As filed with the SEC on July 24, 2002
File No. 70-09913
United States Securities and Exchange Commission
Washington, D.C. 20549
----------------------------------------
Pre-effective Amendment No. 3 to
Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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Pepco Holdings, Inc. Conectiv
701 Ninth Street, N.W. 800 King Street
Washington, DC 20068. Wilmington, DE 19899
(Names of companies filing this statement
and addresses of principal executive offices)
----------------------------------------
Pepco Holdings, Inc.
(Name of top registered holding company)
----------------------------------------
Dennis R Wraase William T. Torgerson Peter F. Clark
President General Counsel Vice President, General
Pepco Holdings, Inc. Potomac Electric Power Company Counsel and Secretary
701 Ninth Street, N.W. 701 Ninth Street, N.W. Conectiv
Washington, DC 20068. Washington, DC 20068. 800 King Street
Wilmington, DE 19801
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communication in connection with this matter to:
Sheri E. Bloomberg Judith A. Center
Sonia Mendonca William C. Weeden
LeBoeuf, Lamb, Greene & MacRae, Skadden, Arps, Slate, Meagher &
L.L.P. Flom, L.L.P.
125 West 55th Street 1440 New York Avenue, NW
New York, NY 10019-5389 Washington, D.C. 20005
(212) 424-8000 (202) 371-7000
Facsimile: (212) 424-8500 Facsimile: (202) 371-5760
TABLE OF CONTENTS
Page
Item 1. Description of the Proposed Transaction................................1
A. Introduction...........................................................1
B. General Request........................................................2
C. The Companies..........................................................4
1. Pepco System.....................................................4
2. Conectiv System..................................................6
3. Pepco Holdings..................................................10
4. Regulatory Environment..........................................12
D. Description of the Transaction........................................16
1. The Mergers.....................................................16
2. Conditions to the Transaction...................................19
3. Background of the Transaction...................................21
4. Financing the Transaction.......................................30
5. Management and Operations of Pepco and Conectiv
Following the Transaction.......................................31
6. Benefits of the Transaction.....................................32
Item 2. Fees, Commissions and Expenses........................................34
Item 3. Applicable Statutory Provisions.......................................35
A. Applicable Provisions.................................................35
B. Legal Analysis........................................................35
1. Section 10(b)...................................................35
2. Section 10(c)...................................................46
3. Section 10(f)...................................................57
4. Section 11(b)(2)................................................57
5. Section 13 - Intra-system Provision of Services.................59
6. Nonutility Reorganizations......................................68
7. Authorization to Engage in Energy-Related Activities
Outside of the United States....................................69
8. Tax Allocation Agreement........................................71
9. Rule 54 Analysis................................................73
Item 4. Regulatory Approvals..................................................77
Item 5. Procedure.............................................................81
Item 6. Exhibits and Financial Statements.....................................82
Item 7. Information as to Environmental Effects...............................86
This pre-effective Amendment No. 3 replaces and revises the Form U-1
Application-Declaration in this proceeding, originally filed in File No.
70-09913 on July 20, 2001 and Amendments No. 1 filed on January 9, 2002 and No.
2 filed on March 27, 2002, in their entireties, except that it does not replace
exhibits previously filed.
Item 1. Description of the Proposed Transaction
A. Introduction
This Application-Declaration ("Application") seeks approvals relating
to the proposed acquisition of Potomac Electric Power Company ("Pepco"), a
public utility company, and Conectiv, a registered public utility holding
company. Applicants propose that upon the satisfaction of certain conditions,
including receipt of all necessary regulatory approvals, Pepco and Conectiv will
become subsidiaries of Pepco Holdings, Inc. ("Pepco Holdings"), formerly
referred to as New RC, Inc., headquartered in Washington, DC (the
"Transaction").
Pepco Holdings was recently created as a direct wholly owned
subsidiary of Pepco, and after the completion of the Transaction, as described
below, will be the parent of both Pepco and Conectiv. After completion of the
Transaction, Pepco and Conectiv stockholders will own the common stock of Pepco
Holdings.
The Transaction is conditioned upon, among other things, the approvals
of Pepco and Conectiv stockholders (which were received on July 18, 2001 and
July 17, 2001 respectively) and various state and federal regulatory agencies,
as described below. All of the necessary approvals, other than the approval of
the Commission, have been obtained as of the date of this Application. Upon
consummation of the Transaction, Pepco Holdings will register with the
Commission under the Public Utility Holding Company Act of 1935 (the "Act").
The Transaction will create a stronger combined company, yielding
significant benefits for customers, communities, shareholders, employees and the
region. The combined company will become the largest electricity delivery
company in the mid-Atlantic region in terms of both MW load and kWh sales. It
will also be the largest owner of transmission facilities within the PJM
Interconnection, L.L.C. ("PJM"). The combined company will serve 1.8 million
customers in New Jersey, Delaware, Maryland, Virginia, and the District of
Columbia. The
combined company will have the size and scope needed to compete more effectively
in the energy delivery and related retail markets.
Each of Pepco and Conectiv will continue to operate under their
existing names and each is committed to maintaining management teams in their
current headquarters. Applicants do not expect significant workforce reductions
other than limited common corporate level functions, and any workforce
reductions will not affect reliability or the quality of customer service.
B. General Request
Applicants request authorization under Sections 9(a)(2) and 10 of the
Act to effect the Transaction. To implement the Transaction, Pepco Holdings
proposes to form two wholly owned subsidiaries that will merge with and into
respectively, Pepco and Conectiv ("Mergers"). Pepco stockholders will receive
one share of Pepco Holdings' common stock for each share of Pepco common stock
they hold prior to the Mergers. Conectiv common stockholders and Class A common
stockholders/1 will receive either cash or Pepco Holdings common stock, subject
to proration, such that the aggregate consideration paid to all Conectiv
stockholders will be 50 percent cash and 50 percent stock. As a result of the
Transaction, all of the outstanding shares of common stock of Pepco Holdings
will be held by the former stockholders of Conectiv and Pepco
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1 Conectiv has the following securities registered pursuant to Section 12(b) of
Securities Exchange Act of 1934: Common stock, $0.01 par value, and Class A
common stock, $ 0.01 par value. Both classes of stock are listed on the New York
Stock Exchange. As of March 31, 2002, the authorized capital stock of Conectiv
consisted of (a) 150,000,000 shares of Conectiv Common Stock, of which
83,010,813 shares were outstanding, (b) 10,000,000 shares of Class A Stock, of
which 5,742,315 were outstanding, and (c) 20,000,000 shares of Preferred Stock,
of which no shares were outstanding but of which 1,200,000 shares have been
designated as Series One Junior Preferred Stock and 65,606 shares have been
designated as Series Two Junior Preferred Stock, in each case reserved for
issuance upon exercise of the Preferred Stock Purchase Rights distributed to the
holders of Conectiv stock pursuant to the Stockholders Rights Agreement, dated
as of April 23, 1998 between Conectiv and Conectiv Resource Partners, Inc.
2
and each share of each other class of capital stock of Conectiv and Pepco/2
shall be unaffected and remain outstanding./3
In addition, the following authorizations with respect to the Pepco
Holdings system are requested in this application:
o To retain the non-utility businesses and subsidiaries of Pepco
and Conectiv.
o To retain Conectiv's gas operations.
o To extend the role of Conectiv Resource Partners, Inc. ("CRP") as
a system service company to provide services to all associate
companies in the Pepco Holdings system and authorize Pepco to
provide services to all system companies as an agent of CRP, in
each case to the extent described in Item 3.B.5 herein during a
temporary transition period. The Applicants also request certain
exemptions from the "at cost" standards of the Act with respect
to services provided to specified subsidiaries.
o To reorganize Pepco Holdings' direct and indirect nonutility
subsidiaries without the need to seek further Commission
authorization for an authorization period ending June 30, 2005,
including, without limitation, reorganizing certain of Pepco's
current second and third tier non-utility subsidiaries, Potomac
Capital Investment Corporation ("PCI"), Pepco Energy Services,
Inc. ("PES" or "Energy Services"), and Pepco Communications, Inc.
("PepCom") as first tier subsidiaries of Pepco Holdings shortly
after consummation of the Transaction. Following any
reorganization, Pepco Holdings will continue to hold, directly or
indirectly, the same interest in the voting securities of the
relevant nonutility subsidiary as immediately prior to
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2 Pepco has the following securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934: Common stock, $1 par value and Guarantee by
Pepco of the 7-3/8% Trust Originated Preferred Securities issued by Potomac
Electric Power Company Trust I. Both are listed on the New York Stock Exchange.
As of March 31, 2002, the authorized capital stock of Pepco consisted of (a)
200,000,000 shares of Pepco Common Stock, par value $1.00 per share, of which
107,125,976 shares were outstanding, (b) 8,800,000 shares of Preference Stock,
par value $25 per share, of which no shares were outstanding, and 7,750,000
shares of preferred stock, par value $50 per share, of which 1,695,312 shares
were outstanding.
3 See Agreement and Plan of Merger, dated as of February 9, 2001 among Potomac
Electric Power Company, Pepco Holdings, Inc. and Conectiv ("Merger Agreement"),
Exhibit B-1 herein.
3
the reorganization and any intermediate nonutility holding
companies formed as a result of such reorganizations will be
wholly owned. Pepco's current first tier non-utility holding
company, POM Holdings, Inc. ("POM") (formerly known as Pepco
Holdings, Inc.) is expected to remain in existence after
consummation of the Transaction but will not have any
subsidiaries following the non-utility reorganization previously
discussed.
o To engage in energy-related activities outside of the United
States for an authorization period ending June 30, 2005.
o To allocate consolidated tax among the companies within the Pepco
Holdings system pursuant to a Tax Allocation Agreement.
C. The Companies
1. Pepco System
Pepco is a public utility company within the meaning of the Act. Pepco
is engaged in the transmission and distribution of electric energy in the
Washington, D.C. metropolitan area. Pepco delivers electricity at regulated
rates to approximately 700,000 customers in the District of Columbia ("D.C."),
and major portions of Prince George's and Montgomery counties in suburban
Maryland. During the transition to customer choice, the utility also is selling
electricity at regulated rates within its service area.
Pepco is regulated as a public utility in D.C., the State of Maryland,
and, to a limited extent, in the Commonwealths of Pennsylvania (as a result of
ownership of a 27% interest in the Conemaugh-Conestone EHV transmission line,
which is used to transmit energy from the Conemaugh Generating Station to
Pepco's facilities in other states, and 9.72% undivided tenant-in-common
interest in an electric transmission switching station and related facilities at
the Conemaugh Station) and Virginia (as a result ownership of 55 circuit power
lines in Virginia that interconnect generation and transmission facilities owned
by unaffiliated third parties with Pepco's transmission facilities in other
states).
In 2000, the generating segment of the electric utility industry
continued to transition from a regulatory to a competitive environment, and in
response to this transition, Pepco executed its business plan to exit the
electricity generating business by completing the
4
divestiture of substantially all of its generation assets in December 2000./4
Additionally, Pepco's comprehensive plans to implement customer choice were
completed as Maryland and D.C. customers began to have their choice of
electricity suppliers on July 1, 2000, and January 1, 2001, respectively.
Pepco's transmission facilities, which currently are held directly by
Pepco, are interconnected with those of other transmission owners that are
members of PJM, an Independent System Operator ("ISO") approved by the Federal
Energy Regulatory Commission ("FERC")./5 The interconnected facilities provide
economic energy and reliability benefits by facilitating Pepco's participation
in the federally regulated wholesale energy and capacity market. PJM administers
all transmission service within the PJM region. PJM is the largest centrally
dispatched electric control area in North America, with generating capacity
resources of over 58,000 megawatts. The PJM staff centrally forecasts,
schedules, and coordinates the operation of generating units, bilateral
transactions, and the spot energy market to meet load requirements and
administers a capacity market. PJM also monitors, evaluates and directs the
operation of its members' transmission lines. The PJM Open Access Same Time
Information System ("OASIS") is used to reserve transmission service. In
addition, the PJM staff, working with transmission owners, coordinates the
planning of new generator interconnections in the control area as well as the
planning of the interconnected bulk power transmission system to deliver energy
reliably and economically to customers. Pepco has an investment in the
Keystone-Conemaugh 500kV system ("EHV") that traverses most of Pennsylvania.
Pepco is also engaged in the sale of electricity, natural gas, and
telecommunications in markets throughout the mid-Atlantic region through its
wholly owned non-regulated subsidiary, POM. In May 1999, Pepco reorganized its
non-regulated subsidiaries into two major operating groups to compete for market
share in deregulated markets. As part of the reorganization, POM was created as
the parent company of its two wholly owned subsidiaries, PCI and Energy
Services.
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4 The generation assets retained are all Exempt Wholesale Generators ("EWGs").
5 On July 12, 2001 the FERC conditionally granted RTO status to PJM. PJM
Interconnection, LLC et al., 96 FERCP. 61,061 (2001)("PJM RTO Order").
5
Potomac Electric Power Company Trust I (the "Trust"), a Delaware
statutory business trust, and Edison Capital Reserves Corporation ("Edison"), a
Delaware Investment Holding Company, are also wholly owned subsidiaries of
Pepco. The Trust was established in April 1998 and exists for the exclusive
purposes of (i) issuing Trust securities representing undivided beneficial
interests in the assets of the Trust, (ii) investing the gross proceeds from the
sale of Trust Securities in Junior Subordinated Deferrable Interest Debentures
issued by Pepco, and (iii) engaging only in other activities as necessary or
incidental to the foregoing./6 Edison was established in 2000 and exists for the
purposes of managing and investing a significant portion of the proceeds
received from the divestiture of certain Pepco's generation assets.
On a separate company basis (i) Pepco, for its utility operations,
reported total assets of $3,936.0 million at March 31, 2002, and utility
operating revenues of $1,622.0 million and net income of $148.5 million for the
twelve months ended March 31, 2002, (ii) PCI reported total assets of $1,277.8
million at March 31, 2002, and operating revenues of $111.9 million and net loss
of $(26.0) million for the twelve months ended March 31, 2002 and (iii) PES
reported total assets of $218.0 million at March 31, 2002, and operating
revenues of $665.8 million and net income of $5.6 million for the twelve months
ended March 31, 2002. On a consolidated basis, Pepco reported total assets of
$5,252.9 million at March 31, 2002, total operating revenues of $2,357.7 million
and net income of $128.1 million for the twelve months ended March 31, 2002
Pepco's existing public utility subsidiaries and nonutility companies
are described in further detail in Exhibit K-1 to this Application.
2. Conectiv System
Conectiv was formed on March 1, 1998, through a series of merger
transactions and an exchange of common stock with Delmarva Power & Light Company
("Delmarva") and Atlantic Energy, Inc./7 Conectiv is a registered holding
company under the Act and a Delaware corporation. Conectiv owns all of the
outstanding common stock of Delmarva, a Delaware and
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6 The securities issued by the Trust are reflected on the capitalization table
set forth herein as $125 million company obligated mandatorily redeemable
preferred securities of subsidiary trust which holds solely parent junior
subordinated debentures.
7 See Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998) (the
"Conectiv Merger Order").
6
Virginia corporation, and of Atlantic City Electric Company ("ACE"), a New
Jersey corporation and formerly the wholly owned subsidiary of Atlantic Energy,
Inc., which was merged into Conectiv upon the consummation of the merger
transactions that resulted in Conectiv becoming a registered holding company.
Conectiv also owns a number of other subsidiaries discussed below.
Delmarva and ACE are Conectiv's largest subsidiaries. Delmarva and ACE
are public utilities that supply and deliver electricity to their customers
under the trade name Conectiv Power Delivery. Delmarva provides electric service
in Delaware, Maryland and Virginia and natural gas service in northern Delaware.
ACE provides electric service in New Jersey./8 Delmarva and ACE deliver
electricity within their service areas to approximately 973,600 customers
through their respective transmission and distribution systems and also supply
electricity to most of their electricity delivery customers. Delmarva has about
472,600 customers in its service area and ACE has about 501,000 customers in its
service area. Delmarva's regulated electric service area has a population of
approximately 1.2 million and covers an area of about 6,000 square miles on the
Delmarva Peninsula (Delaware and portions of Maryland and Virginia). ACE's
regulated service area is located in the southern one-third of New Jersey,
covers an area of about 2,700 square miles, and has a population of
approximately 900,000. Delmarva delivers natural gas through its gas
transmission and distribution systems to approximately 110,800 customers in a
service territory that covers about 275 square miles in northern Delaware and
has a population of approximately 500,000.
ACE is subject to regulation as a public utility in the State of New
Jersey and Delmarva is subject to regulation as a public utility in the States
of Delaware, and Maryland, and the Commonwealth of Virginia. Both ACE and
Delmarva are subject, to a limited extent, to regulation by the Commonwealth of
Pennsylvania.
A transition to market pricing and terms of service for supplying
electricity to customers in the regulated service areas of Delmarva and ACE
began in 1999. Substantially all of the customers of Delmarva and ACE can now
elect to choose an alternative electricity supplier. In response to these
changes, Conectiv formed Conectiv Energy Holding Company
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8 The electricity delivered by Delmarva and ACE may be supplied to customers by
alternative suppliers, Delmarva or ACE. Gas delivered may be supplied to
customers by alternative suppliers or Delmarva.
7
("CEH") in 2000. CEH and its subsidiaries are engaged in electricity production
and sales, energy trading and marketing.
In addition to the power delivery conducted by Delmarva and ACE,
Conectiv, through its subsidiaries, is engaged in the generation, purchase,
trading, and sale of electricity, including the obligations of Delmarva and ACE
as default suppliers, gas and other energy supply trading activities./9
CEH owns 100% of the stock of ACE REIT, Inc. ("ACE REIT"), CESI,/10
Conectiv Delmarva Generation, Inc. ("CDG") and Conectiv Pennsylvania Generation,
Inc. ("CPGI"). ACE REIT owns 100% of the interests in Conectiv Atlantic
Generation, LLC ("CAG"), a merchant generation company,/11 and CESI owns 100% of
the stock of Conectiv Operating Services Company ("COSC"), a company that
operates and maintains power plants./12 CDG, CAG and CPGI are utilities within
the meaning of the Act.
In addition, Conectiv is changing the types of electric generation
plants its owns by selling the majority of its baseload plants and increasing
its mid-merit generation portfolio. Based on megawatts of generating capacity,
in 2002 Conectiv expects to enter into agreements to sell approximately 25%
(739.70 MW) of the electric generating plants that it owned as of December 31,
2001 (2,963.70 MW)./13 Conectiv is building new mid-merit electric generating
plants, which Conectiv's management expects will provide a better strategic fit
with Conectiv's
------------------
9 See order authorizing the restructuring of the Conectiv nonutility operations
and the merger into Conectiv Energy Supply, Inc. ("CESI") of Petron Oil
Corporation and the acquisition of stock of Delmarva Operating Services Company
(now Conectiv Operating Services Company) during phase 1 of the restructuring
and of Atlantic Generation, Inc. during phase 2 of the restructuring (Conectiv,
Holding Co. Act Release No. 26953 (Dec. 16, 1998). Also within the Conectiv
system is Conectiv Energy, Inc. ("CEI"), the assets of which CDG expects to
acquire pursuant to authority previously granted by the Commission in Conectiv,
Holding Co. Act Release No. 27192 (June 29, 2000).
10 Named Delmarva Energy Company at the time of the Conectiv Merger Order and
later renamed.
11 In the context of restructuring the market for electricity, merchant
generation is often used to describe a specialized "marketer" for the generating
plants formerly owned by a vertically-integrated utility.
12 COSC's activities fall within the scope of Rule 58.
13 Delmarva's ownership interests in nuclear electric generating plants were
sold on December 29, 2000 and ACE's ownership interests in nuclear electric
generating plants were sold on October 18, 2001. As noted below, the sale of
1,081 MW of Delmarva's baseload coal-fired plans, under contract on December 31,
2000, was completed in June 2001.
8
energy trading activities and have more profitable operating characteristics
than the plants to be sold.
The capacity provided by the electric generating plants of Conectiv's
subsidiaries as of December 31, 2001 is summarized below:
As of 12/31/01 Expected to be
-------------------- retained*
Expected to be sold -------------------
(MW) (MW) (MW)
Coal-fired generating units 731 471 260
Oil-fired generating units 686 241 445
Combustion turbines/combined cycle
generating units 1,516 19 1,497
Diesel units 30.7 8.7 22
Electric generating capacity 2,963.7 739.7 2,224
* Represents the electric generating units as of December 31, 2001, less the
units expected to be sold by the end of the first quarter of 2003.
In addition, as of December 31, 2001, Conectiv's subsidiaries had
long-term purchased power contracts which provided 3,100 MW of capacity and
varying amounts of firm electricity per hour during each month of a given year.
Also, Delmarva agreed to purchase back 500 MW/hr of firm electricity per hour
from the buyer of its generating plants beginning upon completion of the sale
and continuing through December 31, 2005.
As a member of PJM, the generation and transmission facilities of
Conectiv are operated on an integrated basis with other electricity suppliers
and transmission owners in Pennsylvania, New Jersey, Maryland and the District
of Columbia, and are interconnected with other major utilities in the eastern
half of the United States. In addition to having an investment in EHV, ACE and
Delmarva each have investments in two other 500kV systems in the PJM region
("LDV" and "SE")./14 Each of Delmarva and ACE currently holds its interest in
its transmission assets directly.
Conectiv also holds direct and indirect interests in various
nonutility businesses. Conectiv engages in power plant operation services
through COSC, and district heating and cooling systems operation and
construction services, through Conectiv Thermal Systems, Inc.
------------------
14 The EHV, LDV and SE systems interconnect and form the "backbone" of the PJM.
9
("CTS"), and in telecommunications services, including local and long distance
telephone service and Internet services, through Conectiv Communications, Inc.
("CCI")./15
In addition, Conectiv formed a subsidiary service company, Conectiv
Resource Partners, Inc., to provide a variety of support services to Conectiv
subsidiaries. The costs of Conectiv Resource Partners, Inc. are directly
assigned or allocated to the Conectiv subsidiaries.
The sources of Conectiv's consolidated revenues on a percentage basis
are shown below:
2001 2000 1999 1998
---- ---- ---- ----
Regulated electric revenues* 35.9% 40.0% 57.7% 62.4%
Competitive electric revenues 25.2% 18.1% 8.4% 9.3%
Gain on sale of power plants 5.1% 0.3% -- --
Regulated gas revenues 2.7% 2.3% 3.1% 3.5%
Competitive gas revenues 22.7% 28.4% 19.0% 13.9%
Other services** 8.4% 10.9% 11.8% 10.9%
*Regulated electric and gas revenues include the supply and delivery of these
commodities within the service areas of Delmarva and ACE.
**Other services include telecommunications, HVAC, petroleum sales, and other
activities.
All of Conectiv's direct and indirect nonutility subsidiaries are
further described in Exhibit K-1.
3. Pepco Holdings
Pepco Holdings was incorporated under the laws of Delaware on February
9, 2001, as a direct wholly owned subsidiary of Pepco. Pepco Holdings has issued
100 shares of common stock (with a par value of $.01 per share), all of which
are owned by Pepco. Pepco Holdings was created to become the parent company of
Pepco and Conectiv after the
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15 In 2000, Conectiv sold its heating, ventilation and air conditioning ("HVAC")
business and portions of CTS, which constructs and operates district heating and
cooling systems. Conectiv also began exiting from the competitive retail energy
business. In addition, on November 14, 2001, Conectiv sold substantially all of
the assets of CCI. The retained assets are being used to provide
telecommunication services to Conectiv and its affiliates. Conectiv
Communications of Virginia, Inc., a Delaware corporation, formerly wholly owned
by CCI was dissolved in June 2001. CCI is an exempt telecommunications company
("ETC") within the meaning of Section 34 of the Act.
10
consummation of the Transaction. After consummation of the Transaction, Pepco
Holdings will register as a public utility holding company under the Act.
As of and for the twelve months ended March 31, 2002, Pepco and
Conectiv had the following financial results individually, and on an unaudited
pro forma combined basis:
Pepco Conectiv Pro Forma Combined
($ millions) ($ millions) ($ millions)
------------ ------------ ------------------
Total assets 5,252.9 6,323.9 12,240.9
Total operating revenues 2,357.7 5,315.0 7,677.2
Operating income 309.2 758.8 1,082.5
Net Income 128.1 366.8 459.7
The tables below show the capitalization of Pepco and Conectiv on an
unaudited pro forma combined basis as of March 31, 2002.
Pepco % of Conectiv % of
($ mm) capitalization ($ mm) capitalization
-------------- -------------- ------------ --------------
Long-term debt 1,626.4(a) 39 1,316.8 30
Short-term debt 472.5(b) 12 1,622.5 36
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust which holds solely
parent junior subordinated debentures 125.0 3 165.0 4
Preferred stock 84.8 2 48.3 1
Shareholders' equity 1,823.0 44 1,309.4 29
Total capitalization 4,131.7 100 4,462.0 100
Pro Forma Combined
($ mm) % of capitalization
------------------------------------------------------- ------------------ ---------------------------
Long-term debt 3,643.2(a)(c) 40
Short-term debt 2,095.0(b) 23
Company obligated mandatorily redeemable preferred
securities of subsidiary trust which holds solely
parent junior subordinated debentures 290.0 3
Preferred stock 133.1 2
Shareholders' equity 2,921.0 32
Total capitalization 9,082.3 100
(a) Excludes capital lease obligations.
(b) Excludes short term capital lease obligations.
(c) Includes $700 million of borrowings by Pepco Holdings to finance the
Transaction.
11
4. Regulatory Environment
Federal level
In December 1999 and February 2000, the FERC issued its landmark
Orders No. 2000 and 2000-A. Order 2000 requires all public utilities to join or
form a regional transmission organization ("RTO") in furtherance of the FERC's
goal to increase competition in the wholesale generation market. The
qualifications to become certified by FERC as an RTO expand on the independence,
scope, transmission service, ratemaking, and expansion planning elements needed
to achieve approval as an ISO. As noted above, the FERC has conditionally
granted RTO status to PJM./16
Since 1927, PJM has provided economically efficient transmission and
generation services throughout the mid-Atlantic region,/17 and has achieved for
its members, including the Applicants, significant cost savings through shared
generating reserves and integrated operations. The PJM members have transformed
the previous coordinated cost-based pool dispatch into a bid-based regional
energy market. With the implementation of the PJM Open Access Transmission
Tariff ("OATT") on April 1, 1997, PJM began operating the nation's first
regional, bid-based energy market. PJM has become the most liquid and active
energy market in the country. PJM enables participants to buy and sell energy,
capacity and ancillary services, schedule bilateral transactions or rely on a
spot market and reserve transmission service throughout the entire PJM region.
PJM provides accounting and billing services for these transactions. Applicants
expect to continue to be transmission-owning members of PJM after consummation
of the Transaction.
As a result of Applicants' membership in PJM, PJM (rather than the
Applicants) directs and administers significant aspects of the Applicants'
transmission business. PJM directs the operation of the electric transmission
facilities owned by the Applicants, as well as those of other PJM transmission
owners. PJM provides the Applicants and all other transmission
------------------
16 The FERC has also directed PJM "to continue its current efforts at expanding
Westward and to work with NYISO [the New York ISO] and ISO New England to
develop a regional transmission organization that encompasses the entire
Northeast." PJM RTO Order, supra.
17 The PJM service area presently includes all or part of Pennsylvania, New
Jersey, Maryland, Delaware, Virginia, and the District of Columbia.
12
customers in PJM with non-discriminatory open access transmission service and
all required ancillary services over the electric transmission facilities owned
by the PJM transmission owners. PJM determines Available Transmission Capacity
("ATC") and operates an OASIS, processes requests for new transmission service,
and receives and acts upon schedules from transmission customers. PJM also has
the responsibility of preparing a regional plan for the enhancement and
expansion of transmission facilities to meet the demands for firm transmission
service in the PJM control area.
Further, under the zonal rate structure used by PJM, each PJM "zone"
includes the service area of one of the original ten PJM transmission owners
(including the Applicants). Network transmission customers pay a single rate
based on their pro rata share of the costs of the transmission facilities
comprising the zone in which their load is located. Non-zonal load (load located
outside of the PJM control area) is charged as a single rate based on the
weighted average costs of all of the PJM transmission owners. Point-to-point
transmission service customers pay a single rate for any service to load in a
particular zone, or a single border rate (for non-zone load) that is based on
the weighted average of all of the PJM transmission owners' zonal point-to-point
rates.
In essence, through the PJM OATT, the Applicants have open access to
transmission service over the entire PJM area, regardless of the ownership of
the lines and are able to transmit power paying a single, non-pancaked rate for
firm service throughout PJM.
Pepco
In accordance with the terms of agreements approved by the Maryland
Public Service Commission ("Maryland Commission") in 1999, retail access to a
competitive market for generation services was made available to all Maryland
customers on July 1, 2000. Also under these agreements, Maryland customers who
are unable to receive generation services from another supplier, or who do not
select another supplier, are entitled to receive services (default services)
from Pepco until July 1, 2004, at a rate for the applicable customer class that
is no higher than the bundled rate in effect on June 30, 2000, but subject to
adjustment for tax law changes enacted by the Maryland General Assembly relating
to its authorization of electric industry restructuring. Thereafter, Pepco will
provide default services using power obtained through a competitive bidding
process at regulated tariff rates determined on a pass-through
13
basis and including an allowance for the costs incurred by Pepco in providing
the services. In December 1999, the Maryland Commission approved rate reductions
for all of Pepco's customers in Maryland. Although the amount of the reduction
will vary somewhat by class of customer, the estimated overall net effect will
be reductions for all customers equivalent to approximately 4% of base rates, or
approximately $29 million in revenue per year. The Maryland arrangements permit
Pepco to recover certain revenue lost as a result of the rate reductions through
future generation procurement savings discussed below. A surcharge has been
implemented to assist low-income customers in paying energy bills.
In D.C., customers began to have their choice of electricity suppliers
on January 1, 2001, with Pepco required to provide default service through
February 8, 2005, except for default service for low income residential
customers which Pepco is required to provide until February 8, 2007. On November
8, 1999, Pepco filed a Non-Unanimous Agreement of Stipulation and Full
Settlement (the "D.C. Agreement"), which was approved by the D.C. Public Service
Commission ("D.C. Commission") on December 22, 1999. Under the terms of the D.C.
Agreement, the rates for service to residential customers in D.C. would be
reduced by a total of 7% as follows: 2% effective January 1, 2000, an additional
1 1/2 % effective July 1, 2000, and an additional 3 1/2 % effective one month
after the closing of the sale of the generation assets. The corresponding rate
reductions for commercial customers in D.C. total 6 1/2 % as follows: 3 1/2 % on
January 1, 2000, 1 1/2 % on July 1, 2000, and 1 1/2 % one month after the
closing of the sale of the generation assets. The post-generation divestiture
rate reductions of approximately $15 million annually represent the reductions
through the operation of the generation procurement credit discussed below and
are guaranteed, but may be recouped by Pepco if it is able to purchase
electricity at a lower cost than its frozen production rate during the period
Pepco's rates are capped. Pepco's rates will be capped at the levels in effect
one month after the closing of the sale of the assets for a period of six years
for certain low-income residential customers and four years for other customers.
The period during which the caps will be in effect began one month following the
date of the closing on the sale of the assets.
In order to fulfill its default service obligations, Pepco entered
into a full requirements contract with Mirant, formerly Southern Energy, at the
time Pepco sold its generation assets to Mirant. Under that contract, Pepco has
the option of acquiring all of the energy and capacity that is needed for
default services from Mirant at prices that are below
14
Pepco's current cost-based billing rates for default service, thereby providing
Pepco with a built-in profit margin on all default service sales that Pepco
acquires from Mirant. Under the settlement agreements mentioned above, Pepco
will share such profit amounts with customers on an annual cycle basis,
beginning with the period from July 1, 2000 to June 30, 2001, in Maryland and
from February 9, 2001 to February 8, 2002, in D.C. (the "Generation Procurement
Credit" or "GPC"). In both jurisdictions, amounts shared with customers each
year are determined only after Pepco recovers certain guaranteed annual
reductions to customer rates.
Conectiv
The electric utility businesses of Delmarva and ACE were restructured
in 1999 pursuant to legislation enacted in Delaware, Maryland, and New Jersey,
and orders issued by the Delaware Public Service Commission ("Delaware
Commission"), the Maryland Commission, and the New Jersey Board of Public
Utilities ("NJBPU"). Among other things, the electric restructuring orders
provide for the choice of alternative electricity suppliers by customers,
decreases in customer electric rates, recovery of stranded costs (which are the
uneconomic portion of assets and long-term contracts that resulted from electric
utility industry restructuring), securitization of ACE's stranded costs, and the
regulatory treatment of any gain or loss arising from the divestiture of
electric power plants. All customers in ACE's service area could choose an
alternative electricity supplier, effective August 1, 1999. All of Delmarva's
Delaware and Maryland customers, or about 95% of Delmarva's customers, could
choose an alternative electricity supplier by October 1, 2000. Customers
representing approximately 4% of the combined peak loads of Delmarva and ACE
were purchasing electricity from alternative suppliers as of December 31, 2000.
Under New Jersey's Basic Generation Service ("BGS"), ACE is obligated,
through July 31, 2002, to supply electricity to customers who do not choose an
alternative electricity supplier. Delmarva is obligated to supply electricity to
customers who do not choose an alternative electricity supplier for three years
for non-residential customers and four years for residential customers during
the transition periods that began on October 1, 1999, in Delaware, and July 1,
2000, in Maryland. Conectiv forecasts peak loads in 2002 of 2,622 MW for
Delmarva's default service and 2,243 MW for ACE's BGS.
15
D. Description of the Transaction
1. The Mergers
Pursuant to the Merger Agreement, Pepco Holdings will form two wholly
owned subsidiaries ("Merger Sub A" and "Merger Sub B," collectively, the "Merger
Subs"). Merger Sub A will be a corporation organized under the laws of the
District of Columbia and Virginia. Merger Sub B will be a corporation organized
under the laws of Delaware. Pepco Holdings will designate the officers of Merger
Sub A and Merger Sub B. Subsequent to formation, the Merger Subs will become
parties to the Merger Agreement.
Merger Sub A will merge with and into Pepco, in accordance with the
applicable provisions of the laws of Virginia and the District of Columbia
("Pepco Merger"). Pepco will be the surviving corporation and will continue its
existence under the laws of the District of Columbia and Virginia. As a result
of the Pepco Merger, Pepco will become a subsidiary of Pepco Holdings. The
parties currently intend that shortly after the consummation of the Transaction,
PHI will become a first tier subsidiary of Pepco Holdings.
Merger Sub B will merge with and into Conectiv, in accordance with the
laws of Delaware ("Conectiv Merger"). Conectiv will be the surviving corporation
in the Conectiv Merger and will continue its existence under the laws of
Delaware. As a result of the Conectiv Merger, Conectiv will become a subsidiary
of Pepco Holdings.
As a consequence of the Mergers, all property, rights, privileges,
powers and franchises of Pepco and Merger Sub A will be vested in Pepco as the
surviving corporation. All the debts, liabilities and duties of Pepco and Merger
Sub A will also become debts, liabilities and duties of Pepco as the surviving
corporation. Similarly, all property, rights, privileges, powers and franchises
of Conectiv and Merger Sub B will be vested in Conectiv, as the surviving
corporation. All the debts, liabilities and duties of Conectiv and Merger Sub B
will also become debts, liabilities and duties of Conectiv as the surviving
corporation. The officers of Merger Sub A and Merger Sub B will become,
respectively, the officers of Pepco and Conectiv.
By virtue of the Mergers, each share of common stock, par value $1.00
per share of Pepco ("Pepco Common Stock"), each share of common stock, par value
$.01 per share, of Conectiv ("Conectiv Common Stock"), and each share of Class A
common stock, par value $.01
16
per share of Conectiv ("Conectiv Class A Stock" and together with the Conectiv
Common Stock, "Conectiv Stock") that are owned by Pepco, Conectiv or any of
their subsidiaries, will be cancelled and no consideration will be delivered in
exchange therefor ("Cancelled Stock").
Shares of Pepco Common Stock (other than the Cancelled Stock and shares
with respect to which the owner duly exercises the right to dissent under
applicable law) will be converted into the right to receive one share of common
stock, par value $.01 per share, of Pepco Holdings ("Pepco Holdings Common
Stock") (the "Pepco Merger Consideration").
Shares of Conectiv Common Stock (other than the Cancelled Stock and
shares with respect to which the owner duly exercises the right to dissent under
applicable law) will be converted into the right to receive: (a) $25.00 in cash
(the "Conectiv Common Stock Cash Consideration") or (b) the number of validly
issued, fully paid and nonassessable shares of Pepco Holdings Common Stock (the
"Conectiv Common Stock Share Consideration") determined by dividing $25.00 by
the Average Final Price/18 (the "Conectiv Common Stock Exchange Ratio"). The
Conectiv Common Stock Exchange Ratio may vary in accordance with the Average
Final Price within minimum and maximum exchange ratios established in Section
1.8 of the Merger Agreement.
Shares of Conectiv Class A Stock other than Cancelled Stock and shares
with respect to which the owner duly exercises the right to dissent under
applicable law will be converted into the right to receive (a) $21.69 in cash
(the "Class A Cash Consideration" and together with the Conectiv Common Stock
Cash Consideration, the "Conectiv Cash Consideration") or (b) the number of
validly issued, fully paid and nonassessable shares of Pepco Holdings Common
Stock (the "Class A Share Consideration" and together with the Conectiv Common
Stock Share Consideration, the "Conectiv Share Consideration") determined by
dividing $21.69 by the Average Final Price (the "Class A Stock Exchange Ratio").
The Class A Stock Exchange Ratio may vary in accordance with the Average Final
Price within minimum and maximum exchange ratios established in Section 1.8 of
the Merger Agreement.
------------------
18 The calculation of the Average Final Price is more fully described in the
Merger Agreement and consists of a volume-weighted average of the closing
trading prices of Pepco common stock during a certain period of time prior to
the closing of the Transaction.
17
Each record holder of Conectiv Stock immediately prior to the
consummation of the Transaction will be entitled to elect to receive shares of
Pepco Holdings Common Stock or cash for all or any part of such holder's shares
of Conectiv Stock. As described in Section 1.8 of the Merger Agreement, such
election is subject to the requirement that, in the aggregate, 50% of the
consideration to be paid to Conectiv stockholders consists of cash and 50%
consists of Pepco Holdings common stock.
Each share of common stock, without par value, of Merger Sub A that is
issued and outstanding immediately prior to the consummation of the Transaction
will be converted into one share of common stock, without par value, of Pepco.
Each share of common stock, par value $.01 per share, of Merger Sub B that is
issued and outstanding immediately prior to the consummation of the Transaction
will be converted into one share of common stock, par value $.01 per share, of
Conectiv.
The estimated value of the consideration to be paid to Conectiv
shareholders in exchange for their equity interests in Conectiv is approximately
$2.2 billion.
The Transaction will be accounted for by Pepco Holdings as an
acquisition of Conectiv by Pepco using the purchase method of accounting for a
business combination in accordance with generally accepted accounting
principles. Under this method of accounting, the assets and liabilities of
Conectiv will be recorded at their fair values and, if necessary, any excess of
the merger consideration over those amounts will be recorded as goodwill. The
results of operations and cash flows of Conectiv will be included in Pepco
Holdings' financial statements prospectively as of the effective time of the
transaction. Staff Accounting Bulletin No. 54, or SAB 54, generally requires
that the premium paid in an acquisition using the purchase method of accounting
be "pushed down" to the books of the acquired company, which in this case would
be Conectiv. However, the Applicants have determined that, under applicable
exceptions to the general rule, the premium paid in the Transaction will not be
"pushed down" to Conectiv. Specifically, under SAB 54 application of push down
accounting is not required when the acquired company will continue to have
public debt, and Conectiv has and will have after the merger, publicly held debt
(medium-term notes).
18
2. Conditions to the Transaction
The Transaction will not be completed unless customary conditions,
fully described in the Merger Agreement, are satisfied or waived by Pepco and
Conectiv. The required conditions include stockholder approval, receipt of the
regulatory approvals described in Item 4 herein, and the absence of governmental
action to block the transaction. The required stockholder approvals were
obtained on July 18, 2001 (Pepco) and July 17, 2001 (Conectiv). In addition, the
following conditions must be satisfied or waived: the regulatory approvals do
not contain materially adverse terms, the Pepco Holdings shares to be issued in
the Transaction must be listed on the New York Stock Exchange, the
representations and warranties contained in the Merger Agreement must be
accurate, the material agreements in the Merger Agreement must be performed, the
applicable tax opinions must be received, and a material adverse effect on
either company must not have occurred.
Pepco and Conectiv have the right to terminate the Merger Agreement by
mutual written consent in the event that the Transaction has not been completed
by August 9, 2002, or, if the only remaining condition at August 9, 2002 is the
receipt of required regulatory approvals, by February 9, 2003. The companies
also have the right to terminate the Merger Agreement if the Transaction is
prohibited by a governmental entity, if the stockholders of Pepco or Conectiv do
not adopt or approve the Merger Agreement, or if any of the companies materially
violates, and does not cure, any of its representations, warranties or
covenants.
In addition, Pepco has the right to terminate the Merger Agreement if
the Conectiv Board withdraws or adversely modifies its approval of the Merger
Agreement, approves or recommends another acquisition proposal or resolves to
take any of those actions. Conectiv also has the right to terminate the Merger
Agreement if (i) the Conectiv Board approves a superior acquisition proposal, as
long as Pepco has had an opportunity to propose revised transaction terms, (ii)
the Pepco Board withdraws or adversely modifies its approval of the Merger
Agreement or resolves to take any of those actions, or (iii) the Average Final
Price is less than $16.50, subject to Pepco's right to supplement the value of
the Conectiv Share Consideration to a value of $21.15 per share of Conectiv
Common Stock (and $18.35 per share of Conectiv Class A Common Stock).
19
Under the Merger Agreement, termination fees of $60 million are
payable under the following circumstances:
o By Conectiv to Pepco, in the event (a) Conectiv terminates the
Merger Agreement due to the Conectiv Board's approval of a
superior combination proposal, (b) Conectiv or Pepco terminates
the Merger Agreement due to the failure of Conectiv's
stockholders to adopt the Merger Agreement, at any time after
February 9, 2001 and at or before the time of the Conectiv's
stockholders' meeting, a bona fide acquisition proposal has been
made public and has not been withdrawn and, within 12 months of
the termination of the Merger Agreement, Conectiv enters into a
definitive agreement with a third party with respect to an
acquisition proposal (which is subsequently consummated), or (c)
Pepco terminates the Merger Agreement as a result of the Conectiv
Board withdrawing or modifying its approval of the Merger
Agreement and the Transaction, approving or recommending another
acquisition proposal, or resolving to do any of those things, so
long as this action by the Conectiv Board giving rise to Pepco's
termination right was not caused by Pepco entering into a
definitive agreement with respect to a business combination
involving Pepco that could reasonably be expected to materially
delay or impede the consummation of the Transaction.
o By Pepco to Conectiv, in the event (a) Conectiv or Pepco
terminates the Merger Agreement due to the failure of Pepco's
stockholders to adopt the Merger Agreement, at any time after
February 9, 2001 and at or before the time of the Pepco
stockholders' meeting, a bona fide proposal with respect to a
business combination involving Pepco has been made public and not
withdrawn and, within 12 months of the termination of the Merger
Agreement, Pepco enters into a definitive agreement with a third
party with respect to a business combination (which is
subsequently consummated), or (b) Conectiv terminates the Merger
Agreement as a result of the Pepco Board's withdrawing or
modifying its approval of the
20
Merger Agreement and the Transaction, or resolving to do any of
those things.
3. Background of the Transaction
Over the past several years, Pepco has carefully monitored market and
regulatory developments in the electric utility industry that have substantially
increased competition in all sectors of the industry and analyzed how best to
position itself in this changing environment. In 1999, Pepco announced a
strategy of being an electricity delivery company with growing energy and
telecommunications retail businesses. Pepco determined that it was not big
enough to achieve the economies of scale that would be needed in the long term
to compete effectively in the rapidly consolidating nationwide generation
business. As a result, Pepco decided to sell the bulk of the generation
facilities it then owned in an auction process, which was completed in late 2000
and early 2001. The strategy announced by Pepco involves the continued operation
and expansion of an electric distribution system in the mid-Atlantic region as
well as the development of energy and telecommunications retail operations, in
each case through both internal growth and acquisitions.
Since the commencement of operations of Conectiv in 1998, the Conectiv
Board has carefully followed the developments in the electric and natural gas
industries. The Conectiv Board, with the assistance of management, has regularly
reviewed the ongoing restructuring of the energy industry and has evaluated
Conectiv's strategy in this context. After much consideration and review, and
taking into account the legislative developments in Delaware, Maryland and New
Jersey, the Conectiv Board adopted a strategy of disposing of Conectiv's
interests in nuclear generating plants and baseload fossil fuel-fired generating
plants and developing new mid-merit generation plants in the PJM region.
Between January and July 2000, in the course of several meetings, the
Conectiv Board, together with Conectiv's management and financial advisor,
Credit Suisse First Boston Corporation, continued to evaluate the potential
impact of the mid-merit strategy, including its significant capital
requirements, on Conectiv and possible alternatives to implementing this
strategy. As the Conectiv Board weighed the potential risks and benefits of the
mid-merit strategy, the Conectiv Board determined that it should begin to
consider the risks and benefits of potential strategic alternatives, including a
possible business combination. In this regard, Credit
21
Suisse First Boston outlined for the Conectiv Board the process for soliciting
proposals from potentially interested parties if the Conectiv Board decided to
explore a possible business combination, and management and Credit Suisse First
Boston discussed with the Conectiv Board potential strategic and financial
parties who might have an interest in such a transaction. During these months,
the Conectiv Board did not take any formal action relating to any potential
strategic alternatives and determined that remaining independent and continuing
to pursue the mid-merit strategy and existing long-term plans remained an
alternative that was available depending on the results of further evaluation.
During the spring of 2000, an ad hoc committee consisting of
independent outside directors met several times to review in greater detail the
possible acceleration of the mid-merit strategy. In June 2000, based on the
recommendation of this ad hoc committee, the Conectiv Board instructed
management to preserve the option of accelerating the implementation of the
mid-merit strategy. At that time, the Conectiv Board also appointed another ad
hoc committee of three independent outside directors to evaluate other strategic
alternatives and authorized the retention by the ad hoc committee of outside
advisors to assist in this evaluation. This second committee selected Credit
Suisse First Boston as financial advisor and Simpson Thacher & Bartlett as
special legal counsel on behalf of the Conectiv Board in connection with the
evaluation of potential strategic alternatives.
In August 2000, following several meetings with Credit Suisse First
Boston and Simpson Thacher & Bartlett, the second ad hoc committee authorized
Credit Suisse First Boston, with the consent of the Conectiv Board, to make
preliminary contact with likely possible transaction candidates. In August,
Credit Suisse First Boston contacted 10 potential domestic bidders, including
Pepco, and 5 potential foreign bidders. Thereafter, several additional parties
were contacted.
When contacted in August 2000 in connection with the process
established by Conectiv, Pepco's management determined that a business
combination with Conectiv was consistent with Pepco's announced regionally-based
strategy and, in October 2000, entered into a confidentiality agreement with
Conectiv in order to participate in the process. At that time, Pepco engaged
LeBoeuf, Lamb, Greene & MacRae, L.L.P. to act as its legal counsel and Merrill
22
Lynch, Pierce Fenner & Smith Incorporated ("Merrill Lynch") to act as its
financial advisor in the process.
On September 8, 2000, the Conectiv Board convened to review, among
other matters, a report of the ad hoc committee relating to its evaluation of
potential strategic alternatives. Representatives of Credit Suisse First Boston
reviewed for the Conectiv Board the recent performance of utility stocks and
recent mergers and acquisitions activity in the utility industry and reported
that 10 parties had expressed interest in participating in a business
combination with Conectiv. Credit Suisse First Boston also reviewed a potential
timeline for the process of soliciting transaction bids. Representatives of
Simpson Thacher & Bartlett then reviewed for the Conectiv Board its fiduciary
duties in the context of commencing a process which could lead to a merger or
acquisition transaction. After discussion, the Conectiv Board approved the
recommendation of the ad hoc committee to commence a process for soliciting
transaction proposals.
Beginning in October 2000, with the assistance of Simpson Thacher &
Bartlett and Potter Anderson & Corroon LLP, Conectiv's legal counsel, Conectiv
negotiated and entered into confidentiality and standstill agreements with 13
parties, including Pepco, for the purpose of facilitating the delivery of
confidential information regarding Conectiv to the parties who had expressed an
interest in receiving such information. Beginning on October 14, 2000, each
party that had entered into a confidentiality and standstill agreement received
a confidential information memorandum relating to Conectiv and a letter inviting
submission of preliminary indications of interest by November 13, 2000.
On October 26, 2000, the Pepco Board met to review the potential
transaction. John M. Derrick, Jr., Chairman and Chief Executive Officer, Dennis
R. Wraase, at that time President and Chief Financial Officer, and William T.
Torgerson, at that time Senior Vice President, External Affairs and General
Counsel, together with representatives from Merrill Lynch and LeBoeuf, Lamb,
Greene & MacRae, L.L.P. reported to the Pepco Board on the process established
by Conectiv and the status of due diligence review of Conectiv's operations.
The Pepco Board discussed the terms of a potential indication of
interest to be submitted by Pepco to Conectiv and authorized management to
proceed with the indication of
23
interest, with the understanding that any final offer would be subject to
satisfactory completion of due diligence, negotiation of a definitive merger
agreement and approval by the Pepco Board.
On November 13, 2000, Conectiv received preliminary indications of
interest from six parties for the acquisition of Conectiv. Among the parties
expressing an interest was Pepco.
On November 17, 2000, at a regularly scheduled meeting of the Conectiv
Board, representatives of Credit Suisse First Boston discussed with the Conectiv
Board the preliminary indications of interest received. The Conectiv Board
decided to continue discussions with five of the initial bidders whose
preliminary proposals offered the highest consideration for the Conectiv
stockholders. The Conectiv Board authorized the process to continue but noted
that it was preserving the option to remain independent, including the option to
continue to implement the mid-merit business plan on an accelerated basis.
On November 27, 2000, additional confidential materials were
distributed to the five bidders who were invited to continue participating in
the process. Thereafter, in December 2000 and January 2001, Conectiv's
management made presentations to such parties concerning Conectiv and its
business operations and responded to detailed due diligence inquiries.
On December 5, 2000, the Conectiv Board, at its regularly scheduled
meeting, continued its strategic review process and discussed with management
and representatives of Credit Suisse First Boston the bidders remaining in the
process. Since many of the remaining bidders, including Pepco, had indicated a
desire to pay for the transaction at least partly in stock, Credit Suisse First
Boston also gave an overview of potential "collar" structures and related
issues. Simpson Thacher & Bartlett informed the directors of the material terms
of the draft merger agreement which would be distributed to bidders. Simpson
Thacher & Bartlett explained to the Conectiv Board that the draft merger
agreement would provide for a part cash and part stock consideration and a fixed
value formula without a collar for determining the amount of stock
consideration. Simpson Thacher & Bartlett also explained that the draft merger
agreement would provide that the merger consideration payable to the holders of
the Conectiv Class A Common Stock would be determined in accordance with
Conectiv's certificate of incorporation.
On separate occasions between December 2000 and the time the Merger
Agreement was executed, the Audit Committee of the Conectiv Board met to consult
with
24
Conectiv's legal and financial advisors and to discuss the Conectiv Board's
fiduciary duties, the provisions of Conectiv's certificate of incorporation and
the anticipated terms of the Merger Agreement, the financial implications of a
business combination and other matters, in each case as they related to the
Conectiv Class A Common Stock.
On January 12, 2001, the remaining transaction candidates were sent a
letter outlining the procedures for submitting a final bid for Conectiv,
accompanied by a draft merger agreement prepared by Simpson Thacher & Bartlett.
On January 23, 2001, a meeting of the Conectiv Board was convened to
update the Conectiv Board on the process for soliciting transaction proposals.
Representatives of Credit Suisse First Boston informed the Conectiv Board that
two of the five parties invited to continue in the process had elected to
withdraw from the process. Credit Suisse First Boston then provided the Conectiv
Board with additional information relating to the three parties, including
Pepco, remaining in the process. Credit Suisse First Boston reported that one of
the three remaining bidders had indicated that it was not prepared to bid for
the entire company alone and accordingly was exploring an on-sale disposition of
Conectiv's generation assets to another party in order to make a bid.
Representatives of Simpson Thacher & Bartlett then provided a review of the
material legal issues that might arise in negotiations with any of the three
remaining bidders, including potential proposals containing collars. Howard
Cosgrove, Chairman of the Board and Chief Executive Officer of Conectiv, and
other members of management provided the Conectiv Board with a regulatory
assessment of a potential transaction with each of the remaining parties. Potter
Anderson & Corroon LLP and Simpson Thacher & Bartlett further informed the
Conectiv Board of its fiduciary duties in the context of this process and
discussed with the Conectiv Board the provisions of the certificate of
incorporation regarding the treatment of Conectiv Class A Common Stock.
On January 24, 2001, Conectiv received an unsolicited letter from a
party expressing interest in acquiring Conectiv. On January 26, 2001, Conectiv's
legal and financial advisors met with this party and its financial and legal
advisors to explore whether a transaction was feasible and the potential timing
of any such transaction. The preliminary price level expressed by this party was
in the high range of the remaining three parties' indications of interest. This
party, however, had not performed due diligence and informed Conectiv's advisors
25
that it had not yet obtained commitments for the equity or debt financing
required to complete a transaction. This party further advised that it would
require at least another month to complete due diligence and be in a position to
make a definitive proposal and begin to negotiate a definitive agreement.
At the Pepco Board's regularly scheduled meeting on January 25, 2001,
following conclusion of the Pepco Board's regularly scheduled business,
representatives of LeBoeuf, Lamb, Greene & MacRae, L.L.P. discussed the duties
of the Pepco Board in considering the submission of a bid to Conectiv as well as
the terms of the proposed merger agreement to be included as part of the bid
package. Representatives of Merrill Lynch discussed the proposed bid to be
submitted to Conectiv. In addition, Messrs. Derrick and Wraase (who in the
interim had been promoted to President and Chief Operating Officer) discussed
the financial and strategic benefits and risks of the proposed transaction in
the context of Pepco's business plans and the results of Pepco's due diligence
review. After considering these discussions as well as the recommendation of
Pepco's management, the Pepco Board authorized management to submit a bid and,
if successful, to enter into a transaction with Conectiv substantially in the
form provided in the bid. The Pepco Board authorized management to negotiate
final terms for a transaction with Conectiv, but required further consultation
with the Pepco Board regarding any material changes from the bid proposal. The
Pepco Board also discussed the rationale behind a potential common stock
dividend reduction and share repurchase program which was then under
consideration and its relationship to the proposed acquisition of Conectiv
should the bid be successful.
On January 29, 2001, the deadline for all proposals under Conectiv's
process, Pepco submitted a final bid to acquire Conectiv at a price of $24.00
per share of Conectiv Common Stock. Under Pepco's proposal, half of the
consideration would consist of cash and the other half would consist of stock,
with the stock consideration subject to a collar. The Pepco bid also stated that
Pepco would, simultaneously with the execution of the merger agreement, announce
a reduction of its dividend and a share repurchase program.
Conectiv did not receive final proposals from the two other remaining
participants in the process. One such participant indicated that its efforts to
collaborate on a bid with a third- party purchaser of generation assets were not
successful and thus it would be prepared, with
26
additional due diligence, to make an offer to purchase only Conectiv's
transmission and distribution assets. The proposed third-party purchaser of the
generation assets also submitted a separate letter expressing interest in
acquiring the generation assets with an indicated pricing level that was not
considered attractive. The other participant in this process, a foreign utility
company, indicated that it was not yet prepared to make a final bid because
aspects of the transaction were continuing to be reviewed by its senior
executives and that it could not provide a definitive timeframe for submitting a
proposal.
On January 31, 2001, a telephonic meeting of the Conectiv Board was
convened. At this meeting, the Conectiv Board was briefed by Conectiv's
management and legal and financial advisors on the material aspects of Pepco's
bid, the status of the other two participants and the recent unsolicited
inquiry. After this discussion, the Conectiv Board determined that, in light of
the unattractiveness of selling only a portion of Conectiv and the preliminary
and conditional nature of the unsolicited inquiry, the time and resources it
would take to explore a transaction with either of such parties would delay or
hinder Conectiv's ability to negotiate with Pepco and could jeopardize
negotiation of a transaction with Pepco. The Conectiv Board authorized
management and its advisors to commence negotiations with Pepco, particularly
with respect to increasing the consideration for Conectiv's stockholders, and
also directed Credit Suisse First Boston to ascertain whether a definitive bid
would be forthcoming from the potential foreign bidder. The Conectiv Board
requested that it be kept informed of these negotiations as well as developments
with respect to any other potential bidders.
On February 2, 2001, at the direction of the Conectiv Board,
representatives of Credit Suisse First Boston contacted representatives of
Merrill Lynch, to convey that a price of $24.00 per share of Conectiv Common
Stock was not sufficient and to identify other aspects of Pepco's proposal that
raised material issues for Conectiv. Later that day, Merrill Lynch indicated
that Pepco was prepared to pay $24.50 per share of Conectiv Common Stock in cash
and stock. Over the next few days, representatives of Credit Suisse First Boston
and Merrill Lynch continued to hold discussions on price, the proposed collar
and other material business and financial terms of the proposed transaction.
Prior to the end of that week, in accordance with the instructions of
the Conectiv Board, Credit Suisse First Boston attempted to ascertain from the
potential foreign bidder and its
27
financial advisors whether it would eventually submit a definitive bid, but was
unable to obtain any assurances as to the timing or likelihood of any such bid
being made.
On February 5, 2001, Mr. Cosgrove contacted Mr. Derrick and stated
that Conectiv was not prepared to negotiate and execute a merger agreement with
Pepco at a price below $25.00 per share of Conectiv Common Stock. Mr. Cosgrove
and Mr. Derrick also discussed, among other matters, the status of negotiations,
regulatory risks and the number of directors from the Conectiv Board that should
serve on Pepco Holdings' Board to increase representation by directors resident
in or otherwise familiar with the service territories of Conectiv's utility
subsidiaries. Later that evening, Mr. Derrick called Mr. Cosgrove to convey that
Pepco would agree to the $25.00 per share price requested by Conectiv subject to
satisfactory resolution of the other remaining open issues.
On February 6, 2001, Simpson Thacher & Bartlett sent to LeBoeuf, Lamb,
Greene & MacRae, L.L.P. a revised draft of the merger agreement reflecting the
prior conversations between the chief executive officers and financial advisors
as well as revisions reflecting Conectiv's response to certain aspects of
Pepco's proposal. Between the evenings of February 6 and February 9, 2001,
representatives of Simpson Thacher & Bartlett, Potter Anderson & Corroon LLP and
LeBoeuf, Lamb, Greene & MacRae, L.L.P., along with Conectiv's and Pepco's
management and financial advisors, met at the offices of Simpson Thacher &
Bartlett to negotiate the merger agreement. During the same period, Conectiv's
management and financial advisors received additional information with respect
to Pepco's dividend reduction and share repurchase program and completed their
due diligence of Pepco.
On February 8, 2001, the Conectiv Board met to consider and review the
terms of the proposed transaction with Pepco. Representatives of Simpson Thacher
& Bartlett and Potter Anderson & Corroon LLP reviewed for the Conectiv Board its
fiduciary and other legal duties, including duties with respect to the Conectiv
Class A common stock. Mr. Cosgrove reviewed the status of discussions with Pepco
and made a presentation with respect to management's recommendation that the
Conectiv Board approve the proposed transaction with Pepco if the remaining
issues could be resolved in a manner satisfactory to Conectiv. Conectiv
Management then provided a regulatory assessment of the proposed transaction.
Credit Suisse First Boston then reviewed with the Conectiv Board its financial
analysis of the merger consideration payable
28
in the transaction. Conectiv Management and Credit Suisse First Boston also
reported on the due diligence that had been conducted on Pepco. Credit Suisse
First Boston also reported that there were no further developments with respect
to other potential bidders. Representatives of Simpson Thacher & Bartlett then
reviewed in detail for the Conectiv Board the terms of the proposed Merger
Agreement and the other legal aspects of the Pepco transaction.
At this meeting, the Conectiv Board discussed, among other matters,
the risks and benefits of the Pepco proposal, taking into account the matters
described above. The Conectiv Board also considered the alternative of remaining
independent and implementing the mid-merit strategy in that context, along with
the execution risks relating to such strategy in light of the significant
investments required by Conectiv going forward in the deregulated energy
markets. After additional discussion and deliberation, the Conectiv Board
authorized management and the advisors to complete the negotiation of the Merger
Agreement.
On February 9, 2001, the parties reached agreement on all of the
remaining terms of the merger agreement.
On February 9, 2001, the Pepco Board held a special meeting by
telephone at which the board was provided updates by management, LeBoeuf, Lamb,
Greene & MacRae, L.L.P. and Merrill Lynch on the final terms of the proposed
transaction with Conectiv. Pepco Management also discussed with the Pepco Board
the terms of the proposed dividend cut and share repurchase program. At that
time, Merrill Lynch delivered its oral opinion to the Pepco Board (which was
subsequently confirmed in writing) that, as of that date and based on the
assumptions made, matters considered and limitations reviewed with the Pepco
Board, the Pepco exchange ratio was fair from a financial point of view to the
holders of Pepco Common Stock, taking into account the Conectiv Merger, and the
consideration to be paid by Pepco in connection with the Conectiv Merger was
fair from a financial point of view to Pepco. After considering and discussing
these matters as well as the recommendation of management, the Pepco Board, by a
unanimous vote, approved the Merger Agreement and the transactions contemplated
thereby and authorized the execution of the Merger Agreement. The Pepco Board
also approved a dividend cut, effective with the June 30 dividend to a rate of
$1.00 per share annually and a share repurchase program not to exceed $450
million in the aggregate. On
29
February 9, 2001, Pepco caused Pepco Holdings to be formed in the State of
Delaware and the Pepco Holdings Board approved the Merger Agreement.
On the evening of February 9, 2001, a telephonic meeting of the
Conectiv Board was convened. Mr. Cosgrove reported on the progress of the final
negotiations with Pepco and reaffirmed management's recommendation of the
proposed transaction on the terms that had been negotiated. At this meeting,
Credit Suisse First Boston rendered to the Conectiv Board an oral opinion, which
opinion was confirmed by delivery of a written opinion dated February 9, 2001,
to the effect that, as of that date and based on and subject to the matters
described in the opinion, the Conectiv common stock consideration was fair, from
a financial point of view, to the holders of Conectiv Common Stock and the
Conectiv Class A Common Stock consideration was fair, from a financial point of
view, to the holders of Conectiv Class A Common Stock. The Audit Committee
reported to the Conectiv Board that, at a telephonic meeting convened earlier
that evening, it had determined that the consideration for the Conectiv Class A
Common Stock under the Merger Agreement was determined in accordance with
Conectiv's certificate of incorporation and decided to recommend the transaction
to the Conectiv Board. After additional discussion and deliberation, the
Conectiv Board approved the Transaction and the Merger Agreement and decided to
recommend to Conectiv stockholders that they adopt the Merger Agreement. One of
the nine directors, citing concerns over the number of Conectiv directors to be
appointed to the Pepco Holdings Board, voted against approval of the
Transaction.
Later that evening, the Merger Agreement was executed by Pepco,
Conectiv and Pepco Holdings.
4. Financing the Transaction
The management of Pepco and Pepco Holdings has evaluated various
sources and methods of financing the amount necessary to fund a portion of the
cash consideration to be paid in the transaction (the total amount of cash
consideration is approximately $1.098 billion). Applicants intend to use
approximately $400 million of the proceeds that Pepco has received from the
recent sale of its generation assets to fund a portion of the Conectiv Cash
Consideration, and intend to raise the remaining approximately $700 million of
other funds required for the Transaction at the Pepco Holdings level through
external sources. Such financings, however, will be offset by reductions since
the date of its generation asset sale
30
in a like amount of Pepco's borrowings. Sources of financing that Pepco Holdings
is arranging include commercial and investment banks, institutional lenders and
public securities markets.
Pepco Holdings is currently planning to fund the merger with proceeds
from the issuance of debt securities (the "Notes") in a private placement under
Section 144A of the Securities Act with various maturities prior to the merger
closing. In connection with the issuance of the Notes, Pepco Holdings will enter
into a registration rights agreement with the initial purchasers of the Notes.
Pursuant to the registration rights agreement, Pepco Holdings will agree to file
with the SEC, within 180 days after the closing of the private placement, an
exchange offer registration statement on the appropriate form under the
Securities Act with respect to the registered offer to exchange the Notes for
registered debt securities (the "Exchange Notes"). The Exchange Notes will have
terms identical to the Notes in all material respects, except that the Exchange
Notes will not contain terms with respect to transfer restrictions, payment of
additional interest, registration rights or mandatory redemption. As a back-up
plan, in the event such issuance is not practical, Pepco Holdings has arranged a
bridge bank facility which would be used in conjunction with commercial paper
issuance to fund the merger consideration, which will be refinanced following
completion of the Transaction in the public and/or private markets with debt and
preferred securities of various maturities and types to be determined after the
closing of the Transaction. The management of Pepco and Pepco Holdings believe
that Pepco Holdings will have access to many sources and types of short-term and
long-term capital sources at market rates. The financing for the Transaction by
Pepco Holdings will not be recourse to any system companies other than Pepco
Holdings.
5. Management and Operations of Pepco and Conectiv Following the
Transaction
Following the Transaction, the Pepco Holdings board will consist of 12
persons, at least two of whom will come from the current Conectiv Board. It is
expected that John M. Derrick, Jr., chairman and chief executive officer of
Pepco will be chairman and chief executive officer of Pepco Holdings. It is also
expected that all members of the Pepco Board of Directors immediately prior to
the closing of the Transaction will be named as directors of Pepco Holdings.
31
Pepco Holdings will operate from and have its headquarters in
Washington, D.C. Pepco will continue its operations from its headquarters in
Washington, D.C., substantially as currently operated. Conectiv will continue to
maintain its headquarters in Wilmington, Delaware, and will continue to have
significant operations in New Jersey and on the Delmarva Peninsula.
Pepco Holdings will adopt Pepco's dividend policy and expects (but can
give no assurances) that the annual dividend at the effective time will be $1.00
per share of Pepco Holdings common stock.
6. Benefits of the Transaction
Pepco and Conectiv continually evaluate business and strategic
opportunities to enhance shareholder and customer value. Pepco has had the
opportunity to develop a strong working relationship with Conectiv over the
years as neighbors, partners and members of PJM. The companies have
complementary business strategies and similar corporate values.
The Transaction elevates the combined company to the leading position
among the mid-Atlantic delivery companies. The Transaction will double Pepco's
customer base and expand its service territory by nine times. The strategic
combination will improve the two companies' ability to grow earnings in the
changing energy marketplace and give the combined company the size and scope
needed to compete more effectively in the energy delivery and related retail
services markets.
The Transaction will create a stronger combined company, yielding
significant benefits for customers, communities, shareholders, employees and the
region. The combined company will become the largest electricity delivery
company in the mid-Atlantic region in terms of both MW load and kWh sales with a
secure energy supply based on Conectiv's mid-merit generation capabilities and
Pepco's favorable supply contracts. It will also be the largest owner of
transmission facilities within PJM. The combined company will serve 1.8 million
customers in New Jersey, Delaware, Maryland, Virginia, and the District of
Columbia.
The combined company is expected to have a solid investment grade
balance sheet, which will facilitate future growth through acquisitions or
external investments.
32
Customers will benefit as the system's utilities are able to support
rates lower than they would otherwise, resulting from increased efficiencies
that will be reflected in any new rate schedules put into effect following
expiration of the restructuring transition periods currently in place./19 The
efficiencies expected to result from the Transaction include the implementation
of new technologies to enhance reliability and customer service at a lower cost,
due to the increase in kWh sales and the number of customers in the combined
company; the elimination of redundant administrative functions; the enhanced
financial strength of the combined company; and the increased purchasing power
of the combined company.
While the parties believe the primary benefits of the Transaction
relate to strategic growth opportunities for the combined company, the parties
have identified and estimated potential cost savings as a result of the
Transaction. These costs have been categorized as either "redundant" (meaning
that both companies do something now but only one company will perform that
activity after the merger), or "leveraged" (resulting from opportunities to take
advantage of experience, capacity, and third party or vendor relationships
across common support-type areas). The identified cost savings estimates are
summarized below:/20
Total Estimated Savings, by Category and Year (In Thousands):
-------------------------------------------------------------
One-Time
Year of Annual Avoided Cumulative
Redundant Costs: Savings Savings Cost through 2005
--------------- ------- ------- ---- ------------
Executives 2002 $3000 - $12,000
Shareholder Records 2002 1000 - 4,000
Annual Meetings/Report 2002 300 - 1,200
Board of Directors 2002 200 - 800
Support Services 2005 3500 - 3,500
PJM 2002 400 - 1,600
----- - -------
Total Redundant Costs: $8,400 - $23,100
------ -------
------------------
19 As previously discussed, most of the retail rates of the combined company are
subject to rate caps or freezes for the next several years. Applicants will
reflect efficiencies achieved through the Transaction in any new rates once the
rate cap or freeze ends to the extent required by the relevant state regulatory
commissions.
20 The estimates on this chart do not include the cost to achieve savings.
33
One-Time
Year of Annual Avoided Cumulative
Leveaged Costs: Savings Savings Cost through 2005
-------------- ------- ------- ---- ------------
Mainframe/Output Services 2004 $3,000 - $6000
Remittance Processing 2004 500 - 1000
Supply Chain 2004 4,200 - 8400
Legal 2003 1,000 - 3000
IT Contractors/Licenses 2003 2,50 - 750
Insurance 2002 300 - 1200
IT Systems:
SAP 2002/04 - $1,850 1850
Itron 2002 - 250 250
Constr. Mgmt. 2002 - 250 250
- --- ---
Total Leveraged Costs $9,250 $2,350 $22,700
------ ------ -------
Total (Redundant &
Leveraged Costs) $17,650 $2,350 $45,800
======= ====== =======
Pepco and Conectiv will continue to operate under their existing names
and are committed to maintaining management teams where they are currently
headquartered. This structure will preserve the benefits of localized management
and the system, as a whole, will facilitate efficient operations.
Item 2. Fees, Commissions and Expenses
Commission registration fees $ 959,650
Financial advisors' fees (Pepco Holdings) $ 9,100,000
Financial advisor's fees (Conectiv) $ 19,800,000
Accountant fees $ 600,000
Legal fees $ 7,000,000
Stockholder communication and proxy solicitation expenses $ 4,336,919
Miscellaneous $ 4,000,000
Total $ 45,796,569
===========
34
Item 3. Applicable Statutory Provisions
A. Applicable Provisions
The proposed transactions are subject to Sections 5, 6(a), 7, 9(a),
10, 11, 12 and 13 of the Act and Rules 42, 43, 45, 53, 54, 80-88 and 90-91
thereunder.
B. Legal Analysis
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate . . . of such company and of any other public utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11)(A) of the Act, 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."
Pepco is directly engaged in utility operations and is engaged in
diversified, competitive energy and telecommunications businesses through a
wholly owned non-regulated subsidiary. Conectiv is the owner of 100% of the
outstanding common stock of four public utility companies, including Delmarva,
ACE, CDG and CAG. As a result of the Transaction, Pepco Holdings will indirectly
own more than five percent of the outstanding voting securities of Pepco and of
the public utility company subsidiaries of Conectiv. As a consequence, Pepco
Holdings must obtain the approval of the Commission for the acquisition under
Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by
the Commission in determining whether to approve the proposed acquisition are
set forth in Sections 10(b), 10(c) and 10(f) of the Act.
As described below, the acquisition complies with all of the
applicable provisions of Section 10 of the Act.
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)(2)
unless the Commission finds that:
35
o 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;
o 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
o 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 interest
of investors or consumers or the proper functioning of such
holding-company system.
a. Section 10(b)(1)
i. Interlocking Relations
Under Section 10(b)(1), the Commission shall approve an acquisition
unless the Commission finds that "such acquisition will tend towards
interlocking relations. . . ." By its nature, any merger of previously unrelated
companies results in new links and relations between the companies./21 These
links, however, are not the types of interlocking relations targeted by Section
10(b)(1), which was primarily aimed at preventing business combinations
unrelated to operating efficiencies./22
Pepco Holdings' purchase of Pepco and Conectiv does not create the
type of interlocking relations prohibited by Section 10(b)(1). Following the
Merger, Pepco's current
------------------
21 Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), as
modified, Holding Co. Act Release No. 25273 (Mar. 15, 1991), aff'd sub nom. City
of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) ("interlocking relationships
are necessary to integrate [the two merging entities]").
22 See Section 1(b)(4) of the Act (finding that the public interests of
consumers are adversely affected "when the growth and extension of holding
companies bears no relation to economy of management and operation or the
integration and coordination of related operating properties . . .").
36
Chairman and CEO, John Derrick, will serve as Chairman of Pepco Holdings. In
addition, two current directors of Conectiv will serve on the board of directors
of Pepco Holdings.
These arrangements and the representation of Conectiv on Pepco
Holdings' board are necessary to integrate Conectiv fully into the Pepco
Holdings System and to promote group-wide policies and practices for the
efficient operation of the combined system. Such overlap is, therefore, in the
public interest and in the interest of investors and consumers.
ii. Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that
would result in "huge, complex and irrational holding company systems," and to
avoid "an excess of concentration and bigness" while preserving opportunities
for the "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./23 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 [to
prohibit]."24 Pepco Holdings' acquisition of Conectiv will not result in a "huge
system" and will avoid the "excess of concentration and bigness" which Section
10(b)(1) seeks to prevent. The Pepco Holdings System will be smaller than many
other systems that have been approved by the Commission.
The Commission has approved acquisitions involving registered holding
companies with much larger public utility systems.25 As the table below shows,
after the Merger, Pepco Holdings will be smaller than several other registered
holding companies. The table compares Pepco and Conectiv combined on a pro forma
basis to Southern Company, American Electric Power Company ("AEP"), Exelon
Corp., Entergy, and Xcel Energy Inc. - all large registered holding companies.
------------------
23 American Elec. Power Co., Inc., Holding Co. Act Release No. 20633 (July 21,
1978).
24 Vermont Yankee Nuclear Corp., Holding Co. Act Release No. 15958 (Feb. 6,
1968).
25 See American Elec. Power Co., Inc. and Central and South West Corp., Holding
Co. Act Release No. 27186 (June 14, 2000) ("AEP Merger Order"); and Exelon
Corp., Holding Co. Act Release No. 27256 (Oct. 19, 2000).
37
---------------------------- ------------------------- -------------------------- -------------------------
Customers
Total Assets Operating Revenues
Company/26 (million) (million) (000s)
---------------------------- ------------------------- -------------------------- -------------------------
Pepco Holdings $11,546 $8,293 1,800
(Pepco/Conectiv)
---------------------------- ------------------------- -------------------------- -------------------------
Southern Company 29,824 10,155 3,998
---------------------------- ------------------------- -------------------------- -------------------------
AEP 47,300 61,257 4,930
---------------------------- ------------------------- -------------------------- -------------------------
Exelon Corp 34,821 15,140 5,440
---------------------------- ------------------------- -------------------------- -------------------------
Entergy 25,910 9,620 2,600
---------------------------- ------------------------- -------------------------- -------------------------
Xcel Energy Inc. 28,735 15,028 4,800*
---------------------------- ------------------------- -------------------------- -------------------------
* As reported at www.xcelenergy.com.
Overall, Pepco Holdings' acquisition of Conectiv will not create a
"complex and irrational system", but will create a company focused on
reliability, competitive pricing and high quality customer service in the
mid-Atlantic region. The larger size of the combined company will provide
strategic scale and expertise needed to compete in changing markets.
Finally, Section 10(b)(1) also requires the Commission to consider
possible anticompetitive effects of a proposed combination. As the Commission
noted in Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990),
the "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 to customers." Pepco
Holdings, Pepco, and Conectiv have filed Notification and Report Forms with the
Department of Justice and the Federal Trade Commission under the
Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") describing the effects
of the acquisition on competition in the relevant market. The waiting period has
terminated and the merger has been cleared for closing under the HSR Act.
The competitive impact of the acquisition was also fully considered by
FERC in proceedings under Section 203 of the Federal Power Act. As described in
its Merger Policy Statement, the FERC evaluates the competitive effects of a
proposed merger before deciding whether to approve the merger as "consistent
with the public interest," the applicable standard of
------------------
26 As of December 31, 2001. Source: Individual companies' 2001 Annual Reports,
except as stated otherwise.
38
review./27 In particular, under the Merger Policy Statement, the FERC considers
whether a merger has an adverse effect on (1) competition in any market, (2)
customer rates, and (3) the effectiveness of regulation.
The Applicants have submitted an application to the FERC that
demonstrates that all the tests in the Merger Policy Statement are satisfied and
that the acquisition is in the public interest./28 Included in the FERC
application is the testimony of Dr. Joe D. Pace, demonstrating that the
Transaction will not have an adverse effect on competition./29 As Dr. Pace's
testimony shows, Conectiv and Pepco are not business rivals in the generation
market. Pepco has effectively exited the generation business and owns only 806
MW of generating capacity./30 Conectiv is greatly reducing its presence in that
business. The Applicants have submitted market concentration analysis showing
two potential scenarios: the first assumes that Conectiv's post-Transaction
ownership of generating capacity will be 5,080 MW; the second assumes that the
nuclear and NRG sales are completed and that Conectiv's post-Transaction
ownership of generating capacity will be 2,878 MW./31 Total PJM capacity
(exclusive of imports) is forecast to be about 63,797 MW in 2002. Under either
scenario, the market concentration analysis demonstrates that the Transaction
has no adverse competitive effect as it will not result in a material increase
in market concentration within PJM (either considered as a whole or within the
three distinct markets considered to reflect the presence, from time to time, of
internal PJM transmission constraints.)/32
------------------
27 16 U.S.C.ss.824b(a). The factors that FERC focuses on in making this public
interest determination are set out in its Inquiry Concerning the Commission's
Merger Policy Under the Federal Power Act: Policy Statement, Order No. 592, 61
Fed. Reg. 68,595 (1996), reconsideration denied, Order No. 592-A, 62 Fed. Reg.
33,341 (1997) ("Merger Policy Statement").
28 The FERC application is attached hereto as Exhibit G-1.
29 Dr. Pace's testimony is attached hereto as Exhibit G-2.
30 This generation capacity is oil-fired and operates only during very limited
hours of the year.
31 Dr. Pace's analysis also treats all of Conectiv's purchased capacity, as well
as its minority-owned capacity as part of Conectiv's market share. As more fully
discussed in the FERC application and Dr. Pace's testimony, Pepco has no control
over the capacity associated with its purchased power.
32 The Applicants own immaterial amounts of non-PJM generating capacity, which
was not deemed to be relevant to Dr. Pace's market concentration analysis.
39
The acquisition also does not have a significant effect on vertical
market power as a result of control over transmission, the siting of new
generation, or fuel supplies and delivery systems. Since the Applicants
participate in the PJM RTO, that is guided by FERC-approved market monitoring
rules, they cannot exercise market power through control of their bulk power
transmission systems. Transmission access to new generators is assured through
the independent control by PJM of the Applicants' transmission systems and the
Commission's open access policies.
The Applicants' FERC application also shows that the acquisition will
not adversely impact customer rates. The Applicants commit to hold wholesale
requirements and transmission customers harmless from the effects of the
Transaction by pledging not to charge those customers for any Transaction costs
that exceed any Merger savings. In addition, due to the rate freezes or caps
currently in place, the rates of the Applicants' retail customers cannot be
affected by the Transaction except to the extent permitted by state regulatory
commissions.
Lastly, the acquisition will not impair effective regulation. The
regulation of Pepco Holdings' utility subsidiaries will not be affected. The
acquisition does not alter the corporate form of Pepco Holdings' public utility
subsidiaries, which will continue to be subject to FERC regulation and (with the
exception of CAG and CDG, which are subject only to FERC regulation) state
regulation, in particular, as to its rates, operations and services. The FERC
approved the application on September 26, 2001.
For all these reasons, the acquisition does not result in the
concentration of control of public utility companies to an extent detrimental to
the public interest or the interest of investors or consumers and the Commission
should find the standards of Section 10(b)(1) satisfied.
b. Section 10(b)(2)
i. Fairness of Consideration
Section 10(b)(2) precludes approval of the acquisition if the
Commission finds that the consideration paid by Pepco Holdings for Conectiv is
not reasonable or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets underlying the securities to be acquired.
Pepco Holdings' registration statement on Form S-4 includes an
40
extensive discussion of the analysis conducted by Merrill Lynch and Credit
Suisse First Boston in arriving at their opinions./33
As explained in the registration statement, Merrill Lynch delivered to
the Pepco Board its opinion that, as of that date and based on the assumptions
made, matters considered and limitations reviewed with the Pepco Board, the
Pepco exchange ratio was fair from a financial point of view to the holders of
Pepco Common Stock, taking into account the Conectiv Merger, and the
consideration to be paid by Pepco in connection with the Conectiv Merger was
fair from a financial point of view to Pepco. In addition, Credit Suisse First
Boston delivered to the Conectiv Board an opinion to the effect that, as of that
date, and based on and subject to the matters described in the opinion, the
Conectiv Common Stock consideration was fair, from a financial point of view, to
the holders of Conectiv Common Stock and the Conectiv Class A Common Stock
consideration was fair, from a financial point of view, to the holders of
Conectiv Class A Common Stock.
Market prices at which securities are traded have always been strong
indicators as to values. As shown in the table below, the quarterly price data,
high and low, for Conectiv common stock and Conectiv Class A Common Stock (prior
to, and therefore unaffected by, announcement of the Transaction) provides
support that the consideration of approximately $25.00 and $21.69 per share
(depending on the operation of the exchange ratio) for each share of Conectiv
Common Stock or Class A Common Stock, respectively, is fair./34
------------------
33 Pepco Holdings' registration statement on Form S-4 is included as Exhibit B-2
hereto. The Merrill Lynch and Credit Suisse First Boston fairness opinions are
found in Appendices D and E to the registration statement.
34 Because Pepco Common stock will be exchanged on a one-for-one basis for Pepco
Holdings Common Stock, the Applicants treat those shares as equivalent.
41
Pepco Common Stock Conectiv Common Stock Conectiv Class A C/S
Price Dividend Price Dividend Price Dividend
Declared Declared Declared
High Low High Low High Low
1999
First $26.50 $23.00 $0.415 $24.38 $19.38 $0.385 $40.00 $34.88 $0.800
Quarter
Second $31.75 $23.13 $0.415 $25.50 $19.38 $0.220 $42.25 $34.38 $0.800
Quarter
Third $31.31 $25.06 $0.415 $25.25 $19.00 $0.220 $43.00 $37.31 $0.800
Quarter
Fourth $28.06 $21.25 $0.415 $20.75 $16.25 $0.220 $40.81 $26.50 $0.800
Quarter
2000
First $27.69 $19.06 $0.415 $18.25 $13.44 $0.220 $21.75 $23.13 $0.800
Quarter
Second $27.88 $20.94 $0.415 $18.81 $15.00 $0.220 $24.63 $19.38 $0.800
Quarter
Third $27.44 $23.63 $0.415 $19.19 $15.50 $0.220 $25.56 $17.75 $0.800
Quarter
Fourth $25.56 $21.50 $0.415 $20.75 $15.81 $0.220 $20.25 $8.50 $0.800
Quarter
2001
First $24.90 $20.20 $0.415 $22.50 $17.19 $0.220 $22.80 $12.63 $0.800
Quarter
February $21.39 $20.60 (Closing) $21.34 $20.92 (Closing) $22.05 $20.50 (Closing)
9, 2001* $21.35 $21.00 $22.00
* Last full trading day before the public announcement of the execution of the
Merger Agreement.
More importantly, however, the consideration agreed to by the parties
was the product of arm's-length negotiation. See the summary of the companies'
preliminary discussions in Item 1.D.2, supra. The Commission has found
"persuasive evidence" that the standards of Section 10(b)(2) are satisfied
where, as here, the agreed consideration for an acquisition is the result of
arm's-length negotiations between the managements of the companies involved,
supported by the opinions of financial advisors./35
Finally, the acquisition has been submitted to and approved by the
affected public shareholders, i.e., the common and preferred stockholders of
Pepco and common and Class A common stockholders of Conectiv.
ii. Reasonableness of Fees
The Applicants believe that the estimated overall fees, commissions
and expenses incurred and to be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the transaction
relative to other transactions and the anticipated benefits of the acquisition
to the public, investors and consumers; that they are consistent with recent
precedent; and that they meet the standards of Section 10(b)(2).
------------------
35 See Southern Co., Holding Co. Act Release No. 24579 (Feb. 12, 1988).
42
The fees and expenses that the Applicants expect to incur in
connection with the Transaction total approximately $45.8 million. This amount
represents 2.1% (based on a purchase price of $2.2 billion) of the value of the
consideration to be paid by Pepco Holdings to Conectiv's stockholders. This
percentage is consistent with percentages previously approved by the
Commission./36
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
acquisition will unduly complicate Pepco Holdings' capital structure or be
detrimental to the public interest, the interest of investors or consumers or
the proper functioning of the Pepco Holdings system.
The proposed Transaction will not unduly complicate the capital
structure of Pepco Holdings or its subsidiaries. The financing of the
Transaction will not affect the priorities, preferences, voting power, or other
rights of the holders of the outstanding securities of Pepco Holdings or its
subsidiaries. The proposed transactions do not involve the creation of any
minority interests. As a result of the Transaction, Conectiv's common stock will
become wholly owned by Pepco Holdings and its publicly held debt will remain
outstanding, unaffected by the Transaction. Moreover, neither Conectiv nor Pepco
Holdings will have classified common stock following the Transaction. Similarly,
Pepco Common Stock will be wholly owned by Pepco Holdings and Pepco preferred
stock and publicly held debt will remain unaffected.
Post-Transaction, the Applicants will fall within the
seventy-to-thirty percent debt-to-common equity ratio generally prescribed by
the Commission./37 On an unaudited pro forma basis, as the following table
shows, assuming the Transaction was consummated on March 31, 2002, common
shareholders' equity would have been 32% of Pepco Holdings' total
capitalization.
------------------
36 See, e.g., New Century Energies, Inc., Holding Co. Act Release No. 27212
(Aug. 16, 2000) ("New Century Energies") (fees and expenses of approximately $52
million represented approximately 1.4% of the value of the consideration to be
paid for New Century Energies, Inc.); AEP Merger Order (fees and expenses of
approximately $73 million represented approximately 1.1% of the value of the
consideration to be paid for Central and South West Corporation); Entergy Corp.,
Holding Co. Act Release No. 25952 (Dec. 17, 1993) ("Entergy")(fees and expenses
represented approximately 1.7% of the value of the consideration paid to the
shareholders of Gulf States Utilities); Northeast Utilities, Holding Co. Act
Release No. 25548 (June 3, 1992) (fees and expenses of approximately 2% of the
value of the assets to be acquired).
37 See, e.g., The National Grid Group plc, Holding Co. Act Release No. 27154
(Mar. 15, 2000) ("National Grid").
43
-----------------------------------------------------------------------------------------------------------
Unaudited Pro Forma Capital Structure
(see also Item 1.C.3 for combining information)
-----------------------------------------------------------------------------------------------------------
($ millions) % of Total Capitalization
---------------------------------------- ------------------------------ -----------------------------------
Long-term debt (including Transaction
financing and excluding capital lease
obligations) 3,643.2 40
---------------------------------------- ------------------------------ -----------------------------------
Short term debt (excluding short-term
capital lease obligations) 2,095.0 23
---------------------------------------- ------------------------------ -----------------------------------
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust which holds solely
parent junior subordinated debentures 290.0 3
---------------------------------------- ------------------------------ -----------------------------------
Preferred stock 133.1 2
---------------------------------------- ------------------------------ -----------------------------------
Shareholders' equity 2,921.0 32
---------------------------------------- ------------------------------ -----------------------------------
9,082.3 100
Total capitalization
---------------------------------------- ------------------------------ -----------------------------------
Section 10(b)(3) also requires that a proposed acquisition not be
detrimental to the public interest, the interest of the investors or consumers
or the proper functioning of the resulting holding company system. As set forth
more fully in the discussion of the standards of Section 10(c)(2), below, and
elsewhere in this Application, the acquisition will benefit shareholders and
consumers. The combination will result in a fully integrated utility system and
will produce savings and benefits to the public, consumers and investors that
would, quite possibly, be otherwise unavailable.
As noted by the Commission in Entergy, "concerns with respect to
investors' interests have been largely addressed by developments in the federal
securities laws and the securities markets themselves." In this regard,
following completion of the Transaction, Pepco Holdings will be a reporting
company subject to the disclosure requirements of the Securities Exchange Act of
1934 that will provide investors with readily available information concerning
Pepco Holdings and its subsidiary companies.
44
The Transaction is also subject to various other federal and state
regulatory approvals as discussed in Item 4. In particular, FERC's review and
approval of the Transaction assures that there will be no significant effect to
competition. The numerous regulatory reviews provide adequate protection for the
public interest and the interest of customers.
Finally, the Applicants note that the incurrence of acquisition
indebtedness is not detrimental to investor's interests. As the Commission has
previously recognized in the Conectiv Merger Order, under Section 7(c)(2)(A) of
the Act, a registered holding company can issue other than plain vanilla
securities "solely . . . for the purpose of effecting a merger, consolidation,
or other reorganization." Indeed, the issue for purposes of Section 10(b)(3) is
not the existence of parent-level debt per se. Rather, the question is whether
it is permissible for a registered system to have debt at more than one level.
The Commission has answered this question in the affirmative. In the
1992 amendments to Rule 52, the Commission eliminated the requirement that a
public-utility subsidiary company could issue debt to nonassociates only if its
parent holding company had issued no securities other than common stock and
short-term debt. The rule release explains:
Condition (6) provides that a public-utility subsidiary company
may issue and sell securities to nonassociates only if its parent
holding company has issued no securities other than common stock
and short-term debt. All eight commenters that considered this
condition recommended that it be eliminated. They noted that it
may be appropriate for a holding company to issue and sell
long-term debt and that such a transaction is subject to prior
Commission approval. They further observed that other controls,
that did not exist when the statute was enacted, provide
assurance that such financings will not lead to abuse. These
include the likely adverse reaction of rating agencies to
excessive amounts of debt at the parent holding company level and
the disclosure required of companies seeking public capital. The
Commission agrees with these observations and also noted the
power of many state utility commissions to limit the ability of
utility subsidiaries to service holding company debt by
restricting the payment of dividends to the parent company. The
Commission concludes that this provision should be eliminated.
Exemption of Issuance and Sale of Certain Securities by Public-Utility
Subsidiary Companies of Registered Public-Utility Holding Companies, Holding Co.
Act Release No. 25573 (July 7, 1992).
45
For these reasons, the Applicants submit that investors' interests in
Pepco and Conectiv will continue to be protected and that the Commission has no
basis for making a negative finding under Section 10(b)(3). The acquisition of
Pepco and Conectiv by Pepco Holdings will be in the public interest and in the
interest of investors and consumers, and will not be detrimental to the proper
functioning of the resulting holding company system.
2. Section 10(c)
i. Section 10(c)(1)
Section 10(c)(1) prohibits the Commission from approving an
acquisition if it would be unlawful under the provisions of Section 8 or
detrimental to carrying out the provisions of Section 11.
Section 8 prohibits Commission approval of an acquisition by a
registered holding company of an interest in an electric utility and a gas
utility serving substantially the same territory without the express approval of
the state commission when the state's law prohibits or requires the approval of
the acquisition. In this case, the acquisition will not cause the overlap of an
electric and gas utility systems and, therefore Section 8 is not applicable./38
In addition, as explained below, the acquisition will not be
detrimental to carrying out the provisions of Section 11. The primary electric
operations of Conectiv and Pepco will result in a single integrated electric
utility system. Integration will result primarily from the companies' membership
in PJM, which is highly interconnected and coordinated, and will be accomplished
by the functioning of the open, competitive markets administered by the PJM RTO.
Sellers and purchasers within PJM's control area may engage in transactions
among themselves through readily-accessible, OASIS-based transmission access. In
addition, coordination will be further achieved through the utilization by Pepco
Holdings' subsidiaries of the services of the Service Company.
The Delmarva gas system will also result in a separate integrated gas
utility system and is a permissible additional system under Section 11(b)(1)A-C
(the "ABC clauses") and the Commission's order in the Conectiv Merger Order.
------------------
38 Further, the only electric and gas utilities in the combined system that
serve substantially the same territory already do so in compliance with
applicable state law. See Conectiv Merger Order.
46
(a). Section 11, Integrated Utility System
Section 11 (b)(1) directs the Commission to require each registered
holding company system to limit its utility operations to "a single integrated
public-utility system" and "such other businesses as are reasonably incidental,
or economically necessary or appropriate to the operations of such integrated
public utility system." Section 2(a)(29)(A) defines an integrated public utility
system with respect to electric utility companies 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 operations 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 established four standards that must be met before
it will find that a proposed combination of utilities will result in an
integrated electric system:
1. the combined utility assets must be physically interconnected or
capable of physical interconnection ("interconnection
requirement");
2. the combined utility assets, under normal conditions, must be
economically operated as a single interconnected and coordinated
system ("economic and coordinated operation requirement");
3. the system must be confined in its operations to a single area or
region ("single area or region requirement"); and
4. the system must not be so large as to impair (considering the
state of the art and the area or region affected) the advantages
of localized management, efficient operation, and the
effectiveness of regulation ("no impairment requirement").
In its review of the merger of Delmarva and ACE (which resulted in the
formation of Conectiv), the Commission found that the merger of two companies
interconnected through
47
the PJM ISO and operated on an integrated basis with those of other PJM members
did result in an integrated system under the Act. The Commission also held that
the additional gas system of Delmarva could be retained. See Conectiv Merger
Order. In addition, the Commission found that, although the electric service
territories of ACE and Delmarva were not contiguous, and the companies were not
directly interconnected, the combined electric properties satisfied each of the
four requirements for integration by virtue of their membership in the PJM ISO.
Id. As described below, the electric systems of Pepco and Conectiv also
constitute an integrated system.
The PJM RTO
Pursuant to a FERC Order issued in 1997, PJM was authorized, as an
Independent System Operator, to administer transmission service under a poolwide
transmission tariff and provide open access transmission service on a poolwide
basis. The ISO began operation in January 1998 and is responsible for system
operations and regional transmission planning. In addition, FERC decided that
the independent body that operates the ISO may also operate the PJM power
exchange. FERC approved the power pool's use of single, non-pancaked
transmission rates to access the ten transmission systems that make up PJM.
Pursuant to a rate design in effect since April 1997, each transmission owner
within PJM has its own transmission rate, whereby the transmission customer will
pay a single rate based on the cost of the transmission system where the
generating capacity is delivered. FERC also approved, effective April 1998,
locational marginal pricing for managing scarce transmission capability. This
method is based on price differences in energy at the various locations on the
transmission system. In March 1999, FERC approved market-based rates for pricing
sales through the PJM energy market and a market monitoring plan. On July 12,
2001 the FERC conditionally granted RTO status to PJM.
The Interconnection Requirement
The electric transmission facilities of Conectiv and Pepco are
interconnected through their investment in jointly owned transmission lines in
the PJM system and through the facilities of other members of the PJM RTO. Pepco
and Conectiv each have investments in and are, directly or indirectly,
interconnected with the EHV that traverses most of Pennsylvania. Pepco connects
to the EHV directly at its Brighton substation, and Conectiv connects indirectly
to EHV through a direct connection to LDV (which interconnects with EHV) at the
Keeney and
48
Red Lion substations owned by Delmarva and the New Freedom substation, in which
ACE has an ownership interest. Delmarva and ACE, together with PJM, serve as the
means of interconnecting the facilities of CEH's generation subsidiaries. The
PJM transmission owning members, including Pepco, ACE and Delmarva, own part of
the transmission lines that connect them. Specifically, the PJM transmission
owning members share the carrying costs of the EHV through an investment
responsibility (of which Pepco has approximately 7.4%, Delamrva has
approximately 4.7% and ACE has approximately 3.63%) and jointly own as
tenants-in-common the Conemaugh-Hunterstown-Conastone 500kV line and Conemaugh
500 kV switching station (Pepco holds directly a 27% interest in the line and a
9.72% interest in the station; Delmarva holds directly a 9% interest in the line
and a 3.72% interest in the station, and ACE holds directly an 8% interest in
the line and a 3.83% interest in the station). The PJM transmission owning
members also have investment responsibilities in recent enhancement facilities
attached to the EHV system that are treated separately from the line itself.
Going forward, pending FERC approval, new transmission lines in PJM will be
jointly owned by the transmission owning members as a tenancy in common,
creating a "virtual transco."
The Commission has previously found the interconnection requirement
satisfied on the basis of contractual rights to use a third-party's transmission
lines./39 In several of these cases, holding companies had secured firm
contracts to use third-party lines, and in other cases holding companies relied
on participation in power pools to satisfy the physical interconnection
requirement. In such situations, the Commission has focused on the actual
ability of the holding company systems to access third-party transmission lines
and has found that so long as there is an ability to use third-party lines,
those paths are sufficient to satisfy the physical interconnection requirement.
The Commission has also found that the interconnection requirement was
satisfied through participation in a tight power pool, where the companies were
indirectly interconnected through the pool transmission facilities./40 This
understanding was recently
------------------
39 See Unitil Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992)
("Unitil"); Conectiv Merger Order; C&T Enterprises, Inc., Holding Co. Act
Release No. 26973 (Feb. 5, 1999).
40 See Unitil and Conectiv Merger Order.
49
reiterated by the United States Court of Appeals for the District of Columbia
Circuit in its review of the Commission's order in the AEP/CSW merger case./41
The Applicants will use a collection of transmission access rights
representing current standard techniques for operating a single interconnected
and coordinated system economically under normal conditions. The interconnecting
transmission paths between the Applicants will be accessible pursuant to the PJM
OATT. Under the PJM OATT, PJM is required to provide open access to the PJM
members' transmission lines to all parties requesting service so long as
capacity is available.
As a matter of right under Order No. 888, two utilities can arrange
contractually for transmission to achieve interconnection solely by relying on
an OATT. All parties, including transmission facility owners, reserve
transmission services electronically through the owner's OASIS. Service is
reserved for a specific amount of power and for a specific period of time, which
may be as short as one hour or as long as several years. Service can also be
reserved on a firm or non-firm basis. In all cases, a party will reserve service
on the basis of terms and conditions that, in its business judgment, represent
the economically and operationally preferable alternative. In addition, OATTs
establish a hierarchy of service and a corresponding variation in cost. "Firm"
service is the most reliable. It is available on a long-term (i.e., one year or
more), monthly, weekly or daily basis. A transmission provider may "cut" (i.e.,
refuse to initiate or curtail use of the transmission for energy deliveries
notwithstanding the firm reservation) only when a threat to system reliability
appears, i.e., in emergency situations. All users of firm service, including the
transmission facility owner with respect to its "native load," must receive
equal treatment when service is cut.
The Economic and Coordinated Operation Requirement
Where previously vertically integrated companies combined generation,
transmission and distribution functions to provide a "bundled" product,
delivered electricity, to retail customers within franchised service areas,
under the new functionally, or operationally separated industry structure,
separate companies, or separate functional/operational components
------------------
41 Nat'l Rural Elec. Coop. Ass'n, v. SEC, 2002 U.S. App. LEXIS 777 (D.C. Cir.
Jan. 18, 2002).
50
of companies, perform the generation, merchant, transmission and distribution
functions, with the goal of fostering competition in the generation sector.
Among other things, these structural changes have resulted in the
rapid development of wholesale markets through which load-serving utilities,
retail aggregators, and individual retail customers are able to obtain needed
electricity products. Many states, including the states in which Pepco and
Conectiv operate, have implemented or are considering open access at the retail
level. Where retail open access is provided, retail customers have the ability
to "shop" for their electric power from a power supplier other than their
traditional distribution utility. The distributor is obligated to deliver the
third-party power supplies to the customer.
The FERC has recognized that the efficient functioning of the
transmission grid is critical to connecting buyers with the competitive
generation markets and has promoted the formation of Regional Transmission
Organizations to reduce the barriers to the free flow of power and increase
reliability and transmission efficiency./42 Having evolved from a tight power
pool with a history of coordinated operations, PJM is a good example of the
trend towards the regionalization of electric transmission operations. Similar
to what the Commission found in the Conectiv Merger Order, with regard to ACE
and Delmarva, the transmission and distribution systems of Pepco and Conectiv
are now used, and in the future will increasingly be used in a coordinated
manner, to accomplish transfers of power between generation and load within the
PJM region, because of their membership in the PJM RTO. In sum, the coordination
of transmission operations within the PJM RTO effectively coordinates the
operations of Pepco, ACE, Delmarva and CEH's generation subsidiaries (which
currently consist of three utility subsidiaries, CDG, CAG and CPGI, and two
EWGs, Conectiv Mid-Merit, Inc. and Conectiv Bethlehem, Inc.) in satisfaction of
the economic and coordinated operations requirement./43
The PJM RTO engages in coordinated activities so that its members may
participate in a single market, with free-flowing inter-ties that are available,
on an open-access
------------------
42 Regional Transmission Organizations, Order No. 2000, III FERC Stats. & Regs.
[Regs. Preambles]P. 31,089 (1999), on reh'g, Order No. 2000-A, III FERC Stats. &
Regs.P. 31,092 (2000), petitions for review pending sub nom., Pub. Util. Dist.
No. 1 of Snohomish County. v. FERC, Case No. 00-1174 (D.C. Cir. Apr. 24, 2000).
43 See Energy East Corp., Holding Co. Act Release No. 27224 (Aug. 31, 2000)
("Energy East") (finding integration and coordination requirements satisfied
through the combined companies' participation in NY ISO and ISO-NE). See also,
Unitil (the combined electric utility assets of the companies may be operated as
a single interconnected and coordinated system through their participation in
NEPOOL).
51
basis, to purchasers and sellers of electric energy and related energy products.
Also, PJM and its individual members, including ACE, Delmarva and Pepco,
participate in joint pool and regional transmission planning and reliability
studies. PJM operates as a non-profit organization and includes over 200
investor-owned utility ("IOU") and non-IOU members, and operates centralized
power markets. In addition, PJM performs congestion management to free up
transmission capacity for the most economic uses of the system.
Although coordination between merging utilities has traditionally been
shown by using joint operating agreements to dispatch generating plants on a
coordinated basis,/44 as the Commission found in the Energy East/45 matter, "the
fact that [the Energy East Applicants] are now essentially transmission and
distribution companies does not preclude a finding that the combined electric
properties are an integrated system." In addition to the coordination of their
transmission systems, Pepco, ACE, Delmarva and CEH's generation subsidiaries
will also be economically operated as a single interconnected and coordinated
system through (1) coordinated power purchasing to satisfy their standard offer
service (provider of last resort) obligations, (2) coordinated disaster response
programs, (3) the sharing of utility supplies inventories, and (4) the
integration of a range of central and corporate functions. The combined
purchasing power of Pepco, ACE, Delmarva and CEH's generation subsidiaries can
provide efficiencies in their ability to obtain economies of scale and will
provide a ready market for power supplies that turn out to be in excess of one
of the individual company's needs.
Single Area or Region Requirement
The third requirement for integration; the single area or region
requirement, is also satisfied. The combined post-Transaction system will extend
from New Jersey to Virginia. This service area, substantially in the
mid-Atlantic U.S., is essentially the same as the area found to be a single area
or region in the Conectiv Merger Order. The Commission has made clear that the
"single area or region" requirement does not mandate that a system's operations
be confined to a small geographic area or a single state. In considering size,
the Commission has consistently found that utility systems spanning multiple
states satisfy the single area or region requirement of
------------------
44 See AEP Merger Order (applicants implemented a joint operating agreement to
coordinate the efficient use of generating resources).
45 Energy East.
52
the Act./46 In addition, the high degree of operational coordination and energy
trading that occurs within the PJM RTO demonstrate that the mid-Atlantic U.S. is
a single area or region in both operational and economic terms.
The No Impairment Requirement
Lastly, the combined Conectiv and Pepco system will 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. Pepco Holdings will adopt a local management structure to
efficiently operate and manage the combined system. ACE and Delmarva will stay
responsive to customer needs on the local level. Conectiv's operational
decisions will continue to be made by Conectiv's management team, headquartered,
as they are now, in Wilmington, Delaware. There will be at least two Conectiv
directors on Pepco Holdings' board of directors. Pepco and Conectiv, ACE,
Delmarva and CEH's generation subsidiaries will continue to be subject to the
regulation of FERC and (with the exception of CAG and CDG) their respective
state commissions. In sum, Pepco and Conectiv will preserve all the benefits of
localized management that they currently enjoy while coordinating their
management so as to achieve the economies and efficiencies of operation from the
Transaction.
(b). Section 11, Retention of the Additional Gas System
As the Commission found in the Conectiv Merger Order, under New
Jersey, Virginia, Delaware and Pennsylvania law, Conectiv was permitted to own
both the gas and electric properties that constitute the Conectiv system. Thus,
the requirements of Section 8 of the Act are satisfied.
Under Section 10(c)(1) of the Act, the Commission may not approve an
acquisition that would be "detrimental to the carrying out of the provisions of
Section 11." Section 11(b)(1) of the Act generally confines the utility
properties of a registered holding company to a "single integrated
public-utility system," either gas or electric. An exception to the requirement
of a "single system" is provided in the ABC clauses./47 A registered holding
------------------
46 See, e.g., Southern Co. Holding Co. Act Release No. 24579 (Feb. 12, 1988)
(approving an electric utility system covering portions of four states) and New
Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997)
(approving a utility system covering portions of five states.)
47 See, generally, NIPSCO Industries, Inc., Holding Co. Act Release No. 26975
(Feb. 10, 1999).
53
company may own one or more additional integrated public utility systems, i.e.,
gas as well as electric, if each system meets the criteria set forth in these
clauses.
The acquisition of the Delmarva gas system by Pepco Holdings meets the
criteria contained in the ABC clauses, for the same reasons that the acquisition
of the Delmarva gas system by Conectiv did. See Conectiv Merger Order. As the
Commission found in the Conectiv Merger Order, after reviewing the studies
submitted by Conectiv, the loss of economies resulting from the divestiture of
the gas system would be significantly higher than the thresholds established in
Commission precedent, thus satisfying the requirements under clause A. In
addition, the Commission found that the acquisition of the Delmarva gas system
by Conectiv did not raise issues under clauses B or C. The principal electric
system of Conectiv and Delmarva were located in adjoining states and the
combination of systems was not "so large as to impair ... the advantages of
localized management, efficient operations, or the effectiveness of regulation."
The same analysis applies to the acquisition of the Delmarva gas system by Pepco
Holdings. Neither the relevant facts nor the applicable law changed since then.
(c). Non-Utility Subsidiaries
The acquisition of Pepco and Conectiv introduces several new
non-utility subsidiaries into the Pepco Holdings System, but the Applicants
believe that all of Pepco and Conectiv's non-utility businesses are
energy-related or otherwise retainable under the Commission's rules and
precedent.
Section 11(b)(1) limits the non-utility interests of a registered
holding company to those that are "reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public-utility
system," on a finding by the Commission that such interests are "necessary or
appropriate in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning" of the integrated
system. The Commission has interpreted these provisions to require: (i) the
existence of an operating or functional relationship between the utility
operations of the registered holding company and the non-utility activities
sought to be retained,/48 and (ii) that the retention is in the public
interest./49 A non-utility business
------------------
48 See generally, Michigan Consolidated Gas Co., Holding Co. Act Release No.
16763 (June 22, 1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971).
54
may also be retained if it evolved out of the system's utility business, the
investment is not significant in relation to the system's total financial
resources and the investment has the potential to produce benefits for investors
and/or consumers./50
Rule 58 under the Act codifies the types of permissible non-utility
activities retainable by registered systems by exempting from Section 9(a) of
the Act acquisitions by registered holding companies of the securities of
energy-related companies or gas-related companies. With respect to
energy-related companies, a holding company's aggregate investment in such
energy-related companies may not exceed the greater of $50 million or 15% of the
consolidated capitalization of the registered holding company. Rule
58(a)(1)(i)-(ii). Rule 58 defines "energy-related company" as a company that,
directly or indirectly, derives substantially all of its revenues from certain
enumerated activities such as rendering energy management services, the sale of
electric and gas appliances and the development of certain energy-related
technologies./51
As discussed in Exhibit K-1 herein, each of Pepco and Conectiv's
active non-utility businesses is retainable.
ii. Section 10(c)(2)
Section 10(c)(2) requires the Commission to examine whether a proposed
acquisition will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. The Transaction
will result in benefits to investors, consumers and the public interest and
represents an opportunity for growth.
The Transaction allows Pepco Holdings to build on the platform Pepco
and Conectiv have created in PJM and reinforce the combined company's position
as a leading player in the mid-Atlantic region, which is at the forefront of the
electric industry's restructuring in the U.S. The addition of Conectiv's
experience with gas operations strengthen Pepco
------------------
49 See, e.g., id. quoting General Public Utilities Corp., Holding Co. Act
Release No. 10982 (Dec. 28, 1951); United Light and Railways Co., Holding Co.
Act Release No. 12317 (Jan. 22, 1954).
50 CSW Credit, Inc., Holding Co. Act Release No. 25995 (Mar. 2, 1994); Jersey
Central Power and Light Co., Holding Co. Act Release No. 24348 (Mar. 18, 1987).
51 The Act also allows registered holding companies to acquire and maintain
interests in the following exempt entities: exempt telecommunications companies
(Section 34), foreign utility companies (Section 33) and exempt wholesale
generators (Section 32).
55
Holdings' ability to provide services that will benefit customers in today's
rapidly changing U.S. energy markets. Pepco Holdings intends to continue to
contribute to the current debate on the restructuring of the U.S. transmission
sector.
As previously discussed, the strategic combination will improve the
two companies' ability to grow earnings in the changing energy marketplace and
give the combined company the size and scope needed to compete more effectively
in the energy delivery and related retail services market.
While the primary benefits of the Transaction relate to these
strategic growth opportunities for the combined companies, the parties have also
identified potential cost savings from the Transaction that further establish
the economies and efficiencies created by the combined system. Specifically, the
parties have estimated that through 2005 there are $23.1 million in potential
redundant costs that can be saved as a result of the combination, including
primarily $12 million in executive management costs, $4 million in shareholder
records costs and $3.5 million in support services costs. In addition,
approximately $22.7 million in potential leveraged cost savings (resulting from
opportunities to take advantage of experience, capacity and vendor relationships
across common support-type areas) through 2005 have been identified. The largest
categories of these potential savings are mainframe/output services ($6
million), supply chain ($8.4 million), legal ($3 million) and insurance ($1.2
million). The total combined estimated savings through 2005 is $45.8 million.
Although some of the anticipated benefits discussed above are
strategic and will be fully realizable only in the longer term, they are
properly considered in determining whether the standards of Section 10(c)(2) are
met./52 The Commission has recognized that potential benefits are entitled to be
considered, regardless of whether they can be precisely estimated: "[S]pecific
dollar forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even where these are not precisely
quantifiable."/53
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52 See National Grid.
53 Centerior Energy Corp., Holding Co. Act Release No. 24073 (Apr. 29, 1986)
(citation omitted). See also Energy East Corp., Holding Co. Act Release No.
26976 (Feb. 12, 1999) (authorizing acquisition based on strategic benefits and
potential, but unquantifiable, savings).
56
3. Section 10(f)
Section 10(f) prohibits the Commission from approving an acquisition
unless the Commission is satisfied that the acquisition will be undertaken in
compliance with applicable state laws. As described in Item 4, the acquisition
will be consummated in compliance with all applicable state laws.
4. Section 11(b)(2)
Section 11(b)(2) of the Act requires 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." Section
11(b)(2) also requires each registered system company "to take such action as
the Commission shall find necessary in order that such holding company shall
cease to be a holding company with respect to each of its subsidiary companies
which itself has a subsidiary company which is a holding company," in other
words, to eliminate "great-grandfather" holding companies.
After the consummation of the Transaction, Conectiv will become a
subsidiary company of Pepco Holdings and will be a holding company with respect
to CEH. Pepco Holdings will be a great-grandfather company with respect to one
of CEH's utility subsidiaries for an interim period after the closing. This
structure, which results from the superposition of Pepco Holdings over the
existing and previously approved Conectiv holding company structure, cannot be
altered without a substantial tax burden./54 The creation of CEH precedes the
combination of Pepco and Conectiv and occurred in response to the changes in the
regulatory environment in which Conectiv conducts its electric utility
business./55
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54 Because of the structure of the Transaction and the cash consideration to be
paid to Conectiv stockholders, under Section 355(b)(2)(D) of the Internal
Revenue Code, the restructuring of any Conectiv subsidiaries as part of the
Transaction and for a five year "seasoning" period thereafter in order to make
the Conectiv subsidiary a direct Pepco Holdings subsidiary would be treated as a
taxable distribution and would result in an immediate taxable event on the state
level and a deferred taxable event on the federal level. The resulting loss that
the Pepco Holdings system would experience if CEH were to be restructured as a
direct subsidiary of Pepco Holdings is currently estimated to be a minimum of
$36 million after taxes.
55 See Conectiv, Holding Co. Act Release No. 27192 (June 29, 2000) ("CEH Order")
(authorizing the creation of CEH). In connection with the issuance of Release
No. 35-27415 in File No. 70-9095 (June 7, 2001), CEH and ACE REIT agreed to
register under the Act and are in fact now deemed to be so registered. All
reporting requirements under the Act for CEH and ACE REIT are subsumed in the
reporting requirements for Conectiv. After the Transaction, all reporting
requirements under the Act for Conectiv, CEH and ACE REIT will be subsumed in
the reporting requirements for Pepco Holdings.
57
As discussed in the CEH Order, CEH was formed as a wholly owned
intermediate holding company to hold ownership interests previously held by
Delmarva and ACE in mid-merit generating facilities. CEH owns 100% of the stock
of ACE REIT, CESI/56, CDG and CPGI. In addition, ACE REIT owns 100% of the
interests in CAG, a merchant generation company. CEH's subsidiaries CDG, CAG and
CPGI are utilities within the meaning of the Act. Thus, at the creation of CEH,
Conectiv was already a great-grandfather company with regard to ACE-REIT's
subsidiary CAG. The Commission in the CEH Order expressly approved this
structure./57
In this respect, the CEH Order simply follows the precedent
established in a number of recent cases in which the Commission has permitted
the existence of holding company structures containing three or more layers
(i.e., a "great-grandfather holding company"). Generally, the Commission found
that under the facts of each case, the corporate structure did not implicate the
abuses that section 11(b)(2) was designed to address, i.e., the pyramiding of
holding company groups with the interposition of one or more holding companies
between the ultimate parent holding company and the operating companies, and the
issuance, at each level of the structure, of different classes of debt or stock
with unequal voting rights./58 In addition, as described in more detail in the
separate Application-Declaration on Form U-1 filed by the Pepco Holdings system
companies with respect to post-Transaction financing activities (File No.
70-9947), the Applicants are in the process of seeking the necessary approvals
to obtain exempt wholesale generator (or EWG) status for the utility
subsidiaries of CEH and ACE REIT, which, once obtained, will result in CEH and
ACE REIT ceasing to be holding companies within the meaning of the Act.
------------------
56 Named Delmarva Energy Company at the time of the Conectiv Merger Order and
later renamed.
57 In the CEH Order, the Commission observed that it would not, under certain
circumstances, deem intermediate holding companies to be holding companies for
the purposes of Section 11(b)(2) of the Act, where the intermediate holding
company was a special purpose entity designed for the sole purpose of capturing
economic efficiencies that might otherwise be lost.
58 National Grid, Energy East, Exelon Corp., Holding Co. Act Release No. 27256
(Oct. 19, 2000), KeySpan Corp., Holding Co. Act Release No. 27271 (Nov. 7,
2000).
58
The Transaction will not result in a change in the corporate structure
of the Conectiv and CEH subsidiaries (other than the superposition of Pepco
Holdings as the holding company of Conectiv). Neither Conectiv nor CEH or their
subsidiaries will borrow or issue any security or pledge any assets to finance
the Transaction./59 Thus, implementation of the proposed Transaction structure
will not result in an unduly complicated capital structure of the Conectiv
system, to the detriment of protected interests. Consequently, it is appropriate
to "look through" the intermediate holding companies (or to treat the
intermediate holding companies and Conectiv as a single company) for purposes of
the analysis under Section 11(b)(2) of the Act. Additionally, in this case, the
economic benefits associated with the retention of the additional corporate
layers outweighs the potential for harm and the possibility that there could be
a recurrence of the financial abuses that the Act was intended to eliminate. It
is the intention of Pepco Holdings to have all of the direct and indirect
subsidiaries of CEH engaged in generation activities designated as EWGs as soon
as possible after the Merger but not later than 1 year following completion of
the Merger. At the time that FERC applications for EWG status are filed with
respect to such CEH subsidiaries, CEH and ACE REIT will make the appropriate
filings for deregistration with the Commission.
These circumstances support a finding that the corporate structure
resulting from the proposed Transaction will not unduly or unnecessarily
complicate the corporate structure, or unfairly or inequitably distribute voting
power among security holders of the holding company system.
5. Section 13 - Intra-system Provision of Services
After consummation of the Transaction, and during the transition
period described herein, both CRP (which may be renamed after the Transaction is
completed) and Pepco will provide Pepco Holdings, Conectiv, Pepco and other
system companies with certain system wide administrative, management and support
services such as, for example, executive management, financial services and
human resources. All services provided to Pepco Holdings or to both Pepco or any
of its current subsidiaries ("Pepco companies") and Conectiv or any of its
current subsidiaries ("Conectiv companies") by either CRP or Pepco will be
billed and allocated through
------------------
59 Conectiv's existing medium term notes, $250 million aggregate principle
amount outstanding at March 31, 2001, are not redeemable at the option of
Conectiv without prepayment of the present value of all future interest
payments, and will remain outstanding at the closing of the Transaction. These
debt securities were issued prior to, and are not related to, the Transaction.
59
CRP in accordance with a Revised CRP Service Agreement submitted herein as
Exhibit J-1. In addition to these services that are immediately provided on a
system wide basis, during the transition period the parties intend to maintain
many of their currently existing internal service relationships. As a result,
during the transition period not all services will be provided on a system-wide
basis and CRP will continue to provide certain services solely to Conectiv
companies, while Pepco companies will continue to provide services solely to
Pepco companies. The Applicants have not yet completed their analysis of how
best to accomplish the goal of centralizing the service functions in the
combined company. The Applicants believe that this task is not capable of being
completed until after the companies are in fact merged. Therefore, the
Applicants propose certain interim arrangements described below. Once this
analysis is completed, Pepco Holdings will consolidate the provision of services
in CRP, which will be a first tier system service company, as appropriate and
subject to Commission approval.
Transition Period
During a transition period, defined below, the Applicants propose to
have CRP function as an interim service company through which system wide
services are allocated and billed. CRP will provide services to Pepco Holdings
as well as both Pepco companies and Conectiv companies and these services will
be allocated and billed in accordance with the revised CRP service company
agreement. In addition, some Pepco employees will provide services to Pepco
Holdings and Pepco companies and Conectiv companies. Pepco will bill these
services to CRP at cost determined in accordance with Rules 90 and 91 of the
Act, and CRP will then allocate and bill the costs to the appropriate system
companies in accordance with the revised CRP service company agreement. During
the transition period, CRP will either be a direct or indirect subsidiary of
Pepco Holdings. Pepco Holdings intends to reorganize CRP as a first tier
subsidiary shortly after consummation of the Transaction.
In addition to providing system wide services, during the transition
period, CRP will continue to provide certain services solely to Conectiv
companies, while Pepco companies will continue to provide certain services
solely to Pepco companies. All such services provided by either CRP or Pepco
companies for which an exemption is not requested herein under the caption
"Other Services" would be charged at cost as determined by Rules 90 and 91 of
the Act. If allocation is appropriate, charges for services provided by Pepco
companies to other Pepco
60
companies, and charges for services provided by CRP to Conectiv companies, will
be allocated using an approved allocation formula from the Revised CRP service
company agreement.
Exhibit J-1 and J-2 herein consist of a revised service company
agreement, which is based on the existing and approved CRP service company
agreement and CRP's service company policy and procedures that will govern
intra-system provision of services during the transition period. All system wide
services provided during the transition period will be provided either by CRP or
by Pepco, serving as an agent of CRP. With respect to such services provided by
Pepco, CRP will retain the billing and cost allocation function for the system.
Following the transition period, Pepco will not provide intra-system services
except as permitted by rule promulgated by the Commission or as specifically
authorized in a subsequent order of the Commission.
The services to be provided during the transition period may include
the following:
(a) Executive Management, including the services of the Chairman, CEO,
President, COO, Corporate Secretary and supporting staff;
(b) Financial Services, including corporate planning; strategic
planning; budgeting; treasury and finance including risk management, cash
management, financing, and funded plans administration; investor relations;
shareholder services, accounting services including general ledger, corporate
accounting, accounts payable, payroll, asset and project accounting; tax
accounting services; regulatory affairs; insurance and claims processing; and
insurance and claims administration;
(c) Human Resource Services, including compensation and benefit
services; personnel, employment and staffing; employee/labor relations; skills
training and management development; performance improvement; and organizational
development;
(d) Legal and Internal Audit Services, including internal audit
services and legal counsel related to general corporate issues;
(e) Procurement and Administrative Services, including security, asset
protection and investigative services; purchasing and storeroom management;
procurement and materials management; vehicle resource management, including
company vehicle maintenance; general
61
services including mail, graphics, records management and other office services;
building services including facilities management and building maintenance; and
real estate services, including rights-of-way;
(f) Customer Services, including customer service centers, billing,
credit and collections, cash remittance processing, administrative & technical
support, quality assurance and training, as well as a separate group that
provides billing of non-energy materials and services;
(g) Marketing Services, including sales; market product and sales
planning; market and customer research; direct response marketing; marketing
communication; and general corporate advertising/branding;
(h) Information Technology Services, including employee labor,
contractors, and other operating support of voice and information technology
services, which currently include the following: 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;
(i) Communications Services, including general corporate
communications; governmental affairs; community relations; sponsorships &
contributions; and employee communications;
(j) Environmental and Safety Services, including oversight of
environmental concerns related to air, water, land and waste, as well as
compliance with relevant regulations; reporting and compliance with safety
regulations, and oversight of corporate safety awareness programs;
(k) Regulated Electric and Gas Delivery Services, including the
following electric and gas delivery services: delivery senior management;
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,
62
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;
(l) Energy Business Services, including energy senior management,
financial analysis and generation, as well as 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; and
(m) Internal Consulting Services, including consulting in areas such
as the alignment of people, processes and technologies with a goal of improving
productivity and reducing costs for a business line or shared service
department.
The services provided by CRP will be billed under the Revised CRP Service
Company Agreement. The system wide services provided by Pepco will also be
billed under the Revised CRP Service Company Agreement.
As noted above, Applicants intend to restructure CRP as a direct
subsidiary of Pepco Holdings and following the transition period further expand
CRP's role to provide more centralized services and request that they be allowed
to maintain their interim service company arrangements until the later of
January 1, 2003 or approval of new service company arrangements by the
Commission (the "transition period"). Applicants commit to file, within six
months of the consummation of the Transaction, an application including a
revised service agreement and service company policy and procedures that address
the final service company arrangements to be proposed. Consistent with CRP's
current operations, the headquarters of the service company will be in the same
location as Pepco Holdings' headquarters (currently in Washington, D.C.) while
system company personnel may be located at various system locations as
appropriate for the service provided.
Applicants believe that their approach to service company arrangements
provides them with the appropriate degree of flexibility to integrate their
operations in a manner consistent
63
with applicable laws and regulations./60 Accordingly, the Applicants request
authorization to implement their transitional services proposal, as described
herein.
Restriction on Amendments
During the transition period, no change in the organization of CRP,
the type and character of the companies to be serviced, the methods of
allocating costs to associate companies, or in the scope or character of the
services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder shall be made unless and until CRP 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 CRP 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 CRP shall have filed with the Commission an appropriate declaration
regarding such proposed change and the Commission shall have permitted such
declaration to become effective.
Interaction with FERC Policy
All services provided by Pepco Holdings system companies to other
Pepco Holdings system companies will be in accordance with the requirements of
Section 13 of the Act and the rules promulgated thereunder. Pepco Holdings is
aware that questions concerning the FERC's policy in this area are likely to
arise with respect to affiliate transactions with system companies that are
public utilities under the Federal Power Act. In connection with the FERC
authorization, the applicants in that matter represented that they would abide
by FERC policy with respect to any transaction between any member company of the
Pepco Holdings system and any of its subsidiary or affiliated companies. The
FERC intra-corporate transactions policy, with respect to non-power goods and
services, generally requires that affiliates or associates of a
------------------
60 See New Century Energies (authorizing delay in implementation of services
company arrangements to accommodate the need to develop systems to implement
fully the desired accounting requirements or for other reasons). See also First
Energy Corp., GPU, Inc. et al., Holding Co. Act Release No. 27459 (Oct. 29,
2001); Emera Incorporated, Holding Co. Act Release No. 27445 (Oct. 1, 2001);
Kansas City Power & Light Company, Holding Co. Act Release No. 27436 (Sep. 7,
2001); KeySpan Corporation et al., Holding Co. Act Release No. 27272 (Nov. 8,
2000); NiSource, Inc., Holding Co. Act Release No. 27263 (Oct. 30, 2000); Exelon
Corporation, Holding Co. Act Release No. 27256 (Oct. 19, 2000); Energy East
Corp. et al., Holding Co. Act Release No. 27248 (Oct. 13, 2000); Dominion
Resources, Inc., Holding Co. Act Release No. 27113 (Dec. 15, 1999).
64
public utility not sell non-power goods and services to the public utility at a
price above market; and 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.
The Applicants recognize that affiliate transactions among the member
companies of Pepco Holdings will be subject of the jurisdiction of the
Commission under Section 13(b) of the Act and the rules and regulations
thereunder. That section generally requires that affiliate transactions
involving system utilities be "at cost, fairly and equitably allocated among
such companies." See also Rule 90. Nonetheless, Pepco Holdings believes that, as
a practical matter, there should not be any irreconcilable inconsistency between
the application of the Commission's "at cost" standard and the FERC's policies
with respect to intra-system transactions as applied to Pepco Holdings.
On this basis, the Applicants believe that Pepco Holdings 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, sales and construction contracts between
associate companies and with the holding company parent unless otherwise
permitted by the Commission by rule or order./61
Other Services
The Applicants hereby request an exemption from the at-cost
requirements of rules 90 and 91 for services rendered by Pepco Holdings
nonutility subsidiaries to certain other Pepco Holdings nonutility subsidiaries,
if one or more of the following conditions apply:
(i) the purchasing nonutility subsidiary is a FUCO or an EWG that
derives no part of its income, directly or indirectly, from the generation and
sale of electric energy within the United States;
------------------
61 Under circumstances of divergent cost and market prices such that both the
FERC and SEC pricing standards could not be reconciled if the transaction was
performed, Service Company will comply by refraining from performing the
affected service, sales or construction contract.
65
(ii) the purchasing nonutility subsidiary is an EWG that sells
electricity at market-based rates that have been approved by the FERC or the
relevant state public utility commission, provided that the purchaser is not one
of Pepco Holdings' regulated public utility subsidiaries;
(iii) the purchasing nonutility subsidiary is a "qualifying facility"
("QF") under the Public Utility Regulatory Policies Act of 1978, as amended
("PURPA"), that sells electricity exclusively at rates negotiated at arm's
length to one or more industrial or commercial customers purchasing the
electricity for their own use and not for resale, or to a electric utility
company (other than one of Pepco Holdings' regulated public utility
subsidiaries) at the purchaser's "avoided costs" as determined under the
regulations under PURPA; and
(iv) the purchasing nonutility subsidiary is an EWG or QF that sells
electricity at rates based upon its cost of service, as approved by the FERC or
any state public utility commission having jurisdiction, provided that the
purchaser of the electricity is not one of Pepco Holdings' regulated public
utility subsidiaries.
The nonutility subsidiaries described in clauses (i)-(iv) are referred
to collectively below as "Exempt Nonutility Companies." To the extent not exempt
or otherwise authorized, Applicants request an exemption from the at-cost
requirements of rules 90 and 91 for services rendered to any Exempt Nonutility
Company that (a) is partially owned, provided that the ultimate purchaser of the
services is not a regulated public utility subsidiary of Pepco Holdings, (b) is
engaged solely in the business of developing, owning, operating and/or providing
services to Exempt Nonutility Companies, or (c) does not derive, directly or
indirectly, any material part of its income from sources within the United
States and is not a public-utility company operating within the United States.
The Commission has granted exemptions from the at-cost requirement
transactions that "involve special or unusual circumstances or are not in the
ordinary course of business."/62 In addition, the Commission has previously
granted exemptions under section 13(b) in circumstances where a market rate
would not adversely affect consumers. Orders granting an exemption from the
at-cost requirement involve power projects that (1) do not derive their
------------------
62 Section 13(b) further provides an exception for transactions with an
associate company that does not derive, directly or indirectly, any material
part of its income from sources within the United States and which is not a
public-utility company operating within the United States.
66
income from sales of electricity within the United States, (2) sell electricity
at rates that have been approved by federal or state regulators, (3) sell
electricity to industrial or commercial customers at arms-length negotiated
rates, or (4) sell electricity, but not to associate companies that are retail
public-utility companies, at rates based upon cost of service and approved by
federal or state regulators./63 Applicants submit that this request for
exemption is similar to those that have been previously granted, where
structural protections to protect consumers against any adverse effect of
pricing at market rates were in place./64
Pepco's indirect wholly owned subsidiaries W. A. Chester LLC and W. A.
Chester Corporation are in the business of installing and maintaining utility
cable systems. These companies currently provide services to Pepco at market
rates under contracts entered into before they became part of a registered
system and will continue to operate under these contracts for the existing term
of the contracts. Upon consummation of the Transaction, any new service
arrangements between these companies and Pepco will be priced at cost, as
required under Rules 90 and 91 of the Act.
In conjunction with its sale to Edison Place, LLC of the property on
which the new headquarters building was built, Pepco entered into a lease
arrangement with Edison Place, LLC pursuant to which Pepco rents office space in
the new headquarters building from Edison Place. This 15 year lease was entered
into before Pepco and Edison Place were part of a registered system and contains
rent arrangements that Pepco believes are more favorable to it than other
available options in the market. The rent arrangements were not determined in
accordance with the provisions of Rules 90 and 91 of the Act but were an
integral part of the property sale between Pepco and Edison Place. Pepco and
Edison Place request authorization to leave the existing lease in place until
the expiration of its term.
In its Application before the Commission relating to securitization
bonds to be issued by a subsidiary of ACE (File No. 70-9899), Conectiv has
requested an exception from the
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63 See, e.g., 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. 26887 (June 19, 1998).
64 See Progress Energy, et al., Holding Co. Act Release No. 27297 (Dec. 12.
2000); Entergy Corporation, et al., Holding Co. Act Release No. 27039 (June 22,
1999)
67
"at cost" standards for fees relating to the servicing of such bonds. Any such
authorization granted pursuant thereto shall continue following consummation of
the Transaction.
6. Nonutility Reorganizations
Applicants propose to restructure the nonutility subsidiaries from
time to time as may be necessary or appropriate in the furtherance of the Pepco
Holdings authorized non-utility activities. To that end, Pepco Holdings requests
authorization for the period beginning on the effective date of an order issued
pursuant to this filing and continuing to and including June 30, 2005, to
acquire, directly or indirectly, the equity securities of one or more
intermediate subsidiaries ("Intermediate Subsidiaries") organized exclusively
for the purpose of acquiring, financing, and holding the securities of one or
more existing or future non-utility subsidiaries. Intermediate Subsidiaries may
also provide management, administrative, project development, and operating
services to such entities.
Reorganizations could involve the acquisition of one or more new
subsidiaries to acquire and hold direct or indirect interests in any or all of
Pepco Holdings' existing or future authorized non-utility businesses.
Restructuring could also involve the transfer of existing subsidiaries, or
portions of existing businesses, to Pepco Holdings or among the Pepco Holdings
non-utility subsidiaries and/or the re-incorporation of existing subsidiaries in
a different jurisdiction. Following any such reorganization, Pepco Holdings will
continue to hold, directly or indirectly, the same interest in the voting
securities of the non-utility subsidiary as immediately prior to the
reorganization. This would enable Pepco Holdings to consolidate similar
businesses and to participate effectively in authorized non-utility activities,
without the need to apply for or receive additional Commission approval.
The direct or indirect newly created non-utility holding company
subsidiaries referred to above might be corporations, partnerships, limited
liability companies or other entities in which Pepco Holdings, directly or
indirectly, will have a 100% voting equity interest. These subsidiaries would
engage only in businesses to the extent Pepco Holdings is authorized, whether by
statute, rule, regulation or order, to engage in those businesses. Pepco
Holdings does not seek authorization to acquire an interest in any nonassociate
company as part of the authority requested in this application and states that
the reorganization will not result in the entry by Pepco Holdings into a new,
unauthorized line of business.
68
As previously noted, the first such reorganization is expected to
occur shortly after the consummation of the Transaction, when Pepco and Pepco
Holdings will effect transactions by which PCI, PES and PepCom will become first
tier subsidiaries of Pepco Holdings.
7. Authorization to Engage in Energy-Related Activities Outside of
the United States
Pepco Holdings, on behalf of any current or future non-utility
subsidiaries, requests authority for such non-utility subsidiaries to engage in
certain "energy-related" activities outside the United States for the period
beginning on the effective date of an order issued pursuant to this filing and
continuing to and including June 30, 2005.
Such activities may include:
(i) the brokering and marketing of electricity, natural gas and other
energy commodities ("Energy Marketing");
(ii) energy management services ("Energy Management Services"),
including the marketing, sale, installation, operation and maintenance
of various products and services related to energy management and
demand-side management, including energy and efficiency audits;
facility design and process control and enhancements; construction,
installation, testing, sales and maintenance 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; the
design, construction, installation, testing, sales and maintenance of
new and retrofit heating, ventilating, and air conditioning ("HVAC"),
electrical and power systems, alarm and warning systems, motors,
pumps, lighting, water, water-purification and plumbing systems, and
related structures, in connection with energy-related needs; and the
provision of services and products designed to prevent, control, or
mitigate adverse effects of power disturbances on a customer's
electrical systems; and
69
(iii) engineering, consulting and other technical support services
("Consulting Services") with respect to energy-related businesses, as
well as for individuals. Such Consulting Services would include
technology assessments, power factor correction and harmonics
mitigation analysis, meter reading and repair, rate schedule design
and analysis, environmental services, engineering services, billing
services (including consolidation billing and bill disaggregation
tools), risk management services, communications systems, information
systems/data processing, system planning, strategic planning, finance,
feasibility studies, and other similar services.
The Applicants request that the Commission (i) authorize non-utility
subsidiaries to engage in Energy Marketing activities in Canada and reserve
jurisdiction over Energy Marketing activities outside of Canada pending
completion of the record in this proceeding,/65 (ii) authorize non-utility
subsidiaries to provide Energy Management Services and Consulting Services
anywhere outside the United States,/66 and (iii) reserve jurisdiction over other
activities of non-utility subsidiaries outside the United States, pending
completion of the record.
The Applicants note that Conectiv's non-utility subsidiaries already
have authorization from the Commission to provide the services referred to in
this Application through its Rule 58 subsidiaries (Holding Co. Act Release No.
27464 (Nov. 8, 2001). Pepco Holdings requests that this authorization be
extended to its other non-utility subsidiaries.
8. Tax Allocation Agreement
The Applicants ask the Commission to approve the entering into and
maintenance of an agreement for the allocation of consolidated tax among the
companies within the Pepco Holdings system (the "Tax Allocation Agreement").
Approval is necessary because the Tax
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65 See NiSource Inc. et al., Holding Co. Act Release No. 27265 (Nov. 1, 2000);
Southern Energy, Inc., Holding Co. Act Release No. 27020 (May 13, 1999)
(supplemental order amending prior order to permit registered holding company
subsidiary to engage in power and gas marketing activities in Canada and
reserving jurisdiction over such activities outside the United States and
Canada); Interstate Energy Corp., Holding Co. Act Release No. 27069 (Aug. 26,
1999). See also National Fuel Gas Co., Holding Co. Act Release No. 27114 (Dec.
16, 1999).
66 The Commission has authorized non-utility subsidiaries of a registered
holding company to sell similarly-defined energy management services and
technical consulting services to customers outside the United States. See
NiSource Inc. et al., Holding Co. Act Release No. 27265 (Nov. 1, 2000); Columbia
Gas System, Inc., Holding Co. Act Release No. 26498 (Mar. 25, 1996); Cinergy
Corp., Holding Co. Act Release No. 26662 (Feb. 7, 1997); and Interstate Energy
Corporation, Holding Co. Act Release No. 27069 (Aug. 26, 1999).
70
Allocation Agreement provides for the retention by Pepco Holdings of payments
for tax losses that it has incurred in connection with financing or refinancing
approximately $700 million of the cash consideration to be paid in the
Transaction, rather than the allocation of such losses to its subsidiaries
without payment as would otherwise be required by Rule 45(c)(5). A copy of the
proposed Tax Allocation Agreement is filed as Exhibit J-3.
Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule 45
thereunder. Rule 45(a) of the Act generally prohibits any registered holding
company or subsidiary company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making any donation or
capital contribution to, any company in the same holding company system, except
pursuant to a Commission order. Rule 45(c) provides that no approval is required
for a tax allocation agreement between eligible associate companies in
registered holding company system, that "provides for allocation among such
associate companies of the liabilities and benefits arising from such
consolidated tax return for each tax year in a manner not inconsistent with" the
conditions of the rule. Of interest here, Rule 45(c)(5) provides that:
The agreement may, instead of excluding members as provided in
paragraph (c)(4), include all members of the group in the tax
allocation, recognizing negative corporate taxable income or a
negative corporate tax, according to the allocation method chosen. An
agreement under this paragraph shall provide that those associate
companies with a positive allocation will pay the amount allocated and
those subsidiary companies with a negative allocation will receive
current payment of their corporate tax credits. The agreement shall
provide a method for apportioning such payments, and for carrying over
uncompensated benefits, if the consolidated loss is too large to be
used in full. Such method may assign priorities to specified kinds of
benefits.
Under the rule, only "subsidiary companies," as opposed to "associate
companies" (which includes the holding company in a holding company system), are
entitled to be paid for corporate tax credits. However, if a tax allocation
agreement does not fully comply with the provisions of Rule 45(c), it may
nonetheless be approved by the Commission under Section 12(b) and Rule 45(a). In
connection with the 1981 amendments to Rule 45, the Commission explained that
the distinction between associate companies, on the one hand, and subsidiary
companies, on the other, represented a policy decision to preclude the holding
71
company from sharing in consolidated return savings. The Commission noted that
exploitation of utility companies by holding companies through the misallocation
of consolidated tax return benefits was among the abuses examined in the
investigations underlying the enactment of the 1935 Act. Holding Co. Act Release
No. 21968 (Mar. 18, 1981), citing Sen. Doc. 92, Part 72A, 70th Congress, 1st
Sess. at 477-482.
It must be noted, however, that the result in Rule 45(c)(5) is not
dictated by the statute and, as the Commission has recognized, there is
discretion on the part of the agency to approve tax allocation agreements that
do not, by their terms, comply with Rule 45(c) so long as the policies and
provisions of the Act are otherwise satisfied. In this matter, where the holding
company is seeking only to receive payment for tax losses that have been
generated by it, the proposed arrangement will not give rise to the types of
problems (e.g., upstream loans) that the Act was intended to address. Compare
Section 12(a) of the Act.
As a result of financing or refinancing a portion of the cash
consideration for the Transaction, Pepco Holdings will be creating tax credits
that are non-recourse to its subsidiaries. As a result, Pepco Holdings should
retain the benefits of those tax credits. Accordingly, the Applicants request
that the Commission approve the entering into and maintenance of the Tax
Allocation Agreement./67
Filing of Certificates of Notification
Pepco Holdings will file a Rule 24 certificate within 60 days of the
end of any of the first three calendar quarters and 90 days after the end of the
last calendar quarter if, during such calendar quarter, a consolidated federal
income tax return has been filed, with information showing the calculation of
the portion of Pepco Holdings' loss that is attributable to interest expense on
the Merger acquisition indebtedness and a spreadsheet showing the actual
allocation of income taxes to each of the members of the consolidated group.
This Rule 24 certificate may be combined with the quarterly Rule 24 certificate
to be filed pursuant to the financing application in File No. 70-9947.
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67 See, National Grid. See also, Progress Energy, Inc., Holding Co. Act Release
No. 27522 (April 18, 2002).
72
9. Rule 54 Analysis
Rule 54 provides that the Commission shall consider the effect of the
capitalization or earnings of any subsidiaries of a registered holding company
that are EWGs or FUCOs (referred to collectively as "Exempt Projects") in
determining whether to approve other transactions if Rule 53(a), (b) and (c) are
satisfied. Under Rule 53, in determining whether to approve the issue or sale of
a security by Pepco Holdings to finance an Exempt Project investment, the
Commission must consider the circumstances surrounding the proposed issuance
and, if the issuance cannot qualify for the safe harbor in Rule 53(a), the
applicant must demonstrate under Rule 53(c) that the proposed Exempt Project
financing will not have an adverse impact on the financial integrity of the
registered holding company system, any utility subsidiary, its customers or on
the ability of state commissions to protect such subsidiary or customers.
On a pro forma combined basis, Pepco Holdings' aggregate investment,
as defined in Rule 53(a), in Exempt Projects as of March 31, 2002 was $1,006.2
million. As of March 31, 2002, Pepco Holdings' unaudited pro forma combined
retained earnings calculated in accordance with U.S. GAAP was $970.5 million
(which amount would be $1,182.8 million absent the accounting effect of the
Merger). Consequently, aggregate investment in Exempt Projects as a percentage
of Pepco Holding's unaudited pro forma combined retained earnings was
approximately 104% as of March 31, 2002. Applicants note that the related
financing application (File No. 70-9947) includes a request for authorization
for Pepco Holdings to invest up to 100% of consolidated retained earnings plus
$3.5 billion in EWGs and FUCOs. As set forth below, Applicants meet the
requirements of Rule 53(c) as their investments in Exempt Projects will not have
an adverse impact on the financial integrity of the registered holding company
system, any utility subsidiary, its customers or on the ability of state
commissions to protect such subsidiary or customers.
73
1. Project review procedures/risk mitigation
Pepco Holdings will subject potential investments in Exempt Projects
to a series of rigorous project review screens before committing any funds, and
once funds have been invested, Pepco Holdings will closely monitor project
performance, using effective techniques to mitigate project risks.
A thorough review of operating assumptions relating to any project
will include an analysis of fuel supply and environmental effects by appropriate
internal or external personnel. Other operating risks may be mitigated by
equipment warranties and various forms of insurance, as appropriate.
Pepco Holdings will perform detailed analysis to ensure that an EWG
will be able to produce energy at competitive prices and that sufficient demand
will be available for the output and engage in commodity hedging activities to
protect the expected cash flow from the project.
Financing risks will be minimized by attempting to obtain the maximum
amount of permanent financing that is available at a reasonable cost. Wherever
practicable, Pepco Holdings will finance Exempt Projects with non-recourse debt.
Pepco Holdings will seek to minimize interest rate risk by borrowing
at a fixed rate or through the use of interest rate hedging strategies. The goal
will be to limit the effects of rising interest rates on the economics of the
project.
By involving counsel in the entire scope of the project, legal risks
will be mitigated. Counsel will include in its review regulatory and permitting
risks, environmental risks, the adequacy and enforceability of guarantees or
other contractual undertaking of third parties, the status of title to property
and the obligations inherent in the financing arrangements.
Pepco Holdings' portfolio diversification approach will serve to
mitigate the risks presented by any single project. Open access transmission
service and the growing demand for new generating capacity also mitigate risks
of domestic EWG projects.
74
2. Prior investments
Through Conectiv and Pepco, Pepco Holdings has considerable experience
with generation projects and foreign utility investments, including both Exempt
Projects and non-exempt projects.
3. Current financial condition
Credit ratings, capitalization ratios, and other financial factors
attest that Pepco Holdings and Pepco, ACE and Delmarva are in sound financial
condition.
As of May 14, 2002, the senior unsecured debt of each of Pepco, ACE
and Delmarva was rated "investment grade" by both of the major rating agencies.
The senior unsecured debt of Pepco Holdings was rated "investment grade" by
Moody's. Standard & Poor's has not yet issued a senior unsecured debt rating for
Pepco Holdings but it is anticipated that such rating will be "investment grade"
when it is issued.
As a result of the terms and conditions applicable to the general
financing authorization sought in the financing application, the Pepco Holdings
system's authority under the Act to engage in financing transactions would be
restricted in the event Pepco Holdings' senior unsecured debt falls below
investment grade. Specifically, Pepco Holdings has committed that without
further authorization from the Commission, it will not issue any additional debt
to finance investments in Exempt Projects if, upon original issuance, Pepco
Holdings' senior unsecured debt obligations are not rated investment grade by at
least one of the major ratings agencies.
As of the date of the Merger, the common equity ratios of Pepco
Holdings, Pepco, ACE,/68 and Delmarva will exceed the Commission's traditional
30% standard. Pursuant to the terms and conditions applicable to the general
financing authorization sought herein, significant restrictions come into play
if Pepco Holdings' common equity ratio would fall below 30%. In that event,
without a further order from the Commission, Pepco Holdings would be precluded
from issuing any additional debt.
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68 As discussed in the financing application, Pepco Holdings has requested that
ACE's required common equity ratio be reduced in the event that ACE Transition
Funding issues up to $1.7 billion of securitization securities. Also in the
financing application, Pepco Holdings has requested that the Commission reserve
jurisdiction over the reduction in ACE's required common equity ratio pending
completion of the record in File No. 70-9899.
73
Additional investments in Exempt Projects will not have a negative
impact on any of Pepco, ACE or Delmarva's abilities to fund their operations
since these companies will not depend on Pepco Holdings for capital. In the
financing application, Pepco Holdings noted that it is anticipated that Pepco,
ACE and Delmarva will finance their capital needs entirely with their own
internal funds and proceeds of external financings by them during the period for
which financing authority is sought in the financing application. Pepco Holdings
does not currently anticipate a need to make any equity investments in Pepco,
ACE or Delmarva over the course of the time period for which authorization for
the Mergers is requested or financing authorization is sought in the financing
application.
4. Protection of Operating Utility Companies; State Letters
Pepco, ACE and Delmarva will remain insulated from the direct effects
of EWG and FUCO investments.
All of Pepco Holdings' Exempt Projects will be legally and
structurally separate from Pepco, ACE and Delmarva. Consequently, any losses in
connection with Exempt Projects would have no direct effect on the wholesale or
retail electric or gas rates of these companies.
Pepco Holdings affirms that it will not seek recovery through higher
rates to the utility customers of Pepco, ACE or Delmarva in order to compensate
Pepco Holdings for any losses it may sustain on investments in any Exempt
Projects or for any inadequate returns on those investments.
Pepco Holdings affirms that it will comply with the other conditions
of rule 53(a) conferring specific protections on customers of Pepco, ACE and
Delmarva and their state commissions, namely:
o the requirements of rule 53(a)(2) regarding the preparation and making
available of books and records and financial reports regarding Exempt
Projects;
o the requirements of rule 53(a)(3) regarding the limitation on the use
of employees of Pepco, ACE and Delmarva in connection with providing
services to Exempt Projects; and
o the requirement of rule 53(a)(4) regarding filing of copies of
applications and reports.
With respect to relevant financial benchmarks specifically
contemplated by the terms of rule 53, none of the conditions enumerated in
paragraph (b) thereof is applicable. Pepco
76
Holdings affirms that it will notify the Commission in writing if any of the
circumstances described in rule 53(b) arise during the period for which
authorization for the Mergers is requested or financing authorization is sought
in the financing application.
Pepco Holdings will remain in compliance with the requirements of Rule
53(a), other than Rule 53(a)(1), at all times during the period for which
authorization for the Mergers is requested or financing authorization is sought
in the financing application.
Further, in addition to providing the affected state commissions with
copies of FUCO notices filed with this Commission and EWG applications filed
with the FERC apprising the state commissions of each specific project in which
Pepco Holdings invests, Pepco Holdings agrees to furnish to these state
commissions, concurrently with submission to the Commission, copies of the
quarterly reports Pepco Holdings files in the financing application docket
pursuant to rule 24.
Finally, Pepco Holdings has obtained letters from the state
commissions to the Commission stating that, based on the commitments of Pepco
Holdings and subject to the qualifications referred to or stated in the letters,
Pepco Holdings' investment in Exempt Projects up to the Pepco Holdings Exempt
Project Limit will not have an adverse impact on the respective state
commission's ability to protect Pepco, ACE and Delmarva or their retail
customers.
Item 4. Regulatory Approvals
The federal and state regulatory requirements described below must be
complied with before the Applicants can complete the Transaction. All of the
necessary approvals described herein have been obtained.
State Approvals
Delaware
Delmarva is subject to the jurisdiction of the Delaware Commission as
a public utility. The approval of the Delaware Commission is required before a
Delaware public utility may directly or indirectly merge or consolidate with any
other person or company. Delaware Commission approval is also required before
any person may directly or indirectly acquire control of a Delaware public
utility. To grant its approval, the Delaware Commission must find that the
Transaction is to be made in accordance with law, for a proper purpose and is
consistent
77
with the public interest. Pepco Holdings and Delmarva filed an application
seeking the approval of the Delaware Commission consistent with these
requirements. On March 19, 2002, the Delaware Commission issued an order
approving this application.
Maryland
The Maryland Commission is granted general authority to supervise and
regulate public utilities with operations in the State of Maryland. Both Pepco
and Delmarva have utility operations in the State of Maryland. Pepco and
Conectiv have filed an application with the Maryland Commission under the
Commission's general authority to determine whether the Transaction will have an
adverse effect on the relevant Maryland franchises. On April 10, 2002, the
Maryland Commission issued an order approving this application.
New Jersey
ACE is subject to the jurisdiction of the NJBPU as a public utility.
The approval of the NJBPU is required before any person may directly or
indirectly acquire control of a New Jersey public utility. In considering a
request to acquire control of a public utility, the NJBPU evaluates the impact
of the acquisition on competition, on the 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.
Pepco Holdings and ACE filed an application seeking the approval of the NJBPU
consistent with these requirements. On July 8, 2002, the NJBPU issued an order
approving this application.
ACE has operations that are considered "industrial establishments"
under New Jersey's Industrial Site Recovery Act. Under that Act, filings with
and clearances from the New Jersey Department of Environmental Protection are
required for any direct or indirect change of ownership of an industrial
establishment. However, if a transaction involves only the indirect owner of an
industrial establishment with another owner and the indirect owner's assets
would have been unavailable for remediation under the Industrial Site Recovery
Act, the transaction is not subject to the requirements of that Act. While we do
not believe that any filings or clearances are required for the Transaction,
Pepco Holdings, Conectiv and ACE may make filings with the New Jersey Department
of Environmental Protection as deemed appropriate, including seeking a letter of
non- applicability for the Transaction with respect to the Industrial Site
Recovery Act.
78
Pennsylvania
Delmarva and ACE each own minority interests in electric generating
stations and related transmission lines located in Pennsylvania and thus are
considered Pennsylvania public utilities. The approval of the Pennsylvania
Public Utility Commission ("Pennsylvania Commission") is required for a
Pennsylvania public utility to directly or indirectly transfer any public
utility property located in Pennsylvania. To grant its approval, the
Pennsylvania Commission must find that the Transaction is necessary or proper
for the service, accommodation, convenience or safety of the public. Pepco
Holdings, Delmarva and ACE filed an application seeking the approval of the
Pennsylvania Commission consistent with these requirements. On October 15, 2001,
the Pennsylvania Commission issued an order, approving the joint application.
Virginia
Delmarva provides utility service in Virginia and is subject to the
jurisdiction of the Virginia State Corporation Commission ("Virginia
Commission") as a public service company and a public utility. Because of its
ownership of transmission lines in Virginia, Pepco is subject to the
jurisdiction of the Virginia Commission as a public utility for limited
purposes. The Virginia Commission must approve the acquisition of any Virginia
public utility and the disposition of any utility assets located in Virginia.
The applicants must show that the provision of adequate service at just and
reasonable rates will not be threatened or impaired by the Transaction. Delmarva
and Pepco filed an application seeking the approvals of the Virginia Commission
consistent with these requirements. The Virginia Commission has issued an order
on November 1, 2001, approving the application.
District of Columbia
Pepco is subject to the jurisdiction of the DC Commission. Pepco
Holdings will not become a public utility as a result of the Transaction.
However, in view of the DC Commission's plenary authority over the operations of
Pepco, Pepco filed an application for approval of the Transaction with the DC
Commission. On May 1, 2002, the DC Commission issued an order approving this
application.
No other state utility regulatory approvals are required with respect
to the merger.
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Federal Approvals
Antitrust
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder by the Federal
Trade Commission ("FTC"), the Transaction may not be consummated until Pepco
Holdings, Pepco and Conectiv file notifications and provide specified
information to the FTC and the Antitrust Division of the Department of Justice
and specified waiting period requirements are satisfied. A review process under
the HSR Act is undertaken for the purpose of determining whether a proposed
transaction will have an adverse effect on competition in the marketplace in
which the companies involved in that transaction currently operate. Since the
Transaction falls within the scope of the transactions to which the HSR Act is
applicable, the companies must file notifications with, and present information
to, the Department of Justice and the FTC so as to provide an opportunity for
the Department of Justice, the FTC and the public to evaluate whether the
proposed Transaction might have any such anti-competitive effects. Even after
the HSR Act waiting period expires or terminates, the FTC or the Antitrust
Division of the Department of Justice may later challenge the Transaction on
antitrust grounds. If the transaction is not completed within 12 months after
the expiration or earlier termination of the initial HSR Act waiting period, the
parties would be required to submit new information under the HSR Act and a new
waiting period would begin. On July 6, 2001, the parties filed their
notification and report forms under the HSR Act with the FTC and the Antitrust
Division of the Department of Justice.
Federal Power Act
The FERC must approve the Transaction. Under Section 203 of the
Federal Power Act, the FERC is directed to approve a merger if it finds such
merger consistent with the public interest. In reviewing a merger, the FERC
generally evaluates:
o whether the merger will adversely affect competition;
o whether the merger will adversely affect rates; and
o whether the merger will impair the effectiveness of regulation.
80
The parties have filed an application with the FERC requesting
approval of the Transaction under the Federal Power Act. FERC issued an order
approving the Transaction on September 26, 2001.
The Communications Act
The Communications Act of 1934 prohibits the transfer, assignment or
disposal in any manner of any construction permit or station license or any
related rights, to any person without approval from the Federal Communications
Commission. The Federal Communications Commission will approve a transfer of
control if it serves the public convenience, interest and necessity. We will
seek the necessary approval from the Federal Communications Commission for the
transfer of control of licenses held by Pepco, Starpower Communications, L.L.C.,
Delmarva, ACE, and CCI.
No other federal regulatory approvals, other than the approval of this
Commission, are required with respect to the Merger.
Item 5. Procedure
The requisite notice under Rule 23 with respect to the filing of this
Application-Declaration was issued on March 26, 2002, and specified a date not
later than April 16, 2002 by which comments may be entered and a date not later
than April 16, 2002 as the date after which an order of the Commission granting
and permitting this Application to become effective may be entered by the
Commission. One letter asking for an extension of time to make comments was
filed during the comment period; however this request was withdrawn on May 21,
2002.
The Applicants waive a recommended decision by a hearing or other
responsible officer of the Commission for approval of the Transaction and
consent to the Division of Investment Management's assistance in the preparation
of the Commission's decision. There should not be a waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
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Item 6. Exhibits and Financial Statements
Exhibits
A-1 Form of Amended and Restated Certificate of Incorporation of Pepco
Holdings, Inc., incorporated by reference to Annex B to Pepco Holdings,
Inc.'s Registration Statement in Exhibit B-2, hereto.
A-2 Form of Amended and Restated Bylaws of Pepco Holdings, Inc., incorporated
by reference to Annex C to Pepco Holdings, Inc.'s Registration Statement `s
Registration Statement in Exhibit B-2, hereto.
A-3 Charter of Pepco, incorporated by reference to Pepco's Annual Report on
Form 10-K, filed on March 27, 2000, SEC File No. 1-1072.
A-4 Bylaws of Potomac Electric Power Company, as amended through January 25,
2001, incorporated by reference to Pepco's 2000 Annual Report on Form 10-K,
filed on March 23, 2001, SEC File No. 1-1072.
A-5 Restated Certificate of Incorporation of Conectiv, incorporated by
reference to Conectiv's Current Report on Form 8-K, filed on March 6, 1998,
SEC File No. 1-13895.
A-6 Conectiv's Bylaws as amended October 26, 1999, incorporated by reference to
Conectiv's 2000 Annual Report on Form 10-K filed on March 15, 2001, SEC
File No. 1-13895.
B-1 Agreement and Plan of Merger, dated as of February 9, 2001 among Potomac
Electric Power Company, Pepco Holdings, Inc. and Conectiv, incorporated by
reference to Annex A to Pepco Holdings, Inc.'s Registration Statement in
Exhibit B-2, hereto.
B-2 Pepco Holdings, Inc. Registration Statement on Form S-4, filed on May 30,
2001, incorporated by reference to SEC File No. 333-57042.
C-1 Application to the Delaware Public Service Commission (previously filed).
C-2 Application to the Maryland Public Service Commission (previously filed).
C-3 Application to the New Jersey Board of Public Utilities (previously filed).
C-4 Application to the Pennsylvania Public Utility Commission (previously
filed).
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C-5 Application to the Virginia State Corporation Commission (previously
filed).
C-6 Application to the District of Columbia Public Service Commission
(previously filed).
C-7 Order of the Delaware Public Service Commission.
C-8 Order of the Maryland Public Service Commission.
C-9 Order of the New Jersey Board of Public Utilities.
C-10 Order of the Pennsylvania Public Utility Commission (previously filed).
C-11 Order of the Virginia State Corporation Commission (previously filed).
C-12 Order of the District of Columbia Public Service Commission.
D-1 Map of Pepco's service territory (previously filed on Form SE).
D-2 Map of ACE and Delmarva's service territory (previously filed on Form SE).
D-3 Map of PJM Interconnection Transmission Owners (previously filed on Form
SE).
E-1 Opinion of Counsel - Pepco.
E-2 Opinion of Counsel - Conectiv.
F-2 Past tense opinion of counsel - Pepco (to be filed by amendment).
F-3 Past tense opinion of counsel - Conectiv (to be filed by amendment).
G-1 Application to the Federal Energy Regulatory Commission (previously filed).
G-2 Testimony of Joe D. Pace as filed with the Federal Energy Regulatory
Commission (previously filed).
G-3 Order of the Federal Energy Regulatory Commission (previously filed).
H-1 Pepco's 2001 Annual Report on Form 10-K, filed on March 29, 2002,
incorporated by reference to SEC File No. 1-1072.
H-2 Conectiv's 2001 Annual Report on Form 10-K filed on March 19, 2002,
incorporated by reference to SEC File No. 1-13895.
H-3 Pepco's Quarterly Report on Form 10-Q, filed on May 2, 2001, incorporated
by reference to SEC File No. 1-1072.
83
H-4 Withdrawn
H-5 Withdrawn
H-6 Conectiv's Quarterly Report on Form 10-Q, filed on May 15, 2002,
incorporated by reference to SEC File No. 1-13895.
I-1 Proposed Form of Notice (previously filed).
J-1 Revised CRP Service Agreement (previously filed).
J-2 CRP Policy and Procedures (included in Exhibit J-1) (previously filed).
J-3 Form of Tax Allocation Agreement.
K-1 Description of Pepco and Conectiv Subsidiaries - Revised.
M-1 Post-Transaction Corporate Chart (previously filed on Form SE)
M-2 Supplemental Information regarding the Edison Place lease (previously filed
pursuant to a request for confidential treatment)
N-1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (included as
Annex D to Pepco Holdings' Registration Statement in Exhibit B-2, hereto).
N-2 Opinion of Credit Suisse First Boston Corporation (included as Annex E to
Pepco Holdings' Registration Statement in Exhibit B-2, hereto).
Financial Statements
FS-1 Pepco's Consolidated Balance Sheet as of December 31, 2001 and the quarter
ended March 31, 2002, incorporated by reference to Pepco's Annual Report on
Form 10-K filed on March 29, 2001, and Quarterly Report on Form 10-Q filed
on May 10, 2002, SEC File No. 1-1072.
FS-2 Pepco's Consolidated Statement of Earnings for the year ended December 31,
2001 and the quarter ended March 31, 2002, incorporated by reference to
Pepco's Annual Report on Form 10-K filed on March 29, 2002, and Quarterly
Report on Form 10-Q filed on May 10, 2002, SEC File No. 1-1072.
FS-3 Pepco's Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the year ended December 31, 2001 and the quarter ended March 31,
2002,
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incorporated by reference to Pepco's Annual Report on Form 10-K filed on
March 29, 2002, and Quarterly Report on Form 10-Q filed on May 10, 2002,
SEC File No. 1-1072.
FS-4 Pepco's Consolidated Statement of Cash Flows for the year ended December
31, 2000, incorporated by reference to Pepco's Annual Report on Form 10-K
filed on March 29, 2002, and Quarterly Report on Form 10-Q filed on May 10,
2002, SEC File No. 1-1072.
FS-5 Notes to Consolidated Financial Statements, incorporated by reference to
Pepco's Annual Report on Form 10-K filed on March 29, 2002 and Quarterly
Report on Form 10-Q filed on May 10, 2002, SEC File No. 1-1072.
FS-6 Conectiv's Consolidated Statement of Income for the year ended December 31,
2001 and the quarter ended March 31, 2002, incorporated by reference to
Conectiv's 2001 Annual Report on Form 10-K filed on March 19, 2002 and
Quarterly Report on Form 10-Q filed on May 15, 2002, SEC File No. 1-13895.
FS-7 Conectiv's Consolidated Statement of Cash Flows for the year ended December
31, 2001 and the quarter ended March 31, 2002, incorporated by reference to
Conectiv's 2001 Annual Report on Form 10-K filed on March 19, 2002 and
Quarterly Report on Form 10-Q filed on May 15, 2002, SEC File No. 1-13895.
FS-8 Conectiv's Consolidated Balance Sheets as of December 31, 2001 and the
quarter ended March 31, 2002, incorporated by reference to Conectiv's 2001
Annual Report on Form 10-K filed on March 19, 2002 and Quarterly Report on
Form 10-Q filed on May 15, 2002, SEC File No. 1-13895.
FS-9 Conectiv's Consolidated Statement of Changes in Common Stockholders' Equity
for the year ended December 31, 2001 and the quarter ended March 31, 2002,
incorporated by reference to Conectiv's 2001 Annual Report on Form 10-K
filed on March 19, 2002 and Quarterly Report on Form 10-Q filed on May 15,
2002, SEC File No. 1-13895.
FS-10 Notes to Consolidated Financial Statements, Conectiv's 2001 Annual Report
on Form 10-K filed on March 19, 2002 and Quarterly Report on Form 10-Q
filed on May 15, 2002, incorporated by reference to SEC File No. 1-13895.
85
FS-11 Pepco Holdings Unaudited Pro Forma Combined Statement of Income for the
three months ending March 31, 2002, incorporated by reference to PHI's
Current Report on Form 8-K filed on June 7, 2002, SEC File No. 000-33049.
FS-12 Pepco Holdings Unaudited Pro Forma Combined Statement of Income for the
year ended December 31, 2001, incorporated by reference to PHI's Current
Report on Form 8-K filed on June 7, 2002, SEC File No. 000-33049.
FS-14 Pepco Holdings Unaudited Pro Forma Combined Balance Sheet as of March 31,
2002, incorporated by reference to PHI's Current Report on Form 8-K filed
on June 7, 2002, SEC File No. 000-33049.
FS-15 Notes to Unaudited Pro Forma Combined Financial Statements of Pepco
Holdings, incorporated by reference to PHI's Current Report on Form 8-K
filed on June 7, 2002, SEC File No. 000-33049.
Item 7. Information as to Environmental Effects.
The proposed Transaction involves neither 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. No federal agency is preparing an environmental impact
statement with respect to this matter.
86
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, Applicants have duly caused this pre-effective Amendment to an
Application-Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Date: July 24, 2002
PEPCO HOLDINGS, INC.
By: /s/ Dennis R. Wraase
Name: Dennis R. Wraase
Title: President
CONECTIV
By: /s/ Peter G. Clark
Name: Peter F. Clark
Title: Vice President, General Counsel &
Secretary
87
Index of Defined Terms
ABC clauses...................................................................45
ACE............................................................................6
ACE REIT.......................................................................8
Act............................................................................1
Application....................................................................1
ATC...........................................................................12
BGS...........................................................................15
CAG............................................................................8
Cancelled Stock...............................................................16
CCI............................................................................9
CDG............................................................................8
CEH............................................................................7
Class A Share Consideration...................................................17
Class A Stock Exchange Ratio..................................................17
Conectiv Cash Consideration...................................................17
Conectiv Class A Stock........................................................16
Conectiv Common Stock.........................................................16
Conectiv Common Stock Cash Consideration".....................................17
Conectiv Common Stock Exchange Ratio..........................................17
Conectiv Common Stock Share Consideration.....................................17
Conectiv companies"...........................................................58
Conectiv Merger"..............................................................16
Conectiv Share Consideration..................................................17
Conectiv Stock................................................................16
Consulting Services...........................................................68
COSC...........................................................................8
CPGI...........................................................................8
CRP............................................................................3
CTS............................................................................9
D.C............................................................................4
D.C. Agreement................................................................14
D.C. Commission...............................................................14
Delaware Commission...........................................................15
Delmarva.......................................................................6
Edison.........................................................................5
EHV............................................................................5
Energy Management Services....................................................67
Energy Marketing..............................................................67
Energy Services................................................................3
FERC...........................................................................5
FTC...........................................................................75
Generation Procurement Credit.................................................14
GPC...........................................................................15
HSR Act.......................................................................37
HVAC..........................................................................68
interconnection requirement...................................................46
Intermediate Subsidiaries.....................................................66
IOU...........................................................................50
ISO............................................................................5
LDV............................................................................9
Maryland Commission...........................................................13
Merger Sub A..................................................................15
Merger Sub B..................................................................15
Merger Subs...................................................................15
Mergers........................................................................2
Merrill Lynch.................................................................22
NJBPU.........................................................................15
OASIS..........................................................................5
OATT..........................................................................12
PCI............................................................................3
Pennsylvania Commission.......................................................74
Pepco..........................................................................1
Pepco Common Stock............................................................16
Pepco companies...............................................................58
Pepco Holdings.................................................................1
Pepco Holdings Common Stock...................................................17
Pepco Merger..................................................................16
Pepco Merger Consideration....................................................17
PepCom.........................................................................3
PES............................................................................3
PJM............................................................................1
POM............................................................................4
PURPA.........................................................................64
QF............................................................................64
RTO...........................................................................11
SE.............................................................................9
Tax Allocation Agreement......................................................69
Transaction....................................................................1
Trust..........................................................................5
Virginia Commission...........................................................74