File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Conectiv, Inc.
800 King Street
Wilmington, Delaware 19899
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(Name of company filing this statement
and address of principal executive offices)
None
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(Name of top registered holding company parent)
Barbara S. Graham Michael J. Barron
President Vice President
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:
William S. Lamb, Esq. James M. Cotter, Esq.
H. Liza Moses, Esq. Vincent Pagano, Jr., Esq.
Joanne C. Rutkowski, 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. James E. Franklin II, Esq.
Delmarva Power & Light Company Atlantic Energy, Inc.
800 King Street 6801 Black Horse Pike
Wilmington, Delaware 19899 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....................................8
a. Delmarva.................................................8
i. General (8);
ii. Electric Generating Facilities and
Resources (8);
iii. Electric Transmission and Other
Facilities (10);
iv. Gas Facilities (11);
v. Other (11)
b. Atlantic................................................11
i. General (11);
ii. Electric Generating Facilities and
Resources (12);
iii. Electric Transmission and Other
Facilities (13);
iv. Other (13)
3. Nonutility Subsidiaries.....................................13
a. Delmarva................................................13
b. Atlantic................................................17
C. Description of the Mergers......................................20
1. Background and Negotiations Leading to the Proposed Mergers.20
2. Merger Agreement............................................25
D. Benefit Plans...................................................26
E. Management and Operations of Conectiv Following the Mergers.....26
F. Industry Restructuring Initiatives..............................28
Item 2. Fees, Commissions and Expenses......................................30
Item 3. Applicable Statutory Provisions.....................................31
A. Legal Analysis..................................................32
1. Section 10(b)...............................................34
a. Section 10(b)(1)........................................35
i. Interlocking Relationships (35);
ii. Concentration of Control (35)
b. Section 10(b)(2) -- Fairness of Consideration...........38
c. Section 10(b)(2) -- Reasonableness of Fees..............39
d. Section 10(b)(3)........................................40
2. Section 10(c)...............................................48
a. Section 10(c)(1)........................................49
i. Retention of Gas Operations (50);
ii. Direct and Indirect Nonutility
Subsidiaries of Conectiv (57)
b. Section 10(c)(2)........................................67
i. Efficiencies and Economies (67);
ii. Integrated Public Utility System (71)
3. Section 10(f)...............................................76
4. Other Applicable Provisions -- Section 9(a)(1)..............77
B. Intra-System Provision of Services..............................77
1. Support Conectiv............................................79
2. Other Services..............................................80
C. Transfer of Utility Assets......................................81
Item 4. Regulatory Approvals................................................81
A. Antitrust.......................................................81
B. Federal Power Act...............................................82
C. Atomic Energy Act...............................................82
D. State Public Utility Regulation.................................82
Item 5. Procedure...........................................................84
Item 6. Exhibits and Financial Statements...................................84
A. Exhibits.......................................................84
B. Financial Statements...........................................86
Item 7. Information as to Environmental Effects.............................86
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").
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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 both approved the Mergers at
their respective meetings held on January 30, 1997. Delmarva and Atlantic have
submitted applications requesting approval of the Mergers and/or related matters
to (i) the Delaware Public Service Commission (the "DPSC"), (ii) the Virginia
State Corporation Commission (the "VSCC"), (iii) the New Jersey Board of Public
Utilities (the "NJBPU"), (iv) the Pennsylvania Public Utility Commission (the
"PPUC"), (v) the Maryland Public Service Commission (the "MPSC"), (vi) the
Federal Energy Regulatory Commission (the "FERC"), and (vii) 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. Apart from the approval of the Commission under the Act, the
foregoing approvals are the only regulatory approvals required for the Mergers.
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.
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 retention by Conectiv of the gas properties of
Delmarva and the continued operation of Delmarva as a combination
utility;
(iii) the retention by Conectiv of the nonutility
activities, businesses and investments of Delmarva and Atlantic;
(iv) the investment by Conectiv, directly or indirectly, of
up to an additional $100 million (exclusive of guarantees)
through the period ending December 31, 2000 for the further
development, including through acquisitions, of its HVAC,
consumer services and customer financing businesses (generally,
"Consumer Services"); and
(v) 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, Maryland and Virginia, 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, Deepwater will be either merged into ACE or made a subsidiary of
Atlantic Energy Enterprises, Inc. ("AEE"). In either event, it will no longer
operate utility assets.
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 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, 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, 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.
At present, Conectiv is considering how to structure its nonutility
businesses in light of regulatory requirements, tax and other legal
considerations. As explained more fully herein, Conectiv requests authority to
restructure and realign its nonutility interests in a manner consistent with its
authority under the Act, without the need to apply for or receive further
Commission approval.
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. Certain other subsidiaries will remain subsidiaries of
Delmarva until they are dissolved, divested or until they are transferred to,
merge with, or become direct or indirect subsidiaries of Conectiv.
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 and support
services.
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.
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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. 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.
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
a. Delmarva
Delmarva has seven direct nonutility subsidiaries: Delmarva Industries,
Inc., Delmarva Services Company, Delmarva Energy Company, Conectiv Services,
Inc., Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI")
and East Coast Natural Gas Cooperative, L.L.C. ("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 Corp., 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 winding
down its business.
Conectiv Services, Inc., a Delaware corporation and a direct subsidiary
of Delmarva, was formed in 1996 to acquire and operate service
businesses involving heating, ventilation and air conditioning ("HVAC")
sales, installation and servicing.
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 to own and finance 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 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 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, 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,
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 EnterTech 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 EnterTech 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 provides operating services for thermal
heating and cooling systems.
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.
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.
The Mergers are subject to customary closing conditions, including all
necessary governmental approvals, including the approval of the Commission.
- --------
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.
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.
Each electric utility in New Jersey is to file a complete restructuring
plan, stranded cost estimates and unbundled rates no later than July 15, 1997.
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 financing
transactions,6 utility ownership7 and diversification8 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 addresses, for example, reduced regulatory
burdens associated with routine financings. 1995 REPORT at
50.
7 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.
8 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 $9 billion).
As the following table demonstrates, nearly all of the registered electric,
or combination gas and electric, utility holding company systems are larger than
Conectiv will be following the Mergers in terms of assets, operating revenues,
customers and/or sales of electricity:9
Total Operating Electric Sales in
System Assets Revenues Customers KWH
Total ($ 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]
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
- --------
9 Amounts are as of December 31, 1996 or for the year ended
December 31, 1996. [Bracketed numbers are 1995 figures.]
In addition, Conectiv will be smaller than at least two of the registered
holding companies to be formed as a result of recently announced mergers,
specifically: the merger of Public Service Company of Colorado and Southwestern
Public Service (combined 1994 year-end assets of approximately $6,018 million
and operating revenues of $2,881 million); and 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 mid- to small-sized registered holding company, and its
operations would 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.10
- --------
10 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 will be fully considered
by the FERC pursuant to Section 203 of the Federal Power Act before it approves
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. The application filed by Delmarva and Atlantic with the FERC is filed
as Exhibit D-1.1 and incorporated herein.
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>
<S> <C> <C> <C> <C> <C> <C>
Delmarva Atlantic
High Low Dividends High Low Dividends
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 21 7/8 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. The Conectiv Class A Common Stock will also not
unfairly or inequitably distribute voting power among security holders.
Simplification of holding company capital structures was clearly a primary
objective of the Act. As the Commission recently stated,
By 1932, approximately 49% of the investor-owned utilities
were controlled by three holding companies. Virtually all the
holding company systems were characterized by extremely complex
capital structures that made it difficult, if not impossible, for
investors to analyze the quality of earnings and the financial
condition of the companies in which they were investing. In the
early 1930s, many of the holding companies collapsed, leaving
investors with billions of dollars of losses.11
The Act's concern with complicated capital structures focuses on the use of an
inordinate number of different securities having different preferences,
dividends, voting rights and other special characteristics12 and the resulting
difficulty in understanding the factors determining the performance of a
security and voting control of the issuer. Section 1(b)(1) of the Act identifies
utility securities being "issued upon the basis of fictitious or unsound asset
values having no fair relation to the sums invested in or the earning capacity
of the properties and upon the basis of paper profits from intercompany
transactions, or in anticipation of excessive revenues from subsidiary public
utility companies" as abusive. Section 1(b)(3) of the Act highlights problems
resulting from "when control of [utility holding] companies is exerted through
disproportionately small investment," i.e., pyramiding.
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.13 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 was "no longer necessary to protect investors and
shareholders."14
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11 NORTHEAST UTILITIES, HCAR No. 25273 (March 15, 1991), at note 13.
12 An example of a holding company with an unduly complicated
capital structure was Associated Gas & Electric Co., which
had consolidated assets of $6 million in 1923 that grew to
$1 billion in 1929. Prior to its bankruptcy, it had the
following securities outstanding (plus warrants and
options): 3 classes of common stock, 6 classes of preferred
stock, 4 classes of preference stock, 24 classes of
debentures (some convertible), 7 issues of secured notes and
4 issues of investment certificates. SEE HAWES, UTILITY
HOLDING COMPANIES, Section 2.04 (1987).
13 SEE UTAH POWER & LIGHT COMPANY, HCAR No. 13748 (May 6, 1958)
and ILLINOIS POWER COMPANY, HCAR No. 16574 (January 2,
1970).
14 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).
Section 10(b)(3) and Section 11(b)(2) were designed to eliminate the
abusive holding company structures that predated the adoption of the 1935 Act.
These provisions were needed at that time given the immature nature of other
federal securities law protections available to investors. In the 1995 REPORT,
the Staff extensively discussed 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
1934.15 Given these advances, there is clearly no concern that the issuance of
the Conectiv Class A Common Stock would unduly complicate Conectiv's capital
structure.
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.16 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).
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15 1995 REPORT at 34-38.
16 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 1934.17
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.
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, there is no concern with the capital
structure of Conectiv under Section 1(b)(1) of the Act.
As illustrated above, the issuance of tracking stock in this case is
consistent with the standards of Section 10(b)(3) and Section 11(b)(2) under the
Act. The proposed issuance of tracking stock by Conectiv is, to our knowledge, a
question of first impression for the Commission. In the 1995 REPORT, the Staff
noted that the Commission has historically "responded to change by flexible
interpretation and rulemaking."18 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.
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17 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.
18 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 1119;
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 . . . .
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19 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. Retention of Gas Operations
Conectiv's retention 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.
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.20
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.21 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.22 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.
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20 AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC
at 983, n.3.
21 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).
22. 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. 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). 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 does not prohibit combination
companies where such approvals can be obtained.
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.23 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.24 Furthermore, the proposed merger of PanEnergy Corp., a
large pipeline and electric and gas marketer with Duke Power Company, an
electric utility holding company, and the proposed 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,25 marked by "the
interchangeability of different forms of energy, particularly gas and
electricity.26
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23 1995 REPORT at 15-6.
24 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).
25 CNG Order.
26 CNG Order at 11.
Another important factor in favor of focusing on state commission
determinations regarding combination companies is that one of the primary goals
of Congress in enacting the Act was to simplify the corporate structures of
holding company systems to enable states to regulate the production and
distribution of energy. Section 8 provides that the Act may be used as a tool to
further state policy when state policy prohibits combined electric and gas
operations, and implicitly allows such combination companies where consistent
with state policy. This is consistent with 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.27 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.
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27 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."28 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).
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28 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.29 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 result if the
divestiture of the gas operations of Public Service Company of Colorado and
Cheyenne Light, Fuel and Power Company were 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.
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29 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.
(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. For further discussion
of the requirements of Section 11(b)(1)(C), see the legal memorandum filed as
Exhibit J-2 hereto.
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 December 31, 1996 totaled $294 million, constituting
5.2% of the pro forma consolidated assets of Conectiv.
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 as Exhibit
E-4.
Standard for retention: Section 11(b)(1) permits a registered holding
company to retain "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 58,30 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.31 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.
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30 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").
31 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," and so retainable under Section 11(b)(1) of the Act:32
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.
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 EnterTech Capital Partners, L.P., a
limited partnership that will invest in and support a variety
of energy technology growth companies.
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32 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," and so 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.
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," and
so retainable subsidiaries of a registered holding company 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," and so retainable under Section 11(b)(1) of the Act:
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 operates and maintains 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 the following
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.
There are two additional real estate subsidiaries which the Applicants seek
approval to retain. These companies have total assets of less than $5 million.
Given the de minimis size of the investment and that the Applicants are seeking
only to retain the existing assets, the Commission should approve retention of
the following two companies:
Delmarva Capital Realty Company is a vehicle for the sale of
properties not used or useful for the utility business.
Post and Rail Farms, Inc. is engaged in the development
and sale of a residential housing development.
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 EnterTech 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 East
Coast Natural Gas Cooperative, L.L.C. ("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:
Delmarva Capital Investments, Inc. ("DCI") is the
holding company over DCI I, Inc., DCI II, Inc. 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.
Consumer Services:
Conectiv Services, Inc. currently provides heating, ventilation and air
conditioning ("HVAC") sales, installation and servicing. Since 1996, it has
acquired 6 HVAC service companies. The Applicants hereby seek authority for
Conectiv Services, Inc. to acquire additional HVAC companies through December
31, 2000.
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 and commercial customers ("Consumer Services"). While the precise
list of services is still under consideration, it is anticipated that Consumer
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 appliances and, in connection
therewith or separately, marketing of appliance inspection and repair services
and extended service warranties covering the cost of repairing customers'
appliances; (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; and (5) incidental and reasonably necessary
products and services related to the choice, purchase 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 Consumer 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 CINERGY CORP., HCAR No. 26662 (Feb. 7, 1997).
In connection with the HVAC business, Consumer Services and customer
financing, the Applicants seek approval for Conectiv Services to invest up to an
additional $100 million, exclusive of guarantees, through the period ending
December 31, 2000.
As detailed above, many of the nonutility activities of Conectiv and its
affiliates fall within the ambit of newly adopted Rule 58. Rule 58 also provides
(in section (a)(1)(ii)) that investments in nonutility activities that are
exempt under Rule 58 cannot exceed 15% of the consolidated capitalization of the
registered holding company. In its statement supporting the adoption of the
Rule, the Commission stated:
The Commission believes that all amounts that have actually
been invested in energy-related companies pursuant to
commission order prior to the date of effectiveness of the
Rule should be excluded from the calculation of aggregate
investment under Rule 58. The Commission also believes it is
appropriate to exclude from the calculation all investments
made prior to that date pursuant to available exemptions.
RULE 58 RELEASE at 50-51.
Because Conectiv is not yet a registered holding company, none of the
investments in nonutility activities that are described herein are the subject
of a Commission order. However, since all of the activities of Delmarva were
outside the ambit of the Act and since the nonutility investments of Atlantic,
an exempt holding company, were not subject to limitations under the Act,
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. The same reasoning that led the Commission to grandfather prior
investments for registered holding companies justifies exempting from the 15%
calculation the existing investments of a company prior to registration. 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.
Conectiv requests authority to restructure and realign its existing
nonutility interests after the Mergers in a manner consistent with the Act,
without the need to apply for or receive further Commission approval. Conectiv
also requests authority to form subsidiaries and enter into joint ventures and
other arrangements with nonaffiliates in the businesses described above without
need for further Commission approval in an amount not to exceed $100 million,
exclusive of guarantees.
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."33
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33 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.34 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.
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34 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.35
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.36 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.
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 37 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.38 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.
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35 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).
36 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).
37 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").
38 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."39 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.40
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.
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39 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).
40 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."41 The 1995 REPORT also recommends primacy be
given to "demonstrated economies and efficiencies to satisfy the integration
requirements."42 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.
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41 1995 REPORT at 72-74.
42 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,"43 especially since these Mergers will result in a system similar
to the traditional registered holding company system.
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43 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 currently operate as a single, integrated public
utility system. 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 in
Public Service Company of Colorado and Southwestern Public Service Company, 75
FERC Para.61,325 (1996), gave Public Service Company of Colorado and
Southwestern Public Service Company the choice of following its affiliate
pricing standards or having a hearing on the issue of whether the proposed
merger would impair effective regulation. The FERC articulated its standards in
that order as follows:
(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.
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-based
prices, 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. In any event, even if some
inconsistency were to develop, Conectiv understands that FERC will continue to
have full authority to disallow, for purposes of FERC-jurisdictional wholesale
power and transmission rates, any charge to the extent of any inconsistency
between the SEC "at cost" and FERC "cost or market" standards.
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.
C. Transfer of Utility Assets
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, ACE, or other Conectiv companies at cost to Support
Conectiv in conjunction with the integration of the two companies after
consummation of the Mergers. 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 to Support Conectiv. It is also requested that this
authorization be for a period of 24 months from the effective date of the
Mergers.
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. See Exhibit D-1.1.
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. Conectiv and Delmarva submitted an application with the
VSCC requesting approval of the Mergers on February 25, 1997. See Exhibit D-3.1.
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. Delmarva will
seek to show that the Mergers will not have an adverse effect on the conduct of
its Maryland franchises. See Exhibit D-6.1.
Item 5. Procedure
The Commission is respectfully requested to issue and publish not later
than August 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 August
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. (to be filed by amendment)
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. (to be filed by amendment)
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 (to be filed by
amendment)
D-6.2 MPSC Order. (to be filed by amendment)
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.
(to be filed by amendment)
E-2 Delmarva corporate chart. (to be filed by
amendment)
E-3 Atlantic corporate chart. (to be filed by
amendment)
E-4 Conectiv corporate chart. (to be filed by
amendment)
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).
I-1 Proposed Form of Notice.
J-1 Analysis of the Economic Impact of a Divestiture
of the Gas Business of DPL. (to be filed by
amendment)
J-2 Legal Memorandum of LeBoeuf, Lamb, Greene &
MacRae, L.L.P. (to be filed by amendment)
J-3 Table of Estimated Losses of Economies in Prior
Decisions on Divestiture and Retention of Gas
Operations. (to be filed by amendment)
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, 1996.
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, 1996.
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 Application/Declaration of
Conectiv, Inc. to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: July 2, 1997
Conectiv, Inc.
By: /s/ B. S. Graham
Barbara S. Graham
President
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Atlantic City Electric Company )
) Docket No. EC97-___-000
Delmarva Power & Light Company )
JOINT APPLICATION OF
ATLANTIC CITY ELECTRIC COMPANY
AND
DELMARVA POWER & LIGHT COMPANY
FOR
AUTHORIZATION AND APPROVAL OF MERGER
-------------------------------------
VOLUME 1 OF 2
APPLICATION, APPENDICES AND EXHIBITS
-------------------------------------
I. INTRODUCTION
Atlantic City Electric Company ("Atlantic") and Delmarva Power & Light
Company ("Delmarva") (collectively, "the Applicants") submit this Joint
Application under Section 203 of the Federal Power Act ("the Act") and Part 33
of the Commission's Regulations to obtain authorization and approval to merge
the Applicants' facilities that are subject to this Commission's jurisdiction.
The merger of the facilities will be accomplished by a corporate merger of
equals through affiliation of Atlantic and Delmarva as subsidiaries of a new
company, temporarily named DS, Inc. (hereinafter referred to as "Newco"), which
will be a registered holding company under the Public Utility Holding Company
Act of 1935 ("PUHCA").1 Newco will be the sole owner of Atlantic's and
Delmarva's common shares. Upon consummation of the merger, Newco will have four
direct subsidiaries, Atlantic, Delmarva, a service company and a company engaged
in non-utility activities.
The projected closing date of the merger is December 31, 1997, some 13
months hence. Applicants request approval of the merger upon this Application
without hearing. If a hearing is established, Applicants request that such a
hearing be limited to specific, identified issues and under procedural
guidelines that ensure a final order on the merits by November 26, 1997.
This application includes the exhibits required under Section 33.3 of the
Commission's regulations. The Agreement and Plan of Merger of August 9, 1996 is
included in this filing as Exhibit H.
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1 The application to the SEC for authorization to create the registered
holding company is under development and will be supplied to the Commission
promptly after filing with the SEC.
II. THE APPLICANTS
Applicant Atlantic is an electric utility incorporated in New Jersey
serving retail load throughout the southern one-third of the state. It has
473,000 retail customers and one interconnection customer, the City of Vineland,
New Jersey. Atlantic's annual peak load in 1995 was 2,042 MW and its energy
sales in that year were 8.1 million MW hours. Its 1995 electric revenues were
$953 million. The company has owned generation of 1,679 MW and contracted
generation of 670 MW, which represents 4.2% of the generating capability of the
Pennsylvania-New Jersey-Maryland Interconnection Association ("PJM"), of which
Atlantic is a member. Atlantic is a wholly owned subsidiary of Atlantic Energy,
Inc. ("Atlantic Energy"), an exempt holding company under PUHCA, whose stock is
publicly held. Atlantic is subject to retail rate regulation by the New Jersey
Board of Public Utilities.
Applicant Delmarva is an electric utility incorporated in Delaware and
Virginia serving wholesale and retail electric loads in Delaware and the Eastern
Shore of Maryland and Virginia. The company has 437,000 retail electric
customers, 10 wholesale customers, and two interconnection customers, the City
of Dover, Delaware and the Town of Easton, Maryland.2 Delmarva's annual peak
load in 1995 was 2,364 MW, and its energy sales in that year were 12.3 million
MW hours. Its 1995 electric revenues were $995 million. Delmarva has owned
generation of 2,728 MW and contracted generation of 105 MW, which represents
5.0% of the generating capability of PJM, of which Delmarva, too, is a member.
Delmarva's common stock is publicly held. It is subject to retail regulation by
the Public Service Commissions of Delaware and Maryland and the State
Corporation Commission of Virginia. A map of the Applicants' service areas
appears in Exhibit I.
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2 Delmarva's wholesale sales customers are the Old Dominion Electric
Cooperative ("ODEC") and the Cities or Towns of Berlin, MD; Clayton, DE; Lewes,
DE; Middletown, DE; Milford, DE; Newark, DE; New Castle, DE; Seaford, DE; and
Smyrna, DE. ODEC has three cooperative members served by Delmarva: Delaware
Electric Cooperative, A&N Cooperative, and Choptank Electric Cooperative. All of
Delmarva's wholesale sales customers are eligible to receive transmission
services.
Delmarva also provides natural gas sales and transportation services to
approximately 100,000 natural gas customers, all of whom are retail customers
located in New Castle County, Delaware. Delmarva's gas business is described in
more detail below in section IV.B.5.(d).
In compliance with Order No. 888, Atlantic and Delmarva have open-access,
comparable transmission service tariffs which were filed in Docket Nos.
OA96-159-000 and OA96-165-000, respectively. Both companies are "supporting
companies" of the PJM restructuring refiling, Docket Nos. ER96-2516-000, et al.,
with accompanying filed transmission tariffs. Both companies' systems are
centrally dispatched by PJM. Neither company holds any hydroelectric licenses.
III. THE MERGER PROCEDURES
The merger will be achieved among four corporations: the two Applicants,
the previously mentioned newly-formed holding company, Newco (whose permanent
name will be selected after market studies are performed), and a new corporation
named DS Sub, Inc., which will serve the sole purpose of effecting the merger
and will not survive the merger. At the closing, Atlantic Energy will merge into
Newco, and DS Sub, Inc. will merge into Delmarva.
Also at the closing, each share of Delmarva common stock (other than
certain canceled common stock) will be converted into the right to receive one
share of Newco common stock, and each share of Atlantic Energy common stock
(other than certain canceled common stock) will be converted into the right to
receive 0.75 shares of Newco Common Stock and 0.125 shares of Class A Common
Stock, par value $0.01 per share (the latter common stock is so-called Letter
Stock). Further, each share of DS Sub, Inc. common stock, par value of $0.01 per
share, issued and outstanding immediately prior to the closing will be converted
into one share of common stock of Newco. The shares of Atlantic and Delmarva
preferred stock will be unchanged and remain outstanding after the merger. The
result of the above procedures will be that the former shareholders of Atlantic
and Delmarva will become the shareholders of Newco, and Newco will become the
sole shareholder of Atlantic and Delmarva. The merger will not affect any
long-term or short-term debt securities of Delmarva, Atlantic, or any of their
affiliates.
The registered holding company resulting from the merger will have four
subsidiaries. Delmarva and Atlantic will be separate, first-tier utility
operating subsidiaries and will not lose their individual corporate existence.
The non- utility subsidiaries of Atlantic Energy, Inc. will be consolidated
under one first-tier, non-utility subsidiary, Atlantic Energy Enterprises, Inc.3
Finally, a Service Company will be created as the fourth and final first-tier
subsidiary. The Service Company will provide management, accounting, financial,
legal, and other support services to the two operating utilities, the holding
company and the non-utility subsidiaries. A comprehensive description of the
various services that will be provided by the Service Company will be included
in the Applicants' filing with the Securities and Exchange Commission ("SEC") to
establish the registered holding company. As previously noted, the Applicants
will provide copies of that filing to the Commission promptly after filing with
the SEC.
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3 Delmarva also owns non-utility subsidiaries, and it is currently expected
that, initially, those subsidiaries would remain as subsidiaries of Delmarva. At
some point, all non- utility subsidiaries may be consolidated under a first-tier
subsidiary of the registered holding company.
IV. THE MERGER IS CONSISTENT WITH THE
PUBLIC INTEREST (18 C.F.R. ss. 33.2(j))
A. Introduction
The Commission's approval of a proposed acquisition and merger requires a
finding that such a transaction "will be consistent with the public interest."
16 U.S.C. ss. 824(b). As stated in IES Industries, Inc., et al., 65 FERC P.
62,191 at 64,416 (1993) (footnote omitted):
An applicant need not show that a positive benefit will result from a
proposed merger or disposition of facilities in order to support a
public interest finding. Rather, an applicant is required to make a
full disclosure of all material facts and to show that the disposition
is consistent with the public interest.
This public interest finding thus requires only a showing of consistency or
compatibility with the public interest, not that the transaction is the only
means of achieving the public interest.4 The Commission has established a list
of six factors generally applied to determine whether the public interest
requirement has been met in the context of a merger or acquisition. Commonwealth
Edison Co., 36 F.P.C. 927, 931 (1966), aff'd sub nom., Utilities Users League v.
F.P.C., 394 F.2d 16 (7th Cir.), cert. denied, 393 U.S. 953 (1968). The
Applicants address each of these factors below. As set out in Washington Power
Co. and Sierra Pacific Power Co., 73 FERC P. 61,218 at 61,595 (1995), those
factors are:
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4 Pacific Power & Light Co. v. FPC, 111 F.2d 1014, 1016 (9th Cir. 1940);
Northeast Utilities Service Co. v. FERC, 993 F.2d 937, 951 (1st Cir. 1993),
quoted in Entergy Services, Inc. and Gulf States Utilities Co., 65 FERC P.
61,332 at 62,471 (1993). There is no requirement that applicants make a showing
of a "positive benefit of the merger." Utah Power & Light Co., 47 FERC P. 61,209
at 61,750 (1989), remanded on other grounds, Environmental Action v. FERC, 939
F.2d 1057 (D.C. Cir. 1991); Entergy Services, Inc., 62 FERC P. 61,073 at 61,370
(1993) (footnotes and citations omitted).
(1) The effect of the proposed Acquisition and Merger on the Applicants'
costs and rate levels;
(2) The proposed accounting treatment;
(3) The reasonableness of the purchase price;
(4) Whether the proposed Acquisition and Merger involves coercion;
(5) The effect the proposed Acquisition and Merger may have on the existing
competitive situation; and
(6) Whether the proposed Acquisition and Merger will impair effective
regulation by this Commission or by the appropriate state regulatory
authorities.
The Commission in a later order establishing hearing procedures in Public
Service Company of Colorado and Southwestern Public Service Co., 75 FERC P.
61,325 at 62,046 (1996), elaborated upon the last of the above factors, as
follows:
Currently, the Commission has authority to review all of the costs
incurred by the companies if they seek to recover those costs in
wholesale power rates. Under Applicants' proposed registered holding
company structure, however, they can avoid Commission authority to
review all of their costs. If a public utility subsidiary of the
registered holding company chose to enter into a service, sale or
construction contract (i.e., a contract for non-power goods or
services) with an associate company, and obtained SEC approval of that
contract, the Commission would not have authority to determine whether
and to what extent the utility should be allowed to recover, in its
FERC- jurisdictional wholesale power and transmission rates, the costs
incurred under the contract [footnote omitted]. The costs would be
flowed through to ratepayers, even if the goods or services were
obtained at an above-market price or the costs were imprudently
incurred.
Because the Commission may not be able to adequately protect
ratepayers from affiliate abuse in the Applicants' proposed registered
holding company structure, we will give the Applicants two options,
and direct them to inform us of their choice within 15 days of the
date of this order. The Applicants either may elect to have a hearing
on the issue of whether the proposed registered holding company
structure will impair effective regulation by this Commission, or they
may elect to abide by this Commission's policies with respect to
intracorporate transactions within the newly-formed registered holding
company structure [footnote omitted].
B. The Six Public Interest Factors
1. Factor 1: The Effect of the Transaction on
the Applicants' Operating Costs and Rate Levels
Through the elimination of duplicative activities, increased scale and
improved purchasing power, the companies expect to capture merger-related
savings net of transaction costs in excess of $500 million in the first ten
years after the merger (1998 to 2007). These cost savings, estimated by Mr.
Thomas Flaherty of Deloitte & Touche Consulting Group in his testimony and
related exhibits (see Volume 2, herein), are attributable strictly to the merger
and do not include savings that might be achieved without the merger. The
estimated savings reflect the creation of cost reduction or cost avoidance
opportunities through the affiliation of previously stand-alone corporations
within the holding company structure.
As competition intensifies within the industry, scale will increasingly
contribute to overall business success. Scale has importance in many areas,
including utility operations, product development, advertising and corporate
services. The merger is expected to improve the profitability of the combined
company by roughly doubling the customer base and providing increased economies
of scale in a widespread range of activities and operations.
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 merger will enable Newco to compete to
retain and grow its load in these customer groups.
Atlantic and Delmarva will hold harmless their existing wholesale
requirements customers from the effects of the merger on resale base rates that
become effective after the merger. In any base rate change proceeding commenced
by either Delmarva or Atlantic requesting an increase in any resale base rate,
the companies will not request the recovery of any merger-related costs, unless
such costs are at least offset by merger-related benefits. This hold-harmless
provision shall remain in place through the expiration or termination of the
respective resale customer service agreements over the years 2001 to 2004, as
further explained in Mr. Paul S. Gerritsen's testimony (see Volume 2).
2. Factor 2: The Proposed Accounting Treatment
The merger of Atlantic and Delmarva is a merger of equals that for
accounting purposes will be treated as a purchase and will be recorded using the
purchase method of accounting for business combinations in accordance with
Accounting Principles Board ("APB") Opinion No. 16. For the merger accounting,
Delmarva will be treated as the acquiring company and Atlantic Energy will be
treated as the acquired company. The merger does not, however, satisfy at least
one of the conditions required by APB Opinion No. 16 for the pooling of
interests method of accounting. That condition is that a corporation offer and
issue only common stock with rights identical to those of the majority of its
outstanding voting common stock in exchange for substantially all of the voting
common stock interest of another company at the date the plan of combination is
consummated. Since the common stockholders of Atlantic Energy will receive a
second security (i.e., Class A common stock) that is not identical to the
majority of outstanding common stock, that condition of eligibility for the use
of the pooling method of accounting is not met and therefore the purchase method
of accounting is used. The Commission has approved the use of the purchase
method of accounting where that method is required by generally accepted
accounting principles without undue detriment to regulatory principles.5
Since the utility operating subsidiaries of Newco have publicly held debt
and preferred stock, "push down" accounting will not be utilized (i.e., the
economic effects of the merger will not be pushed down to the books and records
of the subsidiary companies).6 Separate financial statements, essentially
identical to the current financial statements of each merging public utility,
will continue to be issued for those utilities.
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5 See Entergy Services, Inc. and Gulf States Utilities Co., Opinion No.
385, 65 FERC P. 61,332 (1993), order on reh'g., Opinion No. 385-A, 67 FERC P.
61,192 (1994); El Paso Electric Co. and Central and Southwest Services, Inc., 68
FERC P. 61,181 (1994).
6 Although the Applicants do not intend to "push down" any portion of the
acquisition premium (goodwill) to the books and records of Atlantic or Delmarva,
the Applicants reserve the right to seek rate recovery in future rate
proceedings of the acquisition premium upon a showing of specific benefits to
ratepayers in accordance with the Commission's policy. No rate recovery of the
acquisition premium is being sought in this proceeding. Minnesota Power & Light
Co. and Northern States Power Co., 43 FERC P. 61,104 at 61,342 (1988), reh'g.
denied, 43 FERC P. 61,502 (1988); SunShine Interstate Transmission Co., 67 FERC
P. 61,299 at 61,710 (1994).
The assets of Atlantic and Delmarva, the regulated utility operating
companies, will continue to be recorded on their books and records at the same
values as before the merger. The utility plant assets will continue to be
recorded based on historical cost (original cost) less accumulated depreciation.
Also, there will be no adjustment to the jurisdictional companies' books and
records to restate common equity amounts or to record the premium (goodwill)
paid to Atlantic Energy's common stockholders. Instead, the holding company,
Newco, will record the consideration paid to Atlantic Energy's common
stockholders as an investment in subsidiaries. In consolidation, Newco will
eliminate its investment in subsidiaries, adjust the common equity accounts
accordingly, adjust any non-utility assets or liabilities to their acquired fair
values as appropriate, and recognize the goodwill acquired in the acquisition of
Atlantic Energy. Newco will amortize the goodwill over 40 years.
The Applicants' proposed accounting described above is consistent with the
Commission's decision in Opinion No. 385. Entergy Services, Inc. and Gulf States
Utilities Co., 65 FERC P. 61,332 at 62,532-540 (1993). In that proceeding, the
Commission decided that, under the purchase method of accounting, a public
utility holding company can properly record an acquisition premium. Also, since
the books and records of the two jurisdictional utility companies will not
reflect "push down" accounting, the Applicants will maintain records so that the
accounting that would have resulted from the use of the pooling method can be
reconstructed.
Delmarva is deferring the merger transaction costs -- the direct costs
incurred to acquire Atlantic Energy -- in Account 186, Miscellaneous Deferred
Debits. At the time of the merger, the direct acquisition costs deferred in that
account by Delmarva will be transferred to Newco. For Atlantic, the direct
merger transaction costs will be expensed as incurred, consistent with APB
Opinion No. 16, on the books and records of Atlantic's exempt holding company
parent, Atlantic Energy, Inc., which will not survive the merger. For both
Atlantic and Delmarva, indirect costs and internal company labor costs related
to the merger are being expensed as incurred.
3. Factor 3: Reasonableness of the Purchase Price
The purchase price involves no cash payouts, except payments for fractional
shares of common stock and for appraisals under appraisal rights of dissenters,
if any, who own certain classes of preferred stock.
As stated previously, each share of common stock of each company will be
converted to stock of the holding company, Newco. The conversion ratios of
common stock of the existing companies for stock of Newco were negotiated at
arms-length by Atlantic Energy and Delmarva. Also as stated previously, the
conversion ratio for Atlantic Energy common stock to Newco is 1 to 0.75 and an
additional 0.125 shares of Class A common stock, and the conversion ratio for
Delmarva common stock to Newco common stock is 1 to 1. The Class A common stock
is to reflect the growth prospects of, and uncertainties associated with the
possible deregulation of, the regulated electric business of Atlantic.
The conversion ratios were negotiated at arms-length and have been approved
unanimously by each company's Board of Directors, including outside directors.
Each company was assisted by its own outside investment banker in the
negotiation process. The "Fairness Opinion" of each investment broker is
attached as Appendix A-1. Because the conversion ratios were negotiated at
arms-length, the purchase price is presumptively reasonable. Baltimore Gas and
Electric Co. and Potomac Edison Power Co., 76 FERC P. 61,111 at 61,575-76
(1996); Public Service Co. of Colorado and Southwestern Public Service Co., 75
FERC P. 61,325 at 62,046-047 (1996); and Wisconsin Electric Power Co. and
Northern States Power Co., 74 FERC P. 61,069 at 61,192 (1996).
4. Factor 4: Possible Coercion of the
Acquired Utility by the Acquiring Utility
Neither utility is being acquired by the other; both utilities are being
acquired by a holding company that will be owned by their former shareholders.
In any event, neither party was subject to any coercion by the other; nor did
either party have the ability to subject the other to coercion. The transaction
is strictly one of a voluntary association of equals for their mutual benefit.
Moreover, the proposed merger must be approved by a vote of Atlantic Energy's
and Delmarva's shareholders, a requirement that insures that a majority of each
group considers that the transaction is beneficial to their respective
interests. Consequently, the Commission need not "consider the effect of the
purchase price on the shareholders." Southern California Edison Co., 47 FERC P.
61,196 at 61,673 n. 20 (1989). In the event of shareholder complaints, "the
federal and state securities laws provide[ ] a mechanism to address these
concerns." Id.
5. Factor 5: The Effect of the Acquisition and
Merger on the Existing Competitive Situation
(a) No Market Power In Generation
Attached in Volume 2 is the testimony and related report of Mr. John C.
Dalton of Reed Consulting Group. Mr. Dalton's study concludes that the proposed
merger would result in no significant reduction in competition. The study
examines the effects on competition using both a Herfindahl-Hirschman Index
analysis and other economic measures of market power. In brief, Mr. Dalton
concludes that:
1. A merged Atlantic and Delmarva will not be able to exercise market power
in the short-term firm bulk power markets. In fact, the merged company will not
have any uncommitted capacity during any of the first four years after the
merger, calendar years 1998 to 2001, which constitute the period of the
short-run market in firm bulk power.
2. Competition is sufficient in power supply in the relevant geographic
markets that sellers will be unable to coordinate pricing and output in order to
exercise market power collectively. That conclusion is based on two factors.
First, differences in production costs and the amount of available generating
capacity will produce significant divergent interests that will forestall
coordinated behavior. Second, since in the existing market the participants may
be buyers one day and sellers the next, a higher price in the market may not
serve various sellers' perceived overall best interests.
3. Under current market structures (i.e., before any restructuring of PJM),
the merged company's highest share of installed or total capacity in the
relevant geographic markets will be 14.5%. That market share is well below the
20% market share that the Commission has found to be the threshold of concern
for purposes of screening market-based rate applications. Further, this 14.5%
market share is less than half of the 35% "leading edge indicator" used by the
Department of Justice Antitrust Division for such purposes. In addition, the
merged companies' market share will be consistently below all other
investor-owned utilities' market shares in the relevant markets, except in a
capacity constrained evaluation where the merged companies were still smaller
than the two dominant market competitors.
4. The merged company's market share in the restructured PJM market, for
the relevant geographic markets evaluated and all of the capacity measures
considered, remains well below the 20% level. The merged company's increase in
market power measured under the Department of Justice/Federal Trade Commission
Herfindahl-Hirschman Index for identifying anticompetitive increases in market
power resulting from mergers is also below the "safe harbor" levels for all
geographic markets and all capacity measures evaluated, with one exception. That
exception occurs in the most narrowly drawn geographic market, which is a
relevant market for the approximately 4% of the year that power flows are
constrained on the 500 kV facilities from the western and central PJM areas
across the so-called "Eastern Interface" into the eastern portion of PJM where
Atlantic and Delmarva are located. Even in this narrowly drawn market, the
merged companies have a maximum market share of 16.9% and would be competing
with much larger utilities in the region -- PECO Energy, Public Service Electric
and Gas, and GPU acting through one or more of its affiliates.
5. Coordinated behavior among suppliers to increase prices is likely to be
difficult in any proposed restructured PJM pool because of the difficulty in
reliably forecasting industry demand, output levels and prices and because there
are significant incentives provided by the bilateral market for rivals to
"cheat" on any tacit pricing agreements.
6. In the long-run bulk power markets, the merging companies control no
evident barriers to entry that would allow them to exercise market power in such
markets. There is, in fact, ample evidence of active, effective competition in
that market.
7. Neither Atlantic nor Delmarva exercises exclusionary control over new
generating facilities or fuel sources or fuel transportation.
(b) No Market Power in Transmission
1. In the transmission market, there is no market power because the merged
company will not control any alternative transmission paths that currently
provide participants access to customers or suppliers. Atlantic and Delmarva
have filed tariffs under Order No. 888 affording open access transmission of
wholesale power.
2. As discussed in detail in the testimony of Messrs. Morgan T. Morris, III
and William C. Mitchell (attached in Volume 2), both Atlantic and Delmarva have
joint rights to use the transmission facilities that comprise the three
jointly-owned 500 kV Systems within PJM. Delmarva receives electricity off the
500 kV Systems through its Keeney substation, which has a first contingency
transfer capability of 1300 MVA. During periods where exceptionally high
transfers are expected, PJM constrains the power flow through Keeney to 1300 MVA
and schedules generation that would not otherwise be dispatched by PJM
("off-cost generation"). Over the six years of 1990-95, PJM has constrained the
Keeney transfer capability less than 4% of the time, about 2,000 hours out of
52,600. In other words, during less than 4% of the hours in the last six years,
there was generation that had to be run within the Delmarva Peninsula and, in
some instances, by other PJM companies on the eastern side of PJM, to meet
customer loads that, absent the constraint, would have been met via the 500 kV
Systems from generation located off the Peninsula.
As more fully described in the testimony of Messrs. Morris and Mitchell, to
eliminate this situation, Delmarva, at an estimated cost of between $16.5
million and $18 million, is constructing an additional 500-230 kV transformer
rated at 800 MVA at its existing Red Lion substation. That transformer is
scheduled for operation on or before May 31, 1997, and the transfer capability
from the 500 kV Systems will then be 2100 MVA. After the installation of the Red
Lion substation, even upon a failure of a 500-230 kV transformer (either at
Keeney or Red Lion), the number of constrained hours per year is estimated to be
zero at least through the year 2008 based on currently projected increases in
load.
Atlantic and Delmarva do not have any other constraints on their systems
that affect wholesale or transmission customers under normal operating
conditions. Because the Applicants are members of the Mid-Atlantic Area Council
("MAAC") and meet MAAC reliability requirements, each of the Applicants'
transmission systems has been and will be designed in conjunction with existing
generation assets, such that reliability is assured consistent with good utility
practices under reasonably anticipated conditions. As with any electric system,
occasional constraints may arise in abnormal circumstances where a combination
of heavy electric demand, unavailable generators, and/or transformers and/or
transmission lines may occur at the same time. Any foreseeable constraints that
might arise under such conditions would be short-term and resolvable by
returning the facilities to service or by redispatching other generating units
in the constrained area.
(c) Provision of Open Access Transmission
A usual requirement of approval of a merger is that the Applicants offer a
joint rate over their merged transmission facilities. Based on the November 13,
1996, Order in the PJM restructuring case, Atlantic City Electric Co., et al.,
Docket Nos. ER96-2516-000, EC96-28-000 and EL96-69-000, this requirement will
likely be met through the implementation on an interim basis of a PJM pool-wide
tariff and, subsequently, through a restructured PJM. In its November 13, 1996,
Order, the Commission provided guidance to the PJM Companies, which include
Atlantic and Delmarva, to amend their proposal to restructure the PJM pool
consistent with the discussion in the body of that Order. The PJM Companies were
also directed to file a joint pool-wide pro forma open access transmission
tariff in accordance with FERC Order No. 888. The Commission also discussed
numerous modifications which must be made in the PJM Open Access Tariff to make
it consistent with the provisions contained in the Commission's pro forma FERC
Order No. 888 transmission tariff. Delmarva and Atlantic believe the
modifications to the PJM tariffs will address the Commission's desire for
comparable access and non-pancaked rates. This pool-wide tariff is expected to
become effective well before the estimated time for closing the merger proposed
here, December 31, 1997. In the event that, for any reason, the PJM joint
pool-wide tariff would not become effective by the date of closing of the
merger, the Applicants have included in this filing a joint Order 888 compliance
tariff applicable to their systems to be made effective as of the merger closing
date. (See Exhibit No. (PSG-4) attached in Volume 2 to the testimony of Mr. Paul
S. Gerritsen.)
(d) No Market Power Over
Electric Generation Fuel Inputs
The Applicants do not have market power regarding fuel used or
transportation of fuel to generate electricity. Atlantic and Delmarva do not own
or operate coal mines, railroad, barge or trucking equipment used to transport
coal or oil products. Atlantic does not own or operate natural gas facilities.
Delmarva, through subsidiaries, owns a minor interest in a small number of gas
and oil leases.
Delmarva does provide retail gas service in a small portion of its electric
service area, but it has no market power to control either the price of natural
gas or access to natural gas on the Delmarva Peninsula. First, Delmarva's retail
gas service area is located solely within northern New Castle County, Delaware,
and comprises about 275 square miles, compared to the 6,700 square miles of the
Delmarva Peninsula and parts of Delmarva's electric service territory not on the
Peninsula. Natural gas service available on the remainder of the Delmarva
Peninsula is provided by Chesapeake Utilities Corporation and its pipeline
subsidiary, Eastern Shore Natural Gas Company. Eastern Shore is currently in the
process of becoming an open-access pipeline, Docket No. CP96-128-000. Thus,
within most of the Delmarva Peninsula, Delmarva would not be the supplying
company for any potential competitor seeking to generate electricity using
natural gas.
Even within Delmarva's limited gas service area, Delmarva does not use its
gas-related assets to restrict the access of natural gas to any potential
competitor. In conjunction with its last Request for Proposals for long-term
electric supply, Delmarva developed a gas transportation rate based on a fully
allocated embedded cost approach for rate design. Of the seven gas-fired
combined cycle projects that submitted bids, only one project requested local
transportation to be provided by Delmarva. The other six projects developed
alternative supply and transportation arrangements that included direct
purchases from an interstate pipeline. Delmarva did not require bidders to use
its gas facilities or prevent bypass of its system. Furthermore, the provision
of retail gas sales and transportation service is regulated by the Delaware
Public Service Commission and Delmarva would be unable to limit access to gas
service within its service territory, except to the extent permitted by the
Delaware Commission.
Delmarva also does not use its gas-related assets to provide any price
advantage to its Electric Division relative to potential competitors. The costs
of facilities used to deliver gas from the citygate to Delmarva's gas- fired
powerplants are separately accounted for and reflected in Delmarva's electric
rate base. Over 90% of the gas consumed for electric generation is purchased by
different staff and independent of gas purchased for the retail gas business.
The remaining amount of gas consumed for electric generation is supplied under a
cost formula approved by the Maryland and Delaware Public Service Commissions.
6. Factor 6: The Effect of the Proposed
Merger on the Effectiveness of
State and Federal Regulation and, in
Particular, on this Commission's Jurisdiction
Because Atlantic and Delmarva will continue as separate utility operating
companies, each of the states that currently regulates the retail rates of the
Applicants will continue to regulate those rates. Likewise, the wholesale sales
and transmission services of each of the Applicants and the joint transmission
tariff herein filed will remain subject to this Commission's regulation after
the merger to the same extent as before. Also, power sales between the merging
utilities will remain as fully subject to this Commission's jurisdiction as
before. Newco will be subject to regulation by the SEC as a registered holding
company under PUHCA, but the Applicants commit as a condition of approval of the
merger that, for Commission ratemaking purposes, the Applicants will follow the
Commission's policy regarding the treatment of the costs and revenues of
inter-company transactions. This commitment eliminates the potential concern of
the Commission regarding loss of jurisdiction to the SEC under the holding of
Ohio Power Co. v. FERC, 954 F.2d 779, 782-786 (D.C. Cir. 1992), cert. denied,
498 U.S. 73 (1992).
C. Other Factors Supporting the Application
1. More Balanced Customer Base
The combined service territories of Atlantic and Delmarva will be more
diverse than their individual service territories, reducing Newco's exposure to
adverse changes in any sector's economic and competitive conditions. Delmarva
will be less reliant on the chemical and financial services industries, and
Atlantic will be less reliant on casino gaming, tourism and recreation. The
geographical and economic diversity will improve the stability of Newco's
revenue stream.
2. Financial Flexibility
By roughly doubling the market capitalization of Newco compared to that of
the individual companies, the merger will improve the merged company's overall
credit quality and the liquidity of its securities and thereby improve its
ability to fund continued growth at lower costs, permitting it to compete more
effectively.
3. Regional Platform for Growth
The combination of Atlantic and Delmarva will create a regional platform
for growth in the mid-Atlantic corridor. The corridor is experiencing economic
growth that is led by the casino gaming industry and related services in
southern New Jersey and the expansion of the financial services industry in
Delaware. The merged company plans to expand relationships with existing
customers and to develop relationships with new customers in the region. It will
use its combined distribution channels to market a portfolio of energy-related
products and services throughout the region and will follow regional
relationships into other geographical areas.
4. Improved Cost Accounting
Delmarva has contracted for the design and installation of a computerized
cost accounting system so that Delmarva will be better able to track and report
costs across business functions, among regulated/non-regulated activities, and
on a cost-center by cost-center basis. Under this project, known as the
Management Information Process Redesign ("MIPR"), administrative functions such
as legal, financial and accounting, human resources and information systems will
be billed out to various cost centers on a business function basis. Direct cost
assignment will continue for operations within generating stations and other
non-administrative functions, but the level of cost detail will be enhanced. The
methods for billing out and assigning costs will be published as part of a cost
accounting manual that will be submitted to the state regulatory agencies and
this Commission later this year or early in 1997.
MIPR, which is to become operational on January 1, 1997, is highly flexible
and, after the merger, will be modified to track costs of goods and services
among and between the Applicants and affiliated entities. MIPR will operate well
in the registered holding company structure contemplated by the proposed merger,
which includes the establishment of a service corporation that would provide and
bill out various services to each of the operating utilities. Because of MIPR's
high degree of flexibility with respect to gathering, tracking and reporting
costs, the SEC, this Commission and the various state commissions will be able
readily to audit transfers of goods and services among the affiliated entities.
The extension of MIPR to Atlantic's operations will be another benefit of the
merger.
V. INFORMATION SUBMITTED UNDER THE
ACQUISITION AND MERGER FILING
REQUIREMENTS OF 18 C.F.R. ss. 33.2(a) Through (i)
A. Names and Addresses of Principal
Business Offices (18 C.F.R. ss. 33.2(a))
Atlantic City Electric Company
6801 Black Horse Pike
Egg Harbor Township,
New Jersey 08234-4130
Delmarva Power & Light Company
800 King Street
Post Office Box 231
Wilmington, DE 19899-0231
B. Names and Addresses of Persons
Authorized to Receive Notices and
Communications (18 C.F.R. ss. 33.2(b))
James E. Franklin, II
Senior Vice President, Secretary
and General Counsel
Atlantic City Electric Company
6801 Black Horse Pike
Egg Harbor Township,
New Jersey 08234-4130
Dale G. Stoodley
Vice President and General Counsel
Randall V. Griffin
Senior Counsel
Delmarva Power & Light Company
800 King Street
Post Office Box 231
Wilmington, DE 19899-0231
George F. Bruder, Esq.
Carmen L. Gentile, Esq.
Bruder, Gentile & Marcoux, L.L.P.
1100 New York Avenue, N.W.
Suite 510 East
Washington, DC 20005-3934
C. Designation of Territories Served by
County and State (18 C.F.R. ss.33.2(c))
The states and counties served in whole or in part by the Applicants are:
Atlantic City Electric Company
New Jersey: Atlantic, Burlington, Camden, Cape May
Cumberland, Gloucester, Ocean, Salem
Delmarva Power & Light Company
Delaware: New Castle, Kent, Sussex
Maryland: Caroline, Cecil, Dorchester, Harford, Kent,
Queen Anne's, Somerset, Talbot, Wicomico, Worcester
Virginia: Accomack, Northampton
D. Brief Description of the Facilities
Owned or Operated for Transmission of
Electric Energy in Interstate Commerce
or the Sale of Electric Energy at
at Wholesale (18 C.F.R. ss.33.2(d))
1. Atlantic City Electric Company
Transmission Facilities
Atlantic currently owns approximately 963 miles of transmission line
facilities in New Jersey at the voltages set forth below:
Transmission Line Miles
500 kV 0
230 kV 127
138 kV 209
69 kV 627
Total 963
Atlantic owns 71 substations operating at primary voltages at or above 69
kV.
2. Delmarva Power & Light Company
Transmission Facilities
Delmarva currently owns approximately 1,508 miles of transmission line
facilities on the Delmarva Peninsula at the voltages set forth below:
Transmission Line Miles
500 kV 16
230 kV 326
138 kV 449
69 kV 717
Total 1,508
Delmarva owns 110 substations operating at primary voltages at or above 69
kV. As previously noted, Delmarva is installing an additional 500 kV-230 kV
transformer at a substation near Red Lion, Delaware, which will greatly enhance
Delmarva's transfer capability of electricity from the 500 kV transmission lines
to the rest of Delmarva's system. The Red Lion substation transformer has been
built and tested. The transformer will be in operation on or before May 31,
1997.
3. Joint-Use Facilities
Atlantic and Delmarva are signatories to several agreements that permit the
joint use of 500 kV transmission lines and related substations within the states
of Delaware, Maryland, New Jersey and Pennsylvania. These transmission
facilities interconnect with Atlantic and Delmarva and other utilities that are
members of PJM. These facilities also electrically interconnect with generating
units that are partially owned by Atlantic and Delmarva. A more detailed
description of these joint-use facilities is set out in the testimony and
exhibits of Messrs. Morris and Mitchell attached in Volume 2.
E. Description of Transaction and
Consideration (18 C.F.R. ss. 33.2(e))
1. Transaction
The transaction is described above in Section III, Merger Procedures.
2. Consideration
The consideration in the merger is that which is inherent in the treatment
at closing of shares as negotiated at arms-length between the parties (see
Article II of the Agreement and Plan of Merger). That treatment is as follows:
a. The following shares are to be canceled: (1) Delmarva common stock
owned by Delmarva as treasury stock or by Atlantic Energy or any wholly
owned subsidiary of Delmarva or Atlantic Energy, (2) Atlantic Energy common
stock, no par value, owned by Atlantic Energy as treasury stock or by
Delmarva or any wholly owned subsidiary as treasury stock, and (3) Newco
common stock that is owned by Delmarva, Atlantic Energy or any of their
wholly owned subsidiaries.
b. Each share of Delmarva common stock is to be converted into
one share of Newco common stock, and each share of Atlantic Energy common
stock is to be converted into 0.75 shares of Newco common stock and
0.125 shares of Newco Class A common stock, par value $0.01 (the
Letter Stock).
c. Each share of DS Sub, Inc. common stock, par value $.01 per
share, issued and outstanding immediately prior to the effective time shall
be converted into one share par value $2.25 of Newco common stock.
The above treatment of shares at the closing was negotiated by the parties
at arms-length and separately evaluated for fairness by each party. The parties
did not establish a mutually agreed-upon methodology to determine the fairness
of the consideration to each. In the negotiations, each party had access to
analyses and advice prepared by its own investment banking advisors. The merger
must be approved by vote of Atlantic Energy and Delmarva's shareholders.
F. Statement of Jurisdictional
Facilities to be Disposed of or Merged (18
C.F.R. ss. 33.2(f))
No jurisdictional facilities are to be disposed of. The facilities to be
merged under Section 203 of the Federal Power Act are all jurisdictional
facilities of Atlantic and Delmarva. The merger is to be achieved through the
ultimate joint ownership and control of the facilities by Newco through its
operating company subsidiaries, Atlantic and Delmarva. Legal title to the
facilities will be unchanged from the companies that now own them.
G. Cost of Facilities Involved
in Merger (18 C.F.R. ss. 33.2(g))
The required information setting forth Atlantic's and Delmarva's costs of
merged facilities is attached hereto as Exhibit C.
H. Statement of Effects on Any
Contract for the Purchase, Sale or
Interchange of Electric Energy (18 C.F.R. ss. 33.2(h))
1. Because Atlantic and Delmarva will continue their corporate existence,
the merger will not affect any contract for the purchase, sale, or interchange
of electric energy of either Atlantic or Delmarva.
2. Each of the Applicants has an open-access tariff in effect pursuant to
Order No. 888, and the Applicants have submitted herewith in Volume 2 a joint
open access Order No. 888 tariff to be effective upon the date of the merger if
joint service is not then available under a PJM rate. The joint tariff adopts
for the combined transmission system the lower of each company's rates for
network, point-to-point and ancillary services.
3. The merger will not affect reliability or service to the Applicants'
existing wholesale sales or transmission customers.
4. The Applicants are not proposing any changes to their separate fuel
adjustment clauses, and are not proposing to reallocate power production costs
among jurisdictions or levelize their wholesale or retail rates. The Applicants
commit, as a condition for approval of the merger, that their wholesale rates
will be held harmless from merger-related cost increases, as described in more
detail in the testimony of Mr. Paul S. Gerritsen attached in Volume 2.
I. Statement Regarding Other
Required Filings (18 C.F.R. ss. 33.2(i))
The Delaware Public Service Commission, the New Jersey Board of Public
Utilities and the Virginia State Corporation Commission must approve the merger.
The Pennsylvania Public Utility Commission will be requested to issue a limited
approval with respect to jointly-owned production and transmission facilities
located in Pennsylvania. The Maryland Public Service Commission does not have
jurisdiction to approve or disapprove the proposed merger. The SEC must
authorize creation of Newco as a registered holding company under PUHCA and the
arrangements within the holding company system. A notification of the merger to
the Federal Trade Commission ("FTC") will be filed pursuant to the
Hart-Scott-Rodino Act, relating to any antitrust implications of the proposed
acquisition and merger. No objection by the FTC or the Department of Justice to
the merger is expected. The Nuclear Regulatory Commission must approve the
merger with respect to financial commitments regarding nuclear facilities owned
in part by Atlantic and Delmarva. Again, no objection is anticipated.
VI. ACQUISITION AND MERGER REQUIRED EXHIBITS UNDER 18 C.F.R. ss. 33.3
Attached are Exhibits A through I. Exhibit G requires inclusion of all
other state and federal regulatory applications in connection with the
transaction and certified copies of any orders issued. Exhibit G will be
supplemented with copies of the applications made to the Securities and Exchange
Commission, the Federal Trade Commission, the Department of Justice, the Nuclear
Regulatory Commission, and the state commissions of Delaware, New Jersey,
Virginia and Pennsylvania, as those applications are filed. As observed earlier,
the Maryland Public Service Commission does not have jurisdiction to approve the
merger.
VII. DOCUMENTS SUBMITTED UNDER 18 C.F.R.ss.33.2 (k) and (l)
A. Statement of Franchises Held (18 C.F.R. ss. 33.2(k))
Attached as Appendix A-2.
B. Form of Notice for the Federal
Register (18 C.F.R. ss. 33.2(l))
Attached as Appendix A-3.
VIII. PROCEDURAL MATTERS
A. Request for Approval Without Hearing
The Applicants' request that the Commission approve the
merger without hearing on the basis of the considerations
and circumstances listed below indicating, individually and
collectively, that a hearing is not needed.
1. As the market power study submitted in volume 2 herewith shows, the
merger of the two smallest utilities in PJM will not result in the Newco
system's attaining any degree of market power in generation that is
anticompetitive or contrary to the public interest. Moreover, the merger, by
forestalling potential mergers of each utility with a larger one, producing a
greater concentration of market power than the proposed merger, will tend to
preserve competition in regional power supply markets.
2. The parties have addressed market power in transmission by including
herewith a proposed joint Order No. 888 tariff and by continuing to support a
PJM pool-wide tariff. The only significant transmission constraint on the
merging electric systems is the one that is being currently addressed by
Delmarva's transformer addition at its Red Lion substation, a project which,
before the merger, will entirely eliminate the transmission constraint and
provide abundant transmission capacity for future load growth.
3. In Docket Nos. ER96-2516-000, et al., the Applicants have joined in the
comprehensive restructuring proposal of nine of the 10 members of PJM. That
comprehensive restructuring proposal would result in the creation of an ISO,
which would administer a pool-wide transmission tariff. The Commission, clearly,
will require that any rates approved in that proceeding will eliminate pancaking
of transmission rates and will reduce any market power that PJM members,
including the Applicants, may have.
4. The merger will not cause loss of jurisdiction by any of the four state
commissions over the retail rates of either of the Applicants. The wholesale
rates of the Applicants are currently regulated by this Commission and will
continue to be so regulated after the merger.
B. Closing Date
The Applicants intend to close on the transactions required to effect the
merger as soon as practicable after receiving the last of the required
regulatory approvals. The Applicants will advise the Commission of the closing
date promptly upon its occurrence.
IX. CONCLUSION
The Applicants jointly request the following:
A. Findings
1. The merger will not produce any aggregation of market power
which is inconsistent with the public interest under the Federal Power Act.
2. The merger will produce significant savings in
the cost of service to both of the merging utilities and
thereby either reduce their regulated retail and wholesale rates under a rate
regulation regime or render the utilities more effective competitors under any
superseding competitive market regime. In either case, the ultimate consumers of
power will benefit.
3. The Commission properly may consider both the level of the
aggregated market share after the merger as well as the merits of the merger in
preserving competitive market shares as consolidation in the industry goes
forward.
4. The Applicants have fulfilled all applicable requirements for
authorization of the merger under Section 203 of the Federal Power Act and Part
33 of its Regulations.
B. Requested Commission Actions
The Applicants request the following actions:
1. Approval of the merger, to the full extent required by law, of Atlantic
and Delmarva as subsidiaries of a newly formed registered public utility holding
company and any other authorizations or approvals that might be required
incidental thereto;
2. Approval on the merger on the Application and pleadings, without
hearing;
3. If a hearing is found to be necessary, procedures (such as a paper
hearing) that would permit the approval of the acquisition and merger to be
granted as expeditiously as possible; and
4. Waivers of any filing requirements or other regulations as the
Commission may find necessary or appropriate to allow this Application to be
accepted for filing and granted.
Respectfully submitted
on behalf of:
Atlantic City Electric Company and
Delmarva Power & Light Company
By: _______________________________
Dale G. Stoodley
Vice President and
General Counsel
Randall V. Griffin
Senior Counsel
Delmarva Power & Light Company
James E. Franklin, II
Senior Vice President, Secretary
and General Counsel
Atlantic City Electric Company
George F. Bruder
Carmen L. Gentile
Bruder, Gentile & Marcoux, L.L.P.
Attorneys for the Applicants
Atlantic City Electric Company
Delmarva Power & Light Company
Docket No. EC97-___-000
Ex.__________
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
TESTIMONY OF JOHN C. DALTON
FILED ON BEHALF OF
ATLANTIC CITY ELECTRIC COMPANY
DELMARVA POWER & LIGHT COMPANY
1. Q: Please state your name, occupation, and business address.
A: My name is John C. Dalton. I am a Vice President and
Principal of Reed Consulting Group (RCG), 200 Wheeler Road,
Burlington, Massachusetts 01803.
2. Q: Please describe your educational background and professional
qualifications.
A: I graduated from Brown University with a Bachelor of
Arts Degree in Economics in 1980 and received a Masters in
Business Administration from Boston University in 1987.
From 1981 to 1984, I was employed by the Massachusetts
Department of Environmental Protection as an environmental
planner and staff economist. In 1984, I joined the Massachusetts
Energy Facilities Siting Council (Siting Council) as a staff
economist responsible for reviewing the demand forecasts and
supply plans of Massachusetts electric and natural gas utilities.
In 1987, I joined R.J. Rudden, a management consulting firm
specializing in energy matters, as a consultant. In 1988, I left
R.J. Rudden with others to form RCG. While at RCG, I have managed
many of RCG's market power analysis assignments. Specifically, I
have served as Responsible Officer or Project Manager in our
market power consulting assignments for Orange & Rockland
Utilities, Inc., the Province of Ontario's Advisory Committee on
Competition in Ontario's Electricity Sector, Ocean State Power,
NORSTAR Energy Limited Partnership, Delmarva Power & Light
Company, Avoca Natural Gas Storage, Steuben Gas Storage Company,
the Cove Point LNG Limited Partnership, and Pacific Gas &
Electric. Exhibit ___(JCD-2) reviews my professional experience
and background.
3. Q: Have you testified before any regulatory agencies prior to
this case?
A: Yes. I have testified before the Massachusetts Department of
Public Utilities, the Massachusetts Siting Council, and the Rhode
Island Public Utilities Commission on various matters pertaining
to electric utility resource planning and procurement. In
addition, I have prepared a number of reports and affidavits for
market power analyses that have been submitted to the Federal
Energy Regulatory Commission (FERC or Commission).
4. Q: What is the purpose of your testimony?
A: RCG has been engaged by Delmarva Power & Light Company
(DP&L) and Atlantic City Electric Company (AE) to evaluate
whether their proposed merger as subsidiaries under a holding
company (Newco) would significantly lessen competition in their
relevant markets as a result of the consolidation of their
generation and transmission facilities.
My testimony summarizes the various analyses that I
performed to evaluate the implications of the merger on
competition in the relevant markets that would be affected by the
merger.
I prepared the report attached hereto as Exhibit ____
(JCD-1), which is an "Assessment of the Competitive Implications
of the Proposed Merger between Delmarva Power & Light Company and
Atlantic City Electric Company."
This report presents my findings on the impact of the merger
on the competitiveness of the markets in which DP&L and AE
currently operate. In light of proposals to restructure the
Pennsylvania-New Jersey-Maryland (PJM) Interconnection, in which
both DP&L and AE are members, I also assessed the impact of the
merger on a market that is restructured consistent with the
general framework outlined in these proposals. I found that the
proposed merger will not lessen competition either in the
restructured PJM Pool or under the existing market structure.
5. Q: Please summarize your conclusions on the competitive
implications of the DP&L and AE merger.
A: As described in detail in my attached report, I have
found the following:
1. The proposed merger between DP&L and AE will not
lessen competition in any of the merged company's relevant
markets.
2. During the short-run period, which consists of the
first four years after the merger is completed, i.e., 1998
to 2001, the merged company is projected to have no
uncommitted capacity, which is an indicator of a supplier's
ability to make firm bulk power sales. Therefore, the
proposed merger will have no effect on market concentration
in the merged company's short-run firm bulk power markets
and will not lessen competition in these markets.
3. My analysis of the non-firm energy markets indicates
that the merger will not lessen competition in these
markets. This analysis evaluated the merged company's
non-firm energy markets using the Commission's traditional
hub and spoke analysis framework and an analysis, i.e., the
Eastern PJM analysis, which reflected both increased
transmission access through the PJM 500 kV facilities and
the influence of transmission constraints on the scope of
the geographic market. (This Eastern PJM analysis recognizes
that there is a constraint on power flows on the 500 kV
facilities from the western and central portions of PJM
across the so-called Eastern Interface into the eastern
portion of PJM where DP&L and AE are located.) Most
importantly, the merged company's highest share of installed
capacity in its relevant geographic markets is projected to
be 14.5%, which is well below the 20% market share that the
Commission has used as an indicator of the lack of market
power. Furthermore, the increases in the market
concentration levels for the non-firm energy markets suggest
that the merger will not reduce competition within the
merged company's relevant markets, given the conservative
market definitions utilized, and the divergent interests
among electric utilities.
4. In the restructured PJM markets, for both relevant
geographic markets evaluated and all of the capacity
measures considered, the merged company's market share is
below the 20% level that the FERC has found to be an
indicator of a lack of market power. This indicates that the
unilateral exercise of market power by the merged company is
unlikely. Furthermore, the collective exercise of market
power is unlikely given the difficulty of reliably
forecasting industry demand, output levels, and the prices
to be offered by competitors and the significant incentives
provided by the bilateral market for rivals to cheat on any
tacit or explicit pricing arrangements. Finally, the markets
are moderately concentrated and the increases in market
concentration from the merger are below the safe harbor
thresholds identified by the Department of Justice (DOJ) and
the Federal Trade Commission (FTC) in their Horizontal
Merger Guidelines in all cases except for one of four
capacity measures evaluated. This one exception occurs in
the most narrowly defined market, which is a relevant market
only during those limited periods when the PJM's Eastern
Interface is constrained. For all other periods, a broader
market definition would be appropriate. In light of the
factors discussed above, the merged company would not be
able to exercise unilaterally any market power even in the
most narrowly- drawn geographic market for this one capacity
measure. Therefore, I found that, with respect to all
relevant markets, the merger will not lessen competition in
a restructured PJM market.
5. The merging companies do not control any barriers to
entry and, as such, the proposed merger will not reduce the
competitiveness of the long-run bulk power market.
6. FERC's open access transmission tariff requirement,
the joint Order No. 888 tariff submitted by DP&L and AE, the
limited strategic value of the merging companies'
transmission facilities, and the proposed ISO for the PJM
Pool will ensure that the merged company is unable to use
its transmission facilities to exercise market power.
Therefore, the merger will not provide the merged company
with market power in the transmission market.
7. The proposed merger will not have a significant
effect on retail competition.
6. Q: What methods of assessing the competitive effects of
the merger did you use?
A: As "threshold" or "screening" measures of market power,
I used the following methods: (1) For market share, I
compared the merged company's market share to the 20%
threshold which has been applied in the past by the FERC as
an indicator of the lack of market power; and to DOJ's 35%
leading firm standard; and (2) For market concentration, I
utilized DOJ's and the Federal Trade Commission's (FTC)
"1992 Horizontal Merger Guidelines" and have calculated
market concentrations using the Herfindahl-Hirschman Index
(HHI). The merger passed this initial screen: if the market
was unconcentrated; moderately concentrated and the change
in HHI due to the merger was less than 100; or heavily
concentrated and the change in HHI due to the merger was
less than 50.
In addition to assessing market shares and market
concentration to determine the competitive effects of a merger, I
also considered the following factors: (1) the likelihood that
sellers can effectively coordinate their behavior to achieve an
uncompetitive result; (2) the degree to which the market
definition applied accurately reflects the competitive
alternatives that are likely to be available to the utilities in
the relevant market; and (3) the relative ease of market entry.
Each of these issues is discussed in greater detail, as
appropriate, in my report.
7. Q: What are the relevant product markets that you analyzed?
A: As more fully described in my report, I found the following
to be the relevant product markets for the merged company:
(1) The short-run bulk power market, including the four
years 1998-2001; and
(2) The long-run bulk power market, including any period
extending beyond the short-run period. Because the PJM Pool is in
the midst of a potential restructuring, I performed analyses for
both the existing PJM market structure and for a restructured PJM
market.
I subdivided the bulk power market into two different types
of products, consistent with FERC precedent:
(1) Firm Bulk Power Transactions, which I assessed using
uncommitted capacity as an indicator of a seller's ability to
make firm power sales; and
(2) Non-Firm Energy Transactions, where I used installed
capacity as a measure of a seller's ability to make these sales.
8. Q: How did you define the relevant geographic markets for the
DP&L and AE merger?
A: I followed the FERC's prior merger analyses and adopted a
"Hub and Spoke" approach, including first and second tier
suppliers, for the existing PJM market structure. As described in
my report, this method determined four "hubs" to be analyzed:
PSE&G, PECO, GPU and the Transmission Dependent Utilities (TDUs).
As explained in my report, the analyses would be the same for
each TDU, and, thus, each of the TDU markets is validly described
by a single analysis. To assess the influence of transmission
constraints on the scope of the relevant geographic market, I
conducted an additional analysis of the Eastern PJM market that
reflects the Eastern Interface transmission constraint. For the
restructured PJM market, I conservatively focused on the Eastern
Zone of PJM because there is a transmission constraint that
limits the flow of electricity into the Eastern Zone portion of
PJM about 4% of the time, based on historic data. I also analyzed
the entire PJM as a geographic market, which would represent the
market during the roughly 96% of the year when constraints do not
exist on the Eastern Interface.
9. Q: Starting with the existing market structure, what are the
results of your analyses?
A: For the Short-Run Firm Bulk Power Market, neither DP&L nor
AE has any uncommitted capacity in the four years 1998-2001 (they
both are "short" on capacity). Therefore, the merger won't affect
market concentration and won't reduce competition in any
geographic market.
For the Non-Firm Energy Market, using the hub and spoke
framework, my market concentration analysis to define the
geographic market indicated the following:
<TABLE>
<S> <C> <C> <C> <C> <C>
Newco HHI HHI Market Pass
Hub Market Market Share Post-Merger Increase Concentration Screen
PECO
- without
BGE/PEPCO
Merger 10.0% 1771 48 Moderately Yes
- with
BGE/PEPCO
Merger 8.8% 1809 37 Heavily Yes
PSE&G 9.4% 1688 42 Moderately Yes
GPU 9.5% 1339 43 Moderately Yes
TDUs 14.5% 2640 102 Heavily No
</TABLE>
The first four of these markets easily pass the screening
test used by the DOJ/FTC. The TDU market hub does not pass the
screen, which is an increase of 50 or less in the HHI for a
"heavily concentrated" market. However, I believe that the
reported increases in HHIs under the hub and spoke analysis
overstate the true level of increase in market concentration from
the proposed merger, since the market definition that I applied
in this analysis is conservative and results in a narrow market
definition. I conservatively assumed that the merger would not
increase the geographic scope of the market and only considered
the non-firm energy that would be available to the market hub
utility from other PJM members that are directly interconnected
with the market hub or that the market hub could access through
the merged company's open access tariff. An analysis of the
non-firm energy transactions for the investor-owned market hub
utilities indicates that over 50% of their purchases from
utilities were from utilities that were outside of the geographic
market definition that I used. This verifies the reasonableness
of applying a less conservative approach that would broaden the
geographic market and, thus, reduce the calculated change in
market concentration as a result of the merger.
For the Eastern PJM analysis, the increase in the HHI is 96
and the market is considered to be a heavily concentrated market.
The Eastern PJM market definition that I employed also represents
a narrow definition of the merged company's relevant market and
understates the alternatives that are available to the Eastern
PJM utilities. Specifically, the analysis only considered the
transfer capability of the 500 kV system, i.e., 6,900 MW. For
planning purposes, the PJM uses a total transfer capability over
the Eastern Interface which is approximately 10,000 MW, which
would reduce the merged company's market share and consequently
reduce the increase in the HHI from the merger to 80. Finally,
this Eastern PJM market represents a relevant market for the
merged company only during the period that the Eastern Interface
is constrained. When the Eastern Interface is unconstrained, a
broader geographic market definition is appropriate. Based on
historic data, a broader market definition would be appropriate
for approximately 96% of the year. Another indication of the
narrowness of the market definition that I employed for the hub
and spoke and Eastern PJM analyses is that no consideration was
given to the non-firm energy that would be available from power
marketers, independent power producers, and other prospective
suppliers, even though these entities represent a significant
presence in the market as demonstrated by recent deals with
various power marketers to supply power to the City of Dover,
Town of Easton and Old Dominion Electric Cooperative, all of
which are TDUs receiving transmission service from DP&L.
Nonetheless, assuming that these reported increases in HHI
were a valid indication of the actual increase in market
concentration as a result of the proposed merger, I believe that
these increases in the HHI reported for the TDU hub and Eastern
PJM markets would not suggest that the merger will lessen
competition within the merging companies' relevant markets when
other relevant factors are considered. Specifically, there are
several aspects of the existing market structure that make it
unlikely that suppliers will be able to coordinate their pricing
and output decisions in an effort to collectively exercise market
power. First of all, the differences among suppliers' production
costs and the amount of available generating capacity are likely
to result in significant divergent interests which make
coordinated behavior unlikely. Furthermore, under the existing
market structure, an electric utility that is a seller one day
may be a buyer the next. Therefore, a higher market price would
not necessarily be in its best interests. Furthermore, a
significant portion of the merged company's installed capacity
would be in generating units in which it is a joint owner and has
a minority interest and, as such, it would be unable to
unilaterally use this capacity to attempt to exercise market
power. These factors suggest that the reported market shares for
the merged company and for other suppliers in the market
overstate their true influence with the market and that the
resulting market concentration levels and increases in HHI from
the proposed merger are overstated. Therefore, I believe that the
calculated increases in the HHI from the merger should not be
considered reliable indicators of reduced competition within the
merged company's non-firm markets.
I also note the maximum market share for the merged company
for the four hub and spoke and the transmission constraint based
geographic markets is only 14.5%, well below the FERC's 20%
threshold. Thus, the merged company has little ability to
exercise any market power unilaterally. Since passage of the
Energy Policy Act of 1992, the competition from nearby, much
larger, utilities with DP&L and AE to serve the TDUs further
supports my conclusion that exercise of market power through
collusion with these dominant players in the market is unlikely.
10. Q: Turning now to your analysis of a restructured PJM market,
what are your results?
A: As noted above, the merged company has no uncommitted
capacity. To the degree that there is a firm bulk power market in
a restructured PJM, the merged company is unlikely to have any
uncommitted capacity that it could make available to this market;
therefore, the merger would not lessen competition in these PJM
and Eastern Zone markets.
Regarding the market for energy, I evaluated the impact of
the merger on competition for energy under a restructured PJM in
the entire PJM area and in the Eastern Zone of PJM.
For the entire PJM geographic market, I found the following
results:
<TABLE>
<S> <C> <C> <C> <C> <C>
Newco HHI Post- HHI Market Pass
Capacity Measure Mkt. Share Merger Increase Concentration Screen
Total 7.9% 1185 30 Moderately Yes
Intermediate 6.3% 1450 19 Moderately Yes
Base & Intermediate 5.3% 1141 14 Moderately Yes
Intermediate & Peaking 9.7% 1276 44 Moderately Yes
</TABLE>
My results for the Eastern PJM geographic market are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Newco HHI Post- HHI Market Pass
Capacity Measure Mkt. Share Merger Increase Concentration Screen
Total 14.1% 1435 76 Moderately Yes
Intermediate 9.3% 920 0 Unconcentrated Yes
Base & Intermediate 7.1% 1139 12 Moderately Yes
Intermediate & Peaking 16.9% 1609 119 Moderately No
</TABLE>
My analysis of the restructured PJM for both of the merged
company's relevant geographic markets indicates that the proposed
merger will result in an increase in market concentration as
measured by the HHI that is just above the safe harbor threshold
of 100 for a moderately concentrated market specified in the
Horizontal Merger Guidelines for just one capacity measure, i.e.,
intermediate and peaking capacity. And this is for the most
narrowly defined market, the Eastern PJM market, which is a
relevant market only during those periods when the Eastern
Interface is constrained. When the Eastern Interface is
unconstrained, a broader geographic market definition is
appropriate and, based on historic data, a broader market
definition would be appropriate for approximately 96% of the
year. Furthermore, my Eastern PJM analysis is extremely
conservative because I have only considered the 6,900 MW transfer
capability of the 500 kV system. PJM estimates a total transfer
capability over the Eastern Interface for all transmission
facilities of approximately 10,000 MW, which would reduce the
increase in HHI for this market from 119 to 105.
Possibly the most clear cut evidence that the merged company
will not be able to exercise market power is that, for both
relevant geographic markets and all of the capacity measures
considered, the merged company's market share is below the 20%
level that the FERC found in Public Service Co. of Indiana was an
indicator of a lack of market power. As noted above in connection
with the existing market structure analysis, this small market
share indicates that the unilateral exercise of market power by
the merged company is unlikely.
11. Q: What other factors did you consider regarding the competitive
effects of the merger on the restructured PJM market?
A: If the merged company will not be able to unilaterally
exercise market power, the only way in which the merger could
lessen competition would be if it would make the collective
exercise of market power more likely. However, there are several
aspects of the restructured PJM market that indicate that an
increase in the HHI that is just above the safe harbor threshold
does not indicate that suppliers would be able to collude in an
effort to increase market prices. In general, for suppliers to
collude successfully and, by doing so, to increase market prices,
they must be able to reach terms of coordination that are
profitable to the suppliers involved and to detect and punish
deviations that would undermine the coordinated action. Factors
that tend to facilitate collusion are: (1) a frequently repeated
auction for a homogenous product under similar demand and supply
conditions; (2) intimate knowledge of a rival's operating costs;
and (3) almost immediate knowledge of a rival's actions. The
first two factors facilitate collusion by making it easier to
anticipate a rival's likely actions and the third factor limits
the ability of suppliers to cheat on any tacit or formal
agreements, since rivals would be able to quickly respond to any
cheating and, as a consequence, to limit the profitability of
cheating or undercutting market prices.
Coordinated behavior among suppliers that produces an
increase in market prices is likely to be difficult in the
restructured PJM market, given the difficulty of reliability
forecasting industry demand, output levels, and the prices to be
offered by competitors and the significant incentives provided by
the bilateral market for rivals to cheat on any tacit or explicit
pricing agreements. Therefore, given the insignificant increase
in market concentration from the merger in all cases but one, the
merged company's relatively small market share in all cases, and
the many factors that promote competition within the restructured
PJM market, I find that the proposed merger would not lessen
competition in a restructured PJM market.
12. Q: Are there other factors which indicate that the merger will
not have anticompetitive effects in either the current PJM market
of the future restructured PJM market?
A: To the limited extent the HHIs in the market analyses I have
developed exceed safe harbor levels or are in the area raising
competitive concerns, they do so for very limited periods of the
year and only on a border line basis. As shown in my report (Exh.
No. ____ (JCD-1) at pages III-3 and 4), these HHIs are far below
the levels which have caused DOJ to file objections to mergers on
the basis that the merger would substantially lessen competition.
Such treatment confirms my own analysis provided above that this
proposed merger will not have anticompetitive consequences.
In connection with the HHI data and the market share data, I
also note the small size of the merged company on a post-merger
basis relative to the other PJM members. The large size of these
other utilities (and not the small size of the merged company)
accounts for the market concentration results. In this respect,
rejection of the merger based on relatively small HHI increases
would elevate form over substance and have the effect of
dampening rather than promoting competition. The reasons are
simple. First, the merged company has a much better chance of
remaining independent of its larger neighbors than either DP&L or
AE on an unmerged basis. Second, with its combined resources, the
merged company will be better positioned to compete with its
large utility neighbors than would either DP&L or AE standing
alone. Thus, the merged company will promote the existence of
robust competition in the PJM region, and denial of the merger
would actually have the opposite effect and reduce the level of
competition in the PJM region.
Denial of the merger would cause this loss of competition
and would be inappropriate given certain other factors which show
that the merger could not cause anticompetitive harm. These
include the following. The higher HHIs occur only during brief
periods of the year for limited products. There is ease of entry
into the generation market at least on a longer term (four year)
basis. The TDUs in DP&L's service area have been extremely
successful in obtaining power from non- DP&L sources within PJM
with the result that actual market experience demonstrates that
DP&L, in fact, lacks market power over its TDUs. Those TDUs which
continue to take sales service from DP&L do so under contracts
which remain in effect until after the end of the four year entry
period and are covered by a "hold harmless" commitment by DP&L
and AE; thus, they are insulated from any possible exercise by
the merged company of market power. In short, this merger will
produce procompetitive benefits without causing any
anticompetitive harm.
13. Q: Have you also analyzed the Long-Run Bulk Power Market?
A: Yes, I have. In Appendix B to my report, I have evaluated
the competitiveness of the long-run bulk power market and
assessed whether the merging companies were able to erect or
maintain any barriers to entry. I found that the merging
companies could not control any barriers to entry and a
significant amount of empirical evidence that indicates a
competitive long-run bulk power market. Therefore, the proposed
merger will not reduce the competitiveness of the long-run bulk
power market.
14. Q: What did you find when you analyzed the merged company's market
power as a buyer?
A: The proposed merger will not cause the merged company to
have any market power as a buyer in the short-run or long-run
bulk power markets. First of all, the merged company will
represent a relatively small portion of the market with its load
representing approximately 9% of the 1995 peak load in the PJM
area. Furthermore, the merged company's joint comparable services
transmission tariff will ensure that it is unable to exert any
market power over any supplier that is located or intends to
locate in the merged company's service territory. Finally, under
a restructured PJM, the merged company will be unable to exert
market power as a buyer, because suppliers will be free to offer
their output to an Independent System Operator (ISO) or to other
load serving entities under a bilateral contract. Clearly, the
merged company will be unable to exercise market power as a buyer
in either the short-run or long-run bulk power markets.
15. Q: Have you also analyzed Transmission Market Power?
A: Yes. Both DP&L and AE have filed open access transmission
tariffs that conform with FERC Order No. 888, and in granting
both these companies authority to charge market-based rates for
generation services, the FERC found that the companies meet "the
Commission's transmission market power standard for approval of
market-based rates." Therefore, FERC's open access transmission
tariff requirement and the joint open access tariff submitted
herein mitigate sufficiently any concerns regarding market power
in the transmission services market. Furthermore, I find that, in
general, the transmission facilities owned by DP&L and AE do not
represent strategic transmission paths that prior to the merger
provided prospective customers or competitors with an alternative
to the transmission services offered by the other merging
company. To a large degree, both DP&L and AE are geographically
isolated. Given their location at the eastern end of the PJM pool
with no utilities connected to the east and the majority of the
PJM pool generation to the west, their transmission facilities do
not represent major transmission paths that are used by other
electric utilities to access bulk power supplies. Their
transmission facilities are used instead to connect the two
companies to adjacent electric utilities and are used primarily
to move their generation in jointly-owned units located outside
of their service territories. Finally, under PJM restructuring,
it is likely that all major transmission facilities will be
controlled by an ISO. Thus, even if these facilities were of
strategic value, the merged company would not be able to use them
to attempt to limit access to competitors. Therefore, the merger
will not provide the merged company with market power in the
transmission market or adversely affect the competitiveness of
the bulk power markets in which the merging companies compete.
16. Q: Did you also review the merger's implications on retail
competition?
A: Yes, I did. In general, there are five primary areas of
retail competition that exist under the current market structure
which potentially could be affected by this merger. These areas,
which are discussed in more detail in my report, include:
industrial location competition; fringe area competition;
interfuel competition; franchise competition; and yardstick
competition. Finally, in testimony submitted in the Docket
pertaining to the proposed merger between PEPCO and BG&E (Docket
Nos. EC96-10-000 and ER96-784-000), a staff witness evaluated the
impact of the proposed merger on "retail access", i.e.,
competition between suppliers to sell power to retail customers.
Therefore, I also addressed whether such an analysis is
appropriate in light of the current retail market structure.
For reasons explained in my report, I found that, the merger
of the two utilities in this case will not have a significant
effect on retail competition, either in the region or within the
two utilities' service areas.
17. Q: Does this conclude your testimony?
A: Yes, it does.
Atlantic City Electric Company & Delmarva Power & Light Company
FERC Docket No. EC97-7-000
Supplemental Testimony of John C. Dalton Exhibit No. __ (JCD-3)
- --------------------------------------------------------------------------------
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
SUPPLEMENTAL TESTIMONY OF
JOHN C. DALTON
FILED ON BEHALF OF
ATLANTIC CITY ELECTRIC COMPANY
AND
DELMARVA POWER & LIGHT COMPANY
1. Q: Are you the same John Dalton who has previously offered testimony in
this proceeding?
A: I am.
2. Q: What is the purpose of your present testimony?
A: I describe the significance of interconnected PJM operation under a PJM
open-access tariff to the competitiveness of the markets in which the merger
applicants, Atlantic and Delmarva, operate. I also sponsor and explain a new
competitive analysis, Exhibit No. ___ (JCD-4), which I prepared in accordance
with the requirements of Appendix A of the Commission's Merger Policy Statement.
I also address additional considerations which relate to curbs on market power
which were discussed in the Commission's Policy Statement and the Department of
Justice/Federal Trade Commission Merger Guidelines.
3. Q: Have you reviewed the PJM transmission tariff as sponsored by the
nine "Supporting Companies" and as filed with the Commission on December 31,
1996?
A: I have. The Commission issued an order on February 28, 1997 allowing the
Supporting Companies' Tariff to become effective subject to a single exception
and subject to a hearing.
4. Q: What is the effect of that tariff on the dimensions of the geographic
market for use in your market power analyses?
A: That tariff, together with the three revised 500 kV transmission
facility agreements, transforms PJM into a networked open-access transmission
highway for all utilities located within and adjacent to the PJM
Interconnection. The filing contains the following features of particular
relevance to the size of the geographic market:
Elimination of rate pancaking: PJM is divided into ten zones encompassing
the transmission service areas of the ten PJM members with 10 zonal rates based
on the respective transmission costs of the ten members. However, there will be
no pancaking of rates for inter-zonal transactions. Any inter-zonal transaction
will pay a single zonal rate. This will be a destination rate; i.e., the
transmission charge will be the rate for the zone to which the power is
delivered. This single zonal rate, either a network rate or a point-to-point
rate, will apply to all energy deliveries to a load in that zone, regardless of
the number of zones which are traversed and regardless of whether the power
originates within or outside of PJM. The network rate will be based on a load
ratio share of the annual transmission revenue requirement in the zone. The firm
point-to-point transmission rate is a pool-wide postage stamp rate based on a
sum of the individual zones' annual revenue requirements divided by the sum of
the 12 coincident peak demands in each zone. Ancillary services will also be
supplied on a non-pancaked basis within the PJM Control Area.
Network and point-to-point rates: The PJM tariff provides for both network
and point-to-point rates, each computed as described above. The network rate is
an umbrella transmission rate that encompasses the totality of the network
user's purchases. Point-to- point rates would apply to users who prefer to
purchase transmission services on a transaction-by-transaction basis.
Elimination of charges for non-firm point-to-point service:
PJM will provide non-firm point-to-point transmission service without a
transmission charge.
Elimination of charges for pancaked losses: There will be no pancaking of
losses from utility to utility or from zone to zone.
Open-access 500 kV agreements: The three 500 kV agreements:
the Lower Delaware Valley ("LDV") Agreement, the Extra-High
Voltage ("EHV") Agreement, and the Susquehanna Eastern ("SE")
Agreement would be modified to eliminate previously effective
conditions on the use of those facilities, establish that use
is to be determined in accordance with the PJM open-access
tariff, and provide for the recovery of each owning utility's
500 kV costs through that utility's zonal rate.
5. Q: What are the specific effects of these changes on your market power
analyses?
A: These changes have two parallel specific, tangible effects on the
Atlantic and Delmarva TDUs. Under PJM network service, Vineland -- Atlantic's
only TDU -- will incur the same transmission cost and incur the same
transmission losses whether it purchases power from Conectiv or from the most
geographically remote PJM generating resource. Also, Delmarva's several TDUs
will incur the same transmission cost and incur the same transmission losses
whether they purchase power from Conectiv or from the most geographically remote
PJM generating resource.
6. Q: What do these changes signify with respect to the transmission cost
element of the delivered price test you have performed?
A: For purposes of transmission cost, Atlantic and Delmarva and the other
PJM members have converted PJM into a single integrated power market.
7. Q: Does the new PJM tariff provide for bid-based pricing?
A. It does, subject to two conditions. First, bids must be based on costs.
Second, members must bid all their units; i.e., no unit can be withheld from the
market. As a consequence, no member may exert market power within PJM by
withholding supply to the PJM market.
8. Q: May non-PJM members bid into the PJM dispatch?
A: Yes. They may do so on a price basis if they have market-based rate
authority and on a cost basis if they lack that authority.
9. Q: How will PJM handle transmission constraints?
A: When a constraint occurs, PJM will invoke congestion pricing, which
along with the requirement that bids be based on costs, will prevent any
participant from obtaining or exerting market power over a constrained
interface. In addition, the tariff provides mechanisms to facilitate the
construction of transmission facilities.
10. Q: Please explain.
A: Congestion pricing will limit any supplier's ability to control prices.
When congestion occurs, PJM-established congestion prices apply to all
generating units and loads in the congested zone.
11. Q: Did you consider congestion pricing in your market study?
A: Yes, indirectly. Under the congestion pricing framework that has been
proposed by the Supporting Companies, congestion prices would be based on
differences between locational marginal prices. In our analysis, we have
recognized that the Eastern Interface represents a limit on the transfer of
power from the central and western PJM zones into eastern PJM. As discussed, we
have considered this limit in our analyses and recognized that once this
interface is constrained the Eastern PJM represents a separate market and that
while economic capacity from the west and central zones will continue to be
supplied to Eastern PJM, the delivered price that this capacity receives will be
different than that received by Eastern PJM capacity.
12. Q: Did the Commission allow the Supporting Companies' congestion
proposal to become effective immediately?
A: No. This is the single exception I referred to earlier. The Commission
ordered PJM to implement the PECO Energy congestion proposal "for interim
implementation" only because of unresolved questions on how to implement the
Supporting Companies' proposal.
13. Q: Does the Commission's temporary implementation of PECO Energy's
congestion proposal affect your conclusion that Conectiv could not exercise
market power during periods of constraint?
A: No, for two reasons. First, the PECO Energy congestion proposal, along
with bidding rules, will also prevent Conectiv from exploiting constraints to
exercise market power. Second, the Commission order indicates that the
Supporting Companies' proposal is likely to be adopted after a conference is
convened to explore and resolve certain technical issues.
14. Q: Does PJM intend to evolve eventually to bidding based on price
rather than cost?
A: Yes. It is contemplated that PJM will evolve toward true price- based
dispatch, but that change would take place on or after the next PJM
restructuring filing submission and only with Commission approval. I have
explained at length in my original report (Exh. No. ___ (JCD-1) at IV-22 to
IV-25) that Conectiv will not be able to exercise market power in such an
arrangement. Also, the initiation of price-based dispatch in PJM will require
and be subject to a specific Commission finding that the PJM bid-based pricing
arrangement will not give any participant, including Conectiv, the opportunity
to manipulate prices or exercise market power in any other way.
15. Q: In your original report, you described two of your studies as based
on the PJM restructuring proposal. Since the PJM restructuring filing was not
accepted by the Commission, are those studies valid?
A: Yes. Even with only the transmission component of the PJM restructuring
plan in place as a result of the Commission's February 28th order and without
the other PJM restructuring components, my analyses are valid due to the
previously discussed PJM tariff features, including the elimination of rate and
loss pancaking, and the fact that PJM is centrally dispatched based on least
cost. However, while those studies continue to be valid, they are not in all
respects the kind of analysis required by Appendix A to the Merger Policy
Statement. Therefore, I rely only on the uncommitted capacity analysis from
Exhibit No. ___ (JCD-1).
16. Q: What is Exhibit No. ___ (JCD-4)?
A: This is my updated competitive analysis prepared in accordance with the
Commission's Merger Policy Statement and its January 15, 1997 directive that the
Applicants submit a competitive analysis meeting the requirements of Appendix A
to that Statement.
17. Q: Will the merger of the Applicants have anticompetitive consequences?
A: It will not. The proposed merger will not lessen competition in any of
Conectiv's relevant markets. In fact, the merger will promote competition
because it will strengthen the ability of Atlantic and Delmarva to compete with
their larger PJM neighbors.
18. Q: Will the merger reduce the competitiveness of the long-run capacity
markets?
A: No, it will not. As shown in my original report, Exhibit No. ___ (JCD-2)
at pages B-1 through B-8, there are no entry barriers to the markets in which
the Applicants operate. Hence, the proposed merger will not reduce the
competitiveness of the long-run capacity markets.
19. Q: Will the merger reduce the competitiveness of the short-run firm
capacity markets for sales of a year or more?
A: No, it will not. The Applicants are projected to not have any
uncommitted capacity during the short-run period, which consists of the first
four years after the merger is completed, i.e., 1998 to 2001. All the
Applicants' capacity will be needed to serve their own and contractual loads.
Indeed, each Applicant must purchase from others in order to have enough
capacity to meet its service requirements. As a consequence, the Applicants have
a zero share of this market.
20. Q: Did you evaluate whether the proposed merger would lessen
competition in the non-firm energy markets?
A: Yes. I used the merger policy statement's competitive screen analysis to
determine whether the proposed merger would lessen competition in Conectiv's
relevant geographic markets for this product. After first identifying the
relevant product as non-firm energy, I then identified the customers likely to
be affected by the merger (at pages 2-5 and Tables 1-3). The next step was to
perform the delivered price test using variable production cost data from the
FERC Form No. 1 to determine the suppliers who are within the geographic market
(at pages 5-6 and Tables 4 and 5).
21. Q: How did transmission and ancillary services charges affect the
delivered price test?
A: As noted above, the PJM tariff eliminates the pancaking of transmission
charges and losses and also makes ancillary services available through the Pool.
Thus, suppliers from within PJM seeking to serve a specific market within PJM
will incur the same transmission and ancillary service charges and the same
level of losses regardless of where the supplier is located. Thus, these factors
do not affect the delivered price test as applied to suppliers located within
PJM (see page 7 and Table 6). Of course, these factors do affect suppliers
outside of PJM such as Consolidated Edison.
22. Q: Are there restrictions on the physical deliverability of power
within PJM?
A: Yes. Constraints arise at certain infrequent periods at different load
levels, as discussed at pages 7 and 8 of my report. These constraints occur at
unique transmission points or at interfaces such as the so-called Eastern
Interface which divides the eastern subregion of PJM from PJM's central and
western zones. These constraints, when they occur, limit the amount of power
which may be imported to the eastern PJM utilities from western PJM markets, and
cause the eastern PJM subregion to become a distinct geographic market. The
constraints do not shut off eastern PJM from the western and central PJM zones.
However, the constraints do limit the amount of power from central and western
PJM that can supply the eastern PJM market, and thus require off-cost
dispatching of eastern generation or importing energy from New York to meet some
limited part of that eastern PJM load.
23. Q: How does your determination of transfer capability in your present
report differ from the determination in your original November 1996 report?
A: It differs in two key respects. First, the original report focused
primarily on 6,900 MW, the transfer capability of the Eastern Interface 500 kV
facilities, and considered the combined transfer capability of both the 500 kV
facilities and the below 500 kV facilities only in sensitivity analyses.
However, both a valid application of the delivered price test and recognition of
the effect of the new PJM tariff required that in this report we assess the
transfer capability of the Eastern Interface as a whole inclusive of both the
500 kV facilities and the below 500 kV facilities.
Second, in the first report we employed a static transfer capability. In
this report, we recognize that the transfer capability of a voltage maintained
interface varies depending on system conditions such as load, available
generation, location of generation resources, and the use of certain capacitor
banks.
24. Q: How did you determine the transfer capability of the interface?
A: I evaluated the transfer capability of the interface at different load
levels through an equation which is explained in Appendix 1 to my report. In the
equation, we used load as the variable to predict changes in transfer
capability. The electronic file included with this filing containing the source
data for Appendix 1 plus other documents pertinent to Appendix 1 is entitled
TCF/cast.
25. Q: How does load affect the transfer capability of the interface?
A: Load reflects the conditions which affect Eastern Interface transfer
capability. We used 56% of total PJM load to represent the Eastern PJM load
based on information supplied by Mr. Mitchell and Mr. Morris and also because as
load in PJM increases, load in the east typically grows at the same rate. If
eastern generation dispatch follows the load increase thereby supporting system
voltage, then the Eastern Interface capability also increases as a consequence
of the strengthening of system voltage. Also, generally, as load increases, the
lines making up the interface are more evenly used and that distribution of use
tends to increase the interface capability. In addition, the PJM system
operators will, as needed, utilize the capacitor bank capability referred to in
the Mitchell and Morris testimony to improve flows, and therefore, increase the
interface transfer capability. There are 33 capacitors at the Eastern Interface
which can increase transfer capability by 1,450 MW. Since the capacitors are
used as needed to serve the load, the load data reflect this capacitor use.
Finally, as explained in the testimony of Mr. Mitchell and Mr. Morris, the
impact of generation on transfer capability is affected by the actual units on
line and their location within PJM. Therefore, there is likely to be greater
variability in the transfer capability associated with a specific generation
level than for load.
26. Q: Please explain Exhibit No. ___ (JCD-5).
A: This exhibit was developed for the convenience of the parties to show on
a single page the load levels and transfer capabilities used in the Exhibit No.
___ (JCD-4) analyses. As noted above, the transfer capability values which are
shown in Columns (c) and (d) were developed through the formula set forth in
Appendix 1 to Exhibit No. ___ (JCD-4).
27. Q: Please explain the "best estimate".
A: The"best estimate" forecast reflects our best estimate of what the
transfer capability will be for a specific load level. This best estimate was
developed by applying our forecast of load for 1998 for the Eastern PJM to the
equation presented in Appendix 1 of Exhibit No. ___ (JCD-4). Our load forecast
was based on the actual 1995 load data and the 3% projected growth in net energy
forecast in the Mid Atlantic Area Council Regional Reliability Council EIA-411
Report dated April 1, 1996.
28. Q: What is the purpose of the 95% confidence data shown in Exhibit No.
___ (JCD-5)?
A: To reflect variations in the transfer capability of the Eastern
Interface, we also developed a conservative estimate of the transfer capability
based on a 95% confidence level. Because lower values for the transfer
capability of the Eastern Interface reduce the amount of capacity offered by
competitors in the relevant markets, we used in our analysis only the lower
limit estimate of the transfer capability provided by this 95% confidence
interval. This 95% confidence interval lower bound estimate of the transfer
capability was developed by multiplying the forecast standard error by the
appropriate value for the confidence interval desired and subtracting this
number from the best estimate forecast.
29. Q: Do you have any additional comments regarding the "best estimate"
and 95% confidence interval estimates?
A: Yes. Three aspects of these transfer capability forecasts should be
emphasized. First, the 95% confidence interval analysis recognizes that
variations from the best estimate forecast can result in transfer capabilities
that are above as well as below the best estimate forecast. We ignored the
confidence interval transfer capability values above the best estimate values
since use of those higher values would provide cumulative and redundant evidence
that the merger will not have anticompetitive effects. Second, a 95% confidence
interval indicates a 5% probability that the actual transfer capability is above
or below the best estimate. Therefore, the probability that the actual transfer
values will not be less than those resulting from the analysis is 97 1/2%, i.e.,
95% + ((5%) (50%)). Third, we are not suggesting that the values shown in
Exhibit No. ___ (JCD 5) resulting from the confidence interval analysis will
apply 95% (or 97 1/2%) of the time. We believe that the best estimate will apply
most of the time, and that there is a 97 1/2% probability that any variations
from the best estimate will not result in transfer values less than we have used
in our analysis.
30. Q: What additional support do you have for the use of these transfer
capabilities?
A: Off-cost generation occurs for multiple reasons. Although our earlier
analysis of off-cost generation on the eastern side of the Eastern Interface
indicated that it runs about 4% of the time (see Exhibit No. ___ (JCD-2), p.
IV-18), our current analyses indicate that the Eastern Interface constraint
causes off-cost generation to be run only approximately 1% of the time.
Presented below are revised figures for the total number of hours that off-cost
generation was run as a result of the Eastern Interface being constrained.
1994 1995 Jan-June 1996
----
New Value 0 57 125
Old Value 597 109 254
Also, a comparison of the historic experience regarding the total number of
hours that the Eastern Interface is constrained suggests that our 95% confidence
level estimate of the transfer capability for the interface overstates the
amount of time that the interface is likely to be constrained. Mr. Mitchell and
Mr. Morris present PJM load flow data and provide engineering testimony
supporting these transfer capability values.
31. Q: Aside from your best estimate and 95% confidence level estimate of
the Eastern Interface transfer capability, what other data are shown on Exhibit
No. ___ (JCD-5)?
A: In Columns (e), (f) and (g), I show the PJM operator estimates of
Eastern Interface capabilities at the specified Columb (b) load levels within a
plus or minus 50 MW range. Column (e) contains the average of all operator
estimates at each load level (not the average of the low and the high estimate
at each load level). Column (f) shows the lowest operator estimate and Column
(g) the highest operator estimate at each load level. Mr. Mitchell and Mr.
Morris describe the process under which these operator estimates were made and
demonstrate that these estimates tend to understate actual transfer values.
Exhibit No. ___ (JCD-5) provides a side-by- side comparison of my estimates with
the PJM operator estimates.
32. Q: Why are no PJM operator transfer capability estimates shown for
Increments 10 through 14?
A: The Appendix 1 equation, which was developed to generate the best
estimate and 95% confidence level estimates as shown in Appendix 1 to my report,
was applied to the entire PJM supply curve. Therefore, the best estimate and 95%
confidence level estimate of the Eastern Interface transfer capability was
provided for all segments of the supply curve, even the increments which
represent extreme load conditions. Also, the total supply curve includes not
only the generating capacity to meet the PJM load but also the generating
capacity to meet the typical 15-25% reserve requirement. Thus, this portion of
the supply curve reflects generating reserves which are used to maintain system
reliability and are available to operate during peak periods when lower costs
units are not available. The reason that there is no PJM operator transfer
capability data shown for Increments 10 through 14 is that actual Eastern PJM
load in 1995 did not reach the load levels indicative of Increments 10 through
14. Nevertheless, our analysis evaluated Increments 10 through 14 to reflect the
transfer capability for the full range of existing resources in the supply curve
and to reflect conditions which may occur under extreme load conditions as well
as reserve requirements. This represents a more conservative and rigorous
approach than the Commission has outlined in its Policy Statement, and as the
Commission stated it is important to analyze market shares for all generating
units at a price close to the competitive price in the relevant market. In that
regard, the merging companies do own generating capacity within this portion of
the supply curve. For those reasons, our analysis evaluated the entire supply
curve and has shown that the merging companies will be unable to exercise market
power anywhere along the supply curve.
33. Q: Could you explain the results presented in Exhibit No. ___ (JCD-5)?
A: Exhibit No. ___ (JCD-5) shows that both the best estimate and 95%
confidence level estimate of the Eastern Interface transfer capability are
reasonable estimates of the transfer capability as compared to PJM operator
estimates. In all but one case, the best estimate forecast is well within the
range of the minimum and maximum PJM operator estimates of transfer capabilities
at each increment. The only increment in which the best estimate forecast is not
within the range of the PJM operator estimates is Increment 9; however, our
analysis has also evaluated the impact of the transfer capability at the lower
bound of a 95% confidence level estimate and the Eastern Interface remains
unconstrained. In addition, the 95% confidence level estimate for Increment 9 is
below the minimum PJM operator estimate transfer capability. Therefore, our
analysis is even more conservative than the PJM operator estimates would suggest
is necessary.
The 95% confidence level estimate of the transfer capability also compares
favorably to the PJM operator estimates of the transfer capability. The 95%
confidence level estimate of the transfer capability is lower than the actual
minimum PJM estimate of the transfer capability for all but three increments
(Increments 2, 3 and 7). However, if the minimum PJM operator estimate is used
rather than the 95% confidence level estimate at those three increments, the
results are the same (e.g., the Eastern Interface remains unconstrained and the
post-merger HHI and increase in HHI analysis is the same) (see Exhibit No. ___
(JCD-6)). Therefore, the 95% confidence level estimate of the transfer
capability is also a reasonable analysis compared to the operator estimates, and
in most instances, is even more conservative than the minimum operator estimate.
34. Q: Please explain Exhibit No. ___ (JCD-6).
A: I discussed earlier the difference between the operator estimate of
transfer values and my own best estimate and 95% confidence interval transfer
values. Exhibit No. ___ (JCD-6) is a counterpart to Table 8 of Exhibit No. ___
(JCD-4), and documents my earlier testimony that the substitution of the minimum
operator estimate of transfer values for Increments 2, 3 and 7 for my 95%
confidence interval estimate does not result in a change in the HHIs.
This is a significant result. Exhibit No. ___ (JCD-6) takes the lower of
either my 95% confidence interval estimate or the lowest operator estimate and
still shows a lack of anticompetitive effect resulting from the merger. These
results assume even greater significance when it is considered that the operator
estimate of transfer values is conservative and that the average of the operator
estimates is appreciably higher than the operator's lowest estimate. Thus,
Exhibit No. ___ (JCD-6) in combination with Exhibit No. ___ (JCD-5) and my
principal Exhibit No. ___ (JCD-4) shows that our estimate of the transfer
capability of the Eastern Interface is reasonable, and that even using the
lowest operator estimate for the transfer capability at a specific increment,
the merger will not confer any market power on Delmarva or Atlantic or on the
two utilities combined.
35. Q: Please continue your explanation of your delivered price test.
A: As more fully explained in my report (at pages 8-9), we developed a
supply curve based on the delivered cost of generation for each of the suppliers
in the market. We considered a supplier as "in the market" only if it could
offer a delivered price which did not exceed by more than 5% the delivered price
established by the Applicants' plants.
36. Q: For what capacity measures did you perform this analysis?
A: I discuss capacity measures at pages 11 and 12 of the report. We
performed the delivered price test for economic capacity, available economic
capacity and total capacity. We did not perform a new test for uncommitted
capacity because Atlantic and Delmarva do not have any uncommitted capacity.
The results of this analysis for economic capacity are discussed at pages
12 to 15 of my report and shown on Tables 7-8. We developed this analysis based
on a best estimate and a conservative estimate of Eastern Interface transfer
capability at various load levels. Based on the same analysis, 1,700 MW of
capacity was available from suppliers in New York State.
37. Q: Is 1,700 MW of capacity available from New York suppliers?
A: Yes. While actual historic import levels are below this level, this
amount of capacity is available for delivery to eastern PJM (see page 13, ftn.
16 of Exhibit No. ___ (JCD-4)). The critical fact in competitive analyses is not
only the historic imports but the ability of a supplier physically and
economically to access a market. If the supplier has that ability, the potential
of the supplier to enter the market affects and modifies the behavior of market
participants and, in particular, limits their ability to raise prices above
competitive market price levels. A comparison of variable production costs in
New York and PJM indicates that New York suppliers would actually be able to
deliver in excess of 1,700 MW of economic capacity to PJM that is competitive
with PJM economic capacity at the load levels shown in my exhibit. Thus, this
level of capacity is properly considered as a resource that diminishes any
market power that Conectiv could have.
38. Q: Are the HHIs resulting from this analysis within safe harbor levels?
A: Yes, they are in every instance. The merged companies' market shares are
also within acceptable levels as established by the Department of Justice's 35%
leading firm standard and this Commission's 20% standard as employed in
market-based rate cases. The highest combined market share for the merging
companies is 15.7%.
39. Q: Where are the results of the available economic capacity analysis
explained?
A: They are explained at pages 15-17 of my report and shown on Tables 10
and 11. The merging companies' share of available economic capacity is
negligible.
40. Q: Please comment on your total capacity analysis.
A: The analysis is explained on pages 17 and 18 of the report and the
results are shown on Tables 12 and 13. The results of this analysis are also
within safe harbor levels and Conectiv's market share is only 12.4%.
41. Q: What overall conclusion do you reach from these analyses?
A: This merger is unlikely to reduce competition in any of the merging
companies' relevant markets.
42. Q: How do the results of your November Report compare with the results
of the present analyses that you performed for the different capacity measures
identified in Appendix A of the Merger Policy Statement?
A: The analyses that we performed of a restructured PJM in our November
1996 Report provide results which are generally consistent with those achieved
for the economic capacity analysis in our most recent report. See pages IV-34
through IV-38 of Exhibit No. ___ (JCD-2) for the results of our restructured
market analysis presented in our November Report. I do note one difference. In
our November analysis of the Eastern PJM market (for which we assumed a transfer
capability of 6,900 MW for the Eastern Interface), the intermediate and peaking
capacity measure produced an increase in the HHI of 119, which is higher than
the safe harbor thresholds identified in the Horizontal Merger Guidelines. By
contrast, the increases in HHIs for our economic capacity analyses that we
performed in Exhibit No. ___ (JCD-3) were all below the safe harbor thresholds.
The difference between these two analyses is explained by two factors.
First, in our November analysis, we assumed a transfer capability for the
Eastern Interface which is well below the level one would expect when
intermediate and peaking capacity is being called upon. Secondly, in that
analysis we were evaluating intermediate and peaking capacity only and did not
consider the baseload capacity owned by suppliers. To profit from the withdrawal
of intermediate or peaking capacity in an effort to increase market- clearing
prices, a supplier must own a significant share of the operating capacity which
has costs that are below the market- clearing price.
By not considering the amount of baseload capacity controlled by Conectiv
in the November analysis, we did not consider an important factor which is
likely to influence whether the withdrawal of capacity is profitable.
43. Q: What would have been the effect of considering baseload capacity in
the November report?
A: Conectiv has a relatively limited amount of baseload capacity.
Therefore, had we considered the baseload capacity in the analysis, the increase
in HHI as shown in our November 1996 report would have been considerably less.
This point can be seen by comparing the results of that November analysis using
the intermediate and peaking capacity and the total capacity measure, which
combines baseload capacity with intermediate and peaking capacity. The increase
in HHI from the proposed merger for the total capacity measure was 76 for a
moderately concentrated market post-merger, compared to 119 for the intermediate
and peaking capacity measure, which was also a moderately concentrated market
post-merger.
44. Q: How does the economic capacity measure outlined by the Commission in
its Merger Policy Statement aggregate these different types of capacity?
A: The economic capacity measure looks at all capacity controlled by
suppliers that has a delivered price which is no more than 5% above the market
price. Therefore, during peak periods when higher-cost peaking units would be
expected to be establishing the market- clearing price, under the economic
capacity measure, the vast majority of capacity controlled by the suppliers,
including their baseload capacity, would likely be considered when determining
the suppliers' economic capacity.
45. Q: Does the policy statement require additional analysis if safe harbor
levels are not exceeded?
A: It does not. Since the merger will not result in HHI increases in excess
of safe harbor levels, there is no need to provide that analysis.
46. Q: Would you nevertheless comment on the policy statement's treatment
of short-lived market concentrations arising from temporary constraints?
A: Yes. The Commission has stated that short-lived concentrations could be
acceptable if the merged utility cannot control prices during those periods of
concentration or if there are multiple sellers in the market.
47. Q: Could Conectiv control prices during periods of transmission
constraint?
A: It could not for two reasons. First, as I have already testified,
Conectiv's relevant markets will be workably competitive even during periods of
constraint. Second, as I have already testified, PJM rules and bidding
requirements would also prevent any utility, including Conectiv, from exercising
market power during periods of constraint.
48. Q: During periods of constraint, are there multiple sellers into the
eastern PJM market?
A: As shown on Tables 7-10 of my report, Conectiv's market share will be
small under all scenarios. This indicates that multiple sellers would be present
in the market.
49. Q: Does the policy statement refer to de minimis concentrations?
A: Yes. The statement does refer to de minimis concentrations, although it
does not define what constitutes de minimis. Based on the analyses I have
performed, Conectiv has no market power, even in de minimis amounts for very
brief periods.
50. Q: Please summarize your testimony regarding short-lived
concentrations.
A: The policy statement indicates that short-lived HHIs above the
Department of Justice screening levels are not an indication of market power and
may be tolerated if there are other sellers in the congested market or if the
merged company cannot control prices. In this instance, both policy statement
criteria are satisfied: the merged company has a relatively small share of the
congested non-firm energy markets, and further will have no control over pricing
in those markets when they are congested.
51. Q: Does the policy statement also advise that additional analysis based
on considerations cited in the Department of Justice merger guidelines could
also establish that a merger will not harm competition even if concentration
levels exceed safe harbor levels?
A: It does. I have conducted such an analysis even though in this instance
concentration levels are comfortably below safe harbor levels. For example, in
our November 1996 Report (Exh. No. ___ (JCD-1)), I addressed the potential for
entry and found that there were no barriers to entry that could be used by
Conectiv to limit competition in the long-run.
52. Q: Do the merger guidelines view a relatively small market share as
reducing the effect of high HHIs?
A: Yes. As noted above, the merged company's highest market share is 15.7%
under one capacity measure and is below this Commission's 20% and the Department
of Justice's 35% market share test for indicating market power. Companies with
relatively small shares of the total market will not easily be able to influence
prices, even where markets are highly concentrated. Thus, under the Department
of Justice guidelines, a relatively high increase in the HHI is offset when the
merged company has a relatively small share of the market.
53. Q: Is the opportunity to collude a relevant factor?
A: Yes. The threat to competition is regarded as reduced where there is
little risk of collusive behavior by the merged company and others. There is no
opportunity for Conectiv to collude with other suppliers. As noted above, prior
to conversion to bid-based dispatch based on price, dispatch will be based on
costs without the opportunity to withhold generation from the market. A future
conversion to bid-based dispatch based on price cannot occur except by order of
the Commission after a Commission determination that price based dispatch will
not create the potential to engage in collusive behavior (see Exhibit No. ___
(JCD-1) at IV-12 and IV-13, App. A at A-3 to A-5).
54. Q: Will Conectiv have control over its entire portfolio of generation?
A: No. A significant portion of the generating capacity of Delmarva (16.1%)
and Atlantic (26%), the two smallest PJM members, is in the form of small shares
in very large generating units (i.e., minority interests which effectively
preclude Delmarva and Atlantic from being able to control the operation of these
units) -- the Keystone and Conemaugh coal stations and the Peach Bottom, Salem
and Hope Creek nuclear stations. These units are operated by PJM's much larger
members (see Gerritsen Testimony at 21 and Table 14 of Exhibit No. ___ (JCD-4)).
The Applicants have no control over the electric output of these stations and no
way of limiting that output as a way of influencing prices. While I have counted
the Applicants' ownership shares of the jointly-owned generating capacity in
computing market share and market concentration data, the consequence is to
overstate the Applicants' market influence (see Exhibit No. ___ (JCD-1) at
IV-13).
55. Q: Does the actual market experience of the Conectiv transmission
dependent utilities demonstrate the existence of competition?
A: Yes. Atlantic's only TDU, Vineland, and two of Delmarva's TDUs, Dover
and Easton, are not requirements customers. In the immediate past, these TDUs
have operated under Interconnection Agreements pursuant to which (i) they had
the opportunity to share in many of the benefits of the PJM pool, and (ii) they
have been able to make and, in fact, for several years have made, many of their
own power supply arrangements.
The DEMEC members and ODEC are partial requirements customers who have made
extensive power purchases from non-Delmarva sources, which shows that Delmarva
lacks market power over those TDUs. These factors and the contracts they have
been able to negotiate with Delmarva are described in Mr. Gerritsen's initial
testimony.
56. Q: Do the guidelines recognize that a merger can produce procompetitive
benefits?
A: Yes. The guidelines also recognize that "the pricing benefit of mergers
to the economy is their efficiency-enhancing potential which can increase the
competitiveness of firms and results in lower prices to consumers" and that
"[s]ome mergers that the Agency otherwise might challenge may be reasonably
necessary to achieve significant net efficiencies" (Guidelines at ss.4). The
Commission also observes in the merger policy statement (at 20) that "some
merger proposals may strengthen weak firms and create stronger competition."
Atlantic and Delmarva are the two smallest PJM members and the two utilities
combined will still be the smallest in the PJM pool. Nevertheless, with its
merged resources, Conectiv will be better able to competitively challenge the
much larger PJM participants. Thus, the merger will promote competition rather
than suppress it.
In addition, Conectiv has a much better prospect of remaining an
independent competitive force in PJM than Atlantic and Delmarva operating
separately. The net effect of denying the merger could be to cause both
utilities to be lost as independent participants in the PJM market through
takeover by their much larger PJM neighbors.
57. Q: Please comment on the policy statement's mitigation analysis.
A: The Commission has indicated that an otherwise objectionable merger can
be approved if the merger applicants adopt steps to mitigate their market power.
Even though this merger satisfies safe harbor criteria, the policy statement's
mitigation analysis provides additional support for approval of this merger.
58. Q: What remedial steps have Delmarva and Atlantic already taken?
A: Delmarva has already undertaken the expansion of the Red Lion
Substation, which will be completed by May 31, 1997, which will decisively
increase the access of on-Peninsula loads to off-Peninsula generating sources.
Applicants have joined in the December 31, 1996 filing of a PJM-wide tariff.
That filing does not prohibit the merged company from using congested
transmission paths, which is a mitigation measure considered by the policy
statement. However, the PJM filing meets the objective of the Policy Statement
in that it deprives the merged company of any control over the use of a
congested path, over the pricing of transmission service over the congested path
and over the pricing of generation sold over the congested path.
59. Q: Does the new PJM tariff produce any other mitigation benefits?
A: As I have already mentioned, the requirement that bids be based on costs
and that all generation be bid in the new PJM tariff will prevent the merged
company from exercising any control over prices during periods of constraint,
and a conversion to price based dispatch will not occur except upon a Commission
finding that the conditions associated with price base dispatch will not create
anticompetitive effects. In addition, PJM pricing rules emulate some of the
benefits derivable from real-time pricing as described in the Policy Statement.
Therefore, the PJM tariff has the same counterbalancing effect on market power
as real-time pricing. The Commission has also stated that remedial steps should
directly address market power over the provision on generating services. The PJM
tariff and the cost-based bidding requirement eliminates any potential Conectiv
might have to exercise market power in the short-run energy markets during
periods of transmission constraint. The PJM tariff, through elimination of
pancaking of rates and losses and through making the PJM 500 kV facilities
available on an open- access basis, has created a true open-access transmission
arrangement which extends over one of the largest population areas in the
country. Greatly expanding the boundaries of the geographic market, the tariff
converts the entire PJM interconnection into a massive competitive arena.
60. Q: Have Delmarva and Atlantic committed to the formation of a PJM ISO?
A: They have. The Commission regards an ISO as a major mitigation measure.
61. Q: Please summarize pages 20 to 27 of your testimony.
A: I have considered various factors, as well as mitigation measures, which
are viewed as having the effect of mitigating the effect of HHI scores that
exceed safe harbor levels. Although this type of analysis is not needed for the
Conectiv merger, since HHI scores do not exceed safe harbor levels, the analysis
nevertheless provides an additional basis for approval of the merger.
62. Q: Do you have any other summary comment on your testimony?
A: Yes. The screening analysis prepared at the direction of the Commission
provides a conclusive showing that these two utilities, the smallest PJM members
on a stand alone basis or on a combined basis, have no market power. The PJM
tariff converts PJM into one of the largest electricity markets in the world.
All of the HHI and market share results for the entire PJM market show that the
merged companies have no market power. The Eastern Interface constraints, which
occur only 1% of the hours of the year, do not change that result. Thus, with
Eastern PJM viewed as a separate market, the merged companies still have no
market power. The voltage affected transfer capability of the Eastern Interface
has been accounted for in our analysis through our own estimates of transfer
capability, and has been shown to be reasonable when compared to the PJM
operator transfer capability estimates which understate the interface's actual
transfer capability. Even on the basis of the lower of the values in my own
analysis or in the system operator estimates, the results show that the merging
companies lack market power and that the proposed merger will not adversely
affect the competitiveness of the Eastern PJM market, the narrowest conceivable
geographic market definition. These companies as they are now constituted or as
they will be constituted post-merger are simply too small relative to other PJM
members and operate in too large a market to possess market power or to
adversely affect the competitiveness of their relevant markets. As I previously
testified, the effect of this merger on competition will not be to diminish it,
but rather to enhance it.
63. Q: Does that complete your supplemental testimony?
A: It does.
BEFORE THE PUBLIC SERVICE COMMISSION
OF THE STATE OF DELAWARE
IN THE MATTER OF THE APPLICATION )
OF DELMARVA POWER & LIGHT COMPANY )
AND CONECTIV, INC., FOR APPROVALS ) Docket No. 97-___
UNDER 26 DEL. C. ss. 215 )
(Filed February 24, 1997) )
APPLICATION OF
DELMARVA POWER & LIGHT COMPANY
AND CONECTIV, INC.
FOR APPROVALS UNDER 26 DEL. C. ss. 215
Delmarva Power & Light Company ("Delmarva") hereby seeks all requisite
authority and necessary Commission approvals under Delaware law for the merger
of Delmarva and DS Sub, Inc. ("DS Sub"), which is part of an overall transaction
with Atlantic Energy, Inc. ("AEI") and its wholly-owned subsidiary, Atlantic
City Electric Company ("Atlantic Electric"). As part of the same transaction,
Conectiv, Inc. ("Conectiv"), a newly-formed holding company incorporated in
Delaware, hereby seeks all requisite authority and necessary Commission
approvals under Delaware law for acquiring control of Delmarva. Applicants
request approval within 60 days after filing and further request that, if
approvals cannot be obtained within that period, the Commission establish
expedited procedures to ensure that a final decision is made well before
December 31, 1997.
In support of this Application, Delmarva and Conectiv respectfully
represent:
I. PARTIES AFFECTED BY THE PROPOSED TRANSACTIONS DESCRIBED IN THE APPLICATION
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.
1. 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 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.
2. 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.
3. 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.
4. 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 proposed
transactions. DS Sub will merge into Delmarva, with Delmarva as the surviving
corporation.
II. DESCRIPTION OF THE PROPOSED TRANSACTIONS
5. 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 to
this Application 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.
6. After receiving all required regulatory approvals, and on the terms and
conditions set forth in the Merger Agreement:
(i) AEI will merge with Conectiv, with Conectiv as the surviving
corporation; and
(ii) DS Sub will merge with Delmarva, with Delmarva as the surviving
corporation.
(iii) Together, these transactions result in a change in control over
Atlantic Electric and Delmarva, both of which will become wholly-owned
subsidiaries of Conectiv.
(Collectively, the above transactions, including the change in control, 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.
7. 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.
8. 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.
9. The Merger will not affect the debt securities or preferred stock of
either Delmarva or Atlantic Electric.
10. 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.
11. 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.
12. Consummation of the Merger is contingent upon obtaining certain
required regulatory approvals, including approvals from this Commission. In
addition to this filing, filings have been, or will be, made with the Federal
Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities
and Exchange Commission ("SEC"), the U.S. Department of Justice and Federal
Trade Commission, the New Jersey Board of Public Utilities, the Maryland Public
Service Commission, the Virginia State Corporation Commission, and the
Pennsylvania Public Utility Commission.
13. Delmarva and Conectiv request that the Commission approve this
Application within 60 days. 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. Delmarva and Conectiv, therefore,
request that the Commission expedite consideration of this Application.
III. THE PROPOSED MERGER AND CHANGE OF CONTROL IS IN ACCORDANCE WITH
LAW, FOR A PROPER PURPOSE AND CONSISTENT WITH THE PUBLIC INTEREST
14. The Commission has jurisdiction over the proposed transactions pursuant
to 26 Del. C. ss.ss. 215(a)(1) and (b), which, respectively, require Commission
approval: (1) prior to the merger of Delmarva with any other person or company,
i.e., the merger with DS Sub; and (2) prior to any other company, in this case,
Conectiv, acquiring control over Delmarva. As set forth in 26 Del. C. ss.
215(d):
The Commission shall approve any
such proposed merger . . . or acquisition
when it finds that the same is to be made
in accordance with law, for a proper
purpose and is consistent with the public
interest.
15. Attached as Exhibit C is an opinion of Delaware counsel that, upon
meeting the conditions set forth in the Merger Agreement, including receiving
the necessary approvals of this Commission, the proposed transactions will be in
accord with the statutory standard. Further support as to the proposed
transactions' consistency with the public interest is described below and more
thoroughly addressed in testimony attached hereto.
16. 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.
17. The Merger is expected to produce benefits, including cost savings
through greater efficiencies and economies of scale, a more diverse customer
base, improved credit quality and liquidity of securities, and a regional
platform for growth. More specifically:
(i) 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. Scale has importance in many areas, including
utility operations, product development, advertising and corporate services.
(ii) Enhancing geographic and customer diversity will improve the stability
of revenues to Conectiv as a whole.
(iii) Improving overall credit quality and liquidity of securities will
permit each of the operating utilities to fund continued growth at lower cost.
(iv) Creating a regional platform for marketing utility and non-utility
products and services in the mid- Atlantic region and beyond will strengthen the
ability of the combined company to offer additional products and services to
customers.
18. The Merger will not increase Delmarva's Delaware electric retail base
or fuel rates. Delmarva and Atlantic Electric plan to remain separate operating
utilities with separate non-blended base and fuel rates as is the case today.
19. The Merger will not have an adverse effect on competition among
suppliers of utility services. Even after the Merger, the combined company will
be the smallest member of the Pennsylvania-New Jersey-Maryland Interconnection
Association. To the extent that retail competition is permitted to occur by the
Commission, the existence of these larger utilities in the region will ensure
that the combined companies have no market power over electricity supplies in
their traditional service territories. The combined companies will also have
enhanced ability to compete in retail markets in the region.
20. The Merger will not adversely affect service to Delmarva's Delaware
customers. Both companies are committed to maintaining and potentially improving
their existing high standards of reliability and customer service.
Merger-related savings will be obtained primarily through achieving economies of
scale, such as elimination of duplicative departments and systems and reductions
in the total number of employees.
21. The combined companies will continue to maintain a significant local
workforce in each of the States in which they operate. Overall, Conectiv expects
a reduction of approximately 10% (or 400 positions) in the combined utilities'
workforce. 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. In New Jersey, for example, meeting the
special needs of the casino industry, recreational communities and local farming
will continue to be a priority. On the Delmarva Peninsula, the special needs of
the financial services and chemical sectors of the economy, along with
recreational and farming communities, will remain a priority. Although some
current employees of Atlantic Electric are expected to relocate their offices to
Delaware, where Conectiv's headquarters will be located, Atlantic Electric will
retain a significant number of employees in New Jersey, Delmarva will retain a
significant number of employees throughout the Delmarva Peninsula, and expected
reductions in duplicative staff will be handled fairly and even-handedly.
22. The proposed change of control over Delmarva and the resulting holding
company structure 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.
IV. TREATMENT OF MERGER SAVINGS
23. 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. 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 is supported by the testimony of Messrs. David G. Dougher and
William R. Moore, Jr.
24. 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.
25. As described in more detail in the testimony of Mr. Paul S. Gerritsen,
Delmarva and Conectiv specifically propose that one-third of the allocated net
merger savings be used to reduce Delaware retail electric and gas rates,
effective when the Merger closes. Other alternative uses, instead of a rate
decrease, that would also be acceptable to Delmarva and Conectiv 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.
26. Delmarva would be at risk to achieve the level of projected savings and
customers would benefit as proposed even if achieved savings are less than
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.
V. ACCOUNTING AND MISCELLANEOUS INFORMATION ABOUT THE MERGER
27. For accounting purposes, the Merger is treated as an acquisition by
Delmarva of AEI. As such, the Merger will be recorded using the "purchase
method" of accounting for business combinations in accordance with Accounting
Principles Board ("APB") Opinion No. 16. Since Delmarva and Atlantic Electric
have publicly-held debt securities and preferred stock, so-called "push down"
accounting will not be utilized (i.e., the acquisition premium will appear on
Conectiv's books and not "pushed down" to Delmarva's or Atlantic Electric's
books). Separate financial statements, substantially the same as the current
financial statements of Delmarva and Atlantic Electric, will continue to be
issued. The assets of Delmarva and Atlantic Electric will continue to be
recorded on their books and records at the same values as before the Merger,
with no adjustment to restate common equity amounts or to record any acquisition
premium. The direct transaction costs of the Merger are being recorded by
Delmarva in Account 186 (Miscellaneous Deferred Debits), which will be
transferred to Conectiv upon Closing, and have been expensed as incurred by AEI.
Both Delmarva and AEI are expensing indirect costs and internal labor costs as
incurred. Pro forma combined and consolidated balance sheets and statements of
income, including explanatory notes, for Delmarva, AEI and Conectiv are
contained in Exhibit A at 115-140. The testimony of Mr. David G. Dougher further
explains the intended accounting treatment for the transactions.
28. Delmarva and Conectiv commit 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.
29. Conectiv's service company subsidiary (the "Service Company") will
include many employees who are currently employed by Delmarva or Atlantic
Electric. The SEC has oversight over the arrangements by which Service Company
costs are charged and assigned to the related utilities and affiliates. When the
Service Company arrangements are finalized for filing with the SEC, copies will
be provided to this Commission. Delmarva and Conectiv also commit to submit to
this Commission's jurisdiction any issues regarding the ratemaking treatment of
any Service Company costs assigned or allocated to Delmarva. Because the bulk 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.
30. Attached hereto are the following Exhibits:
Exhibit A Proxy Statement of December 26, 1996, including as
Annex I the Agreement and Plan of Merger, dated August 9,
1996, as amended and restated as of December 26, 1996.
Exhibit B Corporate Structures Prior to and After Transaction.
Exhibit C Opinion of Delaware Counsel
Exhibit D Maps
31. Attached hereto in support of this Application and on behalf of both
Delmarva and Conectiv 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.
32. Attached is a draft public notice for Commission consideration.
33. 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 and Conectiv, Inc. request that
the Commission:
A. Order the publication of public notice;
B. Approve the merger of DS Sub into Delmarva;
C. Approve the acquisition of control of Delmarva by Conectiv;
D. Grant all other authority and approvals required from the Commission
under Delaware law for the transactions described herein;
E. Take the above actions within 60 days and otherwise expedite review and
consideration of the proposed transactions so that closing may occur on or
before December 31, 1997; and
F. With respect to all such authority and approvals, grant them subject to
the closing of the transactions contemplated by the Merger Agreement.
Respectfully submitted,
By: _______________________
Corporate Secretary
Delmarva Power & Light Company
By: ________________________
President
Conectiv, Inc.
Counsel for Delmarva and Conectiv:
Dale G. Stoodley, Esq.
Randall V. Griffin, Esq.
Delmarva Power & Light Company
P. O. Box 231
Wilmington, DE 19899
302/429-3757
Dated: February 24, 1997
BEFORE THE COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
IN THE MATTER OF THE APPLICATION )
OF DELMARVA POWER & LIGHT COMPANY )
AND CONECTIV, INC. FOR APPROVALS ) Case No. PUA
UNDER VA. CODE ss.56-88.1 )
AND CHAPTER 4 OF TITLE )
56 OF THE CODE OF VIRGINIA )
APPLICATION
Delmarva Power & Light Company ("Delmarva") and Conectiv, Inc. ("Conectiv")
hereby seek all requisite authority and necessary Commission approvals under
Virginia law for Conectiv's acquiring control of Delmarva and for transactions
between Delmarva and a service company to be formed by Conectiv.
In support of this Application, Delmarva and Conectiv respectfully state:
I.PARTIES AFFECTED BY THE PROPOSED TRANSACTIONS DESCRIBED IN THIS
APPLICATION
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 19,000 retail customers and one wholesale customer in Virginia's
two Eastern Shore counties. The Company's Virginia customers produce
approximately 3% of Delmarva's annual electric revenues. The remainder of
Delmarva's 437,500 residential, commercial, and industrial customers are located
in Delaware and ten primarily Eastern Shore counties in Maryland. Delmarva's
retail electric service rates are established by the Delaware and Maryland
Public Service Commissions and the Virginia State Corporation Commission.
Delmarva also provides natural gas service to approximately 98,000 customers
located in northern New Castle County, Delaware. Delmarva's principal business
office is located at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899.
2. Atlantic City Electric Company ("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 one-third of New Jersey and covers
all or portions of eight counties in New Jersey. Atlantic Electric is a
wholly-owned subsidiary of Atlantic Energy, Inc. ("AEI"). Atlantic Electric's
principal business office is located at 6801 Black Horse Pike, Egg Harbor
Township, New Jersey 08234.
3. AEI is a corporation organized under the laws of the State of New Jersey
and is an exempt holding company under the Public Utility Holding Company Act of
1935 ("PUHCA"). The common stock of AEI is publicly held. AEI is the sole common
shareholder of Atlantic Electric. AEI's principal business office is located at
6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234.
4. Conectiv is a corporation organized under the laws of the State of
Delaware. Conectiv was formed in mid-1996 in connection with the transactions
described in this Application. 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
(the "Merger"), Conectiv will own 100% of the outstanding common stock of
Delmarva and Atlantic Electric, and Conectiv will be a registered holding
company under PUHCA. Conectiv's principal business office is located at 800 King
Street, P. O. Box 231, Wilmington, Delaware 19899.
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 Merger.
DS Sub will merge into Delmarva, with Delmarva as the surviving corporation.
II. DESCRIPTION OF THE PROPOSED TRANSACTIONS
6. Delmarva, Conectiv, AEI, and DS Sub are parties 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" or the "Agreement"). The Merger Agreement is
attached to this Application 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 provides a more detailed description
of the transactions summarized below.
7. After receiving all required regulatory approvals, and on the terms and
conditions set forth in the Merger Agreement:
(i) AEI will merge with Conectiv, with Conectiv as the surviving
corporation; and
(ii) DS Sub will merge with Delmarva, with Delmarva as the surviving
corporation.
(iii) Together, these transactions result in a change in control over
Delmarva and Atlantic Electric, both of which will become wholly-owned
subsidiaries of Conectiv.
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 or shortly after consummation of the Merger, Conectiv will have
five first-tier subsidiaries consisting of: two operating utility companies
(Delmarva and Atlantic Electric); a service company that will provide services
(including, for example, accounting, financial, and legal services) to the
operating utility companies and other affiliates; and two existing non-utility
subsidiaries of AEI.
13. Consummation of the Merger is contingent upon obtaining certain
required regulatory approvals, including approvals from this Commission. In
addition to this filing, filings have been, or will be, made with the Federal
Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities
and Exchange Commission, the U. S. Department of Justice and Federal Trade
Commission, the Delaware Public Service Commission, the Maryland Public Service
Commission, the New Jersey Board of Public Utilities, and the Pennsylvania
Public Utility Commission.
14. The target date for receiving all necessary regulatory approvals,
fulfilling all other conditions in the Merger Agreement, and closing on the
Merger is December 31, 1997. Delays beyond that time would likely increase total
transaction and transition costs while delaying realization of the benefits of
the Merger. Delmarva and Conectiv therefore request that the Commission expedite
consideration of this Application.
III. APPROVALS SOUGHT
15. Conectiv's acquisition of control over Delmarva requires the
Commission's prior approval under the Utility Transfers Act, Va. Code ss.56-88
et seq. Va. Code ss.56-88.1 provides, in pertinent part, that:
No person . . . shall, directly or indirectly, acquire . . . control of (i)
a public utility within the meaning of this chapter . . . without the prior
approval of the Commission.
For purposes of this section, "control" means (i) the acquisition of
twenty-five percent or more of the voting stock or (ii) the actual exercise
of any substantial influence over the policies and actions of any public
utility . . . .
16. The Commission shall approve a person's acquiring control over a public
utility in the Commonwealth if it finds that "adequate service to the public at
just and reasonable rates will not be impaired or jeopardized" by permitting
such a transaction to occur. Va. Code ss.56-90.
17. Delmarva and Conectiv also seek approvals under the Affiliates Act, Va.
Code ss.56-76 et seq., for transactions between Delmarva and the service company
to be formed by Conectiv, since Delmarva and the service company are expected to
be affiliates within the meaning of the Affiliates Act. At this juncture,
however, detailed information about transactions between Delmarva and the
service company is not yet available. Delmarva and Conectiv will supplement this
Application and submit such detailed information as soon as it is available.
Delmarva and Conectiv respectfully request that the Commission begin its
consideration of the Merger-related aspects of this Application prior to the
submission of detailed information related to approvals required under the
Affiliates Act.
18. Delmarva and Conectiv also seek any other necessary approvals under
Virginia law for the proposed transactions described in this Application, except
that Delmarva shall separately seek any approvals required under the Virginia
Stock Corporation Act at the time of the closing on the Merger.
IV. THERE WILL BE NO IMPAIRMENT OF ADEQUATE SERVICE TO THE PUBLIC AT JUST
AND REASONABLE RATES
19. Conectiv's acquiring control of Delmarva on the terms and conditions
set forth in the Merger Agreement satisfies the applicable statutory standard.
20. 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.
21. The Merger is expected to produce benefits, including cost savings,
through greater efficiencies and economies of scale, a more diverse customer
base, improved credit quality and liquidity of securities, and a regional
platform for growth. More specifically: (i) Achieving cost savings through
greater efficiencies and economies of scale will permit each of the operating
utility companies to offer more competitively-priced electric service and
energy-related products and services than would otherwise be possible. Scale has
importance in many areas, including utility operations, product development,
advertising and corporate services.
(ii) Enhancing geographic and customer diversity will improve the stability
of revenues for Conectiv as a whole.
(iii) Improving the overall credit quality and liquidity of securities will
permit each of the operating utility companies to fund continued growth at lower
cost.
(iv) Creating a regional platform for marketing utility and non-utility
products and services in the mid-Atlantic region and beyond will strengthen the
ability of the combined company to offer additional products and services to
customers.
22. The Merger will not increase Delmarva's Virginia retail electric base
or fuel rates. Conectiv expects to retain Delmarva and Atlantic Electric as
separate operating utility companies, with separate base and fuel rates, as is
the case today.
23. The Merger will not have an adverse effect on competition among
suppliers of utility services. Even after the Merger, the combined companies
will be the smallest member of the Pennsylvania-New Jersey-Maryland
Interconnection Association. To the extent that retail competition is permitted
to occur by the Commission or by the regulatory agencies in other states, the
existence of these larger utilities in the region will ensure that the combined
companies have no market power over electricity supplies in their traditional
service territories. The combined companies will also have enhanced ability to
compete in the retail markets in the region.
24. The Merger will not adversely affect service to Delmarva's Virginia
customers. Both companies are committed to maintaining and potentially improving
their existing high standards of service reliability and customer service.
Merger-related savings will be obtained primarily through achieving economies of
scale, such as elimination of duplicative departments and systems and reductions
in the total number of employees.
25. Overall, an expected reduction of approximately 10% (or 400 positions)
may occur as a result of the Merger. The combined companies recognize, however,
that a local workforce is necessary to maintain high-quality customer service
levels and to respond to the particular needs within each of the States in which
the operating utilities will provide electric service. In New Jersey, for
example, meeting the special needs of the casino industry, recreational
communities, and farming communities will continue to be a priority. On the
Delmarva Peninsula, the special needs of the financial services and chemical
sectors of the economy, along with the recreational and farming communities
served by Delmarva, will remain a priority. Although some current employees of
AEI and Atlantic Electric are expected to relocate their offices to Delaware,
where Conectiv's headquarters will be located, Atlantic Electric will have a
significant number of employees in New Jersey, Delmarva will have a significant
number of employees throughout the Delmarva Peninsula, and expected reductions
in duplicative staff will be handled fairly and even-handedly.
26. The proposed change of control over Delmarva and the resulting holding
company structure avoids further multiple incorporation, simplifies contract and
franchise issues, and facilitates the process of maintaining separate utility
base and fuel rates.
27. 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.
28. The operating utility companies are proposing in each State 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 immediately following the Merger. The precise method
for implementing this sharing concept should be established by each regulatory
agency, consistent with the goals and objectives of the State in which the
operating utility company provides service. In Delaware and Virginia, Delmarva
is proposing that one-third of the allocable share of estimated average annual
net Merger-related savings be used to reduce the base rates of Delmarva's retail
electric service customers immediately upon consummation of the Merger. Other
alternative uses of such savings include reducing stranded costs in advance of
the advent of competition among electricity suppliers and/or funding programs
that might benefit customers, such as low income energy assistance,
weatherization programs, or economic development efforts.
29. Delmarva would be at risk to achieve the projected level of
Merger-related savings, and customers would benefit under Delmarva's proposal
even if achieved savings are less than projected, or the realization of
estimated savings is delayed. If, on the other hand, actual achieved
Merger-related savings are higher 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.
30. To effect the proposed post-Merger base rate reduction, Delmarva
proposes that the base rates for each class of Virginia electric retail
customers be reduced by the same percentage on a total revenue basis (less any
taxes). Within each rate class, revenue decrease dollars would be used to reduce
each current base rate component (after excluding fuel costs included in base
rates) by the same percentage. Using this method, every customer's bill would
decrease.
V. ACCOUNTING AND MISCELLANEOUS INFORMATION ABOUT THE MERGER
31. For accounting purposes, the Merger is treated as an acquisition of AEI
by Delmarva. As such, the Merger will be recorded using the "purchase method" of
accounting for business combinations, in accordance with Accounting Principles
Board ("APB") Opinion No. 16. Since Delmarva and Atlantic Electric have
publicly-held debt securities and preferred stock, so-called "push down"
accounting will not be utilized (i.e., the acquisition premium will appear on
Conectiv's books and not "pushed down" to the books of Delmarva or Atlantic
Electric). Separate financial statements, substantially the same as the current
financial statements of Delmarva and Atlantic Electric, will continue to be
issued. The assets of Delmarva and Atlantic Electric will continue to be
recorded on their books and records at the same values as before the Merger,
with no adjustment to restate common equity amounts or to record any acquisition
premium. The direct transaction costs of the Merger are being recorded by
Delmarva in Account 186 (Miscellaneous Deferred Debits), which will be
transferred to Conectiv upon Closing, and have been expensed as incurred by AEI.
Delmarva and AEI are expensing indirect costs and internal labor costs as
incurred. Pro forma combined and consolidated balance sheets and statements of
income, including explanatory notes, for Delmarva, AEI, and Conectiv are
contained in Exhibit A at Pages 115-140.
32. Delmarva and Conectiv commit 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.
33. The service company to be formed by Conectiv will include many
employees who are currently employed by Delmarva or Atlantic Electric. The
Securities and Exchange Commission has oversight over the arrangements by which
service company costs are charged and assigned to related operating utility
companies and affiliates. Delmarva and Conectiv commit to submit to this
Commission's jurisdiction any issues regarding the ratemaking treatment of any
service company costs assigned or allocated to Delmarva. Because the bulk of the
expected Merger-related savings are in administrative-type functions that will
be performed by the service company, it is expected that these cost assignment
and allocation issues will involve how best to allocate a lower overall cost
structure.
34. Attached as Exhibit C are maps showing the electric service territories
of Delmarva and Atlantic Electric. Attached as Exhibit D is a calculation of the
Virginia retail share of estimated annual average net Merger-related savings,
including the amount by which Delmarva proposes that Virginia retail electric
base rates be reduced upon consummation of the Merger.
35. Except for pleadings, which should be sent to counsel, communications
and correspondence relating to this Application should be sent to: Paul S.
Gerritsen, Vice President, Delmarva Power & Light Company, 800 King Street, P.
O. Box 231, Wilmington, DE 19899, with copies to counsel and to James E.
Franklin, II, Esquire, Atlantic City Electric Company, 6801 Black Horse Pike,
Egg Harbor Township, NJ 08234.
V. PRAYER FOR RELIEF
WHEREFORE, Delmarva Power & Light Company and Conectiv, Inc. request that
the Commission:
A. Expedite consideration of the Merger-related aspects of this
Application;
B. Approve Conectiv's acquiring control of Delmarva as a result of the
transactions contemplated by the Merger Agreement on the terms and conditions
set forth in the Merger Agreement and this Application pursuant to Va. Code
ss.56-88.1; C. Upon submission of detailed information concerning transactions
between Delmarva and the service company to be formed by Conectiv, approve such
transactions under the Affiliates Act; D. Grant all other authority and
approvals required under Virginia law for the transactions described herein,
except for approvals required under the Virginia Stock Corporation Act; and E.
With respect to all such authority and approvals, grant them subject to the
condition that the closing on the transactions contemplated by the Merger
Agreement occur.
Respectfully submitted,
DELMARVA POWER & LIGHT COMPANY
By ______________________________
Corporate Secretary
CONECTIV, INC.
By ______________________________
President
Peter F. Clark
Legal Department
P. O. Box 231 -- 800 King Street
Wilmington, DE 19899
302/429-3069
Guy T. Tripp, III
Hunton & Williams
Riverfront Plaza -- East Tower
951 East Byrd Street
Richmond, VA 23219
804/788-8328
Dated: February 25, 1997
STATE OF DELAWARE )
) ss.
COUNTY OF NEW CASTLE )
On this 24th day of February, 1997, personally came before me, the
subscriber, a Notary Public in and for the state and county aforesaid, Donald P.
Connelly, an officer of Delmarva Power & Light Company, a corporation existing
under the laws of the State of Delaware and the Commonwealth of Virginia, party
to this Application, known to me personally to be such, and acknowledged this
Application to be his act and deed and the act and deed of such corporation,
that the signature of such officer is in his own proper handwriting, and that
the facts set forth in this Application are true and correct to the best of his
knowledge, information, and belief.
------------------------
Subscribed and sworn before me this 24th day of February, 1997.
-------------------------
Notary Public
My Commission Expires:____/____/____
STATE OF DELAWARE )
) ss.
COUNTY OF NEW CASTLE )
On this 24th day of February, 1997, personally came before me, the
subscriber, a Notary Public in and for the state and county aforesaid, Barbara
S. Graham, an officer of Conectiv, Inc., a corporation existing under the laws
of the State of Delaware, party to this Application, known to me personally to
be such, and acknowledged this Application to be her act and deed and the act
and deed of such corporation, that the signature of such officer is in her own
proper handwriting, and that the facts set forth in this Application are true
and correct to the best of her knowledge, information, and belief.
------------------------
Subscribed and sworn before me this 24th day of February, 1997.
------------------------
Notary Public
My Commission Expires:____/____/____
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
- ------------------------------------:
:
IN THE MATTER OF THE PETITION :
OF ATLANTIC CITY ELECTRIC : PETITION
:
COMPANY AND CONECTIV, INC. :
FOR APPROVAL UNDER :
N.J.S.A.ss.48:2-51.1 AND :
N.J.S.A. ss. 48:3-10 OF A CHANGE :
IN OWNERSHIP AND CONTROL :
- ------------------------------------:
TO THE HONORABLE COMMISSIONERS OF THE NEW JERSEY BOARD OF PUBLIC
UTILITIES:
1. Petitioner, Atlantic City Electric Company ("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 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
Atlantic Energy, Inc. ("AEI"). Atlantic Electric's principal business office is
at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130.
Co-Petitioner, 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 AEI and 50% of Conectiv's outstanding capital stock is
currently owned by Delmarva Power & Light Company ("Delmarva"). Conectiv's
principal business office is at 800 King Street, P. O. Box 231, Wilmington,
Delaware 19899.
2. Communications and correspondence relating to the proceedings herein
should be sent to:
Stephen B. Genzer, Esq.
Reynold Nebel, Jr., Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
One Riverfront Plaza
Newark, New Jersey 07102-5490
with copies to Petitioner at the following address:
James E. Franklin, II, Esq.
Louis M. Walters
Atlantic City Electric Company
6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234-4130
and copies to Delmarva at the following address:
Paul S. Gerritsen
Delmarva Power & Light Company
800 King Street, P. O. Box 231
Wilmington, Delaware 19899
3. Atlantic Electric and Conectiv respectfully submit this Petition
pursuant to N.J.S.A. ss.ss. 48:2-51.1 and 48:3-10 and N.J.A.C. ss. 14:1-5.10 to
obtain authorization and approval of a transfer upon Atlantic Electric's books
and records all of the issued and outstanding shares of its common stock, which
will result in the change of ownership or control of Atlantic Electric.
4. AEI is a corporation organized under the laws of the State of New Jersey
and is an exempt holding company under the Public Utility Holding Company Act of
1935 ("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. 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 electric service retail 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.
6. Conectiv owns 100% of the outstanding capital stock of DS Sub, Inc. ("DS
Sub"). DS Sub is a corporation organized under the laws of the State of
Delaware. After consummation of the transactions described herein (the
"Merger"), Conectiv will own 100% of the outstanding common stock of Delmarva
and Atlantic Electric, and Conectiv will be a registered holding company under
PUHCA. DS Sub was formed solely for the purpose of facilitating the Merger. DS
Sub will merge into Delmarva, with Delmarva as the surviving company.
7. 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 to
this Application 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 Michael J.
Barron provide a more detailed description of the transactions summarized below.
8. After receiving all required regulatory approvals, and on the terms and
conditions set forth in the Merger Agreement:
(i) AEI will merge with Conectiv, with Conectiv as the surviving
corporation; and
(ii) DS Sub will merge with Delmarva, with Delmarva as the surviving
corporation.
Together, these transactions result in a change in control over Atlantic
Electric and Delmarva, both of which will become wholly-owned subsidiaries of
Conectiv.
9. 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. Exhibit B compares
the pre- and post-Merger corporate structures of the entities involved in these
transactions.
10. 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.
11. 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.
12. The Merger will not affect the debt securities or preferred stock of
either Delmarva or Atlantic Electric.
13. 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.
14. Consummation of the Merger is contingent upon obtaining certain
required regulatory approvals, including approvals from this Board. In addition
to this filing, filings have been, or will be, made with the Federal Energy
Regulatory Commission, the Nuclear Regulatory Commission, the Securities and
Exchange Commission, the U.S. Department of Justice and Federal Trade
Commission, the Delaware Public Service Commission, the Maryland Public Service
Commission, the Virginia State Corporation Commission, and the Pennsylvania
Public Utility Commission.
15. The target date for receiving all necessary regulatory approvals,
fulfilling all other conditions of the Merger Agreement, and closing the Merger
is December 31, 1997. Delays beyond that time would likely increase the total
transaction and transition costs while delaying the benefits of the Merger.
Atlantic Electric, therefore, requests that the Board expedite consideration of
this Application. As the BPU has done in the past with respect to changes in the
ownership or control of New Jersey utilities, Petitioner and Co-Petitioner ask
that the BPU retain this matter, and not transmit this matter as a contested
case to the Office of Administrative Law.
16. 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.
17. The Merger is expected to produce benefits, including cost savings
through greater efficiencies and economies of scale, a more diverse customer
base, improved credit quality and liquidity of securities, and a regional
platform for growth. More specifically:
(i) Achieving cost savings through greater efficiencies and economies of
scale will permit each operating utility to offer more competitively-priced
electric service and energy-related products and services than would otherwise
be possible. Scale has importance in many areas, including utility operations,
product development, advertising and corporate services.
(ii) Enhancing geographic and customer diversity should improve the
stability of revenues to Conectiv as a whole.
(iii) Improving overall credit quality and liquidity of securities will
permit each operating utility to fund continued growth at lower cost.
(iv) Creating a regional platform for marketing utility and non-utility
services in the mid-Atlantic region and beyond will strengthen the ability of
the combined company to offer additional services to customers.
18. The Merger itself will have no immediate effect on Atlantic Electric's
rates for electric service. Delmarva and Atlantic Electric plan to remain
separate operating utilities with separate rate structures as is the case today.
19. The Merger will not have an adverse effect on competition among
suppliers of electric utility services. Even after the Merger, the combined
companies will still be the smallest member of the Pennsylvania-New
Jersey-Maryland Interconnection Association. As the Board of Public Utilities
moves forward with its Energy Master Plan process and the restructuring of the
electric industry in this State, Petitioner expects that it will be better able
to contribute to the new competitive environment, as a result of the
AEI/Delmarva combination. The end result will be a benefit to electric
competition in New Jersey, as changes come to the industry. At the same time,
the existence of the larger utilities in the region will ensure that the
combined companies have no market power over electricity supplies in their
traditional service territories. The combined companies will also have enhanced
ability to compete in the retail markets in the region.
20. The Merger of AEI and Delmarva will not adversely affect Atlantic
Electric's service to its customers in New Jersey. The companies are committed
to maintaining and potentially improving their existing high standards of
reliability and customer service. Merger-related savings will be obtained
primarily through achieving economies of scale, such as elimination of
duplicative departments and systems and reductions in the total number of
employees. As a result, the Merger will not have an adverse effect on the
provision of safe, adequate and proper utility service at just and reasonable
rates.
21. Atlantic Electric will continue to maintain a significant local
workforce. Overall, Conectiv expects a reduction of approximately 10% (or 400
positions) in the combined companies' workforces. As further explained by Mr.
Cosgrove in his testimony, 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. In New Jersey, for example, meeting the special needs of
the casino industry, recreational communities and local farming will continue to
be a priority. On the Delmarva Peninsula, the special needs of the financial
services and chemical sectors of the economy, along with recreational and
farming communities will remain a priority. Although some current employees of
Atlantic Electric are expected to relocate their offices to Delaware, where
Conectiv's headquarters will be located, Atlantic Electric will retain a
significant number of employees in New Jersey, Delmarva will retain a
significant number of employees throughout the Delmarva Peninsula, and expected
reductions in duplicative staff will be handled fairly and even-handedly.
22. The Merger is expected to save approximately $500 million (net of
transaction and transition costs) over the ten years after the Merger is
consummated. The estimated cost savings are supported by Mr. Thomas Flaherty of
Deloitte & Touche Consulting Group in his attached testimony and related
exhibits. The testimonies of Mr. Gary Hanson and Mr. Louis M. Walters describe
in more detail how the net savings are calculated for New Jersey ratemaking
purposes.
23. Atlantic Electric and Delmarva are proposing, in their respective
States, that one-third of each State's allocable share of average annual
estimated 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. For example, to meet the goals
and objectives of New Jersey's Energy Master Plan, Atlantic Electric is
proposing that the treatment of one-third of New Jersey's allocable share be
determined in conjunction with the goals of the BPU enunciated through the
implementation of the Energy Master Plan, taking into consideration Atlantic
Electric's financial condition, including its earnings relative to authorized
levels.
24. Atlantic Electric would be at risk to achieve the level of projected
savings and customers would benefit as proposed even if the achieved savings are
less than projected. If, on the other hand, actually achieved savings are
greater than projected, with the result that the operating utility's actual
earnings rise above its authorized level, the Board retains the power to adjust
base rates accordingly, consistent with traditional statutory and regulatory
practices.
25. For accounting purposes, the Merger is treated as an acquisition by
Delmarva of AEI. As such, the Merger will be recorded using the "purchase
method" of accounting for business combinations in accordance with Accounting
Principles Board ("APB") Opinion No. 16. Since Delmarva and Atlantic Electric
have publicly-held debt securities and preferred stock, so-called "push down"
accounting will not be utilized (i.e., the acquisition premium will appear on
Conectiv's books and not "pushed down" to Delmarva's or Atlantic Electric's
books). Separate financial statements, substantially the same as the current
financial statements of Delmarva and Atlantic Electric, will continue to be
issued. The assets of Delmarva and Atlantic Electric will continue to be
recorded on their books and records at the same values as before the Merger,
with no adjustment to restate common equity amounts or to record any acquisition
premium. The direct transaction costs of the Merger are being recorded by
Delmarva in Account 186 (Miscellaneous Deferred Debits), which will be
transferred to Conectiv upon Closing, and have been expensed as incurred by AEI.
Both Delmarva and AEI are expensing indirect costs and internal labor costs as
incurred. Pro forma combined and consolidated balance sheets and statements of
income, including explanatory notes, for Delmarva, AEI and Conectiv are
contained in Exhibit A at 115-140. The attached testimony of Mr. Gary Hanson
further explains the intended accounting treatment for the transaction.
26. Atlantic Electric and Conectiv commit 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.
27. Conectiv's service company subsidiary (the "Service Company") will
include many employees who are currently employed by Delmarva or Atlantic
Electric. The Securities and Exchange Commission has oversight over the
arrangements by which Service Company costs are charged and assigned to the
related utilities and affiliates. Atlantic Electric and Conectiv commit to
submit to the Board's jurisdiction any issues regarding the ratemaking treatment
of any Service Company costs assigned or allocated to Atlantic Electric. Because
the bulk 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. When the Service Company agreement is finalized, Atlantic Electric
will file that agreement with the Board for review under N.J.S.A. 48:3-7.1.
28. Attached hereto, and made a part hereof by reference, are the following
Exhibits:
A. Proxy Statement, including the Merger Agreement between AEI and Delmarva
on Plan of Merger, dated August 9, 1996, as amended December 26, 1996, which
includes a copy of the Certificates of Incorporation of Conectiv, Inc, and
Changes to the Boards of Directors.
B. Comparison of pre- and post-Merger corporate structure.
C. Copies of corporate resolutions of stockholders of each of the
corporations authorizing the transaction.
D. Copies of the Certificates of Incorporation of both AEI and Delmarva.
29. In support of the Petition, the following testimony is being submitted:
-- Howard E. Cosgrove, Chairman, President and CEO, Delmarva;
Chairman and CEO, Conectiv, Inc.
-- Thomas J. Flaherty, National Partner - Utilities Consulting,
Deloitte & Touche Consulting Group.
-- Michael J. Barron, Vice President and Chief Financial Officer,
AEI; Senior Vice President and CFO, Atlantic City Electric
Company.
-- Gary L. Hanson, Controller, AEI and Atlantic City Electric
Company.
-- Louis M. Walters, Vice President - Treasurer and Assistant
Secretary, Atlantic City Electric Company; Treasurer, AEI.
30. In conclusion, Petitioner and Co-Petitioner respectfully submit that
the merger of AEI with Delmarva will not have an adverse impact on competition
in the electric industry, on either Atlantic Electric's rates or the ability of
the BPU to regulate those rates, on Atlantic Electric's obligations to its
employees, or on the provision of safe, adequate and proper service at just and
reasonable rates. Accordingly, Petitioner and Co-Petitioner respectfully request
the approval of the BPU under N.J.S.A. 48:2-51.1 and 48:3-10.
WHEREFORE, Atlantic City Electric Company and Conectiv request
that the Board of Public Utilities: (1) approve the transfer by Atlantic City
Electric Company on its books and records of all of the issued and outstanding
shares of its Common Stock; (2) approve the acquisition by Conectiv of control
of Atlantic City Electric Company, (3) retain this matter for final disposition
before the BPU; and (4) grant such other relief as may be reasonable and
necessary.
Respectfully submitted,
ATLANTIC CITY ELECTRIC COMPANY
6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234-4130
By:________________________________________
James E. Franklin, II, Esq.
LeBouef, Lamb, Greene & MacRae
One Riverfront Plaza
Newark, New Jersey 07102-5490
Attorneys for Petitioner
Atlantic City Electric Company
By:________________________________________
Stephen B. Genzer, Esq.
Dated: February 24, 1997
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
--------------------------------------
DOCKET NO.
IN RE
JOINT APPLICATION OF
ATLANTIC CITY ELECTRIC COMPANY
AND
DELMARVA POWER & LIGHT COMPANY
AND
CONECTIV, INC.
FOR THE TRANSFER OF CONTROL OF
ATLANTIC CITY ELECTRIC COMPANY
AND
DELMARVA POWER & LIGHT COMPANY
TO
CONECTIV, INC.
Robert C. Gerlach
Ballard Spahr Andrews
& Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103
(215) 864-8526
Dated: March 24, 1997
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
In Re: Joint Application of :
Atlantic City Electric Company :
and Delmarva Power & Light :
Company and Conectiv, Inc. :
For the Transfer of Control of :
Atlantic City Electric Company : Docket No.
and Delmarva Power & Light :
Company to Conectiv, Inc. :
TO PENNSYLVANIA PUBLIC UTILITY COMMISSION:
The names and address of Applicants are:
Atlantic City Electric Company
6801 Black Horse Pike
Egg Harbor Township, NJ 08234-4130
Delmarva Power & Light Company
800 King Street
P.O. Box 231
Wilmington, DE 19899
Conectiv, Inc.
800 King Street
P.O. Box 231
Wilmington, DE 19899
The name and address of Applicants' attorney is:
Robert C. Gerlach
Ballard Spahr Andrews & Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103
THE PARTIES
Atlantic City Electric Company, a New Jersey corporation ("ACE"), is a
public utility primarily engaged in the generation, transmission, distribution
and sale of electric energy in the southern one-third of New Jersey. ACE is a
wholly owned subsidiary of Atlantic Energy, Inc., a New Jersey corporation
("AE"). ACE owns undivided interests in certain generating and transmission
facilities in the Commonwealth of Pennsylvania.
Delmarva Power & Light Company, a Delaware and Virginia corporation
("Delmarva"), is an investor owned public utility that provides predominantly
electric service in Delaware, ten primarily Eastern Shore counties in Maryland,
and the Eastern Shore area of Virginia and gas service in northern Delaware.
Delmarva owns undivided interests in certain generating and transmission
facilities in the Commonwealth of Pennsylvania.
Conectiv, Inc. ("Conectiv") was incorporated under the laws of the State of
Delaware on August 8, 1996. AE and Delmarva each owns 50% of the capital stock
of Conectiv. Upon consummation of the Mergers described below, Delmarva will
become a direct wholly owned subsidiary of Conectiv and AE will cease to exist
and AE's direct subsidiaries, including ACE, will become direct subsidiaries of
Conectiv.
DS Sub, Inc., a Delaware corporation ("DS Sub"), is a wholly owned
subsidiary of Conectiv formed solely to effectuate a merger with and into
Delmarva.
THE PROPOSED MERGERS
AE, Delmarva, Conectiv and DS Sub entered into an Agreement and Plan of
Merger dated as of August 9, 1996, as amended and restated as of December 26,
1996 (the "Merger Agreement"), pursuant to which, among other things: (i) DS Sub
will be merged with and into Delmarva (the "Delmarva Merger"), with Delmarva as
the surviving corporation; (ii) AE will be merged with and into Conectiv (the
"AE Merger" and together with the Delmarva Merger, the "Mergers"), with Conectiv
as the surviving corporation; and (iii) Delmarva and ACE will become wholly
owned subsidiaries of Conectiv. As a result of the Mergers, (i) each issued and
outstanding share of Delmarva common stock, par value $2.25 per share, will be
converted into one share of Conectiv common stock, par value $.01 per share (the
"Conectiv Common Stock"); and (ii) each issued and outstanding share of AE
common stock, no par value per share, will be converted into 0.75 shares of the
Conectiv Common Stock and 0.125 shares of the Class A common stock, par value
$.01 per share (the "Conectiv Class A Common Stock). Upon the consummation of
the Mergers, the current common shareholders of AE will own 39.4% of the
Conectiv Common Stock and 100% of the Conectiv Class A Common Stock and the
current common shareholders of Delmarva will own 60.6% of the Conectiv Common
Stock (based on the capitalization of each company as of September 30, 1996).
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. The Mergers will not affect the
debt securities or preferred stock of either Delmarva or ACE. Although both ACE
and Delmarva will continue to exist as wholly owned operating subsidiaries of
Conectiv and their respective businesses, properties and assets will not be
physically transferred to Conectiv, the Mergers will result in a transfer of
control of each of ACE and Delmarva, through a stock transfer, to Conectiv. Such
transfer of control in each utility constitutes the transfer of utility property
within the meaning of Section 1102(a)(3) of Title 66, Pennsylvania Consolidated
Statutes (the "Code"), thereby requiring the approval of the Pennsylvania Public
Utility Commission (the "Commission").
The Merger Agreement required the approval of the holders of shares of
common stock in Delmarva and AE. The shareholders of Delmarva and AE approved
the Merger Agreement on January 30, 1997. The Mergers will be consummated after
certain regulatory approvals described below are received and other conditions
are satisfied or waived. AE and Delmarva anticipate that the effective date of
the Mergers will occur on or about December 31, 1997.
The proposed Mergers are more fully described in the Joint Proxy
Statement/Prospectus dated December 26, 1996 of AE and Delmarva attached hereto
as Appendix A.
BUSINESS OF THE PARTIES
ACE is a public utility primarily 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. ACE's service
territory is principally the southern one-third of New Jersey and covers all or
portions of eight counties in New Jersey. ACE is a public utility holding
company that is exempt under Section 3(a)(2) of the Public Utility Holding
Company Act of 1935, as amended (the "1935 Act"), pursuant to Rule 2 thereunder.
ACE is a wholly owned subsidiary of AE, which is a public utility holding
company under the 1935 Act and which has claimed an exemption from substantially
all of the provisions of the 1935 Act pursuant to Section 3(a) of the 1935 Act.
ACE also is qualified to do business in the Commonwealth of Pennsylvania where
it owns (i) a 2.47% undivided interest in the Keystone Generating Station and
related facilities located in Armstrong and Indiana Counties, Pennsylvania (the
"Keystone Generating Station"), (ii) a 3.83% undivided interest in the Conemaugh
Generating Station and related facilities located in Indiana County,
Pennsylvania (the "Conemaugh Generating Station"), (iii) an 8% undivided
interest in the Conemaugh-Conastone EHV Transmission Line located in Adams,
Bedford, Blair, Cambria, Cumberland, Franklin, Huntingdon, Indiana, Westmoreland
and York Counties, Pennsylvania (the "Conemaugh-Conastone EHV Transmission
Line"), and (iv) a 7.51% undivided interest in the Peach Bottom Atomic Power
Station and related facilities located in Drumore and Fulton Townships,
Lancaster County, Pennsylvania (the "Peach Bottom Station"). ACE is a member of
the Pennsylvania-New Jersey-Maryland Interconnection ("PJM").
Delmarva is predominantly a public utility that 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 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 in northern
New Castle County, Delaware. Delmarva also is qualified to do business in the
Commonwealth of Pennsylvania where it owns (i) a 3.70% undivided interest in the
Keystone Generating Station, (ii) a 3.72% undivided interest in the Conemaugh
Generating Station, (iii) a 9% undivided interest in the Conemaugh-Conastone EHV
Transmission Line, and (iv) a 7.51% undivided interest in the Peach Bottom
Station. Delmarva also is a member of the PJM.
JURISDICTION OF THE COMMISSION
As stated above, ACE owns an undivided interest in each of the Keystone
Generating Station, the Conemaugh Generating Station, the Conemaugh-Conastone
EHV Transmission Line and the Peach Bottom Station in Pennsylvania, and is a
member of the PJM. ACE has no retail utility customers in Pennsylvania, receives
no gross operating revenue for service rendered pursuant to tariffs filed with
the Commission for intrastate service within the Commonwealth of Pennsylvania,
and operates in the Commonwealth no facilities for electric generation, electric
or gas transmission or electric or gas distribution. The sole business of ACE
subject to the jurisdiction of the Commission in Pennsylvania is the ownership
of the undivided interests described above. As a result of the AE Merger, ACE
will become a wholly owned subsidiary of Conectiv, a new holding company, rather
than AE. Therefore, the AE Merger will result in a transfer of control of ACE,
through a stock transfer, constituting the transfer of utility property within
the intendment of Section 1102(a)(3) of the Code. Since ACE will continue to
exist as an operating company, none of its undivided interests described above
will be physically transferred to Conectiv.
Applications of ACE filed with the Commission at its Application Dockets
Nos. 91674, 93233, 94225 and 96379 for approval of the commencement by ACE of
the exercise of rights within Pennsylvania as a foreign public utility, as and
to the limited extent set forth therein, were granted by Orders and Certificates
of Public Convenience issued by the Commission on November 25, 1964, July 25,
1966, April 24, 1968 and June 21, 1971, respectively.
As stated above, Delmarva owns an undivided interest in each of the
Keystone Generating Station, the Conemaugh Generating Station, the
Conemaugh-Conastone EHV Transmission Line and the Peach Bottom Station in
Pennsylvania and is a member of the PJM. Delmarva has no retail utility
customers in Pennsylvania, receives no gross operating revenue pursuant to
tariffs filed with the Commission for intrastate service within the Commonwealth
of Pennsylvania, and operates in the Commonwealth no facilities for electric
generation, transmission or distribution. The sole business of Delmarva subject
to the jurisdiction of the Commission in Pennsylvania is the ownership of the
undivided interests described above. As a result of the Delmarva Merger,
Delmarva will become a wholly owned subsidiary of Conectiv, a new holding
company. Therefore, the Delmarva Merger will result in a transfer of control of
Delmarva, through a stock transfer, constituting the transfer of utility
property within the intendment of Section 1102(a)(3) of the Code. Since Delmarva
will continue to exist as an operating company, none of its undivided interests
described above will be physically transferred to Conectiv.
Applications of Delmarva filed with the Commission at its Application
Dockets Nos. 91675, 93235, 94227 and 96380 for approval of Delmarva's
commencement of the exercise of rights within Pennsylvania as a foreign public
utility, as and to the limited extent set forth therein, were granted by Orders
and Certificates of Public Convenience issued by the Commission on November 25,
1964, July 25, 1966, April 24, 1968 and June 21, 1971, respectively.
JURISDICTION OF OTHER ADMINISTRATIVE AGENCIES
ACE is currently subject to the jurisdiction of the New Jersey Board of
Public Utilities (the "NJBPU"). The transfer of the ownership or control from AE
to Conectiv is also subject to the jurisdiction of the NJBPU. Accordingly, ACE
and Conectiv are seeking the approval of the NJBPU in connection with the
transfer of control contemplated by the Mergers.
Delmarva is incorporated in Delaware and Virginia, and its electric retail
rates are established by the Delaware Public Service Commission (the "DPSC"),
the Maryland Public Service Commission (the "MPSC") and the Virginia State
Corporation Commission (the "VSCC"). Under Delaware law, Delmarva must obtain
the approval of the DPSC in order to directly or indirectly merge or consolidate
with any other person or company. The DPSC also must approve any acquisition of
any direct or indirect control of any public utility doing business in Delaware.
Accordingly, Delmarva and Conectiv are seeking the approval of the DPSC for the
proposed Delmarva Merger and the acquisition of control by Conectiv. Under
Virginia law, any direct or indirect acquisition of control of a public utility
or any direct or indirect disposition of any utility assets by any public
utility must be approved by the VSCC. Except to the extent preempted by the
Securities Exchange Commission (the "SEC"), the VSCC must also approve any
affiliated transactions, such as certain contracts or arrangements for certain
services, purchases, sales, leases or exchanges, loans and guarantees between a
public utility and its affiliates. Accordingly, Delmarva and its affiliates are
seeking the approvals of the VSCC for the transactions contemplated by the
Mergers.
The MPSC has general authority to supervise and regulate public utilities
with operations in the State of Maryland. The MPSC has advised Delmarva that it
has jurisdiction to determine whether the Mergers will have a material effect on
Delmarva's Maryland franchises or rights thereunder and any other matters that
may properly come before the MPSC at the hearing. Delmarva will seek to show
that the Mergers will not have such an effect.
Conectiv is required to obtain the SEC's approval under Section 9(a)(2) of
the 1935 Act in connection with the Mergers. An application for approval of the
Mergers will be filed by Conectiv shortly. Upon consummation of the Mergers,
Conectiv must register as a holding company under the 1935 Act because it will
not qualify for any exemptions available under the 1935 Act. Consequently,
Conectiv will be subject to various restrictions imposed under the 1935 Act with
respect to the operations of registered holding company systems.
Approval of the Mergers by the Federal Energy Regulatory Commission
("FERC") is required pursuant to Section 203 of the Federal Power Act. ACE and
Delmarva have filed a joint application with FERC requesting that FERC approve
the Mergers under Section 203 of the Federal Power Act.
Delmarva and ACE 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 Station, which consists of two nuclear units. In addition, ACE owns a 5%
interest in the Hope Creek Nuclear Generating Station, which consists of one
nuclear unit. Delmarva and ACE hold Nuclear Regulatory Commission (the "NRC")
licenses with respect to their ownership interests in these nuclear units.
Delmarva and ACE will seek approval from the NRC to the extent that the Mergers
may constitute transfers of control of ownership interests in the operating
licenses for the units which would require approval by the NRC as an amendment
to the facility operating licenses.
A notification of the Mergers to the Federal Trade Commission ("FTC") and
the U.S. Department of Justice will be filed pursuant to the Hart-Scott-Rodino
Act, relating to any antitrust implications of the proposed Mergers. No
objection by the FTC or the U.S. Department of Justice is expected.
Receipt of all required regulatory approvals is a condition precedent to
the effectiveness of the Mergers.
TRANSACTION FOR WHICH APPROVAL IS SOUGHT;
PURPOSE AND EFFECT OF THE MERGERS
AE and Delmarva believe that the Mergers will provide opportunities to
achieve benefits for their respective shareholders, customers, employees and
communities that would not be available if they were to remain separate
companies. The benefits to be achieved through the Mergers include: increased
scale; cost savings; competitive prices and services; and a more balanced
customer base. In addition, the combined entities under Conectiv's new holding
company system will have increased financial flexibility and greater access to
the regional market.
As a result of the Mergers, AE will cease to exist with its current
subsidiaries, including ACE, becoming direct wholly owned subsidiaries of
Conectiv. After the Mergers, Delmarva will become a direct wholly owned
subsidiary of Conectiv and Delmarva's subsidiaries will become indirect
subsidiaries of Conectiv. The businesses and assets, tangible and intangible,
and liabilities of each of ACE and Delmarva will remain with ACE and Delmarva,
respectively. Thus, the Mergers will only result in the transfers of control of
ACE and Delmarva. Such transfers of control of ACE and Delmarva, under Section
1102(a)(3) of the Code, are deemed to constitute the transfers of utility
property.
The consolidated balance sheets of ACE and its subsidiary as of December
31, 1995 and 1994 and the related consolidated statements of income, changes in
common shareholder's equity and cash flows for each of the three-years in the
period ended December 31, 1995, together with the report thereon of Deloitte &
Touche LLP, independent auditors, are included in the AE's and ACE's Annual
Report to the SEC on Form 10-K for the year ended December 31, 1995 included as
Appendix B.
The consolidated balance sheets and statements of capitalization of
Delmarva as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in common stockholders' equity and cash flows for
each of the three-years in the period ended December 31, 1995, together with the
report thereon of Coopers & Lybrand L.L.P., independent accountants, are
included in Delmarva's Annual Report to the SEC on Form 10-K for the year ended
December 31, 1995 included as Appendix C.
Unaudited pro forma combined financial statements of Conectiv combining the
historical financial information of AE and Delmarva giving effect to the Mergers
is included in the Joint Proxy Statement/Prospectus dated December 26, 1996 of
AE and Delmarva attached as Appendix A.
RELIEF REQUESTED
Based on the foregoing, ACE and Delmarva respectfully request (1) approval
under Section 1102(a)(3) of the Code for the transfer of control of ACE to
Conectiv in connection with the AE Merger and for the transfer of control of
Delmarva to Conectiv in connection with the Delmarva Merger, and (2) entry of an
Order granting all relief appropriate under Chapter 21, Title 66, of the Code.
WHEREFORE, the undersigned applicant prays your Honorable Commission to
approve the aforesaid application and grant the relief requested.
ATLANTIC CITY ELECTRIC COMPANY
By: __________________________
Dated: March , 1997
AFFIDAVIT
____________________ being duly sworn according to law, deposes and says
that he is ________________________ of Atlantic City Electric Company; that he
is authorized to and does make this affidavit for it; and that the facts set
forth above are true and correct (or are true and correct to the best of his
knowledge, information and belief) and he expects the said Atlantic City
Electric Company to be able to provide the same at any hearing hereof.
------------------------------
Sworn to and subscribed
before me this _____ day of
______________, 1997
- -----------------------------------
My Commission Expires:
WHEREFORE, the undersigned applicant prays your Honorable Commission to
approve the aforesaid application and grant the relief requested.
DELMARVA POWER & LIGHT COMPANY
By: __________________________
Dated: March , 1997
AFFIDAVIT
____________________ being duly sworn according to law, deposes and says
that he is ________________________ of Delmarva Power & Light Company; that he
is authorized to and does make this affidavit for it; and that the facts set
forth above are true and correct (or are true and correct to the best of his
knowledge, information and belief) and he expects the said Delmarva Power &
Light Company to be able to provide the same at any hearing hereof.
------------------------------
Sworn to and subscribed
before me this _____ day
of ______________, 1997
- -----------------------------------
My Commission Expires:
WHEREFORE, the undersigned applicant prays your Honorable Commission to
approve the aforesaid application and grant the relief requested.
CONECTIV, INC.
By: __________________________
Dated: March , 1997
AFFIDAVIT
____________________ being duly sworn according to law, deposes and says
that he is ________________________ of Conectiv, Inc.; that he is authorized to
and does make this affidavit for it; and that the facts set forth above are true
and correct (or are true and correct to the best of his knowledge, information
and belief) and he expects the said Conectiv, Inc. to be able to provide the
same at any hearing hereof.
------------------------------
Sworn to and subscribed
before me this _____ day
of ______________, 1997
- -----------------------------------
My Commission Expires:
April 30, 1997
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of Atlantic City Electric Company )
and Delmarva Power & Light Company )
)
Salem Nuclear Generating Station )
Units 1 and 2 ) Docket Nos. 50-272, 50-311,
) 50-277 and 50-278
Peach Bottom Atomic Power Station )
Units 2 and 3 )
APPLICATION FOR TRANSFER OF CONTROL
REGARDING OPERATING LICENSES NOS. DPR-70 AND DPR-75
FOR THE SALEM NUCLEAR GENERATING STATION AND
OPERATING LICENSES NOS. DPR-44 AND DPR-56 FOR
THE PEACH BOTTOM ATOMIC POWER STATION
INTRODUCTION AND BACKGROUND
Atlantic City Electric Company t/a Atlantic Electric ("ACE"), Delmarva
Power & Light Company ("DP&L"), Public Service Electric & Gas Company ("PSE&G")
and PECO Energy Company ("PECO") are the holders of Facility Operating License
No. DPR-70 dated August 13, 1976 ("Operating License DPR-70"). Operating License
DPR-70 authorizes the holders to possess the Salem Nuclear Generating Station
Unit 1 ("Salem Unit 1") and authorizes PSE&G to use and operate Salem Unit 1 in
accordance with the procedures and limitations set forth in the Operating
License.
ACE, DP&L, PSE&G and PECO are the holders of Facility Operating License No.
DPR-75, dated May 20, 1981 ("Operating License DPR-75"). Operating License
DPR-75 authorizes the holders to possess the Salem Nuclear Generating Station
Unit 2 ("Salem Unit 2") and authorizes PSE&G to use and operate Salem Unit 2 in
accordance with the procedures and limitations set forth in the Operating
License.
ACE, DP&L, PSE&G and PECO are the holders of Facility Operating License No.
DPR-44, dated December 14, 1973 ("Operating License DPR-44"). Operating License
No. DPR-44 authorizes the holders to possess the Peach Bottom Atomic Power
Station Unit 2 ("Peach Bottom Unit 2") and authorizes PECO to use and operate
Peach Bottom Unit 2 in accordance with the procedures and limitations set forth
in the Operating License.
ACE, DP&L, PSE&G and PECO are the holders of Facility Operating License No.
DPR-56, dated July 2, 1974 ("Operating License DPR-56"). Operating License No.
DPR-56 authorizes the holders to possess the Peach Bottom Atomic Power Station
Unit 3 ("Peach Bottom Unit 3") and authorizes PECO to use and operate Peach
Bottom Unit 3 in accordance with the procedures and limitations set forth in the
Operating License.
The respective percentage ownership interests of ACE, DP&L and each of the
other license holders in the licensed units hereinabove referred to are as
follows:
ACE(%) DP&L (%) PSE&G(%) PECO(%)
Salem Unit 1-DPR-70 7.41 7.41 42.59 42.59
Salem Unit 2-DPR-75 7.41 7.41 42.59 42.59
Peach Bottom Unit 2-DPR-44 7.51 7.51 42.49 42.49
Peach Bottom Unit 3-DPR-56 7.51 7.51 42.49 42.49
This Application is submitted in support of a request for the consent of
the Nuclear Regulatory Commission ("NRC") in accordance with 10 C.F.R. ss.50.80
to the indirect transfers of control of interests in the above-captioned
Operating Licenses which will occur as a result of a proposed merger of Atlantic
Energy, Inc. ("AEI"), of which ACE is a wholly owned subsidiary, and DP&L (the
"Merger"). The Merger will result in the indirect transfer of control of the
interests held by ACE and DP&L as licensees, through the creation of a new
holding company, Conectiv, Inc. ("Conectiv") to be formed through the Merger. A
copy of the Joint Proxy Statement and Prospectus is filed with this Application
as Exhibit A and includes, as an exhibit, "The Agreement and Plan of Merger,
Dated as of August 9, 1996 as Amended and Restated as of December 26, 1996 by
and among Delmarva Power & Light Company, Atlantic Energy, Inc., Conectiv, Inc.
and DS Sub., Inc." (the "Merger Agreement").
Conectiv will be a registered holding company under the Public Utility
Holding Company Act of 1935 ("PUHCA"), and will become the sole owner of all
issued and outstanding shares of common stock of ACE and DP&L. Both ACE and DP&L
will be direct subsidiaries of Conectiv. The additional direct subsidiaries of
Conectiv will include a service company and a company(ies) engaged in
non-utility activities.
As a result of the Merger, ACE and DP&L expect to achieve cost savings and
efficiencies, principally through the elimination of duplicative activities,
increased scale and improved purchasing power, reducing the operating costs of
ACE and DP&L to the benefit of their customers, shareholders and the communities
they serve. By roughly doubling the market capitalization of Conectiv, compared
to that of the individual companies (ACE and DP&L), the Merger should also
improve both the overall credit quality of the merged company and the liquidity
of its securities. Conectiv's ability to fund continued growth at lower costs
will enhance the financial resources of DP&L and ACE to possess their respective
interests in the applicable nuclear generating plants.
The Merger will have no adverse effect on either the technical management
or operation of the Peach Bottom or Salem nuclear generating plants. In each
instance, PSE&G or PECO -- neither of which is involved in the Merger -- will
remain responsible for the operation and maintenance of the respective plants
for which they currently have operating responsibility. Therefore, the Merger
cannot affect the technical qualifications of the responsible operating
entities.
The Operating Licenses for the units which are subject of this Application
were issued pursuant to Section 104(b) of the Atomic Energy Act. Consequently,
the NRC has no antitrust jurisdiction with respect to those units.
Notwithstanding the lack of jurisdiction by the NRC, the antitrust implications
of the proposed Merger, and the competitive aspects thereof, will be considered
by other federal agencies reviewing the Merger, including the Federal Energy
Regulatory Commission ("FERC"), the Securities and Exchange Commission ("SEC"),
the U.S. Department of Justice ("DOJ") and the Federal Trade Commission ("FTC").
Part I below sets forth the information required by 10 C.F.R. ss.50.80 with
respect to the proposed transfers. Part II discusses the effective date for the
license transfers.
PART I. - INFORMATION FOR TRANSFERS OF CONTROL
A. General Information Regarding Organization and Management of the Merged
Company
At the effective time of the Merger, the Merger Agreement contemplates that
the members of the Board of Directors of DP&L will be entitled to nominate ten
(10) members to serve on the Board of Directors of Conectiv, and the AEI Board
will be entitled to nominate eight (8) members. The Conectiv Board will be
divided into three (3) classes so that each class, to the extent possible, has
the same proportion of directors nominated by each of the DP&L and AEI Boards.
The Merger Agreement further provides that at the consummation of the Merger,
Howard E. Cosgrove (Chairman of the Board, President and Chief Executive Officer
of DP&L) will be the Chief Executive Office and Chairman of the Board of
Conectiv. Jerrold L. Jacobs (Chairman and Chief Executive Officer of AEI) will
retire from active employment with AEI after the consummation of the Merger and
will serve as Vice Chairman of the Board of Conectiv until the second
anniversary of the consummation of the Merger.
B. General Information Concerning Atlantic City Electric Company t/a
Atlantic Electric
1. Name and Address
Atlantic City Electric Company t/a Atlantic
Electric 6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234-4130
2. Description of Business
ACE is a wholly owned subsidiary of AEI, an exempt holding company under
PUHCA, whose stock is publicly held. Following the Merger, ACE will be a wholly
owned subsidiary of Conectiv. Its purpose will remain the same as it is now,
which is to engage principally in the generation, transmission, distribution and
sale of electric energy in the southern portion of the State of New Jersey to
residential, commercial and industrial customers for their own use, and in New
Jersey and elsewhere to wholesale customers for resale.
3. Organization and Management
ACE is - and after the Merger will remain - a corporation organized and
existing under the laws of the State of New Jersey. All of ACE's directors and
principal officers are citizens of the United States. All of the directors and
principal officers of AEI are also citizens of the United States.
Following the proposed Merger, ACE will not be owned, controlled or
dominated by an alien, foreign corporation or foreign government. ACE is not
acting as an agent or representative of any other person in this request for
consent to the indirect transfer of control of the licenses.
C. General Information Concerning Delmarva Power & Light Company
1. Name and Address
Delmarva Power & Light Company
800 King Street
P.O. Box 231
Wilmington, Delaware 19899
2. Description of Business
Following the Merger, DP&L will be a wholly owned subsidiary of Conectiv.
Its business operations will generally remain the same as they are now, i.e.,
engaging principally in the generation, transmission, distribution and sale of
electric energy on the Delmarva peninsula in Delaware, Maryland and Virginia;
and the distribution and sale of gas energy in New Castle County, Delaware. The
sales will be to residential, commercial and industrial customers for their own
use, and in Delaware, Maryland, Virginia and elsewhere, to wholesale customers
for resale.
3. Organization and Management
DP&L is - and after the Merger will remain - a corporation organized and
existing under the laws of the State of Delaware and the Commonwealth of
Virginia. All of DP&L's directors and principal officers are citizens of the
United States. Following the proposed Merger, DP&L will not be owned, controlled
or dominated by an alien, foreign corporation or foreign government. Moreover,
DP&L is not acting as an agent or representative of any other person in this
request for consent to the indirect transfer of control of the licenses.
D. Technical Qualifications
The proposed Merger involves no change to either the management
organization or technical personnel of PSE&G, the entity responsible for
operating and maintaining the Salem Nuclear Generating Station Units 1 and 2.
PSE&G is not involved in the Merger. Therefore, the technical qualifications of
PSE&G to carry out its responsibilities under the Operating Licenses remain
unchanged, and will not be adversely affected by the proposed Merger.
Likewise, the proposed Merger involves no change to either the management
organization or technical personnel of PECO, the entity responsible for
operating and maintaining the Peach Bottom Atomic Power Station Units 2 and 3.
PECO is not involved in the Merger. Therefore, the technical qualifications of
PECO to carry out its responsibilities under the Operating Licenses remain
unchanged, and will not be adversely affected by the proposed Merger.
E. Financial Qualifications
ACE and DP&L are - and after the Merger will remain - electric utilities
within the definition set out in 10 C.F.R. ss.50.2. Each company provides
electric service on a retail and wholesale basis. DP&L also provides gas service
on a retail and wholesale basis. After the proposed Merger, ACE will continue to
generate and distribute electricity and recover the cost of the electricity
through rates authorized by the New Jersey Board of Public Utilities ("NJBPU")
and by the FERC. Therefore, ACE will continue to meet the definition of an
"electric utility" set forth in 10 C.F.R. ss.50.2.
After the proposed Merger, DP&L will also continue to generate and
distribute electricity and recover the cost of this electricity through rates
authorized by the Delaware Public Service Commission, the Maryland Public
Service Commission, the State Corporation Commission of Virginia and the FERC.
DP&L will therefore continue to meet the definition of an "electric utility" as
set forth in the regulations.
Thus, the financial qualifications of ACE and DP&L are presumed by 10
C.F.R. ss.50.33(f), and no specific demonstration of financial qualifications is
required.
F. Decommissioning
NRC regulations require information showing "reasonable assurance . . .
that funds will be available to decommission the facility." 10 C.F.R.
ss.50.33(k). ACE and DP&L have each filed decommissioning reports with the NRC
under 10 C.F.R. ss.50.75(b) and are providing financial assurance for
decommissioning their respective ownership interests in each of the
above-captioned plants in accordance with those reports through external nuclear
decommissioning trusts in which deposits are made at least annually. After the
Merger, ACE and DP&L will remain responsible for the decommissioning liabilities
associated with their respective ownership interests in the above-captioned
nuclear generating plants, and will continue to fund their respective
decommissioning trusts in accordance with NRC regulations.
G. Antitrust Considerations
Operating Licenses DPR-44, DPR-56, DPR-70 and DPR-75 were each issued under
Section 104(b) of the Atomic Energy Act. As such, the units which are subject of
this Application are not subject to antitrust review by the NRC. However,
competitive aspects of the Merger, including antitrust considerations associated
therewith, will be reviewed by other federal agencies including the FERC, the
SEC, the DOJ and the FTC.
H. Statement of Purposes for the Transfer and the Nature of the Transaction
Necessitating or Making the License Transfer Desirable
The purpose of the proposed Merger is to achieve benefits for the
shareholders, customers and communities served by ACE and DP&L that would
otherwise not be achievable if they were to remain as separate companies. The
expected savings related to the Merger are approximately $500 million over the
next ten years (1998 to 2007). The savings will come principally from
elimination of duplicative activities, increased scale, improved purchasing
power, improved operating efficiencies, lower capital costs and, to the extent
practicable, by combining the companies' work forces.
I. Restricted Data
This application does not contain any Restricted Data or other classified
defense information, and it is not expected that any such data will become
involved in the licensed activities. However, in the event such information
should become involved, ACE and DP&L agree that they will safeguard such
information and will not permit any person to have access to Restricted Data
until the Office of Personnel Management (as successor to the Civil Service
Commission) shall have made an investigation and reported to the NRC on the
character, associations and loyalty of such person, and the NRC shall have
determined that permitting such person to have access to Restricted Data will
not endanger the common defense and security of the United States.
J. No Environmental Impact
The Merger does not involve any change to the nuclear plant operations or
equipment and does not change any environmental impact previously evaluated in
the Final Environmental Statement of each of the subject plants. Accordingly, no
environmental impact is associated with this Application or the consequences of
the Merger.
PART II. - EFFECTIVE DATE
The proposed Merger of AEI and DP&L is subject to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and requires the approval of
other federal regulatory authorities as described above. Transfer upon ACE's
books and records of all of the issued and outstanding shares of its common
stock which will result in the change of ownership or control of ACE is also
subject to review and approval by the NJBPU. The transfer of DP&L's stock will
similarly be subject to review and approval by the Delaware Public Service
Commission, the Virginia State Corporation Commission and, in limited fashion,
by the Maryland Public Service Commission. The approval of the Pennsylvania
Public Utilities Commission will also be requested with respect to the limited
issue of transfer of jointly-owned production and transmission facilities
located in that Commonwealth. Approval of the Merger has been obtained from the
shareholders of both AEI and DP&L at a Special Meeting of Shareholders of each
of the companies held for that purpose on January 30, 1997. Until all such
approvals have been obtained, the Merger cannot be consummated. AEI and DP&L
intend to consummate the Merger as soon as practicable following receipt of all
necessary approvals. The projected closing date of the Merger is December 31,
1997. Therefore, the NRC is requested to review this Application on a schedule
that will permit it to act on and provide its final consent to the proposed
indirect transfers of control that would be effectuated by the Merger as
promptly as possible, and in any event not later than September 30, 1997.
CONCLUSION
For the foregoing reasons, the NRC is requested to consent to the indirect
transfers of control of the interests held by ACE and DP&L in Operating Licenses
Nos. DPR-70 and DPR-75 for the Salem Nuclear Generating Station Units and
Operating Licenses Nos. DPR-44 and DPR-56 for the Peach Bottom Atomic Power
Station Units that would result from the Merger.
C E R T I F I C A T I O N
I, JAMES E. FRANKLIN II, being duly sworn, state that:
(1) I am Senior Vice President, Secretary and General Counsel of
Atlantic City Electric Company;
(2) I am duly authorized to execute and file this certification on
behalf of Atlantic City Electric Company; and
(3) The statements set forth in the attached application are true and
correct to the best of my information, knowledge and belief.
---------------------------------------
JAMES E. FRANKLIN II
SWORN and subscribed to before me
this 30th day of April, 1997.
- --------------------------------
C E R T I F I C A T I O N
I, DALE G. STOODLEY, being duly sworn, state that:
(1) I am Vice President and General Counsel of Delmarva Power & Light
Company;
(2) I am duly authorized to execute and file this certification on
behalf of Delmarva Power & Light Company; and
(3) The statements set forth in the attached application are true and
correct to the best of my information, knowledge and belief.
---------------------------------------
DALE G. STOODLEY
SWORN and subscribed to before me
this 30th day of April, 1997.
- --------------------------------
APPLICATION FOR TRANSFER OF CONTROL
REGARDING OPERATING LICENSE NOS. DPR-70 AND DPR-75
FOR THE SALEM NUCLEAR GENERATING STATION AND
OPERATING LICENSE NOS. DPR-44 AND DPR-56 FOR
THE PEACH BOTTOM ATOMIC POWER STATION
E X H I B I T A
JOINT PROXY STATEMENT/PROSPECTUS
April 30, 1997
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of Atlantic City Electric Company )
)
Hope Creek Generating Station )
Unit 1-Operating License No. NPF-57 ) Docket No. 50-354
APPLICATION FOR TRANSFER OF CONTROL
REGARDING OPERATING LICENSE NO. NPF-57 FOR
THE HOPE CREEK NUCLEAR GENERATING STATION
INTRODUCTION AND BACKGROUND
Atlantic City Electric Company t/a Atlantic Electric ("ACE") and Public
Service Electric & Gas Company ("PSE&G") are the holders of Facility Operating
License No. NPF-57, dated July 25, 1986 ("Operating License NPF-57"). Operating
License NPF-57 authorizes the holders to possess the Hope Creek Generating
Station Unit 1 ("Hope Creek Unit 1") and authorizes PSE&G to use and operate
Hope Creek Unit 1 in accordance with the procedures and limitations set forth in
the Operating License.
The percentage ownership interest of ACE and the other license holder in
Hope Creek Unit 1 is as follows:
ACE(%) PSE&G(%)
Hope Creek Unit 1 5.00 95.00
This application is submitted in support of a request for the consent of
the Nuclear Regulatory Commission ("NRC") to the indirect transfer of control of
interest in the above-captioned Operating License that will occur as a result of
a proposed merger of Atlantic Energy, Inc. ("AEI") and Delmarva Power & Light
Company ("DP&L") (the "Merger"). ACE is a wholly owned subsidiary of AEI.
The Merger will result in the indirect transfer of control of the five
percent (5%) interest held by ACE as a Licensee due to the creation of a holding
company, Conectiv, Inc. ("Conectiv") to be formed for the Merger. Conectiv will
become a registered holding company under the Public Utility Holding Company Act
of 1935 ("PUHCA"), and will become the sole owner of all issued and outstanding
shares of common stock of ACE and DP&L. Both ACE and DP&L will be direct
subsidiaries of Conectiv. The additional direct subsidiaries of Conectiv will
include a service company and a company(ies) engaged in non-utility activities.
A copy of the Joint Proxy Statement and Prospectus is filed with this
Application as Exhibit A and includes, as an exhibit, "The Agreement and Plan of
Merger, dated as of August 9, 1996 as Amended and Restated as of December 26,
1996 by and among Delmarva Power & Light Company, Atlantic Energy, Inc.,
Conectiv, Inc. and DS Sub., Inc." (the "Merger Agreement").
As a result of the Merger, ACE expects to achieve cost savings and
efficiencies, principally through the elimination of duplicative activities,
increased scale and improved purchasing power. These changes will reduce the
operating costs of ACE to the benefit of its customers, shareholders and the
communities it serves. By roughly doubling the market capitalization of
Conectiv, compared to that of the individual companies (ACE and DP&L), the
Merger should also improve both the overall credit quality of the merged company
and the liquidity of its securities. Conectiv's ability to fund continued growth
at lower cost will enhance ACE's financial resources to possess its interest in
the nuclear generating plant which is the subject of this Application.
The Merger will have no adverse effect on either the technical management
or operation of the Hope Creek Generating Station. PSE&G is not involved in the
Merger and will remain responsible for the operation and maintenance of the Hope
Creek Generating Station for which it currently has operating responsibility.
Therefore, the Merger can have no effect on the technical qualifications of the
responsible operating entity.
In addition to NRC review, the Merger will be reviewed by other federal
agencies, including the Federal Energy Regulatory Commission ("FERC"), the
Securities and Exchange Commission ("SEC"), the U.S. Department of Justice
("DOJ") and the Federal Trade Commission ("FTC"). Among the issues to be
considered by those agencies are the potential competitive aspects of the
proposed Merger, which will include antitrust considerations.
Part I below sets forth the information required by 10 C.F.R. ss.50.80 with
respect to the proposed transfer. Part II discusses the effective date for the
license transfer.
PART I. - INFORMATION FOR TRANSFER OF CONTROL
A. General Information Concerning Atlantic City Electric Company t/a
Atlantic Electric
1. Name and Address
Atlantic City Electric Company t/a Atlantic Electric
6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234-4130
2. Description of Business
ACE is a wholly owned subsidiary of AEI, an exempt holding company under
PUHCA, whose stock is publicly held. Following the Merger, ACE will be a wholly
owned subsidiary of Conectiv. Its purpose will remain the same as it is now,
which is to engage principally in the generation, transmission, distribution and
sale of electric energy in the southern portion of the State of New Jersey to
residential, commercial and industrial customers for their own use, and in New
Jersey and elsewhere to wholesale customers for resale.
3. Organization and Management
ACE is - and after the Merger will remain - a corporation organized and
existing under the laws of the State of New Jersey. All of ACE's directors and
principal officers are citizens of the United States. All of the directors and
principal officers of AEI are also citizens of the United States.
At the effective time of the Merger, the Merger Agreement contemplates that
the members of the Board of Directors of AEI will be entitled to nominate eight
(8) members to serve on the Board of Directors of Conectiv, and the DP&L Board
will be entitled to nominate ten (10) members. The Conectiv Board will be
divided into three (3) classes so that each class, to the extent possible, has
the same proportion of directors nominated by each of the AEI Board and the DP&L
Board. The Merger Agreement provides that, at the consummation of the Merger,
Howard E. Cosgrove (Chairman of the Board, President and Chief Executive Officer
of DP&L) will be the Chief Executive Officer and Chairman of the Board of
Conectiv. Jerrold L. Jacobs (now Chairman and Chief Executive Officer with AEI)
will retire from active employment with AEI after the consummation of the Merger
and will serve as Vice Chairman of the Board of Conectiv until the second
anniversary of the consummation of the Merger.
Following the proposed Merger, ACE will not be owned, controlled or
dominated by an alien, foreign corporation or foreign government. Furthermore,
ACE is not acting as an agent or representative of any other person in this
request for consent to the indirect transfer of control of the license.
B. Technical Qualifications
The proposed Merger involves no change to either the management
organization or technical personnel of PSE&G, the entity responsible for
operating and maintaining the Hope Creek Generating Station. PSE&G is not
involved in the Merger. Therefore, the technical qualifications of PSE&G to
carry out its responsibilities under the Operating License remain unchanged, and
will not be adversely affected by the proposed Merger.
C. Financial Qualifications
ACE is - and after the Merger will remain - an electric utility within the
definition set out in 10 C.F.R. ss.50.2. ACE provides electric service on a
retail and wholesale basis. After the proposed Merger, ACE will continue to
generate and distribute electricity and recover the cost of the electricity
through rates authorized by the New Jersey Board of Public Utilities ("NJBPU")
and by the FERC. Therefore, ACE will continue to meet the definition of an
"electric utility" as set forth in 10 C.F.R. ss.50.2.
D. Decommissioning
NRC regulations require information showing "reasonable assurance . . .
that funds will be available to decommission the facility." 10 C.F.R.
ss.50.33(k). ACE has filed decommissioning reports with the NRC under 10 C.F.R.
ss.50.75(b) and is providing financial assurance for decommissioning its
ownership interest in the above-captioned plant in accordance with those reports
through an external nuclear decommissioning trust in which deposits are made at
least annually. After the Merger, ACE will remain responsible for the
decommissioning liabilities associated with its ownership interest in the
above-captioned nuclear generating plant, and will continue to fund its
respective decommissioning trust in accordance with NRC regulations.
E. Antitrust Considerations
The Hope Creek Generating Station is a nuclear unit licensed by the NRC
under Section 103 of the Atomic Energy Act, as amended (the "Act") and, as such,
the NRC and the Attorney General previously conducted an antitrust review under
Section 105 of the Act. No antitrust conditions on the Hope Creek license were
deemed necessary as a result of that review. Additionally, in 1986, in
connection with the issuance of the Operating License for Hope Creek, the NRC
concluded that there had been no significant changes warranting further
antitrust review. The NRC does not need to conduct a further antitrust review
with respect to the pending Application because no significant changes will have
occurred upon consummation of the Merger since its prior review of this license.
ACE is, and will remain, a licensee and owner of a 5% interest in the Hope Creek
Unit. Similarly, PSE&G is unaffected by the Merger and will continue to own its
95% share of Hope Creek.
The NRC has stated that three criteria are relevant to determine whether
significant changes have occurred:
(1) Whether one or more changes have occurred since the date of the
previous NRC antitrust review;
(2) Whether changes are reasonably attributable to the licensee(s);
and
(3) Whether the changes "have antitrust implications that would likely
warrant some Commission remedy."
South Carolina Electric & Gas Company (Virgil C. Summer Nuclear Station, Unit
1), CLI-81-14, 13 NRC 862, 872 (1981) (Emphasis in original).
The Commission has held that application of the third criterion -- whether
the changes "have antitrust implications that would likely warrant some
Commission remedy" -- "should result in termination of NRC antitrust reviews
where the changes are pro-competitive or have de minimus anti-competitive
effects." Summer, supra, CLI-81-14, 13 NRC at 872 (Emphasis in original). The
Commission further explained that, under the third criterion, "changes would be
considered 'significant' only when the competitive structure, as changed, would
likely warrant and be susceptible to a greater than de minimus license
modification." Summer, CLI-81-14, 13 NRC at 864, note 3 (Emphasis supplied). In
other words, the NRC should undertake an additional antitrust review only if
"there is a genuine likelihood that the outcome of [the] antitrust review, were
it to occur, would be a greater than inconsequential alteration or adjustment in
furtherance of policies underlying the antitrust laws. Otherwise stated, we
believe it was intended that we not undertake the process without an expectation
that it would have greater than de minimus results." In the Matter of South
Carolina Electric and Gas, CLI-80-28, 11 NRC 817, 835 (1980) (Emphasis
supplied).
Applying this standard, it is clear that no additional antitrust review in
connection with the proposed AEI and DP&L Merger is warranted. ACE will remain
the owner of its 5% interest in Hope Creek and will continue to distribute the
electricity generated by its 5% interest and recover the costs of that
electricity (and other electricity) through rates authorized by the NJBPU and by
the FERC. Neither DP&L nor Conectiv will acquire any direct interest in the
subject license or the electricity generated by ACE's 5% interest. PSE&G, as the
95% owner of Hope Creek, will also continue to have "exclusive responsibility
and control over the physical construction, operation and maintenance of the
facility," as well as the distribution and sale of the electricity generated by
its 95% ownership share in the facility. See Public Service Electric & Gas
Company and Atlantic City Electric Company, Docket No. 50-354 Hope Creek
Generating Station Facility Operating License, License No. NPF-57, P. 1.E. (July
25, 1986). Therefore, there is no change in the competitive structure, and the
Merger cannot have even a de minimus antitrust effect insofar as the NRC's
antitrust responsibilities are concerned. Accordingly, the NRC should properly
conclude that no further antitrust review is required with respect to the
Merger.
Furthermore, ACE and DP&L have each filed open-access tariffs with the FERC
that comply with FERC's Order 888 (which requires utilities to provide other
entities access to their transmission lines on terms comparable to their own
use). In addition, both ACE and DP&L are participants in an application pending
before the FERC which has been filed by the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM-IA) in compliance with FERC's Order 888 which,
upon approval, will result in the implementation of an independent system
operator for the combined transmission network of the PJM Pool. This will
enhance the ability of alternative suppliers of wholesale power to make
available their power to other utilities within PJM. It will also eliminate
multiple, cumulative transmission charges reducing the cost of alternative power
sources for other utilities located within the PJM area. Both the open
transmission access currently provided by ACE and Delmava and the future
implementation of an independent system operator for the PJM pool assure a
pro-competitive environment in which Hope Creek is operated.
The competitive effects of the Merger will also be thoroughly reviewed by
other federal agencies, including the FERC. Since the NRC does not possess
plenary antitrust jurisdiction, the antitrust role of the NRC is more limited
than that of the FERC. Consistent with Regulatory Guide 9.1, Regulatory Staff
Position Statement on Antitrust Matters, the NRC should not duplicate the FERC's
role of comprehensively evaluating the potential competitive effects of the
Merger, and there is no reason to do so.1 Instead, the NRC should rely upon the
FERC's consideration of competitive and antitrust considerations to confirm that
there are no significant antitrust changes arising from the Merger that would
require further or additional NRC antitrust review.
- --------
1 Regulatory Guide 9.1 provides, in relevant part, as follows: "In general,
reliance will be placed on the exercise of Federal Power Commission [now FERC]
and State agency jurisdiction regarding the specific terms and conditions of the
sale of power, rates of transmission services and such other matters as may be
within the scope of their jurisdiction". In addition to FERC review, the
proposed Merger of AEI and DP&L is subject to the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Consequently,
both the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice will be provided an opportunity to evaluate the
antitrust implications, if any, of the proposed Merger. In addition, the State
agency jurisdiction will continue over each of the subject operating utility
companies. The State agencies include the NJBPU, the Delaware Public Service
Commission, the Maryland Public Service Commission and the State Corporation
Commission of Virginia.
In conclusion, the proposed Merger of AEI and DP&L will not result in a
significant change in the competitive environment in which Hope Creek operates.
Therefore, no additional antitrust review by the NRC is warranted in connection
with its review of this Application.
F. Statement of Purposes for the Transfer and the Nature of the Transaction
Necessitating or Making the License Transfer Desirable
The purpose of the proposed Merger is to achieve benefits for the
shareholders, customers and communities served by ACE, through a Merger of AEI
and DP&L, that would otherwise not be achievable if they were to remain as
separate companies. The expected savings related to the Merger of AEI and DP&L
have been approximated at $500 million over the next ten years (1998 to 2007).
The savings will come from the elimination of duplicative activities, increased
scale and improved purchasing power, improved operating efficiencies, lower
capital costs and, to the extent practicable, by combining the companies' work
forces.
G. Restricted Data
This Application does not contain any Restricted Data or other classified
defense information, and it is not expected that any such data will become
involved in the licensed activities. However, in the event such information
should become involved, ACE agrees that it will safeguard such information and
will not permit any person to have access to Restricted Data until the Office of
Personnel Management (as successor to the Civil Service Commission) shall have
made an investigation and reported to the NRC on the character, associations and
loyalty of such person, and the NRC shall have determined that permitting such
person to have access to Restricted Data will not endanger the common defense
and security of the United States.
H. No Environmental Impact
The Merger does not involve any change to the nuclear plant operations or
equipment and does not change any environmental impact previously evaluated in
the plant's Final Environmental Statement. Accordingly, no significant
environmental impact is associated with this Application or the consequences of
the Merger.
PART II. - EFFECTIVE DATE
The proposed Merger of AEI and DP&L is subject to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and requires the approval of
other federal regulatory authorities as described above. Transfer upon ACE's
books and records of all of the issued and outstanding shares of its common
stock which will result in the change of ownership or control of ACE is also
subject to review and approval by the NJBPU. The transfer of Delmarva's stock
will be similarly subject to review and approval by the Delaware Public Service
Commission, the Virginia State Corporation Commission and, in a limited fashion,
by the Maryland Public Service Commission. The approval of the Pennsylvania
Public Utility Commission will also be requested with respect to the limited
issue of transfer of jointly-owned production and transmission facilities
located in that Commonwealth. Approval of the Merger has been obtained from the
shareholders of AEI and DP&L at a Special Meeting of Shareholders of each of the
companies held for that purpose on January 30, 1997.
Until all such approvals have been obtained, the Merger cannot be
consummated. AEI intends to consummate the Merger with DP&L as soon as
practicable following receipt of all necessary approvals. The projected closing
date of the Merger is December 31, 1997. Therefore, the NRC is requested to
review this Application on a schedule that will permit it to act on and provide
its final consent to the proposed indirect transfer of control that would be
effectuated by the Merger as promptly as possible, and in any event not later
than September 30, 1997.
CONCLUSION
For the foregoing reasons, the NRC is requested to consent to the indirect
transfers of control that would result from the Merger of AEI and DP&L regarding
the interests held by ACE in Operating License No. NPF-57 for the Hope Creek
Generating Station.
C E R T I F I C A T I O N
I, JAMES E. FRANKLIN II, being duly sworn, state that:
(1) I am Senior Vice President, Secretary and General Counsel of
Atlantic City Electric Company;
(2) I am duly authorized to execute and file this certification on
behalf of Atlantic City Electric Company; and
(3) The statements set forth in the attached Application are true and
correct to the best of my information, knowledge and belief.
---------------------------------------
JAMES E. FRANKLIN II
SWORN and subscribed to before me
this 30th day of April, 1997.
- --------------------------------
APPLICATION FOR TRANSFER OF CONTROL
REGARDING OPERATING LICENSE NO. NPF-57 FOR
THE HOPE CREEK GENERATING STATION
E X H I B I T A
JOINT PROXY STATEMENT/PROSPECTUS
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
Filing under the Public Utility Holding Company Act of 1935
__________, 1997
Conectiv, Inc. (70-_______)
Conectiv, Inc. (Conectiv), 800 King Street, Wilmington, Delaware 19899, a
Delaware corporation not currently subject to the Act, has filed an
application-declaration under sections 4, 5, 8, 9(a)(1), 9(a)(2), 10, 11(b), 13,
21 and rules 16, 80-91 and 93-94 thereunder.
The application-declaration seeks approvals relating to the proposed
mergers (the "Mergers") of Delmarva Power & Light Company ("Delmarva"), a
combination electric and gas public- utility company incorporated in the State
of Delaware and the Commonwealth of Virginia, and Atlantic Energy, Inc.
("Atlantic"), a public-utility company incorporated in the State of New Jersey,
exempt from regulation under the Act (except for Section 9(a)(2) thereof)
pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder, by which Delmarva
and its subsidiaries and the direct subsidiaries of Atlantic, would become
wholly-owned subsidiaries of Conectiv. In addition, Atlantic's electric
public-utility subsidiary, Atlantic City Electric Company ("ACE"), a New Jersey
corporation, would become a direct wholly-owned subsidiary of Conectiv.
Following the Mergers, Conectiv would register with the Commission under the
Act. Conectiv also seeks approval in connection with services to be rendered by
Support Conectiv ("Support Conectiv"), Conectiv's newly formed service company
subsidiary. Conectiv also seeks approvals with regard to the retention by
Conectiv of the gas properties of Delmarva and the continued operation of
Delmarva as a combination utility; the retention by Conectiv of the present
nonutility activities, businesses and investments of Delmarva and Atlantic; the
investment by Conectiv, directly or indirectly, of up to an additional $100
million (exclusive of guarantees) through the period ending December 31, 2000
for the further development, including through acquisitions, of its heating,
ventilation and air conditioning ("HVAC"), consumer services and customer
financing businesses; and the continuation of all outstanding intrasystem
financing arrangements.
Delmarva and Atlantic are primarily engaged in providing electric and gas
service in Delaware, Maryland, New Jersey and Virginia. As of December 31, 1996,
Delmarva provided electric utility service to 442,000 customers and gas utility
service to approximately 100,000 customers, and Atlantic provided electric
utility service to 476,000 customers. 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 in
Wilmington, Delaware. On a consolidated basis, for the year ended December 31,
1996, Delmarva's operating revenues 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 were approximately $2,979 million, consisting
of $2,536 million in identifiable electric utility property, plant, and
equipment, $219 million in identifiable gas utility property, plant, and
equipment, and $224 million in other corporate assets.
Delmarva has seven direct nonutility subsidiaries, six of which are
wholly-owned. The nonutility companies are: Delmarva Industries, Inc., which was
formed to be a partner in a joint venture oil and gas exploration and
development program and is winding down its business; Delmarva Services Company,
which leases an office building to Delmarva and/or its affiliates and owns
approximately 2.9% of Chesapeake Utilities Corp., a publicly-traded gas utility
company; Delmarva Energy Company, which was formed to participate in gas and oil
exploration and development opportunities and is winding down its business;
Conectiv Services, Inc., which was formed to acquire and operate service
businesses involving HVAC sales, installation and servicing; Conectiv
Communications, Inc., which was formed to provide a full range of retail and
wholesale telecommunications services; East Coast Natural Gas Cooperative,
L.L.C., which is engaged in gas-related activities, including bulk purchasing;
and Delmarva Capital Investments, Inc., which was formed to be a holding company
for a variety of investments.
Atlantic is a public utility holding company exempt from regulation under
the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the
Act and Rule 2 thereunder. The principal subsidiary of Atlantic is ACE, a public
utility company incorporated in New Jersey. It is a holding company exempt from
regulation 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. It serves a
population of approximately 476,000 in a 2,700 square-mile area of southern New
Jersey. ACE currently has one utility subsidiary, Deepwater Operating Company, a
New Jersey corporation, that operates generating facilities in New Jersey for
ACE. As of December 31, 1996 there were 52,502,479 shares of Atlantic common
stock. Atlantic's principal corporate office is located in Egg Harbor Township,
New Jersey. On a consolidated basis, for the year ended December 31, 1996,
Atlantic's operating revenues were approximately $980 million, and its total
assets were approximately $2,671 million.
Atlantic has two direct, nonutility subsidiaries, Atlantic Energy
Enterprises, Inc. ("AEE") and Atlantic Energy International, Inc. ("AEII"), both
of which are wholly-owned. AEE was formed to be a holding company for Atlantic's
non-regulated subsidiaries. AEII was formed 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. AEII is winding down
its business.
Conectiv was incorporated in 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. At present and until consummation of the Mergers, the common stock of
Conectiv, which consists of 1000 issued and outstanding shares, is owned by
Delmarva and Atlantic. Each company owns 500 shares.
DS Sub Inc. ("DS Sub") has been incorporated under the laws of the State of
Delaware solely for the purpose of facilitating the Mergers. The authorized
capital stock of DS Sub consists of 1000 shares of common stock, $0.01 par value
and all outstanding shares are 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.
Pursuant to an Agreement and Plan of Merger, dated as of August 9, 1996, as
amended and restated on December 26, 1996 (the "Merger Agreement"), DS Sub, a
direct subsidiary of Conectiv, will be merged with and into Delmarva with
Delmarva continuing as the surviving corporation and Atlantic will be merged
with and into Conectiv, with Conectiv as the surviving corporation. As a result
of the Mergers, 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.
Specifically, upon consummation of the Mergers, 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. 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.
Following the Mergers, Delmarva, ACE, AEE and AEII will become direct
subsidiaries of Conectiv. Several direct subsidiaries of Delmarva, including
Conectiv Services, Inc. and Conectiv Communications, Inc., are also expected to
become direct subsidiaries of Conectiv. The Merger Agreement provides that
Conectiv's principal corporate office will be in Wilmington, Delaware.
Conectiv's board of directors will consist of a total of 18 directors, 10 of
whom will be designated by Delmarva and 8 of whom will be designated by
Atlantic.
Conectiv also requests authorizations with respect to the activities of
Support Conectiv, which will be incorporated in Delaware to serve as the service
company for the Conectiv system after the Mergers. Support Conectiv will provide
companies in the Conectiv system with a variety of administrative, management,
and support services. It is anticipated that Support Conectiv will be staffed by
a transfer of personnel from Delmarva, Atlantic, and their subsidiaries. Support
Conectiv's accounting and cost allocation methods and procedures will comply
with the Commission's standards for service companies in registered
holding-company systems, and that Support Conectiv's billing system will use the
Commission's "Uniform System of Accounts for Mutual Service Companies and
Subsidiary Service Companies." Except as permitted by the Act or the Commission,
all services provided by Support Conectiv to affiliated companies will be on an
"at cost" basis as determined by Rules 90 and 91 of the Act.
Conectiv Services, Inc. currently provides HVAC sales, installation and
servicing. Since 1996, it has acquired 6 HVAC service companies. The HVAC
services provided by Conectiv Services, Inc. are energy-related appliance sales
activities that fall within the exemptive requirements of Rule 58. Conectiv
Services, Inc. intends to engage in additional activities that may be outside
those authorized under Rule 58. These proposed activities, however, are clearly
retainable under Commission precedent. Accordingly, Conectiv is seeking approval
for Conectiv Services, Inc. to acquire additional HVAC companies through
December 31, 2000.
Conectiv also seeks approval for Conectiv Services, Inc. to provide
directly, or through one or more subsidiaries, a variety of energy-related
services and products to residential and commercial customers ("Consumer
Services"). While the precise list of services is still under consideration, it
is anticipated that Consumer 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 appliances and, in connection therewith or separately,
marketing of appliance inspection and repair services and extended service
warranties covering the cost of repairing customers' appliances; (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; and (5) incidental and reasonably necessary products and
services related to the choice, purchase or consumption of any such products and
services.
Conectiv also seeks approval for Conectiv Services, Inc. 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 Consumer 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.
In connection with the HVAC business, Consumer Services and customer
financing, Conectiv seeks approval for Conectiv Services, Inc. to invest up to
an additional $100 million, exclusive of guarantees, through the period ending
December 31, 2000.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
CONECTIV
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997
(Dollars in Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Delmarva Atlantic Pro Forma Conectiv
As Adjusted As Adjusted Adjustments Pro Forma
--------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Utility Plant, At Cost
Electric 2,966,254 2,517,704 - 5,483,958
Gas 229,655 - - 229,655
Common 167,577 - - 167,577
--------------- ---------------- ---------------- ------------------
3,363,486 2,517,704 - 5,881,190
Less: Accumulated depreciation 1,319,101 876,107 - 2,195,208
--------------- ---------------- ---------------- ------------------
Net utility plant in service 2,044,385 1,641,597 - 3,685,982
Construction work-in-progress 106,568 114,940 - 221,508
Leased property, 31,753 38,254 - 70,007
net
Cost in excess of net assets acquired, 75,367 - 230,663 (f) 306,030
net
--------------- ---------------- ---------------- ------------------
2,258,073 1,794,791 230,663 4,283,527
--------------- ---------------- ---------------- ------------------
Investments and Nonutility Property -
Nonutility property, net 79,076 54,931 - 134,007
Investment in leveraged 46,897 79,887 - 126,784
leases
Funds held by trustee 35,604 86,646 - 122,250
Other investments 4,204 38,536 - 42,740
--------------- ---------------- ---------------- ------------------
165,781 260,000 - 425,781
--------------- ---------------- ---------------- ------------------
Current Assets
Cash and cash equivalents 42,859 15,548 - 58,407
Accounts 158,044 124,664 - 282,708
receivable
Deferred energy costs 24,230 30,347 - 54,577
Inventories, at average cost:
Fuel (coal, oil, and gas) 31,009 28,058 - 59,067
Materials and supplies 43,324 38,497 - 81,821
Prepayments 12,512 75,883 - 88,395
Other - 6,729 - 6,729
--------------- ---------------- ---------------- ------------------
311,978 319,726 - 631,704
--------------- ---------------- ---------------- ------------------
Deferred Charges and Other Assets
Unrecovered purchased power costs - 79,120 - 79,120
Deferred recoverable income taxes 134,138 85,858 - 219,996
Unrecovered state excise - 52,324 - 52,324
taxes
Deferred debt refinancing 20,715 29,412 - 50,127
costs
Other regulatory assets 31,133 60,482 - 91,615
Prepaid employee benefit 35,966 7,759 20,901 (g) 64,626
costs
Unamortized debt expense 13,708 14,484 - 28,192
Other 23,797 38,876 (7,764) (i) 54,909
--------------- ---------------- ---------------- ------------------
259,457 368,315 13,137 640,909
--------------- ---------------- ---------------- ------------------
Total Assets 2,995,289 2,742,832 243,800 5,981,921
=============== ================ ================ ==================
</TABLE>
The accompanying notes to the unaudited pro forma condensed consolidated
balance sheet and statements of income are an integral part of this statement.
CONECTIV
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
Delmarva Atlantic Pro Forma Conectiv
As Adjusted As Adjusted Adjustments Pro Forma
--------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Capitalization
Common stock 137,665 562,656 (699,318) (a) 1,003
Class A common stock - - 66 (a) 66
Additional paid-in capital
- common stock 515,283 - 939,587 (b)(k) 1,454,870
Additional paid-in capital -
Class A common stock - - 136,769 (b) 136,769
Retained earnings 294,794 226,047 (239,674) (d) 281,167
--------------- ---------------- ---------------- ------------------
947,742 788,703 137,430 1,873,875
Treasury shares, at cost (4,387) - 4,387 (e) -
Unearned compensation (358) (2,799) 3,157 (k) -
--------------- ---------------- ---------------- ------------------
Total common stockholders'
equity 942,997 785,904 144,974 1,873,875
Preferred stock not subject to
mandatory redemption 89,703 - (89,703) (p) -
Preferred stock of
subsidiaries:
Not subject to mandatory
redemption - 30,000 89,703 (p) 119,703
Subject to mandatory redemption 70,000 113,950 - 183,950
Long-term debt 950,159 844,585 - 1,794,744
--------------- ---------------- ---------------- ------------------
2,052,859 1,774,439 144,974 3,972,272
--------------- ---------------- ---------------- ------------------
Current Liabilities
Short-term debt 33,077 127,500 - 160,577
Preferred stock redemption
requirement - 10,000 - 10,000
Long-term debt due within one year 27,547 112,675 - 140,222
Variable rate demand bonds 85,000 - - 85,000
Accounts payable 76,495 50,708 - 127,203
Taxes accrued 9,847 19,577 (1,464) (k) 27,960
Interest accrued 22,497 17,905 - 40,402
Dividends declared 23,763 21,624 - 45,387
Current capital lease 12,623 715 - 13,338
obligation
Deferred income taxes, net 5,431 1,560 - 6,991
Other 31,756 27,120 82,251 (h)(i) 141,127
--------------- ---------------- ---------------- ------------------
328,036 389,384 80,787 798,207
--------------- ---------------- ---------------- ------------------
Deferred Credits and Other
Liabilities
Deferred income taxes, net 522,906 434,067 (36,957) (l) 920,016
Deferred investment tax 41,861 45,944 - 87,805
credits
Long-term capital lease obligations 19,546 37,538 - 57,084
Postretirement obligations - 34,109 54,996 (g) 89,105
Other 30,081 27,351 - 57,432
--------------- ---------------- ---------------- ------------------
614,394 579,009 18,039 1,211,442
--------------- ---------------- ---------------- ------------------
Total Capitalization and Liabilities 2,995,289 2,742,832 243,800 5,981,921
=============== ================ ================ ==================
</TABLE>
The accompanying notes to the unaudited pro forma condensed consolidated
balance sheet and statements of income are an integral part of this statement.
CONECTIV
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED MARCH 31, 1997
(Dollars in Thousands, Except Per Share
Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Delmarva Atlantic Pro Forma Conectiv
As Adjusted As Adjusted Adjustments Pro Forma
---------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 1,001,375 $ 970,340 $ - $ 1,971,715
Gas 124,710 - - 124,710
Other services 86,950 12,935 - 99,885
---------------- --------------- ---------------- ------------------
1,213,035 983,275 - 2,196,310
---------------- --------------- ---------------- ------------------
Operating Expenses
Electric fuel and purchase energy 348,587 221,042 - 569,629
Gas purchased 73,218 - - 73,218
Purchased electric capacity 29,582 194,624 - 224,206
Operation and maintenance 349,644 208,169 - 557,813
Depreciation and amortization 130,997 81,896 5,767 (j) 218,660
State excise taxes - 102,752 - 102,752
Other taxes 36,177 9,863 - 46,040
---------------- --------------- ---------------- ------------------
968,205 818,346 5,767 1,792,318
---------------- --------------- ---------------- ------------------
Operating Income 244,830 164,929 (5,767) 403,992
---------------- --------------- ---------------- ------------------
Other Income
Allowance for equity funds used
during construction 1,113 922 - 2,035
Other income 8,270 8,302 - 16,572
---------------- --------------- ---------------- ------------------
9,383 9,224 - 18,607
---------------- --------------- ---------------- ------------------
Interest Expense
Interest charges 76,273 69,235 - 145,508
Allowance for borrowed funds used
during construction and capitalized
interest (4,363) (906) - (5,269)
---------------- --------------- ---------------- ------------------
71,910 68,329 - 140,239
---------------- --------------- ---------------- ------------------
Dividends on Preferred Securities
of a Subsidiary Trust 2,812 11,177 - 13,989
---------------- --------------- ---------------- ------------------
Income Before Income Taxes 179,491 94,647 (5,767) 268,371
Income Taxes 72,653 32,785 - 105,438
---------------- --------------- ---------------- ------------------
Net Income 106,838 61,862 (5,767) 162,933
Dividends on Preferred Stock 7,711 - - 7,711
---------------- --------------- ---------------- ------------------
Earnings Applicable to Common Stock:
Common stock 99,127 61,862 (14,142) 146,847
Class A common stock - - 8,375 (m) 8,375
---------------- --------------- ---------------- ------------------
$ 99,127 $ 61,862 $ (5,767) $ 155,222
================ =============== ================ ==================
Average common shares outstanding (000):
Common stock 60,723 52,653 (13,276) (n) 100,100
Class A common stock - - 6,563 (n) 6,563
Earnings per average share outstanding
of:
Common stock $ 1.63 $ 1.17 - $ 1.47
Class A common stock $ - $ - - $ 1.28
Dividends declared per share of:
Common stock $ 1.54 $ 1.54 - $ 1.54
Class A common stock $ - $ - - $ 3.20
</TABLE>
The accompanying notes to the unaudited pro forma condensed consolidated
balance sheet and statements of income are an integral part of this statement.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(a) Adjustments to record the estimated par value at $0.01 per share of the
Company Common Stock and the Company Class A Common Stock to be issued and
outstanding. The number of shares of the Company stock was estimated using
the number of Delmarva and Atlantic Common Stock shares outstanding as of
March 31, 1997. Each outstanding share of Delmarva Common Stock was
converted into one share of the Company Common Stock and each outstanding
share of Atlantic Common Stock was converted into 0.75 of one share of the
Company Common Stock plus 0.125 of one share of the Company Class A Common
Stock. The adjustments are summarized below.
As of March 31, 1997
Common Stock:
Number of Atlantic Common Stock shares outstanding 52,502,479
Conversion Ratio 0.75
Number of Common Stock shares to be issued to
Atlantic Common Stockholders 39,376,859
Number of Common Stock shares to be issued to
Delmarva Common Stockholders (Equal to the
number of Delmarva Common Stock shares
outstanding) 60,972,957
----------------
Total number of Common Stock shares to be issued 100,349,816
Par value per share $ 0.01
----------------
(In Thousands of Dollars)
Adjusted par value of total number of
Common Stock shares
to be issued $1,003
Delmarva's Common Stock, as previously reported (137,665)
Atlantic's Common Stock, as previously reported (562,656)
----------------
Adjustment to Common Stock $(699,318)
================
Class A Common Stock:
Number of Atlantic Common Stock shares outstanding 52,502,479
Conversion Ratio 0.125
Number of Class A Common Stock shares to be issued
to Atlantic Common Stockholders 6,562,810
Par value per share $0.01
----------------
Par value (In Thousands of Dollars) $66
================
(b) Adjustments to record additional paid-in-capital to reflect the
following:
As of March 31, 1997
(Dollars in Thousands)
Additional Paid-In-Capital--Common Stock:
Cancellation of the Delmarva Treasury
Stock cost in excess of par value $(3,911)
Adjustment to par value of Delmarva
Common Stock outstanding 136,579
Consideration to be paid to Atlantic's
Common Stockholders in the
form of the Company Common Stock
in excess of par value 807,816
Estimated registration and issuance costs (1,750)
-------------
$938,734
=============
Additional Paid-In-Capital--Class A Common Stock:
Consideration to be paid to Atlantic's
Common Stockholders in the
form of the Company Class A Common
Stock in excess of par value $136,769
=============
(c) The total consideration to be paid to the Atlantic Common Stockholders
was measured by the average daily closing market price of Atlantic's Common
Stock for the ten trading days following the public announcement of the
Merger Agreement on August 12, 1996.
Delmarva's Common Stockholders will receive one share of Company Common
Stock for each share of Delmarva Common Stock. Therefore, the average daily
market price of Delmarva's Common Stock for the same ten day period
following the public announcement of the Merger Agreement was used to
measure the market value of Company Common Stock to be paid to Atlantic's
Common Stockholders. Delmarva's average market price per share was
multiplied by the Atlantic conversion ratio for Company Common Stock to
determine the estimated market value per share of Atlantic Common Stock
attributed to Company Common Stock. This market value per share was
multiplied by the number of Atlantic Common Stock shares outstanding at
March 31, 1997 to estimate the consideration to be paid to Atlantic Common
Stockholders in the form of Company Common Stock.
The difference between the total compensation to be paid to Atlantic's
Common Stockholders and the portion attributed to Company Common Stock was
attributed to Company Class A Common Stock.
The schedules below show the calculation of the total consideration to be
paid to Atlantic's Common Stockholders and the allocation of the total
consideration to be paid between Company Common Stock and Company Class A
Common Stock:
Amounts
Average market price per share of Atlantic Common Stock
used to determine consideration to be paid $18.00
Number of Atlantic Common Stock shares outstanding as of
March 31, 1997 52,502,479
----------------
Total consideration to be paid to Atlantic Common
Stockholder (In Thousands of Dollars) $945,045
================
Average market price per share of Delmarva
Common Stock for the ten
trading days following the public announcement of
the Merger Agreement $20.525
Conversion ratio of Company Common Stock for each share
of Atlantic Common Stock 0.75
----------------
Estimated market value per share of Atlantic Common
Stock attributed to Company Common Stock $15.39375
Number of Atlantic Common Stock shares outstanding
as of March 31, 1997 52,502,479
----------------
Consideration to be paid to Atlantic's Common
Stockholders in the form of Company Common
Stock (In Thousands of Dollars) $808,210
=============
(In Thousands of Dollars)
Total consideration to be paid to Atlantic
Common Stockholders $945,045
Portion of total consideration attributed
to Company Common Stock 808,210
------------
Portion of total consideration attributed
to Company Class A Common Stock $136,835
(d) Adjustments to retained earnings as follows:
Amounts
(Dollars in Thousands)
Eliminate retained earnings of Atlantic $(224,228)
Charges to expense of $21.5 million ($12.9
million after tax) for nonrecurring employee
separation costs related to Delmarva
employees and employee retraining costs
[see note (h)] (12,900)
Charge to expense to eliminate unearned income
[see Note (k)] (2,546)
----------------
Total adjustment $(239,674)
================
Prior to elimination, the retained earnings of Atlantic, as reported in its
Form 10-Q for the quarter ended March 31, 1997, of $226,047,000 was reduced
by $1,819,000, which is Atlantic's after tax portion of the expense
recognized that was related to employee incentive plans [see Note (k)].
(e) Adjustment to reflect the cancellation of the Delmarva treasury stock
as a condition of the Mergers.
(f) The schedule below shows the calculation of the cost of acquiring
Atlantic and the allocation of the total acquisition cost to identifiable
tangible and intangible assets and liabilities.
Cost of Acquiring Atlantic Amounts
(Dollars in Thousands)
Consideration to be paid to Atlantic's
Common Stockholders [see Note (c)] $945,045
Add: Estimated direct costs of acquisition
to be incurred by Delmarva 25,015
Less: Registration and issuance costs (1,750)
----------------
Total acquisition cost $968,310
Less assets acquired:
Electric utility plant - net $1,794,791
Investments and nonutility property 260,000
Current assets 319,726
Deferred debits 368,315
----------------
Total assets acquired $2,742,832
================
Add liabilities acquired:
Preferred stock of subsidiaries $143,950
Long-term debt 844,585
Current liabilities 388,404
Deferred credits and other liabilities 579,009
----------------
Total liabilities acquired $1,955,948
----------------
Costs incurred and liabilities assumed
in connection with the Mergers $49,237
------------
Cost in excess of net assets acquired $230,663
================
The current liabilities of Atlantic as of March 31, 1997 included in net
assets acquired was adjusted to reflect transactions to be recorded by
Atlantic prior to the Mergers as shown below:
As of March 31, 1997
(Dollars in Thousands)
Current liabilities of Atlantic as adjusted
[see Note (p)] $ 389,384
Accrued tax benefit [see Note (k)] (980)
---------------
Current liabilities acquired $ 388,404
================
The fair value of the utility assets of Atlantic is their book value due to
the ratemaking process. Utility assets are recognized for ratemaking
purposes at their book values in determining utility revenue requirements.
Accordingly, the economic substance is that fair value of the utility
assets is their book value.
(g) Adjustments to record additional pension prepayment ($20.9 million) and
postretirement benefit liabilities ($55.0 million), assumed in the
acquisition of Atlantic in accordance with Statements of Financial
Accounting Standards (SFAS) Nos. 87 and 106.
(h) Adjustment to record an estimated liability of $43.5 million which is
included in the acquisition cost, for employee separation and relocation
costs, and facilities integration costs related to Atlantic's employees and
facilities and a liability of $21.5 million, which will be expensed, for
employee separation costs related to Delmarva's employees and employee
retraining costs. The Unaudited Pro Forma Combined Statement of Income for
the twelve months ended March 31, 1997 does not reflect the nonrecurring
estimated expenses of $21.5 million before taxes ($12.9 million after
taxes) for employee separation costs related to Delmarva's employees and
employee retraining costs.
(i) Adjustment to record the estimated direct costs of the Mergers of $25.0
million. These costs are included in the cost to acquire Atlantic.
As of March 31, 1997
(Dollars in Thousands)
Other current liabilities $ 17,251
================
Deferred debits ($ 7,764)
================
(j) Adjustment to reflect the amortization of goodwill acquired over forty
(40) years.
(k) Adjustment to recognize a pretax expense of $4.0 million to eliminate
unearned and deferred compensation costs payable under employee incentive
plans at the time of the Mergers. The adjustment is summarized below:
As of March 31, 1997
(Dollars in Thousands)
Decrease in retained earnings:
Atlantic $(1,819)
Delmarva (727)
----------
Total decrease in retained
earnings $(2,546)
==========
Accrued tax benefit:
Atlantic $(980)
Delmarva (484)
----------
Total decrease in accrued taxes $(1,464)
==========
Eliminate unearned and deferred compensation $3,157
=========
Additional paid-in capital - common stock $853
=========
The Unaudited Pro Forma Condensed Consolidated Statement of Income for the
twelve months ended March 31, 1997 does not reflect the nonrecurring
estimated expense of $4.0 million before taxes ($2.5 million after taxes).
(l) Adjustment to record additional deferred income taxes for the following
temporary differences:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Temporary Deferred
Differences Income Taxes
<S> <C> <C>
Additional pension prepayment [see Note (g)] $20,901 ($7,315)
Additional postretirement benefit liabilities
[see Note (g)] 54,996 19,249
Liabilities for employee separation, relocation,
and retraining costs and facilities integration
costs [see Note (h)] 65,000 23,825
Liability for a portion of DP&L direct acquisition
costs that are deemed to be tax deductible
[see Note (i)] 3,000 1,198
-------
Total deferred income taxes $36,957
</TABLE>
In accordance with SFAS No. 109, deferred income taxes were not recorded
on goodwill for which the amortization is not deductible for tax purposes.
(m) Adjustment to present earnings applicable to the Class A Common Stock.
The Class A Common Stock is intended to reflect the growth prospects and
regulatory environment of Atlantic's regulated electric utility business.
When the Mergers are consummated, the shares of Class A Common Stock
received by holders of Atlantic Common Stockholders will represent, in
aggregate, a 30% interest in any earnings of Atlantic's regulated electric
utility business in excess of $40 million per year.
The calculation of the pro forma earnings applicable to the Class A Common
Stock for the twelve months ended March 31, 1997 is shown below (in
thousands):
Atlantic City Electric Company (ACE) and
Subsidiary Income Available for Common
Stockholders $67,647
Add: Net Losses of Nonutility Activities
Specifically Excluded 269
Less: Fixed Amount of $40 million per year (40,000)
-------
Subtotal 27,916
Percentage Applicable to Class A Common Stock 30%
-------
Earnings Applicable to Class A Common Stock $ 8,375
=======
(n) Adjustments to decrease the weighted average number of Common Stock
shares outstanding based on the conversion ratio of 0.75 to 1 of the
Company Common Stock to be issued to holders of Atlantic Common Stock and
reflect the issuance of Class A Common Stock shares to holders of Atlantic
Common Stock. The number of shares of Company Common Stock and Class A
Common Stock estimated to be issued to holders of Atlantic Common Stock for
the acquisition were deemed to be issued and outstanding for the entire
period.
(o) The Merger Agreement provides, subject to certain conditions, that the
dividends declared and paid on the class A Common Stock will be maintained
at a level of $3.20 per share per annum from the Effective Date until the
earlier of July 1, 2001 or the end of the twelfth calendar quarter
following the calendar quarter in which the Effective Date occurs.
Thereafter, it is the intention of the Company, subject to certain
conditions, to pay annual dividends on the Class A Common Stock in an
aggregate amount (including the amount credited to the Intergroup Interest
as provided in the Company Charter) equal to 90% of the Company Net Income
Attributable to the Atlantic Utility Group. The Merger Agreement further
provides that if and to the extent that the annual dividends paid on the
Class A Common Stock during the Initial Period (including the aforesaid
amount) shall have exceeded 100% of Company Net Income Attributable to the
Atlantic Utility Group during such period, the Company Board may consider
such fact in determining the appropriate annual dividend rate on the Class
A Common Stock following the Initial Period.
The pro forma Class A Common Stock dividends per share exceed the pro forma
Class A Common Stock earnings per share for the twelve months ended March
31, 1997.
(p) Adjustment to reflect Delmarva's preferred stock as preferred stock of
a subsidiary.
q) As necessary for fair presentation of the pro forma financial
statements, amounts previously reported by Atlantic and Delmarva have been
reclassified for consistency of presentation. The following schedules show
the amounts reclassified.
ATLANTIC ENERGY, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Dollars in
Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Reported Reclass Adjusted
Amount Adjustments Amount
-------------- ---------------- --------------
<S> <C> <C> <C>
Electric utility plant
In 2,512,100 5,604 (1) 2,517,704
service
-------------- ---------------- --------------
2,512,100 5,604 2,517,704
Less: Accumulated depreciation 876,107 - 876,107
-------------- ---------------- --------------
Net utility plant in service 1,635,993 5,604 1,641,597
Construction work-in-progress 114,940 - 114,940
Land Held for Future Use 5,604 (5,604) (1) -
Leased property, net 38,254 - 38,254
-------------- ---------------- --------------
1,794,791 - 1,794,791
-------------- ---------------- --------------
Investments and Nonutility Property
Nonutility property, net 54,931 - 54,931
Investment in leveraged leases 79,887 - 79,887
Funds held by trustee 73,935 12,711 (2) 86,646
Other investments 51,247 (12,711) (2) 38,536
-------------- ---------------- --------------
260,000 - 260,000
-------------- ---------------- --------------
Current Assets
Cash and cash equivalents 15,071 477 (3) 15,548
Accounts receivable 93,188 31,476 (4) 124,664
Unbilled revenues 31,476 (31,476) (4) -
Deferred energy 30,347 - 30,347
costs
Inventories, at average cost:
Fuel (coal, oil, and gas) 28,058 - 28,058
Materials and supplies 23,447 15,050 (3) 38,497
Working funds 15,527 (15,527) (3) -
Prepayments 75,883 - 75,883
Other 15,313 (8,584) (5) 6,729
-------------- ---------------- --------------
328,310 (8,584) 319,726
-------------- ---------------- --------------
Deferred Charges and Other Assets
Unrecovered purchased power costs 79,120 - 79,120
Deferred recoverable income taxes 85,858 - 85,858
Unrecovered state excise taxes 52,324 - 52,324
Deferred debt refinancing costs 43,896 (14,484) (6) 29,412
Other regulatory assets 60,482 - 60,482
Prepaid employee benefit costs - 7,759 (5) 7,759
Unamortized debt expense - 14,484 (6) 14,484
Other 38,876 - 38,876
-------------- ---------------- --------------
360,556 7,759 368,315
-------------- ---------------- --------------
Total Assets 2,743,657 (825) 2,742,832
============== ================ ==============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
ATLANTIC ENERGY, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Dollars in
Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
Reported Reclass Adjusted
Amount Adjustments Amount
-------------- ---------------- --------------
<S> <C> <C> <C>
Capitalization
Common stock 562,656 - 562,656
Retained earnings 226,047 - 226,047
-------------- ---------------- --------------
788,703 - 788,703
Unearned compensation (2,799) - (2,799)
-------------- ---------------- --------------
Total common stockholders' equity 785,904 - 785,904
Preferred stock of subsidiaries:
Not subject to mandatory redemption 30,000 - 30,000
Subject to mandatory redemption 113,950 - 113,950
Long-term debt 844,585 - 844,585
-------------- ---------------- --------------
1,774,439 - 1,774,439
-------------- ---------------- --------------
Current Liabilities
Short-term debt 127,500 - 127,500
Preferred stock redemption requirement 10,000 - 10,000
Long-term debt due within one year 112,675 - 112,675
Accounts payable 50,708 - 50,708
Taxes accrued 19,577 - 19,577
Interest accrued 17,905 - 17,905
Dividends declared 21,624 - 21,624
Current capital lease obligation 715 - 715
Deferred income taxes, net 1,560 - 1,560
Other 27,945 (825)(5) 27,120
-------------- ---------------- --------------
390,209 (825) 389,384
-------------- ---------------- --------------
Deferred Credits and Other Liabilities
Deferred income taxes, net 434,067 - 434,067
Deferred investment tax credits 45,944 - 45,944
Long-term capital lease obligations 37,538 - 37,538
Postretirement obligations - 34,109 (7) 34,109
Other 61,460 (34,109) (7) 27,351
-------------- ---------------- --------------
579,009 - 579,009
-------------- ---------------- --------------
Total Capitalization and 2,743,657 (825) 2,742,832
Liabilities
============== ================ ==============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
(1) Transfer "Land held for future use" to electric utility plant in service.
(2) Transfer $12,711 for investment in Bond Escrow Trust from "Other
investments" to "Funds held by trustee."
(3) Transfer "Working funds" to "Cash" and to "Materials and supplies," as
appropriate.
(4) Transfer "Unbilled revenues" to "Accounts receivable."
(5) Transfer prepaid pension cost to a separate line.
(6) Transfer unamortized debt costs from "Deferred debt refinancing costs" to
"Unamortized debt expense."
(7) Transfer other post-retirement benefits from "Other" to a separate line.
ATLANTIC ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED MARCH 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Reported Reclass Adjusted
Amount Adjustments Amount
--------------- ---------------- ---------------
<S> <C> <C> <C>
Operating Revenues
Electric $ 970,340 $ - $ 970,340
Other services - 12,935 (1) 12,935
--------------- ---------------- ---------------
970,340 12,935 983,275
--------------- ---------------- ---------------
Operating Expenses
Electric fuel and purchase energy 221,042 - 221,042
Purchased electric capacity 194,624 - 194,624
Operation and maintenance 190,589 17,580 (1) 208,169
Depreciation and amortization 81,157 739 (1) 81,896
State excise taxes 102,752 - 102,752
Other taxes 9,863 - 9,863
--------------- ---------------- ---------------
800,027 18,319 818,346
--------------- ---------------- ---------------
Operating Income 170,313 (5,384) 164,929
--------------- ---------------- ---------------
Other Income
Allowance for equity funds used
during construction 922 - 922
Other income 1,880 6,422 (1) 8,302
--------------- ---------------- ---------------
2,802 6,422 9,224
--------------- ---------------- ---------------
Interest Expense
Interest charges 64,768 4,467 (1) 69,235
Allowance for borrowed funds used
during construction and
capitalized interest (906) - (906)
--------------- ---------------- ---------------
63,862 4,467 68,329
--------------- ---------------- ---------------
Dividends on Preferred
Securities of a Subsidiary 11,177 - 11,177
Trust
--------------- ---------------- ---------------
Income Before Income Taxes 98,076 (3,429) 94,647
Income Taxes 36,214 (3,429) (1) 32,785
--------------- ---------------- ---------------
Net Income $ 61,862 $ - 61,862
=============== ================ ===============
Average shares outstanding (000) 52,653 - 52,653
Earnings per average share $ 1.17 $ - $ 1.17
Dividends declared $ 1.54 $ - $ 1.54
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an
integral part of this statement.
(1) Transfer net earnings of nonutility subsidiaries from "Other income" to
appropriate lines.
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Dollars in
Thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Reported Reclass Adjusted
Amount Adjustments Amount
-------------- ---------------- --------------
<S> <C> <C> <C>
Utility Plant, At Cost
Electric 3,043,239 (76,985) (1)(2) 2,966,254
Gas 229,655 - 229,655
Common 170,383 (2,806) (2) 167,577
-------------- ---------------- --------------
3,443,277 (79,791) 3,363,486
Less: Accumulated depreciation 1,322,252 (3,151) (2) 1,319,101
-------------- ---------------- --------------
Net utility plant in service 2,121,025 (76,640) 2,044,385
Construction work-in-progress 106,568 - 106,568
Leased property, net 30,480 1,273 (2) 31,753
Cost in excess of net assets
acquired, net - 75,367 (1) 75,367
-------------- ---------------- --------------
2,258,073 - 2,258,073
-------------- ---------------- --------------
Investments and Nonutility Property
Nonutility property, net 79,076 - 79,076
Investment in leveraged leases 46,897 - 46,897
Funds held by trustee 35,604 - 35,604
Other investments 4,204 - 4,204
-------------- ---------------- --------------
165,781 - 165,781
-------------- ---------------- --------------
Current Assets
Cash and cash equivalents 42,859 - 42,859
Accounts receivable 158,044 - 158,044
Deferred energy costs 24,230 - 24,230
Inventories, at average cost:
Fuel (coal, oil, and gas) 31,009 - 31,009
Materials and supplies 43,324 - 43,324
Prepayments 12,512 - 12,512
-------------- ---------------- --------------
311,978 - 311,978
-------------- ---------------- --------------
Deferred Charges and Other Assets
Deferred recoverable income taxes 134,138 - 134,138
Deferred debt refinancing costs 20,715 - 20,715
Other regulatory assets - 31,133 (3) 31,133
Prepaid employee benefit costs 35,966 - 35,966
Unamortized debt expense 13,708 - 13,708
Other 54,930 (31,133) (3) 23,797
-------------- ---------------- --------------
259,457 - 259,457
-------------- ---------------- --------------
Total Assets 2,995,289 - 2,995,289
============== ================ ==============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Dollars in Thousands)
(Unaudited)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
Reported Reclass Adjusted
Amount Adjustments Amount
-------------- ---------------- --------------
<S> <C> <C> <C>
Capitalization
Common stock 137,665 - 137,665
Additional paid-in capital - common stock 515,283 - 515,283
Retained earnings 294,794 - 294,794
-------------- ---------------- --------------
947,742 - 947,742
Treasury shares, at cost (4,387) - (4,387)
Unearned compensation (358) - (358)
-------------- ---------------- --------------
Total common stockholders' equity 942,997 - 942,997
Preferred stock not subject to mandatory redemption 89,703 - 89,703
Preferred stock of subsidiaries:
Subject to mandatory redemption 70,000 - 70,000
Long-term debt 950,159 - 950,159
-------------- ---------------- --------------
2,052,859 - 2,052,859
-------------- ---------------- --------------
Current Liabilities
Short-term debt 33,077 - 33,077
Long-term debt due within one year 27,547 - 27,547
Variable rate demand bonds 85,000 - 85,000
Accounts payable 76,495 - 76,495
Taxes accrued 9,847 - 9,847
Interest accrued 22,497 - 22,497
Dividends declared 23,763 - 23,763
Current capital lease obligation 12,623 - 12,623
Deferred income taxes, net 5,431 - 5,431
Other 31,756 - 31,756
-------------- ---------------- --------------
328,036 - 328,036
-------------- ---------------- --------------
Deferred Credits and Other Liabilities
Deferred income taxes, net 522,906 - 522,906
Deferred investment tax credits 41,861 - 41,861
Long-term capital lease obligations 19,546 - 19,546
Other 30,081 - 30,081
-------------- ---------------- --------------
614,394 - 614,394
-------------- ---------------- --------------
Total Capitalization and 2,995,289 - 2,995,289
Liabilities
============== ================ ==============
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
(1) Transfer goodwill from Electric plant to "Cost in excess of net assets
acquired, net."
(2) Transfer capital leases, net to "Leased property, net."
(3) Transfer regulatory assets from "Other" to "Other regulatory assets."
DELMARVA POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED MARCH 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Reported Reclass Adjusted
Amount Adjustments Amount
--------------- ---------------- ---------------
<S> <C> <C> <C>
Operating Revenues
Electric $1,001,375 $ - $1,001,375
Gas 124,710 - 124,710
Other services 86,950 - 86,950
--------------- ---------------- ---------------
1,213,035 - 1,213,035
--------------- ---------------- ---------------
Operating Expenses
Electric fuel and purchase energy 348,587 - 348,587
Gas purchased 73,218 - 73,218
Purchased electric capacity 29,582 - 29,582
Operation and maintenance 349,644 - 349,644
Depreciation and amortization 130,997 - 130,997
Other taxes 36,177 - 36,177
--------------- ---------------- ---------------
968,205 - 968,205
--------------- ---------------- ---------------
Operating Income 244,830 - 244,830
--------------- ---------------- ---------------
Other Income
Allowance for equity funds used
during construction 1,113 - 1,113
Other income 8,270 - 8,270
--------------- ---------------- ---------------
9,383 - 9,383
--------------- ---------------- ---------------
Interest Expense
Interest charges 76,273 - 76,273
Allowance for borrowed funds used
during construction and capitalized
interest (4,363) - (4,363)
--------------- ---------------- ---------------
71,910 - 71,910
--------------- ---------------- ---------------
Dividends on Preferred
Securities
of a Subsidiary 2,812 - 2,812
Trust
--------------- ---------------- ---------------
Income Before Income Taxes 179,491 - 179,491
Income Taxes 72,653 - 72,653
--------------- ---------------- ---------------
Net Income 106,838 - 106,838
Dividends on Preferred Stock 7,711 - 7,711
--------------- ---------------- ---------------
Earnings Applicable to Common Stock $ 99,127 - $ 99,127
=============== ================ ===============
Average shares outstanding (000): 60,723 - 60,723
Earnings per average share $ 1.63 $ - $ 1.63
Dividends declared $ 1.54 $ - $ 1.54
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.
