gartner Group IT Budgets and Practices Survey
and DPL Accounting and Information Technology Departments
NEWGAS-CO. Exhibit 2c
NEWGAS-CO.
ESTIMATED INCREASED COST OF INSURANCE COVERAGE
PROFORMA ADJUSTMENT
<TABLE>
<S> <C> <C> <C> <C>
Estimated Net Increase
Limits Stand Alone to
Coverage (Millions) Deductible Premium Cost NEWGAS-CO.
Property $ 5 $250,000 $ 21,000
General Liability $60 $250,000 $213,000
Auto Liability $ 1 - $ 50,000
Directors & Officers Liability $10 $250,000 $ 75,000
Workers Compensation Statutory $350,000 $ 61,000
Fiduciary Liability $ 5 $ 5,000 $ 10,000
Crime (Fidelity) $ 5 $ 5,000 $ 10,000
----------
Total NEWGAS-CO. Premium $440,000
Less: Insurance Cost Allocated to NEWGAS-CO. $322,100
----------
Net Increase in Insurance Costs for NEWGAS-CO. $117,900
========
</TABLE>
Source: DPL's Insurance Department and Insurance Broker reviewed estimated
insurance costs for two gas retention studies. One in particular,
NEWGAS-UE (Union Electric) represents the limits, deductibles, and
premiums most similar to NEWGAS-CO.
NEWGAS-CO. Exhibit 2d
NEWGAS-CO.
ESTIMATED NET LABOR INCREASE, INCLUDING BENEFITS
PROFORMA ADJUSTMENT
(In Thousands of Dollars)
<TABLE>
<S> <C> <C> <C>
Total Estimated Salaries and Wages for NEWGAS-CO. (Exhibit 6) $20,503
Less: Amount Capitalized (average 21.7%) - (1) $ 4,446
Total Estimated NEWGAS-CO. Salaries & Wages Charged to O&M $16,057
Less: Year ending 9/30/96 DPL Gas Salaries & Wages Charged to O&M $12,388
Increase in NEWGAS-CO. Salaries & Wages Charged to O&M $3,669
Benefits 40.69% - (2) $1,493
NEWGAS-CO. Net Labor Increase, Including Benefits $5,162
======
</TABLE>
(1) Amount of labor allocated to capital based on 1995 DPL Percentage of
Wages & Salaries Capitalized Study. Field capitalized salaries - 26.88%
and Administrative capitalized salaries - 17.07%.
(2) Benefit costs were estimated based upon the 1995 actual cost (as a
percentage of payroll). Benefits include: Pension, Post Employment
Benefits, Life Insurance, Medical, Dental, Savings & Thrift, Workers
Compensation, FICA, Unemployment Taxes, and other.
NEWGAS-CO. Exhibit 2e
NEWGAS-CO.
ESTIMATED OPERATING LEASE FACILITIES AND FURNITURE COSTS
PROFORMA ADJUSTMENT
Office Space Calculation
<TABLE>
<S> <C> <C> <C> <C>
Management Office Space
& Staff Needs in Cost Per Total
Employee Square Feet Square Foot Office Space
Count (1) (2) Lease
General Office 274 68,500 $16.83 $1,152,855
Shop and Stores Area 127 34,870 $4.30 $ 149,941
Total 401 $1,302,796
Less: Current allocated costs for gas facilities $ 681,431
Net NEWGAS-CO. Facilities Cost: $ 621,365
</TABLE>
Source: Estimated costs provided by DPL Building Services Department
(1) An average of 250 square feet per employee was used based on Company
experience.
(2) Cost per square foot was provided by Jackson Cross International
Realtors.
NEWGAS-CO. Exhibit 2f
NEWGAS-CO.
ESTIMATED TRANSITION COSTS
PROFORMA ADJUSTMENT
Transition costs required to establish a new corporation would include the
following:
Legal fees
Financial advisory fees
Consulting services of independent accountants, actuaries, and others
Real estate services for acquisitions
Hiring and training costs to staff newly created positions
Benefit plans established
Data conversion
Transition costs for NEWGAS-CO. were established based upon an average of the
following published transition costs for other corporate spin-offs.
Transition
Original Corporation Spin-Off Company Costs (000)
Baxter International Caremark $13,300
Adolph Coors ACX Technologies $ 7,200
Dial Corporation GFC Financial $13,000
Union Carbide Praxair $11,000
Ryder Avial $ 9,000
Price Costco Price Enterprises $15,250
Humana Galen $15,000
Honeywell Aliant $ 4,500
Average Transition Costs of the Above Companies $11,031
Annual amortization of Transition Costs for NEWGAS-CO.(10%) $ 1,103
Source: Transition costs reported in SEC Form 10-K filings
NEWGAS-CO. Exhibit 2g
NEWGAS-CO.
ESTIMATED NET INCREASE IN TRANSPORTATION & MOTORIZED EQUIPMENT EXPENSE
PROFORMA ADJUSTMENT
<TABLE>
<S> <C> <C>
EST. NO. OF EST. ANNUAL
VEHICLE SUMMARY VEHICLES COST
Executive 1 $ 5,500
VP Distribution, Operations, & Construction 1 $ 5,500
Construction & Maintenance 92 $1,154,268
Operations, Planning & Procurement 11 $ 60,204
Gas Engineering 18 $ 91,368
Gas Meter 3 $ 14,544
VP Marketing & Customer Service 1 $ 5,500
Gas Meter Reading 9 $ 37,368
Customer Relations 1 $ 1,245
Media Relations/Comm. Relations/Public Affairs 1 $ 1,245
Marketing 1 $ 4,152
Field Customer Service 51 $ 305,172
VP Business Support Services 1 $ 5,500
VP Human Resources 1 $ 5,500
Safety 2 $ 8,304
Training 3 $ 3,735
Benefits & Employee Relations 1 $ 1,245
VP/CFO 1 $ 5,500
Claims 2 $ 2,490
Controller 1 $ 5,500
VP Legal, Regulatory, Environmental Affairs, & Corp. Plng. 1 $ 5,500
Environmental Affairs 2 $ 2,490
Corporate Secretary 1 $ 5,500
Security 2 $ 8,304
--------------------------
NEWGAS-CO. 208 $1,745,634
Less: Amount charged to Gas Business for 12 months ended 9/30/96 $1,418,619
Net increase in transportation & equipment expenses for NEWGAS-CO. $ 327,015
Less amount Capitalized (56.71%) $ (186,399)
NEWGAS-CO. Increase to O&M Costs $ 140,616
</TABLE>
Source: Estimated costs based on DPL Vehicle Resource Management's assessment of
transportation & equipment needs and operating & maintenance experience.
NEWGAS-CO. Exhibit 2h
NEWGAS-CO.
ESTIMATED SHAREHOLDER COSTS
PROFORMA ADJUSTMENT
Annual Meeting $225,000
Transfer Agent $317,000
Shareholders' Services $ 37,000
--------
TOTAL NEWGAS-CO. $579,000
Less Amount Allocated to Gas Business $ 46,320
Net Increase to NEWGAS-CO. $532,680
========
SOURCE
Estimated costs provided by DPL Financial Services Department
NEWGAS-CO. Exhibit 2j
NEWGAS-CO.
ESTIMATED GAS TRANSMISSION PIPELINE IMPACT
Net Operating Expenses
Gas Transportation/GR Costs $(150,000)
Depreciation Expense $ 23,430
Net decrease to Operating Expenses $(126,570)
NEWGAS-CO. would also have a capital expenditure of approximatey $656,000.
SOURCE
Estimated information provided by DPL Plant Accounting Department and Gas
Division
NEWGAS-CO. Exhibit 2i
NEWGAS-CO.
ESTIMATED POSTAGE & GENERAL SERVICES
PROFORMA ADJUSTMENT
Postage $281,642
General Services (1) $176,899
--------
TOTAL NEWGAS-CO. $458,541
Less Amount Allocated to Gas Business $235,189
New Increase to NEWGAS-CO. $223,352
========
SOURCE
Estimated costs provided by DPL General Services Department
(1) Costs include expenses such as reproduction, printing, internal
mail distribution, and external non-billing mail.
NEWGAS-CO. Exhibit 3
NEWGAS-CO.
RATE BASE
(In Thousands of Dollars)
Existing
DPL Gas
Company Eliminations
Year Ending for Common Proforma
Description 9/30/96 Plant (1) NEWGAS - DPL
Gas Plant In Service $220,855 $ (8,501) $ 212,354
Depreciation Reserve $ 68,467 $ (3,636) $ 64,831
Net Plant $152,388 $ (4,865) $ 147,523
Construction Work In Progress $ 8,381 $ (1,828) $ 6,553
Fuel Inventory And Materials
& Supplies $ 6,781 $ 6,781
Working Funds $ 24 $ (24) $ -
Prepayments $ 4,544 $ 4,544
Deferred Income Tax $ (7,488) $ (7,488)
Investment Tax Credit $ (1,908) $ (1,908)
Customer Advances & Deposits $ (1,513) $ (1,513)
Net Rate Base $161,209 $ (6,717) $ 154,492
(1) Common Plant consists mainly of Buildings, Office Furniture,
Communications Equipment, and Land. Under a divestiture, all common
properties would go with the Electric Division.
SOURCE
Information provided by DPL Pricing & Regulation Department
NEWGAS-CO. Exhibit 4
NEWGAS-CO.
STAND-ALONE COST OF CAPITAL
The provisions of the indentures of DPL would require the recapitalization of
NEWGAS-CO. at the prevailing market rates at the time of the spin-off. This
study assumes that NEWGAS-CO. would have access to capital at the same cost as
DPL.1 In addition, the capital structure of DPL was used to approximate the
capital structure of NEWGAS-CO. As of September 30,1996, DPL was capitalized as
follows.
Ratio Cost Weighted Cost of Capital
Long Term Debt 45.28% 7.37% 3.34%
Preferred Stock 8.67% 5.85% 0.51%
Common Equity 46.05% 11.50% 5.30%
-------
Total 100.00% 9.15%
DPL's long term debt consists of first mortgage bonds, medium term notes, and
tax exempt facilities bonds.2 It is assumed that NEWGAS-CO. will issue medium
term notes for the long term portion of its capitalization. The current market
rate for thirty year medium term notes is 7.500%.3 The effective cost of medium
term notes, including issuance costs of approximately 1% of proceeds, is 7.58%.
The current market rate for utility perpetual preferred stock is 7.125%.3 The
effective cost of preferred stock, including issuance costs of approximately
1.5% of proceeds, is 7.23%.
The cost of common equity is 11.50% which was established by the Delaware Public
Service Commission on October 18, 1994, in Docket Number 94-22. It is assumed
that NEWGAS-CO. will issue the common equity to the existing shareholders of
DPL; therefore, the sale of common equity securities will not be required.
Based on the rates stated above, the resulting cost of capital is as follows.
Ratio Cost Weighted Cost of Capital
Long Term Debt 45.28% 7.58% 3.43%
Preferred Stock 8.67% 7.23% 0.63%
Common Equity 46.05% 11.50% 5.30%
-------
Total 100.00% 9.36%
Applying the increase in the cost of capital to the $159 million of net plant in
service results in an estimated pre-tax increase in annual capital costs of
$477,000 and an after-tax increase in annual capital costs of $270,300.
1 NEWGAS-CO. may actually incur higher capital market costs than DPL due to a
higher level of investor risk resulting from a smaller asset base, concern of
liquidity of the investment, and greater volatility in the cash position due to
the seasonal nature of gas purchases.
2 Approximately $93 million of tax exempt bonds issued by DPL to finance gas
projects are outstanding and not callable as of 12/31/96. In the event that DPL
was required to spin-off its gas assets, DPL may be required to defease such
bonds.
3 Rates were provided by Merrill Lynch and are based on the market conditions of
February 20, 1997. The actual rates in effect at the time of the issuance of
securities may be substantially different than those stated in this study.
NEWGAS-CO. Exhibit 5
NEWGAS-CO.
ORGANIZATION CHART
President & CEO
Vice President - Distribution, Operations & Construction
Manager - Construction & Maintenance
Manager - Gas Operations, Planning & Procurement
Manager - Gas Engineering
Vice President - Marketing & Customer Service
General Manager - Customer Service
Manager - Customer Service
Manager - Field Customer Service
Manager - Marketing
Vice President - Business Support Services
Manager - Procurement & Materials Management,
Vehicle Resource Management, and Real Estate
Manager - Information Resource Management Services,
General Services and Records
Vice President - Human Resources
Manager - Benefits & Employee Relations
Vice President - CFO
Treasurer
Controller
Manager - Financial Planning/Budgets
Manager - General Accounting & Tax Compliance
Manager - Accounts Payable, Plant Accounting & Payroll
Vice President - Legal, Pricing & Regulation, Environmental Affairs, &
Corporate Planning
General Counsel
Manager - Pricing & Regulation
Corporate Secretary
NEWGAS-CO. Exhibit 6
NEW GAS-DPL
SALARIES AND WAGES SUMMARY
(In Thousands of Dollars)
<TABLE>
<S> <C> <C> <C> <C>
Salaries/ Totals
Employees Wages Employees Salaries/Wages
Executive Staff & Administrative Support 20 $ 1,960
Distribution, Operations & Construction:
Construction & Maintenance 80 $ 3,628
Gas Operations, Planning & Procurement 41 $ 1,961
Gas Engineering 35 $ 1,702
Gas Meters 7 $ 322
Dist., Oper. & Const. Total 163 $ 7,612
Marketing & Customer Service:
Customer Service 45 $ 2,084
Field Customer Service 51 $ 2,333
Marketing 12 $ 647
Customer Relations 1 $ 54
Media & Community Relations & Public Affairs 3 $ 162
Marketing & Cust. Svc. Total 112 $ 5,279
Business Support Services:
Procurement & Materials Management 6 $ 305
Vehicle Resource Management 5 $ 270
Real Estate 3 $ 162
Information Resource Management Services 6 $ 324
General Services 4 $ 216
Records 2 $ 108
Business Support Servcs. Total 26 $ 1,384
Human Resources:
Safety 2 $ 108
Training 4 $ 216
Benefits 7 $ 377
Employee Relations 2 $ 108
Human Resources Total 15 $ 809
Treasury:
Treasury Operations 4 $ 216
Investor Relations 2 $ 108
Risk Management - Claims & Insurance 5 $ 270
Treasury Total 11 $ 593
Controller:
Financial Planning/Budgets 7 $ 377
General Accounting, Reporting & Tax Compliance 12 $ 647
Accounts Payable, Plant Accounting, & Payroll 11 $ 547
Controller Total 30 $ 1,571
Legal, Pricing & Regulation, Environmental Affairs, & Corporate Planning
Legal 4 $ 216
Pricing & Regulation 8 $ 431
Environmental Affairs 3 $ 162
Corporate Planning 4 $ 216
Legal, Pricing & Reg., Env. Affrs., & Corp. Plng. Total 19 $ 1,025
Corporate Secretary:
Security 2 $ 108
Internal Auditing 3 $ 162
Corporate Secretary Total 5 $ 270
GRAND TOTAL 401 $20,503
</TABLE>
NEWGAS-CO. Exhibit 7
NEWGAS-CO.
COMPARABLE LOCAL DISTRIBUTION COMPANIES
CUSTOMERS PER EMPLOYEE RATIOS
CUSTOMERS
COMPANIES CUSTOMERS EMPLOYEES PER EMPLOYEE
NEWGAS-CO. 100,000 40 249
Baltimore Gas & Electric Co. 530,036 1,536 345
Chesapeake Utilities Co. 33,514 140 239
Philadelphia Gas Works 532,302 2,000 266
South Jersey Gas Company 248,022 690 359
Washington Gas Light Co. 725,960 2,484 292
Public Service Co. of North Carolina 276,763 1,128 245
Virginia Natural Gas 193,929 550 353
Providence Gas Co. 164,582 553 298
Source: 1997 Brown's Directory of North American and International Gas Companies
NEWGAS-DPL Exhibit 8
NEWGAS-CO.
ESTIMATED SALARIES
An American Gas Association 1996 survey for companies with revenues less than
$200 million was used to establish a reasonable range for the NEWGAS-DPL top
executive salary. This survey, in conjunction with DPL's average salary was used
for the NEWGAS-DPL executives. For remaining management and bargaining unit
positions that would become part of the spin-off company, existing DPL average
salaries were used.
NEWGAS-DPL SALARY
POSITION LEVELS
President & CEO $170,000
Vice President/Executive Level $130,499
Management $ 53,928
Bargaining Unit $ 44,652
Source: 1996 American Gas Association Executive Compensation Survey and
DPL Human Resources Average Salaries
NEWGAS-CO. Exhibit 9
DPL ELECTRIC RATE BASE & RATE OF RETURN
TWELVE MONTHS ENDED 9/30/96
(In Thousands of Dollars)
<TABLE>
<S>
<C> <C> <C>
Existing Eliminations
DPL Electric For Common Proforma
Description Company Plant (1) NewElectric - DPL
Plant In Service $3,011,733 $ 8,501 $3,020,234
Depreciation Reserve $1,143,390 $ 1,487 $1,147,026
Net Plant $1,868,343 $ 7,014 $1,873,208
Construction Work In Progress $ 88,630 $ 1,828 $ 90,458
Fuel Inventory and Materials & Supplies $ 58,912 $ - $ 58,912
Working Funds $ 7,520 $ 24 $ 7,544
Prepayments $ 36,132 $ - $ 36,132
Deferred Income Tax $ (305,482) $ - $ (305,482)
Investment Tax Credit $ (42,475) $ - $ (42,475)
Customer Advances & Deposits $ (7,662) $ - $ (7,662)
Net Rate Base $1,703,918 $ 6,717 $1,710,635
Net Income $ 156,382 $ 156,382
Rate of Return 9.18% 9.14%
</TABLE>
(1) Common Plant consists mainly of Buildings, Office Furniture,
Communications Equipment, and Land. Under a divestiture, all common
properties would go with the Electric Division.
Source:
Information provided by DPL Pricing & Regulation Department
NEWGAS-CO. Exhibit 10
DPL ELECTRIC
ESTIMATED ADDITIONAL OPERATING EXPENSES
PROFORMA ADJUSTMENTS
(In Thousands of Dollars)
Facility Costs $ 507
Transportation & Work Equipment Costs $ 14
Information Technology Costs $1,373
External Auditing Costs $ 17
Insurance Premiums $ 122
Shareholder Costs $ 46
Postage & General Services $ 193
Gas Transmission Pipeline Impact $ 127
Total Additional Operating Expenses $2,399
Exhibit J-3
SUMMARY OF LOST ECONOMY RATIOS
NEW CENTURY ENERGIES, INC.
<TABLE>
<CAPTION>
NewGasco-Colorado NewGasco-Wyoming
Percent of Percent of
estimated estimated
loss of loss of
economies economies
Amount to: Amount to:
<S> <C> <C> <C> <C>
Operating Revenues $677,326,418 6.44% $15,630,080 10.77%
Operating Revenue 607,599,384 7.18% 13,681,672 12.30%
Deductions
Gross Income 69,727,034 62.54% 1,948,408 88.36%
Net Income 51,266,520 85.06% 1,530,526 109.94%
Estimated Loss of 43,605,187 1,682,723
Economies
</TABLE>
GULF STATES UTILITIES
GSU Gas Division 1991
Percent of estimated
Amount loss of economies to:
Operating Revenues $31,858,000 16.13%
Operating Revenues
Deductions 30,770,000 16.70%
Gross Income 1,088,000 472.24%
Net Income n/a n/a
Estimated Loss of Economies 5,138,000
FITCHBURG GAS & ELECTRIC
Fitchburg Gas Division - 1990
Percent of estimated
Amount loss of economies to:
Operating Revenues $17,324,993 13.94%
Operating Revenues
Deductions 15,755,267 15.33%
Gross Income 1,569,726 153.87%
Net Income n/a n/a
Estimated Loss of Economies 2,415,391
ENGINEER PUBLIC SERVICE COMPANY
Gas Properties of Gulf States Utilities Co. - 1940
Percent of estimated
Amount loss of economies to:
Operating Revenues $638,711 6.58%
Operating Revenues
Deductions 444,006 9.46%
Gross Income 201,594 20.85%
Net Income 166,402 25.25%
Estimated Loss of Economies 42,024
Gas Properties of Virginia Electric and Power Co. - 1940
Percent of estimated
Amount loss of economies to:
Operating Revenues $1,057,000 3.38%
Operating Revenues
Deductions 735,294 4.86%
Gross Income 317,890 11.25%
Net Income 168,412 21.23%
Estimated Loss of Economies 35,750
THE NORTH AMERICAN COMPANY
Gas Properties of the St. Louis County Gas Co. - 1942
Percent of estimated
Amount loss of economies to:
Operating Revenues $2,748,770 5.85%
Operating Revenues
Deductions 2,009,757 8.01%
Gross Income 742,027 21.68%
Net Income 661,110 24.34%
Estimated Loss of Economies 160,900
PHILADELPHIA COMPANY
Gas Group - 1946
Percent of estimated
Amount loss of economies to:
Operating Revenues $16,656,560 3.00%
Operating Revenues
Deductions 13,197,846 3.79%
Gross Income 3,565,357 14.03%
Net Income n/a n/a
Estimated Loss of Economies 500,328
GENERAL PUBLIC UTILITIES CORP.
Gas Properties of Jersey Central Power & Light Co. - 1949
Percent of estimated
Amount loss of economies to:
Operating Revenues $4,714,958 4.87%
Operating Revenues
Deductions 4,235,661 5.42%
Gross Income 479,477 47.84%
Net Income 202,582 113.24%
Estimated Loss of Economies 229,398
MIDDLE SOUTH UTILITIES, INC.
Gas Properties of Louisiana Power & Light Co. - 1954
Percent of estimated
Amount loss of economies to:
Operating Revenues $5,264,186 5.18%
Operating Revenues
Deductions 4,112,285 6.63%
Gross Income 1,151,901 23.68%
Net Income n/a n/a
Estimated Loss of Economies 272,816
NEES
Gas Properties of 8 Subsidiaries Combined - 1958
Percent of estimated
Amount loss of economies to:
Operating Revenues $22,752,270 4.83%
Operating Revenues
Deductions 18,207,191 6.03%
Gross Income 4,718,864 23.28%
Net Income 3,669,931 29.93%
Estimated Loss of Economies 1,098,500
- - ---------------------
Excludes federal income taxes.
Before deducting federal income taxes.
* Based on estimated cost increases rejected by the SEC as "overstated" and
"doubtful."
