UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
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
Conectiv, Inc. Conectiv, Inc.
800 King Street 6801 Black Horse Pike
Wilmington, Delaware 19899 Egg Harbor Township,
New Jersey 08234
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
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Joanne C. Rutkowski, Esq. James M. Cotter, Esq.
William S. Lamb, Esq. Vincent Pagano, Jr., Esq.
H. Liza Moses, Esq. Simpson Thacher &
LeBoeuf, Lamb, Greene & Bartlett
MacRae, L.L.P. 425 Lexington Avenue
125 West 55th Street New York, New York 10017
New York, New York 10019
Peter F. Clark, 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
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TABLE OF CONTENTS
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...............................................8
vii. Support Conectiv...................................8
viii. DS Sub.............................................8
2. Description of Facilities.....................................9
a. Delmarva..................................................9
i. General............................................9
ii. Electric Generating Facilities and
Resources..........................................9
iii. Electric Transmission and Other
Facilities........................................10
iv. Gas Facilities....................................11
v. Other.............................................11
b. Atlantic.................................................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
i. Delmarva Services Company.........................13
ii. DEC...............................................14
iii. CSI...............................................14
b. Conectiv Communications, Inc.............................14
c. DCI......................................................14
d. Solutions................................................15
e. ECNG.....................................................17
4. Atlantic.....................................................17
a. AEII.....................................................17
b. AEE......................................................18
c. Solutions................................................20
C. Description of the Mergers.......................................20
1. Background and Negotiations Leading to the
Proposed Mergers.............................................20
2. Merger Agreement.............................................26
D. Benefit Plans....................................................26
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E. Management and Operations of Conectiv Following
the Mergers......................................................27
F. Industry Restructuring Initiatives...............................28
Item 2. Fees, Commissions and Expenses.......................................31
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.....................................................40
d. Section 10(b)(3).........................................41
2. Section 10(c)................................................47
a. Section 10(c)(1).........................................48
i. Acquisition of Gas Operations....................48
ii. Direct and Indirect Nonutility
Subsidiaries of Conectiv.........................57
b. Section 10(c)(2).........................................58
i. Efficiencies and Economies.......................58
ii. Integrated Public Utility System.................62
3. Section 10(f)................................................68
4. Other Applicable Provisions -- Section
9(a)(1)......................................................68
B. Intra-System Provision of Services...............................69
1. Support Conectiv.............................................70
2. Other Services...............................................72
Item 4. Regulatory Approvals.................................................73
A. Antitrust........................................................73
B. Federal Power Act................................................73
C. Atomic Energy Act................................................74
D. State Public Utility Regulation..................................74
Item 5. Procedure............................................................76
Item 6. Exhibits and Financial Statements....................................76
A. Exhibits.........................................................76
B. Financial Statements.............................................78
Item 7. Information as to Environmental Effects..............................79
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The Form U-1 Application/Declaration in this proceeding originally
filed with the Securities and Exchange Commission on July 2, 1997, and
previously amended on August 13, 1997, November 26, 1997 and December 19, 1997
is hereby amended and restated in its entirety as follows:
Item 1. Description of Proposed Mergers
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A. Introduction
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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").
The Mergers are expected to produce substantial benefits to the
public, investors and consumers, and meet all applicable standards of the Act.
Among other things, Delmarva and Atlantic believe that the Mergers will allow
the shareholders of each of the companies to participate in a larger,
financially stronger company that, through a combination of the equity,
management, human resources and technical expertise of each company, will be
able to achieve increased financial stability and strength, greater
opportunities for earnings growth, reduction of operating costs, efficiencies of
operation, better use of facilities for the benefit of customers, improved
ability to use new technologies, greater retail and industrial sales diversity
and improved capability to make wholesale power purchases and sales. In this
regard, Delmarva and Atlantic believe that synergies created by the Mergers will
generate substantial cost savings which would not have been available absent the
Mergers. Delmarva and Atlantic have estimated the dollar value of certain
synergies resulting from the Mergers to be in excess of $500 million over a
ten-year period. The expected benefits of the Mergers are discussed in further
detail in Item 3.A.2.b.i. below.
The shareholders of Delmarva and Atlantic approved the Mergers at
their respective meetings held on January 30, 1997. Delmarva and Atlantic have
received orders approving the Mergers and/or related matters from their various
state and federal regulators. Orders have been received from the Federal Energy
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1 Following consummation of the Mergers, Conectiv, Inc. will change its name
to Conectiv.
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Regulatory Commission (the "FERC"), the Maryland Public Service Commission (the
"MPSC"), the Delaware Public Service Commission (the "DPSC"), the Virginia State
Corporation Commission (the "VSCC"), the New Jersey Board of Public Utilities
(the "NJBPU"), the Pennsylvania Public Utility Commission (the "PPUC"), and the
Nuclear Regulatory Commission (the "NRC"). Finally, both companies have made the
required filings with the Antitrust Division of the U.S. Department of Justice
(the "DOJ") and the Federal Trade Commission (the "FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the waiting period thereunder has expired. See Item 4 below for
additional detail regarding these regulatory approvals.
Conectiv seeks to consummate the Mergers by March 1, 1998. In order to
permit timely consummation of the Mergers and the realization of the substantial
benefits they are expected to produce, Conectiv requests that the Commission's
review of this Application/Declaration commence and proceed as expeditiously as
practicable, and that the Commission order be issued in no event later than
February 25, 1998.
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," which is
now known as "Conectiv Resource Partners, Inc.") as a subsidiary
service company in accordance with the provisions of Rule 88 of the
Act and the Service Agreement as a basis for Support Conectiv to
comply with Section 13 of the Act and the Commission's rules
thereunder;
(ii) the acquisition by Conectiv of the gas properties of Delmarva and
the continued operation of Delmarva as a combination gas and electric
utility company; and
(iii) the acquisition by Conectiv of the nonutility activities,
businesses and investments of Delmarva and Atlantic.
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
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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 subsidiaries and
the subsidiaries of Atlantic will become subsidiaries of Conectiv, which 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
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1. General Description
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a. Delmarva
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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 June 30, 1997, Delmarva provided electric utility service to
approximately 445,000 customers in an area encompassing about 6,000 square miles
in Delaware (255,000 customers), Maryland (170,000 customers) and Virginia
(20,000 customers), and gas utility service to approximately 102,000 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
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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 June
30, 1997, there were 61,269,320 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 twelve months ended June 30, 1997, Delmarva's operating
revenues on a consolidated basis were approximately $1,256 million, of which
approximately $1,018 million were derived from electric operations, $134 million
from gas operations and $104 million from other operations. Consolidated assets
of Delmarva and its subsidiaries at June 30, 1997 were approximately $2,992
million, consisting of approximately $2,531 million in identifiable electric
utility property, plant and equipment; approximately $236 million in
identifiable gas utility property, plant and equipment; and approximately $225
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
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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.
ACE 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.
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, by reason of its public utility company subsidiary,
Deepwater Operating Company ("Deepwater"), a New Jersey corporation, that
operates generating facilities in New Jersey for ACE. Deepwater owns no physical
assets. Prior to the closing of the Mergers, the employees of Deepwater will
become employees of ACE, which will cease to be a holding company for purposes
of the Act. Thereafter, Deepwater will be dissolved.
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, and to
regulation by the PPUC with respect to ownership of generating facilities in
Pennsylvania. 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 June 30, 1997, there were 52,502,479 shares of
Atlantic Common Stock outstanding and no shares of preferred stock. ACE had
839,500 shares of preferred outstanding as of June 30, 1997. Atlantic's
principal executive office is located at 6801 Black Horse Pike,
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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 twelve
months ended June 30, 1997 were approximately $987 million, and its total assets
as of December 31, 1996 were approximately $2,758 million.
More detailed information concerning Atlantic is contained in the
Annual Reports of Atlantic and ACE on Form 10-K for the year ended June 30,
1997, which is incorporated by reference as Exhibit H-2.
c. Conectiv and its Subsidiaries
-----------------------------
i. Conectiv
--------
Conectiv was incorporated under the laws of the State of Delaware on
August 8, 1996 to become a holding company for Delmarva and its direct
subsidiaries and certain direct subsidiaries of Atlantic following the Mergers
and for the purpose of facilitating the Mergers. Conectiv filed a Restated
Certificate of Incorporation on December 24, 1996. Conectiv has, and prior to
the consummation of the Mergers will have, no operations other than those
contemplated by the Merger Agreement to accomplish the Mergers. Upon
consummation of the Mergers, Conectiv will be a public utility holding company
and will own directly all of the issued and outstanding common stock of
Delmarva, certain of Delmarva's direct subsidiaries, ACE, Atlantic Energy
Enterprises, Inc. ("AEE"), Atlantic Energy International, Inc. ("AEII") and
Support Conectiv. At present and until consummation of the Mergers, the common
stock of Conectiv, which consists of 1,000 issued and outstanding shares, is
owned by Delmarva and Atlantic, each of which owns 500 shares. A copy of the
Restated Certificate of Incorporation of Conectiv is attached as Exhibit A-1.
Following consummation of the Mergers, the common equity of the
Company will be divided into two classes: the Conectiv Common Stock and the
Conectiv Class A Common Stock. The use of two classes of common stock is
designed to address the difference in Delmarva's and Atlantic's evaluations of
the growth prospects of, and uncertainties associated with deregulation of, the
regulated electric utility business of Atlantic. Upon the consummation of the
Mergers, the Conectiv Common Stock will be issued both to the holders of the
Delmarva Common Stock and to the holders of the Atlantic Common Stock while the
Conectiv Class A Common Stock will be issued only to the holders of the Atlantic
Common Stock, thereby giving the current holders of Atlantic Common Stock a
proportionately greater opportunity to share in the growth prospects of, and a
proportionately greater exposure to the uncertainties associated with
deregulation of, the regulated electric utility business of
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Atlantic. As discussed infra, Section 7(c)(2)(A) of the Act expressly provides
for the issuance of such types of securities "solely ... for the purpose of
effecting a merger."
As discussed below, upon consummation of the Mergers, and after some
additional organizational changes immediately after the Mergers, it is
contemplated that Conectiv will have two direct utility subsidiaries, Delmarva
and ACE, whose only nonutility subsidiaries would be DPF I and ACI,
respectively. The system's other nonutility interests will be held by various
direct and indirect subsidiaries of Conectiv. The precise structure of the
system's nonutility operations will be determined, in part, by any
consolidation, dissolution and/or divestiture of the existing interests of
Delmarva and ACE in nonutility businesses prior to the Mergers.
ii. Delmarva
--------
Following the consummation of the Mergers, Delmarva will become a
direct subsidiary of Conectiv. Delmarva's utility operations and facilities are
described in Item 1.B.2.a. below and its nonutility subsidiaries and operations
are described in Item 1.B.3.a. below.
iii. Delmarva's Subsidiaries
-----------------------
In conjunction with the Mergers, Delmarva's existing subsidiaries will
be reorganized. Delmarva's direct subsidiaries, except DPF I, are not expected
to remain subsidiaries of Delmarva but instead to become direct or indirect
subsidiaries of Conectiv. At present, these direct subsidiaries of Delmarva are
Conectiv Services, Inc., Conectiv Communications, Inc., Delmarva Capital
Investments, Inc. ("DCI"), Delmarva Service Company, Delmarva Energy Company,
Conectiv Solutions LLC and East Coast Natural Gas Cooperative, LLC ("ECNG"). As
described below, DCI is a holding company for a variety of non-utility
interests.
iv. ACE
---
Following the consummation of the Mergers, ACE will become a direct
subsidiary of Conectiv. ACE's utility operations and facilities are described in
Item 1.B.2.b. below. ACE does not currently own any interest in any nonutility
subsidiaries other than ACI.
v. AEE
---
Following the consummation of the Mergers, AEE will become a direct
subsidiary of Conectiv. AEE is a holding company for Atlantic's nonutility
subsidiaries, including Atlantic Generation, Inc. ("AGI"), Atlantic Southern
Properties, Inc. ("ASP"), ATE Investment, Inc. ("ATE"), Atlantic Thermal
Systems,
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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 and the company dissolved or merged out of
existence by June 30, 1998.
vii. Support Conectiv
----------------
Prior to the consummation of the Mergers, Support Conectiv will be
incorporated in Delaware to serve as the service company for the Conectiv
system. Support Conectiv will provide Delmarva, ACE and the other companies of
the Conectiv system with a variety of administrative, management, engineering,
construction, environmental and support services, either directly or through
agreements with associate or nonassociate companies, as needed.
Support Conectiv will enter into a service agreement with most, if not
all, companies in the Conectiv system (the "Service Agreement"). (A copy of the
form of Service Agreement as well as an appendix entitled "Description of
Services and Determination of Charges for Services" will be filed as Exhibit
B-2).
The authorized capital stock of Support Conectiv will consist of up to
3,000 shares of common stock, $1 par value per share. Upon consummation of the
Mergers, all issued and outstanding shares of Support Conectiv common stock will
be held by Conectiv.
viii. DS Sub
------
Solely for the purpose of facilitating the Mergers proposed herein, DS
Sub has been incorporated under the laws of the State of Delaware as a direct
transitory subsidiary of Conectiv established to effectuate the Delmarva Merger.
The authorized capital stock of DS Sub consists of 1000 shares of common stock,
$0.01 par value ("DS Sub Common Stock"), all of which is held by Conectiv. DS
Sub has not had, and prior to the closing of the Mergers will not have, any
operations other than the activities contemplated by the Merger Agreement
necessary to accomplish the combination of DS Sub and Delmarva as herein
described.
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2. Description of Facilities
-------------------------
a. Delmarva
--------
i. General
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For the twelve months ended June 30, 1997, Delmarva sold the following
amount of electric energy (retail and wholesale) and sold and transported the
following amount of natural gas:
Electric sales...........................................14,209,549 Mwh
Gas sold and transported.................................28,695,000 Mcf
ii. Electric Generating Facilities and Resources
--------------------------------------------
As of June 30, 1997, 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
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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 June 30,
1997, Delmarva's purchased capacity totaled 367 MW. Delmarva's total
capacity available at June 30, 1997 to serve customers is 3105 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 June 30, 1997, 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 June
30, 1997, 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
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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.
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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.
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 June 30, 1997 consisted of a
liquefied natural gas plant located in Wilmington, Delaware with a storage
capacity of 3.045 million gallons and a maximum daily sendout capacity of 49,898
Mcf per day. This facility is used primarily as a peak-shaving facility for
Delmarva's gas customers. Delmarva also owns four natural gas city gate stations
at various locations in its gas service territory. These stations have a total
contract sendout capacity of 125,000 Mcf per day. Delmarva has 111 miles of
transmission mains (including 11 miles of joint-use gas pipelines that are used
10% for gas distribution and 90% for electricity production), 1,539 miles of
distribution mains and 1,091 miles of service lines. The Delmarva gas facilities
are located exclusively in New Castle County, Delaware.
v. Other
-----
Delmarva and its subsidiaries own and occupy office buildings in
Wilmington and Christiana, Delaware and Salisbury, Maryland and also own a
number of other properties located elsewhere in its service area that are used
for office, service and other purposes.
In addition, Delmarva owns other property, plant and equipment
supporting its electric and gas utility functions.
b. Atlantic
--------
i. General
-------
For the twelve months ended June 30, 1997, ACE sold 8.143 billion kwh
of electric energy (at retail and wholesale).
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ii. Electric Generating Facilities and Resources
--------------------------------------------
As of June 30, 1997, 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 June 30,
1997, 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.
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iii. Electric Transmission and Other Facilities
------------------------------------------
As of June 30, 1997, ACE's transmission system consisted of
approximately 22 circuit miles of 500 kV lines; 127 circuit miles of 230 kV
lines; 209 circuit miles of 138 kV lines; 590 circuit miles of 69 kV lines; 113
circuit miles of 34 kV lines and 197 circuit miles of 23 kV lines. As of
December 31, 1996, ACE's distribution system consisted of 10,398 circuit miles
of 12 kV and 4 kV lines. ACE's electric transmission and distribution system
includes 1,215 transmission poleline miles of overhead lines, 46 transmission
cable miles of underground cables, 9,252 distribution poleline miles of overhead
lines and 1,146 distribution cable miles of underground cables.
ACE is also a member of the PJM Interconnection. ACE's generation and
transmission facilities are operated on an integrated basis with those of seven
other utilities, including Delmarva, in Pennsylvania, New Jersey, Maryland and
the District of Columbia. ACE estimates that its fuel savings associated with
energy transactions within the pool amounted to $3.8 million (includes savings
for Vineland Municipal Electric Utility) during 1996.
iv. Other
-----
ACE owns and occupies an office building and a number of operating
centers located throughout southern New Jersey.
In addition, ACE owns property, plant and equipment supporting its
electric utility functions.
3. Nonutility Subsidiaries
-----------------------
Both Delmarva and Atlantic currently engage, through subsidiaries and
affiliates, in various nonutility activities related to the systems' core
utility businesses.
a. Delmarva
--------
Delmarva has seven direct nonutility subsidiaries: Delmarva Services
Company, Delmarva Energy Company ("DEC"), Conectiv Services, Inc. ("CSI"),
Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI"),
Conectiv Solutions LLC ("Solutions") and East Coast Natural Gas Cooperative, LLC
("ECNG").
i. Delmarva Services Company
-------------------------
Delmarva Services Company, a Delaware corporation and a direct
subsidiary of Delmarva, was formed in 1986 to own and finance an office building
that it leases to Delmarva and/or its affiliates. Delmarva Services Company also
owns approximately 2.9% of the common stock of Chesapeake Utilities Corporation,
a
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publicly-traded gas utility company with gas utility operations in Delaware,
Maryland and Florida.
ii. DEC
---
DEC, a Delaware corporation and a direct subsidiary of Delmarva, was
formed in 1975. It is currently engaged, directly and through its subsidiary, in
Rule 58 energy marketing activities.
(A) Conectiv/CNE Energy Services LLC, a Delaware limited
liability company in which DEC holds a 50% interest, was formed in 1997 to
engage in Rule 58 energy marketing activities in the New England states.
iii. CSI, directly and through subsidiaries, provides a wide
---
range of energy-related goods and services to industrial, commercial and
residential customers. Many of these services are "energy-related" within the
meaning of Rule 58. The remainder have previously been found to be "functionally
related" and so retainable under Section 11(b)(1). CSI is engaged in the design,
construction and installation, and maintenance of new and retrofit heating,
ventilating, and air conditioning ("HVAC"), electrical and power systems,
motors, pumps, lighting, water and plumbing systems, and related structures as
approved by the Commission.
(A) Power Consulting Group, Inc., a Delaware corporation,
was formed in 1997 to provide electrical engineering, testing and maintenance
services to large commercial and industrial customers.
(B) Conectiv Plumbing, LLC, a Delaware limited liability
company owned 90% by CSI, provides plumbing services primarily in connection
with the CSI HVAC business. Conectiv Plumbing, LLC was formed in 1998 in
connection with the acquisition of an HVAC company. Under New Jersey law, an
individual with a New Jersey master plumbing license must hold at least a 10%
equity interest in a company providing plumbing services in New Jersey. To meet
this requirement, the bulk of the acquired company's HVAC business was retained
within CSI but the related and incidental plumbing services were spun down to a
new subsidiary, Conectiv Plumbing, LLC, that is 10% owned by a master plumber.
b. 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.
c. 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. In addition,
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<PAGE>
DCI acts as a vehicle for the development and sale of properties that are not
currently used or useful in the utility business
i. DCI I, Inc., a Delaware corporation and a wholly-owned
subsidiary of DCI formed in 1985 to be involved in passive equity investments in
leveraged leases.
ii. DCI II, Inc., a Virgin Islands corporation and a wholly-owned
foreign sales subsidiary of DCI formed in 1985 to be involved in passive
equity investments in leveraged leases.
iii. DCTC-Burney, Inc., a Delaware corporation and a wholly-owned
subsidiary of DCI formed in 1987 to invest in qualifying facilities.
(A) Forest Products, L.P., a Delaware limited partnership,
in which DCTC-Burney, Inc. is the sole 1% general partner, and which is a
general partner in Burney Forest Products, A Joint Venture.
(B) Burney Forest Products, A Joint Venture, a California
general partnership which is owned by DCTC-Burney, Inc. and Forest Products,
L.P. The partnership owns a wood-burning qualifying facility in Burney, CA.
DCTC- Burney, Inc.'s total direct and indirect ownership interest is 45%.
iv. Luz Solar Partners, Ltd. IV, a California limited partnership
which owns a solar-powered generating station in Southern California in which
DCI owns a 4.7% limited partnership interest.
v. UAH-Hydro Kennebec, L.P., a New York limited partnership which
owns a hydro-electric project in which DCI owns a 27.5% limited partnership
interest.
vi. Christiana Capital Management, Inc., a Delaware corporation
and a wholly-owned subsidiary formed in 1987, which owns an office building
leased to affiliates.
vii. Delmarva Operating Services Company, a Delaware corporation
and a wholly-owned subsidiary of DCI formed in 1987, operates and maintains the
following qualifying facilities under contracts with the plants' owners: the
Delaware City Power Plant in Delaware City, DE; a qualifying facility in Burney,
CA; and a qualifying facility in Sacramento, California, owned by the Sacramento
Power Authority under a subcontract with Siemens Power Corporation.
d. Solutions, a Delaware limited liability company that is jointly
---------
owned by Delmarva and Atlantic, was formed in 1997 to provide, directly or
through subsidiaries, power systems consulting, end use efficiency services,
customized on-site
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<PAGE>
systems services and other energy services to large commercial and industrial
customers. Solutions, directly or through subsidiaries, provides Energy
Management Services, often on a turnkey basis, which may involve the marketing,
sale, installation, operation and maintenance of various products and services
related to the business of energy management and demand-side management. Energy
Management Services may include energy audits; facility design and process
enhancements; construction, maintenance and installation of, and training client
personnel to operate energy conservation equipment; design, implementation,
monitoring and evaluation of energy conservation programs; development and
review of architectural, structural and engineering drawings for energy
efficiencies; design and specification of energy consuming equipment; and
general advice on programs. Solutions also provides conditioned power services,
that is, services designed to prevent, control, or mitigate adverse effects of
power disturbances on a customer's electrical system to ensure the level of
power quality required by the customer, particularly with respect to sensitive
electronic equipment, again as approved by the Commission.
Solutions also markets comprehensive Asset Management Services, on a
turnkey basis or otherwise, in respect of energy-related systems, facilities and
equipment, including distribution systems and substations, transmission
facilities, electric generation facilities (stand-by generators and self-
generation facilities), boilers, chillers (refrigeration and coolant equipment),
HVAC and lighting systems, located on or adjacent to the premises of a
commercial or industrial customer and used by that customer in connection with
its business activities, as previously permitted by the Commission. Solutions
also provides such services to qualifying and non-qualifying cogeneration and
small power production facilities under the Public Utility Regulatory Policies
Act of 1978 ("PURPA").
Solutions provides Consulting Services to associate and nonassociate
companies. The Consulting Services may include technical and consulting services
involving technology assessments, power factor correction and harmonics
mitigation analysis, meter reading and repair, rate schedule design and
analysis, environmental services, engineering services, billing services, risk
management services, communications systems, information systems/data
processing, system planning, strategic planning, finance, feasibility studies,
and other similar or related services. Solutions also offers marketing services
to nonassociate businesses in the form of bill insert and automated
meter-reading services, as well as other consulting services, such as how to set
up a marketing program.
Solutions provides service line repair and extended warranties with
respect to all of the utility or energy-related service lines that enter a
customer's house, as well as utility
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<PAGE>
bill insurance and other similar or related services. Solutions may also provide
centralized bill payment centers for "one stop" payment of all utility and
municipal bills, and annual inspection, maintenance and replacement of any
appliance. Solutions also is engaged in the marketing and brokering of energy
commodities, including retail marketing activities.
Solutions also provides Other Goods and Services, from time to time,
related to the consumption of energy and the maintenance of property by those
end-users, where the need for the service arises as a result of, or evolves out
of, the above services and the incidental services do not differ materially from
the enumerated services.
In connection with its activities, Solutions from time to time may
form new subsidiaries to engage in the above activities, or acquire the
securities or assets of nonassociate companies that derive substantially all of
their revenues from the above activities.
Provision of the above goods and services, which are closely related
to the system's core energy business, is intended to further Conectiv's goal of
becoming a full-service energy provider.
e. ECNG, a Delaware limited liability company in which Delmarva holds
----
a 1/7th interest, is engaged in gas-related activities. Delmarva participates in
ECNG to do bulk purchasing of gas in order to improve the efficiency of its
natural gas local distribution operations.
Delmarva also has a nonutility subsidiary trust, Delmarva Power
Financing I ("DPF I"), which was formed in 1996 in connection with the issuance
by Delmarva of Cumulative Quarterly Income Preferred Securities.
Together, at December 31, 1996, Delmarva's nonutility subsidiaries and
investments constituted approximately 4 percent of the consolidated assets of
Delmarva and its subsidiaries. A corporate chart of Delmarva and its
subsidiaries is filed as Exhibit E-2.
4. Atlantic
--------
Atlantic has four direct nonutility subsidiaries, Atlantic Energy
International, Inc. ("AEII"), Atlantic Energy Enterprises, Inc. ("AEE"), and
Solutions.
a. 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
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<PAGE>
its business and is expected to be dissolved or merged out of existence by June
30, 1998.
b. 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, LLC, a natural gas marketing venture, AEE has pursued growth
opportunities in energy-related fields, that will complement Atlantic's existing
businesses and customer relationships.
i. ATE, a New Jersey corporation and a wholly- owned subsidiary
of AEE formed in 1986, 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. ATE owns a 94% limited partnership
interest in EnerTech Capital Partners L.P., a limited partnership that will
invest in and support a variety of energy technology growth companies.
ii. AGI, a New Jersey corporation and a wholly- owned subsidiary
of AEE formed in 1986. AGI develops, owns and operates independent power
production projects.
(A) 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.
(B) 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.
(C) 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.
(D) 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.
(E) Binghamton General, Inc., a Delaware corporation and a
wholly-owned subsidiary of AGI, formed in 1990 to hold a 10% general partnership
interest in Binghamton Cogeneration Limited Partnership, whose assets have been
sold to a third party.
(F) Binghamton Limited, Inc., a Delaware corporation and a
wholly-owned subsidiary of AGI, formed in 1990 to hold a 35% limited partnership
interest in Binghamton
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<PAGE>
Cogeneration Limited Partnership, whose assets have been sold to a third party.
iii. ATS, a Delaware corporation and a wholly- owned subsidiary
of AEE, formed in 1994. ATS and its subsidiaries develop, own and operate
thermal heating and cooling systems. ATS also provides other energy-related
services to business and institutional energy users. ATS has made investments 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.
(A) Atlantic Jersey Thermal Systems, Inc., a Delaware
corporation and wholly-owned subsidiary formed in 1994, that owns a 10% general
partnership interest in TELPI (as defined below).
(B) ATS Operating Services, Inc., a Delaware corporation and
a wholly-owned subsidiary formed in 1995 that provides thermal energy operating
services.
(C) 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, represents
the initial principal operations of ATS. 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 operation and others will continue to be served independently by ATS.
(D) Atlantic Paxton Cogeneration, Inc., a wholly-owned
subsidiary that is currently inactive and expected to be dissolved sometime in
1998.
(E) Atlantic-Pacific Glendale, LLC, a Delaware limited
liability company in which ATS holds a 50% interest, was formed in 1997 to
construct, own and operate an integrated energy facility to provide heating,
cooling and other energy services to DreamWorks Animation, LLC in Glendale,
California.
(F) Atlantic-Pacific Las Vegas, LLC, a Delaware limited
liability company in which ATS holds a 50% interest, was formed in 1997 to
finance, own and operate an integrated energy plant to provide heating and
cooling services to three affiliated customers in Las Vegas, Nevada.
iv. CCI, a Delaware corporation and a wholly- owned subsidiary of
AEE formed in 1995 to pursue investments and business opportunities in the
telecommunications industry.
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<PAGE>
v. ASP, a New Jersey corporation and a wholly- owned subsidiary
of AEE formed in 1970 that owns and manages certain investments in real estate,
including a 280,000 square- foot commercial office and warehouse facility in
southern New Jersey. Approximately fifty percent of the space in this facility
is currently leased to system companies and fifty percent is leased to
nonaffiliates.
vi. AET, a Delaware corporation and a wholly- owned subsidiary of
AEE formed in 1991. AET is currently winding up its sole investment in
technology, The Earth Exchange, Inc., which is nominal. There are no future
plans for investment activity at this time by AET.
vii. 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, LLC. AEE and Cenerprise each own 50
percent of Enerval. Enerval provides energy management services, including
natural gas procurement, transportation and marketing. Discussions are underway
for the purchase by AEE of Cenerprise's interest.
c. Solutions, a Delaware limited liability company that is jointly
---------
owned by Delmarva and Atlantic, was formed in 1997 to provide, directly or
through subsidiaries, power systems consulting, end use efficiency services,
customized on-site systems services and other energy services to large
commercial and industrial customers.
ACE also has a nonutility subsidiary trust, Atlantic Capital I
("ACI"), which was formed in 1996 in connection with the issuance by ACE of
Cumulative Quarterly Income Preferred Securities.
At June 30, 1997, Atlantic's nonutility subsidiaries and investments
constituted approximately 8.9 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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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, 1996, 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
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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
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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.
D. Benefit Plans
-------------
Delmarva currently has a long-term incentive plan and Atlantic
currently has an equity incentive plan. On January 30,
- ----------------
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.
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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.
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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
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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,
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<PAGE>
thereby helping to mitigate the rate impact of stranded cost recovery. Recovery
through securitization may occur over a different period of time. The Plan also
suggests that a cap may be imposed on the level of the charge as a mechanism to
achieve the goal of overall rate reduction.
ACE filed a restructuring plan, stranded cost estimates and unbundled
rates, with the NJBPU on July 15, 1997. Exhibit D-8.
Based on Delmarva's initiative, a formal process has been established
in Delaware and an informal forum has been established in Maryland through which
the commissions and other interested parties are addressing changes in the
regulation of the electric utility industry. During 1996, Delaware and Maryland
forum meetings addressed issues such as retail wheeling, stranded costs,
environmental matters, social programs, rate redesign, and alternative forms of
regulation.
In October 1996, the MPSC issued an order instituting a proceeding to
continue its review of regulatory and competitive issues affecting the electric
industry in Maryland. In consultation with Maryland's electric utilities and
other stakeholders, the MPSC staff has been directed to evaluate regulatory and
competitive issues facing the electric utility industry, including electric
retail competition, developments in federal and state regulation, and the
interests of Maryland's customers and utilities. The MPSC instructed its staff
to submit their recommendations by May 31, 1997.
In December 1996, the forum participants issued to the DPSC and MPSC
reports which discussed the issues and the positions of stakeholders, but did
not reach any conclusions. While there was consensus on some issues, such as the
need for unbundled costs and tariffs, there were many issues where consensus was
not reached, such as the need for and benefits of retail wheeling, recovery of
stranded costs, environmental and social program issues, franchise and property
rights, rate design, and performance-based ratemaking.
The issues mentioned above continue to be discussed by Delmarva, the
DPSC Staff, and other interested parties. Delmarva expects to develop formal
proposals on deregulation which are expected to be filed in mid-1997 with the
DPSC. In Maryland, the participants decided in January 1997 to suspend the
collaborative process until the MPSC Staff files its report.
In response to a directive from the VSCC, the VSCC Staff issued in
July 1996 a report on restructuring the electric industry, which included, among
other recommendations, a recommendation for a "go slow" approach to
restructuring. In November 1996, the VSCC issued an order indicating that more
evaluation is necessary to determine what, if any, restructuring may best serve
the public interest in Virginia. The VSCC
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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............................ $683,187
Accountants' fees............................................. $232,438
Legal fees and expenses
LeBoeuf, Lamb, Greene &
MacRae, L.L.P............................... $3,227,444
Potter Anderson & Corroon............................ $684,003
Simpson Thacher & Bartlett........................... $886,478
Other legal fees and expenses................................. $502,709
Shareholder communication and proxy
solicitation ............................................ $2,639,573
NYSE listing fee.............................................. $200,000
Exchanging, printing and engraving of
stock certificates............................................ $90,000
Investment bankers' fees and expenses
Merrill Lynch, Pierce, Fenner
& Smith Incorporated........................ $4,556,872
Morgan Stanley & Co. Incorporated.................... $5,257,359
Consulting fees and other expenses
relating to the Mergers..................................... $357,997
-----------
TOTAL......................................................... $19,318,060
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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
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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
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consistent with the Act prior to the 1995 REPORT and thus could be approved
without any reference to the 1995 REPORT. However, a number of the
recommendations contained in the 1995 REPORT serve to strengthen the Applicants'
analysis and support certain requests that would facilitate the creation of a
new holding company better able to compete in the rapidly evolving utility
industry. The Division's overall recommendation that the Commission "act
administratively to modernize and simplify holding company regulation. . . and
minimize regulatory overlap, while protecting the interests of consumers and
investors,"5 should be used in reviewing this Application/Declaration since, as
demonstrated below, the Mergers will benefit both consumers and shareholders of
Conectiv and the other federal and state regulatory authorities with
jurisdiction over the Mergers will have approved the Mergers as in the public
interest. In addition, although discussed in more detail in each applicable item
below, the specific recommendations of the Division with regard to utility
ownership6 and diversification,7 in particular, are applicable to the Mergers.
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:
- --------------------
5 Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 REPORT.
6 The 1995 REPORT recommends that the Commission should apply a more flexible
interpretation of the integration requirements under the Act;
interconnection through power pools, reliability councils and wheeling
arrangements can satisfy the physical interconnection requirement of
section 2(a)(29); the geographic requirements of section 2(a)(29) should be
interpreted flexibly, recognizing technical advances consistent with the
purposes and provisions of the Act; the Commission's analysis should focus
on whether the resulting system will be subject to effective regulation;
the Commission should liberalize its interpretation of the "A-B-C" clauses
and permit combination systems where the affected states agree, and the
Commission should "watchfully defer" to the work of other regulators. 1995
REPORT at 71-7.
7 The 1995 REPORT recommended that, for example, the Commission should
promulgate rules to reduce the regulatory burdens associated with
energy-related diversification and the Commission should adopt a more
flexible approach in considering all other requests to enter into
diversified activities. 1995 REPORT at 88-90. The recommendations regarding
energy-related diversification were incorporated in Rule 58.
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(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
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afford the opportunity to achieve economies of scale and efficiencies which are
expected to benefit investors and consumers. AMERICAN ELECTRIC POWER CO., 46 SEC
at 1307 (1978).
Size: If approved, the Conectiv system will serve approximately
915,000 electric customers in four states and 100,000 gas customers in Delaware.
As of and for the year ended December 31, 1996: (1) the combined assets of
Delmarva and Atlantic would have totaled approximately $5.65 billion; (2)
combined operating revenues of Delmarva and Atlantic would have totaled
approximately $2.1 billion; and (3) combined owned generating capacity totaled
would have totaled approximately 5514 MW.
By comparison, the Commission has approved a number of acquisitions
involving significantly larger operating utilities. SEE, E.G., CINERGY CORP.,
HCAR No. 26146 (Oct. 21, 1994) (combination of Cincinnati Gas & Electric Company
and PSI Resources; combined assets at time of acquisition of approximately $7.9
billion); ENTERGY CORP., 55 HCAR No. 25952 (Dec. 17, 1993) (acquisition of Gulf
States Utilities; combined assets at time of acquisition in excess of $21
billion); NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990) (acquisition of
Public Service of New Hampshire; combined assets at time of acquisition of
approximately $9 billion); CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29,
1986) (combination of Cleveland Electric Illuminating Company and Toledo Edison
Company; combined assets at time of acquisition of approximately $9.1 billion);
AMERICAN ELECTRIC POWER CO., 46 SEC 1299 (1978) (acquisition of Columbus and
Southern Ohio Electric Company combined assets at time of acquisition of close
to $9 billion).
As the following table demonstrates, nearly all of the registered
electric, or combination gas and electric, utility holding company systems are
larger than Conectiv will be following the Mergers in terms of assets, operating
revenues, customers and/or sales of electricity:8
- ------------------
8 Amounts are as of December 31, 1996 or for the year ended December 31,
1996. [Bracketed numbers are 1995 figures.] The numbers for New Century
Energies, Inc. are taken from the Commission's order approving its
formation. NEW CENTURY ENERGIES, INC., HCAR No. 26748 (Aug. 1, 1997).
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Total Operating Electric Sales in
System Assets Revenues Customers KWH
Total ($ Millions) ($ Millions) (Thousands) (Millions)
Southern 30,292 10,358 3,445 153,531
AEP 15,886 5,849 2,942 [120,653]
Entergy 22,966 7,163 2,426 106,909
CSW 13,332 5,155 1,704 62,425
GPU 10,941 3,918 1,997 44,448
Northeast 10,742 3,792 [1,695] [39,618]
CINergy 8,849 3,243 1,392 [54,220]
NCE 7,000 3,000 1,500 7,438(1)
Allegheny 6,618 1,013 1,388 59,961
NEES 5,223 2,350 [1,314] 25,194
Conectiv 5,650 2,075 920 21,272
- --------------------------------
(1) This number is in MWH.
In addition, Conectiv will be smaller than the registered holding
company to be formed as a result of the merger of Union Electric Company and
CIPSCO, Inc. (combined 1994 year-end assets of approximately $8,402 million and
operating revenues of $2,850 million).
Conectiv will be a small registered holding company, and its
operations will not exceed the economies of scale of current electric generation
and transmission technology or provide undue power or control to Conectiv in the
region in which it will provide service.
Efficiencies and economies: As noted above, the Commission has
rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing
the size of the resulting system with reference to the efficiencies and
economies that can be achieved through the integration and coordination of
utility operations. More recent pronouncements of the Commission confirm that
size is not determinative. Thus, in Centerior Energy Corp., HCAR No. 24073
(April 29, 1986), the Commission stated flatly that a "determination of whether
to prohibit enlargement of a system by acquisition is to be made on the basis of
all the circumstances, not on the basis of size alone." In addition, in the 1995
REPORT, the Division recommended that the Commission approach its analysis on
merger and acquisition transactions in a flexible manner with emphasis on
whether the Mergers creates an entity subject to effective regulation and is
beneficial for shareholders and customers as opposed to focusing on rigid,
mechanical tests.9
- ---------------------
9 1995 REPORT at 73-4.
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By virtue of the Mergers, Conectiv will be in a position to realize
the "opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves and
generally more efficient operations" described by the Commission in American
Electric Power Co. 46 SEC 1299, 1309. Among other things, the Mergers are
expected to yield significant capital expenditure savings through labor cost
savings, facilities consolidation, corporate and administrative programs,
non-fuel purchasing economies and combined fuel supply and purchased power.
These expected economies and efficiencies from the combined utility operations
are described in greater detail below and are projected to result in net savings
of more than $500 million over the first ten years alone.
Competitive Effects: In Northeast Utilities, HCAR No. 25221 (Dec. 21,
1990), the Commission stated that "antitrust ramifications of an acquisition
must be considered in light of the fact that public utilities are regulated
monopolies and that federal and state administrative agencies regulate the rates
charged consumers." Delmarva and Atlantic have filed Notification and Report
Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the
Mergers on competition in the relevant market and it is a condition to the
consummation of the Mergers that the applicable waiting periods under the HSR
Act shall have expired or been terminated.
In addition, the competitive impact of the Mergers has been fully
considered by the FERC pursuant to Section 203 of the Federal Power Act in its
review of the Mergers. A detailed explanation of the reasons why the Mergers
will not threaten competition in even the most narrowly drawn geographic and
product markets is set forth in the prepared testimony of John C. Dalton, filed
with the FERC on behalf of Delmarva and Atlantic, a copy of which is filed as
Exhibit D-1.2.1. As noted previously, the FERC issued an order on July 30, 1997,
approving the Mergers and concluding, among other things, that the Mergers would
not significantly affect competition in any relevant market. Exhibit D-1.3.
For these reasons, the Mergers will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
b. Section 10(b)(2) -- Fairness of Consideration
---------------------------------------------
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by Conectiv to the holders of Delmarva Common Stock
and Atlantic Common Stock in connection with the Mergers is reasonable and
whether it bears a fair relation to investment in and earning capacity of the
utility assets underlying the securities being acquired. Market prices
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<PAGE>
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.
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.
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 $20 5/8 and (ii) Atlantic Common Stock was $17 1/8, 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
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<PAGE>
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
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<PAGE>
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.
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
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<PAGE>
prospects of, and uncertainties associated with deregulation of, the regulated
electric utility business of Atlantic that the respective managements have
deemed advisable.
Specifically, 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 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 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
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<PAGE>
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." Upon consideration of the totality of circumstances, including the
risk factors discussed in the proxy materials, the shareholders of both Delmarva
and Atlantic voted overwhelmingly to vote to approve the proposed merger.
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.
Both the Conectiv Class A Common Stock and the Conectiv Common Stock 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. Conectiv's certificate of incorporation does not require the declaration
or payment of any dividends on the Conectiv Class A Common Stock and establishes
no priority or preference in favor of the Conectiv Class A Common Stock with
respect to the Conectiv Common Stock or any other security Conectiv may issue.
Dividends on the Conectiv Class A Common Stock will not be cumulative. Further,
the Conectiv Class A Common Stock will have the same priority in liquidation as
the Conectiv Common Stock. Although the Commission has not previously considered
the use of tracking stocks by a registered holding company, so-called "letter"
or tracking 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,
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<PAGE>
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 Tele-Communications Inc.
have also issued tracking stocks. In the utility area, CMS Energy, in July,
1995, issued CMS Class G stock, which is tied to a 25 percent interest in its
natural gas division, Consumers Power Gas Group.
The use of two classes of common stock in the instant matter does not
present an issue under the Act. Section 7(c)(2)(A) expressly provides for the
issuance of securities such as the Conectiv Class A Common Stock "solely . . .
for the purpose of effecting a merger."10
As explained in the disclosure materials, the dual class common equity
structure will not be detrimental to consumer interests. There will be no effect
on the legal title to Conectiv assets or the responsibilities for the
liabilities of Conectiv or its subsidiaries. In addition, to the extent that the
letter stock could be deemed to affect the interests of investors, the
Commission has long held that those interests are adequately protected by the
disclosure required under the other federal securities laws.11 As the Commission
explained in a 1992 order:
Concerns with respect to investors have been largely addressed by
developments in the federal securities laws and in the securities
markets themselves. Registered holding companies are subject to
extensive reporting requirements under the Act. In addition, the
securities of those companies are publicly held and are registered
under the Securities Act of 1933. The companies are subject to the
continuous disclosure requirements of the Securities Exchange Act of
1934. It is important to note that, at the time of the Act's passage,
the Securities Act of 1933 and the Securities Exchange Act of 1934
were in their infancy, having been in effect for only one and two
years, respectively. The interest of investors is protected not only
by the
- -------------------
10 Without conceding that such authority is needed, Conectiv requests
authorization under Sections 6 and 7 of the Act for the issuance of
Conectiv Class A Common Stock to the extent that the Commission deems such
authorization necessary.
11 See Hearings on S. 1869, S. 1870 and S. 1977, to Amend or Repeal the Public
---
Utility Holding Company Act of 1935, Before the Subcommittee on Securities
of the Senate Committee on Banking, Housing and Urban Affairs, 97th Cong.,
2d Sess. 407 (1982) ("investors in a registered public utility companies
would remain adequately protected" if the Act were repealed).
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<PAGE>
requirements of this Act but also by the disclosure requirements of
these other statutes. Since 1935, Congress has expanded and
strengthened the provisions of the Securities Exchange Act. Thus, the
quantity and quality of information available to investors under the
federal securities laws is significantly greater than that available
in 1935.12
Moreover, in the instant matter, the Division of Corporation Finance
participated in the determination that the holders of the letter stock would
receive adequate disclosure on an ongoing basis. The 1995 REPORT discusses the
greater access to information and advances in accounting and recordkeeping
requirements that have developed since the adoption of the Securities Act of
1933 and the Securities Exchange Act of 1934.13
In the 1995 REPORT, the Staff noted that the Commission has
historically "responded to change by flexible interpretation and rulemaking."14
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, Conectiv believes that the use of the tracking stock will
not unduly complicate the capital structure of the registered holding company,
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 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
- ------------
12 Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992).
------------
13 1995 REPORT at 34-38.
14 1995 REPORT at 46.
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<PAGE>
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 June 30, 1997 and the pro forma consolidated capital
structure of Conectiv as of June 30, 1997:
Delmarva and Atlantic Historical Consolidated Capital Structures
(dollars in thousands)
Delmarva Atlantic
Common Stock Equity $942,322 $782,688
Preferred stock not subject to 89,703 30,000
mandatory redemption
Preferred stock subject to 70,000 113,950
mandatory redemption
Long-term Debt 923,710 786,187
--------- ---------
Total $2,025,735 $1,712,825
Conectiv Pro Forma Consolidated Capital Structure*
(dollars in thousands)
(unaudited)
Conectiv
Common Stock (incl. additional $1,461,721
paid in capital)
Class A Common Stock 136,840
Retained Earnings 266,630
Preferred stock not subject to 119,703
mandatory redemption (of
subsidiaries)
Preferred stock subject to 183,950
mandatory redemption (of
subsidiaries)
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<PAGE>
Long-term Debt 1,709,897
----------
Total $3,878,741
* The pro forma consolidated capital structure of Conectiv has been
adjusted to reflect future nonrecurring charges directly related to
the Mergers, which result in, among other things, the recognition of
additional current liabilities and a reduction in retained earnings.
Conectiv's pro forma consolidated common equity to total capitalization ratio of
48% comfortably exceeds the "traditionally acceptable 30% level." NORTHEAST
UTILITIES, HCAR No. 25221 (Dec. 21, 1990), MODIFIED, HCAR No. 25273 (Mar. 15,
1991), AFF'D SUB NOM. CITY OF HOLYOKE V. SEC, 972 F.2d 358 (D.C. Cir. 1992).
Protected interests: As set forth more fully in Item 3.A.2.b.i
(Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System)
and elsewhere in this Application/Declaration, the Mergers are expected to
result in substantial cost savings and synergies, and will integrate and improve
the efficiency of the Delmarva and Atlantic utility systems. The Mergers will
therefore be in the public interest and the interests of investors and
consumers, and will not be detrimental to the proper functioning of the
resulting holding company system.
2. Section 10(c)
-------------
Section 10(c) of the Act provides that, notwithstanding the provisions
of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11\15; 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
- ------------------
15 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.
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<PAGE>
the efficient development of an integrated public utility system.
a. Section 10(c)(1)
----------------
Section 10(c)(1) requires that an acquisition be lawful under Section
8. Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. As discussed below, the
Mergers do not raise any issue under Section 8 or, accordingly, the first clause
of Section 10(c)(1). Indeed, Section 8 indicates that a registered holding
company may own both gas and electric utilities where, as here, the relevant
state utility commissions support such an arrangement.
Section 10(c)(1) also requires that an acquisition not be detrimental
to carrying out the provisions of Section 11. Section 11(a) of the Act requires
the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. As described above, the Mergers
will not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding
company system to limit its operations "to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system," a combination integrated gas and electric system within
a registered holding company is permissible under Section 8. Additionally,
Section 11(b)(1) provides that "one or more additional integrated public utility
systems" may be retained if, as here, certain criteria are met. Section 11(b)(2)
directs the Commission "to ensure that the corporate structure or continued
existence of any company in the holding company system does not unduly or
unnecessarily complicate the structure, or unfairly or inequitably distribute
voting power among security holders, of such holding company system."
As detailed below, the Mergers will not be detrimental to the carrying
out of the provisions of Section 11.
i. Acquisition of Gas Operations
-----------------------------
Conectiv's acquisition of the gas operations of Delmarva is lawful
under Section 8 of the Act and would not be detrimental to the carrying out of
Section 11 of the Act.
Section 8: Section 8 of the Act provides that
[w]henever a State law prohibits, or requires approval or authorization of,
the ownership or operation by a single company of the utility assets of an
electric utility company and a gas utility company serving substantially
the same territory, it shall be unlawful for a registered holding company,
or any subsidiary company thereof . . . (1) to take any step, without the
express approval of the state commission of such state, which results in
its having a direct or indirect interest in an electric utility company and
a gas company serving substantially the same territory; or
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<PAGE>
(2) if it already has any such interest, to acquire, without the express
approval of the state commission, any direct or indirect interest in an
electric utility company or gas utility company serving substantially the
same territory as that served by such companies in which it already has an
interest. (emphasis added).
A fair reading of this section indicates that, with the approval of
the relevant state utility commissions, registered holding company systems can
include both electric and gas utility systems.
In its recent order approving the formation of the New Century
Energies, Inc. registered system, the Commission largely ignored the legislative
intent expressed in Section 8. In its report, the Senate Committee on Interstate
Commerce noted that the provision in Section 8 concerning combination companies
"is concerned with competition in the field of distribution of gas and electric
energy -- a field which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extra-State device of a
holding company is used to circumvent state policy." THE REPORT OF THE COMMITTEE
ON INTERSTATE COMMERCE, S. Rep. No. 621, 74TH Cong., 1st Sess. at 31
(1935)("SENATE REPORT"). It appears that the Supreme Court's apparent rejection
of a Section 8 argument in the NEES case was based on a distinction drawn by the
statute between the divestiture of properties by a registered holding company in
the context of a Section 11 proceeding, and the acquisition of such properties
in other contexts. At issue in SEC v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176
(1966) was the continued retention of gas properties that the NEES system, a
registered electric system, had owned since its formation in 1926. The
Commission in the NEES decision below noted correctly that Section 8, which
concerns the acquisition of additional systems, "does not relate to the
divestment of properties under the policy embodied in Section 11(b)(1)." NEW
ENGLAND ELECTRIC SYSTEM, 41 SEC 888, 902 (1964). This matter, in contrast,
involves the acquisition of a combination system by a newly-formed registered
holding company. The policies and provisions of Section 8 should be considered
in the Commission's determinations in this area.
Conectiv believes that a reemphasis by the Commission on Section 8,
which would allow registered combination companies pending state support, is
consistent both with the Act and its policy objectives. Indeed, over time the
Commission has in fact emphasized different aspects of Section 8 and its
interplay with Section 11 -- initially allowing registered holding companies to
own both gas and electric systems under Section 8, then focusing on Section 11
as controlling determinations regarding combination companies, and requiring the
second system to meet a strict interpretation of the requirements set forth in
clauses A, B and C of Section 11(b)(1).
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<PAGE>
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.16
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.17 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
- ------------------
16 AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC at 983, n.3.
17 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).
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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.18 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.
A review of the legislative history of Section 8 clarifies this
intent. As noted above, in its report, the Senate Committee on Interstate
Commerce noted that the provision in Section 8 concerning combination companies
"is concerned with competition in the field of distribution of gas and electric
energy -- a field which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extra-State device of a
holding company is used to circumvent state policy." SENATE REPORT at 31. In
addition, attached to the above-referenced committee report is the Report of the
National Power Policy Committee on Public Utility Holding Companies, which sets
forth a recommended policy that: "Unless approval of a State commission can be
obtained the commission should not permit the use of the holding-company form to
combine a gas and electric utility serving the same territory where local law
prohibits their combination in a single entity." This recommendation emphasizes
the importance of the state determination in this area.
Much more recently, in the 1995 REPORT, the Division noted "it does
not appear that the SEC's precedent concerning additional systems precludes the
SEC from relaxing its interpretation of Section 11(b)(1)(A)" and "that the
utility industry is evolving toward the creation of one-source energy companies
that will provide their customers with whatever type of energy supply they want,
whether electricity or gas," and recommended that the Commission interpret
Section 11(b)(1) of the Act to allow registered holding companies to hold both
gas and electric operations as long as each affected state utility regulatory
commission approves of the existence of such a company.19 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
- -------------------
18 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).
19 1995 REPORT at 15-6.
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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.20 Furthermore, the recent
merger of PanEnergy Corp., a large pipeline and electric and gas marketer with
Duke Power Company, an electric utility holding company, and the acquisition of
Portland General Corporation, an electric utility holding company, by Enron
Corporation, a large gas pipeline and electric and gas marketer as well as the
acquisition of ENSERCH Corporation, a gas utility company, by Texas Utilities
Company, an electric utility holding company, and the acquisition of NorAm
Energy, Inc., a gas utility company, by Houston Industries, Inc., an electric
utility holding company, demonstrate that market forces are pushing for the
convergence of electric and gas operations into full service utility companies.
Indeed, the Commission has recently explicitly recognized that "the utility
industry is evolving towards a broadly based energy-related business,21 marked
by "the interchangeability of different forms of energy, particularly gas and
electricity.22
The legislative history of Section 11 offers additional support for
focusing on state commission determinations regarding combination companies. The
SENATE REPORT makes clear that "the purpose of section 11 is simply to provide a
mechanism to create conditions under which effective Federal and State
regulation will be possible." SENATE REPORT at 11. This statement underscores
the general policy of the Act that local regulators are in the best position to
assess the needs of their communities. The Act was never intended to supplant
local regulation but, rather, was intended to create conditions under which
local regulation was possible. Section 21 of the Act, which further codifies
this legislative intent, states: "Nothing in [the Act] shall affect . . . the
jurisdiction of any other commission, board, agency, or officer of . . . any
State, or political subdivision of any State, over any person, security, or
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20 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).
21 CNG Order.
22 CNG Order at 11.
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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.23 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.
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
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23 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).
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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."24 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).
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
- ------------------
24 1995 REPORT at 74.
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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.25 The percentage loss that would be suffered by
Delmarva in gas operating revenue and gross gas income exceeds the percentage
loss in the majority of divestiture orders issued by the Commission in the past.
Delmarva's lost economies also exceed the lost economies that would have
resulted if the divestiture of the gas operations of Public Service Company of
Colorado and Cheyenne Light, Fuel and Power Company had been required by the
Commission in connection with the approval of the formation of New Century
Energies, Inc. The applicable percentages here and in past cases are summarized
in Exhibit J-3.
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
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25 NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888 (1964), AFF'D, 384 U.S. 176 (1966)
and 390 U.S. 207 (1968).
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duties for the staffs of the DPSC as a result of dealing with an additional
utility. These additional duties would largely be the result of duplicating
existing functions, such as separate requests for approval of financing.
Conectiv's competitive position in the market would also suffer because as the
utility industry moves toward a complete energy services concept, competitive
companies must be able to offer customers a range of options to meet their
energy needs. Divestiture of gas operations would render Conectiv unable to
offer its customers a significant and important option, namely gas services, and
could damage Conectiv's long-term competitive potential.
Most recently in the NEW CENTURY ENERGIES order, the Commission
explained:
other factors operated to compound the loss of economies represented by
increased costs. The Commission has previously taken notice of developments
that have occurred in the electric and gas utility industry in recent
years, and has interpreted the Act and analyzed proposed transactions in
light of these changed and changing circumstances. In the Commission's
view, these developments should be considered in determining whether PSC's
and Cheyenne's gas system may be retained.
The gas and electric industries are converging, and, in these
circumstances, separation of gas and electric businesses may cause the
separated entities to be weaker competitors than they would be together.
This factor adds to the quantifiable loss of economies caused by increased
costs.
* * *
In the 1960s, when the NEES case was decided, utilities were primarily
franchised monopolies with captive ratepayers, and competition between
suppliers of gas and electricity, however limited, was virtually the only
source of customer choice and was thus deemed beneficial to energy
consumers. The fact that other gas utilities of comparable size could
operate successfully on an independent basis was evidence that a gas system
could operate on its own, a desirable result, without a substantial loss of
economies. The empirical basis for these assumptions, however, is rapidly
eroding. Although franchised monopolies are still the rule, competition is
increasing. Increased expenses of separate operations may no longer be
offset, as they were in NEW ENGLAND ELECTRIC SYSTEM, by a gain of
qualitative competitive benefits, but rather may be compounded by a loss of
such benefits, as the Commission finds in this matter. (footnotes omitted).
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Accordingly, we urge the Commission to find Clause A satisfied for the reasons
set forth above, consistent with its conclusions in the NEW CENTURY ENERGIES
order.
(B) and (C) clauses: The remaining requirements of Section 11(b)(1)
are met because the gas operations of Delmarva are located in only one state
(Delaware) and because the continued gas operations under Conectiv are not so
large (considering the state of the art and the area or region affected) as to
impair the advantages of localized management, efficient operation or the
effectiveness of regulation. The gas system is confined to a small area.
Finally, as detailed above, the gas operations of Delmarva enjoy substantial
economies as part of the Delmarva system, and will realize additional economies
as part of the Conectiv System as a result of the Mergers. Far from impairing
the advantages of efficient operation, the continuation of the gas operations
under Conectiv will facilitate and enhance the efficiency of gas operations.
ii. Direct and Indirect Nonutility Subsidiaries of Conectiv
-------------------------------------------------------
As a result of the Mergers, the nonutility businesses and interests of
Delmarva and Atlantic described in Item 1.B.3 above will become businesses and
interests of Conectiv. The total assets of all nonutility investments of
Delmarva and Atlantic at June 30, 1997 totaled $403 million.
Corporate charts showing the nonutility subsidiaries of Delmarva and
Atlantic are filed as Exhibits E-2 and E-3. A corporate chart showing the
projected arrangement of these subsidiaries under Conectiv has been filed as
Exhibit E-4.
Standard for acquisition: Section 11(b)(1) generally limits a
registered holding company to acquire "such other businesses as are reasonably
incidental, or economically necessary or appropriate, to the operations of [an]
integrated public utility system." Although the Commission has traditionally
interpreted this provision to require an operating or "functional" relationship
between the nonutility activity and the system's core nonutility business, in
its recent release promulgating Rule 58, 26 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
- ------------------
26 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").
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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.27 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.
Attached as Exhibit J-8 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:
As noted previously, Delmarva Services Company also owns approximately
2.9% of the common stock of Chesapeake Utilities Corporation ("Chesapeake"), a
publicly-traded gas utility company with gas utility operations in Delaware,
Maryland and Florida. Conectiv requests that the Commission reserve jurisdiction
over the Chesapeake stock for a period of three years from the date of its order
to permit Conectiv to effect an orderly disposition of the stock or otherwise
comply with the requirements of the Act.
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).
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27 1995 REPORT at 81-87, 91-92.
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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
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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
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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
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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.
The Commission has read the definition to establish 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
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(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 S.E.C. 658, 668 (1958).
The Mergers satisfy each of these requirements.
The first requirement, that the assets of the resulting Conectiv
electric utility system be "physically interconnected or capable of
interconnection" is satisfied because Delmarva and Atlantic jointly own
generation and transmission facilities and are members of the same tight power
pool, PJM Interconnection, LLC ("PJM").
PJM is the largest, and most sophisticated centrally-dispatched
electric control area in North America, and the third largest in the world. PJM
became the first operational Independent System Operator in the U.S. on January
1, 1998, managing the PJM Open Access Transmission Tariff and facilitating the
Mid-Atlantic Spot Market. PJM's objectives are to ensure reliability of the bulk
power transmission system, and to facilitate an open, competitive wholesale
electric market. The PJM service territory includes all or part of Pennsylvania,
New Jersey, Maryland, Delaware, Virginia and the District of Columbia.
With the implementation of the PJM Open Access Transmission Tariff,
PJM began operating the nation's first regional, bid-based energy market. PJM
has become one of the most liquid and active energy markets in the country. PJM
enables participants to buy and sell energy, schedule bilateral transactions and
reserve transmission service.
The PJM staff centrally forecasts, schedules and coordinates the
operation of generating units, bilateral transactions, and the spot energy
market to meet load requirements. To maintain a reliable and secure electric
system, PJM monitors, evaluates and coordinates the operation of over 8,000
miles of high-voltage transmission lines. Operations are closely coordinated
with neighboring control areas, and information is exchanged to enable real-time
security assessments of the transmission grid. PJM provides accounting services
for energy, ancillary services, transmission services, and capacity reserve
obligations.
The PJM staff coordinates the planning of generation to meet combined
peak loads of the control area. They coordinate planning of the interconnected
bulk power transmission system to deliver energy reliably and economically to
customers. PJM conducts many specialized planning studies within the pool and
with surrounding entities.
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The benefits of PJM membership fall generally into five categories:
reliability, adequacy, security, economy and joint maintenance scheduling.
Reliability means providing customers with the amount of electricity they need
when they want it. Reliability exists when the electric system is in balance
between load and generation or can be rapidly brought into balance following any
disruption. The ability of an electric system to recover from a disturbance
depends on the relative size and responsiveness of the remaining system
generation. Operating through PJM provides companies with a larger and more
stable supply of reserves that can be achieved by an individual company alone.
PJM is dedicated to meeting the reliability criteria and standards of the North
American Electric Reliability Council and the Mid Atlantic Area Council.
Adequacy is the assurance of sufficient supply of electricity to meet
customer's maximum needs. Adequacy exists when the system has sufficient
generation and purchased power available to meet the load and reserve
requirements. Reserves must be sufficient to accommodate planned and unexpected
unit unavailability and errors in load forecasts. Through the PJM
interconnection, each energy producer can reduce plant investment through lower
reserve requirements that would be necessary if it were operating on a
stand-alone basis.
Security is the ability of a power system to withstand sudden large
and unanticipated disturbances. Security exists when those responsible for
operational control of the system can monitor system conditions and anticipate
and respond rapidly to disturbances. The PJM dispatch function coordinates
individual member operations to assure system security and coordination with
adjacent interconnected power systems.
Economy in the operation of a system, composed of numerous generators,
requires that the units be dispatched in order of increasing marginal bid price
regardless of their ownership or location relative to system load. In this way,
the operating costs to all customers are minimized. The scheduling of generation
resources, interconnected by free-flowing ties, and dispatched in economic
order, results in the optimal use of resources for all participants.
Joint maintenance scheduling allows companies to perform maintenance
on generating units and transmission lines in coordination with other PJM
members. A coordinated maintenance plan assures reserve capability and optimal
use of resources at all times.
The Commission has expressly found that a tight power pool such as PJM
could be used to establish the integration of two neighboring utilities for
purpose of the 1935 Act. UNITIL Corporation, Holding Co. Act Release No. 25524
(April 24, 1992) See also Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990), supplemented, Holding Co. Act Release No. 25273
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(March 15, 1991), aff'd sub nom. City of Holyoke Gas & Electric Co. v. SEC, 972
F.2d 358 (D.C. Cir. 1992).
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, along with other PJM members, also have undivided
interests in, or 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. While it would be
possible to construct a transmission line directly interconnecting Delmarva and
ACE, Conectiv believes that such action is unnecessary since present
transmission arrangements provide adequate service. See UNITIL Corp., Holding
Co. Act Release No. 25524 (April 24, 1992), citing Electric Energy, Inc., 38
S.E.C. 658, 669 (1953) (direct interconnection not required in circumstances
that would have resulted in an uneconomic duplication of transmission
facilities).
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."28 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
- -------------------
28 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).
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allocated as need or economy directs.29 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. In this matter, in addition to coordinated operation
through PJM, Conectiv will have a central operating transmission and generation
control center in Newark, Delaware (the "Conectiv Control Center"). The Conectiv
Control Center will be responsible for the essentially local functions of the
Conectiv system, including, among other things, the monitoring of system lines,
operation of system breakers, communications with local generators concerning
output and with PJM with respect to bulk power transactions. For these reasons,
Conectiv is able to operate its utility assets as a single interconnected and
coordinated 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."30 The 1995 REPORT also recommends primacy be
given to "demonstrated economies and efficiencies to satisfy the integration
requirements."31 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.
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
- ------------------
29 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).
30 1995 REPORT at 72-74.
31 1995 REPORT at 73.
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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 have received the
requisite orders from these regulators as a condition precedent to consummating
the proposed Mergers.
II. Gas Utility System
------------------
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies:
[A] system consisting of one or more gas utility companies which are
so located and related that substantial economies may be effectuated
by being operated as a single coordinated system confined in its
operation to a single area or region, in one or more States, not so
large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
The gas operations of Delmarva, which are very limited in size, currently
operate as a single, integrated public utility system in New Castle County,
Delaware. The Mergers will not affect that integrated operation. Thus, Conectiv
gas utility system will meet the standard set forth in Section 2(a)(29)(B) and,
therefore, will satisfy the requirements of Sections 10(c)(1) and (2) and should
be approved by the Commission. The Conectiv gas utility system will continue to
operate as a coordinated system confined in its operation to a single area or
region.
3. Section 10(f)
-------------
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect to such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of section 11.
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As described in Item 4 of this Application/Declaration, and as evidenced by the
orders received from 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.
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The FERC, in its order authorizing the proposed mergers, noted that:
in response to the [FERC's] concern under the holding of OHIO POWER
CO. v. FERC, 954 F.2d 779 (D.C. Cir.), CERT. DENIED, 498 U.S. 73
(1992), Applicants commit as a condition that, for Commission
ratemaking purposes, they will follow the Commission's policy
regarding the treatment of costs and revenues associated with inter-
company services.
The FERC intra-corporate transactions policy, with respect to non-power goods
and services, requires that:
(1) affiliates or associates of a public utility not sell non-power
goods and services to the public utility at a price above market; and
(2) sales of non-power goods and services by a public utility to its
affiliates or associates be at the public utility's cost for such
goods and services or market value for such goods and services,
whichever is higher.
ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY, FERC Docket
No. EC-7-000 (slip op., July 30, 1997).
Conectiv recognizes that affiliate transactions among the member
companies of Conectiv will be subject of the jurisdiction of the SEC under
section 13(b) of the Act and the rules and regulations thereunder. Section 13(b)
of the Act generally provides that transactions between affiliates in a
registered holding company system be "at cost, fairly or equitably allocated
among such companies." Conectiv believes that as a practical matter there should
not be any irreconcilable inconsistency between the application of the SEC's "at
cost" standard and the FERC's policies with respect to intra-system transactions
as applied to Conectiv. For example, Support Conectiv will provide non-power
goods and services to associate companies within the Conectiv system at cost,
but it is anticipated that Support Conectiv will provide only those goods and
services where it can meet or better market prices for comparable quality goods
and services. In other words, they are anticipating that Support Conectiv
"costs" will be at or below the market.
On this basis, Conectiv will be able to comply with the requirements
of both the FERC and the "at cost" and fair and equitable allocation of cost
requirements of Section 13, including Rules 87, 90 and 91 thereunder, for all
services, sale and construction contracts between associate companies and with
the holding company parent unless otherwise permitted by the Commission by rule
or order.
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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
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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. Any
modification of allocation factors with requires filing under 60-day letter
procedures based on existing Commission guidelines will be filed on a timely
basis. The current guidelines require approval if the change will cause the
lesser of $50,000 or a 5% change in the allocation of cost between companies.
These guidelines are subject to change.
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
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authorized by the Commission. To the extent necessary, Conectiv requests
authority from the Commission to enter into the business of leasing such space
between and among associate companies and third parties. The Commission has
permitted the leasing of excess office space. SEE, E.G., CENTRAL POWER AND LIGHT
COMPANY, HCAR No. 26408 (Nov. 13, 1995); NORTHEAST UTILITIES, HCAR No. 24908
(June 22, 1989).
Delmarva and Atlantic may also provide to one another services
incidental to their utility businesses, such as power plant maintenance
overhauls, power plant and storm outage emergency repairs and services of
personnel with specialized expertise related to the operation of the utility
(i.e., services by an industrial lighting specialist or waste disposal
specialist). These services will be provided at cost in accordance with the
standards of the Act and Rules 87, 90 and 91 thereunder.
In addition, it is expected that certain assets such as real property
used for administrative purposes and information technology equipment and
software may be transferred from Delmarva or ACE to Support Conectiv or other
Conectiv companies at cost in conjunction with the integration of the two
companies after consummation of the Mergers. For example, Delmarva currently
owns the building that is likely to be used by Support Conectiv and so may seek
to transfer this asset. These transfers may require approval by various public
utility commissions. Any such transfers will be in accordance with Section 13
and the rules thereunder.
Conectiv further requests authority to transfer at cost and/or combine
real property interests and real estate related activities which benefit more
than one member of the Conectiv group, and real property interests of Delmarva
and Atlantic currently intended for sale to third parties, into a single legal
entity through merger of subsidiaries engaged in real estate related activities
and transfers of assets and business activities from Delmarva, Atlantic and
their subsidiaries to such merged real estate subsidiary. Any such transfers
will be in accordance with Rules 87, 90, and 91, except as may be otherwise
authorized by the Commission.
* * * * *
Finally, pursuant to Rule 24 under the Act, Conectiv represents that the
transactions proposed in this filing shall be carried out in accordance with the
terms and conditions of, and for the purposes stated in, the
declaration-application no later than December 31, 2000.
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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. The applicable waiting period has expired or has been terminated.
The expiration of the HSR Act waiting period does not preclude the DOJ
or the FTC from challenging the Mergers on antitrust grounds; however, Conectiv
believes that the Mergers will not violate Federal antitrust laws. If the
Mergers are not consummated within twelve months after the expiration or earlier
termination of the initial HSR Act waiting period, Delmarva and Atlantic would
be required to submit new information to the DOJ and the FTC, and a new HSR Act
waiting period would have to expire or be earlier terminated before the Mergers
could be consummated.
B. Federal Power Act
-----------------
Section 203 of the Federal Power Act as amended (the "Federal Power
Act"), provides that no public utility shall sell or otherwise dispose of its
jurisdictional facilities or directly or indirectly merge or consolidate such
facilities with those of any other person or acquire any security of any other
public utility, without first having obtained authorization from the FERC.
Delmarva and Atlantic submitted a joint application for approval of the Mergers
to the FERC on November 27, 1996. An order was issued approving the Mergers on
July 30, 1997. Exhibit D-1.3.
C. Atomic Energy Act
-----------------
Delmarva and Atlantic hold Nuclear Regulatory Commission ("NRC")
licenses with respect to their ownership interests in certain nuclear units.
Delmarva and Atlantic each own a 7.41% interest in the Salem Nuclear Generating
Station, which consists of two nuclear units, and a 7.51% interest in the Peach
Bottom Nuclear Generating Station, which consists of two nuclear units. In
addition, Atlantic owns a 5% interest in the Hope Creek Nuclear Generating
Station, which consists of one nuclear unit. The Atomic Energy Act currently
provides that licenses may not be transferred or in any manner disposed of,
directly or indirectly, to any person unless the NRC finds that
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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.
An order was issued approving the Mergers on December 18, 1997. See Exhibit
D-7.2.
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. The
DPSC issued an order approving the Mergers on September 23, 1997. See Exhibit
D-2.2.
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. See Exhibit D-3.1. The VSCC issued an order approving
the Mergers on August 8, 1997. See Exhibit D-3.2.
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
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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. The NJBPU issued an order
approving the Mergers on December 30, 1997. See Exhibit D-4.2.
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. The PPUC issued an order approving the Mergers on
October 3, 1997. See Exhibit D-5.2.
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. See Exhibit
D-6.1. The MPSC issued an order approving the Mergers on July 16, 1997. See
Exhibit D-6.2.
Item 5. Procedure
---------
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).
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A-3 Restated Certificate and Articles of Incorporation of
Delmarva (filed with Registration No. 33-50453 and
incorporated herein by reference).
A-4 Restated Certificate of Incorporation of Atlantic (filed as
Exhibit 4(a) to the Atlantic Form 10-Q dated September 30,
1987) and Certificate of Amendment to the Restated
Certificate of Incorporation of Atlantic (filed as Exhibit
3(ii) to the Atlantic Form S-8 dated May 6, 1994), and both
incorporated herein by reference).
B-1 Agreement and Plan of Merger, as amended and restated (filed
as Annex I to the Registration Statement on Form S-4 on
December 26, 1996 (Registration No. 333-18843), and
incorporated herein by reference).
B-2 Form of Service Agreement between Support Conectiv and all
affiliates.
C-1 Registration Statement of Conectiv on Form S-4 (filed on
December 26, 1996 (Registration No 333- 18843) and
incorporated herein by reference).
C-2 Joint Proxy Statement and Prospectus (included in Exhibit
C-1).
D-1.1 Joint Application of Delmarva and Atlantic before the FERC,
as amended.
D-1.2.1 Testimony of John C. Dalton to the FERC.
D-1.3 Order of the FERC.
D-2.1 Application of Delmarva to the DPSC.
D-2.2 DPSC Order.
D-3.1 Application of Delmarva to the VSCC.
D-3.2 VSCC Order.
D-4.1 Application of Atlantic to the NJBPU.
D-4.2 NJBPU Order.
D-5.1 Application of Delmarva to the PPUC.
D-5.2 PPUC Order.
D-6.1 Application of Delmarva to the MPSC.
D-6.2 MPSC Order.
D-7.1 Applications of Delmarva and Atlantic to the NRC.
D-7.2 Orders of the NRC.
E-1 Map of service areas of Delmarva and Atlantic.
E-2 Delmarva corporate chart.
E-3 Atlantic corporate chart.
E-4 Conectiv corporate chart.
F-1.1 Opinion of James E. Franklin II, Esq., General Counsel, Atlantic
Energy, Inc.
F-1.2 Opinion of Peter F. Clark, Esq., Associate General Counsel,
Delmarva Power & Light Company.
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
-76-
<PAGE>
No. 333-18843), and incorporated herein by
reference).
H-1 Quarterly Report of Delmarva on Form 10-Q for the quarter
ended March 31, 1997 (filed on May 14, 1997) (File No.
1-01405) and incorporated herein by reference).
H-2 Quarterly Report of Atlantic on Form 10-Q for the quarter
ended March 31, 1997 (filed on May 13, 1997 (File No.
1-09760) and incorporated herein by reference).
H-3 Form U-3A-2 by Atlantic (filed on February 28, 1997) (File
No. 069-00337) and incorporated herein by reference).
H-4 Schedule of Assets and Revenues of Nonutility Subsidiary
Companies.
I-1 Proposed Form of Notice.
J-1 Analysis of the Economic Impact of a Divestiture of the Gas
Business of DPL.
J-2 (deleted)
J-3 Table of Estimated Losses of Economies in Prior Decisions on
Divestiture and Retention of Gas Operations.
J-4 Memorandum of Law in Response to The Motion of South Jersey
Gas Company.
J-5 Certificate of Service, November 26, 1997.
J-6 Certificate of Service, December 19, 1997.
J-7 FERC Order Denying Rehearing.
J-8 Description of Nonutility Businesses.
B. Financial Statements
--------------------
FS-1 Conectiv Unaudited Pro Forma Condensed Consolidated Balance
Sheets as of March 31, 1997.
FS-2 Conectiv Unaudited Pro Forma Condensed Consolidated
Statements of Income for the twelve months ended March 31,
1997.
FS-3 Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.
FS-4 Atlantic Consolidated Balance Sheet as of March 31, 1997.
FS-5 Atlantic Consolidated Statements of Income for the twelve
months ended March 31, 1997.
FS-6 Delmarva Consolidated Balance Sheet as of March 31, 1997.
FS-7 Delmarva Consolidated Statement of Income for the twelve
months ended March 31, 1997.
FS-8 Atlantic Consolidated Balance Sheet as of December 31, 1997.
FS-9 Atlantic Consolidated Statement of Income for the year to date
December 31, 1997.
FS-10 Delmarva Consolidated Balance Sheet as of December 31, 1997.
FS-11 Delmarva Consolidated Statement of Income for the year ended
December 31, 1997.
FS-12 Delmarva Capital Investments, Inc. Statement of Income for the
year ended December 31, 1998 (filed pursuant to a hardship
exemption).
FS-13 Delmarva Capital Investments, Inc. Balance Sheet as of December
31, 1997 (filed pursuant to a hardship exemption).
FS-14 Delmarva Operating Services Company Statement of Income for the
year ended December 31, 1997 (filed pursuant to a hardship
exemption).
FS-15 Delmarva Operating Services Company Balance Sheet as of December
31, 1997 (filed pursuant to a hardship exemption).
FS-16 Delmarva Capital Technology Company Statement of Income for the
year ended December 31, 1997 (filed pursuant to a hardship
exemption).
FS-17 Delmarva Capital Technology Company Balance Sheet as of December
31, 1997 (filed pursuant to a hardship exemption).
FS-18 Delmarva Capital Realty Company Statement of Income for the year
ended December 31, 1997 (filed pursuant to a hardship exemption).
FS-19 Delmarva Capital Realty Company Balance Sheet as of December 31,
1997 (filed pursuant to a hardship exemption).
FS-20 Atlantic Energy Enterprises, Inc. Statement of Income for the
year ended December 31, 1997 (filed pursuant to a hardship
exemption).
FS-21 Atlantic Energy Enterprises, Inc. Balance Sheet as of December
31, 1997 (filed pursuant to a hardship exemption).
FS-22 Atlantic Generation, Inc. Statement of Income for the year ended
December 31, 1997 (filed pursuant to a hardship exemption).
FS-23 Atlantic Generation, Inc. Balance Sheet as of December 31, 1997
(filed pursuant to a hardship exemption).
FS-24 Atlantic Thermal Systems Statement of Income for the year ended
December 31, 1997 (filed pursuant to a hardship exemption).
FS-25 Atlantic Thermal Systems Balance Sheet as of December 31, 1997
(filed pursuant to a hardship exemption).
FS-26 Pine Grove, Inc. Statement of Income for the year ended December
31, 1997 (filed pursuant to a hardship exemption).
FS-27 Atlantic Energy Technology, Inc. Balance Sheet as of December 31,
1997 (filed pursuant to a hardship exemption).
-77-
<PAGE>
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.
-78-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Amendment No. 4 to the
Application/Declaration of Conectiv, Inc. to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 23, 1998
Conectiv, Inc.
By: /s/ B.S. Graham
------------------------------------
Barbara S. Graham
President
-79-
SERVICE AGREEMENT
This Service Agreement is executed this __ day of _________, 199__, by and
between Conectiv Resource Partners, Inc., a Delaware corporation and a mutual
service company formed under the terms of the Public Utility Holding Company Act
of 1935 ("Service Company") and ________________, a ________________Corporation
and an associate company of the Conectiv system ("Client Company" and
collectively with other associate companies that have or may in the future
execute this form of Service Agreement, the "Client Companies").
WITNESSETH
WHEREAS, the Securities and Exchange Commission (hereinafter referred to as
the "SEC") has approved and authorized as meeting the requirements of Section
13(b) of the Public Utility Holding Company Act of 1935 (hereinafter referred to
as the "Act"), the organization and conduct of the business of the Service
Company in accordance herewith, as a wholly-owned subsidiary service company of
Conectiv; and
WHEREAS, the Service Company and certain Client Companies have entered into
this Service Agreement whereby the Service Company agrees to provide and the
Client Companies agree to accept and pay for various services as provided herein
and determined in accordance with applicable rules and regulations under the
Act, which require the Service Company to fairly and equitably allocate costs
among all associate companies to which it renders services; and
WHEREAS, economies and efficiencies benefiting the Client Companies will
result from the performance by Service Company of the services as herein
provided:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 The Service Company shall furnish to a Client Company, as
requested by a Client Company, upon the terms and conditions hereinafter set
forth, such of the services described in Appendix A hereto (as such may be
amended from time to time) at such times, for such periods and in such manner as
the Client Company may from time to time request and which the Service Company
concludes it is equipped to perform. The Service Company shall also provide a
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by a Client Company and
which the Service Company concludes it is equipped to perform. In supplying such
services, the Service Company may arrange, where it deems appropriate, for the
services of such experts, consultants, advisors and other persons with necessary
qualifications as are required for or pertinent to the provision of such
services.
Section 1.2 Each Client Company shall take from the Service Company such of
the services described in Section 1.1 and such additional general or special
services, whether or not now contemplated, as are requested from time to time by
such Client Company and which the Service Company concludes it is equipped to
perform.
Section 1.3 The services described herein shall be directly assigned,
distributed or allocated by activity, project, program, work order or other
appropriate basis. A Client Company shall have the right from time to time to
amend, alter or rescind any activity, project, program or work order provided
that (i) any such amendment or alteration which results in a material change in
the scope of the services to be performed or equipment to be provided is agreed
to by the Service Company, (ii) the cost for the services covered by the
activity, project, program or work order shall include any additional expense
incurred by the Service Company as a direct result of such amendment, alteration
or rescission of the activity, project, program, or work order, and (iii) no
amendment, alteration or rescission of an activity, project, program, or work
order shall release a Client Company from liability for all costs already
incurred by the Service Company pursuant to the activity, project, program, or
work order, regardless of whether the services associated with such costs have
been completed.
ARTICLE II - COMPENSATION
Section 2.1. As compensation for the services to be rendered hereunder,
each Client Company shall pay to the Service Company all costs which reasonably
can be identified and related to particular services performed by the Service
Company for or on Client's behalf, such costs to be determined in accordance
with Rule 91 and other applicable rules and regulations under the Act. Where
more than one Client Company is involved in or has received benefits from a
service performed, costs will be directly assigned, distributed or allocated, as
set forth in Appendix A hereto, between or among such companies on a basis
reasonably related to the service performed.
Section 2.2. It is the intent of this Service Agreement that the payment
for services rendered by the Service Company to the Client Companies under this
Service Agreement shall cover all the costs of its doing business (less the cost
of services provided to associated companies not a party to this Service
Agreement and other non-associated companies), including but not limited to,
salaries and wages, office supplies and expenses, outside services employed,
insurance, injuries and damages, employee benefits, miscellaneous general
expenses, rents (including property leased from Client Companies for use by the
Service Company), maintenance of structures and equipment, depreciation and
amortization, and compensation for use of capital (initially one hundred percent
debt capital) as permitted by Rule 91 under the Act.
Section 2.3. The method of assignment, distribution or allocation of costs
described in Appendix A shall be subject to review annually, or more frequently
if appropriate. Such method of assignment, distribution or allocation of costs
may be modified or changed by the Service Company upon the express approval of
the modification by each affected Client Company without the necessity of an
amendment to this Service Agreement provided that in each instance, costs of all
services rendered hereunder shall be fairly and equitably assigned, distributed
or allocated, all in accordance with the requirements of the Act and any orders
promulgated thereunder and notice of such change is provided to the Client
Company.
Section 2.4. The Service Company shall render a monthly statement to each
Client Company which shall reflect the billing information necessary to identify
the costs charged for that month. By the tenth (10th) calendar day following
billing, each Client Company shall remit to the Service Company all charges.
Monthly charges may be billed on an estimated basis, but adjustments will be
made within ninety (90) days to assure that billings are in accord with Sections
2.1 and 2.2 above.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective as of the day of
above written, and shall continue in force for five (5) years until terminated
by either party upon no less than ninety (90) days' prior written notice to the
other party. Upon each five (5) year anniversary of this agreement, the parties
may extend this agreement, with or without modifications, for an additional five
(5) years by mutual written agreement to such an extension. This Service
Agreement shall also be subject to termination or modification at any time,
without notice, if and to the extent performance under this Service Agreement
may conflict with the Act or with any rule, regulation or order of the SEC or
any other regulatory body adopted before or after the date of this Service
Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1. All accounts and records of the Service Company shall be kept
in accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act and, in particular, the Uniform System of Accounts for
Mutual Service Companies and Subsidiary Service Companies in effect from and
after the date hereof, except as specifically approved by the SEC.
Section 4.2. Other existing subsidiaries and new direct or indirect
subsidiaries of Conectiv which may come into existence after the effective date
of this Service Agreement may become additional Client Companies (collectively,
the "New Client Companies") subject to this Service Agreement by execution of
this form of agreement, as it may be amended at that time. In addition, the
parties hereto upon the express approval of each affected Client Company shall
make such changes in the scope and character of the services to be rendered and
the method of assigning, distributing or allocating costs of such services among
the Client Companies and the New Client Companies under this Service Agreement
as may become necessary.
Section 4.3 The Service Company shall permit a Client Company access to its
accounts and records, including the basis and computation of allocations.
Section 4.4. This Service Agreement and any amendments hereto shall not be
effective until any necessary regulatory approvals have been obtained.
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
CONECTIV RESOURCE PARTNERS, INC.
By: /s/
---------------------------
[title]
[Client Company]
By: /s/
---------------------------
[title]
<PAGE>
Appendix A
Page 1 of 17
This appendix describes (i) the Policies and Procedures (see pages 10-17) to be
used to accumulate costs of Service Company services and (ii) the direct
assignment of costs to Client Companies and allocation of costs to Client
Companies that cannot practicably be directly charged. Definitions of the ratios
are provided in Appendix B. The Service Company will provide to associate Client
Companies the following services:
I. Executive Management
a. The Executive Management function includes the services of the
Chairman/CEO and supporting staff.
b. To the extent possible, services will be directly charged using a
standard rate per hour as described in the Procedures found on pages
10-17 of Appendix A. Services that are not directly charged will be
accumulated in Cost Centers. Each Cost Center's expenses will be
allocated among Client Companies based on the blended ratio.
II. Procurement and Corporate Services
a. The Procurement and Corporate Services function provides security,
including asset protection and investigative services; purchasing and
storeroom management; procurement and materials management; vehicle
resource management, including company vehicle maintenance; general
services including mail, graphics, records management and other office
services; building services including facilities management and
building maintenance; and real estate services, including
right-of-way.
<PAGE>
Appendix A
Page 2 of 17
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures
found on pages 10-17, except where another direct charge method is
specifically identified. Services that are not directly charged will
be allocated based on the following ratios:
1. security - labor $ ratio
2. purchasing and storeroom management and procurement and materials
management - materials stock expense ratio.
3. vehicle resource management - vehicle $ ratio.
4. general services - employee ratio
5. building services (facilities cost) - square footage ratio for
office space and non-office space
6. real estate - real estate investment ratio
III. Financial Services
a. The Financial Services function includes corporate planning; strategic
planning; budgeting; treasury and finance including risk management,
cash management, financing, and funded plans administration; investor
relations; accounting services including general ledger, corporate
accounting, accounts payable, payroll, plant/property accounting; tax
accounting services; regulatory affairs; insurance and claims
processing; and insurance and claims administration.
<PAGE>
Appendix A
Page 3 of 17
b. To the extent practicable services will be directly charged using a
standard rate per hour as described in the Policies and Procedures
found on pages 10-17 of Appendix A, except where another direct charge
method is specifically identified. Costs that are not directly charged
will be allocated based on the following ratios:
1. insurance administration - blended ratio
2. claims administration - historical claims ratio
3. regulatory affairs - utility asset cost ratio
4. all other financial services - O&M ratio
c. Insurance premiums and claims that are not directly charged will be
allocated as follows:
1. property insurance and miscellaneous insurance coverage - asset
cost ratio
2. general liability insurance - labor $ ratio
3. Directors and Officers insurance - asset cost ratio
4. nuclear insurance - nuclear installed capacity ratio
IV. Human Resource and Performance Improvement Services
a. The Human Resource and Performance Improvement Services function
provides compensation and benefit services; personnel, employment and
staffing; employee/labor relations; skills training and management
development; performance improvement; and organizational development.
<PAGE>
Appendix A
Page 4 of 17
b. To the extent practicable, services will be directly charged using a
standard rate per hour as described in the Policies and Procedures
found on pages 10-17 of Appendix A, except where another direct charge
method is specifically identified. Costs that are not directly charged
will be allocated as follows:
1. cost of benefits - To the extent practicable, each Client Company
will be directly charged their cost of employee benefits.
Employee benefit costs that cannot be directly charged to Client
Companies will be allocated based on the employee ratio.
2. compensation and benefits services - employee ratio
3. personnel, employment and staffing - employee ratio
4. employee / labor relations - employee ratio
5. skills training and management development - Flat fees will be
charged for each training class attendee. The fees will be
calculated on an annual basis by dividing total estimated
training costs by the estimated number of attendees. Any
remainder will be allocated based on the distribution of actual
fees charged.
6. performance improvement - employee ratio
7. organizational development - employee ratio
V. Legal and Internal Audit Services
a. The Legal and Internal Audit Services function provides internal audit
services and legal counsel related to general corporate issues.
<PAGE>
Appendix A
Page 5 of 17
b. Costs will be charged as follows:
1. legal services - All costs will be directly charged to other
Orders, Projects, or Cost Centers at a standard rate per hour.
Legal services related to Conectiv corporate activities, such as
review of consolidated financial reports, will be charged to the
appropriate Service Company Cost Center and included in those
functions billed to Client Companies, as discussed on pages 13
and 14 of Appendix A. Any residual resulting from standard rates
being different from actual costs will be allocated to the Client
Companies based on the actual legal direct labor charges during
the prior year.
2. audit services - To the extent practicable, services will be
directly charged using a standard rate per hour. Costs that are
not directly charged will be allocated based on the O&M ratio.
VI. Customer Services
a. The Customer Services function includes management of customer care
(customer service centers, dispatch, and billing) plus the Special
Billing group. The Special Billing group provides billing of
non-energy materials and services.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures
found on pages 10-17. Costs not directly charged will be allocated to
Client Companies as follows:
1. management of customer care - # customers ratio
2. special billing - # of special bills ratio
<PAGE>
Appendix A
Page 6 of 17
VII. Marketing Services
a. The Marketing Services function includes sales; market product and
sales planning; market and customer research; direct response
marketing; and marketing communication.
b. To the extent practicable, services will be directly charged using a
standard rate per hour. Costs that are not directly charged are
allocated based on the following ratios:
1. regulated sales and marketing services - # utility customers
ratio
2. competitive sales and marketing services - revenue ratio
VIII. Information Technology
a. The Information Technology function provides employee labor,
contractors, and other operating support of voice services; solutions
management, including applications delivery and support; information
management, including data administration and security; operations
management mainframe support; help desk; desktop support; network
support; consulting services, including business technology
management; mid-range operations, support for non-mainframe,
non-network systems; general management and administration.
b. To the extent practicable, service costs will be directly charged to
Orders, Projects, or Cost Centers using a standard rate per hour as
described in the Policies and Procedures found on pages 10-17. Orders
are used to capture costs of specific systems and applications. Costs
that are not directly charged will be allocated as follows:
<PAGE>
Appendix A
Page 7 of 17
1. voice services - telephone ratio
2. solutions management - end user ratio
3. information management - blended ratio
4. operations management - CPU time ratio
5. help desk - end user ratio
6. desktop support - end user ratio
7. network support - end user ratio
8. consulting services - blended ratio
9. general management and administration - blended ratio
IX. Communications Services
a. The Communications Services function includes general corporate
communications; governmental affairs and general corporate
advertising/branding.
b. To the extent practicable, services will be directly charged using a
standard rate per hour. Costs that are not directly charged will be
allocated based on the following ratios:
1. communications - employee ratio
2. governmental affairs - O&M ratio
3. general corporate advertising/branding - O&M ratio
<PAGE>
Appendix A
Page 8 of 17
X. Environmental and Safety Services
a. The Environmental and Safety Services function includes oversight of
environmental concerns related to air, water, land and waste, as well
as compliance with relevant regulations. This function also includes
reporting and compliance with safety regulations, and oversight of
corporate safety awareness programs.
b. To the extent practicable, services will be directly charged using a
standard rate per hour. Costs that are not directly charged will be
allocated based on the following ratios:
1. environmental - O&M ratio
2. safety - employee ratio
XI. Regulated Electric and Gas Delivery
a. The Regulated Electric and Gas Delivery function includes the
following electric and gas delivery services: delivery business
planning, including asset management, business planning, financial
analysis, distribution planning, engineering standards,
interconnection planning and arrangements, transmission planning, and
value added services; engineering services including distribution,
substation and transmission engineering, system protection, drafting
and construction management; system operations services including
senior management, finance director and administrative support,
electric and energy system operations, distribution operations, and
operations planning and analysis; electric maintenance services
including non-regional management and administrative support; forestry
supervision; meter shop; other delivery services including process
improvement, training, safety, performance analysis, benchmarking, and
enabling systems.
<PAGE>
Appendix A
Page 9 of 17
b. To the extent practicable, services will be directly charged using a
standard rate per hour. All costs that are not directly charged will
be allocated based on the following ratios:
1. delivery services - T&D O&M ratio
2. system operations services - Kwh output ratio*
3. maintenance services - Kwh output ratio*
4. other delivery services - T&D O&M ratio
* (See Appendix B for gas conversion factor.)
XII. Energy Supply
a. The Energy Supply function includes services of executive vice
president, finance director, generation vice president/general manager
and Edgemoor and Hay Road managers. This function also provides
non-regulated operations and management; merchant functions including
marketing, portfolio management, risk management, and strategic
planning; and supply engineering and support including technical
support and project management.
b. To the extent practicable, services will be directly charged using a
standard rate per hour. All costs that are not directly charged will
be allocated based on the following ratios:
1. management and administration - Kwh generated ratio
2. merchant functions - merchant cost ratio
3. supply engineering and support - Kwh generated ratio
<PAGE>
Appendix A
Page 10 of 17
Policies and Procedures
General
Service Company will provide services to Client Companies in accordance
with the terms of the Service Agreement. The Service Agreement will be
administered in accordance with the Act.
Service Level Agreements
The Service Company and each Client Company will prepare Service Level
Agreements ("SLA") to specify, in general terms, the services to be performed by
each department of the Service Company for each business group of a Client
Company. The purpose of the SLA is to establish shared services expectations
between the Service Company and each Client Company. The SLA is an
administrative tool used to facilitate the matching of a Client Company's needs
to the capabilities of the Service Company, and therefore, the SLA is not a
legally binding contract. Each SLA shall be reviewed and agreed upon at least
annually by authorized representatives of the Service Company and each Client
Company. In conjunction with this annual review of each SLA, the allocation
methods and ratios presented in Appendix A and B shall be reviewed and agreed
upon by the parties.
An SLA typically contains the following elements:
1. Scope of Services
2. Service Level Expectations
3. Unit Cost Expectations
4. Performance Measures
5. Billing Process
6. Major Contingencies
<PAGE>
Appendix A
Page 11 of 17
Each SLA is approved by the individual(s) authorized to represent the
department of the Service Company and the business group of a Client Company
related to the services to be provided.
Cost Management
Service Company will maintain a cost management information system which
allows it to accumulate costs via cost objects. Cost objects are collection
tools and include: Orders, Projects, and Cost Centers. Orders and Projects
constitute a work order system for charging costs to specific jobs. These tools
collect costs for a limited amount of time and either transfer the dollars to a
cost center, if they are an expense, or to an asset and/or balance sheet account
for capitalized costs. Cost Centers collect resource costs and are the final
receiver of expenses collected in Orders as described above. This system
supports the philosophy of separating costs by business group and legal entity
on a fully costed basis. Service Company will use this system to maintain an
accounting system to record all costs of operations.
The cost of work performed by the Service Company will be collected in
Orders, Projects and Cost Centers. Time records and expense statements will be
used to track resource consumption. Labor related costs are expected to be the
most significant costs for the Service Company. To the extent practicable, the
Service Company employees shall be required to directly charge their time to an
appropriate cost object through the time reporting system. The following
guidelines are provided to ensure accuracy and efficient time keeping by Service
Company employees:
1. Time should be entered daily into the appropriate time reporting
system. If this is not practical, the employee should prepare
manually prepared time records, substantiating later electronic
time entry.
2. In no event should time entry be delayed past the end of the pay
period.
<PAGE>
Appendix A
Page 12 of 17
3. Employees should keep track of time in one hour increments.
4. Employee time shall be approved by the employee's supervisor
using the time reporting system.
Costs will be charged to Client Company Cost Centers, Orders or Projects as
work is performed and costs are incurred. The billing process agreed upon in the
SLA will be used by Service Company personnel to guide the establishment of the
necessary cost objects to charge costs to a Client Company. When a service
requested by a Client Company was not specified in the most recent SLA, a new
cost object may be created. In this instance, the new cost object will be agreed
upon by the Service Company department to provide the service and the business
group of the Client Company to receive the service. The Controller's department
is responsible to ensure that all of the billing methodologies are consistent
with the Service Agreement approved by the SEC. The establishment of cost
objects within the cost management information system for use by the Service
Company will be strictly controlled by the Controller's department. The
Controller's department will ensure that all cost objects have been authorized
by the appropriate Service Company department and the Client Company business
group.
Service Company will use a standard costing system. Resource cost centers
collect the actual costs of labor and related costs. As products or services are
provided by the Service Company cost centers, the services are directly charged
to Orders, Projects or other Cost Centers at standard rates. Standard rates,
which are calculated annually, are based upon anticipated resource costs and
activity levels, e.g. available hours to perform work. Any residual amounts or
costs that can not be practicably directly billed remain in the resource cost
center to be allocated to Client Companies on an appropriate basis, as defined
in the Service Agreement and approved by the SEC. The amount billed to the
Client Company is charged to Client Company Orders, Projects and Client Cost
Centers created to collect the costs of the services provided to that company.
<PAGE>
Appendix A
Page 13 of 17
Service Company will have a tiered approach to billing Client Companies.
First and foremost, costs will be directly charged when practicable. Secondly,
costs will be allocated to the appropriate Client Cost Centers using the
appropriate allocation ratio. Finally, any residuals will be allocated using the
appropriate allocation ratio.
A. Direct Charges: Labor related services consumed for an Order, Project or
Activity performed specifically for a Client Cost Center will be directly
charged to that cost object at a standard rate per unit of labor or unit of
services. The standard rate includes direct costs such as labor, materials
and supplies, including procurement and storeroom costs, and overhead costs
such as vehicle costs, occupancy costs, and benefits and payroll taxes.
When identifiable, any non-labor costs, those costs not included in the
billed standard rates, will be directly charged to a Client Company
Project, Order or Cost Center. Any residuals or variances will be assigned
or allocated to the appropriate Client Company.
B. Allocations: Costs accumulated that apply to all Client Companies or to a
group of Client Companies, which have not been directly charged as
described in A, above, will be allocated based on the allocation ratios
defined in Appendix B. Allocation ratios will be reevaluated by the Service
Company and expressly approved by each Client Company on at least an annual
basis. More frequent reevaluations will be made when significant residuals
result. Any revisions to allocation methods will be agreed upon with the
Client Companies before modifications are implemented. The Controller's
department shall be responsible for ensuring that any revisions to
allocation methodologies are approved by the Client Companies and the SEC
on a timely basis.
C. Service Company Cross Charges: Certain Service Company overhead costs, such
as the cost of benefits, purchasing and storeroom management, procurement
and materials management, and building services are charged to Service
Company functions that utilize these services and included in their
standard rate for billing to Client Companies. In addition, certain Service
Company direct charges, such as information technology services, vehicles
and legal are charged to Service Company functions to the extent these
<PAGE>
Appendix A
Page 14 of 17
functions utilize these services. These charges are included in the amounts
that these functions bill to Client Companies.
Monitoring
The Controller's department shall be responsible for reviewing, monitoring,
and maintaining the process for the accumulation of Service Company costs
charged to Client Companies, either through direct charges or allocations. In
connection with this responsibility, the Controller's department shall:
1. Review and approve all SLA's
2. Control the establishment of all cost objects for billing Service
Company charges
3. Analyze the reasonableness of charges in the cost management
information system.
4. Review and evaluate the reasonableness of the monthly bill to
each Client Company
The Controller's department shall be responsible for updating all
allocations used by the cost management information system. Supporting
workpapers will be maintained with the Controller's department. The Controller's
department will be responsible to ensure that all allocations are proper,
accurate, and current. Also, the Controller's department shall be responsible
for ensuring that the allocations methodologies have been approved by the SEC.
Any modification of an allocation methodology which requires filing under 60-day
letter procedures based on existing SEC guidelines shall be filed on a timely
basis. The current guidelines require SEC approval of a modification of an
allocation methodology if the change will cause the lesser of $50,000 or five
percent (5%) change in the annual allocation of costs among Client Companies.
The Controller's department shall be responsible for ensuring to the extent
practicable that the allocation methodologies are consistent with any orders or
directives issued by utility rate setting regulatory bodies having jurisdiction
over the Company.
<PAGE>
Appendix A
Page 15 of 17
Billing
Monthly, the Service Company will prepare and submit a bill to each Client
Company. The Controller's department shall be responsible for reviewing the
monthly bills, as necessary, with the pertinent officers of the Client
Companies, or their designees, who are responsible for approval of the bills.
Each bill will be approved on a timely basis by the appropriate officer of each
Client Company.
The monthly bills will contain the following information:
1. The Client Company.
2. The cost of each service billed to the Client Company.
3. For each service, the bill will show each Client Company order,
project, or cost center charged for the service.
The cost management information system will contain detailed information
supporting each service charged to a Client Company. Using the cost management
information system, the Controller's department will provide the officer of the
Client Company, or his designee, detailed information on direct and allocated
charges as may be required in order to approve the bill.
Furthermore, each Client Company cost center head and project manager is
responsible for validating, in a timely manner, costs charged to their cost
center or project, including amounts billed by the Service Company. This
validation is a key component of Conectiv's system of internal controls. Using
the cost management information system, cost centers are able to drill down on
all costs billed to them by the Service Company to determine the specifics of
each cost. The Controller's department will assist Client Company cost centers,
as necessary, to research and validate charges to their cost centers.
<PAGE>
Appendix A
Page 16 of 17
When an erroneous charge is discovered, the Controller's department is
responsible for correction of the error in the subsequent month.
Dispute Resolution
If there is a dispute between a Client Company and the Service Company
concerning the appropriateness of an amount billed to a Client Company, the
Controller's department will meet with the appropriate representatives for the
Client Company cost center and the Service Company to resolve the dispute. If
the dispute cannot be resolved by the Controller's department, the issue will be
referred to the Chief Financial Officer and the Service Company Operating
Committee for final resolution.
Internal Audit
The Internal Audit department shall perform an audit of the Service Company
billing process within every two years. Computer systems, billings, and source
documents will be examined to ensure on a test basis that the services provided
are authorized, documented, and accurately recorded in the accounting records.
The audits will include an examination of the allocation factors used to ensure
that the methodologies have been approved by the SEC. Also, the audits will
evaluate the adequacy of the system of internal controls over the billing
process and the reasonableness of each allocation methodology used to distribute
costs to the Client Companies.
Evaluation and Measurement
In order to encourage the Service Company to operate efficiently and cost
effectively, and provide high quality service, the Service Company will
establish benchmarking as well as initiate a customer review process. The
customer review process will be based on a customer-oriented service philosophy
and measure success based on customer satisfaction. It will allow for customer
input into the volume and value of the products and services provided by the
Service
<PAGE>
Appendix A
Page 17 of 17
Company, including benchmarking of the cost/quality of the services by the
Client Company. These reviews will be part of the annual budget development
process and the completion of the Service Level Agreements between the Service
Company and its customers. In addition to the review process with customers, the
Service Company will establish a benchmarking plan for services where it is
practicable to establish external benchmarks within 24 months to continue to
improve the effectiveness of services offered to the Client Companies and to
ensure that the services offered are cost competitive. Also, Client Companies
may request benchmarking of services provided by the Service Company.
<PAGE>
Appendix B
Page 1 of 4
Definition of Service Company Allocation Methods
Ratio Title Ratio Description
Employee Ratio A ratio the numerator of which is the number of employees
of a Client Company, the denominator of which is the
number of employees in all Client Companies using the
service. This ratio will be calculated quarterly.
Square Footage Ratio
office space A ratio the numerator of which is the number of square
feet of office space occupied by a Client Company, the
denominator of which is the total number of square feet
of office space occupied by all Client Companies using
the service.
non-office space A ratio the numerator of which is the number of square
feet of non-office space occupied by a Client Company,
the denominator of which is the total number of square
feet of non-office space occupied by all Client
Companies using the service.
Telephone Ratio A ratio the numerator of which is the number of
telephones used by a Client Company, the denominator of
which is the number of telephones used by all Client
Companies using the service.
CPU Time Ratio A ratio the numerator of which is the number of hours of
CPU time used for a particular system application, the
denominator of which is the total number of CPU hours
used by all companies. Costs are allocated to Orders
based on this ratio. That cost is then either included
in the cost of other Service Company services or
directly routed to the appropriate Client Company.
End User Ratio A ratio the numerator of which is the number of users
of computer systems within a Client Company, the
denominator of which is the total number of users of
computer systems within all Client Companies using the
service.
<PAGE>
Appendix B
Page 2 of 4
Labor $ Ratio A ratio the numerator of which is the amount of labor $
of a Client Company, the denominator of which is total
labor $ for all Client Companies using the service.
This ratio will be calculated monthly.
Historical Claims A ratio the numerator of which is the total claims
Ratio expense of a Client Company, the denominator of which is
the total claims expense for all Client Companies using
the service.
Asset Cost Ratio A ratio the numerator of which is the total cost of
assets in a Client Company, the denominator of which is
the total costs of assets for all Client Companies
using the service. Assets are limited to plant,
property and investments.
O&M Ratio A ratio the numerator of which is the total direct (i.e.,
excludes charges allocated by the Service Company)
operations and maintenance expense, excluding
depreciation and fuel costs, of a Client Company, the
denominator of which is total direct operations and
maintenance expense, excluding depreciation and fuel
costs, of all Client Companies using the service.
Revenue Ratio A ratio the numerator of which is the total revenues of a
client Company, the denominator of which is the total
revenues for all Client Companies using the service.
# Customer Ratio A ratio the numerator of which is the number of customers
served by a Client Company, the denominator of which is
the total number of customers for all the Client
Companies using the service.
# Utility Customers A ratio the numerator of which is the number of utility
Ratio customers served by a Client Company, the denominator of
which is the total number of utility customers for
all Client Companies using the service.
Nuclear Installed A ratio the numerator of which is the nuclear facility
Capacity Ratio installed capacity of a Client Company, the denominator
of which is the total nuclear facility installed capacity
of all Client Companies using the service.
<PAGE>
Appendix B
Page 3 of 4
Materials Stock A ratio the numerator of which is the materials stock
Expense Ratio expense of a Client Company, the denominator of which is
the total materials stock expense of all Client
Companies using the service.
Real Estate A ratio the numerator of which is the cost of real estate
Investment leases and land and buildings owned by a Client Company,
the denominator of which is the total cost of real estate
leases and land and buildings for all Client Companies
using the service.
# of Special Bills A ratio the numerator of which is the number of special
Ratio bills issued for a Client Company, the denominator of
which is the total number of special bills issued for all
Client Companies.
Utility Asset Cost A ratio the numerator of which is the total cost of
Ratio utility assets in a Client Company, the denominator of
which is the total cost of utility assets for all Client
Companies using the service.
T&D O&M Ratio A ratio the numerator of which is the total direct (i.e.,
excludes charges allocated by the Service Company),
operations and maintenance expense, excluding
depreciation and fuel costs, of a Transmission and
Distribution Client Company, the denominator of which
is total direct operations and maintenance expense,
excluding depreciation and fuel costs, of all
Transmission and Distribution Client Companies.
Kwh Generated Ratio A ratio the numerator of which is the number of kilowatt
hours generated by a Client Company, the denominator of
which is the total number of kilowatt hours generated
by all Client Companies using the service.
Kwh Output Ratio A ratio the numerator of which is the number of kilowatt
hours purchased and generated by a Client Company, the
denominator of which is the total number of kilowatt
hours purchased and generated by all Client Companies
using the service.
<PAGE>
Appendix B
Page 4 of 4
Merchant Cost Ratio A ratio the numerator of which is the dollar amount of
direct charges of the merchant function to a specific
Client Company, the denominator of which is the total
dollar amount of direct charges of the merchant
function to all Client Companies using the service.
Vehicle $ Ratio A ratio the numerator of which is the dollar amount of
vehicle charges in a specific Client Company, the
denominator of which is the total amount of vehicle
charges in all Client Companies using the service.
Blended Ratio A composite ratio which is comprised of an average of the
Employee Ratio, the Labor $ Ratio, and the Asset Cost
Ratio, for all Client Companies using the service.
Note: Where applicable, the following will be utilized to convert gas sales to
equivalent electric sales: 0.303048 cubic feet of gas equals 1 kilowatt-hour of
electric sales (Based on electricity at 3412 Btu/Kwh and natural gas at 1034
Btu/cubic foot.)
STATE OF NEW JERSEY
Board of Public Utilities
Two Gateway Center
Newark, NJ 07102
DATE: 12/30/97
ORDER
I/M/O THE PETITION OF ATLANTIC )
CITY ELECTRIC COMPANY AND CONECTIV, )
INC. FOR APPROVAL OF A CHANGE IN )
OWNERSHIP AND CONTROL )
BPU Dkt. No. EM97020103
OAL Dkt. No. PUC4935-97
(SERVICE LIST ATTACHED)
BY THE BOARD:
On February 24, 1997, Atlantic City Electric Company ("ACE"), a corporation
of the State of New Jersey and regulated public electric utility with its
principal business office located in Egg Harbor Township, New Jersey, and
Conectiv, Inc. ("Conectiv"), a corporation of the State of Delaware with its
principal business office located in Wilmington, Delaware (collectively
"Petitioners"), filed a petition with the New Jersey Board of Public Utilities
("Board") pursuant to N.J.S.A. 48:2-51.1 and 48.3-10, and N.J.A.C. 14:1-5.10,
requesting authorization and approval of a transfer on Atlantic Electric Inc.'s
("AEI") books and records of all of the issued and outstanding shares of its
common stock, which will result in the change of ownership and control of ACE.
AEI, a New Jersey corporation and the parent of ACE, is the sole common
shareholder of ACE. ACE provides service to approximately 473,000 residential,
commercial and industrial customers within its service territory which
encompasses all or parts of eight countries in the southern one-third of New
Jersey.
<PAGE>
Petitioners also filed a copy of the Amended and Restated Agreement and
Plan of Merger dated December 26, 1996 ("Agreement") among AEI; Delmarva Power &
Light Company ("Delmarva"), a regulated public electric utility servicing
approximately 437,500 residential, commercial and industrial customers in
Delaware, Maryland and Virginia; Conectiv and DB Sub, Inc., a wholly owned
subsidiary of Conectiv incorporated in Delaware solely to effectuate the merger.
Currently, the ownership of Conectiv's outstanding capital stock is divided
equally between AEI and Delmarva. Ultimately, as a result of several mergers
outlined in the Agreement, Conectiv will become the parent of Delmarva, AEI and
all AEI's current subsidiaries.
The proposed new company, Conectiv, will have a total of 3,700 employees,
over 900,000 electric customers, 98,000 gas customers, and a combined service
territory of nearly 9,000 sq. miles. The Chairman/Chief Executive Offer of
Conectiv will be Howard E. Cosgrove, current Chairman/Chief Executive Officer of
Delmarva. The new President of Conectiv will be Merry L. Harlacker who is a
Senior Executive Vice President of Atlantic Energy. The proposed corporate
headquarters of Conectiv will be located in Wilmington, Delaware, the current
headquarters of Delmarva.
As described in the Joint Proxy Statement of Delmarva and AEI (Proxy,
pp.3-5), petitioners propose to accomplish the merger on the following terms and
conditions after receiving all necessary regulatory approvals: (i) DB Sub, Inc.
will merge into Delmarva; (ii) AEI will merge with and into Conectiv; (iii)
Delmarva common stock owned by Delmarva or AEI or any of their subsidiaries will
be canceled; (iv) AEI common stock owned by AEI of Delmarva or any of their
subsidiaries will be canceled; (v) Delmarva common stock shares issued and
outstanding immediately prior to the consummation of the Delmarva merger will be
converted into Conectiv common stock; (vi) AEI common stock shares issued and
outstanding immediately prior to the consummation of the AEI merger will be
converted into Conectiv common stock, Class A common stock and cash in lieu of
fractional shares; (vii) all issued and outstanding shares of DB Sub, Inc.
common stock will be converted into shares of Delmarva common stock; and (viii)
all shares of Conectiv common stock that are issued and outstanding immediately
prior to the mergers will be canceled. The merger will result in holders of
Delmarva common stock becoming holders of Conectiv common stock in a 1:1 ratio
and holders of AEI common stock becoming holders of both Conectiv common stock
in 1:0.75 and 1:0.125 ratios respectively. Delmarva Preferred Stock outstanding
when the merger is consummated will remain outstanding with the mergers exerting
no effect on said preferred stock.
Initially, the Petitioners, the Division of the Ratepayer Advocate ("DRA")
and Board staff were designated as parties to the proceeding. On March 27, 1997,
South Jersey Gas Company ("SJG") filed a motion to intervene. Given the
potential effect of the merger on SJG in its capacity as a competitor, retail
customer and supplier of AEI, the board granted SJG intervenor status on May 28,
1997. The Board determined to send the matter to the Office of Administrative
Law ("OAL") as a contested case for hearings. OAL Administrative Law Judge
("ALJ") McAfoos conducted a prehearing conference on May 30, 1997. Evidentiary
hearings were held at the OAL on July 14, 15 and 18, August 27, 28 and 29 and
September 2
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<PAGE>
and 3, 1997. Initial briefs were filed October 2, 1997 and reply briefs were
filed October 10, 1997. The ALJ issued his Initial Decision on November 19,
1997, reflecting his analysis of the testimony, transcripts briefs and reply
briefs. Exceptions to the Initial Decision were filed by the parties on December
4, 1997 and reply exceptions were filed on December 11, 1997.
The company has urged the Board to complete its review of the merger in
1997 so that savings can begin to be reflected in customer rates and employment
uncertainties can be resolved. As of the date of this Order, the merger has been
approved by the state utility commissions of Delaware, Maryland, Pennsylvania
and Virginia. At the federal level, the Federal Energy Regulatory Commission and
the Department of Justice have also approved the merger. The determinations of
the Securities and Exchange Commission and the Nuclear Regulatory Commission are
expected when the Board completes its review and issues its final Order, thus
completing all state approvals.
DISCUSSION
Because Petitioners seek to form a new holding company which will acquire
control of ACE, the proposed transaction falls within the jurisdiction of the
Board pursuant to N.J.S.A. 48:2-51.1, which provides that
[n]o person shall acquire or seek to acquire control of a public
utility directly or indirectly through the medium of an affiliated or
parent corporation or organization, or through the purchase of shares,
the election of a board of directors, the acquisition of proxies to
vote for the election of directors, or through any other manner,
without requesting and receiving the written approval of the Board of
Public Utilities. Any agreement reached, or any other action taken, in
violation of this act shall be void. In considering a request for
approval of an acquisition of control, the board shall evaluate the
impact of the acquisition on competition, on the rates of ratepayers
affected by the acquisition of control, on the employees of the
affected public utility or utilities, and on the provision of safe and
adequate utility service at just and reasonable rates. The board shall
accompany its decision on a request for approval of an acquisition of
control, with a written report detailing the basis for its decision,
including findings of fact and conclusions of law.
It is clear from the above that the Board must evaluate the impact of the merger
on (1) rates, (2) employees, (3) competition and (4) the provision of safe and
adequate service at reasonable rates.
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<PAGE>
Standard of Review
The Board must first determine the standard of review to be used in this
case and then apply that standard to an analysis of the impact on competition,
rates, employees, and the provision of continued safe and adequate service.
However, nothing in the statute suggests how or under what standard of review
the Board should conduct its review, and there is no other New Jersey statutory
requirement that the Board use a particular standard ownership or control of
public utilities.
As noted by the ALJ, in recent years the Board has in the vast majority of
its cases utilized a "no harm" standard, meaning that it has approved
acquisitions and mergers of utilities only after it was satisfied that there
would be no adverse impact on the provision of safe, adequate and proper service
at just and reasonable rates and no adverse impact on the other factors listed
in N.J.S.A. 48:2-51.1. The Board on two occasions has used another test which
can be referred to as a "positive benefits" test; also sometimes referred to as
a "best interests of the public" test. Even though rarely used, the DRA has
argued that the Board should use the"positive benefits" test in this case. This
test was first used by the Board in 1969 when it considered a proposed merger of
New Jersey Natural Gas Company with Brooklyn Union Gas Company. See Re New
Jersey Natural Gas Company, 80 PUR 3d 337 (1969). However, while the Board
determined in that case that it would use a "best interest of the public" type
test in preference to a "no harm" test, no strong support for this position was
provided other than the statement that such a test would be consistent with the
Legislature's intent and in keeping with the philosophy of New Jersey utility
regulation. Id. at 339. In 1984, citing Re New Jersey Natural Gas Company for
support, the Board once again used a "positive benefits" test when reviewing a
hostile takeover bid by NUI Corporation. See, In the Matter of the Petition of
New Jersey Resources Corporation and New Jersey Natural Gas Company v. NUI
Corporation and Elizabethtown Gas Company, Docket No. 8312-1093 (January 31,
1984).
Despite the above decisions, the Board has continued to use a "no harm"
test for utility transactions involving a change in ownership and control. For
example, the Board used "no harm" test when evaluating the formation of utility
holding companies which involved a change in ownership of the utility. See, In
the Matter of the Petition of Elizabethtown Water Company, Docket No. WM8502238
(August 9, 1985); In the Petition of Elizabethtown Water Company, Docket No.
693-107 (April 17, 1969). Similarly, the Board has approved the merger or
acquisition of various telecommunications companies using a "no-harm" or "no
adverse impact" test, even thought the ultimate owner was not an in-state
utility. See, In the Mater of Metromedia Communications Corporation and
Resurgens Communications Group, Inc. for Authorization to transfer Control and
Change Name, Request for Relief, Docket No. TM93010016 (September 15,
1993)(provider of intrastate interLATA telecommunications services in New Jersey
authorized to merge into out-of-state alternative operator provider and
reseller); In the Matter of the Petition of Teleport Communications New York, et
al. for Approval of Certain Transactions, Docket No. TM92030301 (October 13,
1992) (change in ownership and control of corporate parent of New Jersey
utility); In the Matter of the Application of Worldcom, Inc. for Approval of
Agreement and Plan of Merger and Related
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<PAGE>
Transactions, Docket No. TM96090644 (December 5, 1996)(merger of reseller and
facilities based operator with parent of provider of intraLATA and interLATA
interexchange services and local exchange service in New Jersey).
In recent years, the Board has made only one statement which describes the
kind of situation which it appeared to believe would cause the Board to utilize
a "positive benefits" test. Referring to In re New Jersey Gas Company, supra,
and In the Matter of the Petition of New Jersey Resources Corporation, supra,
and in an effort to distinguish the case then under review, the Board stated:
"[i]n short, these were merger or 'take over' cases affecting the internal
structure of existing New Jersey utilities." In the Matter of the Petition of
Public Service Electric and Gas Company, at 7-8, Docket No. EM8507774 (January
17, 1986). The Board does not believe that the above language constitutus a
statement of policy mandating adherence to a "positive benefits" in all
circumstances where changes are made in the internal structure of a utility. As
noted above, the Board has on many occasions ruled on mergers without insisting
on use of a "positive benefits" test where there was a potential change in the
operations of the utility. Therefore, the Board is not convinced that the facts
of this case demand that the Board utilize a "positive benefits" standard rather
than a "no harm" standard.
After review, the Board CONCLUDES that adherence to a "no-harm" standard is
reasonable. In this regard, the Board believes that it would be unreasonable to
insist in this case that Petitioners prove that positive benefits will accrue as
a result of the proposed merger, when the use of the "no harm" standard is
sufficient to ensure the continuation of safe, adequate and proper service at
reasonable rates and adherence to the other requirements of N.J.S.A., 48:2-51.1.
Therefore, for the reasons outlined above and for the reasons given by the ALJ,
the Board HEREBY ADOPTS the ALJ's position on standard of review as if fully set
forth herein.
Impact on Rates:
One of the primary issues in controversy in this proceeding is the
estimation of merger savings and how much these cost savings can lower rates.
Analytically the issue was addressed by the Petitioner through: (1) the
measurement of expected merger savings allocable to Atlantic Energy, (2) the
allocation of these cost savings between New Jersey ratepayers and company
shareholders, and (3) the timing for implementing the rate reductions. A
subsidiary but important issue is the extent to which ACE can use the proposed
rate reductions to meet the Board's rate reduction goal of 5 to 10 percent set
out in its April 30, 1997 report, Restructuring the Electric Power Industry in
New Jersey ("Restructuring Report").
Petitioners sponsored a number of witnesses to address the broad issue of
expected merger savings and how the savings should be equitably shared. To
estimate savings, the company employed the traditional 10-year forecast period
for estimating total company savings, allocated savings between the merging
companies' subsidiaries based on a detailed
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<PAGE>
study of recent actual operating costs, and proposed a sharing ratio between
ratepayers and company shareholders to further allocate savings attributed to
the operating utility companies.
Labor force reductions constitute the bulk of the savings estimated to
result from the proposed merger. Nearly 70 percent of Petitioner's savings
estimate is accounted for by an expected labor force reduction of 10 percent of
the combined ACE-Delmarva labor force of more than 4,000 employees. When
combined with the other cost reducing activities, the Petitioners have estimated
net merger savings over 10 years of $509 million with the total annual savings
of $21 million attributable to ACE which the Petitioners further adjusted for
certain merger costs to produce net ACE annual savings of $18.2 million.
Petitioners arrived at an $18.2 million estimate of ACE net annual savings by
adjusting ACE's gross share of savings downward to reflect three "costs"
incurred by the merging companies in the form of (1) an annual acquisition
premium amortization, (2) executive separation payments, and (3) name change
costs. Finally, after reviewing ACE's recent financial performance, Petitioners
proposed that one-third of ACE's net savings be allocated to ratepayers and
two-thirds to shareholders.
In response to this filed position, the DRA supported through expert
testimony a counterproposal that rejected the company's three proposed cost
offsets to ACE's gross share of merger savings and allocated 100 percent of
ACE's share of merger savings, without adjustments, to ratepayers. The
recommendation was based, in part, on the DRA's view that in a traditional
rate-base/rate-of-return regulatory process all cost savings would ultimately
flow to ratepayers. Also, the DRA suggested a five-year rate freeze to guarantee
that all Board-ordered rate reductions would be assured for at least five years.
The Staff, in its initial brief, outlined a merger savings sharing proposal
incorporating (a) a 15-year forecasting period for cost savings; (b) an estimate
of $918 million in merger savings over that period; (c) rejection of
Petitioners' proposed saving offsets for acquisition of goodwill, executive
compensation payments and name change costs; (d) annual estimated savings of
$24.531 million allocated 100 percent to ratepayers; and (e) a recommendation
that ACE be allowed to use the entire rate reduction of 2.6 percent to partially
fulfill the Board's Restructuring Report rate reduction requirement of 5 to 10
percent.
After the hearings concluded, the Petitioners and the other parties filed
briefs and reply briefs that included a thorough discussion of the savings and
sharing issues. The ALJ rejected the DRA's five-year rate freeze proposal as an
"unworkable constraint on the Company" and also rejected Staff's 15-year
forecast period approach. The ALJ ultimately recommended an alternative proposal
using the Petitioners' 10-year forecast period; rejected the company's request
to offset cost savings by the acquisition premium, the executive separation
payments, and the name change cost; and concluded that the annual savings
estimate of $21 million was reasonable. The ALJ also recommended that ratepayers
should receive 75 percent of the savings in the form of a $15.75 million annual
rate reduction (1.7 percent). Under the ALJ's proposal, the rate reduction would
be implemented on closing of the merger. He further recommended that the entire
rate reduction be treated as a credit to the 5 to 10 percent rate reduction
anticipated by the Board in the Restructuring Report.
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<PAGE>
After review, the Board ADOPTS the ALJ's findings on the level of annual
savings and the percentage to be allocated to ratepayers. While the ALJ's
recommendations in this regard reasonably balance the interests of the parties,
the ALJ's proposed annual rate reduction of $15.75 million (1.7 percent), while
correctly calculated, must in part be offset by a $5.025 million (0.5 percent)
increase in rates attributable to the Board's decision in Docket No. ER97080562
to allow ACE to recover Post-retirement Benefits Other than Pensions (PBOPs).
The net result of actions in these two dockets is an approximate 1.2 percent
reduction in rates. The Board's determination to simultaneously account for the
PBOP rate increase and a portion of the merger-related rate decrease is based on
its desire to eliminate unnecessary rate fluctuations within a relatively short
period of time.
The Board also ADOPTS the ALJ's determination that the entire percentage
rate reduction be treated as a credit towards the 5 to 10 percent rate reduction
required pursuant to the Restructuring Report. However, as noted above, the
actual percentage decrease will be 1.2 percent, rather 1.7 percent, because of
the Board's determination herein to implement the Board-approved rate increase
under the PBOP proceeding with the merger-related rate reduction approved in
this Order. This position is supported by the Restructuring Report which defined
the set point against which the Board would measure utilities' achievement of
rate reductions as follows:
In response to concerns that these targeted rate reductions may be
eroded by subsequent upward rate adjustments between now [April 30,
1997] and the date of retail competition, we emphasize that the
targeted rate reductions must be in comparison to the current level of
rates as of the date of this report.
[Restructuring Report at 115.]
Since the Board's Restructuring Report requires rate reductions to be measured
against rates in effect as of April 30, 1997, the Board believes at this time
that the net reduction of 1.2 percent resulting from the simultaneous
implementation of the PBOP increase and merger-related decrease in rates should
be credited towards the required 5 to 10 percent Restructuring Report rate
reduction.
Impact on Employees
The record demonstrates that approximately 70 percent of the cost savings
to be produced by the combination of AEI and Delmarva would come about through a
reduction in the total number of employees between the two companies.
Petitioners have stated that they planned to target "positions which are
rendered redundant or duplicative as a consequence of the merger" and urged that
"it is the long term strength of the company, and the opportunities
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<PAGE>
created by that strength, rather than the short term reduction in jobs, due to
streamlining which should be evaluated in determining the true impact of the
change in control." Pib at 32./1
Conectiv witness Cosgrove testified that as a result of the merger,
Petitioners expect to "initially reduce the combined companies' workforce by
approximately ten percent, or about 400 positions." Exhibit P-8 at 5.
Petitioners witness Flaherty stated that commencing on January 1, 1998, 408
positions will be eliminated between the merging companies. Exhibit P-6 at 23.
Petitioners argued for flexibility in final staff determinations and could offer
no specific assurances or detail of the relative impact of job reductions on the
merging companies beyond Cosgrove's suggestion that positions eliminated "will
be in some rough proportion between the two companies." However, he offered a
qualifier: "I think that a lot has to do with location, where people live, and
then the positions that are available and the people that are making different
types of lifestyle decisions." TR, Vol. 4 at 8.
With regard to the DRA's arguments referenced below, Petitioners rejected
the DRA's call for Petitioners to commit to a precise allocation of job cuts
between the merging companies prior to the Board granting merger approval and
argued that "[u]ltimately, the kind of mathematical precision that the Ratepayer
Advocate proposes is not possible, achievable, or even a sound public policy
goal because of the other things that would have to happen to achieve that
precision." Pib at 36. Petitioners also argued that any attempt by the Board to
regulate or prohibit staff reductions "simply for the sake of preserving jobs"
or to impose quotas, would exceed the Board's statutory authority. Prb at 33 and
35. Petitioners saw an inconsistency in Staff's and the DRA's reasoning: "Staff
and the Ratepayer Advocate insist on lower rates to customers, and therefore
cannot at the same time try to impose conditions which will impair the ability
to achieve those savings." Id. at 35. Petitioners offered a caution on any Board
effort to control job reductions stating that "the quota proposal would unfairly
limit the ability of Atlantic and Conectiv to ensure that the best possible
workforce would be able to serve the needs of customers." Petitioners Exceptions
at 9. Finally, Petitioners urged the Board to focus on a goal rather than a firm
limit in any condition related to jobs to ensure that the merging companies
would retain sufficient flexibility to enable them to realize savings and
optimize staff resources: "At most, the 140/268 should only be a target that the
Board
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1/ Throughout this Order, the following abbreviations are used to refer
to documents of record in BPU Docket No. EM97020103:
Sib Staff initial brief
Srb Staff reply brief
Pib Petitioners initial brief
Prb Petitioners reply brief
DRAib Divisions of the Ratepayer Advocate initial brief
DRArb Division of the Ratepayer Advocate reply brief
SJGib South Jersey Gas Company initial brief
SJGrb South Jersey Gas Company reply brief
TR Transcript (by volume and page)
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encourages Conectiv to strive to attain, but not be required to strictly
adhere to." Petitioners Exceptions at 11.
In response to the strong concerns expressed by the parties regarding job
impacts, Cosgrove testified that the new combined entity will open operations in
New Jersey, not only a facility to maintain the company's presence in Atlantic
City, but also a corporate service center in the western part of Southern New
Jersey, where billing accounts payable, purchasing and other service functions
would be located. TR. Vol. 4 at 5.
The DRA focused on the fact that the Merger Agreement does not adequately
protect Atlantic's employees from arbitrary or disproportionate treatment in the
downsizing effort that will be necessary to achieve the synergy savings. DRAib
at 42-45. The DRA argued, "The Board should require that the labor force
reductions be implemented on a pro-rata basis starting with each company's
pre-merger projected number of employees as of January 1998...A pro-rate
reduction would limit the positions eliminated at Atlantic to 140 out of the
total 408 projected to be eliminated. The other 268 positions would come from
Delmarva." Id. at 42-43. The DRA rejected Petitioners' labeling of its
recommended as a rigid quota system, stating "[w]hile the 140 Atlantic/268
Delmarva ration is mathematically accurate, the Ratepayer Advocate would not
object to minor fluctuations from the actual numerical ratio, if Atlantic could
substantiate the extenuating circumstances that warranted such variation." DRArb
at 20. The DRA found any assurances offered by Petitioners on the record to be
insufficient and argued for the Board to take a proactive stance in its
decisions: "Atlantic's employees will feel more secure knowing that there is a
Board-ordered labor force reduction condition to hold Atlantic to its word.
Accordingly, the Board should affirm the portion of the Initial Decisions
concerning pro-rata labor reductions." DRA Reply to Exceptions at 10.
On the issue of merger impact on jobs, SJG argued, "Petitioners have not
presented a scintilla of proof that the proposed transaction will not adversely
affect employees within the State of New Jersey. One thing is certain about the
proposed transaction and its effect on employment. As a result of the proposed
transaction, employment in New Jersey will be hurt." SJGib at 8. SJG argued that
Staff proposals to cure the Petitioners' deficiencies by imposing job-related
conditions on the merger approval was "out of harmony with N.J.S.A. 48:2-51.1"
and "simply inadequate under the statute" so that the Petition should be denied.
SRGrb at 11-13. Beyond job eliminations, SJG argued that the ALJ's initial
decision did not address the impact of job migration on New Jersey employees or
the state's economy. SJG Exceptions at 5. According to SJG, "[t]his Board is
without any evidence from which it can determine how many employees will be
shifted to Delaware; and the impact of these shifts on the State of New Jersey,
its economy and tax structure and its impact on the ability of ACE to render
safe, adequate and proper service. Without such evidence, the Board cannot
discharge its obligations under N.J.S.A. 48:2-51.1, and thus it should not
approve the transaction." Id. at 11.
Staff argued, "[i]t is evident that AE's workforce has borne the brunt of
job reductions in advance of and in anticipation of the merger" and supported
the DRA's pro-rata formula stating that any level in excess of 140 layoffs at
ACE would constitute an unfair burden on
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ACE and the economy of South Jersey. Staff recommended a condition to the merger
that the Board set the policy that a maximum amount of layoffs for the employees
based in New Jersey should not exceed 140 but tempered its recommendation as
follows: "[h]owever, Staff recognizes that situations may arise where the
140/268 split may not be appropriate, therefore, Staff would consider deviating
from this ratio as long as the Petitioner justifies its actions and that the
circumstances were extenuating." Sib at 13 and 20-21.
The original merger petition reflected a 10 percent reduction in the
combined total workforce of the two companies, some 408 jobs. In agreement with
Staff and the DRA, the ALJ imposed a job loss cap on ACE at 140 employees rather
than the target of 160 or more proposed by Petitioners. The ALJ agreed with the
Staff concerns regarding the split in job reductions between Atlantic and
Delmarva and concluded that the company should be required to allocate the job
losses based on a staff recommendation of 140 for Atlantic and 268 for Delmarva.
This allocation between the two companies would maintain the ratio of estimated
employees at January 1, 1998 levels, i.e., each labor force would maintain its
initial relative importance in the new company, Conectiv.
Based on the latest information available to the Board, the Petitioners
have reported the 122 ACE and 191 Delmarva employees have accepted voluntary
retirement package offers effective upon closing of the merger. These voluntary
labor force reductions in total are close to the numbers of 140 targeted job
reductions for ACE and 268 targeted job reductions for Delmarva. The Board
clearly prefers these voluntary labor force reductions to meet the Petitioners'
target since it limits the disruptive effects of involuntary layoffs which
Petitioners have not implemented to date. The Board encourages the Petitioners
to exert every effort to similarly meet their remaining work force reduction
goals.
The ALJ accepted a Staff recommendation (Id. at 21) that Petitioners are
allowed an opportunity to ask the Board for flexibility regarding the cap if
circumstances dictated a reconsideration of the efficacy of this condition of
the Board's merger approval. Id. at 14. Further, the ALJ also concurred in a
Staff recommendation that for three years following the merger, the Petitioners
would be required to file an annual comprehensive review of merger-related
impacts on New Jersey employees with special emphasis on the positions that have
an interface with customers and/or field operations. Id. at 14. The Board
emphasizes that it shares the specific concern for close monitoring of the
customer services element of the overall labor force reductions.
After review, the Board FINDS that the ALF's recommendations are reasonable
and, therefore, HEREBY ADOPTS the ALJ's findings on labor reductions. However,
in adopting the ALJ's decision in this regard, the Board herein emphasizes that
changes in the cap as it relates to labor reductions resulting from the merger,
will only be allowed by the Board in extraordinary circumstances where failure
to do so would result in irreparable harm to Petitioners. However, the Board
also recognizes that future management decisions related to compliance with the
Board's electric industry restructuring directives may necessitate that ACE take
other actions affecting the fundamental structure of the utility and its
operations that could cause labor force reductions distinct and apart from
merger-related labor force reductions.
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The Board will take causative factors into account as it reviews any future
request by ACE to deviate from the employment goals stated herein by the Board.
Finally, the Board notes that Conectiv Chairman Cosgrove testified that
Petitioners planned to locate a corporate service center in the western part of
Southern New Jersey. TR, Vol. 4 at 5. That facility will be located in Salem
County and will be staffed by up to 300 to 400 Conectiv employees providing a
variety of services. These employees will include individuals now employed by
ACE and Delmarva, as well as employees hired by Conectiv. As a result, under the
140/268 employee ration approved herein, at the end of the transition period
necessary to locate operations in the new Salem County facility, the number of
Conectiv employees in New Jersey will be at least equal to the number of ACE
employees at the time of closing of the merger, less 140 positions.
Impact on Competition:
Market Power Supply
Petitioners did not submit a market power study to address the impact of
the merger on competition and stated that "it is difficult to logically see how
we together could significantly affect market power in our geographic area,
especially since we would control and operate only 6.2% of the capacity in PJM."
Exhibit P-7 at 8-9. Petitioners emphasized that (1) the change in ownership and
control of ACE will not impair the ability of the Board to exercise the same
authority which it now has to prevent anti-competitive behavior and bar cross-
subsidization between utility and non-utility businesses and (2) no party
demonstrated any "legitimate claim of anti-competitive activity" in this
proceeding. Pib at 8, 43 and 50.
As to SJG witness Robertson's testimony, Petitioner argued that his
evaluation of the energy market was seriously flawed in that he failed to give
consideration to other competing firms in either the now-competitive market for
sales of natural gas, or the upcoming competitive market for sales of
electricity and he was unfamiliar with all of the market activities of South
Jersey Gas and its affiliates. Petitioners asserted, "[t]he fact that there are
many competitive retail sellers of natural gas, in addition to affiliates of
Atlantic or South Jersey, undercuts Dr. Robertson's assertion that affiliates of
Atlantic could engage in predatory pricing in the competitive retail gas
market." Pib at 46 and Prb at 27.
The DRA relied on the analysis of its witness Dr. Wakefield who expressed
concern that the combination of load growth and transmission limitations on the
ACE system will result in significant market power by ACE, Conectiv, or both.
DRAib at 71. Dr. Wakefield stated that there was a potential negative effect of
the proposed merger on retail competition in the eastern portion of Atlantic's
service territory due to limited transmission capability. Id. at 70-75. Given
the fact that Petitioners submitted no analysis to the impact of the proposed
merger on retail competition or otherwise established that the merger is in the
public interest with regard to competition, the DRA, therefore, urged the Board
to adopt four pre-conditions to the merger proposed by DRA witness Wakefield
that related to service reliability and transmission system impacts on market
power. DRArb at 31. The DRA also emphasized that the Board "must begin the
process of addressing the system planning problems now in order to
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preclude the Petitioners from having undue influence over market power during
the start of competition." DRA Reply to Exceptions at 8. The ALJ addressed and
adopted the DRA's recommendations in the section of the Initial Decision dealing
with service reliability.
SJG focused on Petitioners' failure to produce any evidence of the effect
of the proposed transaction on competition and the limitations in Petitioners'
testimony that addressed only electric-on-electric competition and argued that
the Board should "make it clear that once it discharges its duty to examine the
competition issues, it may, in fact, unravel the merger at that point." SJGrb at
8, SJG Exceptions at 17 and SJG Reply to Exceptions at 6.
As noted above, Petitioners did not submit a market power study as part of
the record in this proceeding. Staff has recommended that such a market power
study should be submitted by Petitioners as part of the Restructuring
proceeding. In this way, the issues would be fully explored in the company's
segment of the Board's Restructuring case. After review, the Board agrees with
staff's position, and believes that the Board's findings in ACE's restructuring
proceeding can be used to impose conditionis if required to assure competition
and afford all entities a fair opportunity to compete in the service area.
The ALJ essentially found that the interim remedies proposed by SJG's
expert be implemented by the Board at this time and then be fully explored when
the Board develops its generic standards for market structure, affiliate
relations, and conduct in new markets. These interim remedies are set forth at
pages 15-16 of the Initial Decision as follows:
(1) Conectiv, its affiliates, and its subsidiaries shall not sell gas
below cost or in a subsidized bases within the [South Jersey Gas]
service territory;
(2) Conectiv, its affiliates, and its subsidiaries shall not sell
electricity below cost or in a subsidized basis within the [South
Jersey Gas] service territory;
(3) Conectiv, its affiliates, and its subsidiaries shall not sell HVAC,
appliance repair, or other related services below cost or in a
subsidized basis within the [South Jersey Gas] service territory;
(4) Conectiv, its affiliates, and its subsidiaries shall not sell any
service or product, for resale in the [South Jersey Gas] service
territory, below cost or on a subsidized basis to any entity
affiliated with Conectiv;
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(5) Conectiv shall adopt a comprehensive set of safeguards that separate
Conectiv's regulated and non-regulated activities.
With respect to the interim remedies proposed by SJG and adopted by the ALJ, the
Board believes that, subject to the Board's review of and ongoing jurisdiction
over the cost allocation manual and service company agreement as delineated
hereinabove, the interim remedies as proposed by SJG's witness Robertson extend
beyond the current bounds of the Board's appropriate interest in these matters.
Therefore, the Board HEREBY ADOPTS the Initial Decision, but MODIFIES conditions
(1) through (4) above to apply to ACE, the electric public utility operating in
New Jersey, or its successors, and not to Conectiv, its affiliates, and its
subsidiaries at this time. Modification of the Initial Decision in this manner
adequately protects competing utilities by barring the offering of below-cost or
cross-subsidized products and services by the operating utility. The Board
believes that this approach is consistent with existing Board policies
applicable to all regulated utilities operating in New Jersey.
The Board concurs that the established standard that products and services
offered by regulated utilities must not be sold below cost or on a subsidized
basis must be upheld. The Board has found that these safeguards are appropriate
for regulated utilities and has applied this standard to utility operations over
which the Board exercises jurisdiction over rates. However, historically, the
Board has not regulated the rates and pricing of products and services offered
by utility affiliates and subsidiaries. In fact, other utilities currently have
affiliates that offer products and services free from Board rate regulation. The
Board emphasizes that the above modified remedies are interim in nature, and
nothing in this Order will restrict the Board in establishing appropriate future
regulatory policy aimed at addressing impending industry restructuring
encouraging fair competition, and protecting New Jersey ratepayers.
The Board also is examining very closely the potential for each of New
Jersey's electric utilities to exercise market power in the current electric
Restructuring proceedings, including ACE and BPU Docket No. EO97070457. A key
part of the Board's current restructuring investigation includes a significant
analytical component on market power and competition within New Jersey and
within each company's service territory. The Board will examine the focused
audit recommendations of the Board's consultants and their computer modeling
efforts to assure that no utility will be able to exercise market power to the
detriment of the Board's efforts to encourage expanded competition in retail and
wholesale electric markets.
Conectiv Service Company
As part of the merger and attendant restructuring, the new company
Conectiv, will create a service company to jointly provide needed services to
the regulated operating utilities and other unregulated subsidiaries. However,
Petitioners have not as of yet entered into a service company agreement, and
rules for funding Conectiv's proposed service company and cost allocation
procedures have yet to be finalized. In addition, the service company agreement
must be filed with the Securities and Exchange Commission and the Federal Energy
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Regulatory Commission. The Board notes that the Petitioners have agreed to fully
cooperate with the Board when the Board reviews the service company filing and
have agreed to provide the Board with appropriate proofs to protect and maintain
the Board's current regulatory oversight of ACE.
The DRA expressed particular concern over the planned transfer of the
system planning function to an unregulated Conectiv service company and the
potential anti-competitive effect on retail competition of this structure. The
DRA argued that transfer of system planning functions to a Conectiv affiliate in
Delaware that is not regulated by the Board would likely result in reduced
responsiveness to Board concerns and diminished Board influence and jurisdiction
over future system planning in ACE's service territory. DRAib at 72-73.
Staff focused its examination on the DRA's concern regarding cost
allocation methodology proposed by petitioners to properly account for service
company costs, and Petitioners inability at this time to provide a detailed plan
for functions and cost centers prior to completing business and employment
plans. Staff concurred with the DRA's recommendation that ACE should file a cost
allocation manual in addition to any service company agreement and that the
Board should closely examine and rule on the appropriateness of cost allocation
and accounting in the future Restructuring proceeding. Sib at 33.
Petitioners disagreed with the other parties arguments that the service
company structure will hamper Board regulation, and argued that other New Jersey
utilities have successfully employed this kind of structure. Petitioners also
argued that the Board will retain all regulatory authority to access necessary
books and records to ensure proper cost treatments. Further, citing other merger
cases reviewed by the Board, Petitioner argued that the Board's current merger
review as directed by statute should focus on impacts of a change in control of
a regulated utility business, and not on energy business or unregulated
affiliate business activities. Pib at 38-40.
The ALJ concurred with the positions of DRA and Staff and ruled that the
Board should condition its approval of the merger on the submission of a cost
allocation manual and service company agreement for the Board's review and
approval. After review, the Board FINDS that the ALJ's position is reasonable,
and HEREBY ADOPTS the ALJ's position on this issue. The Board believes that a
review of the cost allocation manual and service company agreement will be
critical to a full understanding of the final structure of the merged company,
as well as the functions and services proposed to be performed by the utility as
opposed to the service company and/or unregulated subsidiaries. Moreover, Board
review of the yet-to-be submitted cost allocation manual is critical to the
Board's ongoing responsibilities to ensure that unregulated activities are not
subsidized by the utility or its ratepayers. Accordingly, the Board further
conditions its approval as follows:
1. That the Board shall have full access to all books and records of the
service company on an ongoing basis to the extent necessary to
continually monitor and ensure that there is no cross-subsidization by
the utility of other service company activities and that service
company activities do not otherwise impinge
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upon the utility's ability to provide safe, adequate and proper
service at reasonable rates.
2. That, notwithstanding any federal agency review and approvals,
Petitioners shall submit the service company agreement and cost
allocation manual to the Board for its review and approval, and that
further, Petitioners shall abide by Board decisions related thereto
for purposes of utility rates and services.
Impact on Continued Safe and Adequate Service:
Service Reliability
Throughout the proceeding, ACE has maintained that the company is committed
to providing safe, adequate and proper service in a post-merger environment. In
response to a chief concern of the other parties that planned work force
reductions resulting from the merger would negatively impact the quality of
service delivered by the new Conectiv, ACE emphasized that the savings from the
AEI-Conectiv merger will accrue through "the elimination of redundant and
duplicative positions, and not through cutting back on essential services." Pib
at 24.
In testimony, ACE witness Cosgrove suggested that service quality could
likely increase in a post-merger, competitive environment because the merging
companies will not want to jeopardize current high levels of customer
satisfaction. In addition, he maintained that the merger will bring a "wider
range of people, talents and other resources" to meet customers' needs in terms
of service and reliability. Cosgrove also highlighted the fact that Conectiv may
be in an improved position to more effectively deploy storm repair crews because
experience demonstrates that storms rarely strike the entire South
Jersey-Delmarva peninsula area at once, so from throughout Conectiv's service
territory can be dispatched to problem areas. Id. at 25.
In response to DRA witnesses' concerns that staff reductions could impair
the delivery of customer service and negatively impact low-income customers,
Petitioners' witness Flaherty testified that reductions would target "executive,
managerial and supervisory job titles which were duplicated as a result of the
merger . . . in areas that were unrelated to the direct provision of service or
maintenance of service levels and, therefore, any of those reductions due to
duplication, overlap or redundancy could not result in any deterioration of
service or disruption to service." Pib at 29 and TR, Vol. 8 at 70-71. ACE
emphasized that DRA witnesses' concerns of the future service deterioration are
not supported by the current experience or any fact of the filing and that low
income customers will benefit from rate reductions afforded by merger savings.
Prb at 38 and Pib 27. In its reply brief, Petitioners reiterated, "functions
that have a direct interface with customers and/or filed operations were not
identified as areas where consolidation of operations was to occur." Prb at 38.
Lastly, Petitioners asserted that the change in control of ACE to be
accomplished through the merger will have no impact on the ability of the Board
to continue to regulate New Jersey utility operations and continue to ensure the
provision of safe, adequate and proper service. Id. at 39.
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The DRA argued, among other things, that Petitioners failed to identify
with any level of certainty exactly what operational areas will be affected by
job costs, so that the record contains insufficient evidence to ensure that the
merger will not affect service quality and reliability and will indeed be "in
the public interest." The DRA urged that its set of proposed service quality and
reliability standards be formally adopted because absent the formal adoption of
verifiable standards to monitor service quality and reliability, the merger
cannot be deemed to be in the public interest. DRAib at 46-47. The DRA stated
that as New Jersey moves to restructure its electric industry concurrent with
the merger time frame,
the management of the merged company will be under tremendous pressure
to achieve the projected cost savings . . . with new competitive
pressures and other demands placed on the merged company's finite
resources. This scenario, coupled with the absence of a verifiable
commitment to customer service and service reliability, places the New
Jersey customers of the merged company at great risk.
[DRAib at 48.]
Therefore, the DRA urged that the following requirements be adopted as
pre-conditions to the merger: (1) Petitioners must provide detailed load
forecasts for the southeastern New Jersey coastal area under various future
scenarios; (2) Petitioners must demonstrate through power flow analyses that its
transmission system will be able to adequately serve coastal customers under all
reasonable future scenarios; (3) Petitioners must repeat the analysis annually
during the restructuring implementation phase; and (4) Petitioners must remedy
any deficiencies in the transmission system that could impair the provision of
robust retail competition to coastal New Jersey customers.
The DRA expressed a number of particular concerns regarding the provision
of service to low-income customers in a post-merger environment in which the
number of direct customer-company contacts is reduced as is likely under a plan
in which merger savings for customer service operations accounts for the third
largest number under projected operating and maintenance savings. The DRA sees a
problem with such reduced interactions because the low-income population
especially can benefit from direct company contact. DRAib at 53-56. To address
the problems of low-income customers and assure that the merger will be in the
public interest, the DRA argued that the Board should adopt special rate
discount and arrearage forgiveness programs for the population as a
pre-condition to merger approval and proposed that Conectiv participate in a
statewide fuel fund support program and establish weatherization and education
programs for the benefit of low-income customers. Id. at 57.
SJG maintained that Petitioners failed to sustain their burden of proof
that the merger will not negatively impact their ability to provide safe,
adequate and proper service to New Jersey customers. SJG pointed to Petitioner's
inability to identify the level of employment necessary to ensure continued
provision of service consistent with New Jersey statute. Absent such a
determination of what level of employment is necessary to maintain service
properly and the companion assurance that employment levels in New Jersey will
not be reduced below
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that level, SJG argued that Petitioners cannot demonstrate to the Board that the
merger will be in the public interest. SJGib at 15-16.
Staff acknowledged the DRA's concerns over system reliability and customer
service quality under the plan for Conectiv to acquire of ACE. Staff focused on
DRA witness Wakefield's assessment of potential growth and constraints on ACE's
transmission system. Staff concluded that the merger will not in any way hinder
the Board's ability to effectively regulate New Jersey utility operations but
recommended that the Board adopt certain conditions to ensure that the
reliability concerns raised by the DRA would not become a problem after the
merger. Thus, Staff recommended that the merged utility be required to: (1)
continue to meet all applicable requirements of New Jersey statute and code and
industry standards; (2) abide by all future standards the Board may impose in
conjunction with I/M/O Restructuring the Electric Power Industry in New Jersey
(BPU Dkt. No. EX94120585Y); (3) conform with the reliability conditions proposed
by the DRA; and (4) file annual reports reflecting pre- and post-merger related
figures on performance levels on system reliability and customer service
quality. Sib at 25-26. In its reply brief, Staff recommended that the Board
order staff to meet with ACE to develop service quality and reliability as a
condition to approving the merger.
As to the issue of the Board's continuing ability to address problems of
service reliability and transmission system deficiencies, the Board believes
that N.J.S.A. 48:2-23 and N.J.S.A., 48:3-3 provide the Board with the authority
to ensure that utilities provide safe, adequate and proper service. As part of
that authority, the Board has historically reviewed utility electric generation
and transmission plans to ensure that sufficient capacity exists. As we move
nationally towards electric restructuring, both the reliability standards
currently in place and the relationship between federal and state jurisdiction
over transmission planning are being examined. The federal Department of Energy
(DOE), the FERC and the North American Electric Reliability Council (NERC) all
have ongoing reviews to develop a national regulatory structure that ensures
reliability in a competitive marketplace. Further, the FERC recently approved
the creation of an independent system operator (ISO) to oversee the operation of
the Pennsylvania-New Jersey-Maryland(PJM) power pool generation and transmission
system. While the DOE, the FERC and the NERC study national and regional
transmission and reliability concerns, the Board in its Restructuring proceeding
is also examining more local transmission system concerns that may impact
competition within local markets.
The Board has been working and will continue to work with the above-noted
entities to ensure a sound regulatory structure in a post-restructuring
environment. While the review of electric reliability is taking place, the Board
continues to retain the authority to ensure that utilities provide safe,
adequate and proper service. This authority includes the ability to require that
a regulated utility construct any transmission system upgrades deemed necessary.
Subsequent to the proposed merger under consideration herein, the Board will
maintain all existing jurisdiction. Therefore, this merger will in no way
compromise the Board's existing ability to ensure service reliability in the
affected service territory.
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In terms of service reliability, the ALJ concluded that the company should
be required to meet all existing standards and any new standards derived from
the Restructuring case, and that Petitioners should file appropriate annual
reports to verify that the merger has not impaired service reliability. In doing
so, the ALJ adopted the above-referenced DRA and Staff conditions relating to
system reliability and customer service quality. Specifically, in his Initial
Decision, the ALJ incorporated the following post-merger requirements as a
condition of approval:
(1) that Atlantic continue to meet the requirement of current law;
(2) that Atlantic abide by all future applicable standards and those that
the Board may impose as a result of the Board's proceeding in the
Restructuring docket; and
(3) that Atlantic file annual reports which reflect annual figures on pre-
and post-merger-related performance levels affecting systems
reliability and customer service quality.
[Initial Decision at 19.]
Finally, regarding the issue of low-income initiatives raised by the DRA, the
ALJ did not support dealing with this concern as a condition for approving the
merger and indicated that they would be dealt with more appropriately in a base
rate proceeding or in the Board's ongoing Restructuring proceeding. In making
this decision, the ALJ acknowledged that the merger will bring certain benefits,
such as reduced rates, that will benefit the low-income population. However, the
ALJ was troubled by Petitioners' expressed intent to reduce or discontinue
certain customer services now available in Atlantic City, and the Bridgeton and
Hammonton areas. The ALJ recommended to the Board that it condition approval of
the merger on ACE "providing a full study regarding continuation of walk-in
customers service facilities in the Atlantic City, Bridgeton and Hammonton areas
of its service territory," and also recommended that "[u]ntil such a study is
undertaken, customer service centers should remain open to service the needs of
the utility's ratepayers." Initial Decision at 24-25.
After review, the Board HEREBY ADOPTS the ALJ's findings relative to system
reliability and customer service as discussed above, including the directive to
continue the operations of customer service centers in Atlantic City, Bridgeton
and Hammonton, pending submission by ACE of a study regarding the continuation
of those centers and pending the conclusion of the Board's review of said study.
The Board DIRECTS Staff to meet the Petitioners for the purpose of determining
the parameters of the study regarding ACE's Atlantic City, Bridgeton and
Hammonton service centers.
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Summary:
The Board HEREBY ADOPTS in part and HEREBY MODIFIES in the part of the
Initial Decision. As stated above, the Board is modifying the Initial Decision
wto reflect certain changes to the conditions set forth by the ALJ at pages 15-
16 of the Initial Decision. In all other respects, the Board is adopting the
Initial Decision as if fully set forth at length herein. As stated above, the
Board will not permit labor force reductions resulting from the merger in excess
of the ratio approved by the ALJ except in extraordinary circumstances where
there is a showing by Petitioners that these changed circumstances would result
in irreparable harm to Petitioners.
By this Order, the Board FINDS the merger of AEI with Delmarva to be in the
public interest and:
(1) APPROVES the transfer by ACE on its books and records all of the issued and
outstanding shares of its Common Stock; and
(2) APPROVES the acquisition by Conectiv of control of ACE.
In approving this merger, the Board retains all of its authority and ability to
regulate ACE or its successor electric public utility and its ability to ensure
the provision of safe, adequate and proper service to all ratepayers in the
affected service territory.
IMPLEMENTATION
The Board DIRECTS that the rate reduction associated with the merger
savings be implemented as follows:
(1) The merger driven rate reduction shall be applied on an equal percentage
basis across all rate classes. Petitioners proposed reducing rates using
the allocation percentages it employed in its 1991 rate case; however, the
Board FINDS it is more appropriate to implement the reduction across all
classes by a uniform percentage of revenues.
(2) The decrease shall be implemented by ACE in two steps:
(a) First, effective January 1, 1998, ACE will decrease rates by $5.025
million, an amount equal to the Post Retirement Benefits other than
Pensions (PBOP) increase authorized by the Board in Docket No.
ER97080562 on December 30, 1997; and
(b) Second, ACE will decrease its rate by $9.888 million effective on the
closing date of the merger (assuming a closing in March 1998) which
amount reflects the benefits to ratepayers of accelerating the merger
savings to offset the PBOP increase.
-19-
<PAGE>
Effective January 1, 1999, ACE's rates shall reflect the full annual savings of
$15.75 million through implementation of a small downward adjustment in rates
equivalent to the value of the accelerated reduction in 1998.
This Order is issued subject to the following requirements:
(1) This Order shall not affect nor in any way limit the exercise of the
authority of the Board or the State of New Jersey in any future
petition, or in any proceeding regarding rates, franchises, services,
financing, accounting, capitalization, depreciation, or any other
matter affecting Petitioners.
(2) This Order shall not be construed as directly or indirectly fixing for
any purpose whatsoever any value of tangible or intangible assets now
owned or hereafter owned by Petitioners.
(3) Consummation of the above-referenced transactions must take place no
later than ninety (90) days from the date of this Order unless
otherwise extended by the Board.
(4) Approval of the transactions herein shall not constitute a
determination, nor in any way limit, any future determination of the
Board, as to the treatment of indebtedness, capital structure and
interest expense for rate making purposes in any rate proceeding under
state or federal law.
DATED: 1-7-98
BOARD OF PUBLIC UTILITIES
BY:
/s/ Herbert H. Tate
HERBERT H. TATE
PRESIDENT
/s/ Carmen J. Armenti
CARMEN J. ARMENTI
COMMISSIONER
ATTEST: I HEREBY CERTIFY that the within
document is a true copy of the original in the
files of the Board of Public Utilities.
/s/ James A Nappi______
JAMES A. NAPPI
SECRETARY Docket No. EM97020103
-20-
<PAGE>
I/M/O The Petition of Atlantic City Electric Co. and Conectiv, Inc.
for Approval of a Change in Ownership and Control
Docket No. EM97020103
Service List
<TABLE>
<CAPTION>
<S> <C> <C>
Robert Chilton, Director Michael Ambrosia, Louis M. Walters,
BPU Division of Energy Elective Director VP - Treas. & Asst. Sec.
2 Gateway Center BPU Atlantic City Electric Co.
Newark, NJ 07102 2 Gateway Center 6801 Black Horse Pike
Newark, NJ 07102 Egg Harbor Twp., NJ 08234
James A. Nappi, Secretary Ami Morita, Esq. David A. Kindlick,
BPU Div. of the Ratepayer Adv. VP - Treas. & Asst. Sec.
2 Gateway Center 31 Clinton Street - 11th Flr. Atlantic City Electric Co.
Newark, NJ 07102 Newark, NJ 07101 6801 Black Horse Pike
Egg Harbor Twp., NJ 08234
George Riepe, Asst. Dir. Howard E. Cosgrove Ira C. Megdal, Esq.
BPU Division of Energy Chairman, President & Ceo Davis Reberkenny &
2 Gateway Center Delmarva Power & Light Co. Abramowitz, P.C.
Newark, NJ 07102 800 King Street 499 Cooper Landing Rd
Wilmington, DE 19899 P.O. Box 5459
Cherry Hill, NJ 08002
Dr. Fred S. Grygiel Gregory Eisenstark, Esq. Michael J. Barron, Sr. VP
Chief Economist Div. of the Ratepayer Adv. Atlantic City Electric Co.
BPU 31 Clinton Street - 11th Flr. 6801 Black Horse Pike
Gateway Center Newark, NJ 07101 Egg Harbor Twp., NJ 08234
Newark, NJ 07102
Rene Demuynck Richard A. Wakefield Cindy L. Jacobs, Manager
BPU Division of Energy CSA Energy Consultants Rates and Tariffs
2 Gateway Center 1901 N. Ft. Myer Dr - 503 South Jersey Gas Company
Newark, NJ 07102 Arlington, VA 22209 One South Jersey Plaza
Folsom, NJ 08037
Edward Beslow Mona Mosser Rickey Joe
Chief Legal Specialist BPU Division of Energy BPU Division of Energy
BPU 2 Gateway Center 2 Gateway Center
2 Gateway Center Newark, NJ 07102 Newark, NJ 07102
Newark, NJ 07102
Alice Bator, Bur. Chief Robert Glowacki Mark C. Beyer
BPU Division of Energy BPU Division of Energy Office of the Economist
2 Gateway Center 2 Gateway Center BPU
Newark, NJ 07102 Newark, NJ 07102 2 Gateway Center
Newark, NJ 07102
Peter Yochum, Bur. Chief Naji Ugoji
BPU Division of Energy BPU Division of Energy
2 Gateway Center 2 Gateway Center
Newark, NJ 07102 Newark, NJ 07102
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Joseph O'Hara Janet Simon Gary L. Hanson, Controller
BPU Division of Energy BPU Division of Energy Atlantic City Electric Co.
2 Gateway Center 2 Gateway Center 6801 Black Horse Pike
Newark, NJ 07101 Newark, NJ 07101 Egg Harbor Twp., NJ 08234
Michael Kammer Elise Goldblat, Dag Henry Levari, Sr. VP
BPU Division of Energy Dept. of Law & Public Safety Atlantic City Electric Co.
2 Gateway Center 124 Halsey Street, 5th Flr. 6801 Black Horse Pike
Newark, NJ 07101 Newark, NJ 07101 Egg Harbor Twp., NJ 08234
Blossom A. Peretz, Dir. Eric Andrews, Dag James J. Lees
Div. of the Ratepayer Adv. Dept. of Law & Public Safety South Jersey Gas Company
31 Clinton Street - 11th Flr. 124 Halsey Street, 5th Flr. One South Jersey Plaza
Newark, NJ 07102 Newark, NJ 07101 Folsom, NJ 08037
Gary Epler, Esq. David Peterson Paul S. Gerritsen, VP
Div. of the Ratepayer Adv. Chesapeake Regulatory Corporate Services
31 Clinton Street - 11th Flr. Consultants Delmarva Power & Light Co.
Newark, NJ 07101 2880 Dunkirk Way, Ste 303 800 King Street
Dunkirk, MD 20754 Wilmington, DE 19899
J. Mack Wathen, Mgr. Pricing Joseph Quirolo, Dag
Delmarva Power & Light Co. Dept. of Law & Public Safety
800 King Street 124 Halsey Street, 5th Flr.
Wilmington, DE 19899 Newark, NJ 07101
Christine Lin Thomas J. Flaherty
BPU Division of Energy Deloitte & Touche
2 Gateway Center 2200 Ross Avenue, Ste 1600
Newark, NJ 07102 Dallas, TX 75201
Julie Huff Reynold Nebel, Jr., Esq.
BPU Division of Energy LeBoeuf, Lamb, Greene &
2 Gateway Center MacRae
Newark, NJ 07102 One Riverfront Plaza
Newark, NJ 07102
Stephen B. Cenzer, Esq. Jacqueline Galka, Bur. Chf.
LeBoeuf, Lamb, Greene & BPU Division of Energy
MacRae 2 Gateway Center
One Riverfront Plaza Newark, NJ 07102
Newark, NJ 07102
Kurt Lewandowski, Esq. Jackie O'Grady
Div. of the Ratepayer Adv. BPU Division of Energy
31 Clinton Street - 11th Flr. 2 Gateway Center
Newark, NJ 07101 Newark, NJ 07102
Mark L. Mucci, Esq. James E. Franklin, II, Esq.
LeBoeuf, Lamb, Greene & Atlantic City Electric Co.
MacRae 6801 Black Horse Pike
One Riverfront Plaza Egg Harbor Twp., NJ 08234
Newark, NJ 07102
</TABLE>
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UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20555-0001
December 2, 1997
John H. O'Neill, Jr., Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, NW
Washington, D.C. 20037
SUBJECT: ENVIRONMENTAL ASSESSMENT AND FINDING OF NO SIGNIFICANT
IMPACT AND NOTICE OF CONSIDERATION OF APPROVAL OF APPLICATION
REGARDING PROPOSED RESTRUCTURING CONCERNING THE INDIRECT TRANSFER OF
CONTROL OF ATLANTIC CITY ELECTRIC COMPANY'S (ACE) AND DELMARVA POWER
AND LIGHT COMPANY'S (DP&L) INTERESTS IN PEACH BOTTOM ATOMIC POWER
STATION, UNITS 2 AND 3 (TAC NOS. M98682 AND M98683)
Dear Mr. O'Neill:
Enclosed is a copy of the Environmental Assessment and Finding of No Significant
Impact and a Notice of Consideration of Approval of Application Regarding
Proposed Corporate Restructuring concerning the indirect transfer of control of
ACE's and DP&L's possessory interests in the Peach Bottom Atomic Power Station,
Units 2 and 3, licenses that would result from the restructuring. The assessment
and notice relate to an application filed by ACE and DP&L under cover of your
letter dated April 30, 1997, for consent under 10 CFR 50.80 regarding the
proposed merger of Atlantic Energy, Inc. (the parent holding company of ACE) and
DP&L, resulting in the formation of a new holding company, Conectiv, Inc.
The assessment and notice are being forwarded to the Office of the Federal
Register for publication.
Sincerely,
/s/ John F. Stolz for
L. Mark Padovan, Project Manager
Project Directorate I-2
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
Docket Nos. 50-277 and 50-278
Enclosures: 1. Environmental Assessment
2. Notice of Corporate Restructuring
cc w/encls: See next page
<PAGE>
PECO Energy Company Peach Bottom Atomic Power Station,
Units 2 and 3
cc:
<TABLE>
<CAPTION>
<S> <C>
J. W. Durham, Sr., Esquire Chief-Division of Nuclear Safety
Sr. V.P. & General Counsel PA Dept. of Environmental
PECO Energy Company Resources
2301 Market Street, S26-1 P.O. Box 8469
Philadelphia, PA 19101 Harrisburg, PA 17105-8469
PECO Energy Company Board of Supervisors
ATTN: Mr. T. N. Mitchell, Peach Bottom Township
Vice President R.D. #1
Peach Bottom Atomic Power Station Delta, PA 17314
1848 Lay Road
Delta, PA 17314 Public Service Commission of
Maryland
PECO Energy Company Engineering Division
ATTN: Regulatory Engineer, A4-5S Chief Engineer
Peach Bottom Atomic Power Station 6 St. Paul Centre
1848 Lay Road Baltimore, MD 21202-6806
Delta, PA 17314
Mr. Richard McLean
Resident Inspector Power Plant and Environmental
U.S. Nuclear Regulatory Review Division
Commission Department of Natural Resources
Peach Bottom Atomic Power Station B-3, Tawes State Office Building
P.O. Box 399 Annapolis, MD 21401
Delta, PA 17314
Dr. Judith Johnsrud
Regional Administrator, Region I National Energy Committee
U.S. Nuclear Regulatory Sierra Club
Commission 433 Orlando Avenue
475 Allendale Road State College, PA 16803
King of Prussia, PA 19406
Manager-Business & Co-owner
Mr. Roland Fletcher Affairs
Department of Environment Public Service Electric and Gas
201 West Preston Street Company
Baltimore, MD 21201 P.O. Box 236
Hancocks Bridge, NJ 08038-0236
A.F. Kirby, III
External Operations - Nuclear Manager-Peach Bottom Licensing
Delmarva Power & Light Company PECO Energy Company
P.O. Box 231 Nuclear Group Headquarters
Wilmington, DE 19899 Correspondence Control Desk
P.O. Box No. 195
PECO Energy Company Wayne, PA 19087-0195
Plant Manager
Peach Bottom Atomic Power Station James E. Franklin, II, Esq.
1848 Lay Road Sr. V.P. and General Counsel
Delta, PA 17314 Atlantic City Electric Company
6801 Blackhorse Pike
Egg Harbor Township, NJ 08234-4130
</TABLE>
<PAGE>
PECO Energy Company Peach Bottom Atomic Power Station,
Units 2 and 3
<TABLE>
<CAPTION>
<S> <C>
Mr. George A. Hunger, Jr. Dale G. Stoodley, Esq.
Director-Licensing, MC 62A-1 V.P. and General Counsel
PECO Energy Company Delmarva Power & Light Company
Nuclear Group Headquarters 800 King Street
Correspondence Control Desk P.O. Box 231
P.O. Box No. 195 Wilmington, DE 19899
Wayne, PA 19087-0195
Mr. Leon R. Eliason
Chief Nuclear Officer &
President-Nuclear Business Unit
Public Service Electric and Gas
Company
Post Office Box 236
Hancocks Bridge, NJ 08038
Mr. Roy Denmark
Environmental Review Coordinator
Environmental Protection Agency
841 Chestnut Street
Philadelphia, PA 19107
</TABLE>
-2-
<PAGE>
UNITED STATES NUCLEAR REGULATORY COMMISSION
PECO ENERGY COMPANY
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
DELMARVA POWER AND LIGHT COMPANY
ATLANTIC CITY ELECTRIC COMPANY
PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3
DOCKET NOS. 50-277 AND 50-278
ENVIRONMENTAL ASSESSMENT AND FINDING OF
NO SIGNIFICANT IMPACT
The U.S Nuclear Regulatory Commission (the Commission) is considering
approval, by issuance of an order, under 10 CFR 50.80, of the indirect transfer
of control of the interests in the Peach Bottom Atomic Power Station (PBAPS),
Units 2 and 3, licenses to the extent effected by a proposed merger of Atlantic
Energy, Inc. (the parent holding company of Atlantic City Electric Company
(ACE)) and Delmarva Power & Light Company (DP&L), resulting in the formation of
a new holding company, Conectiv, Inc. ACE is co-holder of Facility Operating
Licenses Nos. DPR-44 and DPR-56, along with Public Service Electric and Gas
Company (PSE&G), PECO Energy Company (PECO), and DP&L, issued for operation of
the PBAPS, Units 2 and 3, located in Peach Bottom Township, York County,
Pennsylvania.
ENVIRONMENTAL ASSESSMENT
Identification of the Proposed Action:
The proposed action would consent to the indirect transfer of the interests
in PBAPS to the extent effected by the
<PAGE>
proposed merger of Atlantic Energy, Inc. and DP&L, resulting in the formation of
a new holding company, Conectiv, Inc., under which ACE and DP&L would become
wholly owned subsidiaries. No direct transfer of the licenses as held by ACE and
DP&L would occur. PECO, the licensed operator of the facilities, and PSE&G are
not involved in the merger and restructuring.
The proposed action is in accordance with an application filed by ACE and
DP&L under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of
Shaw, Pittman, Potts & Trowbridge, Counsel for ACE and DP&L.
The Need for the Proposed Action:
The proposed action is required to enable the proposed merger and
restructuring of Atlantic Energy, Inc., ACE and DP&L to occur to the extent
indirect transfers of control of the licenses will be effected by the merger and
restructuring.
Environmental Impacts of the Proposed Action:
The Commission has completed its evaluation of the proposed action and
concludes that there will be no physical or operational changes as a result of
the proposed action. The corporate merger and restructuring will not affect the
qualifications or organizational affiliation of the personnel who operate the
facilities, as PECO, not involved in the merger, will continue to be responsible
for the operation of PBAPS, Units 2 and 3.
The change will not increase the probability or consequences of accidents,
no changes are being made in the types of any effluents that may be released
offsite, and there is no
-2-
<PAGE>
significant increase in the allowable individual or cumulative occupational
radiation exposure. Accordingly, the Commission concludes that there are no
significant radiological environmental impacts associated with the proposed
action.
With regard to potential nonradiological impacts, the proposed action will
not affect nonradiological plant effluents and will have no other environmental
impact. Accordingly, the Commission concludes that there are no significant
nonradiological environmental impacts associated with the proposed action.
Alternatives to the Proposed Action:
Since the Commission has concluded there is no measurable environmental
impact associated with the proposed action, any alternatives with equal or
greater environmental impact need not be evaluated. As an alternative to the
proposed action, the staff considered denial of the proposed action. Denial of
the application would result in no change in current environmental impacts. The
environmental impacts of the proposed action and the alternative action are
similar.
Alternative Use of Resources:
This action does not involve the use of any resources not previously
considered in the "Final Environmental Statement Related to the Operation of
Peach Bottom Atomic Power Station, Units 2 and 3," April 1973.
Agencies and Persons Consulted:
In accordance with its stated policy, on September 15, 1997, the staff
consulted with the Pennsylvania State official,
-3-
<PAGE>
Mr. S. Maingi of the State of Pennsylvania, Bureau of Radiation Protection,
regarding the environmental impact of the proposed action. The State official
had no comments.
FINDING OF NO SIGNIFICANT IMPACT
Based upon the environmental assessment, the Commission concludes that the
proposed action will not have a significant effect on the quality of the human
environment. Accordingly, the Commission has determined not to prepare an
environmental impact statement for the proposed action.
For further details with respect to the proposed action, see the
application filed by ACE and DP&L under cover of a letter dated April 30, 1997,
as supplemented November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman,
Potts & Trowbridge (Counsel for ACE and DP&L), which is available for public
inspection at the Commission's Public Document Room, the Gelman Building, 2120 L
Street, NW., Washington, DC, and at the local public document room located at
the Government Publications Section, State Library of Pennsylvania, (REGIONAL
DEPOSITORY) Education Building, Walnut Street and Commonwealth Avenue, Box 1601,
Harrisburg, Pennsylvania.
Dated at Rockville, Maryland, this 2nd day of December, 1997.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/ John F. Stolz
John F. Stolz, Director
Project Directorate I-2
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
-4-
<PAGE>
UNITED STATES NUCLEAR REGULATORY COMMISSION
PECO ENERGY COMPANY
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
DELMARVA POWER AND LIGHT COMPANY
ATLANTIC CITY ELECTRIC COMPANY
PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3
DOCKET NOS. 50-277 AND 50-278
NOTICE OF CONSIDERATION OF APPROVAL OF APPLICATION
REGARDING PROPOSED CORPORATE RESTRUCTURING
Notice is hereby given that the U.S. Nuclear Regulatory Commission (the
Commission) is considering approval, by issuance of an order, under 10 CFR
50.80, of the indirect transfer of control of Atlantic City Electric Company's
(ACE) and Delmarva Power and Light Company's (DP&L) interests in the Peach
Bottom Atomic Power Station (PBAPS), Units 2 and 3, licenses to the extent
effected by a proposed merger and restructuring of Atlantic Energy, Inc. (the
parent holding company of ACE) and DP&L, resulting in the formation of a new
holding company, Conectiv, Inc., under which ACE and DP&L would become wholly
owned subsidiaries. Atlantic Energy, Inc., will cease to exist. PECO Energy
Company, Public Service Electric and Gas Company (PSE&G), DP&L, and ACE are
co-holders of Facility Operating Licenses Nos. DPR-44 and DPR-56, issued for
operation of PBAPS, Units 2 and 3, located in Peach Bottom Township, York
County, Pennsylvania. PECO, the licensed operator of the facilities, and PSE&G
are not involved in the proposed merger and restructuring. An application filed
by ACE and DP&L under cover of a letter
<PAGE>
dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts &
Trowbridge, Counsel for ACE and DP&L, informed the Commission of the proposed
merger and corporate restructuring.
According to the proposed plan, there will be no significant change in
ownership, management, or sources of funds for operation, maintenance, or
decommissioning of PBAPS, Units 2 and 3, due to the corporate restructuring. ACE
and DP&L will continue to hold the licenses, and no direct transfer of the
licenses will occur.
Pursuant to 10 CFR 50.80, the Commission may approve the transfer of
control of a license after appropriate notice to interested persons. Such
approval is contingent upon the Commission's determination that the holder of
the license following the transfer is qualified to hold the license and that the
transfer is otherwise consistent with applicable provisions of law, regulations,
and orders of the Commission.
For further details with respect to the proposed action, see the
application filed by ACE and DP&L under cover of a letter dated April 30, 1997,
as supplemented November 7, 1997, from John H. O'Neill, Jr., Shaw, Pittman,
Potts & Trowbridge (counsel for ACE and DP&L), which is available for public
inspection at the Commission's Public Document Room, The Gelman Building, 2120 L
Street, NW., Washington, DC, and at the local public document room located at
the Government Publications Section, State Library of Pennsylvania, (REGIONAL
DEPOSITORY)
-2-
<PAGE>
Education Building, Walnut Street and Commonwealth Avenue, Box 1601, Harrisburg,
Pennsylvania.
Dated at Rockville, Maryland, this 2nd day of December, 1997.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/ John F. Stolz
John F. Stolz, Director
Project Directorate I-2
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
-3-
UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20555-0001
December 18, 1997
John H. O'Neill, Jr., Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, NW
Washington, DC 20037
SUBJECT: ORDER APPROVING APPLICATION REGARDING THE MERGER
AGREEMENT BETWEEN ATLANTIC ENERGY INC., PARENT OF
ATLANTIC CITY ELECTRIC COMPANY (ACE) AND DELMARVA POWER
AND LIGHT COMPANY (DP&L) AFFECTING LICENSE NO. NPF-57,
HOPE CREEK GENERATING STATION (TAC NO. M98618)
Dear Mr. O'Neill:
The enclosed Order responds to the application for approval under 10 CFR 50.80,
submitted under cover of your letter of April 30, 1997, concerning the proposed
merger of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L,
which would result in the formation of a new holding company, Conectiv, Inc.,
under which ACE and DP&L would become wholly owned subsidiaries. The staff's
safety evaluation in support of the Order is also enclosed.
The Order is being forwarded to the Office of the Federal Register for
publication.
Sincerely,
/s/ John F. Stolz for
Brenda L. Mozafari, Project Manager
Project Directorate I-2
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
Docket No. 50-354
Enclosures: 1. Order
2. Safety Evaluation
cc w/encls: See next page
<PAGE>
Public Service Electric & Gas Hope Creek Generating Station
Company
cc:
Jeffrie J. Keenan, Esquire Manager - Joint Generation
Nuclear Business Unit - N21 Atlantic Energy
P.O. Box 236 6801 Black Horse Pike
Hancocks Bridge, NJ 08038 Pleasantville, NJ 08232-4130
Hope Creek Resident Inspector Richard Hartung
U.S. Nuclear Regulatory Commission Electric Service Evaluation
Drawer 0509 Board of Regulatory Commissioners
Hancocks Bridge, NJ 08038 2 Gateway Center, Tenth Floor
Newark, NJ 07102
Mr. Louis Storz
Sr. Vice President - Nuclear Lower Alloways Creek Township
Operations c/o Mary O. Henderson, Clerk
Nuclear Department Municipal Building,
P.O. Box 236 P.O. Box 157
Hancocks Bridge, NJ 08038 Hancocks Bridge, NJ 08038
General Manager - Mr. Elbert Simpson
Hope Creek Operations Senior Vice President-
Hope Creek Generating Station Nuclear Engineering
P.O. Box 236 Nuclear Department
Hancocks Bridge, NJ 08038 P.O. Box 236
Hancocks Bridge, NJ 08038
Manager - Licensing and Regulation
Nuclear Business Unit - N21 Mr. Leon R. Eliason
P.O. Box 236 Chief Nuclear Officer & President-
Hancocks Bridge, NJ 08038 Nuclear Business Unit
Public Service Electric and
Regional Administrator, Region I Gas Company
U.S. Nuclear Regulatory Commission Post Office Box 236
475 Allendale Road Hancocks Bridge, NJ 08038
King of Prussia, PA 19406
Dr. Jill Lipoti, Asst. Director
Radiation Protection Programs
NJ Department of Environmental
Protection and Energy
CN 415
Trenton, NJ 08625-0415
James E. Franklin, II, Esq.
Sr. V.P. and General Counsel
Atlantic City Electric Company
6801 Blackhorse Pike
Egg Harbor Township, NJ 08234-4130
-2-
<PAGE>
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
ATLANTIC CITY ELECTRIC COMPANY ) Docket No. 50-354
)
)
(Hope Creek Generating Station) )
ORDER APPROVING APPLICATION REGARDING
MERGER AGREEMENT BETWEEN
ATLANTIC ENERGY, INC. (PARENT OF ATLANTIC CITY ELECTRIC COMPANY)
AND
DELMARVA POWER AND LIGHT COMPANY
I.
Atlantic City Electric Company (ACE) and Public Service Electric and Gas
Company (PSE&G) are co-holders of Facility Operating License No. NPF-57, issued
by the U.S. Nuclear Regulatory Commission (NRC or Commission) pursuant to Part
50 of Title 10 of the Code of Federal Relations (10 CFR Part 50) for operation
of the Hope Creek Generating Station (Hope Creek). Under the license, PSE&G is
authorized to possess, use, and operate the facility, and ACE is authorized to
possess the facility. Hope Creek is located in Salem County, New Jersey.
<PAGE>
II.
By application filed by ACE under cover of a letter dated April 30, 1997,
from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, attorney for
ACE, supplemented by letter dated November 7, 1997, ACE requested the
Commission's approval, pursuant to 10 CFR 50.80, of the indirect transfer of the
license, to the extent held by ACE, that would result from the consummation of a
merger agreement between Atlantic Energy, Inc. (parent of ACE) and Delmarva
Power and Light Company (DP&L). Under the merger agreement, Atlantic Energy,
Inc. and DP&L would form a new holding company, Conectiv, Inc., under which ACE
and DP&L would become wholly owned subsidiaries. No direct transfer of the
license would occur. PSE&G is not involved in the merger.
A Notice of Consideration of Application Regarding Proposed Corporate
Restructuring was published in the Federal Register on December 8, 1997 (62 FR
64600), and an Environmental Assessment and Finding of No Significant Impact was
published in the Federal Register on December 8, 1997 (62 FR 64603).
Under 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through transfer of control of the license, unless the Commission
gives its consent in writing. Upon review of the information submitted in the
letter and application of April 30, 1997, and supplement dated November 7, 1997,
the NRC staff has determined that the proposed merger of Atlantic Energy, Inc.
and DP&L will not affect the qualifications of ACE as a holder of the license,
and that the transfer of control of the license for Hope Creek, to the extent
effected by
-2-
<PAGE>
the proposed merger, is otherwise consistent with applicable provisions of law,
regulations, and orders issued by the Commission, subject to the conditions
stated herein. These findings are supported by a safety evaluation dated
December 18, 1997.
III.
Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic
Energy Act of 1954, as amended, 42 USC ss.ss. 2201(b), 2201(i), 2201(o), and
2234, and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the
application regarding the proposed merger of Atlantic Energy, Inc. and DP&L
subject to the following conditions: (1) ACE shall provide the Director of the
Office of Nuclear Reactor Regulation a copy of any application, at the time it
is filed, to transfer (excluding grants of security interests or liens) from ACE
to its proposed parent or to any other affiliated company, facilities for the
production, transmission, or distribution of electric energy having a
depreciated book value exceeding 10 percent (10%) of ACE's consolidated net
utility plant, as recorded on ACE's books of account; and (2) should the merger
of Atlantic Energy, Inc. and DP&L, as described herein, not be completed by
December 31, 1998, this Order shall become null and void provided, however, on
application and for good cause shown, such date is extended.
This Order is effective upon issuance.
-3-
<PAGE>
IV.
By January 23, 1998, any person adversely affected by this Order may file a
request for a hearing with respect to issuance of the Order. Any person
requesting a hearing shall set forth with particularity how that interest is
adversely affected by this Order and shall address the criteria set forth in 10
CFR 2.714(d).
If a hearing is to be held, the Commission will issue an order designating
the time and place of such hearing.
The issue to be considered at any such hearing shall be whether this Order
should be sustained.
Any request for a hearing must be filed with the Secretary of the
Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001,
Attention: Rulemakings and Adjudications Staff, or may be delivered to the
Commission's Public Document Room, The Gelman Building, 2120 L Street, NW.,
Washington, DC by the above date. Copies should be also sent to the Office of
the General Counsel and to the Director, Office of Nuclear Reactor Regulation,
U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, and to John H.
O'Neill, Jr., Shaw, Pittman, Potts & Trowbridge, 2300 N Street, NW., Washington,
DC, 20037, attorney for ACE.
For further details with respect to this action, see the application filed
by ACE under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr.,
of Shaw, Pittman, Potts & Trowbridge, as supplemented by a letter dated November
7, 1997, and the safety evaluation dated December 18, 1997, which are
-4-
<PAGE>
available for public inspection at the Commission's Public Document Room, The
Gelman Building, 2120 L Street, NW., Washington, DC, and at the local public
document room at the Pennsville Public Library, 190 South Broadway, Pennsville,
NJ.
Dated at Rockville, Maryland, this 18th day of December 1997.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/Samuel J. Collins
Samuel J. Collins, Director
Office of Nuclear Reactor Regulation
-5-
<PAGE>
UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20555-0001
SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION
PROPOSED MERGER OF ATLANTIC ENERGY, INC. AND
DELMARVA POWER AND LIGHT COMPANY
HOPE CREEK GENERATING STATION
DOCKET NO. 50-354
1.0 BACKGROUND
Under cover of a letter dated April 30, 1997, as supplemented by a letter dated
November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts &
Trowbridge, Atlantic City Electric Company (ACE) submitted an application for
approval under 10 CFR 50.80, in connection with a proposed merger between
Atlantic Energy, Inc. (AEI), which is the parent holding company of ACE, and
Delmarva Power & Light Company (DP&L). A new holding company will result from
this merger named Conectiv, Inc. (Conectiv). Under the merger agreement, all of
AEI's subsidiaries (including ACE) and DP&L will become wholly owned
subsidiaries of Conectiv, and AEI will cease to exist. Current holders of AEI
and DP&L common stock would become holders of Conectiv common stock pursuant to
a formula stipulated in the merger agreement.
ACE is a 5-percent owner of the Hope Creek Generating Station (HCGS), a
single-unit facility. Public Service Electric & Gas Company (PSE&G) owns the
remaining 95 percent. The proposed merger does not involve PSE&G, which is the
licensed operator of HCGS. The proposed merger will result in the indirect
transfer of control of the interest held by ACE (but not PSE&G's interest) in
HCGS's operating license to the proposed new holding company, Conectiv.
Accordingly, under the provisions of 10 CFR 50.80, Commission approval is
required.
In the application for approval dated April 30, 1997, the applicant states on
page 10:
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
<PAGE>
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.
2.0 FINANCIAL AND TECHNICAL QUALIFICATIONS
On the basis of information submitted in the application, the staff finds that
there will be no near-term substantive change in the financial ability of ACE to
contribute appropriately to the operations and decommissioning of HCGS as a
result of the proposed merger. ACE is, and would remain after the merger, an
"electric utility" as defined in 10 CFR 50.2, engaged in the generation and
distribution of electricity, the cost of which is recovered through rates
established by the New Jersey Board of Public Utilities and the Federal Energy
Regulatory Commission. Thus, pursuant to 10 CFR 50.33(f), ACE, as an electric
utility, is exempt from further financial qualifications review.
However, in view of the NRC's concern that restructuring can lead to a
diminution of assets necessary for the safe operation and decommissioning of a
licensee's nuclear power plant, the NRC has sought to obtain commitments from
its licensees that initiate restructuring actions not to transfer significant
assets from the licensee without notifying the NRC. ACE has agreed:
to provide the Director of the Office of Nuclear Reactor Regulation a copy
of any application, at the time it is filed, to transfer (excluding grants
of a security interest or liens) from ACE to its proposed parent, or to any
other affiliated company, facilities for the production, transmission, or
distribution of electric energy having a depreciated book value exceeding
10 percent (10%) of ACE's consolidated net utility plant, as recorded on
ACE's books of account.
See letter from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge to
the NRC, dated November 7, 1997. This commitment, incorporated as a condition to
the NRC's consent to the indirect license transfer to the extent effected by the
proposed merger and restructuring, will assist the NRC in assuring that ACE will
continue to maintain adequate resources to contribute to the safe operation and
decommissioning of HCGS.
With respect to technical qualifications, the proposed merger will not effect
any change in the technical qualifications of the licensed operator, PSE&G, and
will not effect any change in the responsibilities and obligations of PSE&G or
ACE as set forth in the license.
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<PAGE>
3.0 ANTITRUST
The antitrust provisions of Section 105c of the Atomic Energy Act apply to an
application for a license to construct or operate a facility licensed under
Section 103 of the Act. Although Connectiv may become the holding company of
ACE, a licensee for HCGS, i.e., may indirectly acquire control of the license,
it will not be performing activities for which a license is needed. Since
approval of the application would not involve the issuance of a license, the
procedures under Section 105c do not apply, including the making of any
"significant changes" determination.
4.0 FOREIGN OWNERSHIP
The application states that for ACE, after the proposed merger, ACE will not "be
owned, controlled or dominated by any alien, foreign corporation or foreign
government." Also, it states that 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." (See page 5 of the application dated April
30, 1997.) The staff does not know or have reason to believe that ACE will be
owned, controlled, or dominated by any alien, foreign corporation, or foreign
government as a result of the proposed merger.
5.0 CONCLUSIONS
In view of the foregoing, the staff concludes that the proposed merger of AEI
and DP&L resulting in the formation of a new holding company, Conectiv, will not
adversely affect the financial or technical qualifications of ACE with respect
to the operation and decommissioning of the HCGS facility. Also, there do not
appear to be any problematic antitrust or foreign ownership considerations
related to the HCGS license that would result from the proposed merger. Thus,
the proposed merger will not affect the qualifications of ACE as a holder of the
license, and the transfer of control of the license, to the extent effected by
the proposed merger, is otherwise consistent with applicable provisions of law,
regulations, and orders issued by the Commission. Accordingly, with the
condition discussed above relating to significant asset transfers, the NRC
should approve the application regarding the proposed merger.
Principal Contributor: A. McKeigney
Date: December 18, 1997
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UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20555-0001
December 18, 1997
John H. O'Neill, Jr., Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, NW
Washington, DC 20037
SUBJECT: ORDER APPROVING APPLICATION REGARDING THE MERGER
AGREEMENT BETWEEN ATLANTIC ENERGY INC., PARENT OF
ATLANTIC CITY ELECTRIC COMPANY (ACE) AND DELMARVA
POWER AND LIGHT COMPANY (DP&L) AFFECTING LICENSES NOS.
DPR-70 AND DPR-75, SALEM NUCLEAR GENERATING STATION,
UNITS 1 AND 2 (TAC NOS. M98634 AND M98635)
Dear Mr. O'Neill:
The enclosed Order responds to the application for approval under 10 CFR
50.80, submitted under cover of your letter of April 30, 1997, concerning the
proposed merger of Atlantic Energy, Inc. (the parent holding company of ACE) and
DP&L, which would result in the formation of a new holding company, Conectiv,
Inc., under which ACE and DP&L would become wholly owned subsidiaries. The
staff's safety evaluation in support of the Order is also enclosed.
The Order is being forwarded to the Office of the Federal Register for
publication.
Sincerely,
/s/ John F. Stolz for
Patrick D. Milano, Senior Project Manager
Project Directorate I-2
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
Docket Nos. 50-272 and 50-311
Enclosures: 1. Order
2. Safety Evaluation
cc w/encls: See next page
<PAGE>
Public Service Electric & Gas Salem Nuclear Generating Station
Company Units 1 and 2
cc:
<TABLE>
<CAPTION>
<S> <C>
Jeffrie J. Keenan, Esquire Richard Hartung
Nuclear Business Unit - N21 Electric Service Evaluation
P.O. Box 236 Board of Regulatory Commissioners
Hancocks Bridge, NJ 08038 2 Gateway Center, Tenth Floor
Newark, NJ 07102
General Manager - Salem Operations
Salem Nuclear Generating Station Regional Administrator, Region I
P.O. Box 236 U.S. Nuclear Regulatory Commission
Hancocks Bridge, NJ 08038 475 Allendale Road
King of Prussia, PA 19406
Mr. Louis Storz
Sr. Vice President - Nuclear Operations Lower Alloways Creek Township
Nuclear Department c/o Mary O. Henderson, Clerk
P.O. Box 236 Municipal Building, P.O. Box 157
Hancocks Bridge, NJ 08038 Hancocks Bridge, NJ 08038
Senior Resident Inspector Manager-Licensing and Regulation
Salem Nuclear Generating Station Nuclear Business Unit - N21
U.S. Nuclear Regulatory Commission P.O. Box 236
Drawer 0509 Hancocks Bridge, NJ 08038
Hancocks Bridge, NJ 08038
Mr. David Wersan
Dr. Jill Lipoti, Asst. Director Assistant Consumer Advocate
Radiation Protection Programs Office of Consumer Advocate
NJ Department of Environmental 1425 Strawberry Square
Protection and Energy - CN 415 Harrisburg, PA 17120
Trenton, NJ 08625-0415
Manager - Joint Generation
Maryland Office of People's Counsel Atlantic Energy
6 St. Paul St., 21st floor, Suite 2102 6801 Black Horse Pike
Baltimore, MD 21202 Egg Harbor Twp., NJ 08234-4130
Ms. R. A. Kankus Carl O. Schaefer
Joint Owner Affairs External Operations - Nuclear
PECO Energy Company Delmarva Power & Light Company
965 Chesterbrook Blvd., 63C-5 P.O. Box 231
Wayne, PA 19067 Wilmington, DE 19899
Mr. Elbert Simpson Public Service Commission of Maryland
Senior Vice President-Nuclear Engineering Engineering Division
Nuclear Department Chief Engineer
P.O. Box 236 6 St. Paul Centre
Hancocks Bridge, NJ 08038 Baltimore, MD 21202-6806
</TABLE>
<PAGE>
Public Service Electric & Gas Salem Nuclear Generating Station
Company Units 1 and 2
<TABLE>
<CAPTION>
<S> <C>
Mr. Leon R. Eliason James E. Franklin, II, Esq.
Chief Nuclear Officer & President- Sr. V.P. and General Counsel
Nuclear Business Unit Atlantic City Electric Company
Public Service Electric and Gas Company 6801 Blackhorse Pike
Post Office Box 236 Egg Harbor Township, NJ 08234-4130
Hancocks Bridge, NJ 08038
Dale G. Stoodley, Esq.
Mr. George A. Hunger, Jr. V.P. and General Counsel
Director-Licensing, MC 62A-l Delmarva Power & Light Company
PECO Energy Company 800 King Street
Nuclear Group Headquarters P.0.Box 231
Correspondence Control Desk Wilmington, DE 19899
P.O. Box No. 195
Wayne, PA 19087-0195
</TABLE>
-2-
<PAGE>
UNITED STATES Of AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
ATLANTIC CITY ELECTRIC COMPANY ) Docket Nos. 50-272 and 50-311
DELMARVA POWER AND LIGHT )
COMPANY )
)
(Salem Nuclear Generating Station, ) )
Units 1 and 2) )
ORDER APPROVING-APPLICATION REGARDING
MERGER AGREEMENT BETWEEN
ATLANTIC ENERGY, INC. (PARENT Of ATLANTIC CITY ELECTRIC COMPANY)
AND
DELMARVA POWER AND LIGHT COMPANY
I.
Atlantic City Electric Company (ACE) and Delmarva Power and Light Company
(DP&L) are co-holders of Facility Operating Licenses Nos. DPR-70 and DPR-75,
along with Public Service Electric and Gas Company (PSE&G) and Philadelphia
Electric Company [also known as PECO Energy Company], issued by the U.S. Nuclear
Regulatory Commission (NRC or Commission) pursuant to Part 50 of Title 10 of the
Code of Federal Regulations (10 CFR Part 50), for operation of the Salem Nuclear
Generating Station, Units 1 and 2 (Salem). Under the licenses, PSE&G is
authorized to possess, use, and operate the facilities, and ACE, DP&L, and
Philadelphia Electric Company are authorized to possess the facilities. Salem is
located in Salem County, New Jersey.
<PAGE>
-2-
II.
By application filed by ACE and DP&L under cover of a letter dated April
30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge,
attorney for ACE and DP&L, supplemented by letter dated November 7, 1997, ACE
and DP&L requested the Commission's approval, pursuant to 10 CFR 50.80, of the
indirect transfer of the licenses, to the extent held by ACE and DP&L, that
would result from the consummation of a merger agreement between Atlantic
Energy, Inc. (parent of ACE), and DP&L. Under the merger agreement, Atlantic
Energy, Inc. and DP&L would form a new holding company, Conectiv, Inc., under
which ACE and DP&L would become wholly owned subsidiaries. No direct transfer of
the licenses would occur. PSE&G and Philadelphia Electric Company are not
involved in the merger.
A Notice of Consideration of Approval of Application Regarding Proposed
Corporate Restructuring was published in the Federal Register on December 8,
1997 (62 FR 64600), and an Environmental Assessment and Finding of No
Significant Impact was published in the Federal Register on December 8, 1997 (62
FR 64602).
Under 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through transfer of control of the license, unless the Commission
gives its consent in writing. Upon review of the information submitted in the
letter and application of April 30, 1997, and supplement dated November 7, 1997,
the NRC staff has determined that the proposed merger of Atlantic Energy, Inc.
and DP&L will not affect the qualifications of ACE and DP&L as holders of the
licenses, and that the transfer of control of the licenses for Salem, to the
extent effected by the proposed merger, is otherwise consistent with applicable
provisions of law,
<PAGE>
-3-
regulations, and orders issued by the Commission, subject to the conditions
stated herein. These findings are supported by a safety evaluation dated
December 18, 1997.
III.
Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic
Energy Act of 1954, as amended, 42 USC ss.ss. 2201(b), 2201(i), 2201(o), and
2234, and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the
application regarding the proposed merger of Atlantic Energy, Inc. and DP&L
subject to the following conditions: (1) ACE shall provide the Director of the
Office of Nuclear Reactor Regulation a copy of any application, at the time it
is filed, to transfer (excluding grants of security interests or liens) from ACE
to its proposed parent or to any other affiliated company, facilities for the
production, transmission, or distribution of electric energy having a
depreciated book value exceeding 10 percent (10%) of ACE's consolidated net
utility plant, as recorded on ACE's books of account; (2) DP&L shall provide the
Director of the Office of Nuclear Reactor Regulation a copy of any application,
at the time it is filed, to transfer (excluding grants of security interests or
liens) from DP&L to its proposed parent or to any other affiliated company,
facilities for the production, transmission, or distribution of electric energy
having a depreciated book value exceeding 10 percent (10%) of DP&L's
consolidated net utility plant, as recorded on DP&L's books of account; and (3)
should the merger of Atlantic Energy, Inc. and DP&L, as described herein, not be
completed by December 31, 1998, this Order shall become null and void, provided,
however, on application and for good cause shown, such date is extended.
This Order is effective upon issuance.
<PAGE>
-4-
IV.
By January 23, 1998, any person adversely affected by this Order may file a
request for a hearing with respect to issuance of the Order. Any person
requesting a hearing shall set forth with particularity how that interest is
adversely affected by this Order and shall address the criteria set forth in 10
CFR 2.714(d).
If a hearing is to be held, the Commission will issue an order designating
the time and place of such hearing.
The issue to be considered at any such hearing shall be whether this Order
should be sustained.
Any request for a hearing must be filed with the Secretary of the
Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001,
Attention: Rulemakings and Adjudications Staff, or may be delivered to the
Commission's Public Document Room, The Gelman Building, 2120 L Street, NW.,
Washington, D.C. by the above date. Copies should be also sent to the Office of
the General Counsel and to the Director, Office of Nuclear Reactor Regulation,
U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, and to John H.
O'Neill, Jr., Shaw, Pittman, Potts & Trowbridge, 2300 N Street, NW., Washington,
DC, 20037, attorney for ACE and DP&L.
For further details with respect to this action, see the application filed
by ACE and DP&L under cover of a letter dated April 30, 1997, from John H.
O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, as supplemented by a letter
dated November 7, 1997, and the safety evaluation dated December 18, 1997, which
are available for public inspection at the Commission's Public Document Room,
The Gelman Building, 2120 L Street, NW.,
<PAGE>
-5-
Washington, DC, and at the local public document room located at the Salem Free
Public Library, 112 West Broadway, Salem, NJ.
Dated at Rockville, Maryland, this 18th day of December 1997.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/ Samuel J. Collins
Samuel J. Collins, Director
Office of Nuclear Reactor Regulator
<PAGE>
SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION
PROPOSED MERGER Of ATLANTIC ENERGY. INC. AND
DELMARVA POWER AND LIGHT COMPANY
SALEM NUCLEAR GENERATING STATION. UNITS 1 AND 2
DOCKET NOS. 50-272 AND 50-311
1.0 BACKGROUND
Under cover of a letter dated April 30, 1997, as supplemented by a letter dated
November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts &
Trowbridge, Atlantic City Electric Company (ACE) and Delmarva Power & Light
Company (DP&L) submitted an application for approval under 10 CFR 50.80, in
connection with a proposed merger between Atlantic Energy, Inc. (AEI), which is
the parent holding company of ACE, and DP&L. A new holding company will result
from this merger named Conectiv, Inc. (Conectiv). Under the merger agreement,
all of AEI's subsidiaries (including ACE) and DP&L will become wholly owned
subsidiaries of Conectiv, and AEI will cease to exist. Current holders of AEI
and DP&L common stock would become holders of Conectiv common stock pursuant to
a formula stipulated in the merger agreement.
ACE is a 7.41-percent owner of Unit 1 of the Salem Nuclear Generating Station, a
two-unit facility, and DP&L is a 7.41-percent owner of Unit 1. Public Service
Electric & Gas Company (PSE&G) owns 42.59 percent of Unit 1 and Philadelphia
Electric Company (PECO) owns the remaining 42.59 percent. Each of these four
utilities owns the same respective percentages of Unit 2 of Salem. The proposed
merger does not involve PSE&G, which is the licensed operator of Salem, or PECO.
The proposed merger will result in the indirect transfer of control of the
interests held by ACE and DP&L in the Salem station operating licenses to the
proposed new holding company, Conectiv. Accordingly, under the provisions of 10
CFR 50.80, Commission approval is required.
In the application for approval dated April 30, 1997, the applicants state on
page 10:
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.
<PAGE>
-2-
2.0 FINANCIAL AND TECHNICAL QUALIFICATIONS
On the basis of information submitted in the application, the staff finds that
there will be no near-term substantive change in the financial ability of ACE
and DP&L to contribute appropriately to the operations and decommissioning of
the Salem facility as a result of the proposed merger. Each of ACE and DP&L is,
and would remain after the merger, an "electric utility" as defined in 10 CFR
50.2, engaged in the generation and distribution of electricity, the cost of
which is recovered through rates established by the New Jersey Board of Public
Utilities and the Federal Energy Regulatory Commission, in the case of ACE, and
the Delaware Public Service Commission, the Maryland Public Service Commission,
the State Corporation Commission of Virginia, and the Federal Energy Regulatory
Commission, in the case of DP&L. Thus, pursuant to 10 CFR 50.33(f), ACE and
DP&L, as electric utilities, are exempt from further financial qualifications
review.
However, in view of the NRC's concern that restructuring can lead to a
diminution of assets necessary for the safe operation and decommissioning of a
licensee's nuclear power plant, the NRC has sought to obtain commitments from
its licensees that initiate restructuring actions not to transfer significant
assets from the licensee without notifying the NRC. ACE and DP&L have agreed:
to provide the Director of the Office of Nuclear Reactor Regulation a copy
of any application, at the time it is filed, to transfer (excluding grants
of a security interest or liens) from such licensee to its proposed parent,
or to any other affiliated company, facilities for the production,
transmission, or distribution of electric energy having a depreciated book
value exceeding ten percent (10%) of such licensee's consolidated net
utility plant, as recorded on the licensee's books of account.
See letter from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge to
the NRC dated November 7, 1997.
This commitment, incorporated as a condition to the NRC's consent to the
indirect license transfers to the extent effected by the proposed merger and
restructuring, will assist the NRC in assuring that ACE and DP&L will continue
to maintain adequate resources to contribute to the safe operation and
decommissioning of the Salem facility.
With respect to technical qualifications, the proposed merger will not effect
any change in the technical qualifications of the licensed operator, PSE&G, and
will not effect any change in the responsibilities and obligations of PSE&G or
any other licensee as set forth in the licenses.
3.0 ANTITRUST
The antitrust provisions of the Atomic Energy Act in Section 105 of the Act
require the Commission to conduct an antitrust review in connection with an
application for a license to construct or operate a utilization or production
facility under Section 103 of the Act. Salem
<PAGE>
-3-
Units 1 and 2 were licensed under
Section 104b and, as a result, are not subject to an antitrust review by the
staff in connection with the application regarding the proposed merger.
4.0 FOREIGN OWNERSHIP
The application states that for ACE and DP&L, after the proposed merger, neither
ACE nor DP&L will "be owned, controlled or dominated by any alien, foreign
corporation or foreign government." Also, it states that neither ACE nor DP&L is
"acting as an agent or representative of any other person in this request for
consent to the indirect transfer of control of the license." (See pages 6 and 7
of the application dated April 30, 1997.) The staff does not know or have reason
to believe that ACE or DP&L will be owned, controlled, or dominated by any
alien, foreign corporation, or foreign government as a result of the proposed
merger.
5.0 CONCLUSIONS
In view of the foregoing, the staff concludes that the proposed merger of AEI
and DP&L resulting in the formation of a new holding company, Conectiv, will not
adversely affect the financial or technical qualifications of ACE or DP&L with
respect to the operation and decommissioning of Units 1 and 2 of the Salem
facility. Also, there do not appear to be any problematic antitrust or foreign
ownership considerations related to the Salem Units 1 and 2 licenses that would
result from the proposed merger. Thus, the proposed merger will not affect the
qualifications of ACE or DP&L as holders of the licenses, and the transfer of
control of the licenses, to the extent effected by the proposed merger, is
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission. Accordingly, with the condition discussed above
relating to significant asset transfers, the NRC should approve the application
regarding the proposed merger.
Principal Contributor: A. McKeigney
Date: December 18, 1997
UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20555-0001
December 18, 1997
John H. O'Neill, Jr., Esq.
Shaw, Pittman, Potts & Trowbridge
2300 N Street, NW
Washington, DC 20037
SUBJECT: ORDER APPROVING APPLICATION REGARDING THE MERGER
AGREEMENT BETWEEN ATLANTIC ENERGY INC., PARENT OF
ATLANTIC CITY ELECTRIC COMPANY (ACE) AND DELMARVA POWER
AND LIGHT COMPANY (DP&L) AFFECTING LICENSES NOS. DPR-44
AND DPR-56, PEACH BOTTOM ATOMIC POWER STATION, UNITS 2
AND 3 (TAC NOS. M98682 AND M98683)
Dear Mr. O'Neill:
The enclosed Order responds to the application for approval under 10 CFR 50.80,
submitted under cover of your letter of April 30, 1997, concerning the proposed
merger of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L,
which would result in the formation of a new holding company, Conectiv, Inc.,
under which ACE and DP&L would become wholly owned subsidiaries. The staff's
safety evaluation in support of the Order is also enclosed.
The Order is being forwarded to the Office of the Federal Register for
publication.
Sincerely,
/s/ Joseph F. Williams
Joseph F. Williams, Project Manager
Project Directorate I-2
Division of Reactor Projects - I/II
Office of Nuclear Reactor Regulation
Docket Nos. 50-277 and 50-278
Enclosures: 1. Order
2. Safety Evaluation
CC w/encls: See next page
<PAGE>
PECO Energy Company Peach Bottom Atomic Power Station,
Units 2 and 3
cc:
J. W. Durham, Sr., Esquire Chief-Division of Nuclear Safety
Sr. V.P. & General Counsel PA Dept. of Environmental
PECO Energy Company Resources
2301 Market Street, S26-1 P.O. Box 8469
Philadelphia, PA 19101 Harrisburg, PA 17105-8469
PECO Energy Company Board of Supervisors
ATTN: Mr. T. N. Mitchell, Peach Bottom Township
Vice President R.D. #1
Peach Bottom Atomic Power Station Delta, PA 17314
1848 Lay Road
Delta, PA 17314 Public Service Commission of
Maryland
PECO Energy Company Engineering Division
ATTN: Regulatory Engineer, A4-5S Chief Engineer
Peach Bottom Atomic Power Station 6 St. Paul Centre
1848 Lay Road Balimore, MD 21202-6806
Delta PA 17314
Mr. Richard McLean
Resident Inspector Power Plant and Environmental
U.S. Nuclear Regulatory Review Division
Commission Department of Natural Resources
Peach Bottom Atomic Power Station B-3, Tawes State Office Building
P.O. Box 399 Annapolis, MD 21401
Delta, PA 17314
Dr. Judith Johnsrud
Regional Administrator, Region I National Energy Committee
U.S. Nuclear Regulatory Sierra Club
Commission 433 Orlando Avenue
475 Allendale Road State College, PA 16803
King of Prussia, PA 19406
Manager-Business & Co-owner
Mr. Roland Fletcher Affairs
Department of Environment Public Service Electric and Gas
201 West Preston Street Company
Baltimore, MD 21201 P.O. Box 236
Hancocks Bridge, NJ 08038-0236
A.F. Kirby, III
External Operations - Nuclear Manager-Peach Bottom Licensing
Delmarva Power & Light Company PECO Energy Company
P.O. Box 231 Nuclear Group Headquarters
Wilmington, DE 19899 Correspondence Control Desk
P.O. Box No. 195
PECO Energy Company Wayne, PA 19087-0195
Plant Manager
Peach Bottom Atomic Power Station
1848 Lay Road
Delta, PA 17314
<PAGE>
PECO Energy Company Peach Bottom Atomic Power Station,
Units 2 and 3
Mr. George A. Hunger, Jr. James E. Franklin, II, Esq.
Director-Licensing, MC 62A-l Sr. V.P. and General Counsel
PECO Energy Company Atlantic City Electric Company
Nuclear Group Headquarters 4801 Blackhorse Pike
Correspondence Control Desk Egg Harbor Township, NJ 08234-4130
P.O. Box No. 195
Wayne, PA 19087-0195 Dale G. Stoodley, Esq.
V.P. and General Counsel
Mr. Leon R. Eliason Delmarva Power & Light Company
Chief Nuclear Officer & President- 800 King Street
Nuclear Business Unit P.O. Box 331
Public Service Electric and Gas Wilmington, DE 19899
Company
Post Office Box 236
Hancocks Bridge, NJ 08038
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<PAGE>
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
ATLANTIC CITY ELECTRIC COMPANY ) Docket Nos. 50-277 and
DELMARVA POWER AND LIGHT ) 50-278
COMPANY )
)
(Peach Bottom Atomic Power Station, )
Units 2 and 3) x
ORDER APPROVING APPLICATION REGARDING
MERGER AGREEMENT BETWEEN
ATLANTIC ENERGY, INC. (PARENT OF ATLANTIC CITY ELECTRIC COMPANY)
AND
DELMARVA POWER AND LIGHT COMPANY
I.
Atlantic City Electric Company (ACE) and Delmarva Power and Light Company
(DP&L) are co-holders of Facility Operating Licenses Nos. DPR-44 and DPR-56,
along with Public Service Electric and Gas Company (PSE&G) and PECO Energy
Company, issued by the U.S. Nuclear Regulatory Commission (NRC or Commission)
pursuant to Part 50 of Title 10 of the Code of Federal Regulations (10 CFR Part
50) for operation of the Peach Bottom Atomic Power Station, Units 2 and 3
(PBAPS). Under the licenses, PECO Energy Company is authorized to possess, use,
and operate the facilities, and ACE, DP&L, and PSE&G are authorized to possess
the facilities. PBAPS is located in York County, Pennsylvania.
<PAGE>
II.
By application filed by ACE and DP&L under cover of a letter dated April
30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge,
attorney for ACE and DP&L, supplemented by letter dated November 7, 1997, ACE
and DP&L requested the Commission's approval, pursuant to 10 CFR 50.80, of the
indirect transfer of the licenses, to the extent held by ACE and DP&L, that
would result from the consummation of a merger agreement between Atlantic
Energy, Inc. (parent of ACE) and DP&L. Under the merger agreement, Atlantic
Energy, Inc. and DP&L would form a new holding company, Conectiv, Inc., under
which ACE and DP&L would become wholly owned subsidiaries. No direct transfer of
the licenses would occur. PSE&G and PECO Energy Company are not involved in the
merger.
A Notice of Consideration of Approval of Application Regarding Proposed
Corporate Restructuring was published in the Federal Register on December 8,
1997 (62 FR 64601), and an Environmental Assessment and Finding of No
Significant Impact was published in the Federal Register on December 8, 1997 (62
FR 64601).
Under 10 CFR 50.80, no license shall be transferred, directly or
indirectly, through transfer of control of the license, unless the Commission
gives its consent in writing. Upon review of the information submitted in the
letter and application of April 30, 1997, and supplement dated November 7, 1997,
the NRC staff has determined that the proposed merger of Atlantic Energy, Inc.
and DP&L will not affect the qualifications
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<PAGE>
of ACE and DP&L as holders of the licenses, and that the transfer of control of
the licenses for PBAPS, to the extent effected by the proposed merger, is
otherwise consistent with applicable provisions of law, regulations, and orders
issued by the Commission, subject to the conditions stated herein. These
findings are supported by a safety evaluation dated December 18, 1997.
III.
Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic
Energy Act of 1954, as amended, 42 USC ss.ss.2201(b), 2201(i), 2201(o), and
2234, and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the
application regarding the proposed merger of Atlantic Energy, Inc. and DP&L
subject to the following conditions: (1) ACE shall provide the Director of the
Office of Nuclear Reactor Regulation a copy of any application, at the time it
is filed, to transfer (excluding grants of security interests or liens) from ACE
to its proposed parent or to any other affiliated company, facilities for the
production, transmission, or distribution of electric energy having a
depreciated book
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<PAGE>
value exceeding 10 percent (10%) of ACE's consolidated net utility plant, as
recorded on ACE's books of account; (2) DP&L shall provide the Director of the
Office of Nuclear Reactor Regulation a copy of any application, at the time it
is filed, to transfer (excluding grants of security interests or liens) from
DP&L to its proposed parent or to any other affiliated company, facilities for
the production, transmission, or distribution of electric energy having a
depreciated book value exceeding 10 percent (10%) of DP&L's consolidated net
utility plant, as recorded on DP&L's books of account; and (3) should the merger
of Atlantic Energy, Inc. and DP&L, as described herein, not be completed by
December 31, 1998, this Order shall become null and void, provided, however, on
application and for good cause shown, such date is extended.
This Order is effective upon issuance.
IV.
By January 23, 1998, any person adversely affected by this Order may file a
request for a hearing with respect to issuance of the Order. Any person
requesting a hearing shall set forth with particularity how that interest is
adversely affected by this Order and shall address the criteria set forth in 10
CFR 2.714(d).
If a hearing is to be held, the Commission will issue an order designating
the time and place of such hearing.
The issue to be considered at any such hearing shall be whether this Order
should be sustained.
Any request for a hearing must be filed with the Secretary of the
Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001,
Attention: Rulemakings and Adjudications Staff, or may be delivered to the
Commission's Public Document Room, The Gelman Building, 2120 L Street, NW.,
Washington, DC by the above date. Copies should be also sent to the Office of
the General Counsel and to the Director, Office of Nuclear Reactor Regulation,
U.S. Nuclear Regulatory Commission,
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<PAGE>
Washington, DC 20555-0001, and to John H. O'Neill, Jr., Shaw, Pittman, Potts &
Trowbridge, 2300 N Street, NW., Washington, DC, 20037, attorney for ACE and
DP&L.
For further details with respect to this action, see the application filed
by ACE and DP&L under cover of a letter dated April 30, 1997, from John H.
0'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, as supplemented by a letter
dated November 7, 1997, and the safety evaluation dated December 18, 1997, which
are available for public inspection at the Commission's Public Document Room,
The Gelman Building, 2120 L Street, NW., Washington, DC, and at the local public
document room in the Government Publications Section, State Library of
Pennsylvania, (REGIONAL DEPOSITORY) Education Building, Walnut Street and
Commonwealth Avenue, Box 1601, Harrisburg, Pennsylvania.
Dated at Rockville, Maryland, this 18th day of December 1997.
FOR THE NUCLEAR REGULATORY COMMISSION
/s/ Samuel J. Collins
Samuel J. Collins, Director
Office of Nuclear Reactor Regulation
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<PAGE>
UNITED STATES
NUCLEAR REGULATORY COMMISSION
WASHINGTON, D.C. 20555-0001
SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION
PROPOSED MERGER OF ATLANTIC ENERGY, INC. AND
DELMARVA POWER AND LIGHT COMPANY
PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3
DOCKET NOS. 50-277 AND 50-278
1.0 BACKGROUND
Under cover of a letter dated April 30, 1997, as supplemented by a letter dated
November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts &
Trowbridge, Atlantic City Electric Company (ACE) and Delmarva Power & Light
Company (DP&L) submitted an application for approval under 10 CFR 50.80, in
connection with a proposed merger between Atlantic Energy, Inc. (AEI), which is
the parent holding company of ACE, and DP&L. A new holding company will result
from this merger named Conectiv, Inc. (Conectiv). Under the merger agreement,
all of AEI's subsidiaries (including ACE) and DP&L will become wholly owned
subsidiaries of Conectiv, and AEI will cease to exist. Current holders of AEI
and DP&L common stock would become holders of Conectiv common stock pursuant to
a formula stipulated in the merger agreement.
ACE is a 7.51-percent owner of Unit 2 of the Peach Bottom Atomic Power Station
(PBAPS), a three-unit facility (with Unit 1 in shutdown status), and DP&L is a
7.51-percent owner of Unit 2. Public Service Electric & Gas Company (PSE&G) owns
42.49 percent of Unit 2, and PECO Energy Company owns the remaining 42.49
percent. Each of these four utilities owns the same respective percentages of
Unit 3 of PBAPS. The proposed merger does not involve PSE&G or PECO Energy
Company. PECO Energy Company is the licensed operator of PBAPS. The proposed
merger will result in the Indirect transfer of control of the interests held by
ACE and DP&L in the PBAPS operating licenses to the proposed new holding
company, Conectiv. Accordingly, under the provisions of 10 CFR 50.80, Commission
approval is required.
In the application for approval dated April 30, 1997, the applicants state on
page 10:
The purpose of the proposed Merger is to achieve benefits for the
shareholders, customers and co-unities served by ACE and DP&L that would
otherwise not be achievable if they were to remain as separate
<PAGE>
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.
2.0 FINANCIAL AND TECHNICAL QUALIFICATIONS
On the basis of information submitted in the application, the staff finds that
there will be no near-term substantive change in the financial ability of ACE
and DP&L to contribute appropriately to the operations and decommissioning of
the PBAPS facility as a result of the proposed merger. Each of ACE and DP&L is,
and would remain after the merger, an "electric utility" as defined in 10 CFR
50.2, engaged in the generation and distribution of electricity, the cost of
which is recovered through rates established by the New Jersey Board of Public
Utilities and the Federal Energy Regulatory Commission, in the case of ACE, and
the Delaware Public Service Commission, the Maryland Public Service Commission,
the State Corporation Commission of Virginia, and the Federal Energy Regulatory
Commission, in the case of DP&L. Thus, pursuant to 10 CFR 50.33(f), ACE and
DP&L, as electric utilities, are exempt from further financial qualifications
review.
However, in view of the NRC's concern that restructuring can lead to a
diminution of assets necessary for the safe operation and decommissioning of a
licensee's nuclear power plant, the NRC has sought to obtain commitments from
its licensees that initiate restructuring actions not to transfer significant
assets from the licensee without notifying the NRC. ACE and DP&L have agreed:
to provide the Director of the Office of Nuclear Reactor Regulation a copy
of any application, at the time it is filed, to transfer (excluding grants
of a security interest or liens) from such licensee to its proposed parent,
or to any other affiliated company, facilities for the production,
transmission, or distribution of electric energy having a depreciated book
value exceeding ten percent (10%) of such licensee's consolidated net
utility plant, as recorded on the licensee's books of account.
See the letter from John H. O'Nelll, Jr., of Shaw, Pittman, Potts & Trowbridge
to the NRC dated November 7, 1997. This commitment, incorporated as a condition
to the NRC's consent to the indirect license transfers to the extent effected by
the proposed merger and restructuring, will assist the NRC in assuring that ACE
and DP&L will continue to maintain adequate resources to contribute to the safe
operation and decommissioning of the PBAPS facility.
With respect to technical qualifications, the proposed merger will not effect
any change in the technical qualifications of the
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<PAGE>
licensed operator, PECO Energy Company, and will not effect any change in the
responsibilities and obligations of PECO Energy Company or any other licensee as
set forth in the licenses.
3.0 ANTITRUST
The antitrust provisions of the Atomic Energy Act in Section 105 of the Act
require the Commission to conduct an antitrust review in connection with an
application for a license to construct or operate a utilization or production
facility under Section 105 of the Act. PBAPS Units 2 and 3 were licensed under
Section 104b and, as a result, are not subject to an antitrust review by the
staff in connection with the application regarding the proposed merger.
4.0 FOREIGN OWNERSHIP
The application states that for ACE and DP&L, after the proposed merger, neither
ACE nor DP&L will "be owned, controlled or dominated by any alien, foreign
corporation or foreign government." Also, it states that neither ACE nor DP&L is
"acting as an agent or representative of any other person in this request for
consent to the indirect transfer of control of the license." (See pages 6 and 7
of the application dated April 30, 1997.) The staff does not know or have reason
to believe that ACE or DP&L will be owned, controlled, or dominated by any
alien, foreign corporation, or foreign government as a result of the proposed
merger.
5.0 CONCLUSIONS
In view of the foregoing, the staff concludes that the proposed merger of AEI
and DP&L resulting in the formation of a new holding company, Conectiv, will not
adversely affect the financial or technical qualifications of ACE or DP&L with
respect to the operation and decommissioning of the PBAPS facility. Also, there
do not appear to be any problematic antitrust or foreign ownership
considerations related to PBAPS licenses that would result from the proposed
merger. Thus, the proposed merger will not affect the qualifications of ACE or
DP&L as holders of the licenses, and the transfer of control of the licenses, to
the extent effected by the proposed merger, is otherwise consistent with
applicable provisions of law, regulations, and orders issued by the Commission.
Accordingly, with the condition discussed above relating to significant asset
transfers, the NRC should approve the application regarding the proposed merger.
Principal Contributor: A. McKeigney
Date: December 18, 1997
-3-
James E. Franklin II, Esq.
General Counsel
Atlantic Energy, Inc.
6801 Black Horse Pike
Egg Harbor Township, New Jersey 08234-4130
February 24, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Conectiv, Inc. (File No. 70-9069)
Ladies and Gentlemen:
As General Counsel for Atlantic Energy, Inc., a New Jersey corporation
("Atlantic"), I have acted as counsel to Atlantic with respect to the matters
described in the application and declaration (the "Application") on Form U-1 to
the Securities and Exchange Commission (the "Commission") filed by Conectiv,
Inc., a Delaware corporation (File No. 70-9069). The Application seeks the
Commission's authorization under the Public Utility Holding Company Act of 1935,
as amended (the "Act"), for a series of transactions (the "Transactions"). I am
furnishing this opinion to you in connection with the Application.
The Application seeks approval for the merger of Atlantic with and into
Conectiv and the merger of DS Sub, Inc., a Delaware corporation and a subsidiary
of Conectiv ("DS Sub"), with and into Delmarva Power and Light Company, a
Delaware and Virginia corporation ("Delmarva"). The Application also seeks
approval for a number of related corporate actions, including:
(i) the acquisition by Conectiv of the gas properties of Delmarva;
(ii) the continued operation of Delmarva as a combination gas and
electric utility company;
(iii)the acquisition by Conectiv of the nonutility activities,
businesses and investments of Delmarva and Atlantic; and
(iv) the designation of Support Conectiv as a subsidiary service
company under the Act.
As counsel for Atlantic, I am familiar with the nature and character of
the proposed Transactions. I am a member of the bar of the State of New Jersey,
the state in which Atlantic is incorporated and in it conducts most of its
utility operations.
In connection with this opinion, I have examined or caused to be
examined the Application and various exhibits thereto, the minutes of various
meetings of the Board of Directors of Atlantic, the laws of the State of New
Jersey, the certificate of incorporation and bylaws of Atlantic and such other
documents as I deem necessary for the purpose of this opinion. In such
examination I have assumed the genuineness of all signatures and the
authenticity of all documents submitted to me as originals and the conformity
with the originals of all documents submitted to me as copies. As to various
questions of fact material to such opinions I have, when relevant facts were not
independently established, relied upon certificates of officers of Atlantic and
other appropriate persons and statements contained in the Application and the
exhibits thereto. I assume that the Board of Directors of Atlantic and the
officers and other representatives of Atlantic will take all future corporate
action necessary to authorize and implement the Transactions contemplated by the
Application. I also assume that the Commission will issue an order under the Act
as requested in the Application.
The opinions expressed below in respect of the transactions described
in the Application are subject to the following further assumptions and
conditions:
(a) The Transactions shall have been duly authorized and approved, to
the extent required by the governing corporate documents and
applicable state laws, by the Boards of Directors and shareholders of
Conectiv, Delmarva, Atlantic and DS Sub and subsidiaries thereof;
(b) All required approvals, authorizations, consents, certificates,
and orders of, and all filings and registrations with, all applicable
federal and state commissions and regulatory authorities with respect
to the Transactions shall have been obtained or made, as the case may
be, and shall remain in effect (including the approval and
authorization of the Commission under the Act, the Federal Energy
Regulatory Commission under the Federal Power Act, as amended, the
Nuclear Regulatory Commission under the Atomic Energy Act, as amended,
the Public Service Commission of the State of Delaware, the State
Corporation Commission of the Commonwealth of Virginia, the Board of
Public Utilities of the State of New Jersey,1 the Public Utility
Commission of the Commonwealth of Pennsylvania and the Public Service
Commission of the State of Maryland under the applicable laws of
Delaware, Virginia, New Jersey, Pennsylvania and Maryland), and the
Transactions shall have been accomplished in accordance with all such
approvals, authorizations, consents, certificates, orders, filings and
registrations;
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1 I note that the appeal period has not expired with respect to the order
issued by the Board of Public Utilities of the State of New Jersey on
January 7, 1998 ("the New Jersey Order"). The Motion for Reconsideration
and Clarification of Certain Issues does not seek, as an item of relief,
the denial of the approval of the merger. No stay has been requested or
issued with respect to the New Jersey Order, which remains in full force
and effect.
(c) The Commission shall have duly entered an appropriate order or
orders with respect to the Transactions as described in the
Application granting and permitting the Application to become
effective under the Act and the rules and regulations thereunder;
(d) The Registration Statements with respect to the Shares of Conectiv
Common Stock and Conectiv Class A Common Stock to be issued in
connection with the Transactions shall have become effective pursuant
to the Securities Act of 1933, as amended; no stop order shall have
been entered with respect thereto; and the issuance of shares of
Conectiv Common Stock and Conectiv Class A Common Stock in connection
with the transactions shall have been consummated in compliance with
the Securities Act of 1933, as amended and the rules and regulations
thereunder;
(e) The solicitation of proxies from the stockholders of Delmarva and
Atlantic with respect to the transactions shall have been made in
accordance with the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder;
(f) The parties shall have obtained all consents, waivers and
releases, if any, required for the Transactions under all applicable
governing corporate documents, contracts, agreements, debt
instruments, indentures, franchises, licenses and permits; and
(g) No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed above.
Based upon the foregoing, I am of the opinion that, in the event that
the proposed Transactions are consummated in accordance with the Application:
1. All laws of the State of New Jersey applicable to the proposed
Transactions will have been complied with; and
2. Atlantic is validly organized and duly existing.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ James E. Franklin II
James E. Franklin II
Peter F. Clark, Esq.
Associate General Counsel
Delmarva Power & Light Company
800 King Street
Wilmington, Delaware 19899
February 23, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Conectiv, Inc. (File No. 70-9069)
Ladies and Gentlemen:
As Associate General Counsel for Delmarva Power and Light Company, a
Delaware and Virginia corporation ("Delmarva"), I have acted as counsel to
Delmarva and Conectiv, Inc., a Delaware corporation ("Conectiv"), with respect
to Conectiv's application and declaration (the "Application") on Form U-1 to the
Securities and Exchange Commission (the "Commission") in File No. 70-9069. The
Application seeks the Commission's authorization under the Public Utility
Holding Company Act of 1935, as amended (the "Act"), for a series of
transactions (the "Transactions"). I am furnishing this opinion to you in
connection with the Application.
The Application seeks approval for the merger of Atlantic Energy, Inc.
("Atlantic") with and into Conectiv and the merger of DS Sub, Inc., a Delaware
corporation and a subsidiary of Conectiv ("DS Sub"), with and into Delmarva. The
Application also seeks approval for a number of related corporate actions,
including:
(i) the acquisition by Conectiv of the gas properties of Delmarva;
(ii) the continued operation of Delmarva as a combination gas and
electric utility company;
(iii) the acquisition by Conectiv of the nonutility activities,
businesses and investments of Delmarva and Atlantic; and
(iv) the designation of Conectiv Resource Partners, Inc. (sometimes
referred to as "Support Conectiv") as a subsidiary service company
under the Act.
As counsel for Delmarva and Conectiv, I am familiar with the nature and
character of the Transactions. I am a member of the bar of the State of
Delaware, a state in which Delmarva, Conectiv and DS Sub are incorporated and in
which Delmarva conducts most of its utility operations. I am also a member of
the bar of the Commonwealth of Virginia, a state in which Delmarva also is
incorporated and conducts utility operations. I am not a member of the bars of
the State of Maryland, a state in which Delmarva conducts utility operations, or
the Commonwealth of Pennsylvania, a state in which Delmarva owns electric
generating and related transmission facilities, and do not hold myself out as an
expert in the laws of such states, although I have consulted with counsel to
Delmarva who are expert in such laws. For purposes of this opinion, I have
relied on advice from counsel employed or retained by Delmarva who are members
of the bar of the State of Maryland and the Commonwealth of Pennsylvania.
In connection with this opinion, I have examined or caused to be examined,
the Application and various exhibits thereto, the minutes of various meetings of
the Boards of Directors of Delmarva, Conectiv and DS Sub, the laws of the States
of Delaware and Maryland and of the Commonwealths of Virginia and Pennsylvania,
the certificates of incorporation and bylaws of Delmarva, Conectiv and DS Sub
and such other documents as I deem necessary for the purposes of this opinion.
In such examination, I have assumed the genuineness of all signatures and the
authenticity of all documents submitted to me as originals and the conformity
with the originals of all documents submitted to me as copies. As to various
questions of fact material to such opinions I have, when relevant facts were not
independently established, relied upon certificates of officers of Delmarva,
Conectiv and DS Sub and other appropriate persons and statements contained in
the Application and the exhibits thereto. I assume that the Boards of Directors
of Delmarva, Conectiv and DS Sub and the officers and other representatives of
Delmarva, Conectiv and DS Sub will take all future corporate actions necessary
to authorize and implement the Transactions in accordance with any Commission
under issued under the Act. I also assume that the Commission will issue an
order under the Act as requested in the Application.
The opinions expressed below in respect of the Transactions are subject to
the following further assumptions and conditions:
(a) The Transactions shall have been duly authorized and approved, to
the extent required by the governing corporate documents and
applicable state laws, by the Boards of Directors and shareholders of
Conectiv, Delmarva, Atlantic and DS Sub and subsidiaries thereof;
(b) All required approvals, authorizations, consents, certificates,
and orders of, and all filings and registrations with, all applicable
federal and state commissions and regulatory authorities with respect
to the Transactions shall have been obtained or made, as the case may
be, and shall remain in effect (including the approval and
authorization of the Commission under the Act, the Federal Energy
Regulatory Commission under the Federal Power Act, as amended, the
Nuclear Regulatory Commission under the Atomic Energy Act, as amended,
the Public Service Commission of the State of Delaware, the State
Corporation Commission of the Commonwealth of Virginia, the Board of
Public Utilities of the State of New Jersey, the Public Service
Commission of the State of Maryland and the Public Utility Commission
of the Commonwealth of Pennsylvania under the applicable laws of
Delaware, Virginia, New Jersey, Maryland and Pennsylvania), and the
Transactions shall have been accomplished in accordance with all such
approvals, authorizations, consents, certificates, orders, filings and
registrations;
(c) The Commission shall have duly entered an appropriate order or
orders with respect to the Transactions granting and permitting the
Application to become effective under the Act and the rules and
regulations thereunder;
(d) The Registration Statements with respect to the shares of Conectiv
Common Stock and Conectiv Class A Common Stock to be issued in
connection with the Transactions shall have become effective pursuant
to the Securities Act of 1933, as amended; no stop order shall have
been entered with respect thereto; and the issuance of shares of
Conectiv Common Stock and Conectiv Class A Common Stock in connection
with the Transactions shall have been consummated in compliance with
the Securities Act of 1933, as amended, and the rules and regulations
thereunder;
(e) The solicitation of proxies from the stockholders of Delmarva and
Atlantic with respect to the Transactions shall have been made in
accordance with the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder;
(f) The parties shall have obtained all consents, waivers and
releases, if any required for the transactions under all applicable
governing corporate documents, contracts, agreements, debt
instruments, indentures, franchises, licenses and permits; and
(g) No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed herein.
Based upon the foregoing, I am of the opinion that, in the event that the
proposed Transactions are consummated in accordance with the Application:
1. All laws of the States of Delaware and Maryland and of the Commonwealths
of Virginia and Pennsylvania applicable to the proposed Transactions will have
been complied with;
2. Delmarva, Conectiv and DS Sub are validly organized and duly existing;
3. The shares of Conectiv Common Stock and Conectiv Class A Common Stock to
be issued in connection with the Transactions will be validly issued, fully paid
and nonassessable, and the holders thereof will be entitled to the rights and
privileges appertaining thereto set forth in the Restated Certificate of
Incorporation of Conectiv;
4. Conectiv will legally acquire (a) the shares of common stock of Delmarva
that it will be acquiring as a result of the merger of DS Sub with and into
Delmarva and (b) the shares of common stock of Atlantic that it will be
acquiring as a result of the merger of Atlantic with and into Conectiv, and
Conectiv has legally acquired the shares of common stock of DS Sub issued to it
in connection with the organization of DS Sub; and
5. The consummation of the proposed Transactions will not violate the legal
rights of the holders of any securities issued by Conectiv or any associate
company of Conectiv.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ Peter F. Clark
Peter F. Clark
EXHIBIT J-8
DESCRIPTION OF NONUTILITY BUSINESSES
Both Delmarva and Atlantic currently engage, through subsidiaries and
affiliates, in various nonutility activities related to the systems' core
utility businesses.
A. Delmarva
Delmarva has seven direct nonutility subsidiaries: Delmarva Services
Company, Delmarva Energy Company ("DEC"), Conectiv Services, Inc. ("CSI"),
Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI"),
Conectiv Solutions LLC ("Solutions") and East Coast Natural Gas Cooperative,
L.L.C. ("ECNG").
1. Delmarva Services Company
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.1 Delmarva Services Company also owns
approximately 2.9% of the common stock of Chesapeake Utilities Corporation, a
publicly-traded gas utility company with gas utility operations in Delaware,
Maryland and Florida.2
2. DEC
DEC, a Delaware corporation and a direct subsidiary of Delmarva, was formed
in 1975. It is currently engaged, directly and through its subsidiary, in Rule
58 energy marketing activities.
a. Conectiv/CNE Energy Services LLC, a Delaware limited liability
company in which DEC holds a 50% interest, was formed in 1997 to engage in Rule
58 energy marketing activities in the New England states.3
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1 See UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992)
(subsidiary that had acquired real estate to support the system's utility
operations deemed to be retainable under the standards of Section
11(b)(1)).
2 As noted previously, Conectiv has requested that the Commission reserve
jurisdiction over the Chesapeake stock for a period of three years from the
date of this order to permit Conectiv to effect an orderly disposition of
the Chesapeake stock.
3 See Rule 58(b)(1)(v) (subject to certain conditions, no Commission approval
is required for a registered holding company to acquire the securities of a
company that derives substantially all of its revenues from "the brokering
and marketing of energy commodities, including but not limited to
electricity or natural or manufactured gas or other combustible fuels").
See also New Century Energies, Inc., Holding Co. Act Release No. 26784
(Aug. 1, 1997); SEI Holdings, Inc., Holding Co. Act Release No. 26581 (Sept
26, 1996); Northeast Utilities, Holding Co. Act Release No. 26654 (Aug. 13,
1996); UNITIL Corp., Holding Co. Act Release No. 26257 (May 31, 1996); New
England Electric System, Holding Co. Act Release No. 26520 (May 23, 1996);
and Eastern Utilities Associates, Holding Co. Act Release No. 26493 (March
14, 1996).
<PAGE>
Page 2
3. CSI, directly and through subsidiaries, provides a wide range of
energy-related goods and services to industrial, commercial and residential
customers. Many of these services are "energy-related" within the meaning of
Rule 58. The remainder have previously been found to be "functionally related"
and so retainable under Section 11(b)(1). CSI is engaged in the design,
construction and installation, and maintenance of new and retrofit heating,
ventilating, and air conditioning ("HVAC"), electrical and power systems,
motors, pumps, lighting, water and plumbing systems, and related structures as
approved by the Commission.4
a. Power Consulting Group, Inc., a Delaware corporation, was formed
in 1997 to provide electrical engineering, testing and maintenance services to
large commercial and industrial customers.5
b. Conectiv Plumbing, L.L.C., a Delaware limited liability company
owned 90% by CSI, provides plumbing services primarily in connection with the
CSI HVAC business. Conectiv Plumbing, L.L.C. was formed in 1998 in connection
with the acquisition of an HVAC company. Under New Jersey law, an individual
with a New Jersey master plumbing license must hold at least a 10% equity
interest in a company providing plumbing services in New Jersey. To meet this
requirement, the bulk of the acquired company's HVAC business was retained
within CSI but the related and incidental plumbing services were spun down to a
new subsidiary, Conectiv Plumbing, L.L.C., that is 10% owned by a master
plumber.
- --------
4 See Cinergy Corp., Holding Co. Act Release No. 26662 (Feb. 7, 1997)
("Cinergy Solutions Order").
5 Subject to certain conditions, Rule 53(b)(1)(ii) exempts the acquisition of
the securities of a company that derives substantially all of its revenues
from "[t]he development and commercialization of electrotechnologies
related to energy conservation, storage and conversion, energy efficiency,
waste treatment, greenhouse gas reduction, and similar innovations." See
also Allegheny Power System, Inc., Holding Co. Act Release No. 26085 (July
14, 1994) (investments in technologies related to power conservation and
storage, conservation and load management, environmental and waste
treatment, and power-related electronic systems and components).
<PAGE>
Page 3
4. 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.6
5. 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.
In addition DCI acts as a vehicle for the development and sale of properties
that are not currently used or useful in the utility business.7
- --------
6 Section 34 of the Act provides an exemption from the requirement of prior
Commission approval for 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. is an
exempt telecommunications company under Section 34 of the Act.
7 DCI is managing real estate that was acquired for an intended utility
purpose which has ceased to exist, or in order for the utility to obtain
the necessary rights of way for transmission lines and other utility
operations. Unlike many other states, Delaware does not provide a right of
condemnation for a franchised electric utility. Rather, the utility is
often forced to acquire the underlying fee simple for a larger parcel in
order to obtain an easement or right of way. The development and sale of
these properties is a means of recovering the costs associated with their
acquisition. Such interests are retainable either under Section 11(b)(1) or
pursuant to Section 9(c)(3) "in the ordinary course of business" of a
registered system.
<PAGE>
Page 4
a. DCI I, Inc., a Delaware corporation and a wholly-owned subsidiary
of DCI formed in 1985 to be involved in passive equity investments in leveraged
leases.8
b. DCI II, Inc., a Virgin Islands corporation and a wholly-owned
foreign sales subsidiary of DCI formed in 1985 to be involved in passive
equity investments in leveraged leases.9
c. DCTC-Burney, Inc., a Delaware corporation and a wholly-owned
subsidiary of DCI formed in 1987 to invest in qualifying facilities.10
i. Forest Products, L.P., a Delaware limited partnership,
in which DCTC-Burney, Inc. is the sole 1% general partner, and which is a
general partner in Burney Forest Products, A Joint Venture.
ii. Burney Forest Products, A Joint Venture, a California
general partnership which is owned by DCTC-Burney, Inc. and Forest Products,
L.P. The partnership owns a wood-burning qualifying facility in Burney, CA.
DCTC-Burney, Inc.'s total direct and indirect ownership interest is 45%.
d. Luz Solar Partners, Ltd. IV, a California limited partnership
which owns a solar-powered generating station in Southern California in which
DCI owns a 4.7% limited partnership interest.11
e. UAH-Hydro Kennebec, L.P., a New York limited partnership which
owns a hydro-electric project in which DCI owns a 27.5% limited partnership
interest.12
- --------
8 See Central and South West Corporation, Holding Co. Act Release No. 23578
(Jan. 22, 1985) (approving leveraged lease investments by a registered
holding company).
9 Id.
10 Subject to certain conditions, Rule 58(b)(1)(viii) exempts the acquisition
of the securities of a company that is primarily engaged in "the
development, ownership or operation of 'qualifying facilities'..., and any
integrated thermal, steam host, or other necessary facility constructed,
developed or acquired primarily to enable the qualifying facility to
satisfy the useful thermal output requirements under PURPA." See also New
Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997);
Entergy Corp., Holding Co. Act Release No. 26322 (June 30, 1995); Southern
Co., Holding Co. Act Release No. 26212 (Dec. 30, 1994); Central and South
West Corp., Holding Co. Act Release No. 26156 (Nov. 3, 1994); Central and
South West Corp., Holding Co. Act Release No. 26155 (Nov. 2, 1994); and
Northeast Utilities, Holding Co. Act Release No. 25977 (Jan. 24, 1994).
11 Id.
12 Id.
<PAGE>
Page 5
f. Christiana Capital Management, Inc., a Delaware corporation and a
wholly-owned subsidiary formed in 1987, which owns an office building leased to
affiliates.13
g. Delmarva Operating Services Company, a Delaware corporation and a
wholly-owned subsidiary of DCI formed in 1987, operates and maintains the
following qualifying facilities under contracts with the plants' owners: the
Delaware City Power Plant in Delaware City, DE; a qualifying facility in Burney,
CA; and a qualifying facility in Sacramento, California, owned by the Sacramento
Power Authority under a subcontract with Siemens Power Corporation.14
6. Solutions, a Delaware limited liability company that is jointly owned by
Delmarva and Atlantic, was formed in 1997 to provide, directly or through
subsidiaries, power systems consulting, end-use efficiency services, customized
on-site systems services and other energy services to large commercial and
industrial customers.15 Solutions, directly or through subsidiaries, provides
Energy Management Services, often on a turnkey basis, which may involve the
marketing, sale, installation, operation and maintenance of various products and
services related to the business of energy management and demand-side
management. Energy Management Services may include energy audits; facility
design and process enhancements; construction, maintenance and installation of,
and training client personnel to operate energy conservation equipment; design,
implementation, monitoring and evaluation of energy conservation programs;
development and review of architectural, structural and engineering drawings for
energy efficiencies; design and specification of energy consuming equipment; and
general advice on programs.16 Solutions also provides conditioned power
services, that is, services designed to prevent, control, or mitigate adverse
effects of power disturbances on a customer's electrical system to ensure the
level of power quality required by the customer, particularly with respect to
sensitive electronic equipment, again as approved by the Commission.17
- --------
13 See Unitil Corp., Holding Co. Act Release No. 25524 (April 24, 1992).
14 See supra note 9.
15 Upon consummation of the proposed transactions, Solutions will become a
wholly-owned subsidiary of Conectiv.
16 Subject to certain conditions, Rule 58(b)(1)(i) exempts the acquisition of
the securities of a company that derives substantially all of its revenues
from "[t]he rendering of energy management services and demand-side
management services." See also Eastern Utilities Associates, Holding Co.
Act Release No. 26232 (Feb. 15, 1995); Northeast Utilities, Holding Co. Act
Release No. 25114-A (July 27, 1990) and New England Electric System,
Holding Co. Act Release No. 22719 (Nov. 19, 1982).
17 See supra note 4.
<PAGE>
Page 6
Solutions also markets comprehensive Asset Management Services, on a
turnkey basis or otherwise, in respect of energy-related systems, facilities and
equipment, including distribution systems and substations, transmission
facilities, electric generation facilities (stand-by generators and
self-generation facilities), boilers, chillers (refrigeration and coolant
equipment), HVAC and lighting systems, located on or adjacent to the premises of
a commercial or industrial customer and used by that customer in connection with
its business activities, as previously permitted by the Commission.18 Solutions
also provides such services to qualifying and non-qualifying cogeneration and
small power production facilities under the Public Utility Regulatory Policies
Act of 1978 ("PURPA").19
Solutions provides Consulting Services to associate and nonassociate
companies. The Consulting Services may include technical and consulting services
involving technology assessments, power factor correction and harmonics
mitigation analysis, meter reading and repair, rate schedule design and
analysis, environmental services, engineering services, billing services, risk
management services, communications systems, information systems/data
processing, system planning, strategic planning, finance, feasibility studies,
and other similar or related services.20 Solutions also offers marketing
services to nonassociate businesses in the form of bill insert and automated
meter-reading services, as well as other consulting services, such as how to set
up a marketing program.21
- --------
18 Id.
19 See Rule 58(b)(1)(viii) (an energy-related company can engage in the
development, ownership or operation of "qualifying facilities," as defined
under PURPA, 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 of
PURPA). Solutions will not undertake any Asset Management Service without
further Commission approval if, as a result thereof, Solutions would become
a public utility company within the meaning of the Act.
20 See the Cinergy Solutions Order; see also Rule 58(b)(1)(vii) (relating to
the sale of technical, operational, management, and other similar kinds of
services and expertise, developed in the course of utility operations).
21 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26757 (Aug.
27, 1997) (the "1997 CNG Order").
<PAGE>
Page 7
Solutions provides service line repair and extended warranties with respect
to all of the utility or energy-related service lines that enter a customer's
house, as well as utility bill insurance and other similar or related
services.22 Solutions may also provide centralized bill payment centers for "one
stop" payment of all utility and municipal bills, and annual inspection,
maintenance and replacement of any appliance.23 Solutions also is engaged in the
marketing and brokering of energy commodities, including retail marketing
activities.24
Solutions also provides Other Goods and Services, from time to time,
related to the consumption of energy and the maintenance of property by those
end-users, where the need for the service arises as a result of, or evolves out
of, the above services and the incidental services do not differ materially from
the enumerated services.25 In connection with its activities, Solutions from
time to time may form new subsidiaries to engage in the above activities, or
acquire the securities or assets of nonassociate companies that derive
substantially all of their revenues from the above activities.
Provision of the above goods and services, which are closely related to the
system's core energy business, is intended to further Conectiv's goal of
becoming a full-service energy provider.
- --------
22 See the Cinergy Solutions Order.
23 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26363 (Aug.
28, 1995).
24 See supra note 3.
25 See the 1997 CNG Order.
<PAGE>
Page 8
7. ECNG, a Delaware limited liability company in which Delmarva holds a
1/7th interest, is engaged in gas-related activities. Delmarva participates in
ECNG to do bulk purchasing of gas in order to improve the efficiency of its
natural gas local distribution operations.26
Delmarva also has a nonutility subsidiary trust, Delmarva Power Financing I
("DPF I"), which was formed in 1996 in connection with the issuance by Delmarva
of Cumulative Quarterly Income Preferred Securities.
B. Atlantic
Atlantic has three direct nonutility subsidiaries, Atlantic Energy
International, Inc. ("AEII"), Atlantic Energy Enterprises, Inc. ("AEE"), and
Solutions.27
1. 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 and
will be dissolved or merged out of existence by June 30, 1998.
2. 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, LLC, a natural gas marketing venture, AEE has pursued growth
opportunities in energy-related fields, that will complement Atlantic's existing
businesses and customer relationships.
- --------
26 Conectiv will hold an indirect ownership interest in ECNG, which is engaged
in gas-related activities. Delmarva participated in the formation of ECNG
in order to improve the efficiency of its natural gas local distribution
operations. ECNG members provide emergency backup natural gas supplies to
other members and jointly undertake the bulk purchase and storage of
natural gas for use in their local distribution business. Because these
activities are functionally related to the operations of the gas utility
business of Delmarva, ECNG is retainable by Conectiv under Section
11(b)(1). Further, upon Commission approval of the Mergers, ECNG will be
exempt from all obligations, duties or liabilities imposed upon it by the
Act as a subsidiary company or as an affiliate of a registered holding
company or of a subsidiary company thereof. See Rule 16 under the Act.
27 ACE has a very small home security business, with annual revenues of less
than $10,000, that is located exclusively in its service territory. The
business, which has developed from utility operations, 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.
<PAGE>
Page 9
a. ATE, a New Jersey corporation and a wholly-owned subsidiary
of AEE formed in 1986, 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.28 ATE owns a 94% limited
partnership interest in EnerTech Capital Partners L.P., a limited partnership
that will invest in and support a variety of energy technology growth
companies.29
b. AGI, a New Jersey corporation and a wholly-owned subsidiary
of AEE formed in 1986. AGI develops, owns and operates independent power
production projects.30
i. 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.
ii. 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.
iii. 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.
iv. 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.
- --------
28 See Central and South West Corporation, Holding Co. Act Release No. 23588
(Jan. 22, 1985).
29 Activities involving "the development and commercialization of
electrotechnologies related to energy conservation, storage and conversion,
energy efficiency, waste treatment, greenhouse gas reduction, and similar
innovations" are energy-related activities within the meaning of Rule
58(b)(1)(ii). See also New Century Energies, Holding Co. Act Release No.
26748 (Aug. 1, 1997).
30 See supra note 9.
<PAGE>
Page 10
v. Binghamton General, Inc., a Delaware corporation and a
wholly-owned subsidiary of AGI, formed in 1990 to hold a 10% general partnership
interest in Binghamton Cogeneration Limited Partnership, whose assets have been
sold to a third party.
vi. Binghamton Limited, Inc., a Delaware corporation and a
wholly-owned subsidiary of AGI, formed in 1990 to hold a 35% limited partnership
interest in Binghamton Cogeneration Limited Partnership, whose assets have been
sold to a third party.
c. ATS, a Delaware corporation and a wholly-owned subsidiary of AEE,
formed in 1994. ATS and its subsidiaries develop, own and operate thermal
heating and cooling systems. ATS also provides other energy-related services to
business and institutional energy users. ATS has made investments 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.31
i. Atlantic Jersey Thermal Systems, Inc., a Delaware
corporation and wholly-owned subsidiary formed in 1994, that owns a 10% general
partnership interest in TELPI (as defined below).
ii. ATS Operating Services, Inc., a Delaware corporation and a
wholly-owned subsidiary formed in 1995 that provides thermal energy operating
services.
iii. 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, represents the initial
principal operations of ATS. 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
operation and others will continue to be served independently by ATS.
- --------
31 Subject to certain conditions, Rule 58(b)(1)(vi) exempts the acquisition of
the securities of a company that derives substantially all of its revenues
from "the production, conversion, sale and distribution of thermal energy
products, such as process steam, heat, hot water, chilled water, air
conditioning, compressed air and similar products; alternative fuels; and
renewable energy resources; and the servicing of thermal energy
facilities." See also New Century Energies, Holding Co. Act Release No.
26748 (Aug. 1, 1997); Cinergy Corp., Holding Co. Act Release No. 26474
(Feb. 20, 1996).
<PAGE>
Page 11
iv. Atlantic Paxton Cogeneration, Inc., a wholly-owned
subsidiary that is currently inactive and expected to be dissolved sometime in
1998.
v. Atlantic-Pacific Glendale, LLC, a Delaware limited liability
company in which ATS holds a 50% interest, was formed in 1997 to construct, own
and operate an integrated energy facility to provide heating, cooling and other
energy services to DreamWorks Animation, LLC in Glendale, California.
vi. Atlantic-Pacific Las Vegas, LLC, a Delaware limited
liability company in which ATS holds a 50% interest, was formed in 1997 to
finance, own and operate an integrated energy plant to provide heating and
cooling services to three affiliated customers in Las Vegas, Nevada.
d. CCI, a Delaware corporation and a wholly-owned subsidiary of AEE
formed in 1995 to pursue investments and business opportunities in the
telecommunications industry.32
e. ASP, a New Jersey corporation and a wholly-owned subsidiary of
AEE formed in 1970 that owns and manages certain investments in real estate,
including a 280,000 square-foot commercial office and warehouse facility in
southern New Jersey. Approximately fifty percent of the space in this facility
is currently leased to system companies and fifty percent is leased to
nonaffiliates.33
f. AET, a Delaware corporation and a wholly-owned subsidiary of AEE
formed in 1991. AET is currently winding up its sole investment in technology,
The Earth Exchange, Inc., which is nominal. There are no future plans for
investment activity at this time by AET.
g. 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, LLC. AEE and Cenerprise each own 50
percent of Enerval. Enerval provides energy management services, including
natural gas procurement, transportation and marketing. Discussions are underway
for the purchase by AEE of Cenerprise's interest.34
- --------
32 It is contemplated that CCI will be merged with and into Conectiv
Communications, Inc. See supra note 5.
33 See Central Power and Light Co., Holding Co. Act Release No. 26408 (Nov.
13, 1995).
<PAGE>
Page 12
3. Solutions, a Delaware limited liability company that is jointly owned by
Delmarva and Atlantic, was formed in 1997 to provide, directly or through
subsidiaries, power systems consulting, end use efficiency services, customized
on-site systems services and other energy services to large commercial and
industrial customers.35
ACE also has a nonutility subsidiary trust, Atlantic Capital I ("ACI"),
which was formed in 1996 in connection with the issuance by ACE of Cumulative
Quarterly Income Preferred Securities.
- --------
34 See supra note 15.
35 Upon consummation of the proposed transactions, Solutions will become a
wholly-owned subsidiary of Conectiv.
Atlantic Energy, Inc.
Consolidating Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
Consolidating
Entries Atlantic Energy,
(Debit) Credit Inc. Consolidated
<S> <C> <C>
----------------- -----------------
ASSETS:
ELECTRIC UTILITY PLANT:
IN SERVICE $ 0.00 $ 2,585,286,586.09
LESS ACCUMULATED DEPRECIATION 0.00 934,234,723.71
----------------- -----------------
NET 0.00 1,651,051,862.38
CONSTRUCTION WORK IN PROGRESS 0.00 95,119,632.88
LAND HELD FOR FUTURE USE 0.00 5,603,813.62
LEASED PROPERTY-NET 0.00 39,729,612.16
----------------- -----------------
ELECTRIC UTILITY PLANT-NET 0.00 1,791,504,921.04
----------------- -----------------
INVESTMENTS AND NON-UTILITY PROPERTY
INVESTMENT IN LEVERAGED LEASES 0.00 80,448,493.02
DECOMMISSIONING TRUST FUND 0.00 81,649,976.46
NON-UTILITY PROPERTY 0.00 110,963,018.95
LESS ACCUMULATED DEPRECIATION 0.00 5,607,390.07
----------------- -----------------
NON-UTILITY PROPERTY-NET 0.00 105,355,628.88
INVESTMENT IN SUBSIDIARY CO. (830,679,927.33) 0.00
POLLUTION CONTROL CONSTRUCTION FUNDS 0.00 2,188.62
OTHER INVESTMENTS 0.00 53,856,740.14
----------------- -----------------
TOTAL INVESTMENTS AND NON-UTILITY PROPERTY (830,679,927.33) 321,313,027.12
----------------- -----------------
CURRENT ASSETS:
CASH & TEMPORARY INVESTMENTS 0.00 17,224,113.27
ACCOUNTS RECEIVABLE-UTILITY 0.00 64,510,691.57
MISCELLANEOUS RECEIVABLES 0.48 42,034,084.66
ALLOWANCE FOR DOUBTFUL ACCOUNTS 0.00 (3,500,000.00)
UNBILLED REVENUES 0.00 36,915,000.00
FUEL (AT AVERAGE COST) 0.00 29,241,676.90
MATERIALS & SUPPLIES (AT AVG COST) 0.00 20,892,936.86
WORKING FUNDS 0.00 15,126,393.07
DEFERRED ENERGY COSTS 0.00 27,424,212.19
DEFERRED INCOME TAXES 0.00 0.00
NOTES RECEIVABLE 0.00 1,654,912.00
ADVANCES-ASSOC CO. 0.00 0.00
DIVIDENDS RECEIVABLE-SUBSIDIARIES (20,214,224.41) 0.00
ACCTS RECEIVABLE-ASSOC.CO. (12,411,040.47) 0.00
PREPAYMENTS 0.00 `12,693,290.04
PREPAID STATE EXCISE TAXES 0.00 3,804,488.47
----------------- -----------------
TOTAL CURRENT ASSETS (32,625,264.40) 268,021,799.03
----------------- -----------------
DEFERRED DEBITS:
UNRECOVERED PURCHASED POWER COSTS 0.00 66,263,759.87
RECOVERABLE FEDERAL INCOME TAXES 0.00 85,858,065.73
UNRECOVERED STATE EXCISE TAXES 0.00 45,153,706.76
UNAMORTIZED LOSS ON REACQUIRED DEBT 0.00 30,001,858.31
UNAMORTIZED DEBT COSTS 0.00 14,945,310.47
OTHER REGULATORY ASSETS 0.00 56,401,417.90
PROPERTY ABANDONMENT COSTS 0.00 5,712,304.23
PRELIMINARY SURVEY & INVESTIGATION 0.00 1,085,244.83
DEFERRED INCOME TAXES 0.00 456,801.76
LICENSE FEES 0.00 26,080,937.51
MISCELLANEOUS DEFERRED DEBITS 0.00 11,085,034.89
----------------- -----------------
TOTAL DEFERRED DEBITS 0.00 343,044,442.26
TOTAL ASSETS $ (863,305,191.73) $ 2,723,884,189.45
================= =================
</TABLE>
<PAGE>
Atlantic Energy, Inc.
Consolidating Balance Sheet
December 31, 1997
December 31, 1997
<TABLE>
<CAPTION>
Consolidating
Entries Atlantic Energy,
(Debit) Credit Inc. Consolidated
----------------- -----------------
<S> <C> <C>
LIABILITIES & CAPITALIZATION
CAPITALIZATION:
COMMON SHAREHOLDERS' EQUITY:
COMMON STOCK $ (103,724,804.62) $ 563,460,382.06
PREMIUM ON CAPITAL STOCK (231,080,921.36) 0.00
MISC. PAID IN CAPITAL (263,617,447.42) 0.00
CONTRIBUTED CAPITAL (13,448,650.74) 0.00
CAPITAL STOCK EXPENSE 1,537,021.23 0.00
RETAINED EARNINGS (220,345,124.44) 221,622,789.57
UNEARNED COMPENSATION 0.00 0.00
---------------- -----------------
TOTAL COMMON S/H EQUITY (830,679,927.35) 785,083,171.63
---------------- -----------------
PREFERRED SECURITIES:
CUM P/S NOT SUBJ TO MAND REDEMPTION 0.00 30,000,000.00
CUM P/S SUBJ TO MAND REDEMPTION 0.00 23,950,000.00
QUARTERLY INCOME PREFERRED SECURITIES 0.00 70,000,000.00
LONG TERM DEBT 0.00 889,743,671.11
---------------- ----------------
TOTAL CAPITALIZATION (830,679,927.35) 1,798,776,842.74
---------------- ----------------
CURRENT LIABILITIES:
CURRENT PORTION:
CUM P/S SUBJ TO MAND REDEMPTION 0.00 0.00
LONG TERM DEBT 0.00 147,566,370.65
SHORT TERM DEBT 0.00 55,675,000.00
COMMERCIAL PAPER 0.00 0.00
ACCOUNTS PAYABLE 0.00 65,368,838.72
TAXES ACCRUED 0.00 6,048,854.00
INTEREST ACCRUED 0.00 20,116,187.32
DIVIDENDS DECLARED (20,214,224.41) 21,215,079.44
EMPLOYEE SEPARATION COSTS 0.00 751.59
OBLIGATIONS UNDER CAPITAL LEASES 0.00 653,109.33
NOTES PAYABLE-ASSOCIATED CO. 0.00 0.00
ACCOUNTS PAYABLE-ASSOCIATED CO. (12,411,039.97) 0.00
ADVANCES ASSOC. CO. 0.00 0.00
CUSTOMER DEPOSITS 0.00 7,730,251.34
DEFERRED TAXES 0.00 1,888,339.48
MISC ACCRUED LIABILITIES 0.00 16,263,699.46
---------------- ----------------
TOTAL CURRENT LIABILITIES (32,625,264.38) 342,526,481.33
---------------- ----------------
DEFERRED CREDITS AND OTHER LIAB:
DEFERRED INCOME TAXES 0.00 439,266,982.47
DEFERRED INVESTMENT TAX CREDITS 0.00 44,043,109.77
OBLIGATIONS UNDER CAPITAL LEASE 0.00 39,076,503.33
CUSTOMER ADVANCES FOR CONSTRUCTION 0.00 1,146,377.62
OTHER DEFERRED CREDITS 0.00 55,124,292.15
OPERATING RESERVES 0.00 3,923,600.04
---------------- ----------------
TOTAL DEFD CREDITS & OTHER LIAB 0.00 582,580,865.38
---------------- ----------------
TOTAL LIABILITIES & CAPITAL $ (863,305,191.73) $ 2,723,884,189.45
================ ================
</TABLE>
Atlantic Energy, Inc.
Consolidating Income Statement
For the Year to Date December 31, 1997
<TABLE>
<CAPTION>
Consolidating Atlantic
Entries Energy, Inc.
(Debit) Credit Consolidated Rounded
<S> <C> <C> <C>
Operating Revenues:
Electric Revenues $ (6,547,811.81) $ 989,941,360.69 $ 989,941
Other Revenues (24,037,688.26) 0.00 0
------------------ ----------------- ---------------
Total Operating Revenues (30,585,500.07) 989,941,360.69 989,941
------------------ ----------------- ---------------
Operating Expenses:
Net Energy 0.00 222,671,569.62 222,672
Purchased Power 0.00 197,386,367.72 197,386
Operations 23,623,939.29 163,246,683.41 163,247
Maintenance 284,797.16 32,603,657.36 32,604
Depreciation
& Amortization 673,715.99 83,276,335.85 83,276
State Excise Taxes 0.00 103,990,923.19 103,991
State Income Taxes 178,518.16 0.00 0
Federal Income Taxes (621,948.09) 43,801,652.86 43,801
Other Taxes 323,199.01 7,292,760.56 7,293
----------------- ----------------- ---------------
Total Operating Expenses: 24,462,221.52 854,269,950.57 854,270
----------------- ----------------- ---------------
Total Operating Income (55,047,721.59) 135,671,410.12 135,671
Other income:
Nonutility Revenues
& Gains 24,840,136.22 24,840,136.22 24,840
Nonutility Expenses,
including interest
& income taxes (24,029,048.08) (24,029,048.08) (24,029)
------------------ ------------------ ----------------
Net Earnings from
Nonutility Companies 811,088.14 811,088.14 811
Net Earnings from
Subsidiary Companies (83,329,164.81) 0.00 0
Net Earnings from
Joint Venture (803,619.00) (803)
Net Earnings from
Investees *1,866,400.45 0.00 0
AFDC - Equity Funds 0.00 815,420.56 815
Other income (2,707,807.16) 12,004,675.98 12,005
Other (Expense) 35,177.99 0.00 0
----------------- ----------------- ---------------
Total Other Income (83,324,305.39) 12,827,565.66 12,828
------------------ ----------------- ---------------
Income before Utility
Interest Charges
& Preferred Dividends (138,372,026.98) 148,498,975.80 148,499
------------------ ----------------- ---------------
Utility Interest Charges:
Interest on Long
Term Debt 2,719,706.66 59,597,319.59 59,597
Interest on Short
Term Debt 3,075,516.67 4,430,403.98 4,430
Other Interest Expense 323,195.80 473,194.75 473
----------------- ----------------- ---------------
Total Interest Charges 6,118,419.13 64,500,918.32 64,501
AFDC - Borrowed Funds 0.00 1,002,685.41 1,003
----------------- ----------------- ---------------
Net Interest Charges 6,118,419.13 63,498.232.91 63,498
Preferred Dividends of
Subsidiary 5,775,000.00 0.00 0
----------------- ----------------- ---------------
Income Before Preferred
Dividends of Subsidiary (150,265,446.11) 85,000,742.89 85,001
------------------ ----------------- ---------------
Preferred Dividends of
Subsidiary (5,775,000.00) 10,595,650.00 10,596
Net Income (Loss) (144,490,446.11) 74,405,092.89 74,405
------------------ ----------------- ---------------
Preferred Dividend
Requirements 4,820,650.00 0.00 0
----------------- ----------------- ---------------
Income Available for
Common Stock $ (149,311,096.11) 74,405,092.89 $ 74,405
================= ================= ===============
Earnings Per Share $ 1.4184
================
Retained Earnings, Beginning
of Period $ 222,800,889.93 $ 227,629,668.69
Net Income (Loss) 83,329,164.81 74,405,092.89
Dividends - Common Stock (80,856,127.64) (80,856,127.64)
Dividends - Preferred Stock (4,820,650.00) 0.00
Preferred Stock Expense (108,152.68) 0.00
Other Charges 0.02 444,115.63
----------------- ----------------
Retained Earnings, End of
Period $ 220,345,124.44 $ 221,622,789.57
================ ================
Average Shares (Diluted)
Consolidated Earnings Per
Share - Reported $ 1.42
* Includes 1996 Enerval Audit Adjustment ($2,537,868.50)
</TABLE>
DELMARVA POWER AND LIGHT COMPANY
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
($ in Thousands)
Eliminations Consolidated
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash
equivalents $ 35,339
Accounts receivable $ (13,145) 197,561
Inventories, at
average cost:
Fuel(coal, oil,
and gas) 37,425
Materials and supplies 40,518
Prepayments (4,286) 11,255
Deferred energy costs 18,017
Deferred income
taxes, net (448) 776
-------------- ------------
(17,879) 340,891
-------------- ------------
NONUTILITY PROPERTY AND
INVESTMENTS
Nonutility property,
net 93,528
Investment in
leveraged leases 46,375
Funds held by trustee 38,642
Other investments (184,707) 9,500
-------------- ------------
(184,707) 188,045
-------------- ------------
UTILITY PLANT, AT ORIGINAL
COST
Electric 3,083,910
Gas 241,580
Common 154,826
------------- ------------
0 3,480,316
Less: Accumulated
depreciation 1,364,232
------------- ------------
Net utility plant
in service 2,116,084
Construction work-
in-progress 93,017
Leased nuclear fuel,
at amortized cost 31,031
------------- ------------
0 2,240,132
------------- ------------
DEFERRED CHARGES AND
OTHER ASSETS
Prepaid employee benefit
costs 58,111
Unamortized debt expense 12,911
Deferred debt refinancing
costs 18,760
Deferred recoverable
income taxes 88,683
Other 67,948
------------- ------------
0 246,413
------------- ------------
TOTAL ASSETS $ (202,586) $ 3,015,481
============== ============
CAPITALIZATION
AND LIABILITIES
CURRENT LIABILITIES
Short-term debt $ 23,254
Long-term debt due
within one year 33,318
Variable rate demand
bonds 71,500
Accounts payable ($12,991) 103,607
Taxes accrued (4,286) 10,723
Interest accrued 19,902
Dividends declared (154) 23,775
Current capital lease
obligation 12,516
Deferred income taxes,
net 0
Other 35,819
------------- ------------
(17,431) 334,414
-------------- ------------
DEFERRED CREDITS AND
OTHER LIABILITIES
Deferred income taxes,
net (448) 492,792
Deferred investment
tax credits 39,942
Long-term capital lease
obligation 19,877
Other 30,585
------------- ------------
(448) 583,196
-------------- ------------
CAPITALIZATION
Common stock, $2.25
par value; 90,000,000
shares authorized;
shares outstanding:
1997--61,210,262,
1996--60,682,719 (2,179) 139,116
-------------- ------------
Additional paid-in
capital (108,349) 526,812
Retained earnings 5,143 300,757
------------- ------------
(105,385) 966,685
Treasury shares, at cost:
1997-616,788 shares,
1996--101,831 shares (7,157) (11,687)
Unearned compensation (502)
------------- -------------
Total common stock-
holders' equity (112,542) 954,496
Cumulative preferred
stock 89,703
Company obligated
mandatorily redeemable
preferred securities
of subsidiary trust
holding solely
Company debentures 70,000
Long-term debt (72,165) 983,672
-------------- ------------
(184,707) 2,097,871
-------------- ------------
TOTAL CAPITALIZATION
AND LIABILITIES $ (202,586) $ 3,015,481
============== ============
DELMARVA POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Dollars in Thousands) Eliminations Consolidated
- ---------------------- ------------ ------------
OPERATING REVENUES
Electric $ 1,092,144
Gas 204,057
Other services $ (2,730) 127,301
-------------- -------------
(2,730) 1,423,502
-------------- -------------
OPERATING EXPENSES
Electric fuel and
purchased power 416,640
Gas purchased 153,027
Other services'
cost of sales 85,192
Purchased electric
capacity 28,470
Operation and maintenance (2,730) 331,770
Depreciation 136,340
Taxes other than income
taxes 37,634
-------------- -------------
(2,730) 1,189,073
-------------- -------------
OPERATING INCOME - 234,429
-------------- -------------
OTHER INCOME
Allowance for equity
funds used during
construction 1,337
Equity in earnings of
consolidated
subsidiaries (10,103) 0
Other income (6,171) 28,187
-------------- -------------
(16,274) 29,524
-------------- -------------
INTEREST EXPENSE
Interest charges (5,863) 83,398
Allowance for borrowed
funds used during
construction and
capitalized interest (2,996)
-------------- -------------
(5,863) 80,402
-------------- -------------
DIVIDENDS ON PREFERRED
SECURITIES OF A
SUBSIDIARY TRUST - 5,687
-------------- -------------
INCOME BEFORE INCOME TAXES (10,411) 177,864
-------------- -------------
INCOME TAXES 72,155
-------------- -------------
NET INCOME (10,411) 105,709
DIVIDENDS ON PREFERRED
STOCK - 4,491
-------------- -------------
EARNINGS APPLICABLE TO
COMMON STOCK $ (10,411) $ 101,218
============== =============
