As filed with the SEC on July 20, 2001
File No. 70-
United States Securities and Exchange Commission
Washington, D.C. 20549
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Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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New RC, Inc. Conectiv
1900 Pennsylvania Avenue NW 800 King Street
Washington, DC 20068 Wilmington, DE 19899
(Names of companies filing this statement
and addresses of principal executive offices)
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New RC, Inc.
(Name of top registered holding company)
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Dennis R Wraase William T. Torgerson Peter F. Clark
President General Counsel Vice President, General
New RC, Inc. Potomac Electric Power Company Counsel and Secretary
1900 Pennsylvania Avenue, N.W. 1900 Pennsylvania Avenue, 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, L.L.P. Skadden, Arps, Slate, Meagher & 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................................3
A. Introduction..........................................................3
B. General Request.......................................................4
C. The Companies.........................................................5
1. Pepco System.......................................................5
2. Conectiv System....................................................7
3. New RC............................................................11
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.........................................31
5. Management and Operations of Pepco and Conectiv
Following the Transaction.......................................31
6. Benefits of the Transaction.......................................32
Item 2. Fees, Commissions and Expenses........................................33
Item 3. Applicable Statutory Provisions.......................................33
A. Applicable Provisions................................................33
B. Legal Analysis.......................................................33
1. Section 10(b).....................................................34
a. Section 10(b)(1)..................................................35
i. Interlocking Relations........................................35
ii. Concentration of Control......................................35
b. Section 10(b)(2)..................................................39
i. Fairness of Consideration.....................................39
ii. Reasonableness of Fees........................................41
c. Section 10(b)(3)..................................................41
2. Section 10(c).....................................................44
i. Section 10(c)(1)..............................................44
(a). Section 11, Integrated Utility System...................45
(b). Section 11, Retention of the Additional Gas System......51
(c). Non-Utility Subsidiaries................................52
ii. Section 10(c)(2)..............................................53
3. Section 10(f).....................................................54
4. Section 11(b)(2)..................................................54
5. Section 13 - Intra-system Provision of Services...................56
6. Nonutility Reorganizations........................................64
7. Authorization to Engage in Energy-Related Activities
Outside of the United States...................................65
8. Tax Allocation Agreement..........................................67
Item 4. Regulatory Approvals..................................................69
Item 5. Procedure.............................................................73
Item 6. Exhibits and Financial Statements.....................................73
Item 7. Information as to Environmental Effects...............................77
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 New RC, Inc. ("New RC"), headquartered in Washington, DC
(the "Transaction").
New RC 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 New RC, which will
be renamed prior to the completion of the Transaction.
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. Applicants believe that the necessary approvals can be
obtained by the first quarter of 2002. Upon consummation of the Transaction, New
RC 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, New RC 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 New
RC's 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 New RC 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 New RC will be held by the former
stockholders of Conectiv and Pepco and each share of each other class of capital
stock of Conectiv and Pepco/2 shall be unaffected and remain outstanding./3
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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 January 31, 2001, the authorized capital stock of Conectiv
consisted of (a) 150,000,000 shares of Conectiv Common Stock, of which
82,972,179 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 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 January 31, 2001, 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
110,751,976 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 1,806,543 shares
were outstanding.
3 See Agreement and Plan of Merger, dated as of February 9, 2001 among Potomac
Electric Power Company, New RC, Inc. and Conectiv. ("Merger Agreement"), Exhibit
B-1 herein.
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In addition, the following authorizations with respect to the New RC
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 either (a) extend the role of Conectiv Resource Partners, Inc.
("CRP") as a system service company to provide services to all
associate companies in the New RC system or (b) form a new system
service company as a direct subsidiary of New RC, in each case
following a 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 New RC direct and indirect nonutility subsidiaries
without the need to seek further Commission authorization, including,
without limitation, reorganizing Pepco Holdings, Inc. ("PHI"), the
intermediate holding company for most of Pepco's non-utility
subsidiaries, as a first tier subsidiary of New RC shortly after
consummation of the Transaction.
o To engage in energy-related activities outside of the United States.
o To allocate consolidated tax among the companies within the New RC
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 1.9 million people 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 and Virginia
where it owns transmission lines and other jurisdictional assets.
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 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 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.
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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").
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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, PHI. 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, PHI was created as
the parent company of its two wholly owned subsidiaries, Potomac Capital
Investment Corporation ("PCI") and Pepco Energy Services, Inc. ("Energy
Services").
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. 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.
As of December 31, 2000, Pepco reported $2,237.5 million, $149.9
million, and $236.4 million in revenues in connection with utility operations,
PCI and Energy Services operations, respectively. During the same period the net
income/loss was: $348.9 million (utility operations), $13.3 million (PCI) and
$(8.8) million (Energy Services).
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./6 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 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./7 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.
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6 See Conectiv, Inc., Holding Co. Act Release No. 26832 (Feb. 25, 1998) (the
"Conectiv Merger Order").
7 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.
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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 ("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./8
CEH owns 100% of the stock of ACE REIT, Inc. ("ACE REIT"), CESI./9,
and Conectiv Delmarva Generation, Inc. ("CDG"). ACE REIT owns 100% of the
interests in Conectiv Atlantic Generation, LLC ("CAG"), a merchant generation
company, and CESI owns 100% of the stock of Conectiv Operating Services Company
("COSC"), a company that operates and maintains power plants. CDG and CAG 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,
approximately 54% (2,203.50 MW) of the electric generating plants owned by
Conectiv as of December 31, 2000 (4,079.50 MW) were under agreements for
sale./10 Conectiv is building new mid-merit electric generating plants, which
Conectiv's management expects will provide a better strategic fit with
Conectiv's energy trading activities and have more profitable operating
characteristics than the plants to be sold.
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8 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).
9 Named Delmarva Energy Company at the time of the Conectiv Merger Order and
later renamed.
10 Including the ownership interests of ACE in nuclear electric generating
plants. Delmarva's ownership interests in nuclear electric generating plants
were sold on December 29, 2000. 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.
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The capacity provided by the electric generating plants of Conectiv's
subsidiaries as of December 31, 2000 is summarized below:
As of 12/31/00 Expected to be Expected to be
sold retained ***
(MW) (MW) (MW)
-------------------- ------------------- -------------------
Coal-fired generating units 1,624* 1,364* 260
Oil-fired generating units 839* 394* 445
Combustion turbines/combined cycle
generating units 1,205 56 1,149
Nuclear generating units 380** 380 --
Diesel units 31.5 9.5 22
Electric generating capacity 4,079.5 2,203.5 1,876
* On June 25, 2001, the sale of Delmarva's generating units (1,081 MW) to NRG
Energy, Inc. was completed.
** Excludes a 3 MW ownership interest of ACE in a combustion turbine located at
the Salem Nuclear Generating Station.
*** Represents the electric generating units as of December 31, 2000, less the
units expected to be sold during 2001.
In addition, as of December 31, 2000, Conectiv's subsidiaries had
long-term purchased power contracts which provided 1,421 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")./11
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. ("CTS"), and in
telecommunications services, including local and long distance telephone service
and Internet services, through Conectiv Communications, Inc. ("CCI")./12
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11 The EHV, LDV and SE systems interconnect and form the "backbone" of the PJM.
12 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 June 4, 2001, Conectiv reached agreement to sell
substantially all the telecommunications assets of CCI to Cavalier Telephone,
L.L.C.
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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 and allocated to the Conectiv subsidiaries.
The sources of Conectiv's consolidated revenues on a percentage basis
are shown below:
2000 1999 1998
---- ---- ----
Regulated electric revenues* 39.8% 57.4% 62.4%
Competitive electric revenues 18.0% 8.3% 9.3%
Regulated gas revenues 2.2% 3.1% 3.5%
Competitive gas revenues 28.2% 18.7% 13.9%
Other services** 11.8% 12.5% 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. New RC
New RC was incorporated under the laws of Delaware on February 9,
2001, as a direct wholly owned subsidiary of Pepco. New RC has issued 100 shares
of common stock (with a par value of $.01 per share), all of which are owned by
Pepco. New RC was created to become the parent company of Pepco and Conectiv
after the consummation of the Transaction. After consummation of the
Transaction, New RC will register as a public utility holding company under the
Act.
For the three months ended March 31, 2001 and the twelve months ended
December 31, 2000, Pepco and Conectiv had the following financial results
individually, and on a pro forma combined basis:/13
Pepco Conectiv Pro Forma Combined
($ millions) ($ millions) ($ millions)
Total assets (at March 31, 2001) 5,758.7 6,655.8 12,694.4
Total operating revenues (year
ended December 31, 2000) 3,047.7(a) 5,035.6 8,005.9
Operating income 702.4(a) 324.7 919.7
Net income 352.0(a) 170.8 452.3
(a) In December 2000, Pepco divested substantially all of its generation assets.
This divestiture resulted in the recognition of a pre-tax gain of approximately
$423.8 million ($182 million net of income taxes).
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13 The selected pro forma combined financial information at year ended December
31, 2000 is derived from the audited financial statements of Pepco and Conectiv.
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The table below shows the capitalization of Pepco and Conectiv on a
pro forma combined basis as of March 31, 2001.
Pro Forma Combined
Pepco ($ mm) Conectiv ($ mm) ($ mm)
Long-term debt and capital lease obligations 1,718.5 2,032.0 3,738.0
Short-term debt 798.1 997.7 1,795.8
Company obligated mandatorily redeemable
preferred securities of subsidiary trust which
holds solely parent junior subordinated
debentures 125.0 165.0 290.0
Preferred stock 84.8 119.9 203.0
Shareholders' equity 1,838.9 1,166.5 2,936.9
Total capitalization 4,565.3 4,480.2 8,963.7
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./14
Since 1927, PJM has provided economically efficient transmission and
generation services throughout the mid-Atlantic region,/15 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.
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14 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.
15 The PJM service area presently includes all or part of Pennsylvania, New
Jersey, Maryland, Delaware, Virginia, and the District of Columbia.
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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 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 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 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 6% 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 2001 of 2,530 MW for
Delmarva's default service and 2,074 MW for ACE's BGS.
D. Description of the Transaction
1. The Mergers
Pursuant to the Merger Agreement, New RC 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. New RC 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 New RC. The parties
currently intend that shortly after the consummation of the Transaction, Pepco
will dividend the stock of PHI to New RC such that PHI will become a first tier
subsidiary of New RC.
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 New RC.
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 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 New RC ("New RC 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 New RC Common Stock (the
"Conectiv Common Stock Share Consideration") determined by dividing $25.00 by
the Average Final Price/16 (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.
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16 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.
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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 nonassesseable shares of New RC 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.
Each record holder of Conectiv Stock immediately prior to the
consummation of the Transaction will be entitled to elect to receive shares of
New RC 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 New RC 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 Transaction will be accounted for by New RC 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 New RC's financial
statements prospectively as of the effective time of the transaction.
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, 20001 (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 New RC 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).
Under the Merger Agreement, termination fees of $60 million are
payable under the following circumstances:
- 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.
- 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 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 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
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 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 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
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 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 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 New RC's 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 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 February 9, 2001, Pepco caused New RC to be formed
in the State of Delaware and the New RC 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 New RC Board, voted against approval of the Transaction.
Later that evening, the Merger Agreement was executed by Pepco,
Conectiv and New RC.
4. Financing the Transaction
Before completing the Transaction, the management of Pepco and New RC
will evaluate 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
may use up to 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 anticipate that all other funds required for the
Transaction will be financed at the New RC level through external sources. Such
financings, however, will be offset by reductions since the date of its
generation asset sale in a like amount of Pepco's borrowings. Sources of
financing that New RC is considering include commercial and investment banks,
institutional lenders and public securities markets. Methods of financing may
include commercial paper, bank lines of credit, debt and preferred securities of
various maturities and types. The management of Pepco and New RC believe that
New RC will have access to many sources and types of short-term and long-term
capital sources at market rates.
5. Management and Operations of Pepco and Conectiv Following the
Transaction
Following the Transaction, the New RC 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 New RC. 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 New RC.
New RC 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.
New RC 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 New RC 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.
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./17 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.
--------
17 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.
--------
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 (New RC) $ 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
===========
Item 3. Applicable Statutory Provisions
A. Applicable Provisions
The proposed transactions are subject to Sections 5, 6(a), 7, 9(a),
10, and 13 of the Act and Rules 42, 43, 45, 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, New RC 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, New RC 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:
- 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;
- 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
- 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./18 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./19
---------
18 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]").
19 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 . . .").
---------
New RC's 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 Chairman and CEO, John Derrick, will serve as Chairman of New
RC. In addition, two current directors of Conectiv will serve on the board of
directors of New RC.
These arrangements and the representation of Conectiv on New RC's
board are necessary to integrate Conectiv fully into the New RC 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./20 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]."/21 New RC's 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 New RC 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./22 As the table below shows,
after the Merger, New RC 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.
---------
20 American Elec. Power Co., Inc., Holding Co. Act Release No. 20633 (July 21,
1978).
21 Vermont Yankee Nuclear Corp., Holding Co. Act Release No. 15958 (Feb. 6,
1968).
22 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).
---------
---------------------------- ------------------------- -------------------------- -------------------------
Customers
Total Assets Operating Revenues
Company/23 (million) (million) (000s)
---------------------------- ------------------------- -------------------------- -------------------------
New RC (Pepco/Conectiv) $12,694 $ 8,006 1,800,000
(at 3/31/01)
---------------------------- ------------------------- -------------------------- -------------------------
Southern Company 31,362 10,066 3,944,000
---------------------------- ------------------------- -------------------------- -------------------------
AEP 54,548 13,694 4,893,000
---------------------------- ------------------------- -------------------------- -------------------------
Exelon Corp 34,597 7,499 4,661,405*
---------------------------- ------------------------- -------------------------- -------------------------
Entergy 25,565 10,016 2,500,000*
---------------------------- ------------------------- -------------------------- -------------------------
Xcel Energy Inc. 21,769 11,591 4,679,000*
---------------------------- ------------------------- -------------------------- -------------------------
* 1999 data. Source: U.S. Securities and Exchange Commission, Financial and
Corporate Report, Holding Companies Registered under the Public Utility Holding
Company Act of 1935 as of August 1, 2000 (data provided is as of Dec. 31, 1999).
--------
23 As of December 31, 2000. Source: Individual companies' 2000 Annual Reports,
except as stated otherwise.
--------
Overall, New RC's 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." New RC,
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 competitive impact of the acquisition will also be 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 review./24 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./25 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./26 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./27 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./28 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.)/29
---------
24 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").
25 The FERC application is attached hereto as Exhibit G-1.
26 Dr. Pace's testimony is attached hereto as Exhibit G-2.
27 This generation capacity is oil-fired and operates only during very limited
hours of the year.
28 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.
29 The Applicants own immaterial amounts of non-PJM generating capacity, which
was not deemed to be relevant to Dr. Pace's market concentration analysis.
---------
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 New RC's utility subsidiaries will not be affected. The
acquisition does not alter the corporate form of New RC's 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. 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 New RC 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.
New RC's registration statement on Form S-4 includes an extensive discussion of
the analysis conducted by Merrill Lynch and Credit Suisse First Boston in
arriving at their opinions./30
--------
30 New RC's 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.
--------
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
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./31
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./32
---------
31 Because Pepco Common stock will be exchanged on a one-for-one basis for New
RC Common Stock, the Applicants treat those shares as equivalent.
32 See Southern Co., Holding Co. Act Release No. 24579 (Feb. 12, 1988).
---------
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).
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 New RC to Conectiv's stockholders. This percentage
is consistent with percentages previously approved by the Commission./33
--------
33 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).
--------
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
acquisition will unduly complicate New RC's capital structure or be detrimental
to the public interest, the interest of investors or consumers or the proper
functioning of the New RC system.
The proposed Transaction will not unduly complicate the capital
structure of New RC 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 New RC 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
New RC and its publicly held debt will remain outstanding, unaffected by the
Transaction. Moreover, neither Conectiv nor New RC will have classified common
stock following the Transaction. Similarly, Pepco Common Stock will be wholly
owned by New RC 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./34 On a pro forma basis, as the following table shows, assuming
the Transaction was consummated on March 31, 2001, common stockholders' equity
would have been 33% of New RC's total capitalization.
--------
34 See, e.g., The National Grid Group plc, Holding Co. Act Release No. 27154
(Mar. 15, 2000) ("National Grid").
--------
-----------------------------------------------------------------------------------------------------------
Pro Forma Capital Structure
-----------------------------------------------------------------------------------------------------------
($ millions) % of Total Capitalization
---------------------------------------- ------------------------------ -----------------------------------
Long-term debt and capital lease
obligation 3,738.0 42
---------------------------------------- ------------------------------ -----------------------------------
Short term debt 1,795.8 20
---------------------------------------- ------------------------------ -----------------------------------
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust which holds solely
parent junior subordinated debentures 290.0 3
---------------------------------------- ------------------------------ -----------------------------------
Preferred stock 203.0 2
---------------------------------------- ------------------------------ -----------------------------------
Shareholders' equity 2,936.9 33
---------------------------------------- ------------------------------ -----------------------------------
Total capitalization 8,963.7 100
---------------------------------------- ------------------------------ -----------------------------------
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, New RC 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 New RC
and its subsidiary companies.
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).
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 New RC 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./35
--------
35 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.
--------
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 New
RC's 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.
(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 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 itself interconnects with EHV
at the Keeney and 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. 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./36 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./37
---------
36 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); AEP Merger Order.
37 See Unitil and Conectiv Merger Order.
---------
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 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./38 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 in
satisfaction of the economic and coordinated operations requirement./39
---------
38 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).
39 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).
---------
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 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,/40 as the Commission found in the Energy East/41 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 the 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 utilities'
combined purchasing power 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 utility's needs.
---------
40 See AEP Merger Order (applicants implemented a joint operating agreement to
coordinate the efficient use of generating resources).
41 Energy East Corp., Holding Co. Act Release No. 27224 (Aug. 31, 2000) ("Energy
East")
---------
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 the Act./42 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.
---------
42 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.)
---------
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. New RC 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
New RC's board of directors. Pepco and Conectiv, and Conectiv's public utility
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./43 A registered holding
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.
---------
43 See, generally, NIPSCO Industries, Inc., Holding Co. Act Release No. 26975
(Feb. 10, 1999).
---------
The acquisition of the Delmarva gas system by New RC 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 New
RC. 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 New RC 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,/44 and (ii) that the retention is in the public
interest./45 A non-utility business 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./46
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./47
---------
44 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).
45 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).
46 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).
47 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).
---------
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 New RC 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 New RC's ability to provide services
that will benefit customers in today's rapidly changing U.S. energy markets. New
RC intends to continue to contribute to the current debate on the restructuring
of the U.S. transmission sector.
Finally, 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.
Although some of the anticipated benefits 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./48 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."/49
---------
48 See National Grid.
49 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).
---------
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 New RC and will be a holding company with respect to CEH.
Conectiv will be a great-grandfather company with respect to one of CEH's
utility subsidiaries. This structure, which results from the superposition of
New RC over the existing and previously approved Conectiv holding company
structure, cannot be altered without a substantial tax burden./50 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./51
---------
50 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 in order to make the Conectiv subsidiary a direct New RC 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 New RC system would experience if CEH were to
be restructured as a direct subsidiary of New RC is currently estimated to be a
minimum of $36 million after taxes.
51 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 have agreed to
register under the Act upon the formation of any additional utility subsidiaries
under CEH (the formation of which was authorized in such order).
---------
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/52, and CDG. In addition, ACE REIT owns 100% of the interests
in CAG, a merchant generation company. CEH's subsidiaries CDG and CAG 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./53
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./54
The Transaction will not result in a change in the corporate structure
of the Conectiv and CEH subsidiaries (other than the superposition of New RC 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./55 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.
---------
52 Named Delmarva Energy Company at the time of the Conectiv Merger Order and
later renamed.
53 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.
54 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).
55 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.
---------
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
Scope of Service
After consummation of the Transaction, and subject to the transition
period described below, either CRP, which has been previously approved by the
Commission, or a newly formed system service company ("New Service Co") will
provide New RC, Conectiv, Pepco and other system companies with a variety of
administrative, management and support services. The determination of whether to
have CRP serve as the system service company or New Service Co perform such
function will be made based on tax and regulatory considerations discussed
below. In this application, we refer to the system service company generally as
"Service Company". In any event, Service Company will provide services to New RC
and its subsidiaries that are similar to those that CRP currently provides to
Conectiv and its subsidiaries. These services may include:
I. Executive Management - The Executive Management function includes
the services of the Chairman/CEO and supporting staff.
II. Procurement and Corporate Services - The Procurement and Corporate
Services function provides security, including asset protection and
investigative services; purchasing and storeroom management; procurement and
materials management; vehicle resource management, including company vehicle
maintenance; general services including mail, graphics, records management and
other office services; building services including facilities management and
building maintenance; and real estate services, including right-of-way.
III. Financial Services - The Financial Services function includes
corporate planning; strategic planning; budgeting; treasury and finance
including risk management, cash management, financing, and funded plans
administration; investor relations; accounting services including general
ledger, corporate accounting, accounts payable , payroll, plant/property
accounting; tax accounting services; regulatory affairs; insurance and claims
processing; and insurance and claims administration.
IV. Human Resource and Performance Improvement Services - The Human
Resource and Performance Improvement Services function provides compensation and
benefit services; personnel, employment and staffing; employee/labor relations;
skills training and management development; performance improvement;
organizational development; and payroll services.
V. Legal and Internal Audit Services - The Legal and Internal Audit
Services function provides internal audit services and legal counsel related to
general corporate issues.
VI. Customer Services - The Customer Services function includes
management of customer care (customer service centers, dispatch, and billing) as
well as a separate group that provides billing of non-energy materials and
services.
VII. Marketing Services - The Marketing Services function includes
sales; market product and sales planning; market and customer research; direct
response marketing; marketing communication; and general corporate
advertising/branding.
VIII. Information Technology - The Information Technology function
provides employee labor, contractors, and other operating support of voice
services; solutions management including, applications delivery and support;
information management, including data administration and security; operations
management mainframe support; help desk; desktop support; network support;
consulting services, including business technology management; mid- range
operations, support for non-mainframe, non-network systems; general management
and administration.
IX. Public Affairs Services - The Public Affairs Services function
includes general corporate communications; governmental affairs; community
relations; employee relations; sponsorships; and customer education.
X. Environmental and Safety Services - The Environmental and Safety
Services function includes oversight of environmental concerns related to air,
water, land and waste, as well as compliance with relevant regulations. This
function also includes reporting and compliance with safety regulations, and
oversight of corporate safety awareness programs.
XI. Regulated Electric and Gas Delivery - The Regulated Electric and
Gas Delivery function includes the following electric and gas delivery services:
delivery business planning including, asset management, business planning,
financial analysis, distribution planning, engineering standards,
interconnection planning and arrangements, transmission planning, and value
added services; engineering services including distribution, substation and
transmission engineering, system protection, drafting and construction
management; system operations services including senior management, finance
director and administrative support, electric and energy system operations,
distribution operations, and operations planning and analysis; electric
maintenance services including non-regional management and administrative
support; forestry supervision; meter shop; other delivery services including
process improvement, training, safety, performance analysis, benchmarking, and
enabling systems.
XII. Energy Business - The Energy Business function provides
non-regulated operations and management; merchant functions including marketing,
portfolio management, risk management, and strategic planning; and supply
engineering and support including technical support and project management and
includes the services of related management and other personnel.
XIII. Internal Consulting Services - The internal consulting services
function will provide 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.
Allocation of Service Costs
The costs of services provided by the Service Company and members of
the New RC System will be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis.
Calculation of Service Costs
To gather the information necessary to allocate service costs,
employees of the Service Company will record transactions utilizing the existing
data capture and accounting systems of each client company. Costs will be
accumulated in accounts of the Service Company and directly assigned,
distributed and allocated to the appropriate client company in accordance with
the guidelines set forth in the Standard Form. The Service Company's accounting
and cost allocation methods and procedures are structured so as to comply with
the Commission's standards for service companies in registered holding-company
systems, except as otherwise approved by the Commission.
The Service Company's billing system will use the "Uniform System of
Accounts for Mutual Service Companies and Subsidiary Service Companies"
established by the Commission for service companies of registered
holding-company systems, as may be adjusted to use the FERC uniform system of
accounts. Further, since costs will be equitably allocated, charges for all
services provided by the Service Company to affiliates will be on an "at cost"
basis as determined under Rules 90 and 91 of the Act.
The operations of the Service Company will be more fully described in
the Service Company Policy and Procedures, Exhibit J-2 hereto.
Restriction on Amendments and Request for Authority to Restructure Service
Company
No change in the organization of the Service Company, 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 the Service Company 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 the Service Company 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
the Service Company shall have filed with the Commission an appropriate
declaration regarding such proposed change and the Commission shall have
permitted such declaration to become effective.
The Applicants are hereby requesting authorization to extend CRP's
authority to be a system wide service company as either a direct or indirect
subsidiary of New RC. Applicants note that there are tax implications involved
in moving CRP to a direct subsidiary of New RC (see footnote 48) as well as both
management and regulatory implications of having a system service company that
is a subsidiary of an intermediate holding company, which they are in the
process of analyzing full impact of. To the extent that the Applicants determine
that using CRP as the system service company is not desirable, New RC will form
New Service Co to serve as the system service company. The Applicants hereby
request Commission authorization to form New Service Co and engage in this
reorganization if CRP is not used as the system service company. In either case,
the type and character of the companies receiving services, the methods of
allocating costs to associate companies, and the scope and character of services
to be rendered subject to Section 13 of the Act, or any rule, regulation or
order thereunder would be as described herein. New RC may rename the Service
Company after consummation of the Transaction.
Interaction with FERC Policy
All services provided by New RC system companies to other New RC
system companies will be in accordance with the requirements of Section 13 of
the Act and the rules promulgated thereunder. New RC 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 requested FERC authorization, the
applicants in that matter have represented that they would abide by FERC policy
with respect to any transaction between any member company of the New RC 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 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 New RC 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, New RC 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 New RC.
On this basis, the Applicants believe that New RC 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./56
---------
56 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.
---------
Transition Period
Pepco currently provides certain services to its subsidiaries. In
addition, as noted herein, CRP provides certain services to the Conectiv
subsidiaries. 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 probably capable of being
completed until after the companies are in fact merged. Thus, in order to ensure
the transition to a combined company proceeds smoothly and in compliance with
applicable laws and regulations, the Applicants propose, initially, that for a
transition period of six months, Pepco and/or New RC will continue to provide
certain types of services to the Pepco subsidiaries. During the same time
period, Pepco and/or New RC will perform certain administrative functions for
Conectiv and the Conectiv subsidiaries. New RC will not provide services to
utility subsidiaries. Operating services for the Conectiv subsidiaries will
continue to be provided by the Service Company, as they are today. The company
providing the service will allocate costs pursuant to the Commission-approved
allocation formula.
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 with applicable laws and regulations./57
Accordingly, the Applicants request authorization to implement their
transitional services proposal, as described herein.
---------
57 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
Dominion Resources, Inc., Holding Co. Act Release No. 27113 (Dec. 15, 1999).
---------
Other Services
The Applicants hereby request an exemption from the at-cost
requirements of rules 90 and 91 for services rendered by New RC nonutility
subsidiaries to certain other New RC 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;
(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 New RC's 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 New RC's 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 New RC's 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 Exempt Nonutility
Companies and to partially owned nonutility subsidiaries, provided that the
ultimate purchaser of the services is not a New RC subsidiary whose activities
and operations are primarily related to the provision of services or goods to
New RC's regulated public utility subsidiaries. In addition, Applicants request
that the exemption apply to services provided by nonutility subsidiaries to any
nonutility subsidiary (a) that is engaged solely in the business of developing,
owning, operating and/or providing services to Exempt Nonutility Companies, or
(b) that 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."/58 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 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./59 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./60
---------
58 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.
59 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).
60 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)
---------
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 is being built, Pepco entered into a lease
arrangement with Edison Place, LLC pursuant to which it will rent 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 terms.
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 "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 New RC
authorized non-utility activities. To that end, New RC requests authorization 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
special-purpose subsidiaries to acquire and hold direct or indirect interests in
any or all of New RC's existing or future authorized non-utility businesses.
Restructuring could also involve the transfer of existing subsidiaries, or
portions of existing businesses, among the New RC associates and/or the
re-incorporation of existing subsidiaries in a different jurisdiction. This
would enable New RC to consolidate similar businesses and to participate
effectively in authorized non-utility activities, without the need to apply for
or receive additional Commission approval.
These direct or indirect subsidiaries might be corporations,
partnerships, limited liability companies or other entities in which New RC,
directly or indirectly, might have a 100% interest, a majority equity or debt
position, or a minority debt or equity position. These subsidiaries would engage
only in businesses to the extent New RC is authorized, whether by statute, rule,
regulation or order, to engage in those businesses. New RC 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 New RC into a new, unauthorized line of business.
As previously noted, the first such reorganization is expected to
occur shortly after the consummation of the Transaction when Pepco intends to
dividend the shares of PHI that it holds to New RC such that PHI will become a
first tier subsidiary of New RC. PHI will continue to serve as an intermediate
holding company for certain non-utility subsidiaries in the New RC system.
7. Authorization to Engage in Energy-Related Activities Outside of
the United States
New RC, 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.
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
(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 requests 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,/61 (ii) authorize non-utility
subsidiaries to provide Energy Management Services and Consulting Services
anywhere outside the United States,/62 and (iii) reserve jurisdiction over other
activities of non-utility subsidiaries outside the United States, pending
completion of the record.
---------
61 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).
62 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).
---------
The Applicants note that Conectiv has filed a separate application
with the Commission, on behalf of Conectiv's non-utility subsidiaries requesting
authorization to provide the services referred to in this Application through
its Rule 58 subsidiaries. In the event that such authority is received prior to
the consummation of the Transaction, New RC requests that it be extended to its
other non-utility subsidiaries.
8. Tax Allocation Agreement
The Applicants ask the Commission to approve an agreement for the
allocation of consolidated tax among the companies within the New RC system (the
"Tax Allocation Agreement"). Approval is necessary because the Tax Allocation
Agreement provides for the retention by New RC of certain payments for tax
losses that it has incurred, 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 will be 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
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 the Transaction, New RC will be creating tax credits
that are non-recourse to its subsidiaries. As a result, New RC should retain the
benefits of those tax credits. Accordingly, the Applicants request that the
Commission approve the Tax Allocation Agreement./63
---------
63 See, National Grid.
---------
Item 4. Regulatory Approvals
The federal and state regulatory requirements described below must be
complied with before the Applicants can complete the Transaction. The Applicants
currently believe that the necessary approvals can be obtained by the first
quarter of 2002.
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 with the public interest. New RC and Delmarva have filed an
application seeking the approval of the Delaware Commission consistent with
these requirements.
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.
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.
New RC and ACE have filed an application seeking the approval of the NJBPU
consistent with these requirements.
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, New
RC, 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.
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. New RC,
Delmarva and ACE have filed an application seeking the approval of the
Pennsylvania Commission consistent with these requirements.
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 have filed an application seeking the approvals of the Virginia
Commission consistent with these requirements.
District of Columbia
Pepco is subject to the jurisdiction of the DC Commission. New RC 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 has
filed an application for approval of the Transaction with the DC Commission.
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 New RC,
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:
- whether the merger will adversely affect competition;
- whether the merger will adversely affect rates; and
- whether the merger will impair the effectiveness of regulation.
The parties have filed an application with the FERC requesting
approval of the Transaction under the Federal Power Act in the first half of
2001.
Atomic Energy Act
ACE holds licenses issued by the Nuclear Regulatory Commission in
connection with its 7.41% ownership interest in the Salem Nuclear Generating
Station, its 7.51% ownership interest in the Peach Bottom Atomic Generating
Station, and its 5% ownership interest in the Hope Creek Nuclear Generating
Station. The Atomic Energy Act of 1954 requires that any direct or indirect
transfer of a license must be approved by the Nuclear Regulatory Commission.
Although ACE has entered into agreements to sell its interests in these nuclear
facilities, and the related license transfers have been approved by the Nuclear
Regulatory Commission, the sale of the facilities is not a condition to
completing the Transaction. As a result, if the sale of the nuclear facilities
has not been completed, the transaction will constitute an indirect change of
control of ACE and therefore an indirect transfer of its nuclear licenses. ACE
intends to file an application with the Nuclear Regulatory Commission in
connection with the Transaction as appropriate.
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 Applicants expect to close the proposed Transaction on or about
the first quarter of 2002. The Applicants respectfully request that the
Commission issue and publish, not later than August 3, 2001, the requisite
notice under Rule 23 with respect to the filing of this Application-Declaration,
such notice to specify a date not later than August 28, 2001 by which comments
may be entered and a date not later than August 30, 2001 as the date after which
an order of the Commission granting and permitting this Application to become
effective may be entered by the Commission.
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.
Item 6. Exhibits and Financial Statements
Exhibits
A-1 Form of Amended and Restated Certificate of Incorporation of New RC, Inc.,
incorporated by reference to Annex B to New RC, Inc.'s Registration
Statement in Exhibit B-2, hereto.
A-2 Form of Amended and Restated Bylaws of New RC, Inc., incorporated by
reference to Annex C to New RC, 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, New RC, Inc. and Conectiv, incorporated by
reference to Annex A to New RC, Inc.'s Registration Statement in Exhibit
B-2, hereto.
B-2 New RC, 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.
C-2 Application to the Maryland Public Service Commission.
C-3 Application to the New Jersey Board of Public Utilities.
C-4 Application to the Pennsylvania Public Utility Commission.
C-5 Application to the Virginia State Corporation Commission.
C-6 Application to the District of Columbia Public Service Commission.
C-7 Order of the Delaware Public Service Commission (to be filed by amendment).
C-8 Order of the Maryland Public Service Commission (to be filed by amendment).
C-9 Order of the New Jersey Board of Public Utilities (to be filed by
amendment).
C-10 Order of the Pennsylvania Public Utility Commission (to be filed by
amendment).
C-11 Order of the Virginia State Corporation Commission (to be filed by
amendment).
C-12 Order of the District of Columbia Public Service Commission (to be filed by
amendment).
D-1 Map of Pepco's service territory (Filed on Form SE).
D-2 Map of ACE and Delmarva's service territory (Filed on Form SE).
D-3 Map of PJM Interconnection Transmission Owners (Filed on Form SE).
E-1 Opinion of Counsel - Pepco (to be filed by amendment).
E-2 Opinion of Counsel - Conectiv (to be filed by amendment).
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.
G-2 Testimony of Joe D. Pace as filed with the Federal Energy Regulatory
Commission.
G-3 Order of the Federal Energy Regulatory Commission (to be filed by
amendment).
H-1 Pepco's 2000 Annual Report on Form 10-K, filed on March 23, 2001,
incorporated by reference to SEC File No. 1-1072.
H-2 Conectiv's 2000 Annual Report on Form 10-K filed on March 15, 2001,
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.
H-4 Conectiv's Quarterly Report on Form 10-Q, filed on May 10, 2001,
incorporated by reference to SEC File No. 1-13895.
I-1 Proposed Form of Notice.
J-1 Form of Service Agreement (to be filed by amendment).
J-2 Service Company Policy and Procedures (to be filed by amendment).
J-3 Form of Tax Allocation Agreement (to be filed by amendment).
K-1 Description of Pepco and Conectiv Subsidiaries.
M-1 Post-Transaction Corporate Chart (to be filed by amendment).
N-1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (included as
Annex D to New RC's Registration Statement in Exhibit B-2, hereto).
N-2 Opinion of Credit Suisse First Boston Corporation (included as Annex E to
New RC's Registration Statement in Exhibit B-2, hereto).
Financial Statements
FS-1 Pepco's Consolidated Balance Sheet as of December 31, 2000, incorporated by
reference to Pepco's Annual Report on Form 10-K, SEC File No. 1-1072, filed
on March 23, 2001.
FS-2 Pepco's Consolidated Statement of Earnings for the year ended December 31,
2000, incorporated by reference to Pepco's Annual Report on Form 10-K, SEC
File No. 1-1072, filed on March 23, 2001.
FS-3 Pepco's Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the year ended December 31, 2000, incorporated by reference to
Pepco's Annual Report on Form 10-K, SEC File No. 1-1072, filed on March 23,
2001.
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,
SEC File No. 1-1072, filed on March 23, 2001.
FS-5 Notes to Consolidated Financial Statements, incorporated by reference to
Pepco's Annual Report on Form 10-K, SEC File No. 1-1072, filed on March 23,
2001.
FS-6 Conectiv's Consolidated Statement of Income for the year ended December 31,
2000, incorporated by reference to Conectiv's 2000 Annual Report on Form
10-K filed on March 15, 2001, SEC File No. 1-13895.
FS-7 Conectiv's Consolidated Statement of Cash Flows for the year ended December
31, 2000, incorporated by reference to Conectiv's 2000 Annual Report on
Form 10-K filed on March 15, 2001, SEC File No. 1-13895.
FS-8 Conectiv's Consolidated Balance Sheets as of December 31, 2000,
incorporated by reference to Conectiv's 2000 Annual Report on Form 10-K
filed on March 15, 2001, SEC File No. 1-13895.
FS-9 Conectiv's Consolidated Statement of Changes in Common Stockholders' Equity
for the year ended December 31, 2000, incorporated by reference to
Conectiv's 2000 Annual Report on Form 10-K filed on March 15, 2001, SEC
File No. 1-13895.
FS-10 Notes to Consolidated Financial Statements, Conectiv's 2000 Annual Report
on Form 10-K filed on March 15, 2001, incorporated by reference to SEC File
No. 1-13895.
FS-11 New RC Unaudited Pro Forma Combined Statement of Earnings for the three
months ending March 31, 2001, incorporated by reference to New RC, Inc.
Registration Statement in Exhibit B-2, hereto.
FS-12 New RC Unaudited Pro Forma Combined Statement of Earnings for the year
ended December 31, 2000, incorporated by reference to New RC, Inc.'s
Registration Statement in Exhibit B-2.
FS-14 New RC Unaudited Pro Forma Combined Balance Sheet as of March 31, 2001,
incorporated by reference to New RC, Inc.'s Registration Statement in
Exhibit B-2, hereto.
FS-15 Notes to Unaudited Pro Forma Combined Financial Statements of New RC,
incorporated by reference to New RC, Inc.'s Registration Statement in
Exhibit B-2.
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.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, Applicants have duly caused this Application-Declaration to be signed
on their behalf by the undersigned thereunto duly authorized.
Date: July 20, 2001
NEW RC, INC.
By: /s/ Dennis R. Wraase
----------------------------
Name: Dennis R. Wraase
Title: President and Treasurer
CONECTIV
By: /s/ Peter F. Clark
-------------------------------
Name: Peter F. Clark
Title: Vice President, General Counsel
& Secretary