-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JES064gvpiXNE3Duha3ml6a/Q1FNGz/TnwRFfBNkP1yCmznOCHh07NH8cLhQ7Nmz uMd75Ejv4ox5534dpp6dvQ== 0000898080-02-000396.txt : 20021028 0000898080-02-000396.hdr.sgml : 20021028 20021028122854 ACCESSION NUMBER: 0000898080-02-000396 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20021028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONECTIV CENTRAL INDEX KEY: 0001029590 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 510377417 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-09899 FILM NUMBER: 02799514 BUSINESS ADDRESS: STREET 1: 800 KING ST STREET 2: P O BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 BUSINESS PHONE: 3024293114 MAIL ADDRESS: STREET 1: 800 KING ST STREET 2: P O BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 U-1/A 1 formu1a.txt FORM U-1/A Date: October 28, 2002 File No. 70-9899 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------ AMENDMENT NO. 3 TO FORM U-1 APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ----------------------------------------------------- Conectiv Atlantic City Electric Company PHI Service Company P.O. Box 231 Wilmington, DE 19899-0231 Atlantic City Electric Transition Funding LLC Mail Code: 89KS33 P.O. Box 15597 Wilmington, DE 19850-5597 (Name of company filing this statement and addresses of principal executive offices) -------------------------------------------- Pepco Holdings, Inc. (Name of top registered holding company parent) -------------------------------------------- Anthony J. Kamerick Conectiv Vice President and Treasurer 701 Ninth Street, N.W. Washington, DC 20068 (Name and addresses of agent for service) ------------------------------------ The Commission is also requested to send copies of any communications in connection with this matter to: Warren J. Ingber Thomas B. Reems Anthony J. Kamerick LeBoeuf, Lamb, Greene LeBoeuf, Lamb, Greene Conectiv & MacRae, L.L.P. & MacRae, L.L.P. Vice President and 125 West 55th Street 1875 Connecticut Avenue, NW Treasurer New York, NY 10019-5389 Washington, DC 20036 701 Ninth Street, N.W. (212) 424-8000 (202) 986-8000 Washington, DC 20068 (202) 872-3015 TABLE OF CONTENTS Item 1. Description of Proposed Transaction...................................3 A. SUMMARY OF REQUEST......................................................3 B. REGULATORY HISTORY......................................................4 C. CHARACTERISTICS OF TRANSITION BONDS.....................................6 D. ACE'S ORDERS FROM THE BPU...............................................9 E. SERVICING AGREEMENT....................................................10 F. ADMINISTRATION AGREEMENT...............................................11 G. USE OF PROCEEDS........................................................12 H. HEDGING TRANSACTIONS...................................................12 I. ACE'S OBLIGATION TO INDEMNIFY THE SPECIAL PURPOSE ISSUER AND THE TRUSTEE......................................................13 J. HOLDING COMPANY SYSTEM.................................................15 Item 2. Fees, Commissions and Expenses.......................................17 Item 3. Applicable Statutory Provisions......................................18 Item 4. Regulatory Approval..................................................18 Item 5. Procedure............................................................18 Item 6. Exhibits and Financial Statements....................................18 Item 7. Information as to Environmental Effects..............................20 1 This Amendment No. 3 amends and restates in their entireties the previous filings made in File No. 70-9899. By Holding Company Act Release No. 26833, File No. 70-9095, dated February 26, 1998, and by various supplemental orders\1 (the "Prior Orders"), the Securities and Exchange Commission (the "Commission") authorized Conectiv, a registered holding company under the Public Utility Holding Company Act of 1935 (the "Act"), and its subsidiaries to effect certain financial transactions. Conectiv, Atlantic City Electric Company ("ACE"), a wholly owned electric utility company subsidiary of Conectiv, PHI Service Company\2 ("PHI Service"), the service company for the Pepco Holdings System, and Atlantic City Electric Transition Funding LLC (collectively, the "Applicants") now request authority to issue transition bonds as contemplated in recently adopted New Jersey legislation restructuring the electric utility industry of that state. ACE is a regulated public electric utility incorporated under the laws of the State of New Jersey on April 28, 1924. As of December 31, 2001, ACE served approximately 509,000 customers in its service territory, which covers an area of about 2,700 square miles in the southern one-third of New Jersey and has a population of approximately 0.9 million. ACE's customer base consists primarily of residential and commercial customers. ACE reported net income after extraordinary items of $75.5 million on revenue of $1,041 million for the year ended December 31, 2001. On February 9, 2001, Conectiv and Potomac Electric Power Company, known as PEPCO, entered into an agreement and plan of merger. The agreement and plan of merger contemplated the formation of a new holding company that would own all of the stock of Conectiv and PEPCO. The merger was consummated on August 1, 2002 with the formation of Pepco Holdings, Inc. ("PHI") as the new registered holding company under the Act.\3 Subsequent to the merger, Conectiv remains the parent of ACE. The merger should not materially affect the structure of any issuance of transition bonds, the servicing of any bondable transition property or the tax or accounting treatment of any issuance. - ------------------------------ 1/ Holding Co. Act Release No. 26907, File No. 70-9095, (August 21, 1998); Holding Co. Act Release No. 26921, File No. 70-9095, (Sept. 28, 1998); Holding Co. Act Release No. 26930, File No. 70-9095, (Oct. 21, 1998); Holding Co. Act Release No. 26941, File No. 70-9095, (Nov. 13, 1998); and Holding Co. Act Release No. 27111, File No. 70-9095 (Dec. 14, 1999); Holding Co. Act Release No. 27213, File No. 70-9095 (Aug. 17, 2000); Holding Co. Act Release No. 27415, File No. 70-9095, (June 7, 2001); Holding Co. Act Release No. 35-27507, File No. 70-9095, (Mar. 22, 2002); and Holding Co. Act Release No. 35-27523, File No. 70-9095, (Apr. 22, 2002). Such orders have been consolidated with the order of the Commission dated July 31, 2002 (Holding Co. Act Release No. 35-27557, File No. 70-99947) that authorizes the ongoing financing activities of Pepco Holdings, Inc. and its subsidiaries (the "PHI Financing Order"). 2/ Formerly Conectiv Resource Partners, Inc. 3/ See Pepco Holdings, Inc., Holding Co. Act Release No. 35-27553, File No. 70-9913 (July 24, 2002) 2 Item 1. Description of Proposed Transaction. A. Summary of Request. In order to facilitate the issuance of transition bonds, ACE formed Atlantic City Electric Transition Funding LLC, a Delaware limited liability company, on March 28, 2001 (the "Special Purpose Issuer" or "ACE Transition Funding"), pursuant to a limited liability company agreement with ACE as its sole member, and acquired its securities pursuant to its authority under the Prior Orders.\4 To the extent not already authorized in the Prior Orders or the PHI Financing Order, Applicants seek authority, through May 31, 2006 (the "Authorization Period"), for: (1) ACE to sell, pledge or assign bondable transition property to the Special Purpose Issuer from time to time in exchange for the net proceeds from the sale of a series of transition bonds, as described more fully in Exhibit B-1, the sale agreement; (2) the Special Purpose Issuer to issue and sell transition bonds from time to time, pursuant to an underwriting agreement, in an aggregate principal amount up to $1.7 billion to be authorized and approved by the New Jersey Board of Public Utilities ("BPU"), as described more fully in Exhibit A-2, the registration statement. Applicants request that the Commission authorize the issuance of up to $440 million of transition bonds and reserve jurisdiction over the issuance of the remaining $1.26 billion of transition bonds pending completion of the record in this application/declaration. The authority requested in this application/declaration is in addition to authority granted in the Prior Orders and the PHI Financing Order; (3) the Special Purpose Issuer to enter into interest rate swaps, interest rate hedging programs, and credit enhancement arrangements to reduce interest rate and credit risks with respect to, and to facilitate the issuance of, transition bonds as described more fully in Exhibit A-2. The authority requested in this application/declaration is in addition to authority granted in the Prior Orders and the PHI Financing Order; - ------------------------------ 4/ ACE will also make capital contributions to the Special Purpose Issuer. ACE will receive any investment earnings thereon, except as otherwise required under the indenture to make principal and interest payments to the bondholders and to meet other priority payment obligations such as those to the trustee, the independent managers, the servicer and administrator. Because of the possible return on the capital contributions, this aspect of the transaction is beyond the scope of Rule 45. The initial capital contribution will be at least 0.5% of the aggregate initial principal amount of the transition bonds. The capital contributions were approved in the BPU's order, and this request is consistent with prior applications approved by the Commission. See paragraph 9 in amendment number 5 of the application in File 70-9697 which resulted in Holding Co. Act Release Nos. 27364 (March 23, 2001) and 27319 (December 26, 2000). 3 (4) ACE to act as the servicer of the bondable transition property and enter into the servicing agreement, attached as Exhibit B-2, pursuant to which ACE or an affiliate will perform services for the Special Purpose Issuer and receive compensation determined on a market basis rather than the "at-cost" standard of Section 13(b) of the Act; (5) ACE, PHI Service or any successor entity, or another affiliate to act as the administrator for the Special Purpose Issuer and enter into the administration agreement attached as Exhibit B-3. The Special Purpose Issuer will pay a fee for these services which will be equal to a market rate fee rather than the "at-cost" standard of Section 13(b) of the Act; (6) the Special Purpose Issuer to use the proceeds from the transition bonds to pay the expenses of issuance and to purchase the bondable transition property from ACE. ACE will use these proceeds principally to reduce stranded costs through the retirement of debt or equity or both, and/or to finance or refinance the cost of buying down and/or buying out long-term power purchase contracts from nonutility generators and to pay related expenses. The specific amount of proceeds to be used to retire debt and /or equity will be dependent on ACE's capital structure and market conditions at the time of redemption; (7) ACE to enter into the indemnity provisions of the sale agreement through which it may indemnify the Special Purpose Issuer and related parties pursuant to the terms of the sale agreement; ACE, as servicer, to enter into the indemnity provisions of the servicing agreement through which it may indemnify the Special Purpose Issuer and related parties pursuant to the terms of the servicing agreement; ACE, PHI Service Company, or any successor entity or another affiliate, as administrator, to enter into the indemnity provisions of the administration agreement through which it may indemnify the Special Purpose Issuer pursuant to the terms of the administration agreement; and the Special Purpose Issuer to inter into the indemnity provisions of its limited liability company agreement through which it may indemnify ACE and other parties pursuant to the limited liability company agreement, all as further described herein; (8) ACE to make capital contributions to the Special Purpose Issuer and receive interest and other investment earnings thereon. B. Regulatory History. The New Jersey Electric Discount and Energy Competition Act (the "Competition Act"), signed into law in February 1999, provides, among other things, for the restructuring of the electric utility industry in New Jersey. The Competition Act requires the unbundling of electric services into separate generation, transmission and distribution services with open retail 4 competition for generation services. While electric utilities will continue to provide transmission and distribution services, the Competition Act authorizes third-party electric power suppliers licensed by the BPU, referred to as third-party suppliers, to provide electric generation services to customers. Prior to enactment of the Competition Act, electric utilities such as ACE invested in various generation-related assets, such as electric generating facilities, and entered into power purchase contracts with nonutility generators of electricity to help fulfill their duties to serve the public as regulated utilities. The electric utilities recovered their investments in these assets and the costs they incurred under these contracts by charging their customers the regulated rates approved by the BPU. One of the expected effects of the deregulation of electricity generation is that rates will be determined by market forces. These market rates may not be high enough to allow the utilities to recover their investments in generation-related assets or to recover all of the costs incurred under power purchase contracts with nonutility generators of electricity, as market prices may be below a level that would provide a return on these investments or cover the costs incurred under these contracts. Accordingly, utilities may incur losses as a result of the transition from a regulated environment to a competitive environment for electric generation services. The Competition Act provides for utilities to recover the anticipated loss in value of their generation-related assets and the costs incurred under power purchase contracts with nonutility generators of electricity that are not recoverable under market rates, including buyouts and buydowns of such contracts. These costs are known as stranded costs, and the Competition Act provides for their recovery through a nonbypassable charge included in customers' bills known as a market transition charge. The Competition Act authorizes a utility to securitize its right to recover stranded costs through the issuance of transition bonds by the electric public utility or other financing entity approved by the BPU. This right is included in what is known as bondable transition property. To the extent a utility's right to recover stranded costs is securitized, a portion of the market transition charge is replaced by a nonbypassable irrevocable charge included in customers' electric bills known as a transition bond charge,\5 which is designed to meet the costs of paying the principal of and interest on the transition bonds and the costs associated with the issuance, credit enhancing and servicing of the transition bonds. The bondable transition property embodies the right to charge, collect and receive the transition bond charge and MTC Tax. The Competition Act authorizes the BPU to issue a "bondable stranded costs rate order," such as a BPU financing order, approving, among other things, the issuance of transition - ------------------------------ 5/ The Competition Act also authorizes the recovery of a related market transition charge tax component (the "MTC Tax"). 5 bonds to recover bondable stranded costs\6 and related expenses of a public electric utility. A utility, a finance subsidiary of a utility or a third-party assignee of a utility may issue transition bonds. C. Characteristics of Transition Bonds. The Special Purpose Issuer may issue transition bonds in different series, each made up of one or more classes, up to an amount authorized by the BPU, secured by its right, title and interest in and to the bondable transition property. Different series may have different interest rates and amortizations of principal, and each series may have classes with different interest rates and amortizations of principal. The Competition Act contains a number of provisions designed to facilitate the securitization of stranded costs and related expenses while achieving reliable credit ratings, thereby reducing interest expenses and maximizing the benefits from securitization. The structure and pricing of the transition bonds assures that ACE's customers pay the lowest transition bond charge consistent with market conditions and the BPU's financing order. (a) A Bondable Stranded Costs Rate Order Is Irrevocable. Under the Competition Act, bondable transition property is created by the issuance by the BPU of a bondable stranded costs rate order such as a BPU financing order. The Competition Act provides that a bondable stranded costs rate order will become irrevocable upon issuance and effectiveness of the order. Upon the transfer of the bondable transition property to an assignee, such as the Special Purpose Issuer, and the receipt of consideration for the sale of the transition bonds, the bondable stranded costs rate order, the transition bond charge and the bondable transition property become a vested, presently existing property right, vested ab initio in the assignee. Under the Competition Act, neither the BPU nor any other governmental entity has the authority, directly or indirectly, legally or equitably, to rescind, alter, repeal, modify or amend a bondable stranded costs rate order, to revalue, re-evaluate or revise the amount of bondable stranded costs, to determine that the transition bond charge or the revenues required to recover bondable stranded costs are unjust or unreasonable, or in any way to reduce or impair the value of bondable transition property, nor will the amount of revenues from the transition bond charge be subject to reduction, impairment, postponement or termination. In addition, under the - ------------------------------ 6/ Bondable stranded costs, as more fully described in N.J.S.A. 48:3-51, means any stranded costs of an electric public utility approved by the BPU for recovery under the Competition Act, together with: (1) the cost of retiring existing debt or equity capital of the utility, including accrued interest, premium and other fees, costs and charges relating thereto; (2) if requested, the recovery of federal, state and local tax liabilities associated with stranded costs recovery or the transfer or financing of such property or both; and (3) the costs incurred to issue, service or refinance transition bonds, including interest, acquisition or redemption premium, and other financing costs. The concept of bondable stranded costs is used by the BPU in determining the size of the aggregate amount of transition bonds to be issued but is not material to the use of the proceeds from the issuance of transition bonds, which is governed by N.J.S.A. 48:3-62 and is described in this application/declaration in Section "G" of Item 1. 6 Competition Act, the State of New Jersey pledges and agrees with the holders of transition bonds, and with any assignee or financing entity, such as the Special Purpose Issuer, not to limit, alter or impair the bondable transition property or the other rights vested in a public electric utility or any assignee or pledgee of the utility or any financing entity or vested in the holders of any transition bonds pursuant to the bondable stranded costs rate order until the transition bonds are fully paid and discharged. In addition, the State of New Jersey pledges and agrees in the Competition Act that it will not in any way limit, alter, impair or reduce the value or amount of bondable transition property approved by the bondable stranded costs rate order except as contemplated by the periodic adjustments to the transition bond charge authorized by the Competition Act. (b) The Transition Bond Charge Will Cover All Costs. The transition bond charge will be designed to be sufficient to pay the principal of and interest on the transition bonds and all other costs associated with the issuance of the transition bonds, including costs of credit enhancements and hedging transactions, to fund reserves and to pay premiums, if any, costs of retiring existing debt and preferred equity, costs of defeasance, servicing fees and certain other expenses. (c) The Transition Bond Charge Is To Be Adjusted Periodically. The Competition Act requires a bondable stranded costs rate order to provide for mandatory adjustment of the transition bond charge, at least once a year, upon petition of the public electric utility or its assignee or financing party. Such adjustments are based on formulas designed to provide for the full recovery of bondable stranded costs, including without limitation the timely payment of the principal of, and interest and acquisition or redemption premium on, the transition bonds in accordance with the expected amortization schedule. (d) Customers Cannot Avoid Paying the Transition Bond Charge. Under the Competition Act, the transition bond charge and MTC-Tax are nonbypassable and will be assessed against and collected from all customers of ACE or any successor utility until all ongoing transition bond costs and other bondable stranded costs determined by the BPU to be recoverable are paid in full, even past legal maturity, subject to Section 28 of the Competition Act. The transition bond charge will apply equally to each customer, regardless of class, based on the amount of electricity delivered to the customer through the transmission and distribution system of ACE or any successor utility. (e) The Competition Act Characterizes the Transfer of Bondable Transition Property as a Sale or Other Absolute Transfer. The Competition Act provides that a transfer by a public electric utility or its assignee of bondable transition property will be treated as a sale or other absolute transfer of the transferor's right, title and interest and not as a borrowing secured by the bondable transition property if the parties expressly state in governing documents that a transfer is to be a sale or other absolute transfer. The Special Purpose Issuer is otherwise structured so as to qualify as "bankruptcy-remote" from ACE. Supplementally, the transition bonds will be secured by the bondable transition property since, despite the provisions of the Competition Act providing for treatment of the transaction as a sale or other absolute transfer, it 7 might later be recharacterized as a financing and not a sale. The Competition Act provides for the perfection of the security interest granted in the bondable transition property by ACE to the trustee under the indenture pursuant to which the transition bonds are issued (the "Trustee"). (f) Security and Credit Enhancement. To protect bondholders against losses or delays in scheduled payments, the transition bonds may include credit enhancements typically used in securitization transactions such as surety bonds, letters of credit, maturity guarantees, financial guarantee insurance policies, a credit or liquidity facility, a repurchase obligation, a third-party payment or cash deposit. (g) Trustee. The trustee, which will initially be the Bank of New York, an unaffiliated party, may, pursuant to the indenture, invest funds held by it in collection accounts and use the proceeds to meet payment requirements to the bondholders, trustee, independent managers, administrator and servicer. Investment of these funds increases the security of the transition bonds by allowing the trustee to efficiently use funds collected from ratepayers while they are held prior to dispursement. Although these investments are not subject to the Act because the trustee is an unaffiliated party, the Applicants are describing them here because the disclosure is useful in understanding the entire securitization process. The trustee's investments are governed by the bond indenture, and the trustee may invest in eligible investments such as: i. direct obligations of, and obligations fully and unconditionally guaranteed as to their timely payment by, the United States of America; ii. demand deposits, time deposits or certificates of deposit of depository institutions or trust companies meeting standards specified in the indenture; iii. commercial paper or other short-term unsecured debt obligations (other than those of ACE and its affiliates) having, at the time of investment, a rating in the highest rating category from each rating agency; iv. investments in money market funds that have the highest rating from each rating agency, including funds for which the trustee or any of its affiliates is investment manager or advisor; v. banker's acceptances issued by any depository institution or trust company meeting standards specified in the indenture; vi. repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof, in either case entered into with depository institutions or trust companies meeting standards specified in the indenture; or vii. any other investment permitted by the rating agencies, but: a. any book-entry security, instrument or security having a maturity of one month or less that would be an eligible investment but for its failure, or the failure of the 8 obligor thereon, to have the rating specified above will be an eligible investment if the book-entry security, instrument or security, or the obligor thereon, has a long-term unsecured debt rating of at least "A2" by Moody's Investors Service, or the equivalent thereof by the other rating agencies, or a short-term rating of at least "P-1" by Moody's Investors Service or the equivalent thereof by the other rating agencies, and b. any book-entry security, instrument or security having a maturity of greater than one month that would be an eligible investment but for its failure, or the failure of the obligor thereon, to have the rating specified above shall be an eligible investment if this book-entry security, instrument or security, or the obligor thereon, has a long-term unsecured debt rating of at least "A1" by Moody's Investors Service, or the equivalent thereof by the other rating agencies, and a short-term rating of at least "P-1" by Moody's Investors Service or the equivalent thereof by the other rating agencies. D. ACE's Orders from the BPU. On June 25, 2001, ACE filed a petition with the BPU, which was supplemented on August 19, 2002, requesting the issuance by the BPU of a bondable stranded costs rate order under the Competition Act to allow ACE to monetize its bondable stranded costs, plus associated transaction costs and the cost of retiring its debt or equity or both (See Exhibits D-1 and D-2). ACE may file additional petitions with the BPU from time to time in connection with the recovery of additional stranded costs should the need arise. The Competition Act provides for the issuance of transition bonds with scheduled amortizations upon issuance (1) not exceeding 15 years from the date of issuance in the case of transition bonds the proceeds of which will be used to reduce stranded costs related to utility-owned generation and (2) not exceeding the remaining term of a long-term power purchase agreement with a nonutility generator, in the case of transition bonds the proceeds of which will be used to buydown or buyout that power purchase agreement. The BPU approved bonds with these amortizations plus stated maturities of up to two years, or in the case of the transition bonds referred to in clause (2) above, three years beyond the expected final scheduled maturity date of each class of transition bonds in order to minimize over collateralization requirements and enhance the prospects of securing the highest possible credit rating. For ACE, the power purchase agreement with the longest remaining term expires December 31, 2024. In its petition, ACE has requested that in connection with its issuance of the financing order, the BPU find that: (i) ACE has taken reasonable measures to date, and has the appropriate incentives or plans in place to take reasonable measures, to mitigate the total amount of its recoverable stranded costs, (ii) ACE will not be able to achieve the level of rate reduction deemed by the BPU to be necessary and appropriate pursuant to the provisions of N.J.S.A. 48:3-52 and N.J.S.A. 48:3-61 (as embodied for the benefit of customers in the BPU's final order), absent the issuance of transition bonds and the recovery of the MTC-Tax for the term of the 9 transition bonds, and (iii) the issuance of the Transition Bonds provides tangible and quantifiable benefits to customers, including net present value savings over the term of the Transition Bonds (See Exhibit D-1, pages 45 to 46). The final structure, pricing and other terms of the transition bonds will be subject to the approval of the BPU or its designee. On, September 20, 2002, the BPU issued an order authorizing the issuance of up to $440 million of transition bonds. See Exhibit D-3. The Special Purpose Issuer has requested authority to enter into hedge agreements to protect ACE's customers against interest rate exposure in connection with the sale of transition bonds. The Commission has already granted ACE authority to enter into these hedge agreements under the Prior Orders. E. Servicing Agreement. ACE will enter into a servicing agreement with the Special Purpose Issuer and act as the servicer of the bondable transition property and will assess the transition bond charge on its customers bills.\7 ACE will calculate the transition bond charge based on the total amount required to be billed to customers in order to enhance the likelihood that transition bond charge collections, including any amounts on deposit in the reserve subaccount, are neither more nor less than the amount necessary to make timely payments of principal of and interest on the transition bonds and the other amounts required to be paid by the Special Purpose Issuer. The BPU is required to make periodic adjustments to the transition bond charge upon petition by ACE, as servicer, or the Special Purpose Issuer, to ensure receipt of revenues sufficient to recover all ongoing transaction costs. ACE, as servicer, will petition the BPU to approve such adjustments in the transition bond charge as are required to make up for any shortfall or excess in transition bond charge collections. The Special Purpose Issuer will pay the servicer the monthly servicing fee with respect to the transition bonds to the extent that the Special Purpose Issuer has funds available to pay this fee. The servicing fee will be allocated among all series of transition bonds. The servicing fee must be comparable to one negotiated at market terms, which would be reasonable and sufficient for a similar, unaffiliated entity performing similar services. This rating agency requirement is meant to ensure that the Special Purpose Issuer will be able to operate independently, and if for any reason ACE could not continue to perform these services, a third-party servicer may be retained. Although the fee represents a reasonable good faith estimate of ACE's incremental cost to service the transition bonds, ACE cannot be certain that this fee will reflect ACE's actual costs of providing the related services and therefore may not meet the "at cost" requirements of Section 13(b) of the Act and Rules 90 and 91 thereunder. Thus, ACE and the Special Purpose Issuer are seeking an exemption from these requirements. The BPU will - ------------------------------ 7/ ACE currently contemplates that, in its capacity as servicer, it will have the sole responsibility for the billing, collection and remittance of the transition bond charge. The BPU, however, may permit a third-party supplier of electric power to assume such role. 10 approve the servicer fee and has extensive regulatory authority over securitization (See Exhibit D-1, pages 41 to 44 and 28 to 31). Accordingly, this exemption if granted, would not threaten any of the protected interests under the Act. Similar exemptions were granted in prior securitization orders. See Central and South West Corporation, Holding Co. Act Release No. 27168, File No. 70-9107 (April 20, 2000); Connecticut Light and Power Company, Holding Co. Act Release No. 27319, File No. 70-9697 (Dec. 26, 2000) (paragraphs 10 and 20 in Pre-Effective Amendment No. 5, filed on December 21, 2000, describe the servicing and administration agreements) supplemented by Holding Co. Act Release No. 27364, File No. 70-9697 (March 23, 2001). As long as ACE acts as servicer, the servicing fee will be 0.10% (ten basis points) per annum of the initial principal balance of all transition bonds issued. Under certain limited circumstances, the BPU may designate or approve a successor servicer. If a successor servicer is appointed, the BPU order provides that the servicing fee will not exceed a per annum rate equal to 1.25% of the initial principal balance of all transition bonds issued. See Exhibit D-3. Although not presently contemplated, ACE may subcontract some or all of its responsibilities as servicer to a third party. F. Administration Agreement. ACE, PHI Service or any successor entity, or another affiliate will provide administrative services for the Special Purpose Issuer pursuant to an administration agreement between the Special Purpose Issuer and the administrator. In order to support the Special Purpose Issuer's status as a bankruptcy-remote entity, and to satisfy related rating agency and legal opinion requirements, the administration fee must be comparable to one negotiated in a market-based transaction - i.e., reasonable and sufficient for a similar, unaffiliated entity providing such services and facilities. Accordingly, the Special Purpose Issuer will pay the administrator a market rate fee for performing these services. Although the market-based fee represents a reasonable good faith estimate of ACE's costs to provide administrative services for the transition bonds, ACE cannot be sure that this fee will reflect its actual costs of providing the related services and therefore may not meet the "at cost" requirements of Section 13(b) of the Act and Rules 90 and 91 thereunder. Thus, ACE and PHI Service are seeking an exemption from these requirements. The BPU will approve the administrator's fee and has extensive regulatory authority over securitization (See Exhibit D-1, pages 53 to 54). Accordingly, this exemption, if granted, would not threaten any of the protected interests under the Act. A similar exemption was granted in Connecticut Light and Power Company, Holding Co. Act Release No. 27319, File No. 70-9697 (Dec. 26, 2000)(paragraphs 10 and 20 in Pre-Effective Amendment No. 5, filed on December 21, 2000, describe the servicing and administration agreements) supplemented by Holding Co. Act Release No. 27364, File No. 70-9697 (March 23, 2001). G. Use of Proceeds. As previously stated, the BPU will determine the specific amount of recovery eligible stranded costs to be recovered through the issuance of transition bonds. As required by the Competition Act, the Special Purpose Issuer will use the net proceeds from the issuance of the transition bonds to pay the expenses of issuance and to purchase the bondable transition property from ACE. ACE will use these proceeds to reduce its stranded costs through the 11 buydown or buyout of long-term power purchase contracts with non-utility generators and through the retirement of its debt or equity, or both, including the retirement of debt related to specific transactions completed prior to the issuance of the transition bonds for the buydown or buyout of long-term power purchase contracts with non-utility generators. The specific amount of proceeds to be used to retire debt and /or equity will be dependent on ACE's capital structure and market conditions at the time of redemption. H. Hedging Transactions. The Special Purpose Issuer may enter into interest rate swaps, interest rate hedging programs, and credit enhancement arrangements to reduce interest rate and credit risks with respect to, and to facilitate the issuance of, the transition bonds.\8 One or more classes of the transition bonds may be issued as variable rate instruments which are fixed or capped through the execution of an interest rate exchange agreement, an interest rate cap agreement or similar hedging arrangement (collectively, a "hedging arrangement"). This may occur in the event that ACE and its lead underwriter determine that such a hedging arrangement is expected to result in a lower interest cost on such classes of bonds or on all classes of a series taken as a whole. Any counterparty to a hedging agreement must have a credit rating consistent with achieving the highest possible ratings on the transition bonds. So long as the structure, pricing, terms and conditions meet such parameters, ACE will be authorized under BPU orders to undertake the hedging arrangement. It may be advantageous, under certain market conditions, to enter into a hedging arrangement in order to attempt to synthetically fix or cap interest rates on the transition bonds in advance of the actual pricing of the transition bonds. The implementation of a hedging arrangement in advance of the pricing of the transition bonds will be undertaken only if ACE determines that such an arrangement is appropriate to assure that ACE can achieve the required rate reductions through securitization and to protect customers against future interest rate increases. Because there is no market for hedging transition bonds directly, any hedging arrangement may not provide a "perfect" hedge against interest rate volatility. In order to hedge the risk of changes in the interest rates prior to the pricing of the transition bonds, it is necessary to make reference to rates and spreads in other markets, including the United States Treasury Bond market and the interest rate swap market. In addition, ACE may itself enter into hedging arrangements with one or more third party counterparties and enter into a back-to-back hedging arrangement with the Special Purpose Issuer. - ------------------------------ 8/ These contracts and programs will have a duration up to a term matching the maturity of the underlying transition bonds. See Central and South West Corp., Holding Co. Act Release No. 27168 (April 20, 2002). 12 I. Indemnifications. 1. As more fully described in the sale agreement pursuant to which the bondable transition property is sold and/or assigned by ACE to the Special Purpose Issuer, subject to the limitations set forth below, ACE is obligated to indemnify the Special Purpose Issuer and its current and future officers, directors, managers, employees and agents, which may be subsidiaries, affiliates and associate companies of the Applicants, against:\9 (a) any and all taxes, other than any taxes imposed on transition bondholders solely as a result of their ownership of transition bonds, that may at any time be imposed on or asserted against the Special Purpose Issuer and the Trustee under existing law as of the date of issuance of the transition bonds as a result of the sale and assignment of the bondable transition property by ACE to the Special Purpose Issuer, or the acquisition or holding of the bondable transition property by the Special Purpose Issuer, or the issuance and sale by the Special Purpose Issuer of the transition bonds, including any sales, general corporation, personal property, privilege or license taxes, but excluding any taxes imposed as a result of a failure of that person to properly withhold or remit taxes imposed with respect to payments on any transition bond; (b) any and all amounts of principal of and interest on the transition bonds not paid when due or when scheduled to be paid in accordance with their terms and the amount of any deposits to the Special Purpose Issuer required to have been made in accordance with the terms of the basic documents that are not made when so required, in either case as a result of ACE's breach of any of its representations, warranties or covenants contained in the sale agreement; (c) any and all liabilities, obligations, claims, actions, suits or payments of any kind whatsoever that may be imposed on or asserted against the Special Purpose Issuer or the Trustee other than any liabilities, obligations or claims for or payments of principal of or interest on the transition bonds, together with any reasonable costs and expenses incurred by that person, as a result of ACE's breach of any of its representations, warranties or covenants contained in the sale agreement; and (d) any and all liabilities, obligations, losses, damages, payments or expenses that result from: (i) ACE's willful misconduct, bad faith or gross negligence in the performance of its duties under the sale agreement, or (ii) ACE's reckless disregard of its obligations and duties under the sale agreement. - ------------------------------ 9/ ACE must also indemnify the trustee, an unaffiliated person. 13 Notwithstanding the foregoing, ACE will not indemnify the Special Purpose Issuer or the Trustee on behalf of the transition bondholders as a result of any change in the law by legislative enactment or constitutional amendment or any reduction by the State of New Jersey of the bondable transition property or transition bond charges in breach of the pledge and agreement of the State of New Jersey under the Competition Act. 2. As more fully described in the Servicing Agreement, the servicer, which is initially ACE, will indemnify the Special Purpose Issuer (for itself and on behalf of the transition bondholders) and its current and future trustees, managers, members, officers, directors, employees and agents, which may be subsidiaries, affiliates and associate companies of the Applicants, against any and all liabilities that may be incurred by or asserted against any of those persons as a result of:\10 (a) the servicer's willful misconduct, bad faith or gross negligence in the performance of its duties or observance of its covenants under the servicing agreement or the servicer's reckless disregard of its obligations or duties under the servicing agreement; (b) the servicer's breach of any of its representatives or warranties under the servicing agreement; and (c) litigation and related expenses relating to its status and obligations as servicer. 3. As more fully described in the administration agreement, the administrator, which is initially ACE, will indemnify the Special Purpose Issuer and its current and future officials, officers, directors, managers, employees, consultants counsel and agents, against any and all liabilities that may be incurred by or asserted against any of those persons as a result of the Administrator's willful misconduct or negligence in the performance of its duties or observance of its covenants under the Administration Agreement. These indemnified companies and persons may be subsidiaries, affiliates and associate companies of the Applicants.\11 4. As more fully described in the Special Purpose Issuer's limited liability company agreement, the Special Purpose Issuer will indemnify its current and future Members, Special Members and Managers against liabilities that are incurred by reason of the fact that the indemnified company is or was a Member, a Special Member or a Manager of the Special Purpose Issuer, or by reason of the fact that the Member, such Special Member or such Manager is or was serving at the request of the Special Purpose Issuer as a member, director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, limited liability company, partnership, joint venture, trust, sole - ------------------------------ 10/ ACE must also indemnify the trustee, an unaffiliated person. 11/ ACE will not indemnify the trustee under the administration agreement. 14 proprietorship, employee benefit plan or other enterprise.\12 ACE is currently the Special Purpose Issuer's Member. In addition, these indemnified companies and persons may be subsidiaries, affiliates and associate companies of the Applicants.\13 J. Holding Company System. Conectiv remained a registered holding company following the creation of PHI, and issuance of the transition bonds will unduly complicate neither Conectiv nor PHI's holding company system. The authority requested by ACE in this application/declaration is consistent with similar orders issued in West Penn Power Company, Holding Co. Act Release No. 27091, File No. 70-9469, (October 19, 1999); Central and South West Corporation, Holding Co. Act Release No. 27168, File No. 70-9107. (April 20, 2000); Connecticut Light and Power Company, Holding Co. Act Release No. 27319, File No. 70-9697 (Dec. 26, 2000) supplemented by Holding Co. Act Release No. 27364, File No. 70-9697 (March 23, 2001). Conectiv's common equity ratio as of June 30, 2002 was 29.3%. In File 70-9947, (the "PHI Financing Application") PHI committed that it would cause Conectiv's common equity ratio to meet or exceed 30% by December 31, 2003. PHI also agreed to maintain a common equity ratio of 30%. Applicants are not proposing to modify these commitments. The issuance of the transition bonds was contemplated as a possibility at the time of the PHI Financing Application, and the cash flow and capitalization forecasts accompanying the PHI Financing Application assumed that such issuance was going to occur. Accordingly, as demonstrated by those forecasts and the forecasts accompanying this Application, the issuance of transition bonds pursuant to this Application will not adversely impact PHI's and Conectiv's ability to maintain the common equity ratios and operate within the other financing parameters described in the PHI Financing Application and resulting order. In File 70-9947, the Commission reserved jurisdiction over the question of ACE's common equity ratio and directed that the level be established upon completion of the record in this proceeding.\14 In this amendment, the Applicants are lowering the amount of requested immediate bond-issuance authority from $1.7 billion to $440 million. Applicants have made a similar modification to their application before the BPU, and the BPU has authorized up to $440 million. Applicants ask that the Commission reserve jurisdiction over the remainder of the proposed transition bonds and any corresponding effect on ACE's common equity ratio until the BPU takes subsequent action to authorization additional issuances. ACE's common equity ratio as of June 30, 2002 was 36.7%. It is anticipated that the issuance of $440 million of transition bonds would reduce ACE's common equity ratio to approximately 28%.\15 It is further - ------------------------------ 12/ Defined terms in this sentence have the meaning given in the Special Purpose Issuer's limited liability company agreement. 13/ ACE must also indemnify the trustee, an unaffiliated person. 14/ See Pepco Holdings, Inc., Holding Co. Act Release No. 27577 (2002). 15/ Applicants described the anticipated issuance of transition bonds in the applications for that order and supplemental orders. See e.g. Pre-Effective Amendment No. 3 in File No. 70-9947, Post-Effective Amendment No. 16 to Form U-1, filed June 6, 2001, (filed prior to Holding Co. Act Release No. 27415) in File No. 70-9095; Post-Effective Amendment No. 11 to Form U-1, filed August 16, 2000 (filed prior to Holding Co. Act Release No. 27213) in File No. 70-9095; Post-Effective Amendment No. 9 to Form U-1, filed December 9, 1999 (filed prior to Holding Co. Act Release No. 27111) in File No. 70-9095. The anticipated amount of securitization bonds was also reflected in the exhibits of prior applications. See Post-Effective Amendment No. 7 to Form U-1, filed October 14, 1999 in File No. 70-9095 and Pre-Effective Amendment No. 4 to Form U-1, filed June 28, 2000 in File No. 70-9655. It should be noted that the application submitted as Post-Effective Amendments No. 11 Form U-1 in File No. 70-9095 contemplated an initial an initial issuance of transition bonds in an amount less than $1.7 billion when calculating when ACE's common equity ratio would return to over 30%. As described above, Applicants now anticipate an immediate issuance of only $440 million of transition bonds. 15 anticipated that the retirement of debt and equity with the proceeds of the transition bonds and projected earnings will cause ACE's common equity ratio to exceed 30% by December 31, 2005. Therefore, ACE requests authorization to maintain a common equity ratio not lower than 28% through that date. Financial information, including projected capitalization ratios for PHI, Conectiv and ACE, is provided in Exhibit H-3, which is filed herewith pursuant to a request for confidential treatment. The transition bonds will be serviced by the cash flows from the transition bond charges. Accordingly, while shown as debt on financial statements, the transition bonds do not represent leverage in the classical sense that the 30% standard was intended to address. Excluding the transition bonds of $440 million from the consolidated pro forma capital structure of ACE, the common equity ratio would exceed 30% prior to May 31, 2006. The transition bonds will be separately rated by credit rating agencies. The transition bonds will not impact Conectiv or ACE's credit ratings. The credit rating agencies recognize that the transition bonds will be serviced by the transition bond charge approved by the BPU and, therefore, are independent of Conectiv or ACE's credit. Bonds similar to these transition bonds that have been issued by other utility companies have been rated AAA. It is expected that an AAA rating will be achieved for the transition bonds to be issued by ACE Transition Funding. Accordingly, the Commission should find that the requested authority does not unduly complicate the Applicants' financial system. By order August 17, 2000, Holding Co. Act Release No. 27213, File No. 70-9095 (the "Conectiv EWG Order"), the Commission authorized Conectiv to invest up to $350 million in EWGs. Subsequently, by order dated July 31, 2002, Holding Co. Act Release No. 27557, File No. 70-9947, (the "PHI Financing Order"), the Commission authorized PHI to invest up to 100% of its retained earnings plus $3.5 billion in Exempt Wholesale Generators ("EWGs") and foreign utility companies ("FUCOs"). The PHI Financing Order consolidated the authority granted in the Conectiv EWG Order. As of June 30, 2002, Conectiv's investment in EWGs was $318.6 million, and Conectiv has complied with the requirements of the Conectiv EWG Order. Conectiv's EWG investments have not negatively impacted Conectiv's financial health. Conectiv's consolidated retained earnings grew from $178.5 million on June 30, 2001 to $230.2 million on June 30, 2002. In the application accompanying the Conectiv EWG Order, Conectiv stated that its common equity ratio as of December 31, 1999 was 26.3%. Conectiv's common equity ratio as of June 30, 2002 was 29.3%. PHI, Conectiv and ACE are financially sound companies as indicated by their investment grade ratings from the nationally recognized rating agencies for 16 senior unsecured long-term and short-term debt. The following chart describes the senior unsecured credit ratings of PHI, Conectiv and ACE. These ratings were assigned in conjunction with the merger that resulted in the formation of PHI. As of the date of this Application, neither Conectiv, ACE nor any associated companies is on credit watch.\16 UNSECURED CREDIT RATINGS - -------------------- ------------- ------------ ------------------------------- Agency PHI Conectiv Atlantic City Electric Company - -------------------- ------------- ------------ ------------------------------- Moody's Baa1/P-2 Baa1/P-2 A3/P-1 - -------------------- ------------- ------------ ------------------------------- S & P BBB/A-2 BBB/A-2 BBB/A-2 - -------------------- ------------- ------------ ------------------------------- None of the conditions described in paragraph (b) of Rule 53 exists for PHI or Conectiv. Conectiv's earnings per share from continuing operations and the associated return on average common equity were $0.45 and 2.82% for the quarter ending June 30, 2002 and $3.09 and 21.3%, respectively, for the quarter ending June 30, 2001. As described in its Rule 24 Certificate for the quarter ending June 30, 2002, the market-to-book ratio of Conectiv's common stock was 1.70, and for Conectiv's Class A common stock was 1.43. The Commission reviewed PHI's planned investments in EWGs and FUCOs in File No. 70-9947, and Applicants incorporate by reference the discussion of these investments in that application. The PHI Financing Order was issued merely two months ago, and PHI has not yet compiled and reported its first quarterly report under that order. However, PHI is operating within the limits of the PHI Financing Order. In the PHI Financing Application, PHI pledged to comply with the record keeping, employee and service requirements of Rule 53(a)(2) - (4) and PHI is currently in compliance. Accordingly, because the Conectiv holding company system is financially sound and because PHI is in compliance with the PHI Financing Order, which was issued approximately two months ago, and, in which the Commission evaluated PHI's planned EWG and FUCO investments, there is ample evidence that PHI's and Conectiv EWG and FUCO investments are not unduly complicating the PHI and Conectiv holding company systems. Item 2. Fees, Commissions and Expenses. ACE estimates that through the issuance of the transition bonds, it will incur approximately $9 million in legal, financial, and other transaction related fees. These fees represent approximately 2% of the total value of the $440 million in bonds, a ratio that is within the same range of other securitization transactions. See West Penn Power Company, Holding Co. Act Release 27091, File No. 70-9469, (October 19, 1999) (authorizing fees of $2,076,260 for - ------------------------------ 16/ Amendment No. 2 to this Application reviewed the previous, temporary credit watches announced by the nationally recognized rating agencies. 17 issuance of $600,000,000 in transition bonds, 0.3%); Central and South West Corporation, Holding Co. Act Release No. 27168, File No. 70-9107, (April 20, 2000) (authorizing fees of $19,288,000 for issuance of $797,400,000 in transition bonds, 2.4%); Connecticut Light and Power Company, Holding Co. Act Release No. 27319, File No. 70-9697, (Dec. 26, 2000) supplemented by Holding Co. Act Release No. 27364 (March 23, 2001) (authorizing fees of $28,000,000 for issuance of $2,462,000,000 by three entities, 1.2%). Item 3. Applicable Statutory Provisions. Sections 6(a), 7, 9, 10, 12(b), 12(f), 12(g) and 13(b) and Rules 42, 43, 44, 45, 54, 90 and 91 thereunder govern the proposed transaction. To the extent the Commission believes other sections or rules are applicable to the proposed transaction, Applicants deem that they be included in this item. Item 4. Regulatory Approval. The proposed securitization is subject only to the approval of the BPU. ACE's applications to the BPU are described in Item 1.D. Item 5. Procedure. Applicants hereby request that there be no hearing on this application/declaration and that the Commission issue its order by October 7, 2002. The Commission published notice under Rule 23 with respect to the filing of this application/declaration on October 26, 2001; no comments were received. Applicants hereby: (i) waive a recommended decision by a hearing officer; (ii) waive a recommended decision by any other responsible officer or the Commission; (iii) consent that the Division of Investment Management may assist in the preparation of the Commission's decision; and (iv) waive a 30-day 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 Membership Agreement of the Special Purpose Issuer (incorporated by reference to Form S-3, Exhibit 3.1, File No. 333-59558) A-2 Registration Statement on Form S-3 (incorporated by reference to Form S-3, File No. 333-59558) B-1 Form of Sale Agreement (incorporated by reference to Form S-3, Exhibit 10.1, File No. 333-59558) 18 B-2 Form of Servicing Agreement (incorporated by reference to Form S-3, Exhibit 10.2, File No. 333-59558) B-3 Form of Administration Agreement (incorporated by reference to Form S-3, Exhibit 10.3, File No. 333-59558) B-4 Form of Indenture (incorporated by reference to Form S-3, Exhibit 4.1, File No. 333- 59558) D-1 Application before the BPU (previously filed) D-2 Supplement to the application before the BPU (filed herewith) D-3 Order of the BPU (filed herewith) F-1 Opinion of Counsel (filed herewith) F-2 Past-Tense Opinion of Counsel (to be filed by amendment) H-1 Revised Proposed Form of Notice (previously filed) H-2 Estimated Stranded Costs (previously filed under a request for confidential treatment) H-3 Financial Forecast for Pepco Holdings, Inc., Conectiv and Atlantic City Electric Company (filed herewith under a request for confidential treatment) Financial Statements FS-1 Conectiv's Consolidated Balance Sheet for the quarter ended June 30, 2002 (incorporated by reference to Form 10-Q, File No. 1-13895, filed on August 14, 2002) FS-2 Conectiv's Consolidated Statements of Income for the quarter ended June 30, 2002 (incorporated by reference to Form 10-Q, File No. 1-13895, filed on August 14, 2002) FS-3 Conectiv's Condensed Consolidated Statements of Income for the year ended December 31, 2001 (incorporated by reference to Form 10-K, File No. 1-13895, filed on March 19, 2002) FS-4 Atlantic City Electric's Consolidated Balance Sheet for the quarter ended June 30, 2002 (incorporated by reference to Form 10-Q, File No. 1-3559, filed on August 14, 2002) FS-5 Atlantic City Electric's Consolidated Statements of Income for the quarter ended June 30, 2002 (incorporated by reference to Form 10-Q, File No. 1-3559, filed on August 14, 2002) 19 FS-6 Atlantic City Electric's Consolidated Statements of Income for the year ended December 31, 2001 (incorporated by reference to Form 10-K, File No. 13559, filed on April 2, 2002) FS-7 Conectiv's Pro Forma Consolidated Balance Sheet for the quarter ended June 30, 2001 (previously filed) FS-8 Conectiv's Pro Forma Consolidated Statements of Income for the 12 months ended June 30, 2001 (previously filed) FS-9 Atlantic City Electric's Pro Forma Consolidated Balance Sheet for the quarter ended June 30, 2001 (previously filed) FS-10 Atlantic City Electric's Pro Forma Consolidated Statements of Income for the 12 months ended June 30, 2001 (previously filed) Item 7. Information as to Environmental Effects. This application/declaration and the proposed transactions do not involve a "major federal action" nor do they "significantly affect the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act. The transactions that are the subject of this application/declaration will not result in changes in the operation of the company that will have an impact on the environment. Applicants are not aware of any federal agency that has prepared or is preparing an environmental impact statement with respect to the transactions that are the subject of this application/declaration. 20 SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned companies have duly caused this application/declaration to be signed on their behalf by the undersigned thereunto duly authorized. The signature of the applicants, through the undersigned, is restricted to the information contained in this application/declaration which is pertinent to the instant application/declaration. Conectiv Atlantic City Electric Company PHI Service Company /s/ Anthony J. Kamerick Name: Anthony J. Kamerick Title: Vice President and Treasurer Atlantic City Electric Transition Funding LLC /s/ Jeffrey E. Snyder Name: Jeffrey E. Snyder Title: Assistant Treasurer October 28, 2002 21 EX-5 3 ex5.txt EX. F-1 OPINION OF COUNSEL Exhibit F-1 October 24, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Application to Issue Transition Bonds, File No. 70-9899 Ladies and Gentlemen: This opinion is furnished to the Securities and Exchange Commission (the "Commission") in connection with the Application-Declaration on Form U-1 under the Public Utility Holding Company Act of 1935, as amended (the "Act") (File 70-9899) (the "Application") of Conectiv, Atlantic City Electric Company ("ACE"), PHI Service Company ("PHI Service"), and Atlantic City Electric Transition Funding LLC (the "Special Purpose Issuer") (collectively, the "Applicants"). As counsel for the Applicants, I deliver this opinion to you for filing as Exhibit F-1 to the Application-Declaration referenced above. Terms not otherwise defined herein have the meaning ascribed to them in the Application. The Application seeks the authorization and approval of the Commission with respect to the Special Purpose Issuer's issuance of up to $440 million in transition bonds pursuant to the New Jersey Electric Discount and Energy Competition Act and related transactions. Specifically, the Application seeks, among other things, the following authorizations and approvals of the Commission (collectively, "Transactions"): a. for ACE to sell, pledge or assign bondable transition property to the Special Purpose Issuer from time to time in exchange for the net proceeds from the sale of a series of transition bonds; b. for the Special Purpose Issuer to issue and sell transition bonds from time to time, pursuant to an underwriting agreement, in an aggregate principal amount up to $440 million, with a reservation of Commission jurisdiction on an amount up to $1.7 billion, to be authorized and approved by the New Jersey Board of Public Utilities; Securities and Exchange Commission October 24, 2002 Page 2 c. for the Special Purpose Issuer to enter into interest rate swaps, interest rate hedging programs, and credit enhancement arrangements to reduce interest rate and credit risks with respect to, and to facilitate the issuance of, transition bonds; d. for ACE to act as the servicer of the bondable transition property and enter into a servicing agreement pursuant to which ACE or an affiliate will perform services for the Special Purpose Issuer and receive compensation determined on a market basis rather than the "at-cost" standard of Section 13(b) of the Act; e. for ACE, PHI Service or any successor entity, or another affiliate to act as the administrator for the Special Purpose Issuer and enter into an administration agreement. The Special Purpose Issuer will pay a fee for these services which will be equal to a market rate fee rather than the "at-cost" standard of Section 13(b) of the Act; f. for the Special Purpose Issuer to use the proceeds from the transition bonds to pay the expenses of issuance and to purchase the bondable transition property from ACE.; g. for ACE to enter into the indemnity provisions of a sale agreement, through which it may indemnify the Special Purpose Issuer and related parties pursuant to the terms of the sale agreement; for ACE, as servicer, to enter into the indemnity provisions of a servicing agreement through which it may indemnify the Special Purpose Issuer and related parties pursuant to the terms of the servicing agreement; for ACE, PHI Service Company, or any successor entity or another affiliate, as administrator, to enter into the indemnity provisions of an administration agreement through which it may indemnify the Special Purpose Issuer pursuant to the terms of the administration agreement; and for the Special Purpose Issuer to inter into the indemnity provisions of its limited liability company agreement through which it may indemnify ACE and other parties pursuant to the limited liability company agreement, all as further described herein; and h. for ACE to make capital contributions to the Special Purpose Issuer and receive interest and other investment earnings thereon. I am counsel to the Applicants. I am a member of the bar of the State of Delaware, the state in which Conectiv, PHI Service and the Special Purpose Issuer were formed. I am not a member of the bars of other states. I do not hold myself out as an expert in the laws of any state other than Delaware, although I have consulted, and will consult, with counsel to the Applicants who are experts in the laws of states other than Delaware, including New Jersey. For purposes of rendering this opinion, to the extent I deemed necessary, I have relied on Securities and Exchange Commission October 24, 2002 Page 3 advice from counsel employed or retained by Conectiv who are members of the bars of the states in which the Applicants were formed, including, specifically, New Jersey. In connection with this opinion, I or attorneys in whom I have confidence, have examined originals or copies certified or otherwise identified to my satisfaction of such corporate records of the Applicants, certificates of public officials, certificates of officers and representatives of Applicants, and other documents as I have deemed necessary in order to render the opinions hereinafter set forth. In such examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to the original documents of all documents submitted to us as copies. As to any facts material to our opinion, I have, when relevant facts were not independently established, relied upon the aforesaid agreements, instruments, certificates and documents. The opinions expressed below are subject to the following assumptions, qualifications, limitations, conditions and exceptions: a. The Transactions shall have been duly authorized and approved, to the extent required by the governing corporate documents and applicable state laws, by the Board of Directors of the appropriate Applicant. b. All required approvals, authorizations, consents, certificates, rulings and orders of, and all filings and registrations with, all applicable federal and state commissions and regulatory authorities with respect to the Transactions shall have been obtained or made, as the case may be, and shall have become final and unconditional in all respects and shall remain in effect (including the approval and authorization of the Commission under the Act) and such Transactions shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations. c. The Commission shall have duly entered an appropriate order with respect to the Transactions as described in the Application, granting and permitting the Application to become effective under the Act and the rules and regulations thereunder. d. A registration statement shall have been declared effective under the Securities Act of 1933 or an exemption from registration shall be applicable under such Act with respect to any securities to be issued in a Transaction and no stop order shall have been entered by the Securities and Exchange Commission with respect thereto. e. The parties shall have obtained all consents, waivers and releases, if any, required for the transactions under all applicable governing corporate Securities and Exchange Commission October 24, 2002 Page 4 documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits. f. No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein. Based on the foregoing, and subject to the assumptions and conditions set forth herein, I am of the opinion that when the Commission has taken the action requested in the Application: 1. The laws of the states of Delaware and New Jersey applicable to the proposed Transactions will have been complied with; 2. The Special Purpose Issuer is a limited liability company validly organized, duly existing and in good standing in its state of formation; 3. The transition bonds will be valid and binding obligations of the Special Purpose Issuer in accordance with their terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or similar laws from time to time in effect affecting the enforceability of creditors' rights generally and to general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing) regardless of whether considered in a proceeding in equity or at law; 4. The Special Purpose Issuer will legally acquire the bondable transition property from ACE; and 5. The consummation of the Transactions will not violate the legal rights of the holders of any securities issued by the Applicants or any associate company thereof. This letter is addressed to the Commission, and no person or entity, other than the Commission, may rely on it. I hereby consent to the use of this opinion as an exhibit to the Application. Very truly yours, /s/CHRISTIE DAY CANNON Christie Day Cannon Assistant General Counsel EX-99.1 4 ex991.txt EX. D-2 SUPPLEMENT TO BPU LeBoeuf, Lamb, Greene & MacRae L.L.P. A New York Limited Liability Partnership Including Professional Corporations One Riverfront Plaza Newark, NJ 07102-5490 (973) 643-8000 Facsimile: (973) 643-6111 August 19, 2002 By Hand Kristi Izzo, Secretary New Jersey Board of Public Utilities Two Gateway Center Newark, New Jersey 07102 Re: Petition of Atlantic City Electric Company for a Bondable Stranded Costs Rate Order in Accordance with N.J.S.A. 48:3-49 et seq. BPU Docket No. EF01060394 Dear Secretary Izzo: In connection with the Board of Public Utilities' (the "Board") review of the above-referenced proceeding, Atlantic City Electric Company ("Atlantic") respectfully requests that the Board confirm the level of stranded costs which Atlantic is eligible to recover at this time via the proposed securitization transaction. Atlantic makes this request in response to prior Board orders which, in certain cases, stated that the Board would determine the level of stranded costs eligible for securitization at the time Atlantic sought a bondable stranded costs rate order from the Board. Atlantic filed such a petition in the present docket on June 25, 2001, and now seeks the Board's confirmation of Atlantic's quantification of stranded costs eligible for securitization at this time. In this proceeding, Atlantic seeks to securitize the stranded costs associated with three transactions. The first such transaction was the buyout of the Pedricktown Cogeneration Limited Partnership ("PCLP") contract which was approved by the Board in 1999.\1 In its order, the Board authorized Atlantic: "full and timely recovery of the $228.5 million termination - ---------------------------- 1/ I/M/O the Petition of Atlantic City Electric Company for Approval of an Agreement to Terminate its Power Purchase Agreement with Pedricktown Cogeneration Limited Partnership, BPU Docket No. EE99090685, Decision and Order, dated November 10, 1999 [hereinafter, the "PCLP Order"]. Kristi Izzo, Secretary August 19, 2002 Page 2 payment employing the net of tax recovery methodology provided for herein, as well as reasonable and prudently-incurred transaction costs at a level to be determined by the Board and interim financing costs in the manner provided for hereinabove."\2 The Board also found "that the termination payment and related transaction costs determined to be recoverable by the Board may in the aggregate either constitute, or may be included as part of the principal amount of transition bonds for which Atlantic may seek approval to issue under the Act."\3 Atlantic filed detailed information regarding final transaction costs on April 4, 2001, however, the Board has not yet determined the total level of recoverable transaction costs associated with the PCLP contract. Thus, while the Board has authorized the securitization of the termination payment, the Board has not fully quantified the recoverable transaction costs associated with that termination payment. Therefore, Atlantic asks that the Board confirm the level of recoverable transaction costs, and authorize Atlantic to securitize those costs in addition to the termination payment. As noted on the attached Exhibit A, Atlantic estimates that the total after-tax stranded costs attributable to the PCLP buyout are approximately $139.027 million. The second transaction at issue is the buydown of the power purchase agreement with American Ref-Fuel Company of Delaware Valley ("Ref-Fuel").\4 In the Ref-Fuel matter, the Board found "it appropriate to permit all reasonable and prudent costs incurred by ACE in fulfilling the terms of the Amendment to be recovered on a full and timely basis through the Company's MTC to its electric customers, and to pass through any savings to its electric customers through the approved mechanism."\5 The Board also directed Atlantic to provide detailed information to support its transaction costs, and noted that it would reserve judgment regarding the amount of stranded costs eligible for securitization.\6 Atlantic filed the additional information as directed on April 4, 2001, and the Board has not yet quantified the recoverable transaction costs or authorized securitization of eligible stranded costs. As illustrated on the attached Exhibit A, Atlantic estimates that the total after-tax stranded costs attributable to the Ref-Fuel buydown are approximately $3.860 million. The third transaction at issue is the sale of Atlantic's nuclear generating assets.\7 In that matter, the Board issued two orders addressing different aspects of the sale of assets. The July, 2000 Nuclear Order approved the sale.\8 The September, 2001 Nuclear Order determined the amount of recovery eligible stranded costs to be approximately $297.9 million as of December 31, 1999, subject to further adjustment at the time of closing.\9 On June 24, 2002, - ---------------------------- 2/ PCLP Order, at 11. 3/ PCLP Order, at 11. 4/ I/M/O the Petition of Atlantic City Electric Company for Approval of an Amendment to the Agreement for Purchase of Electric Power with American Ref-Fuel Company of Delaware Valley, L.P., BPU Docket No. EM00060388, Order of Approval, dated December 6, 2000 [hereinafter, the "Ref-Fuel Order"]. 5/ Ref-Fuel Order, at 3. 6/ Ref-Fuel Order, at 3. 7/ I/M/O the Petition of Atlantic City Electric Company for Approval of the Sale of its Nuclear Generating Units, BPU Docket No. EM99110870, Decision and Orders, dated July 21, 2000 [hereinafter, the "July, 2000 Nuclear Order"] and September 17, 2001 [hereinafter, the "September, 2001 Nuclear Order"]. 8/ July, 2000 Nuclear Order, at 20. 9/ September, 2001 Nuclear Order, at 5. Kristi Izzo, Secretary August 19, 2002 Page 3 Atlantic filed with the Board and the Ratepayer Advocate a final accounting indicating after-tax stranded costs of $277.946 million for the nuclear assets. In each of the nuclear orders, the Board indicated that it would "reserve its decision regarding the amount, if any, of stranded costs eligible for securitization until a later date after the Company's sale of its fossil assets ha[d] been evaluated and considered by the Board."\10 In reaching this decision, the Board did not cite to any statutory authority mandating that both sales be consummated but merely noted that a sale of fossil assets was then pending before the Board. Indeed, when the Board issued its order in the proposed fossil sale, it specifically noted that it was not ruling on the amount of bondable stranded costs.\11 Thus, while the Board previously linked securitization to the fossil asset sale, the Board ultimately determined not to address securitization in that docket. As the Board is well aware the fossil transaction pending at the time of the nuclear sale did not go forward. Instead, the prospective buyer of the fossil assets (NRG) elected to withdraw from the asset purchase, and Atlantic is again marketing the fossil assets. Atlantic hopes to have a contract of sale for those assets executed by October, 2002, at which time it will make a filing to obtain Board approval of the sale. In the meantime, Atlantic believes it is in the interests of customers to securitize now those stranded costs associated with the nuclear sale and the two NUG contracts. Moreover, based on the Board's prior evaluation of the market for generating assets, there is no factual basis for arguing that the re-marketing of the fossil assets will yield a result which is a material improvement over the fossil sale approved by the Board less than six months ago. In its Order approving the sale of the fossil assets to NRG, the Board determined that the after-tax stranded costs associated with the fossil assets totaled approximately $100.9 million.\12 At the time the Board made that determination, it also examined in detail the current state of the market for generating assets and specifically the market for plants such as Atlantic's B.L. England station, which is the primary source for the Company's fossil-related stranded costs. On the issue of the value of B.L. England, the Board concluded: Based on the evidence presented, the Board does not believe that a re-bidding of B.L. England at this time would yield a significantly higher price and, in fact, a re-bid could well yield a lower price.\13 As noted above, Atlantic is presently conducting an auction process to sell the fossil assets. The auction process is not scheduled to conclude with the execution of an asset purchase agreement(s) until October, 2002. Although the auction will not be concluded for several weeks, - ---------------------------- 10/ September, 2001 Nuclear Order, at 2. See also July, 2000 Nuclear Order, at 25. 11/ The Board approved the sale of ACE's fossil assets in In the Matter of the Petition of Atlantic City Electric Company Regarding the Sale of Certain Fossil Generation Assets, BPU Docket No. EM00020106, Decision and Order, dated February 20, 2002 [hereinafter, the "Fossil Order"], at 31. 12/ Fossil Order, at 31. 13/ Fossil Order, at 30. Kristi Izzo, Secretary August 19, 2002 Page 4 preliminary information from potential bidders indicates to Atlantic that the sale of the fossil assets would not result in a net gain. Although Atlantic does not want to release any information which could be viewed as prejudicial by the bidders, Atlantic can state that we anticipate that the result of the auction would be consistent with the Board's prior conclusion that there will not be an overall gain on the sale of the fossil units. Based on the Board's recent assessment of the value of the fossil assets, Atlantic asks that the Board permit Atlantic to securitize at this time the stranded costs associated with the NUG contracts and the nuclear assets. Additionally, Atlantic seeks the Board's approval to securitize the costs associated with the securitization transaction pursuant to N.J.S.A. 48:3-51. Atlantic's estimate of securitization transaction costs is contained in Exhibit B.\14 Atlantic believes that its customers will benefit by securitizing its stranded costs now, when interest rates for securitized debt instruments are at historically low rates. Therefore, in addition to the confirmation of stranded costs discussed herein, Atlantic seeks a clarification from the Board that Atlantic's nuclear stranded costs are presently eligible for securitization. Atlantic would note that its proposal to securitize $440 million in stranded costs and securitization transaction costs is entirely consistent with the provisions of N.J.S.A. 48:3-62. Atlantic's proposal to securitize $277.946 million in stranded nuclear generation costs employs the Board's methodology developed in the PSE&G securitization case. In that matter, the Board calculated the applicable securitization percentage (for the purpose of determining compliance with N.J.S.A. 48:3-62(c)) by first grossing up the net-of-tax utility plant stranded costs to reflect a statutory federal and state tax rate of 40.85%. The grossed-up figure represents recovery-eligible utility generation plant stranded costs. The statute is satisfied when the amount of utility generation plant stranded cost securitization is equal to, or less than, 75% of the grossed up number. In Atlantic's case, it is proposing to securitize $277.946 million in net-of-tax utility generation stranded costs. Applying the PSE&G methodology, this figure would be grossed up to approximately $470 million, and the 75% would be applied to the grossed up figure to yield approximately $352.5 million. Compliance with the statute is determined by comparing Atlantic's request to the $352.5 million figure. Clearly, Atlantic's request to securitize $277.946 million in utility generation plant stranded costs complies fully with the statute. In conclusion, Atlantic seeks the Board's authorization to securitize at this time $440 million in stranded costs and securitization transaction costs. This figure is comprised of $277.946 million of nuclear asset stranded costs, $139.027 million of PCLP stranded costs, $3.860 million of Ref-Fuel stranded costs, and $19.167 million in securitization transaction costs. The Board has previously reviewed and approved the underlying transactions, and Atlantic now seeks the Board's authorization to securitize these amounts pursuant to the provisions of N.J.S.A. 48:3-49 et seq. Therefore, Atlantic requests that the Board make those findings the Board deems necessary to permit the securitization transaction to be approved and completed at this time. - ---------------------------- 14/ The chart included as Exhibit B was prepared and submitted in response to Staff discovery request ECO-8. Kristi Izzo, Secretary August 19, 2002 Page 5 If you have any questions, or require any additional information, please do not hesitate to contact me at 973-643-8000. Your assistance in this matter is greatly appreciated. Respectfully submitted, Stephen B. Genzer cc: Service List EX-99.2 5 ex992.txt EX. D-3 LeBoeuf, Lamb, Greene & MacRae, L.L.P. One Riverfront Plaza Newark, NJ 07102-5490 (973) 643-8000 Facsimile: (973) 643-6111 September 20, 2002 BY HAND - ------- Kristi Izzo, Secretary New Jersey Board of Public Utilities Two Gateway Center Newark, New Jersey 07102 Re: Petition of Atlantic City Electric Company for a Bondable Stranded Costs Rate Order in Accordance with N.J.S.A. 48:3-49 et seq. BPU Docket No. EF01060394 Dear Secretary Izzo: In connection with the Board of Public Utilities' (the "Board") approval of the above-referenced proceeding, Atlantic City Electric Company ("Atlantic") respectfully submits its executed consent to the Board's Bondable Stranded Costs Rate Order. If you have any questions, please do not hesitate to contact me at 973-643-8000. Your assistance in this matter is greatly appreciated. Respectfully submitted, Stephen B. Genzer Enclosure cc: Service List In the Matter of the Petition of Atlantic City Electric Company for a Bondable Stranded Costs Rate Order in Accordance with N.J.S.A. 48:3-49 et seq. BPU Docket No. EF 01060394 - -------------------------------------------------------------------------------- Dr. Fred Grygiel, Chief Economist Ray Lamboy, DAG Office of the Economist Department of Law & Public Safety Board of Public Utilities Division of Law Two Gateway Center 124 Halsey Street, P.O. Box 45029 Newark, NJ 07102 Newark, NJ 07101 Phone: (973) 648-3860 Phone: (973) 648-4726 Fax: (973) 648-4410 Fax: (973) 648-3879 Mark Beyer, Manager Seema M. Singh, Director Office of the Economist Division of Ratepayer Advocate Board of Public Utilities 31 Clinton Street, 11th Fl., P.O. Box 46005 Two Gateway Center Newark, NJ 07101 Newark, NJ 07102 Phone: (973) 648-7112 Phone: (973) 648-3414 Fax: (973) 624-1047 Fax: (973) 648-4410 Badrhn Ubushin, Esq. Nusha Wyner, Director Division of Ratepayer Advocate Division of Energy 31 Clinton Street, 11th Fl., P.O. Box 46005 Board of Public Utilities Newark, NJ 07101 Two Gateway Center Phone: (973) 648-2690 Newark, NJ 07102 Fax: (973) 624-1047 Phone: (973) 648-7290 Fax: (973) 648-2467 Stephen B. Genzer, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP George Riepe One Riverfront Plaza, 6th Floor Division of Energy Newark, NJ 07102-5490 Board of Public Utilities Phone: (973) 643-8000 Two Gateway Center Fax: (973) 643-6111 Newark, NJ 07102 Phone: (973) 648-2160 Mark L. Mucci, Esq. Fax: (973) 648-2467 LeBoeuf, Lamb, Greene & MacRae, LLP One Riverfront Plaza, 6th Floor Elise Goldblat, SDAG Newark, NJ 07102-5490 Department of Law & Public Safety Phone: (973) 643-8000 Division of Law Fax: (973) 643-6111 124 Halsey Street, P.O. Box 45029 Newark, NJ 07101 Phone: (973) 648-3174 Fax: (973) 648-3879 Colleen A. Foley, Esq. Geoffrey Hurley, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP Latham & Watkins One Riverfront Plaza, 6th Floor 885 Third Avenue Newark, NJ 07102-5490 New York, NY 10022 Phone: (973) 643-6662 Phone: (212) 906-1243 Fax: (973) 643-6111 Jack Kattan Charles F. Morgan Morgan Stanley Manager, Regulatory Restructuring 1585 Broadway Conectiv Power Delivery New York, NY 10036 5100 Harding Highway, Suite 155 Phone: (212) 761-1850 Mays Landing, NJ 08330 Fax: (212) 761-0872 Phone: (609) 625-5856 Fax: (609) 625-5838 Andrea Zana Morgan Stanley Donna Kinzel 1585 Broadway Assistant Treasurer New York, NY 10036 Conectiv 800 King Street David Rush P.O. Box 231 Bear Stearns & Co., Inc. Wilmington, DE 19899 245 Park Avenue Phone: (302) 429-3004 New York, NY 10167 Fax: (302) 429-3188 James A. Rothschild Jay Ziminsky, Finance Manager Rothschild Financial Consulting Treasury Department 115 Scarlet Oak Drive Conectiv Wilton, CT 06897 800 King Street P.O. Box 231 Wilmington, DE 19899 Phone: (302) 429-3115 Fax: (302) 429-3006 Thomas P. Dwyer, Esq. Special Counsel Conectiv 800 King Street P.O. Box 231 Wilmington, DE 19899 Phone: (302) 429-3045 Fax: (302) 429-3188 CONSENT OF THE COMPANY Pursuant to Section 19 of the Act, the Company hereby consents to all of the terms of this Financing Order, this 20th day of September, 2002. ATLANTIC CITY ELECTRIC COMPANY BY: /s/ Joseph M. Rigby -------------------------------------- Joseph M. Rigby, President Atlantic City Electric Company ACE Bondable Stranded Costs Rate Order 35 BPU Dcoket No. EF01060394 Agenda Date: 9/18/02 Agenda Item: 2B STATE OF NEW JERSEY Board of Public Utilities Two Gateway Center Newark, NJ 07102 IN THE MATTER OF THE PETITION OF ATLANTIC CITY ) ELECTRIC COMPANY FOR A BONDABLE STRANDED ) COSTS RATE ORDER IN ACCORDANCE WITH N.J.S.A. ) 48:3-49 et seq., TO AUTHORIZE THE IMPOSITION OF A ) NON-BYPASSABLE TRANSITION BOND CHARGE AND A ) RELATED MARKET TRANSITION CHARGE-TAX ) COMPONENT, TO AUTHORIZE THE RECOVERY AND ) REFINANCING OF CERTAIN OF ITS RECOVERY-ELIGIBLE ) BONDABLE STRANDED COSTS AND THE SALE OF BONDABLE ) STRANDED COSTS TRANSITION PROPERTY, TO AUTHORIZE THE ISSUANCE ) RATE ORDER AND SALE OF TRANSITION BONDS UP TO AN ) AGGREGATE PRINCIPAL AMOUNT CONSISTENT WITH ) N.J.S.A. 48:3-62 TO RECOVER PETITIONER'S RECOVERY-) DOCKET NO. EF01060394 ELIGIBLE STRANDED COSTS, AND TO AUTHORIZE THE ) APPLICATION OF TRANSITION BOND PROCEEDS TO BUY ) DOWN OR BUY OUT LONG-TERM POWER PURCHASE ) CONTRACTS, TO RETIRE OUTSTANDING DEBT, EQUITY ) OR BOTH, AND TO APPROVE THE METHODOLOGY FOR ) THE CALCULATION AND ADJUSTMENT OF THE ) TRANSITION BOND CHARGE AND MARKET TRANSITION ) CHARGE-TAX RELATED THERETO. ) (SERVICE LIST ATTACHED) LeBoeuf, Lamb, Greene & MacRae, LLP, Stephen B. Genzer, Esq. and Colleen A. Foley, Esq., Newark, New Jersey, Counsel for Atlantic City Electric Company. Fred S. Grygiel, Chief Economist, and Mark C. Beyer, Manager, Office of the Economist, and Larry P. Gentieu, Division of Energy, on behalf of the Staff of the Board of Public Utilities and Ray Lamboy, Deputy Attorney General. Badrhn Ubushin, Deputy Ratepayer Advocate, Division of the Ratepayer Advocate. BY THE BOARD: By Petition filed with the Board of Public Utilities (the "Board" or "BPU") on June 25, 2001 (the "Petition"), Atlantic City Electric Company, (the "Company" or "Atlantic"), for purposes of recovering the stranded costs deemed eligible for rate recovery by the Board in the Summary Order dated July 15, 1999, which was more fully detailed in the Final Decision and Order dated March 30, 2001 ("Restructuring Order"), in BPU Docket Nos. E097070455, E097070456 and E097070457 and OAL Docket Nos. PUC-7311-97 and PUC 7312-97, together with other bondable stranded costs described in the Electric Discount and Energy Competition Act (the "Act"), P.L. 1999, c. 23, codified at N.J.S.A. 48:3-49, et seq., and to enable the Company to comply with the rate reduction requirements determined by the Board to be necessary and appropriate consistent with the provisions of Sections 4 and 13 of the Act, requests that the Board issue an irrevocable Bondable Stranded Costs Rate Order (the "Financing Order") to authorize: (i) the recovery of $420.833 million of recovery-eligible stranded costs, and $19.167 million of transaction costs resulting from the issuance of the transition bonds described herein; (ii) the imposition of a usage-based nonbypassable transition bond charge (the "TBC"), as provided in Section 18 of the Act, and the collection of such charge by the Company or another entity approved by the Board; (iii) the Company to transfer its interest in the Bondable Transition Property (as defined below) in respect of such TBC to a financing entity approved by the Board; (iv) the issuance and sale of up to $440 million aggregate principal amount of transition bonds, series 2002-1 (the "Transition Bonds") by a financing entity approved by the Board to securitize the recovery of a portion of the Company's bondable stranded costs (the "Transition Bond Transaction") and to apply the net proceeds of the Transition Bonds for the purposes of reducing the amount of its otherwise recovery-eligible stranded costs through the buydown or buyout of long-term power purchase contracts, or to retire or refinance the Company's outstanding debt, equity or both; (v) the methodology for the calculation and adjustment of a tax component (the "MTC-Tax") to be included in its nonbypassable market transition charge (the "MTC") and the collection of such charge as previously authorized by the Board in the Restructuring Order to recover federal income and state corporation business taxes, if applicable, associated with the Bondable Transition Property (as defined below) and the collection of the TBC and the MTC-Tax (the "MTC-Tax Component") to reconcile future tax rates and MTC-Tax collections to assure full recovery of the MTC-Tax Component; and (vi) the methodology for the calculation and adjustment of the TBC. Additionally, the Company asks that the Board modify its Order dated July 21, 2000, in Docket No. EM99110870 to permit the Company to securitize its nuclear generation stranded costs prior to the Board's final review and determination of the recovery-eligible stranded costs associated with the Company's fossil generation assets. The Company states that the proceeds of the Transition Bonds (net of Upfront Transaction Costs (as defined below)) will be used by or on behalf of the Company for the purposes of reducing the amount of its otherwise recovery-eligible stranded costs, through the retirement of debt or equity, or both, of the Company consistent with Section 14 of the Act, and to buy down or buy out Board-approved long-term power purchase contracts ("NUG Contracts")/1 consistent with Section 14. The Company estimates that the Transition Bond Transaction will result in present value savings over the term of the Transition Bonds. Exhibit A of this Order sets forth a calculation of the net present value benefits of the Transition Bond Transaction based on the assumptions contained herein. The Company's MTC and TBC will be trued up to reflect the terms of the - -------- 1 Pursuant to a Board Order dated November 10, 1999, the Company bought out an existing Board-approved NUG Contract with the Pedricktown Cogeneration Limited Partnership in BPU Docket No. EE99090685. Pursuant to a Board Order dated December 6, 2000, the Company bought down an existing Board-approved NUG Contract with American Ref-Fuel Company of Delaware Valley, L.P. in BPU Docket No. EM00060388. ACE Bondable Stranded Costs Rate Order 2 BPU Docket No. EF01060394 actual Transition Bond Transaction so that, among other things, any incremental savings from the actual Transition Bond Transaction, beyond those anticipated and already provided to customers of the Company, will benefit such customers through adjustments to the TBC and MTC. 1. PROCEDURAL HISTORY On April 30, 1997, the Board issued an Order adopting and releasing a document entitled "Restructuring the Electric Power Industry in New Jersey: Findings and Recommendations" (the "Final Report"). The Final Report contained the findings and recommendations concerning the future structure of the electric power industry in New Jersey, including the recommendation that in the future electric consumers be offered a choice of electric power suppliers in order to effectuate substantial economic benefits by way of lower electric bills and the provision of more service options to the State's residents and businesses. Recognizing that there were a number of substantial procedural steps necessary to implement the recommended policies and to prepare for the commencement of retail competition, the Board directed in the Order adopting the Final Report that each of the State's four investor owned electric utilities make three filings: a rate unbundling petition, a stranded cost petition, and a restructuring plan. On July 11, 1997, the Board issued an Order Establishing Procedures, wherein it determined to transmit each utility's rate unbundling and stranded cost filings to the Office of Administrative Law (the "OAL") for hearings and the issuance of an Initial Decision. The Board also determined to retain the restructuring plan filings for its own review and, as necessary, hearings. On July 15, 1997, the Company filed its response to the Final Report. The Company's unbundling and stranded costs proceedings were transmitted to the OAL and assigned to Administrative Law Judge William Gural ("ALJ Gural") (BPU Docket Nos. EO97070455 and EO97070456 respectively). The restructuring Petition was retained by the Board (BPU Docket No. EO97070457). Nine days of evidentiary hearings on the unbundling and stranded costs proceedings were conducted by ALJ Gural at the OAL between February 17, 1998 and February 27, 1998. During that time period, witnesses were cross-examined on their prefiled direct testimony, as well as on any filed rebuttal or surrebuttal testimony. At the close of hearings, a briefing schedule was adopted by ALJ Gural. Initial Briefs were filed in March, 1998. Reply Briefs were filed in April, 1998. After the Company's unbundling and stranded cost hearings and briefing were completed at the OAL, approximately twenty additional days of evidentiary hearings were held before Commissioner Carmen J. Armenti between April 27 and May 28, 1998. During these dates, the parties presented testimony and conducted cross-examination on certain identified restructuring issues affecting all four electric utilities. Following the close of hearings before Commissioner Armenti, briefs and reply briefs on the restructuring issues were filed on June 26 and July 17, 1998, respectively. After requesting and receiving an extension of time from the Board, ALJ Gural issued an Initial Decision and Report on the Company's unbundling and stranded cost filings on August 19, ACE Bondable Stranded Costs Rate Order 3 BPU Docket No. EF01060394 1998. The parties filed Exceptions and Replies to Exceptions to the Initial Decision with the Board in October and November, 1998, respectively. On February 9, 1999, then-Governor Whitman signed the Act into law. The Act authorized the Board to permit competition in the electric generation and natural gas supply marketplaces and such other traditional utility areas as the Board determines. In addition, all four electric utilities were mandated to implement specific rate reductions over a period of four years. Among other things, the Act required the Board, by Order, to provide that by no later than August 1, 1999 each electric public utility would provide retail choice of electric power suppliers for its customers, reduce its aggregate level of rates for each customer class by no less than five percent, unbundle its rate schedules and establish so-called "shopping credits" applicable to the bills of retail customers who choose alternative electric power suppliers. By Order dated February 11, 1999, the Board established guidelines and a schedule for the commencement of settlement negotiations among the parties in the Company's stranded costs, rate unbundling, and restructuring proceedings. The Board set a deadline for the submission to the Board of a negotiated settlement, which deadline was later extended. No comprehensive settlement was reached among all the parties; however, on June 9, 1999 a proposed Stipulation of Settlement ("Stipulation") was filed by the Company and four other parties. A proposed alternative stipulation of settlement ("Stipulation II") was submitted to the Board on June 15, 1999 by the Division of the Ratepayer Advocate and three other parties. The parties were provided the opportunity to submit comments to the Board on both Stipulations. At its July 15, 1999 open public agenda meeting, the Board found that with certain modifications the Stipulation could serve as a reasonable framework for a fair and reasonable resolution of the matters and issued its Summary Order dated July 15, 1999 ("Summary Order") memorializing the Board's decision in BPU Docket Nos. EO97070455, EO97070456 and EO97070457. In that Summary Order, the Board determined, among other things, that the Company would have an opportunity to recover its net owned generation stranded costs (established definitively upon divestiture), as well as 100% of NUG Contract stranded costs, through the use of securitization, contingent upon such NUG Contract buyout or buydown or restructuring being approved by the Board and found to be consistent with the standards in Sections 13 and 14 of the Act. Pursuant to a Board Order dated November 10, 1999, the Company bought out an existing Board-approved NUG Contract with the Pedricktown Cogeneration Limited Partnership in BPU Docket No. EE99090685. Pursuant to a Board Order dated December 6, 2000, the Company bought down an existing Board-approved NUG Contract with American Ref-Fuel Company of Delaware Valley, L.P. in BPU Docket No. EM00060388. On October 18, 2001, the Company closed on the sale of its nuclear generation assets for approximately $11.3 million, subject to certain adjustments, in accordance with the Board Orders dated July 21, 2000 and September 17, 2001 in BPU Docket No. EM99110870. Specifically, the Company sold its interests in the Salem Nuclear Generating Station Units 1 and 2 ("Salem") and the Hope Creek Nuclear Generating Station ("Hope Creek") to PSEG Power LLC, and one-half of its interest in the Peach Bottom Station Units 2 and 3 ("Peach Bottom") (collectively the "Nuclear Assets") to each of PSEG Power LLC and PECO Energy Company. As noted above, the Company filed its Initial Petition in this securitization matter on June 25, 2001. ACE Bondable Stranded Costs Rate Order 4 BPU Docket No. EF01060394 On July 26, 2002, the Company filed with the Board a copy of Amendment No. 1 to the Registration Statement of Atlantic City Electric Transition Funding LLC, a Delaware limited liability company (the "SPE"), the equity in which is wholly owned by the Company on Form S-3 (the "SEC Filing") relating to the Transition Bonds. On September 12, 2002, a public legislative-type hearing was held before Commissioner Butler and Commissioner Hughes. Any party wishing to do so was afforded the opportunity to participate and present comments. The parties who participated in the hearing were the Company, the Board's Staff and the Division of the Ratepayer Advocate. Those testifying included a Company-sponsored panel of witnesses, including witnesses from Morgan Stanley & Co. Incorporated and Fitch Ratings, Inc. Witnesses from the Division of the Ratepayer Advocate and Bear, Stearns & Co. Inc., the Board's financial advisor, also appeared. During the public legislative-type hearing, the Division of the Ratepayer Advocate stated that it did not oppose the proposed securitization transaction, but raised concerns about various alleged benefits of securitization to the Company, as well as certain issues related to stranded costs. The Company and the Ratepayer Advocate have agreed that those matters related to stranded costs should be addressed in the Company's pending deferral proceeding in BPU Docket No. ER02080510./2 The Board finds that such matters may be addressed in the deferral proceeding or other appropriate proceeding, however, the Bondable Transition Property described herein will not be altered by such consideration. Further, the Board believes that, to the extent there are any additional benefits as alleged by the Ratepayer Advocate, they can and will be reviewed in the Company's next electric base rate case. Any adjustments that are found to be appropriate following such review can be made at that time. We note that this approach is consistent with the approach taken in the Bondable Stranded Costs Rate Order, dated September 17, 1999, issued in connection with the Public Service Electric and Gas Company securitization transaction in BPU Docket No. EF99060390, and with the Bondable Stranded Costs Rate Order, dated February 6, 2002, issued in connection with the Jersey Central Power & Light Company securitization transaction in BPU Docket No. EF99080615. 2. TRANSITION BOND TRANSACTION a. Proposed Structure A general description of the Transition Bond Transaction structure proposed by the Company follows. This proposed structure is subject to modification, depending upon the requirements of tax authorities, input from underwriters in connection with the marketing of the Transition Bonds and negotiations with nationally recognized statistical rating organizations (collectively the "rating agencies") selected by the Company to assign credit ratings to the Transition Bonds. The Company states that the proposed structure is intended to ensure that the Company's customers pay the lowest TBC consistent with market conditions at the time of pricing and the terms of this Financing Order, in compliance with the requirement of Section 14(b)(4) of the Act. The Company has also requested that the Board authorize the execution of hedging arrangements at the time of pricing as described in Section 2(e) hereof. Pricing of the Transition Bonds will be determined by the Company in consultation with the underwriters and approved by a designee of the Board (the "Designee") subject to the guidelines contained in Appendix F hereto. The structure and terms of the Transition Bond Transaction will be fixed based on such approved pricing. - -------- 2 The Company, the Division of the Ratepayer Advocate and the Board's Staff have agreed to address in the deferral proceeding the final accounting related to the transaction costs in the NUG Contract buyout and buydown, and the stranded costs related to the nuclear asset sale. ACE Bondable Stranded Costs Rate Order 5 BPU Docket No. EF01060394 The Company states that the Bondable Stranded Costs to be securitized in this transaction are attributable to the Company's actual net investment in the Nuclear Assets and to the buyout and buydown of Board-approved NUG Contracts, net of (i) deferred income taxes attributable to the plants and (ii) certain other tax benefits. Such Bondable Stranded Costs are approximately $420.833 million, and the transaction costs are currently estimated at $19.167 million. Section 14(c) of the Act permits the Board to authorize the issuance of Transition Bonds for utility generation plant stranded costs in an amount up to 75 percent of the total amount of an electric public utility's recovery-eligible utility generation plant stranded costs. Pursuant to prior Board orders cited herein and in Appendix I, the Board has found that for the purpose of determining the 75 percent the securitizable amount may be measured relative to the recoverable utility generation plant grossed up to account for the tax liability the Company will incur associated with the recovery of the net-of-tax stranded costs. Therefore, the Company's nuclear generation plant recovery-eligible stranded costs, based on a statutory federal and state tax rate of 40.85% and a net-of-tax recoverable stranded cost amount of $277.946 million, is approximately $470 million. The requested level of nuclear generation plant stranded cost securitization of $277.946 million represents approximately 59% of the total amount of the recovery-eligible nuclear generation related stranded costs, and thereby meets the requirements of Section 14(c) of the Act./3 The Company has requested the authority to recover its aforementioned Bondable Stranded Costs, and, in addition, the following bondable stranded costs relating to the Transition Bonds: (1) the costs (including, but not limited to, redemption premiums, unamortized costs of issuance, interest and preferred dividends accruing on or after the issuance of the Transition Bonds and other fees, costs and charges relating thereto), estimated at $9.734 million, of retiring the Company's debt or preferred equity, or both, with the proceeds of the Transition Bonds ("Capital Reduction Costs"); (2) the costs, estimated at $9.433 million, incurred to issue the Transition Bonds ("Upfront Transaction Costs"); and (3) principal and interest on the Transition Bonds, together with the costs of paying, refinancing, administering and servicing, credit enhancing, overcollateralizing and hedging the Transition Bonds as more fully described herein ("Ongoing Transition Bond Costs"). The Company has also requested approval of the methodology for the calculation and adjustment of the TBC and MTC-Tax related thereto. The Company has also requested that, pursuant to this Financing Order, the Company be granted authority to recover through the sale of the Bondable Transition Property up to $440 million of its bondable stranded costs, including Capital Reduction Costs and Upfront Transaction Costs. Ongoing Transition Bond Costs will be recovered by the SPE through the assessment and collection of the TBC, a separate, nonbypassable, usage-based charge assessed and collected from all of the Company's customers and/or the customers of any electric distribution company that succeeds to all or a significant part of the electric distribution business within the Company's service territory as it exists today ("Successor Utility"), subject to Section 28 of the Act, which specifies when the TBC may be imposed on power produced by on-site generation facilities. The bondable stranded costs whose recovery is approved pursuant to this Financing Order are referred to in this Financing Order as the "Bondable Stranded Costs." - -------- 3 On September 10, 2002, the Company provided a certification indicating that, based on preliminary information from prospective bidders, "it seems highly likely that the sale of ACE's fossil assets will result in additional utility generation plant stranded costs." See Certification of Charles F. Morgan, Jr., paragraph 4 (dated September 10, 2002). ACE Bondable Stranded Costs Rate Order 6 BPU Docket No. EF01060394 The Company states that the principal asset supporting the Transition Bonds will be bondable transition property, which is property created by the Act and this Financing Order that includes (a) the irrevocable right to charge, collect, receive and be paid from collections of, the TBC, in the amount necessary to provide for the full recovery of Ongoing Transition Bond Costs and all other bondable stranded costs determined to be recoverable in this Financing Order, (b) all rights of the Company under this Financing Order, including, without limitation, all rights to obtain periodic adjustments of the TBC pursuant to Section 15(b) of the Act and (c) all revenues, collections, payments, money and proceeds arising under, or with respect to, all of the foregoing. The bondable transition property created by the Act and this Financing Order is herein referred to as the "Bondable Transition Property." For convenience of usage in this Financing Order, there are numerous references to the holding and transfer of the Bondable Transition Property by the Company and others. However, the Bondable Transition Property arises, and constitutes a vested, presently existing property right, only upon (i) its transfer to an assignee and (ii) receipt of consideration therefor. It will be vested in the SPE as an original right and not by assignment from any other entity. Pursuant to Section 16 of the Act, this Financing Order and the TBC are irrevocable upon this Financing Order becoming effective pursuant to Section 19 of the Act, and this Financing Order cannot be rescinded, altered, repealed, modified or amended by the Board or any other governmental entity, nor can it be impaired by the State of New Jersey, as pledged by the State of New Jersey in Section 17 of the Act. The Company will sell its interest in the Bondable Transition Property to implement the Transition Bond Transaction to the SPE, a newly formed, nonutility, bankruptcy-remote special purpose entity, which is a Delaware limited liability company, the equity in which will be wholly-owned by the Company, in exchange for the net proceeds received by the SPE from the sale of the Transition Bonds. The Company will also make a cash capital contribution to the SPE in an amount that will at least equal 0.5% of the aggregate initial principal amount of the Transition Bonds. The capitalization amount for the Transition Bonds will be held in a separate subaccount (the "Capital Subaccount") as described in more detail below. The SPE will remit to the Company the proceeds from the sale of the Transition Bonds, in payment for the Bondable Transition Property. Under Section 23 of the Act, the transfer to the SPE will be treated, for bankruptcy purposes, as a true sale and absolute transfer to the SPE, notwithstanding: (1) the fact that the Company acts as the collector or servicer of the TBC; (2) the treatment of such transfer as a financing for federal, state or local tax purposes or financial accounting purposes; (3) the capitalization of the SPE by the Company; or (4) the retention or acquisition of any rights listed in Section 23(a)(4) of the Act. The SPE will be a "financing entity" for purposes of the Act. The Company states that Board approval of the SPE and the Transition Bond Transaction in this Financing Order will constitute a finding that the SPE's activities will not violate any affiliate relation standards currently in effect or that the Board may adopt in the future. The Company states that the SPE will issue and sell Transition Bonds, which will be either fixed or floating rate instruments, under an indenture ("Indenture") between the SPE and an institutional trustee (the "Transition Bond Trustee") supplemented by a supplemental indenture for the series 2002-1 bonds (the "Series Supplement"), and will purchase the Bondable Transition Property from the Company with the net proceeds received from the sale of the Transition Bonds. The SPE will issue and sell the Transition Bonds in a negotiated, fully underwritten public offering as asset-backed securities ("ABS"). According to the Company, all prior securitizations of utility stranded costs in other jurisdictions have been structured as ABS and sold on a negotiated basis and the expertise of an underwriter is critical to the structuring, ACE Bondable Stranded Costs Rate Order 7 BPU Docket No. EF01060394 pricing and marketing of securities in the ABS market. Indeed, in other states where competitive bidding requirements generally exist, such as Massachusetts, competitive bidding of stranded cost securitization transactions either has been waived or has not been required. The Company asserts that a negotiated sale, as opposed to one accomplished through competitive bidding, should result in lower interest costs and will ensure that the Company's customers pay the lowest TBC consistent with market conditions at time of pricing and the terms of this Financing Order, in compliance with the requirement of Section 14(b)(4) of the Act. If the Company sells floating rate instruments, it intends to enter into appropriate hedging arrangements, including interest rate caps, swaps or collars, which will have the effect of creating fixed interest rate obligations for the SPE. The Company states that all of the assets of the SPE, including, without limitation, the Bondable Transition Property and the other collateral of the SPE (the "Other SPE Collateral"), will be pledged as collateral to secure the Transition Bonds. The Company notes that the Other SPE Collateral may include (without limitation): (i) the rights of the SPE under certain of the Transition Bond Transaction documents, including (a) a sale agreement and related bill of sale by which the SPE acquires the Bondable Transition Property and receives certain indemnification from the Company, (b) a servicing agreement (the "Servicing Agreement") by which the Company or any successor in that capacity acts as servicer of the Bondable Transition Property (the "Servicer"), and (c) an administration agreement by which the SPE will be administered will be with an affiliate of Atlantic; (ii) various trust accounts of the SPE, including, but not necessarily limited to, the Capital Subaccount, the overcollateralization subaccount for the series 2002-1 bonds (the "Overcollateralization Subaccount"), the reserve subaccount for the series 2002-1 bonds (the "Reserve Subaccount"), the series subaccount for the series 2002-1 bonds (the "Series Subaccount"), under which the Capital Subaccount, the Overcollateralization Subaccount and the Reserve Subaccount will be established, and the collection account (the "Collection Account"), under which will be established the foregoing accounts (as well as similar accounts for any other series of transition bonds later issued by the SPE) and a general subaccount (the "General Subaccount"); (iii) any investment earnings on amounts held by the Transition Bond Trustee, other than investment earnings released to the SPE or to counterparties under swap agreements, if any, in accordance with the Indenture and Series Supplement. The Company requests, in accordance with Section 14 of the Act, that the Board approve Transition Bonds with scheduled amortizations upon issuance (1) not exceeding 15 years from the date of issuance in the case of Transition Bonds the proceeds of which will be used to reduce stranded costs related to utility-owned generation and (2) not exceeding the remaining term of a NUG Contract in the case of Transition Bonds the proceeds of which will be used to buy down or buy out such NUG Contract. The Company also requests that the Board approve stated maturities of up to two years (or, in the case of the Transition Bonds referred to in clause (2) above, three years) beyond the expected final scheduled maturity date of each class of Transition Bonds in order to minimize overcollateralization requirements and enhance the prospects of securing the highest possible credit rating for the Transition Bonds. b. Recovery of Upfront Transaction Costs In order to issue Transition Bonds to achieve net savings for the benefit of its customers, the Company will incur Upfront Transaction Costs. Based on the currently estimated initial offering of $440 million of Transition Bonds, the Company has estimated that such amount will include Upfront Transaction Costs of approximately $9.433 million which may vary, in part, based on the factors described below. The Company states that these Upfront Transaction Costs will include, ACE Bondable Stranded Costs Rate Order 8 BPU Docket No. EF01060394 among other items, the underwriting fee, rating agency fees, financial advisory fees, accounting fees, SEC registration fees, printing and marketing expenses, trustees' fees, legal fees, servicing set-up fees and the administrative cost of forming the SPE. The Company has requested authority to recover the Upfront Transaction Costs from the proceeds of the sale of the Transition Bonds and to include such costs as Bondable Stranded Costs so that the right to recover such amounts will constitute a portion of the Bondable Transition Property. The Company indicates that to the extent payment of any Upfront Transaction Costs is required prior to the issuance of the Transition Bonds, the Company will pay such costs and then will be reimbursed from the proceeds of the Transition Bonds. c. Recovery of Capital Reduction Costs The Company has requested recovery of approximately $9.734 million of Capital Reduction Costs of retiring the Company's debt and/or preferred equity, or both, including, but not limited to, any accrued interest or dividends accrued from and after the date of sale of the Transition Bonds, premium and other fees, costs and charges relating thereto, from the proceeds of the sale of the Transition Bonds and to include such Capital Reduction Costs as Bondable Stranded Costs so that the right to recover such amounts will constitute a portion of the Bondable Transition Property. d. Recovery of Ongoing Transition Bond Costs The Company has requested recovery of Ongoing Transition Bond Costs through the TBC. The Company states that the primary Ongoing Transition Bond Costs are the periodic payments of principal and interest on the Transition Bonds (including past due and deferred amounts), and that other such costs include principally the annual servicing fee of .10% of the initial principal amount of all series of transition bonds that the SPE has issued (the "Servicing Fee") payable monthly in 12 equal amounts to the Company, in its capacity as the Servicer (as defined below), or such higher fee as may be payable to a successor Servicer (in an amount of up to 1.25% of the initial principal balance of all series of transition bonds that the SPE has issued), the ongoing cost of credit enhancement and the costs of overcollateralization. The Company states that there will also be a small amount of additional, ongoing costs associated with the Transition Bond Transaction, such as the administration fee, legal and accounting fees, directors' or managers' fees, rating agency fees, trustees' fees and other costs of operating the SPE. The Company states that these costs should be included as Bondable Stranded Costs to be recovered through the TBC in accordance with Section 14 of the Act, and the right to recover these costs as Bondable Stranded Costs will constitute a portion of the Bondable Transition Property. e. Approval of Final Terms and Conditions: Transition Bond Transaction The Company states that upon the pricing of the Transition Bonds, it will cooperate with and provide such information to the Board's Designee as is reasonably requested in order that the Designee may make the certifications required below. To assist the Designee in making his or her required certifications, upon the pricing of the Transition Bonds, the Company will file with the Board's Designee a Pricing Advice Certificate, substantially in the form of Appendix D hereto. This document may be based in part on the advice of the Company's lead underwriter and will certify in substance that the structure and pricing of the Transition Bonds (including any hedging arrangement priced at the time of the pricing of the Transition Bonds as described below) assures that the Company's customers pay the lowest TBC consistent with then current market conditions and the terms of this Financing Order. ACE Bondable Stranded Costs Rate Order 9 BPU Docket No. EF01060394 The Company also states that prior to the approval by the Board's Designee of pricing of the Transition Bonds (including any hedging arrangement priced at the time of the pricing of the Transition Bonds), the Company's lead underwriter will provide a certificate substantially in the form of Appendix G hereto to the effect that, in its judgment and subject to the assumptions, qualifications and limitations contained therein, the structuring and pricing of the Transition Bonds (and any such hedging arrangement at the time of pricing) is reasonable in the light of then current market conditions and the terms of this Financing Order and will result in customers of the Company paying the lowest TBC consistent with then current market conditions and the terms of this Financing Order. Upon the filing of the Pricing Advice Certificate (at the time of the pricing of the Transition Bonds and any such hedging arrangement), the Company requests that the Board's Designee file with the Board a certificate (the "Designee Certification") substantially in the form of Appendix A hereto, (i) approving the pricing and the terms and conditions of the Transition Bonds (and any hedging arrangement), including (a) scheduled amortizations upon issuance (1) not exceeding 15 years from the date of issuance in the case of Transition Bonds the proceeds of which will be used to reduce stranded costs related to utility-owned generation and (2) not exceeding the remaining term of a long-term power purchase agreement with a non-utility generator in the case of Transition Bonds the proceeds of which will be used to buy down or buy out such power purchase agreement and (b) stated maturities of up to two years (or, in the case of the Transition Bonds referred to in clause (a)(2) above, three years) beyond the expected final scheduled maturity date of each class of Transition Bonds and (ii) stating that the structure and pricing of the Transition Bonds assures that the Company's customers pay the lowest TBC consistent with market conditions and the terms of this Financing Order. The Designee Certification will represent the Designee's final and irrevocable approval of the pricing of the Transition Bonds (including any hedging arrangement priced at the time of pricing Transition Bonds, as described below) and the terms and conditions of the Transition Bond Transaction. The Company states that such terms and conditions, including the expected principal amortization schedule (the "Expected Amortization Schedule"), will be fixed based on such approved pricing, and will include (a) scheduled amortizations upon issuance (1) not exceeding 15 years from the date of issuance in the case of Transition Bonds the proceeds of which will be used to reduce stranded costs related to utility-owned generation and (2) not exceeding the remaining term of a long-term power purchase agreement with a non-utility generator in the case of Transition Bonds the proceeds of which will be used to buy down or buy out such power purchase agreement, and such longer legal maturities as are required to obtain the highest possible credit rating on the Transition Bonds (up to two years (or, in the case of the Transition Bonds referred to in clause (a)(2) above, three years) beyond the expected final scheduled maturity date of each class of Transition Bonds). Payments on the Transition Bonds will be made semi-annually or quarterly, depending upon market conditions or rating agency considerations at the time of pricing. Exhibit C-1 of the Company's Petition contains forecasted principal and interest payments each year in the Transition Bond Transaction based upon the forecasted level of the Transition Bonds to be issued. Exhibit B hereto is an updated version of Exhibit C-1 to the Company's Petition. The ultimate Expected Amortization Schedule may be altered as a result of market conditions or rating agency requirements, and will be subject to the Designee's Guidelines contained in Appendix F hereto. The associated MTC-Tax collections may be adjusted from time to time to reflect the changing principal and interest components of the Transition Bond debt service. If the structure, pricing, terms and conditions meet the requirements discussed above, the Company will be authorized under this Financing Order to undertake the Transition Bond Transaction. Prior to the pricing of the Transition Bonds, the Designee may obtain from the Board's financial advisor, Bear, Stearns & Co. (the "Financial Advisor"), recent secondary market trading levels of existing utility stranded cost securitization bonds, to the extent such ACE Bondable Stranded Costs Rate Order 10 BPU Docket No. EF01060394 information is available through public sources. To the extent such information is available, the Company anticipates that such information may, in part, be considered in connection with the pricing of the Transition Bonds. Finally, the Company has invited the Designee to be present at pricing, either in person or by telephone. The Company states that one or more classes of the Transition Bonds may be issued as variable rate instruments under which the SPE will pay a fixed interest rate through the execution of an interest rate exchange agreement, an interest rate cap agreement or similar hedging arrangement. If, at the time of pricing of the Transition Bonds, the Company and its lead underwriter determine that such a hedging arrangement is expected to result in a lower interest cost on such classes of bonds or on all classes of an issue taken as a whole, the hedging arrangement will be competitively bid, will be described in the Pricing Advice Certificate (see Appendix D hereto) and the Company's lead underwriter will provide a certificate as to its reasonableness in accordance with Appendix G hereto, after which the arrangement will be subject to approval by the Designee in the Designee Certification. Any counterparty to such a hedging arrangement must have a credit rating consistent with achieving the highest possible ratings on the Transition Bonds. The Company states that not later than five business days after the issuance and sale of the Transition Bonds, the Company will confirm to the Board, in an "Issuance Advice Letter", substantially in the form of Appendix B hereto, the actual interest rates (or formula for determining variable interest rates) on the Transition Bonds, the Expected Amortization Schedule, the Required Overcollateralization Schedule (as defined in Section 2(f) below) and the initial TBC and MTC-Tax, which will be calculated using the methodology approved hereby and described in Appendix C hereto. At such time, the Company will also file revised tariff sheets with the Board setting forth the initial TBC and MTC-Tax. The initial TBC and MTC-Tax and related revised tariff sheets will become effective the same day the Company files the Issuance Advice Letter and the revised tariff sheets, without further action by the Board. f. TBC In accordance with Section 18 of the Act, the Company states the TBC will apply equally to each customer of the Company, regardless of class, based on the amount of electricity delivered to each customer through the transmission and distribution system of the Company or any Successor Utility within the Company's service territory as it exists today, subject to Section 28 of the Act, which specifies when the TBC may be imposed upon power produced by on-site generation facilities. Pursuant to Section 15(b) of the Act, the Company states that the TBC will be periodically adjusted from time to time, in accordance with the methodology approved in this Financing Order, to ensure that it is set at a level intended to recover the Ongoing Transition Bond Costs, including, without limitation: (1) the principal of (determined in accordance with the Expected Amortization Schedule as detailed in the Issuance Advice Letter), and interest on, the Transition Bonds authorized by the Board in this Financing Order; (2) the costs of operating and administering the SPE; (3) the costs of servicing the Transition Bonds, including servicing and trustee fees, expenses and indemnities, substantially as described in the SEC Filing; (4) amounts required to fund or replenish the Overcollateralization Subaccount in accordance with the overcollateralization schedule ("Required Overcollateralization Schedule"), or to fund or replenish any similar account which provides credit enhancement for the Transition Bonds, all as confirmed in the Issuance and Advice Letter; (5) the reimbursement of any amounts drawn from the Capital Subaccount pursuant to the Indenture, substantially as described in the SEC Filing, or the reimbursement of any drawn amounts from any similar account which provides ACE Bondable Stranded Costs Rate Order 11 BPU Docket No. EF01060394 credit enhancement for the Transition Bonds; and (6) the ongoing expenses, if any, of any other credit enhancement arrangements. In Appendix C, the Company sets forth the general methodology by which it proposes to establish and adjust from time to time the TBC and the MTC-Tax. The Company states that the TBC and the MTC-Tax will be set and adjusted based on assumptions described in Appendix C, as those assumptions are adjusted from time to time based on various factors including, but not limited to, energy sales forecasts, customer payment and charge-off patterns, defaults by third party suppliers (as described herein), the Ongoing Transition Bond Costs (including unpaid amounts from prior periods and replenishment of credit enhancement, if applicable) and, with respect to the MTC-Tax, the applicable income tax rates in effect from time to time. In Exhibit B hereto, the Company has projected the initial TBC and the MTC-Tax using the methodology described in Appendix C and assuming the Ongoing Transition Bond Costs as described herein. In accordance with Section 15(c) of the Act, the Company requests that the TBC remain in effect until the Bondable Stranded Costs, including, without limitation, the principal of, and accrued interest and acquisition or redemption premium on, any Transition Bonds issued to finance such Bondable Stranded Costs, have been paid in full and all other obligations and undertakings with respect thereto have been fully satisfied. The Company states that each customer's monthly bill will reflect, either explicitly, or through a notation, that a portion of the charges on such bill represents amounts being collected on behalf of the SPE as owner of the Bondable Transition Property. g. Periodic Adjustments to the TBC and MTC-Tax Section 15(b) of the Act requires that this Financing Order provide for mandatory periodic adjustments (each, a "TBC True-Up") to be made by the Board at least annually upon petition of the Company, its assignee or a financing entity, to ensure receipt of revenues sufficient to make payments related to Ongoing Transition Bond Costs (including unpaid amounts from prior periods and replenishment of credit enhancements, if applicable) by the payment dates designated by the Company in its TBC True-Up filing, such that the Transition Bonds will be retired in accordance with the Expected Amortization Schedule. Each TBC True-Up must be formula-based, and the Company intends to use the formula-based methodology described in Appendix C hereto. As Servicer, the Company states that it will be responsible for filing with the Board documentation for any TBC True-Up. (The Company, as Servicer under the Servicing Agreement, and any successor to the Company as servicer, are herein referred to as the "Servicer".) Although the Company, as Servicer, will file for TBC True-Ups at least annually, the Company has requested authorization to file for adjustments of the TBC as often as monthly or quarterly, as may be determined from time to time in the future to be necessary to maintain the highest possible credit rating (all as set forth in the Servicing Agreement). Under Section 15(b) of the Act, the Servicer shall propose such TBC True-Up in a filing with the Secretary of the Board at least 30 days in advance of the date upon which it is requested to be effective. The TBC True-Up shall become effective on an interim basis on the date on which it is requested to be effective, in the absence of a Board Order to the contrary. Under Section 15(b) of the Act, in the absence of a Board order to the contrary, the periodic adjustment shall become final and nonappealable 60 days after the filing. The Company has requested that TBC True-ups go into effect at least annually, and that the Board confirm that the TBC True-Up will become effective or final, as the case may be, absent a finding by the Board of manifest error (for purposes of this ACE Bondable Stranded Costs Rate Order 12 BPU Docket No. EF01060394 Financing Order, "manifest error" is an arithmetic error evident on the face of such filing) in the application of the adjustment methodology approved herein. In the event of a finding of manifest error, the rate to be made effective will be the arithmetically corrected rate or, in the absence of agreement on the arithmetically corrected rate, the rate in effect for the prior period will remain in effect until the arithmetically corrected rate is made effective. The Company asserts that this standard for effectiveness is consistent with the other provisions of Section 15(b) of the Act that require that the TBC True-Up be implemented to ensure "timely payment" of, among other things, principal of, and interest and acquisition or redemption premium on, the Transition Bonds. The Company further asserts that in order to achieve the highest possible credit ratings on the Transition Bonds and, thus, to reduce costs to customers, the TBC True-Ups must be made final and nonappealable based upon this objective standard. The Company will be entitled to request, and the Board will approve, mandatory periodic adjustments of the MTC-Tax (each, an "MTC-Tax True-Up"). Each MTC-Tax True-Up will be made at least annually to reconcile the income tax recovered to the income taxes required to be assessed to the Company on the taxable net revenue from the TBC and MTC-Tax. The reconciliation will be made in the same manner and at the same time as the TBC True-Up to ensure receipt of revenues sufficient to assure recovery of the MTC-Tax. Upon petition of the Company, the MTC-Tax will be adjusted based upon assumptions described in Appendix C hereto, as those assumptions are adjusted from time to time in accordance with such Appendix C. No delay in the MTC-Tax True-Up will influence or affect the TBC True-Up. The Company also requests that the Board grant the Company authority to make "non-routine" adjustments to the TBC and the MTC-Tax. Such filings for non-routine adjustments would be made to accommodate material changes to the methodology described in Appendix C hereto. Any such filing must be made at least 90 days prior to the proposed effective date, and will be subject to Board approval before implementation. h. Remittance of TBC Collections The Company states that the Servicer will make monthly remittances (or daily remittances if required to do so under the rating agencies' criteria) of estimated payments arising from the TBC to the Transition Bond Trustee, on behalf of the SPE, based on the Company's collection history (as may be updated from time to time). The Company states that payments from its customers will be applied first to sales taxes (which the Company will collect as trustee for the State and not for its own account or that of the SPE, and which are not "charges" for purposes of the following allocations) until all of such amounts are paid, then to charges in arrears, if any, and then to current charges. With respect to each billing period, partial payments of charges and taxes other than sales taxes will be allocated pro rata (i) to the TBC; (ii) to the MTC-Tax; and (iii) to the Company's other charges, based on the proportions that the TBC, the MTC-Tax and the Company's other charges bear to the total charges billed. If following the issuance of the Transition Bonds, one or more additional series of transition bonds are issued, partial payments of the TBC will be allocated to each respective series so issued, pro rata, based on the estimated revenue requirement of each series of transition bonds for the period in which the allocation is made. Each such period is to begin on a date on which a TBC True-Up goes into effect and end on the day immediately prior to the effective date of the next TBC True-Up. The Company states that in the near future it will file a base rate case and include in that filing data showing the impact of the timing of customer payments of TBCs to the Company versus ACE Bondable Stranded Costs Rate Order 13 BPU Docket No. EF01060394 payments by the Company, as Servicer, to the Bond Trustee. This data will include a calculation of customer daily remittances, timing of remittances to the Bond Trustee and the short-term interest rate then applicable to determine the amount of "float" income earned by the Company in its capacity as Servicer. If the Board determines in its review of this filing that the Company retained interest income over and above its Servicing Fee, it may calculate such retained income, and impute interest thereon, in determining fair and reasonable rates going forward from the date of its review. In determining its cash working capital requirements in a base rate proceeding, the Company will exclude from its cash balances any TBCs collected, but not yet remitted to the Trustee. The Company states that the amounts remitted by the Servicer to the Transition Bond Trustee (the "Deemed TBC Collections") will be retained by the Transition Bond Trustee until it pays to the appropriate parties all periodically required Ongoing Transition Bond Costs, including scheduled principal and interest payments, Servicing Fees, other fees and expenses, any unpaid amounts from prior payment dates related to the aforementioned and any required additions to or replenishments of the Collection Account. The Company expects that monthly disbursements, in amounts to be specified in the Indenture and Series Supplement, will be made to the Transition Bond Trustee, to the independent managers of the SPE, in respect of the Servicing Fee, to the administrator of the SPE and in respect of operating expenses. In addition, payments of principal and interest on the Transition Bonds (as well as payments of the aforementioned amounts) will be made on a quarterly or semi-annual basis. The Transition Bond Trustee will hold all Deemed TBC Collections received from the Servicer from the remittance date to the dates on which such payments are made in the General Subaccount of the Collection Account. The Transition Bond Trustee will invest the funds in the Collection Account in securities that mature on or before the next scheduled distribution date, in accordance with rating agency criteria for investment of such funds. The Company states that investment earnings on funds in the Collection Account held by the Transition Bond Trustee may be used to satisfy currently scheduled interest and principal payments on the Transition Bonds and other Ongoing Transition Bond Costs. Additionally, investment earnings on such funds may be used to restore Capital Subaccount amounts previously withdrawn therefrom to meet periodically required Ongoing Transition Bond Costs and may be applied to meet the Required Overcollateralization Schedule. Investment earnings on funds in the Collection account in excess of the amount applied as described above will be held in the Reserve Subaccount, except for such investment earnings in the Capital Subaccount, which will be distributed to the SPE as provided in the Indenture and Series Supplement. Upon retirement of all outstanding Transition Bonds, including payment of all interest thereon, and the payment of all Ongoing Transition Bond Costs, all other Bondable Stranded Costs, and any bondable stranded costs relating to the Company and the SPE that may be approved in favor of the Company under the Act pursuant to any subsequent financing orders, the Company states that any remaining amounts held by the Transition Bond Trustee will be released to the SPE and ultimately returned to the Company as an equity distribution or, if required under the series indenture supplement for a subsequently issued series of transition bonds, if any, of the SPE, be reallocated to the subaccounts of such series; provided, however, that upon retirement of all outstanding transition bonds of the SPE, including payment of all interest thereon, and the payment of all related bondable stranded costs, any remaining amounts held by the Transition Bond Trustee will be released to the SPE and ultimately returned to the Company as an equity distribution. The Company will credit, against the distribution charges it bills to its customers, any amounts so received from the SPE that exceed the sum of (i) the initial amount of the equity ACE Bondable Stranded Costs Rate Order 14 BPU Docket No. EF01060394 contribution to the SPE and (ii) the investment earnings on funds in the Capital Subaccount, less the amount of any unpaid MTC-Tax charges and any amount that was withdrawn and not replenished to the SPE's equity. i. Credit Enhancement The Transition Bond documents will provide for the TBC True-Up as is authorized by Section 15(b) of the Act as described above and for overcollateralization amounts as described below or other means of credit enhancement as required by the rating agencies. The Company explains that a portion of the TBC will be applied to an "overcollateralization amount" which will be deposited into the Overcollateralization Subaccount to meet the Required Overcollateralization Schedule. The Company states that the collection of the overcollateralization amount will be in addition to the collection of the principal (which will be collected in accordance with the Expected Amortization Schedule) and interest payable on the Transition Bonds, and the collection of the other Ongoing Transition Bond Costs, all of which will be recovered through the TBC. The total overcollateralization requirement will be determined prior to the pricing of the Transition Bonds but will in no event be less than 0.5% of the initial Transition Bond principal amount. The total overcollateralization amount will be determined by the Company based on criteria from the rating agencies, and will be reflected in the Issuance Advice Letter and will be subject to the approval of the Designee. It is possible that the rating agencies may require additional credit enhancement, the terms of which will be set forth in the Pricing Advice Certificate and subject to the Designee Guidelines. All collection shortfall amounts relating to the TBC and amounts expected to become due and payable during the next succeeding period for which the TBC is in effect, including overcollateralization amounts, and any shortfall amounts arising from defaults relating to a third party electric power supplier (an "EPS") will be incorporated into each TBC True-Up to the extent necessary. The Company states that it will reduce the distribution charges payable by its customers by an amount equal to the amount remaining in the Collection Account (including amounts in the Overcollateralization Subaccount), except for amounts in the Capital Subaccount including any investment earnings on funds in such subaccount, after payment in full of all Ongoing Transition Bond Costs, all other Bondable Stranded Costs, and any bondable stranded costs relating to the Company and the SPE that may be approved in favor of the Company under the Act pursuant to any subsequent financing orders, less the amount of any unpaid MTC-Tax charges. j. Formation of SPE The SPE, a Delaware limited liability company, is a direct, wholly-owned, nonutility subsidiary of the Company, which will be managed pursuant to the administration agreement substantially as described in the SEC Filing. k. Bondable Transition Property Under Section 3 of the Act, the Bondable Transition Property includes (a) the irrevocable right to charge, collect and receive, and be paid from collections of, the TBC, in the amount necessary to provide for the full recovery of Ongoing Transition Bond Costs and all other bondable stranded costs whose recovery is authorized in this Financing Order, (b) all rights of the Company under this Financing Order, including, without limitation, all rights to obtain periodic ACE Bondable Stranded Costs Rate Order 15 BPU Docket No. EF01060394 adjustments of the TBC pursuant to Section 15(b) of the Act and (c) all revenues, collections, payments, money and proceeds arising under, or with respect to, all of the foregoing. Pursuant to Sections 16 and 22 of the Act, when the Company has transferred, and received consideration for, the Bondable Transition Property from the SPE, the Bondable Transition Property will constitute a vested, presently existing property right and will continuously exist as property for all purposes as provided in the Act and the Financing Order, whether or not the revenues and proceeds arising with respect thereto have accrued and notwithstanding the fact that the value of the property right may depend upon consumers using electricity or the Servicer performing services; and the validity of any sale, assignment or other transfer of the Bondable Transition Property will not be defeated or adversely affected by the commingling by the Company of revenues recovered or payments arising from amounts billed, collected and received on account of the Bondable Transition Property with other funds of the Company. l. Sale of Bondable Transition Property to SPE The Company requests the Board to approve the transfer by the Company of the Bondable Transition Property to the SPE in one or more transactions which, in accordance with Section 23 of the Act, will be treated as a true sale and absolute transfer to the SPE, even though such transactions may be treated as a financing, and not a sale, for federal and state tax purposes, for financial accounting purposes or for other purposes and even though the Company is the collector or servicer of the TBC. The Company explains that the SPE will have all of the statutory rights inherent in the Bondable Transition Property, including, without limitation, the right to exercise, through the Company or any Successor Utility, any and all rights and remedies to collect any amounts payable by any customer of the Company in respect of the Bondable Transition Property, which includes the right to direct the Company or any Successor Utility to discontinue electric power supply to a particular customer to the extent permitted in accordance with law and any applicable regulations. The SPE and other third parties, however, will not have any right to exercise any direct control over the distribution and transmission system of the Company. Any direction to the Company or any Successor Utility to shut off the electric power supply to a customer would be subject to Board policies and procedures and any applicable laws then in effect. The Company notes that the agreements which will govern transfer of the Bondable Transition Property to the SPE may include representations and warranties with respect to, among other things, the validity of this Financing Order, the Bondable Transition Property and the title thereto, and may provide specific covenants, indemnities and/or repurchase obligations in connection with such transfer for the benefit of the holders of Transition Bonds. m. Issuance of Transition Bonds The Company requests that the Board approve the issuance of Transition Bonds by the SPE. The Company states that the Transition Bonds will, by their terms, permit the holders to have recourse only to the SPE's credit and assets, and will be secured by a pledge to the Transition Bond Trustee of all of the right, title and interest of the SPE in the Bondable Transition Property and Other SPE Collateral. n. Nonbypassable TBC and MTC-Tax Under Section 18 of the Act, the TBC and the MTC-Tax are nonbypassable and will be assessed against and collected from all customers of the Company or any Successor Utility until ACE Bondable Stranded Costs Rate Order 16 BPU Docket No. EF01060394 all Ongoing Transition Bond Costs and other bondable stranded costs determined to be recoverable in this Financing Order are paid in full, even past legal maturity, subject to Section 28 of the Act. The TBC will apply equally to each customer, regardless of class, based on the amount of electricity delivered to the customer through the transmission and distribution system of the Company or any Successor Utility. With respect to on-site generation, Section 28(b) of the Act provides that the TBC will not be imposed on the electricity sold solely to the on-site customer of an on-site generator. Section 28(c), however, provides that the TBC shall be imposed on the generation from on-site generation facilities to the extent that on-site generation has displaced customer purchases from an electric public utility by an amount such that the kilowatt hours distributed by the electric public utility have been reduced to an amount equal to 92.5 percent of the 1999 kilowatt hours distributed by the electric public utility. o. Electric Power Suppliers The Transition Bond Transaction currently contemplates that the Company, in its capacity as Servicer, will have sole responsibility for the billing, collection and remittance of the TBC and the MTC-Tax. The Company states that there is the possibility, however, that an EPS may seek to assume such role. Permitting an EPS to bill, collect and remit the TBC and the MTC-Tax in place of the Company may increase the risk of shortfalls in TBC collections or MTC-Tax collections by exposing the cash flow to potential interruption due to the default, bankruptcy or insolvency of the EPS. This potential interruption will increase risks to investors, and may result in an increase to the required credit enhancement for, and/or a reduction of the credit rating of, and/or an increase in the interest rate on, the Transition Bonds. Additionally, such EPS billing may necessitate an increase to the TBC or to the MTC-Tax if EPS billing causes interruption or delay in payment to the Servicer. In order to mitigate these risks, satisfy rating agency requirements and reduce the cost to customers, the Company requests that any EPS the Board authorizes to bill, collect and remit the TBC be required to comply with the billing, collection and remittance procedures and information access requirements set forth below. These procedures and requirements are comparable to those in effect in this and other states in which utilities have securitized their stranded costs. These requirements are largely derived from rating agencies' criteria. The Company requests that the Board authorize an EPS to bill and collect the TBC and associated MTC-Tax with respect to power sold by it, for remittance to the Servicer, only if (i) such EPS agrees to remit the full amount of all charges it bills to customers for services provided by the Company, together with amounts related to the TBC and the MTC-Tax, regardless of whether payments are received from such customers, within 15 days of the Company's (or any successor Servicer's) bill for such charges; (ii) such EPS agrees to provide the Servicer (or any successor Servicer) with total monthly kWh usage information for each customer in a timely manner to enable the Servicer (or such successor) to fulfill its obligations, because such information is the basis for assessing the required level of such remittances; and (iii) the Servicer (or any successor Servicer) is entitled, seven days after a default by the EPS in remitting any charges payable to it, including amounts related to the TBC and the MTC-Tax, to assume responsibility for billing all charges for services provided by it, including the TBC and the MTC-Tax, or to transfer such billing responsibility to a qualifying third party. In addition, if and so long as the billing EPS does not maintain at least a "Baa2" and "BBB" (or the equivalent) long-term unsecured credit rating from Moody's Investors Service and Standard & Poor's, respectively, such EPS would be required to maintain with the Servicer (or any successor Servicer) a cash deposit or comparable security equal to two months' maximum estimated collections of all charges payable to the Servicer (or such successor), including amounts related ACE Bondable Stranded Costs Rate Order 17 BPU Docket No. EF01060394 to the TBC and the MTC-Tax, as must be agreed upon by the Servicer (or such successor) and the EPS. In the event of a default in the remittance of any such amounts by an EPS, any shortfall in TBC Collections or MTC-Tax collections by an EPS not recovered from a withdrawal from such cash deposit or security would be included in the TBC True-Up and the MTC-Tax True-Up as described in Appendix C hereto. p. Servicing The Company states that it will enter into the Servicing Agreement with the SPE pursuant to which it will perform servicing functions on behalf of the SPE with respect to the Bondable Transition Property. Details regarding the Servicing Agreement, including servicing compensation, will be substantially as described in the SEC Filing. The Company states that under the Servicing Agreement, the Servicer is to receive an annual servicing fee equal to 0.10% of the aggregate initial principal amount of the Transition Bonds (the "Servicing Fee"). The Company also requests that the Board approve a higher annual Servicing Fee of any successor Servicer of up to 1.25% of the initial principal balance of all transition bonds that the SPE has issued, including the Transition Bonds. q. Tax Recoveries - Accounting and Related Issues Pursuant to the Restructuring Order, the Company has been directed to recover the federal income taxes and state corporation business taxes associated with the collection of the TBC and the MTC-Tax through the ongoing collection of the MTC-Tax, until the SPE has received full payment of principal of and interest on the Transition Bonds. The Restructuring Order authorizes the MTC-Tax to be collected over essentially the same period as the TBC. The Restructuring Order also directs that the MTC-Tax be subject to mandatory periodic adjustment (at the same time and in the same manner as the TBC) to reconcile the MTC-Tax collections with the income tax required to be assessed on the taxable revenue from the TBC and the MTC-Tax. The Company will maintain separate accounting for the MTC-Tax collections and the Bondable Transition Property. As provided in Section 23(a)(4) of the Act, the Company's retention of the MTC-Tax until remittance to the appropriate taxing authority will in no way affect or impair treatment of the transfer of the Bondable Transition Property to the SPE as a true sale and absolute transfer for bankruptcy purposes, or otherwise affect the legal rights and attributes of the Bondable Transition Property under the Act. 3. CUSTOMER BENEFITS The Restructuring Order required that rate reductions pursuant to the Act were not to be contingent upon the Company securitizing its stranded costs. Therefore, the rate reductions mandated in the Restructuring Order already anticipate and incorporate net present value savings and rate reductions resulting from the anticipated issuance of the Transition Bonds. The Company represents that, as proposed, the Transition Bond Transaction will result in net present value savings over the term of the Transition Bonds (currently estimated to be $114 million based on projected interest rates at the time of the public hearing and illustrated on Exhibit A hereto), and lower rates than would have been achieved were the recoverable stranded costs to be recovered without issuance of the Transition Bonds. The Company states that the actual net present value savings resulting from the Transition Bond Transaction will depend upon the actual amount of Transition Bonds issued, market conditions at the time of the pricing of the Transition Bonds (and any hedging arrangement) and the actual amount of bondable stranded costs whose recovery is authorized in this Financing Order. The structure, pricing, terms and conditions of the Transition Bonds (and any hedging arrangement) will be ACE Bondable Stranded Costs Rate Order 18 BPU Docket No. EF01060394 subject to approval by the Designee pursuant to the delegation of authority in this Financing Order. In its Issuance Advice Letter to be filed with the Board not later than five business days after the issuance and sale of the Transition Bonds, the Company will present a calculation of the expected net present value savings resulting from the actual terms of the Transition Bonds, using the methodology described in Appendix C hereto and based upon the findings in the Restructuring Order and the rate reductions prescribed in the Act. 4. USE OF PROCEEDS The Company states that the SPE will remit the proceeds from the sale of the Transition Bonds, net of underwriting discount, to the Company in consideration of the Company's transfer of its Bondable Transition Property to the SPE. In accordance with Section 14 of the Act, the Company will use such proceeds to reduce its otherwise recovery-eligible bondable stranded costs through the retirement of its debt or equity, or both (including transactions completed prior to the issuance of the Transition Bonds), and to buy out, buy down or otherwise restructure its existing NUG Contracts (or to repay interim financing in respect of same). 5. FINDINGS WITH RESPECT TO PETITION Based on the record of proceedings in this matter and those related to the Restructuring Order, the Petition and the provisions of the Act and the Restructuring Order, the Board HEREBY FINDS: Recovery of Costs (1) Consistent with the Board's decision in BPU Docket Nos. EO97070455, EO97070456 and EO97070457 (which approval constitutes the "Restructuring Order"), EM99119870 (the Nuclear Asset Sale), EE99090685 (the Pedricktown Buyout), and EM00060388 (the Ref-Fuel Buydown), the Company is authorized to recover, through securitization, its bondable stranded costs as described in paragraph 2 below. (2) The Company's stranded costs to be securitized in connection with the Nuclear Asset Sale, the Pedricktown Buyout, and the Ref-Fuel Buydown, are approximately $420.833 million plus an additional amount of up to $19.167 million for transaction and capital reduction costs and are recoverable through the TBC. In addition, the Restructuring Order permits the recovery of the federal income and state corporation business taxes related to securitization through an MTC-Tax Component with a term identical to the term of the Transition Bonds. (3) The Company's Bondable Stranded Costs include: (1) the Capital Reduction Costs, (2) the Upfront Transaction Costs and (3) the Ongoing Transition Bond Costs. Mitigation (4) In accordance with Section 14(b)(1) of the Act and the Restructuring Order, that the Company has taken reasonable measures to date, and has the appropriate incentives or plans in place to take reasonable measures, to mitigate the total amount of its stranded costs. As required by the Act, the Company shall continue to pursue all reasonable ACE Bondable Stranded Costs Rate Order 19 BPU Docket No. EF01060394 mitigation opportunities to mitigate the total amount of its stranded and deferred costs. Necessity of Securitization (5) In accordance with Section 14(b)(2) of the Act and the Restructuring Order, that the Company would not have been able to achieve the level of rate reduction deemed by the Board to be necessary and appropriate pursuant to the provisions of Sections 4 and 13 of the Act absent the issuance of the Transition Bonds. Tangible Benefits (6) In accordance with Section 14(b)(3) and (b)(4) of the Act, based on current estimates of interest rates, the issuance of such Transition Bonds will provide tangible and quantifiable benefits to customers, including lower rates than would have been achieved absent the issuance of Transition Bonds, and net present value savings over the term of the Transition Bonds (currently estimated at $114 million), even after truing up the MTC, MTC-Tax and TBC to reflect the terms of the actual Transition Bond Transaction. The Company has advised the BPU Staff that it will exercise its best effort to achieve the lowest TBC consistent with market conditions, the terms of this Order and the Designee Guidelines. (7) The methodology used to calculate expected net present value savings, as described in Appendix C and applied in Exhibit A hereto, is reasonable. (8) Exhibit B hereto contains forecasted principal and interest payments each year in the Transition Bond Transaction based upon the forecasted level of the Transition Bonds to be issued. The ultimate Expected Amortization Schedule may be altered as a result of market conditions or rating agency requirements, subject to the approval of the Designee. The methodology used to calculate the initial TBC, the TBC True-Up, the MTC-Tax and the MTC-Tax True-Up as described in Exhibit C of the Petition are reasonable and adherence thereto will provide assurance that customers will pay the lowest TBC consistent with market conditions and the terms of this Financing Order, in compliance with Section 14(b)(4) of the Act. The standard for the Board to use in making TBC True-Ups final is the absence of a manifest error (i.e., an arithmetic error evident on the face of the filing) in the application of the TBC True-Up methodology, which standard the Board finds consistent with Section 15(b) of the Act and the achievement of the lowest TBC consistent with market conditions at the time of pricing and the terms of this Financing Order. The estimate of the initial TBC, determined in accordance with Appendix C attached hereto, is reasonable. The request of the Company that it be authorized to make non-routine adjustments to the TBC and the MTC-Tax as described in Section 2(g) hereof is reasonable. Structuring and Pricing; Hedging Arrangements (9) The procedures established in this Financing Order relating to the final approval of the structuring and pricing of the Transition Bonds (including any hedging arrangements priced at the time of the pricing of the ACE Bondable Stranded Costs Rate Order 20 BPU Docket No. EF01060394 Transition Bonds) assure that, in accordance with Section 14(b)(4) of the Act, the Company's customers pay the lowest TBC consistent with market conditions and the terms of this Financing Order. As authorized herein by the Board and in full satisfaction of the requirements of Sections 14(b)(4) and 15(a)(3) of the Act, the structuring and pricing of the Transition Bonds (including any such hedging arrangement) will be conclusively deemed to satisfy the requirements of Section 14(b)(4), and the terms and conditions of the Transition Bond Transaction shall be conclusively approved, if so certified by the Designee upon the pricing of the Transition Bonds and any such hedging arrangement. (10) The methodology for the determination of the TBC proposed by the Company in Appendix C hereto is reasonable. The assumptions the Company made in such Appendix C are reasonable. The Company's proposed methodologies for the mathematical calculation of the TBC are reasonable. (11) The formation of the SPE by the Company, the capitalization of the SPE by the Company, the transfer by the Company to the SPE of its Bondable Transition Property, the providing of overcollateralization as described herein and as approved in the Designee Certification, the hedging arrangements and the entering into of a servicing agreement, an administration agreement, a sale agreement and other agreements and transactions by the Company and the SPE, all substantially as described in the Petition and the SEC Filing and the hedging arrangements as described herein and in Appendix F hereto, are reasonable and necessary. (12) The lien of the Transition Bond Trustee on the Bondable Transition Property shall: (A) attach automatically to such Bondable Transition Property from the time of the issuance of the Transition Bonds; (B) be continuously perfected through a filing made pursuant to the Uniform Commercial Code with the New Jersey Secretary of State; (C) be enforceable against the Company and the SPE and all third parties, including judicial lien creditors; (D) from and after the filing described in clause (B) above, constitute a continuously perfected security interest in, and lien on, all then existing or subsequent revenues and proceeds arising with respect to the associated Bondable Transition Property, whether or not the electric power and energy included in the calculation of such revenues and proceeds have been provided; and (E) rank prior to any other lien, including any judicial lien, which subsequently attaches to the Bondable Transition Property or any other rights created by this Financing Order or any revenues or proceeds of the foregoing. (13) The methodology for the remittance of payments arising from the TBC as described in the Petition will satisfy the requirements of Section 14 of the Act and is a reasonable means of undertaking the remittance of these amounts. (14) The Servicing Fee to be paid to the Company in its role as Servicer as described herein is reasonable. The Board finds the higher annual servicing fee of any successor Servicer of up to 1.25% of the initial principal balance of all transition bonds that the SPE has issued, including ACE Bondable Stranded Costs Rate Order 21 BPU Docket No. EF01060394 the Transition Bonds, is reasonable. The conditions to the resignation or replacement of the Company as Servicer as described in the SEC Filing are reasonable; however, no third party servicer shall be approved or required to replace the Company in any of its servicing functions in whole or in part if such approval or requirement will cause the then current rating of the Transition Bonds to be withdrawn or downgraded. (15) The TBC and MTC-Tax billing, collection and remittance procedures imposed upon any EPS as set forth in this Financing Order and the Petition are reasonable. (16) Capital Reduction Costs, which do not include interest or preferred dividends accrued prior to the date of the issuance of the Transition Bonds, and the Upfront Transaction Costs, not to exceed $19.167 million in the aggregate, are reasonable. (17) The recovery of Ongoing Transition Bond Costs, as previously described herein, is reasonable and consistent with the Act. (18) The (a) scheduled amortization upon issuance for the Transition Bonds (1) not exceeding 15 years from the date of issuance in the case of Transition Bonds the proceeds of which will be used to reduce stranded costs related to utility-owned generation and (2) not exceeding the remaining term of a long-term power purchase agreement with a nonutility generator in the case of Transition Bonds the proceeds of which will be used to buy down or buy out such power purchase agreement and (b) the stated maturity of the Transition Bonds being up to two additional years (or, in the case of the Transition Bonds referred to in clause (a)(2) above, three years) following the scheduled amortization are reasonable and permitted under the Act, and the collection of the TBC (and the remittance thereof to the SPE) until payment in full of the Transition Bonds is reasonable and permitted under the Act. (19) The issuance of series and classes of Transition Bonds by the SPE in an aggregate principal amount not to exceed $440 million is reasonable and consistent with the Act and prior Board Orders. The Financial Advisor has advised the Board that in this case, in its opinion, the negotiated sale of the Transition Bonds should be expected to provide a lower cost of funds than a competitive sale. Therefore, the negotiation of the sale of the Transition Bonds is reasonable and serves the public interest. (20) The TBC True-Up to obtain adjustments to the TBC and the MTC-Tax True-Up to obtain adjustments to the MTC-Tax described hereinabove and set forth in Appendix C hereof are reasonable. Use of Proceeds (21) The Company's proposed application of the proceeds of the Transition Bonds as described herein and in the Petition is reasonable and consistent with the Act. Regulatory Compliance (22) In light of the specific provisions of the Act governing the Transition Bond Transaction, the Company's Petition is found to comply with N.J.A.C. 14:1-5.6 and -5.9, to the extent either might be deemed applicable. ACE Bondable Stranded Costs Rate Order 22 BPU Docket No. EF01060394 Periodic Adjustment of the MTC-Tax (23) The MTC-Tax should be subject to mandatory periodic adjustment at the same time and in substantially the same manner as adjustments to the TBC; provided, however, the Company makes reasonable efforts to utilize any and all deductions to taxable income for which it may be eligible with respect to the securitization transaction, now or in the future, whether or not such deductions are contained in the methodology presented by the Company in its Petition, so that the MTC-Tax Component does not result in the over-recovery or under-recovery of taxes to the Company. 6. ORDERS Based on the foregoing, the record of proceedings on the Petition and the provisions of the Act, the Restructuring Order, and other related Orders the Board HEREBY ORDERS: (1) The Petition for this Financing Order pursuant to Section 14 of the Act is approved subject to the terms and conditions stated herein. (2) The Board hereby authorizes recovery of the following bondable stranded costs of the Company consisting of: (1) the Capital Reduction Costs, the Upfront Transaction Costs and the Bondable Stranded Costs specified in Appendix I and (2) the Ongoing Transition Bond Costs. The Board hereby also approves the methodology for the calculation and adjustment of the TBC and the MTC-Tax in accordance with the Board's Findings herein. Bondable Transition Property and TBC (3) The issuance of Transition Bonds by the SPE up to a maximum of $440 million, and the transfer by the Company to the SPE of the bondable transition property created by the Act and this Financing Order are authorized. (4) The TBC will be assessed against all existing and future customers of the Company or any Successor Utility, subject to Section 28 of the Act, and will apply equally to each such customer of the Company, regardless of class, based on the amount of electricity delivered to the customer (whether purchased from the Company or an EPS) through the transmission and distribution system of the Company or any Successor Utility. Pursuant to Section 28 of the Act, the TBC shall be imposed on the power produced by on-site generators under the circumstances specified in Section 28 of the Act. (5) The TBC will be set at a level sufficient to recover the Ongoing Transition Bond Costs. The TBC and the MTC-Tax will remain in effect until the SPE, as owner of the Bondable Transition Property, has received TBC collections sufficient to recover the Ongoing Transition Bond Costs. (6) Pursuant to the Act, upon transfer by the Company of its interest in Bondable Transition Property, receipt of consideration therefor by the Company and acquisition of such Bondable Transition Property by an assignee, there will be created and established for the benefit of the assignee in accordance herewith Bondable Transition Property consisting ACE Bondable Stranded Costs Rate Order 23 BPU Docket No. EF01060394 of: (i) the irrevocable right to charge, collect and receive, and be paid from collections of, the TBC in the amount necessary to recover the Ongoing Transition Bond Costs, (ii) all rights of the Company under this Financing Order with respect to the TBC including without limitation all rights to obtain TBC True-Ups pursuant to Section 15(b) of the Act, and (iii) all revenues, collections, payments, money and proceeds arising under, or with respect to, all of the foregoing. (7) Pursuant to Section 16 of the Act, neither the Board nor any other governmental entity will have the authority, directly or indirectly, legally or equitably, to rescind, alter, repeal, modify or amend this Financing Order, to revalue, re-evaluate or revise the amount of Bondable Stranded Costs, to determine that the TBC or the MTC-Tax or the revenues required to recover Bondable Stranded Costs are unjust or unreasonable, or in any way to reduce or impair the value of the Bondable Transition Property, nor shall the amount of revenues arising with respect thereto be subject to reduction, impairment, postponement or termination, directly or indirectly, provided, however, that nothing in this Financing Order will preclude the TBC True-Up or the MTC-Tax True-Up in accordance with the provisions hereof and of Section 15(b) of the Act. (8) Pursuant to Section 16 of the Act, and notwithstanding any other provision of law, this Financing Order and the TBC authorized herein will become irrevocable upon the issuance of this Financing Order and its becoming effective pursuant to Section 19 of the Act. Pursuant to Section 16 of the Act, this Financing Order, the TBC and the Bondable Transition Property will constitute vested, presently existing property rights upon the transfer of the Company's interest in the Bondable Transition Property by the Company to an assignee and receipt by the Company of consideration for such interest in the Bondable Transition Property, and following such transfer and receipt of consideration, such property right in the Bondable Transition Property shall be vested ab initio in such assignee. (9) Pursuant to Section 15(c) of the Act, until the Ongoing Transition Bond Costs have been fully recovered, this Financing Order and the authority to meter, charge, collect and receive the TBC and the MTC-Tax will remain in effect and the Company shall be obligated to provide electricity to its customers and will have the right to meter, charge, collect and receive the TBC and the MTC-Tax, which rights and obligations may be assignable solely within the discretion of the Company. Sale, Pledge and Assignment Of Transition Property (10) In accordance with the Act and as described in the Petition, the Company is authorized to sell, pledge or assign any or all of its interest in the Bondable Transition Property to the SPE. The SPE is authorized to acquire the Bondable Transition Property and is approved and designated as a "financing entity" (as defined in Section 3 of the Act) for such purpose, and for the purpose of issuing Transition Bonds and pledging the Bondable Transition Property to the payment of the Transition Bonds. The transfer by the Company of the Bondable Transition Property to the SPE will be treated as a true sale and absolute transfer to the SPE, even ACE Bondable Stranded Costs Rate Order 24 BPU Docket No. EF01060394 though such transaction may be treated as a financing, and not a sale, for federal and state tax purposes, for financial accounting purposes or for other purposes. Neither this Financing Order nor the transfer of the Bondable Transition Property nor the interest of the SPE in the Bondable Transition Property shall be defeated or otherwise affected by the commingling of TBC collections with other funds of the Company, and the portion of such commingled funds allocable to TBC collections may be determined by such methods of estimation as are set forth in the Servicing Agreement. (11) The SPE will pay the purchase price of the Bondable Transition Property equal to the net proceeds from the issuance of the Transition Bonds to the Company, to be applied substantially as described in the Petition and as set forth in ordering paragraph 36 of this Financing Order. (12) When the Company transfers its interest in the Bondable Transition Property to the SPE as described in this Financing Order, the Bondable Transition Property will arise and constitute a valid, presently existing property right, and will be vested in the SPE as an original property right and not by assignment from any other entity. The SPE will have all of the statutory rights inherent in the Bondable Transition Property, including, without limitation, the right to exercise, through the Company or any Successor Utility, any and all rights and remedies, including the right to direct the Company or any Successor Utility to shut-off electric power to a particular customer to the extent permitted by Board policies and procedures and any applicable laws then in effect, and to assess and collect any amounts payable by any customer in respect of such Bondable Transition Property, notwithstanding any objection or direction to the contrary by the Servicer. (13) When the Company transfers its interest in the Bondable Transition Property to the SPE, neither the Company nor any successor Servicer will be entitled to recover the TBC other than for the benefit of the holders of Transition Bonds in accordance with the Company's duties as Servicer of such Bondable Transition Property as authorized in this Financing Order. Transition Bonds (14) The scheduled amortization upon issuance of the Transition Bonds will be (1) up to 15 years in the case of Transition Bonds the proceeds of which will be used to reduce stranded costs related to utility-owned generation and (2) up to the remaining term of a long-term power purchase agreement with a nonutility generator in the case of Transition Bonds the proceeds of which will be used to buy down or buy out such power purchase agreement, and the stated maturity will be up to two additional years (or, in the case of the Transition Bonds referred to in clause (2) above, three additional years). The Transition Bonds may be issued in series and classes with different terms. Exhibit B hereto contains forecasted principal and interest payments each year in the Transition Bond Transaction based upon the forecasted level of the Transition Bonds to be issued. The ultimate Expected Amortization Schedule may be altered as a result of market conditions or rating agency requirements, subject to Designee approval. The associated MTC-Tax collections may ACE Bondable Stranded Costs Rate Order 25 BPU Docket No. EF01060394 be adjusted from time to time to reflect the changing principal and interest components of the Transition Bond debt service. One or more classes of Transition Bonds may be issued as variable rate instruments, the interest on which will be fixed or hedged in accordance with the terms of a hedging arrangement consistent with this Financing Order. (15) The amount of Transition Bonds to be issued (not to exceed $440 million) is approved as described herein and as detailed in Appendix I. The Company should be afforded substantial flexibility in establishing the provisions of the Transition Bonds, and the final structure, pricing, terms and conditions of the Transition Bonds (including any hedging arrangement described in Section 2(e) hereof) will, to the extent consistent with the provisions of this Financing Order, be determined by the Company and approved by the Board or its Designee pursuant to his delegation of authority from the Board, pursuant to Sections 14(b)(4) and 15(a)(3) of the Act, at the time Transition Bonds are priced. The Designee may rely conclusively on the finding of the tangible and quantifiable benefits of securitization in paragraph 6 of Section 5 hereof, as required by Section 14(b)(3) of the Act, upon the advice of the Financial Advisor provided in the form of Appendix H hereto and upon information provided to the Designee by the Company to support any Designee Certification. Any Designee Certification shall be substantially in the form of Appendix A hereto, shall constitute a part of this Financing Order, shall constitute a full and complete record of the determinations and approvals made therein and full satisfaction of the requirements of Sections 14(b)(4) and 15(a)(3) of the Act, and shall be final and uncontestable as of its date. (16) The issuance and sale of the Transition Bonds through negotiation with underwriters is approved. Recovery of Bondable Stranded Costs (17) In accordance with Section 20 of the Act, Transition Bonds will be recourse only to the credit and assets of the SPE. Investment income earned on the trust accounts held by the Transition Bond Trustee may be used to satisfy current scheduled interest and principal payments on the Transition Bonds and related expenses and to replenish the SPE's equity and the Required Overcollateralization Schedule. Investment income in the Capital Subaccount not used currently for this purpose will be released to the SPE. Any earnings in excess of amounts required to be held in such trust accounts (other than the Capital Subaccount) will reduce the TBC through the TBC True-Up. (18) The Capital Reduction Costs and Upfront Transaction Costs up to $19.167 million in the aggregate are authorized to be recovered through the issuance of Transition Bonds. (19) The Ongoing Transition Bond Costs as described herein are authorized to be recovered through the TBC. Reports ACE Bondable Stranded Costs Rate Order 26 BPU Docket No. EF01060394 (20) The Designee will make his/her determinations and approvals of the pricing of the Transition Bonds upon receipt from the Company of the Pricing Advice Certificate(s) substantially in the form of Appendix D hereto. Within two business days after the pricing of the Transition Bonds, the Designee shall file with the Secretary of the Board a Designee Certification substantially in the form of Appendix A hereto. As provided in ordering paragraph 15 of this Financing Order, any Designee Certification will be final and uncontestable as of its date and will represent final approval, pursuant to Sections 14(b)(4) and 15(a)(3) of the Act, of the structure, pricing, terms and conditions of the Transition Bonds. No delay or error in such filing will affect the validity of this Financing Order, the Bondable Transition Property or the Transition Bonds. (21) Pursuant to Section 15(a)(3) of the Act, not later than five business days after the issuance and sale of the Transition Bonds, the Company will notify the Secretary of the Board, in an Issuance Advice Letter substantially in the form of Appendix B hereto, of the initial TBC and MTC-Tax (which are hereby approved), the Expected Amortization Schedule approved in the Designee Certification and related matters. The Issuance Advice Letter will be automatically effective upon filing with the Secretary of the Board. No delay or error in such filing will affect the validity of this Financing Order, the Bondable Transition Property or the Transition Bonds. Servicing of Transition Bonds (22) The Company, as Servicer, is authorized to enter into a servicing agreement, substantially as described in the SEC Filing, with the SPE pursuant to which the Company agrees to continue to operate its distribution system to provide service to its customers, to impose, charge, collect and receive the TBC with respect to Bondable Transition Property for the benefit and account of such SPE or its assigns, and to account for and remit these amounts to or for the account of such SPE or its assigns in the manner described in the Petition. (23) Each customer's monthly bill will note that a portion of the charges on such bill represents amounts being collected on behalf of the SPE as owner of the Bondable Transition Property. (24) Payments from customers will be applied first to sales taxes (which the Company will collect as trustee for the State and not for its own account or that of the SPE, and which are not "charges" for purposes of the following allocations), then to charges in arrears, if any, and then to current charges. With respect to each billing period, partial payments of charges will be allocated pro rata: (i) to the TBC, (ii) to the MTC-Tax and (iii) to the Company's other charges based on the proportions that the TBC, the MTC-Tax and the Company's other charges bear to the total charges billed. If the Transition Bonds are issued in more than one series, partial payments of the TBC will be allocated to each respective series so issued, pro rata, based on the respective amounts owed under each series. ACE Bondable Stranded Costs Rate Order 27 BPU Docket No. EF01060394 (25) Pursuant to Section 22 of the Act, in the event of a default by a Servicer under any servicing agreement with respect to the Transition Bonds, upon application of the SPE or the Transition Bond Trustee, the Board will designate a successor Servicer for the Bondable Transition Property, who will promptly assume billing and collection responsibilities for the TBC and the MTC-Tax. The Board will act on an expedited basis to designate within 30 days such successor Servicer. Such successor Servicer will assume all rights and obligations of the initial Servicer. (26) The Board will permit a successor Servicer to replace the Company as Servicer in any of its servicing functions with respect to the TBC and the Bondable Transition Property authorized by this Financing Order only upon determining that approving or requiring such successor Servicer will not cause then current credit ratings on Transition Bonds to be withdrawn or downgraded. (27) Any EPS that proposes to collect and remit the TBC and associated MTC-Tax must (i) meet the creditworthiness criteria to be established by the Board, and at a minimum, the criteria set forth and approved below in this Financing Order; and (ii) comply with the billing, collection and remittance procedures and information access requirements set forth below. (28) The Board will authorize a EPS to bill and collect the TBC and associated MTC-Tax, for remittance to the Servicer, only with respect to power sold by it and only if: (i) such EPS agrees to remit the full amount of all charges it bills to customers for services provided by the Company or any Successor Utility, together with amounts related to the TBC and the MTC-Tax, regardless of whether payments are received from such customers, within 15 days of the Company's (or any successor Servicer's) bill for such charges; (ii) such EPS agrees to provide the Servicer with total monthly kWh usage information for each customer in a timely manner to enable the Servicer to fulfill its obligations, because such information is the basis for assessing the required level of such remittances; and (iii) the Servicer is entitled, seven days after a default by the EPS in remitting any charges payable to the Company, including amounts related to the TBC and the MTC-Tax, to assume responsibility for billing and collecting all charges for services provided by the Company or any Servicer, including the TBC and the MTC-Tax, or to transfer responsibility to a qualifying third party. In addition, if and so long as such EPS does not maintain at least a "Baa2" and "BBB" (or the equivalent) long-term unsecured credit rating from Moody's Investors Service and Standard & Poor's Rating Services, respectively, such EPS will maintain, with the Servicer or as directed by the Servicer, a cash deposit or comparable security equal to two months' maximum estimated collections of all charges payable to the Company, including the amounts related to the TBC and the MTC-Tax, as must be agreed upon by the Company (or any Successor Servicer) and the EPS. In the event of a default in the remittance of any such amounts by an EPS, any shortfall in TBC collections or MTC-Tax collections by an EPS not recovered from such cash deposits or comparable security will be included in the TBC True-Up and the MTC-Tax True-Up as described in Appendix C hereto. ACE Bondable Stranded Costs Rate Order 28 BPU Docket No. EF01060394 (29) Customers will continue to be responsible for payment to the Servicer of the TBC and the MTC-Tax billed by an EPS, to the extent such customer has not paid the TBC or MTC-Tax billed to it. In the event of a failure of any customer to pay the TBC or MTC-Tax, the Company is authorized to shut-off power, or a successor Servicer is authorized to direct the Successor Utility to shut-off power, to such customer in accordance with Board policies and procedures and any applicable laws then in effect. (30) The Servicer will be entitled to an annual servicing fee equal to 0.10% of the aggregate initial principal amount of the Transition Bonds (the "Servicing Fee"). The Board approves the Servicing Fee as described herein. The Board also approves a higher annual Servicing Fee of any successor Servicer of up to 1.25% of the initial principal balance of all transition bonds that the SPE has issued, including the Transition Bonds. The TBC: Establishment and Adjustment (31) The methodology used to calculate the TBC, the TBC True-Up and the MTC-Tax True-Up, as described in Appendix C hereof, is approved. (32) Pursuant to Section 15(a)(3) of the Act, the initial TBC and MTC-Tax will be filed with the Secretary of the Board in the Issuance Advice Letter and will be effective upon such filing, to be adjusted up or down, as necessary, by the TBC True-Up and MTC-Tax True-Up. (33) In accordance with Section 15(b) of the Act, the Servicer, on behalf of the Company and the pledgees or transferees of the Bondable Transition Property, is authorized to file with the Secretary of the Board periodic TBC True-Ups, at least annually but not more frequently than quarterly (or monthly in the last two years before the scheduled maturity of the Transition Bonds and continuing until all Ongoing Transition Bond Costs and other bondable stranded costs determined to be recoverable in this Financing Order are paid in full, even past legal maturity), to the extent necessary to ensure the timely receipt of revenues equal in amount to required payments of Ongoing Transition Bonds Costs. Each such adjustment shall be formula-based, shall be in the amount required to ensure the timely receipt of revenues sufficient to provide for the full and timely recovery of Bondable Stranded Costs, including, without limitation, the timely payment of principal of, and interest and acquisition or redemption premium on, the Transition Bonds issued to finance such Bondable Stranded Costs. The periodic adjustments will be filed in substantially the form attached to this Financing Order as Appendix E. (34) The Company will propose each TBC True-Up in a filing with the Secretary of the Board at least 30 days in advance of the date upon which it is requested to be effective. The proposed adjustment will become effective on an interim basis on the date on which it is requested to be effective and, in the absence of a Board Order to the contrary finding manifest error (i.e., an arithmetic error evident on the face of the filing), will become final and nonappealable 60 days after the filing. (35) If necessary to ensure the timely recovery of the Ongoing Transition Bond Costs and the MTC-Tax, the Board will approve adjustments to the ACE Bondable Stranded Costs Rate Order 29 BPU Docket No. EF01060394 methodology as proposed by the Company in "non-routine" adjustments to the TBC and the MTC-Tax. Use Of Transition Bond Proceeds (36) The Company will use the proceeds of the Transition Bonds, net of transaction costs and any costs of credit enhancement for the Transition Bonds paid from the proceeds, to reduce its otherwise recovery-eligible Bondable Stranded Costs through the retirement of the Company's debt or equity, or both (including transactions completed prior to the date of this Financing Order), or to buy out or buy down or otherwise restructure power purchase agreements (or to repay interim financing in respect of same). The Company is authorized to apply the proceeds to retire debt, equity or both, and to buyout, buydown or restructure power purchase agreements, substantially as set forth in the Petition, and to pay any accrued interest and accrued preferred dividends from the date of issuance of the Transition Bonds to the date of retirement, and to pay any premium, unamortized discounts and other fees, costs and charges associated with such retirement. No failure to apply the proceeds in accordance with the Restructuring Order or this Financing Order shall affect the sale of the Bondable Transition Property or the right to collect the TBC. Approval of Servicing Agreement, Administration Agreement, Sale Agreement, Hedging Arrangement, if any, and Other Agreements or Transactions (37) The Company's entering into a servicing agreement, an administration agreement, a sale agreement, any hedging arrangement as described in Section 2(e) and any other Transition Bond Transaction documents with the SPE or any other party consistent with the terms of this Financing Order and/or substantially as described in the SEC Filing and such other related transaction documents and other dealings between the Company and the SPE or any other party as contemplated therein and herein are authorized. Accounting for Certain Benefits (38) Pursuant to Section 15(d) of the Act, any amount of the TBC collections held by the Transition Bond Trustee in excess of those amounts necessary to fully recover the Ongoing Transition Bond Costs will be applied as a credit to reduce charges to customers of the Company, as described in the Petition, except that if more than one series of Transition Bonds is sold, all such requirements with respect to such Transition Bonds will be aggregated for purposes of determining whether or not the total TBC collected exceeds the total of such requirements for all such Transition Bonds. (39) Upon retirement of all outstanding Transition Bonds and payment of any related Ongoing Transition Bond Costs and other Bondable Stranded Costs, any remaining amounts held by the Transition Bond Trustee will be released to the SPE. The Company's equity in the SPE may be distributed to the Company. The Company will credit an amount equal to any remaining TBC (but not investment earnings on funds in the Capital ACE Bondable Stranded Costs Rate Order 30 BPU Docket No. EF01060394 Subaccount), less any amount of any unpaid MTC-Tax charges and any amount that was withdrawn and not replenished to the SPE's equity, to its electric customers against its distribution charges. Any overcollected MTC-Tax charges shall also be credited to the Company's electric customers against the Company's distribution charges. Records (40) Pursuant to Section 21 of the Act, the Company or another Servicer on its behalf will maintain or cause to be maintained records of TBC and associated MTC-Tax collections which have been assessed and collected by the Company, as Servicer, under this Financing Order and the Restructuring Order, respectively. Such records, and any records of a financing entity, will be made available by the Company for inspection and examination within a reasonable time upon demand therefor by the Board or the related financing entity. MTC-Tax Establishment and Adjustment (41) Pursuant to the Restructuring Order and this Financing Order, the Company is authorized to file with the Board proposals for mandatory periodic MTC-Tax True-Ups authorized by the Board in the Restructuring Order. The methodology used to calculate the MTC-Tax and the MTC-Tax True-Up, as described in Appendix C hereto, is approved. Pursuant to Section 15 of the Act, the initial MTC-Tax will be filed with the Secretary of the Board in the Issuance Advice Letter and will be effective upon such filing, to be adjusted up or down, as necessary, by the MTC-Tax True-Up. The MTC-Tax True-Up shall be made substantially in the same manner and at the same time as the TBC True-Up for the TBC in order to insure receipt of revenues sufficient to recover the MTC-Tax Component. Unless the Company or the Board proposes an adjustment to the methodology used to calculate the MTC-Tax, any MTC-Tax True-Up will become effective 30 days after filing absent manifest error and, in the absence of a Board Order to the contrary, will become final and nonappealable 60 days after filing. The periodic adjustments will be filed in substantially the form attached to this Financing Order as Appendix E hereto. (42) It is the express intention of the Board that the Company shall not overrecover or underrecover the MTC-Tax Component. Accordingly, the Company shall adjust the methodology used to calculate the MTC-Tax to reflect changes in federal income tax or state corporate business tax rates and any other changes to the application or interpretation of such laws, provided such changes are either "generic" (affect all taxpayers such as a prospective change in the tax rate) or are securitization-related. Any proposed adjustment to the MTC-Tax methodology by the Company shall be submitted to the Secretary of the Board no less than 60 days prior to its proposed effective date and shall become effective on the proposed effective date absent a Board Order to the contrary; provided, however, that the existing methodology shall remain effective in the interim. ACE Bondable Stranded Costs Rate Order 31 BPU Docket No. EF01060394 (43) As provided in Section 23(a)(4) of the Act, the Company's right to recover the MTC-Tax Component will in no way affect or impair the legal true sale and absolute transfer of the Bondable Transition Property to the SPE, or otherwise affect the legal rights and attributes of the Bondable Transition Property under the Act or under this Financing Order. Miscellaneous (44) Pursuant to Section 19 of the Act, this Financing Order will be effective only in accordance with the terms hereof and upon the written consent of the Company to all such terms. (45) Pursuant to Section 25 of the Act, the consideration or approval by the Board of a petition by the Company under the Act, including this Financing Order and the periodic adjustment provided in Section 15 of the Act, will be wholly separate from, and will not be utilized in the Board's consideration of, any other ratemaking or other proceeding involving the Company, except as otherwise provided in Sections 39 and 40 hereof and in the Act. (46) Any holder of a Transition Bond and the Transition Bond Trustee, for the benefit of such holders, are entitled to the benefit of the pledges and agreements of the State of New Jersey set forth in the Act and each of the Company, the SPE and the Transition Bond Trustee is authorized to include such pledges and agreements in any contract with the holders of the Transition Bonds, the Transition Bond Trustee or with any assignees. (47) The Board is aware of, and hereby expressly modifies, its prior Orders in Docket Nos. E097070455, E097070456 and E097070457 (Electric Restructuring) and EM99110870 (Nuclear Asset Sale) to permit the Company to securitize at this time those bondable stranded costs associated with the Company's nuclear generation assets as set forth hereinabove. The Board takes this step in reliance upon the certification of the Company regarding the fossil divestiture filed on September 10, 2002, and in order to permit customers to benefit from the current low interest rate environment. The Board reserves the right to address, and to adjust if necessary, any net positive benefits which might result from the fossil divestiture in a future divestiture, ratemaking or other proceeding. The Board finds, however, that the Bondable Transition Property described herein will not be altered by such future review. This Financing Order is issued subject to the following provisions, failure of compliance with which shall not affect the rights of the holders of the Transition Bonds: (1) The Company will furnish the Secretary of the Board with copies of all documents as executed and filed with other regulatory agencies relating to the Transition Bonds. (2) The Company will quarterly file with this Board, until all proceeds are disbursed, a statement setting forth details with respect to the disbursement of net proceeds of the Transition Bonds and their use in retiring debt or equity or both and in buying out, buying down or to otherwise restructuring existing Board-approved power purchase ACE Bondable Stranded Costs Rate Order 32 BPU Docket No. EF01060394 agreements. Interest on any undisbursed proceeds will be credited to the Deferred Balance (as that term is defined in the Board's Final Order, dated March 30, 2001) in the monthly reconciliation process. (3) This Financing Order will not be construed as a certification that the Transition Bonds will be secured by tangible or intangible assets of commensurate value or investment costs. (4) The Company is directed to file, as part of its next base rate filing, data showing the impact of the timing of customer payments of TBCs to the Company versus payments by the Company, as Servicer, to the Bond Trustee. This data will include a calculation of customer daily remittances, timing of remittances to the Bond Trustee and the short-term interest rate then applicable to determine the amount of "float" income earned by the Company in its capacity as Servicer. If the Board determines in its review of this filing that the Company retained interest income over and above its Servicing Fee, it may calculate such retained income, and impute interest thereon, in determining fair and reasonable rates going forward from the date of its review. Furthermore, in determining its cash working capital requirements in a base rate proceeding, the Company will exclude from its cash balances any TBCs collected, but not yet remitted to the Trustee. (5) Not more than nine months following issuance of the Transition Bonds, the Company will file with the Board a reconciliation statement for Upfront Transaction Costs and Capital Reduction Costs. If the sum of Upfront Transaction Costs and Capital Reduction Costs exceeds $19.167 million, or if the sum of Upfront Transaction Costs and Capital Reduction Costs is less than $19.167 million, any difference will be accounted for by an appropriate adjustment made to the Deferred Balance, as that term is used in the Restructuring Order. Prior to being expended for their intended purpose, earnings on proceeds from the Transition Bonds issued to pay transaction costs (Capital Reduction Costs and Upfront Transaction Costs) shall be credited to the beginning balance of deferred costs associated with the Company's Deferred Balance, and bear interest at the rate applicable to the Deferred Balance as set forth on page 83 of the Restructuring Order. The failure to file such statement or any delay in filing the same or making such credits shall not affect the validity of this Financing Order, the Bondable Transition Property or the Transition Bonds. ACE Bondable Stranded Costs Rate Order 33 BPU Docket No. EF01060394 (6) The Board hereby designates Commissioner Frederick F. Butler or, in his absence, any other Commissioner, as its Designee under this Financing Order. Such Designee shall act only in accordance with the Designee Guidelines approved herein and attached hereto as Appendix F hereto. DATED: BOARD OF PUBLIC UTILITIES BY: JEANNE M. FOX PRESIDENT FREDERICK F. BUTLER COMMISSIONER CAROL J. MURPHY COMMISSIONER CONNIE O. HUGHES COMMISSIONER ATTEST: KRISTI IZZO BOARD SECRETARY ACE Bondable Stranded Costs Rate Order 34 BPU Docket No. EF01060394 CONSENT OF THE COMPANY Pursuant to Section 19 of the Act, the Company hereby consents to all of the terms of this Financing Order, this ____ day of September, 2002. ATLANTIC CITY ELECTRIC COMPANY BY: ____________________________________ Joseph M. Rigby, President Atlantic City Electric Company ACE Bondable Stranded Costs Rate Order 35 BPU Docket No. EF01060394 INDEX 1. PROCEDURAL HISTORY..........................................................3 2. TRANSITION BOND TRANSACTION.................................................5 a. Proposed Structure.......................................................5 b. Recovery of Upfront Transaction Costs....................................8 c. Recovery of Capital Reduction Costs......................................9 d. Recovery of Ongoing Transition Bond Costs................................9 e. Approval of Final Terms and Conditions: Transition Bond Transaction......9 f. TBC.....................................................................11 g. Periodic Adjustments to the TBC and MTC-Tax.............................12 h. Remittance of TBC Collections...........................................13 i. Credit Enhancement......................................................15 j. Formation of SPE........................................................15 k. Bondable Transition Property............................................15 l. Sale of Bondable Transition Property to SPE.............................16 m. Issuance of Transition Bonds............................................16 n. Nonbypassable TBC and MTC-Tax...........................................16 o. Electric Power Suppliers................................................17 p. Servicing...............................................................18 q. Tax Recoveries - Accounting and Related Issues..........................18 3. RATEPAYER BENEFITS.........................................................18 4. USE OF PROCEEDS............................................................19 5. FINDINGS WITH RESPECT TO PETITION..........................................19 6. ORDERS.....................................................................23 EXHIBITS Exhibit A Savings Analysis (2 pages) Exhibit B Debt Design Chart (1 page), TBC Development Chart (1 page), MTC-Tax Charge Development & True-Up (1 page), and MTC-Tax Charge Development & True-Up Line Item Descriptions (1 page). APPENDICES Appendix A Form of Designee Certification (w/ Attachment 1 Expected Amortization Schedule) Appendix B Form of Issuance Advice Letter (w/ Attachment 1 Expected Amortization Schedule) Appendix C Revised Exhibit C-3 to the Petition (methodology for setting and adjusting the TBC and MTC-Tax) ACE Bondable Stranded Costs Rate Order 36 BPU Docket No. EF01060394 Appendix D Form of Pricing Advice Certificate Appendix E Form of True-Up Letter (w/ Table 1 Input Values) Appendix F Designee Guidelines Appendix G Form of Underwriter Certification Appendix H Form of Bear Stearns Letter Appendix I Series 2002-1 Amounts to be Securitized (1 page), Estimated Securitization Issuance & Capital Reduction Costs (1 page), Detailed Capital Reduction Costs (2 pages) ACE Bondable Stranded Costs Rate Order 37 BPU Docket No. EF01060394 Appendix A [BPU LETTERHEAD] DESIGNEE CERTIFICATION (to be filed with the Secretary of the Board within two business days after the pricing of the Transition Bonds) BOARD OF PUBLIC UTILITIES (THE "BOARD") OF THE STATE OF NEW JERSEY SUBJECT: Certification for Atlantic City Electric Transition Funding LLC Series 2002-1 Transition Bonds ("Transition Bonds") Pursuant to the Order of the Board dated September 18, 2002, Docket No. EF01060394 (the "Financing Order"). I, _____________________________ (the "Designee"), in accordance with Sections 14(b) and 15(a)(3) of the Electric Discount and Energy Competition Act, Chapter 23 of the Laws of 1999 ("Act"), for the purpose of (a) establishing that the structuring and pricing of the Transition Bonds assures that the customers of Atlantic City Electric Company (the "Company") pay the lowest Transition Bond Charges consistent with market conditions and the terms of the Financing Order and (b) approving at the time of pricing of the Transition Bonds, the terms and conditions of the Transition Bonds, servicing fees, if any, with respect to the collection of such Transition Bond Charges and the pledging, assignment and sale of Bondable Transition Property in connection with the initial Transition Bond Charge, HEREBY CERTIFY as follows: 1. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. The following are the terms of the Transition Bonds: Name of Transition Bonds: Series 2002-1 Transition Bonds SPE: Atlantic City Electric Transition Funding LLC Closing Date: _________ Amount Issued: $440,000,000 Interest Rates and Expected Amortization Schedule: See Attachment 1 Distributions to Investors (quarterly or semi-annually): ________ Weighted Average Coupon Rate: ________ Weighted Average Yield:_________ Capitalization Amount: ________ Overcollateralization Amount:_______ Overcollateralization Schedule: See Attachment 1 New Jersey Statutory Corporate Business Tax Rate: __________ New Jersey Sales Tax Rate:____________ Federal Statutory Corporate Income Tax Rate: __________ 2. All such items are within the parameters established in the Financing Order and in the Designee Guidelines in Appendix F to the Financing Order. Accordingly, (a) the structuring A-1 and pricing of the Transition Bonds assures that the Company's customers will pay the lowest Transition Bond Charges consistent with market conditions and the terms of the Financing Order and (b) the terms and conditions of the Transition Bonds and the schedule of payments of principal and interest on the Transition Bonds and overcollateralization requirements are approved. THIS CERTIFICATION, in accordance with Sections 14(b)(4) and 15(a)(3) of the Act and the Financing Order, is final and uncontestable as of its date, which is the pricing date of the Transition Bonds. DATED: ----------------------------------------- Designee A-2 ATTACHMENT 1 EXPECTED AMORTIZATION SCHEDULE (with coupons, prices, classes, if any, expected amortization schedule and stated maturities, call features, and scheduled overcollateralization requirements) General Terms Call Class Price Coupon Fixed/Floating Ave. Life Stated Maturity Feature ----- ----- ------ -------------- --------- --------------- ------- Scheduled Amortization Requirement Date Class A-1 Class A-2 Class A-3 Class A-4 ---- --------- --------- --------- --------- Schedule of Overcollateralization Requirement Date Required Overcollateralization Level ---- ------------------------------------ A-3 Appendix B ISSUANCE ADVICE LETTER [ACE Letterhead] [To be filed with the Board of Public Utilities or its successor not later than five business days after the issuance and sale of the Transition Bonds] [DATE] Kristi Izzo, Secretary State of New Jersey Board of Public Utilities Two Gateway Center Newark, New Jersey 07102 Re: Docket No. EF01060394 Dear Secretary Izzo: Pursuant to your Honorable Board's order in the above-captioned Docket ("Financing Order"), Atlantic City Electric Company (the "Company") hereby transmits for filing this Issuance Advice Letter. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. In the Financing Order, the Board authorized the Company to file an Issuance Advice Letter not later than five business days after the issuance and sale of a series of Transition Bonds. This Issuance Advice Letter filing applies the methodology approved by the Board in the Financing Order to establish the initial Transition Bond Charge and initial MTC-Tax. The terms of issuance are as follows: 1. Transition Bond Name: Series 2002-1 Transition Bonds 2. SPE Name: Atlantic City Electric Transition Funding LLC 3. Trustee: _________ 4. Closing Date: _________ 5. Amount Issued: $440,000,000 6. Upfront Transaction Costs: _______ 7. Interest Rates and Expected Amortization Schedule: See Attachment 1 8. Distributions to Investors (quarterly or semi-annually): ________ 9. Annual Servicing Fee as a percent of the initial principal balance: ________ 10. Overcollateralization amount: _______________ 11. Overcollateralization Schedule: See Attachment 1 12. Capitalization Amount: ________ 13. Brief description of any interest rate exchange agreement or other hedging arrangement: B-1 Table I below shows the current assumptions for each of the variables used in the Transition Bond Charge and MTC-Tax calculation. TABLE I INPUT VALUES FOR INITIAL TRANSITION BOND CHARGE AND MTC-TAX Forecasted annual kWh sales:________ Days Outstanding:_______ Percent of billed amounts expected to be charged-off:____________ Forecasted annual Ongoing Transition Bond Costs (including any hedging costs):________ Required annual overcollateralization amount: ________ Current Transition Bond outstanding balance: ________ Scheduled Transition Bond outstanding balance as of ___/___/___:_____ New Jersey Statutory Corporate Business Tax Rate: __________ New Jersey Sales Tax Rate:____________ Federal Statutory Corporate Income Tax Rate: __________ Based on the approved formula, the initial Transition Bond Charge is ________(cent)/kWh and the initial MTC-Tax is ________(cent)/kWh Revised Exhibit E to the Petition filed in this docket by the Company shows expected net present value savings of $___ million for this series of Transition Bonds. In accordance with the Financing Order, the Transition Bond Charge and MTC-Tax shall be automatically effective when this Issuance Advice Letter is filed and will continue to be effective. Respectfully submitted, [ ] Attachments B-2 ATTACHMENT 1 EXPECTED AMORTIZATION SCHEDULE (with coupons, prices, classes, if any, expected amortization schedule and stated maturities, call features, and scheduled overcollateralization requirements) A. General Terms Stated Class Price Coupon Fixed/Floating Ave. Life Maturity Call Feature ----- ----- ------ -------------- --------- -------- ------------ Scheduled Amortization Requirement Date Class A-1 Class A-2 Class A-3 Class A-4 ---- --------- --------- --------- --------- Schedule of Overcollateralization Requirement Date Required Overcollateralization Level ---- ------------------------------------ B-3 Appendix C Development of the Transition Bond Charge, MTC-Tax and True-up Formula The Transition Bond Charge (the "TBC") is designed to insure full and timely recovery of all Bondable Stranded Costs including financing charges and related costs. A separate Tax Market Transition Charge (the "MTC-Tax") is designed to recover all income taxes associated with the TBC and MTC-Tax revenues. First, the TBC necessary to generate sufficient revenues to service Transition Bonds and pay all related expenses is computed. Second, the MTC-Tax, designed to recover the necessary tax gross-up is developed taking into account projected TBC billings, projected Transition Bond interest expense accrued, the current statutory Federal Income and New Jersey Income tax rates and projected collections of the MTC-Tax. The detailed mechanics of this procedure are described below: Phase 1 - Development of the TBC - -------------------------------- TBC development: The TBC is developed as follows: Subtract any expected collections of TBCs billed in the prior period from the scheduled debt service for the upcoming period (note that in developing the initial charge there are no prior period billed charges). Debt service includes principal, interest, administrative and servicing fees, overcollateralization and any true-up amount computed below (note that there is no true-up adjustment used in developing the initial charge). This results in the TBC amount required to be billed and collected during the upcoming period. That result is then divided by projected kilowatt hours ("kWhs") of electric distribution throughput expected to be billed to customers and collected from customers during the next period. These collected kWhs are computed by multiplying monthly kWhs metered and billed by collections curves which estimate the percent of customer payments received in each month following a billed sale. The result is a charge per kWh that will generate the expected collections necessary to pay required debt service and account for prior period shortfalls or excesses. The resulting TBC is multiplied by 1 plus the New Jersey state sales tax rate to appropriately include sales tax in the charge. Phase 2 - Tax Gross-up Adjustment: MTC-Tax Charge Development - ------------------------------------------------------------- Tax Gross-up on the TBC: The first step of the process is to compute the income tax due on the next projected TBC and MTC-Tax revenue (excluding sales tax). This computation is made as follows: Add projected TBC and MTC-Tax charges to be billed to customers during the upcoming period to determine the combined Total Taxable Revenue (Note this requires an iterative computation since the MTC-Tax charges billed are an input into the equation and also a function of the resulting MTC-Tax charge rate). From Total Taxable Revenue, subtract C-1 projected accrued interest on the Transition Bonds for the period, any accruable fees for administrative or servicing services to be provided to the Issuer, any tax deductible amortization of Transition Bond issuance costs (limited, in aggregate, to the amount recoverable through the TBC), any deductible expenses/losses on the debt retired by Transition Bond proceeds (limited, in aggregate, to the amount recoverable through the TBC), and any projected allowable deduction for uncollectable accounts. The result is taxable income from the net combined charges. Multiply this amount by the combined effective tax rate for New Jersey state income/CBT tax and the statutory regular federal income tax rate in effect for the period, (currently the combined effective tax rate is 40.85%) and the result is the total income tax associated with net combined charges. MTC-Tax charges billed in the prior year but expected to be collected in the upcoming year are subtracted from the estimated total income tax liability associated with the net combined charges to derive the expected tax liability required to be billed and collected during the subsequent year (note that this step is not applicable in developing the initial charge). To that result, any true-up adjustment computed below is added or subtracted (not applicable for initial charge). The result is then divided by projected kWhs of electric distribution throughput expected to be billed to customers and collected from customers during the next period as developed in Phase 1. The result is a charge per kWh that will generate the expected collections necessary to pay the forecasted tax liability resulting from net combined TBC and MTC-Tax charge revenues in the upcoming period. The resulting MTC-Tax charge is multiplied by 1 plus the New Jersey state sales tax rate to appropriately add sales tax to the charge. Computing True-up Adjustments - ----------------------------- True-up adjustments are designed to adjust the charges to ensure that the cost of Transition Bonds, related fees and taxes are fully and timely recovered from customers and that customers pay no more than is required to satisfy these costs. As in the case of the development of the TBC and MTC-Tax charges, the true-up adjustments are completed in two steps - Step One for the TBC and Step Two for the MTC-Tax charge. Step 1: TBC True-up Adjustment - ------------------------------ The TBC is to be adjusted at least annually to ensure full and timely recovery of all Bondable Stranded Costs, financing charges and related costs. The adjustment is computed as follows: 1. TBC Shortfalls: TBC collections are remitted to the Bond Trustee and used to service the Transition Bonds of each outstanding series and pay related expenses. To the extent TBC collections are insufficient to fund required debt service and meet other SPE expenses with respect to a series, the Bond Trustee will fund the shortfall first with any excess C-2 collection from prior periods in the Reserve Subaccount for such series, then the Overcollateralization Subaccount for such series funds held by the Bond Trustee, and then with equity capital of the Issuer held in the Capital Subaccount for such series. If these amounts are not sufficient to fund debt service and meet other expenses, the Bond Trustee will, after paying certain fees and expenses in accordance with the Indenture, pay interest on the Transition Bonds first and then principal to the extent of remaining funds. To the extent overcollateralization or equity funds are used to service debt and meet other SPE expenses, these amounts will be added as a true-up adjustment to be factored into the subsequent period TBC to fully replenish those accounts to their scheduled amounts within the next period. In addition, any principal payment shortfall (relative to the Expected Amortization Schedule) and the interest that accrues on this principal shortfall will be added to the subsequent year's TBC via the true up. 2. TBC Over-collections: To the extent, TBC collections are in excess of the amount needed for current debt service requirements and related expenses, the excess is first applied to reduce any shortfalls from prior periods computed under 1. above. Any TBC excess is next applied to restore the Issuer's Capital Subaccount to its scheduled balance. Excesses are then applied to restore the Overcollateralization Subaccount to its scheduled level. Any remaining excess is retained in the Reserve Subaccount maintained by the Bond Trustee. These amounts are invested by the Bond Trustee in eligible investments and are retained until they are required to service debt, replenish accounts to their scheduled levels or until the next periodic true-up which ever comes first. Any balance in the Reserve Subaccount including interest on hand (with the exception of interest earnings on the Capital Subaccount) at the time of periodic true up is subtracted as a true-up adjustment in determining the subsequent period TBC. 3. Investment Earnings on the accounts held by the Bond Trustee (including to the extent provided in the Indenture, in the Capital Subaccounts) will be used to service debt or fund or replenish the Capital or Overcollateralization Subaccounts to their scheduled levels and if not needed for that purpose will be retained in the Reserve Subaccount and will be subtracted as a true-up adjustment as of the next true-up date. 4. Periodic True-up: On at least an annual basis, any true-up adjustment, computed as above will be used to develop a new TBC rate for the up-coming period. The true-up amount will be added or subtracted to the amount of required debt service and related expenses used in developing the TBC rate for the subsequent period described in Phase 1 above. Step 2 - MTC-Tax True-up Adjustment - ----------------------------------- 1. Using the methodology described in Phase 2 above, compute the income tax associated with net combined charges for the prior period by substituting actual amounts for the prior period for the projected amounts. 2. Compute Income Tax True-up amount: Subtract the tax liability computed in 1. above from the actual MTC-Tax collections for the same period to derive the shortfall or over- C-3 collection with respect to Taxes. Interest will be added to any over or under collection to ensure that no party is economically harmed by any such over or under collection. The net adjustment plus accrued interest will be added or subtracted to the projected amount of total income tax associated with net combined charges used in developing the MTC-Tax charge for the subsequent period described in Phase 2 above. C-4 Appendix D PRICING ADVICE CERTIFICATE [ACE Letterhead] [To be filed no later than the date of pricing of the Transition Bonds] [DATE] [Kristi Izzo, Secretary State of New Jersey Board of Public Utilities Two Gateway Center Newark, New Jersey 07102] and [Board Designee] Re: Docket No. EF01060394 Dear Secretary Izzo: Pursuant to your Honorable Board's order in the above-captioned Docket ("Financing Order"), Atlantic City Electric Company (the "Company") hereby transmits for filing this Pricing Advice Certificate. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. In the Financing Order, the Board requires the Company to file a Pricing Advice Certificate when pricing terms for a series of Transition Bonds and the pricing of any hedging arrangement in advance of the issuance of Transition Bonds have been approved by the Company. The proposed terms of pricing and issuance of the [Transition Bonds] [hedging arrangement] are as follows: Name of Transition Bonds: Series 2002-1 Transition Bonds SPE: Atlantic City Electric Transition Funding LLC Closing Date: __________ Amount Issued: $440,000,000 Interest Rates and Expected Amortization Schedule: See Attachment 1 Distributions to Investors (quarterly or semi-annually): __________ Weighted Average Coupon Rate: __________ Weighted Average Yield: __________ Capitalization Amount: __________ Overcollateralization Amount: __________ Overcollateralization Schedule: See Attachment 1 D-1 [Brief description of any hedging arrangement:] The Company hereby certifies that: (i) all proposed terms of pricing and issuance of the [Transition Bonds] and/or [the hedging arrangement] are within the parameters established in the Financing Order and the Designee's Guidelines attached as Appendix F to the Financing Order [and] (ii) the structuring and pricing of the [Transition Bonds] and/or [the hedging arrangement] assures that the Company's customers will pay the lowest Transition Bond Charges consistent with market conditions and the terms of the Financing Order [or (iii) the hedging arrangement reasonably protects ratepayers against interest rate increases which may occur after the date hereof.] The Company's certification provided in clause (ii) or (iii) above is based, in part, upon representations provided to the Company by its Lead Underwriter for the Transition Bonds, Morgan Stanley & Co. Incorporated. Respectfully submitted, [ ] Attachments D-2 Appendix E TRUE-UP LETTER [ACE Letterhead] [date] Kristi Izzo, Secretary State of New Jersey Board of Public Utilities Two Gateway Center Newark, New Jersey 07102 Re: Docket No. EF01060394 Dear Secretary Izzo: Pursuant to your Honorable Board's order in the above-captioned Docket ("Financing Order"), Atlantic City Electric Company ("Company") as Servicer of the Transition Bonds or any successor Servicer and on behalf of the trustee as assignee of the SPE shall apply at least annually for mandatory periodic adjustment to the Transition Bond Charge and MTC-Tax charge. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. Each such adjustment shall be proposed in a filing ("True-Up Letter") with the Board at least 30 days in advance of the date upon which it is requested to be effective (which effective date hereunder is _________________). The proposed adjustment to the Transition Bond Charge will become effective on an interim basis on the date on which it is requested to be effective and, in the absence of a Board Order to the contrary correcting manifest error in the calculation, will become final 60 days after the filing. The proposed adjustment to the MTC-Tax charge, absent a proposed change in the formula, will become effective on an interim basis on the date on which it is requested to be effective and, in the absence of a Board order to the contrary correcting manifest error in the calculation, will become final 60 days after the filing. Using the formula approved by the Board in the Financing Order (or in effect pursuant to the True-Up Letter dated _______), this filing modifies the variables used in the Transition Bond Charge and MTC-Tax calculation and provides the resulting modified Transition Bond Charge and MTC-Tax charge. Table I shows the revised assumptions for each of the variables used in calculating the Transition Bond Charge and MTC-Tax charge. The assumptions underlying the current Transition Bond Charge and MTC-Tax charge were filed by the Company in an Issuance Advice/True-Up Letter dated ________________. E-1 Based on the approved formula, the proposed Transition Bond Charge is ______ (cent)/kWh and the resulting MTC-Tax is ______ (cent)/kWh. Respectfully submitted, [ ] Attachment E-2 TABLE I INPUT VALUES FOR ADJUSTED TRANSITION BOND CHARGE AND MTC-TAX Forecasted annual kWh sales:______ Days outstanding:________ Percent of billed amounts expected to be charged-off:_______ 1. Under-collection of prior principal amount _______ 2. Upcoming collection of current principal amount _______ 3. Under-collection of prior interest amount ____ 4. Upcoming collection of current interest amount _______ 5. Under-collection of prior over-collateralization amount _______ 6. Upcoming collection of current over-collateralization amount _______ 7. Under-collection of prior tax component amount _______ 8. Upcoming collection of current tax component amount _______ 9. Deficiency in required capital amount _______ 10. Amount in reserve subaccount ________ 11. Upcoming period servicing and administration fees and expenses _______ 12. New Jersey Statutory Corporate Business Tax Rate ___________ 13. New Jersey Sales Tax Rate _________ 14. Federal Statutory Corporate Income Tax Rate___________ E-3 Appendix F Designee Guidelines Docket No. EF01060394 The Designee is empowered to agree to the terms and conditions of the Transition Bonds to be issued to recover a portion of the Stranded Costs of Atlantic City Electric Company (the "Company"), and to certify that the structuring and pricing of the Transition Bonds assure that the ratepayers will pay the lowest Transition Bond Charges ("TBC") consistent with market conditions and the terms of the Financing Order; provided, however, that the Designee cannot approve the terms and conditions or deliver such certification if the terms and conditions of the structuring and pricing of the Transition Bonds fall outside the parameters set forth below: Bond Size: Not to exceed $440,000,000 Bond Maturity: 15 year scheduled amortization, not to exceed 17 year final stated maturity for Transition Bonds the proceeds of which will be used to reduce stranded costs related to the Company's nuclear generation assets, and 20 year scheduled amortization, not to exceed 23 year final stated maturity for Transition Bonds the proceeds of which will be used to buy out or buy down existing Board-approved long-term power purchase agreements. Amortization: Set to provide an approximately level TBC rate per kWh. Payment Dates: The first payment of principal shall occur within 11 months of issuance and payments of principal and interest shall be no less frequent than quarterly or semi-annually. Capital Account and The Company shall capitalize the SPE at no less Over-Collateralization: than 0.50% of the initial principal amount of the bonds. The Transition Bond Charge shall include over-collateralization in amounts sufficient to build up to at least 0.50% of the initial principal amount of the Transition Bonds. Redemption Features: The bonds will have a 5% "clean-up" call. Underwriting and Consistent with the provisions of the Financing Syndication: Order and the letter dated September 10, 2002 from Morgan Stanley & Co. detailing the proposed syndication plan, the Transition Bonds were offered by way of a negotiated sale, and customary practices were used in the syndication and underwriting process for the execution of an asset-backed securitization of this size and credit quality. F-1 Floating Rate Bond If the Company proposes to cause the issuer to Hedging Arrangement: issue floating rate bonds which are swapped to a fixed rate then any such swap shall be competitively bid among no less than three (3) qualified swap counterparties and the issuer shall accept the lowest responsible bid taking into account the trading value of the counterparties. A swap counterparty shall be deemed a qualified swap counterparty if the rating of the counterparty is at least AA-/ Aa3. Hedging Arrangement: The Designee may authorize a Hedging Arrangement if (i) the Company notifies the Designee and the Financial Advisor that it proposes to enter into a Hedging Arrangement, (ii) the Company provides an analysis to the Designee and the Financial Advisor comparing the estimated present value savings using the Hedging Arrangement and the estimated present value savings assuming the Transition Bonds were issued on the same date, (iii) the difference between the estimated present value savings using the Hedging Arrangement and the estimated present value savings assuming the Transition Bonds were issued on the same date is less than $500,000 and (iv) the Financial Advisor concurs with the analysis. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Financing Order. The terms and conditions described therein are hereby approved with such modifications and amendments as are acceptable to the Designee relying upon the written advice and recommendations of the Financial Advisor (collectively, the "Designee Guidelines"). F-2 CONFIDENTIAL Appendix G FORM OF MORGAN STANLEY CERTIFICATION [Morgan Stanley Letterhead] [To be filed on the date of pricing of the Transition Bonds] [DATE] [Kristi Izzo, Secretary State of New Jersey Board of Public Utilities Two Gateway Center Newark, New Jersey 07102] and [Board Designee] Re: Bondable Stranded Costs Rate Order - Docket No. EF01060394 (the "Financing Order"). Dear Secretary Izzo: We have been exclusively engaged by Atlantic City Electric Company (the "Company") to act as lead underwriter in connection with the offering by Atlantic City Electric Transition Funding LLC of $[ ] million in aggregate principal amount of Transition Bonds, Series 2002-1 (the "Transition Bonds") pursuant to the terms of an underwriting agreement dated as of [insert pricing date] (the "Underwriting Agreement"). The Transition Bonds were priced at [ : ] [A.M./P.M.], New York time today (the "Pricing Time"). At the Pricing Time, we agreed to purchase the Transition Bonds from Atlantic City Electric Transition Funding LLC, subject to certain conditions contained in the Underwriting Agreement. Any capitalized terms not defined herein shall have the meanings ascribed thereto in the Financing Order. The Company has informed us that the [State of New Jersey Board of Public Utilities] issued the Financing Order dated September [ ], 2002 and that the Financing Order requires the Company's lead underwriter to file a Certification supporting the Company's Pricing Advice Certificate when [(i)] pricing terms for a series of Transition Bonds have been approved by the Company [and (ii) when the terms of a hedging arrangement have been approved by the Company]. In its Pricing Advice Certificate, the Company indicated that terms of pricing and issuance are as follows: G-1 Name of Transition Bonds: Series 2002-1 Transition Bonds SPE: Atlantic City Electric Transition Funding LLC Closing Date: __________ Amount Issued: __________ Interest Rates and Expected Amortization Schedule: See Attachment 1 Distributions to Investors (quarterly or semi-annually): __________ Weighted Average Coupon Rate: __________ Weighted Average Yield: __________ Capitalization Amount: __________ Overcollateralization Amount: __________ Overcollateralization Schedule: See Attachment 1 [Brief description of any interest rate exchange agreement or other hedging arrangement:] For purposes of the certification set forth herein, we have: (i) reviewed the structuring and pricing of the Transition Bonds as set forth in the Company's Pricing Advice Certificate; (ii) reviewed the reported prices and trading activity for other publicly traded "stranded costs" bonds that are comparable to the Transition Bonds; (iii) reviewed the Financing Order, including the Company's methodology and assumptions set forth therein for calculating the transition bond charge; (iv) discussed with senior executives of the Company the Company's methodology and assumptions for calculating the transition bond charge; [(v) reviewed the structuring and pricing of the hedging arrangement and the proposed structuring and pricing of the Transition Bonds as set forth in the Company's Pricing Advice Certificate; (vi) reviewed the pricing of certain comparable hedging arrangements that are known to us;] and (vii) performed such other analyses and considered such other factors as we have deemed appropriate. We have assumed and relied upon without independent verification the accuracy and completeness of the information provided to us by management of the Company and reviewed by us for the purposes of this certification. We have also assumed that the Company implements the transactions contemplated hereby in accordance with the terms of the Financing Order, including that any hedge payment benefits ratepayers. Our certification is necessarily based on financial, economic, market and other conditions as in effect on, and the information made G-2 available to us as of, the date hereof. We have not made any independent valuation or appraisal of the assets or liabilities of the Issuer, nor have we been furnished with any such appraisals. This certification does not constitute a bid for any of the Transition Bonds. Rather it is a statement of our view of the reasonableness of the structuring and pricing of the Transition Bonds, as proposed, at a particular point in time relative to current market conditions. The structuring and pricing of the Transition Bonds does not reflect a level at which actual other transactions have occurred or may occur. Our views set forth in this certification may vary significantly from the views expressed in certifications from other sources. It is understood that this certification is solely for the information of the Board and the Board Designee and is not on behalf of, and is not intended to confer any rights upon, any other person, and this certification is not to be relied upon by any other person for any purpose. This certification is being delivered to the Board and the Board Designee pursuant to the Financing Order for the sole purpose of supporting the Company's Pricing Advice Certificate. It is understood that the delivery of this certification by us to the Board and the Board Designee does not establish a fiduciary relationship between us and the Board or the Board Designee. This certification does not address nor should it be construed to address the relative merits of alternative business strategies that may be available to the Company. We have acted as lead underwriter for the Company in connection with the proposed offering of Transition Bonds and will receive underwriting compensation for our services. We will not receive a separate fee for providing this certification. In the past, we have provided [financial advisory and] financing services for the Company and have received fees for the rendering of these services. Based on the foregoing it is the view of Morgan Stanley, as lead underwriter, that: (1) The structuring and pricing of the Transition Bonds, as proposed, is reasonable in the light of current market conditions. (2) Assuming the accuracy of the assumptions of the Company contained in the Financing Order and the formulae contained therein, and of the consistency of mathematical calculations made by the Company with those formulae contained in the Financing Order, the customers of the Company will pay the lowest transition bond charges consistent with current market conditions and the terms of the Financing Order. [or, if the certification is given in connection with the execution of a hedging arrangement in advance of the pricing of the Transition Bonds (1) The structuring and pricing of the hedging arrangement is reasonable in light of current market conditions. (2) The hedging arrangement reasonably protects ratepayers against interest rate increases above the locked-in rate which may occur after the date of its execution. G-3 [or if the certification is given in connection with the termination of a hedging arrangement, the pricing of the termination payment is reasonable in light of current market conditions.] Respectfully submitted, Morgan Stanley Attachments G-4 Appendix H Form of Advisory Letter from Bear Stearns & Co. Inc. As Financial Advisor Bear Stearns & Co. Inc. ("Bear Stearns") has acted as the financial advisor to the New Jersey Board of Public Utilities ("BPU") with respect to the offering and issuance of $440,000,000 of Series 2002-1 Transition Bonds (the "Transition Bonds") and/or the execution of a hedging arrangement by [Issuer Designation] (the "Issuer"). Bear Stearns has examined (i) the Final Decision and Order (the "Restructuring Order") of the BPU signed on March 30, 2001 (the "Order Date"); (ii) the Petition of Atlantic City Electric Company ("ACE") for a Financing Order, dated June 25, 2001 (the "Petition"); (iii) the Financing Order of the BPU dated September 18, 2002 (the "Financing Order") (iv) the form of Prospectus and Prospectus Supplement of the Issuer as filed with the SEC on [date of final draft reviewed] concerning the Transition Bonds (collectively the "SEC Filing"); (v) the final pricing terms (the "Final Terms") for the Transition Bonds provided by Morgan Stanley & Co. Incorporated (the "Lead Underwriter") which final pricing terms were agreed upon between the Issuer, ACE and the Lead Underwriter; (vi) the Underwriting Agreement for the Transition Bonds (the "Underwriting Agreement"), proposed for execution on the date hereof among ACE, the Issuer and the Lead Underwriter; (vii) the form of Designee Certification proposed to be delivered to the BPU within two business days after the final pricing terms are determined pursuant to the Financing Order; (viii) the Pricing Advice Certificate delivered by ACE on the date hereof; and (ix) such other documents, representations and other forms of information as we have deemed necessary and appropriate in order for us to deliver this Advisory Letter. We have found the following: 1. The structuring and pricing of the Transition Bonds (and any hedging arrangement), as evidenced, inter alia, by the terms thereof contained in the SEC Filing and the Final Terms provided to us by the Lead Underwriter are reasonable in light of current market conditions and are consistent with the terms of the Financing Order. 2. The Final Terms of the Transition Bonds including the syndicate rules, the estimated costs of issuance, the overcollateralization levels and the servicing fees, appear reasonable and consistent with current market conditions. 3. The initial Transition Bond Charge proposed by ACE in accordance with the Financing Order should be [adjusted up or down] [left unchanged] in order to provide the Issuer with amounts not less than those necessary to fully recover the bondable stranded costs of ACE, in light of the actual interest rates achieved in the marketing and sale of the Securities and the costs, including overcollateralization of __%, associated with the issuance of the Transition Bonds. 4. Assuming the accuracy of the assumptions of ACE contained in the Financing Order and the formulae contained therein, and of the mathematical calculations made by ACE H-1 thereunder, the structuring and pricing of the Transition Bonds assure that the customers of ACE will pay the lowest Transition Bond Charges consistent with current market conditions and the terms of the Financing Order. 5. ACE has delivered its Pricing Advice Certificate, which conforms to the Final Terms. H-2 Appendix I Atlantic City Electric Company Stranded Costs to be Securitized in Series 2002-1 $000 Pre-Tax After-Tax Stranded Stranded Costs Costs ------------------- ---------------------- Nuclear $372,839 $277,946 /1 PCLP: Buyout Payment $228,500 $135,158 /2 Transaction Costs $1,884 $1,114 /3 Tax Payment on CIAC $2,755 $2,755 /4 ------------------- ---------------------- Total $233,139 $139,027 Ref-Fuel: Buydown Payment $3,450 $3,450 /5 Transaction Costs $693 $410 /6 ------------------- ---------------------- Total $4,143 $3,860 Stranded Cost Total $610,121 $420,833 =================== ====================== Securitization Issuance & Capital Reduction Costs Total $19,167 /7 ---------------------- Securitization Grand Total $440,000 ---------------------- - -------- 1 The Board approved the sale of the nuclear assets in I/M/O the Petition of Atlantic City Electric Company for Approval of the Sale of its Nuclear Generating Units, BPU Docket No. EM99110870, Decision and Orders dated July 21, 2000 and September 17, 2001. Final post-closing stranded costs were filed with the Board pursuant to those Orders on June 24, 2002. 2 The Board approved the buyout payment in I/M/O the Petition of Atlantic City Electric Company for Approval of an Agreement to Terminate its Power Purchase Agreement with Pedricktown Cogeneration Limited Partnership, BPU Docket No. EE99090685, Decision and Order, dated November 10, 1999. 3 Atlantic made compliance filings quantifying transaction costs related to the PCLP buyout on February 22, 2001, (estimated costs) and April 4, 2001 (final costs). 4 Atlantic's April 4, 2001 compliance filing identified and quantified the PCLP tax payment on CIAC. 5 The Board approved the Ref-Fuel buydown payment in I/M/O the Petition of Atlantic City Electric Company for Approval of an Amendment to the Agreement for Purchase of Electric Power with American Ref-Fuel Company of Delaware Valley, L.P., BPU Docket No. EM00060388, Order of Approval, dated December 6, 2000. 6 Atlantic made a compliance filing quantifying transaction costs related to the Ref-Fuel buydown on April 4, 2001. 7 A detailed breakdown of estimated securitization issuance and transaction costs is included in Exhibit B to this statement. I-1 Atlantic City Electric Appendix I Docket Number EF 01060394 Estimated Securitization Issuance & Capital Reduction Costs Description Amount - --------------------------------------------------------- Underwriting Discount and Fees $3,023,000 Structuring Fee $336,000 Underwriters' Reimbursable Expenses $100,000 Road Show (Bloomberg) $8,000 Road Show $50,000 SEC Registration Fee $117,000 Issuer's and Underwriter's Legal Fees $4,000,000 Rating Agency Fees $417,000 Auditor's Fees $130,000 Printing Fees $120,000 Trustee Fees $36,000 Blue Sky Fees $3,000 IRS Private Letter Ruling Request User Fee $5,000 SPE Organizational Costs $100,000 BPU Financial Advisor Fee * $150,000 Internal Labor $350,000 Miscellaneous & Contingency $488,000 Capital Reduction Costs $9,734,000 - --------------------------------------------------------- Total $19,167,000 ========================================================= Footnote * - could increase to $300,000 if a hedging arrangement is made APPENDIX I Atlantic City Electric CAPITAL REDUCTION COSTS NPV-Based Priority List for Outstanding Long-Term Debt and Preferred Stock ASSUMING CURRENT CAPITALIZATION (Highlighted Securities Included on RAR-12 - Use of Securitization Proceeds) RATIOS ARE MAINTAINED As of August 22, 2002
- ------------------------------------------------------------------------------------------------------------------------------------ Sorted By NPV (%) Repurchase Pricing Capital Reduction Costs -------------------------------------------------------------------------------------- Security Description Type Type UST Spread Yield Price Cash Capital Planned Tender Unamortized Accrued (%) (bp) (%) (%) Cost Reduction Cap Reduct $mm Issuance Int $mm Cost $mm Cost $mm $mm $mm - ------------------------------------------------------------------------------------------------------------------------------------ $70.00 mm 8.250% QUIPS Pfd Pfd NA NA NA 100.0 70.0 - - --------------------------------------------------------------------------------- $0.41 mm 5.000% undated Pfd Pfd 5.08 -50 4.58 109.1 0.4 0.0 - --------------------------------------------------------------------------------- $2.43 mm 4.000% undated Pfd Pfd 5.08 -50 4.58 87.3 2.1 (0.3) - --------------------------------------------------------------------------------- $0.86 mm 4.750% undated Pfd Pfd 5.08 -50 4.58 103.6 0.9 0.0 - --------------------------------------------------------------------------------- $0.17 mm 4.350% undated Pfd Pfd 5.08 -50 4.58 94.9 0.2 (0.0) - --------------------------------------------------------------------------------- $0.31 mm 4.350% undated Pfd Pfd 5.08 -50 4.58 94.9 0.3 (0.0) - --------------------------------------------------------------------------------- $2.05 mm 4.100% undated Pfd Pfd 5.08 -50 4.58 89.4 1.8 (0.2) - --------------------------------------------------------------------------------- $25.00 mm 7.375% QUIPS Pfd Pfd 1.78 50 2.28 105.9 26.5 1.5 - --------------------------------------------------------------------------------- $19.5mm 7.980% due May 2004- 02 Call ss NA NA NA 100.0 19.5 - 0.6 - 0.0 0.5 - --------------------------------------------------------------------------------- $10.5mm 7.970% due May 2004- 02 Call ss NA NA NA 100.0 10.5 - 0.3 - 0.0 0.3 - --------------------------------------------------------------------------------- $28.0mm 7.125% due Feb 2004- 03 Call ss 1.63 28 1.91 102.2 28.6 0.6 0.9 0.6 0.0 0.3 - --------------------------------------------------------------------------------- $62.5mm 7.000% due Sep 2023- 03 Call ss 1.70 29 1.99 107.8 67.3 4.8 - --------------------------------------------------------------------------------- $7.0mm 7.630% due Aug 2014 Bullet ss 4.30 128 5.58 117.8 8.2 1.2 1.4 1.2 0.0 0.1 - --------------------------------------------------------------------------------- $68.6mm 6.625% due Aug 2013 Bullet ss 4.30 125 5.55 108.7 74.6 6.0 - --------------------------------------------------------------------------------- $1.0mm 7.250% due Aug 2010 Bullet ss 4.05 119 5.24 113.0 1.1 0.1 0.2 0.1 0.0 0.0 - --------------------------------------------------------------------------------- $15.0mm 7.680% due Aug 2015 Bullet ss 4.30 131 5.61 118.9 17.8 2.8 3.2 2.8 0.1 0.3 - --------------------------------------------------------------------------------- $75.0mm 7.000% due Aug 2028- 03 Call ss 1.67 29 1.96 107.4 80.6 5.6 - --------------------------------------------------------------------------------- 5.0mm 6.710% due Jun 2008 Bullet ss 3.61 116 4.77 109.8 5.5 0.5 0.6 0.5 0.0 0.1 - --------------------------------------------------------------------------------- $4.0mm 6.730% due Jun 2008 Bullet ss 3.61 116 4.77 109.9 4.4 0.4 - --------------------------------------------------------------------------------- $11.0mm 6.750% due May 2008 Bullet ss 3.53 116 4.69 110.2 12.1 1.1 - --------------------------------------------------------------------------------- $10.0mm 6.750% due May 2008 Bullet ss 3.53 116 4.69 110.2 11.0 1.0 - --------------------------------------------------------------------------------- $1.0mm 6.770% due Apr 2008 Bullet ss 3.53 116 4.69 110.1 1.1 0.1 - --------------------------------------------------------------------------------- $5.0mm 6.810% due Mar 2008 Bullet ss 3.53 116 4.69 110.3 5.5 0.5 - --------------------------------------------------------------------------------- $10.0mm 6.780% due Mar 2008 Bullet ss 3.53 116 4.69 110.1 11.0 1.0 - --------------------------------------------------------------------------------- $4.0mm 6.730% due May 2008 Bullet ss 3.53 116 4.69 110.1 4.4 0.4 - --------------------------------------------------------------------------------- $2.0mm 7.680% due Aug 2016 Bullet ss 4.30 134 5.64 119.6 2.4 0.4 - --------------------------------------------------------------------------------- $50.0mm 6.190% due Jan 2006 Bullet ss 2.79 98 3.77 107.6 53.8 3.8 - --------------------------------------------------------------------------------- $15.0mm 6.180% due Jan 2006 Bullet ss 2.79 98 3.77 107.5 16.1 1.1 - --------------------------------------------------------------------------------- $1.0mm 7.150% due May 2007 Bullet ss 3.22 102 4.24 112.4 1.1 0.1 - --------------------------------------------------------------------------------- $20.0mm 6.000% due Jan 2003 Bullet ss 1.63 28 1.91 101.5 20.3 0.3 0.3 0.3 0.0 - - --------------------------------------------------------------------------------- $30.0mm 6.630% due Jun 2003 Bullet su 1.67 20 1.87 103.5 31.1 1.1 - --------------------------------------------------------------------------------- $3.3mm 6.300% due Aug 2005 Bullet ss 2.58 65 3.23 108.6 3.5 0.3 - --------------------------------------------------------------------------------- $2.0mm 6.290% due Jul 2005 Bullet ss 2.58 65 3.23 108.4 2.2 0.2 - --------------------------------------------------------------------------------- $1.5mm 6.350% due Aug 2005 Bullet ss 2.58 65 3.23 108.7 1.6 0.1 - --------------------------------------------------------------------------------- $1.0mm 6.350% due Aug 2005 Bullet ss 2.58 65 3.23 108.7 1.1 0.1 - --------------------------------------------------------------------------------- $1.5mm 6.300% due Jul 2005 Bullet ss 2.58 65 3.23 108.4 1.6 0.1 - --------------------------------------------------------------------------------- $1.1mm 6.330% due Jul 2005 Bullet ss 2.58 65 3.23 108.5 1.2 0.1 - --------------------------------------------------------------------------------- $2.5mm 6.340% due Jul 2005 Bullet ss 2.58 65 3.23 108.5 2.7 0.2 - --------------------------------------------------------------------------------- $2.2mm 6.350% due Jul 2005 Bullet ss 2.58 65 3.23 108.5 2.3 0.2 - --------------------------------------------------------------------------------- $2.0mm 6.380% due Aug 2005 Bullet ss 2.58 65 3.23 108.7 2.2 0.2 - --------------------------------------------------------------------------------- $11.0mm 6.400% due Jul 2005 Bullet ss 2.58 65 3.23 108.6 11.9 0.9 - --------------------------------------------------------------------------------- $10.0mm 7.160% due Jan 2003 Bullet ss 1.63 28 1.91 102.1 10.2 0.2 0.2 0.2 0.0 - - --------------------------------------------------------------------------------- $8.0mm 7.190% due Jan 2003 Bullet ss 1.63 28 1.91 102.1 8.2 0.2 0.2 0.2 0.0 - - --------------------------------------------------------------------------------- $2.0mm 7.200% due Jan 2003 Bullet ss 1.63 28 1.91 102.1 2.0 0.0 0.0 0.0 0.0 - - --------------------------------------------------------------------------------- $2.0mm 6.650% due Mar 2005 Bullet ss 2.46 43 2.89 109.2 2.2 0.2 - --------------------------------------------------------------------------------- $10.0mm 6.670% due Mar 2005 Bullet ss 2.46 43 2.89 109.3 10.9 0.9 - --------------------------------------------------------------------------------- $9.0mm 7.150% due May 2004 Bullet ss 1.96 31 2.27 108.3 9.7 0.7 - --------------------------------------------------------------------------------- $5.0mm 7.520% due Apr 2007 Bullet su 3.22 24 3.46 117.1 5.9 0.9 - --------------------------------------------------------------------------------- $10.0mm 7.500% due Apr 2007 Bullet su 3.22 24 3.46 117.0 11.7 1.7 - --------------------------------------------------------------------------------- 106.5 681.6 41.3 8.0 6.0 0.2 1.7 - ------------------------------------------------------------------------------------------------------------------------------------ 1.7 Miscellaneous & Contingency - --------------------------------------------------------------------------------- 9.7 - ------------------------------------------------------------------------------------------------------------------------------------ 2002 Retirements - ---------------------------------------------------- -------- ------- $20.0mm 6.460% Bullet su 20.0 - ---------------------------------------------------- -------- ------- $5.0mm 7.040% Bullet ss 5.0 - ---------------------------------------------------- -------- ------- $12.45 mm 7.800% Pfd Pfd 12.45 - ---------------------------------------------------- -------- ------- $25.0mm 7.010% Bullet ss 25.0 - ---------------------------------------------------- -------- ------- 62.5
Atlantic City Electric CAPITAL REDUCTION COSTS PV-Based Priority List for Outstanding Long-Term Debt and Preferred Stock ASSUMING AUTHORIZED CAPITALIZATION (Highlighted Securities Included on RAR-12 - Use of Securitization Proceeds) RATIOS ARE MAINTAINED As of August 22, 2002
- ------------------------------------------------------------------------------------------------------------------------------------ Sorted By NPV (%) Repurchase Pricing Capital Reduction Costs ------------------------------------------------------------------------------------- Security Description Type Type UST Spread Yield Price Cash Capital Planned Tender Unamortized Accrued (%) (bp) (%) (%) Cost Reduction Cap Reduct $mm Issuance Int $mm Cost $mm Cost $mm $mm $mm - ------------------------------------------------------------------------------------------------------------------------------------ $70.00 mm 8.250% QUIPS Pfd Pfd NA NA NA 100.0 70.0 - - --------------------------------------------------------------------------------- $0.41 mm 5.000% undated Pfd Pfd 5.08 -50 4.58 109.1 0.4 0.0 - --------------------------------------------------------------------------------- $2.43 mm 4.000% undated Pfd Pfd 5.08 -50 4.58 87.3 2.1 (0.3) - --------------------------------------------------------------------------------- $0.86 mm 4.750% undated Pfd Pfd 5.08 -50 4.58 103.6 0.9 0.0 - --------------------------------------------------------------------------------- $0.17 mm 4.350% undated Pfd Pfd 5.08 -50 4.58 94.9 0.2 (0.0) - --------------------------------------------------------------------------------- $0.31 mm 4.350% undated Pfd Pfd 5.08 -50 4.58 94.9 0.3 (0.0) - --------------------------------------------------------------------------------- $2.05 mm 4.100% undated Pfd Pfd 5.08 -50 4.58 89.4 1.8 (0.2) - --------------------------------------------------------------------------------- $25.00 mm 7.375% QUIPS Pfd Pfd 1.78 50 2.28 105.9 26.5 1.5 - --------------------------------------------------------------------------------- $19.5mm 7.980% due May 2004- 02 Call ss NA NA NA 100.0 19.5 - 0.6 - 0.0 0.5 - --------------------------------------------------------------------------------- $10.5mm 7.970% due May 2004- 02 Call ss NA NA NA 100.0 10.5 - 0.3 - 0.0 0.3 - --------------------------------------------------------------------------------- $28.0mm 7.125% due Feb 2004- 03 Call ss 1.63 28 1.91 102.2 28.6 0.6 1.1 0.6 0.0 0.5 - --------------------------------------------------------------------------------- $62.5mm 7.000% due Sep 2023- 03 Call ss 1.70 29 1.99 107.8 67.3 4.8 - --------------------------------------------------------------------------------- $7.0mm 7.630% due Aug 2014 Bullet ss 4.30 128 5.58 117.8 8.2 1.2 1.3 1.2 0.0 0.0 - --------------------------------------------------------------------------------- $68.6mm 6.625% due Aug 2013 Bullet ss 4.30 125 5.55 108.7 74.6 6.0 - --------------------------------------------------------------------------------- $1.0mm 7.250% due Aug 2010 Bullet ss 4.05 119 5.24 113.0 1.1 0.1 - --------------------------------------------------------------------------------- $15.0mm 7.680% due Aug 2015 Bullet ss 4.30 131 5.61 118.9 17.8 2.8 3.2 2.8 0.1 0.3 - --------------------------------------------------------------------------------- $75.0mm 7.000% due Aug 2028- 03 Call ss 1.67 29 1.96 107.4 80.6 5.6 - --------------------------------------------------------------------------------- $5.0mm 6.710% due Jun 2008 Bullet ss 3.61 116 4.77 109.8 5.5 0.5 0.6 0.5 0.0 0.1 - --------------------------------------------------------------------------------- $4.0mm 6.730% due Jun 2008 Bullet ss 3.61 116 4.77 109.9 4.4 0.4 0.5 0.4 0.0 0.1 - --------------------------------------------------------------------------------- $11.0mm 6.750% due May 2008 Bullet ss 3.53 116 4.69 110.2 12.1 1.1 - --------------------------------------------------------------------------------- $10.0mm 6.750% due May 2008 Bullet ss 3.53 116 4.69 110.2 11.0 1.0 - --------------------------------------------------------------------------------- $1.0mm 6.770% due Apr 2008 Bullet ss 3.53 116 4.69 110.1 1.1 0.1 - --------------------------------------------------------------------------------- $5.0mm 6.810% due Mar 2008 Bullet ss 3.53 116 4.69 110.3 5.5 0.5 0.6 0.5 0.0 0.1 - --------------------------------------------------------------------------------- $10.0mm 6.780% due Mar 2008 Bullet ss 3.53 116 4.69 110.1 11.0 1.0 - --------------------------------------------------------------------------------- $4.0mm 6.730% due May 2008 Bullet ss 3.53 116 4.69 110.1 4.4 0.4 - --------------------------------------------------------------------------------- $2.0mm 7.680% due Aug 2016 Bullet ss 4.30 134 5.64 119.6 2.4 0.4 0.4 0.4 0.0 0.0 - --------------------------------------------------------------------------------- $50.0mm 6.190% due Jan 2006 Bullet ss 2.79 98 3.77 107.6 53.8 3.8 - --------------------------------------------------------------------------------- $15.0mm 6.180% due Jan 2006 Bullet ss 2.79 98 3.77 107.5 16.1 1.1 - --------------------------------------------------------------------------------- $1.0mm 7.150% due May 2007 Bullet ss 3.22 102 4.24 112.4 1.1 0.1 - --------------------------------------------------------------------------------- $20.0mm 6.000% due Jan 2003 Bullet ss 1.63 28 1.91 101.5 20.3 0.3 0.3 0.3 0.0 - - --------------------------------------------------------------------------------- $30.0mm 6.630% due Jun 2003 Bullet su 1.67 20 1.87 103.5 31.1 1.1 - --------------------------------------------------------------------------------- $3.3mm 6.300% due Aug 2005 Bullet ss 2.58 65 3.23 108.6 3.5 0.3 - --------------------------------------------------------------------------------- $2.0mm 6.290% due Jul 2005 Bullet ss 2.58 65 3.23 108.4 2.2 0.2 - --------------------------------------------------------------------------------- $1.5mm 6.350% due Aug 2005 Bullet ss 2.58 65 3.23 108.7 1.6 0.1 - --------------------------------------------------------------------------------- $1.0mm 6.350% due Aug 2005 Bullet ss 2.58 65 3.23 108.7 1.1 0.1 - --------------------------------------------------------------------------------- $1.5mm 6.300% due Jul 2005 Bullet ss 2.58 65 3.23 108.4 1.6 0.1 - --------------------------------------------------------------------------------- $1.1mm 6.330% due Jul 2005 Bullet ss 2.58 65 3.23 108.5 1.2 0.1 - --------------------------------------------------------------------------------- $2.5mm 6.340% due Jul 2005 Bullet ss 2.58 65 3.23 108.5 2.7 0.2 - --------------------------------------------------------------------------------- $2.2mm 6.350% due Jul 2005 Bullet ss 2.58 65 3.23 108.5 2.3 0.2 - --------------------------------------------------------------------------------- $2.0mm 6.380% due Aug 2005 Bullet ss 2.58 65 3.23 108.7 2.2 0.2 - --------------------------------------------------------------------------------- $11.0mm 6.400% due Jul 2005 Bullet ss 2.58 65 3.23 108.6 11.9 0.9 - --------------------------------------------------------------------------------- $10.0mm 7.160% due Jan 2003 Bullet ss 1.63 28 1.91 102.1 10.2 0.2 0.2 0.2 0.0 - - --------------------------------------------------------------------------------- $8.0mm 7.190% due Jan 2003 Bullet ss 1.63 28 1.91 102.1 8.2 0.2 0.2 0.2 0.0 - - --------------------------------------------------------------------------------- $2.0mm 7.200% due Jan 2003 Bullet ss 1.63 28 1.91 102.1 2.0 0.0 0.0 0.0 0.0 - - --------------------------------------------------------------------------------- $2.0mm 6.650% due Mar 2005 Bullet ss 2.46 43 2.89 109.2 2.2 0.2 - --------------------------------------------------------------------------------- $10.0mm 6.670% due Mar 2005 Bullet ss 2.46 43 2.89 109.3 10.9 0.9 - --------------------------------------------------------------------------------- $9.0mm 7.150% due May 2004 Bullet ss 1.96 31 2.27 108.3 9.7 0.7 - --------------------------------------------------------------------------------- $5.0mm 7.520% due Apr 2007 Bullet su 3.22 24 3.46 117.1 5.9 0.9 - --------------------------------------------------------------------------------- $10.0mm 7.500% due Apr 2007 Bullet su 3.22 24 3.46 117.0 11.7 1.7 - --------------------------------------------------------------------------------- 106.5 681.6 41.3 9.4 7.2 0.3 1.9 - ------------------------------------------------------------------------------------------------------------------------------------ 0.3 Miscellaneous & Contingency - --------------------------------------------------------------------------------- 9.7 - ------------------------------------------------------------------------------------------------------------------------------------ 2002 Retirements - ---------------------------------------------------- -------- ------- $20.0mm 6.460% Bullet su 20.0 - ---------------------------------------------------- -------- ------- $5.0mm 7.040% Bullet ss 5.0 - ---------------------------------------------------- -------- ------- $12.45 mm 7.800% Pfd Pfd 12.45 - ---------------------------------------------------- -------- ------- $25.0mm 7.010% Bullet ss 25.0 - ---------------------------------------------------- -------- ------- 62.5
Atlantic City Electric Company Exhibit A Net Present Value of Securitization Savings
($000's) Table 1 - No Securitization Rev Req Combined 15 Year Combined 15 Year Nuclear/ 20 Year Nuclear - 15 Year NUGS - 15 Year NUGS - 20 Year Nuclear/NUG NUG ------------------------------------------------------------------------------------------------- Year 1 $ 67,770 $ 21,941 $ 18,946 $ 89,711 $ 86,716 2 $ 65,341 $ 21,941 $ 18,946 $ 87,281 $ 84,286 3 $ 62,911 $ 21,941 $ 18,946 $ 84,852 $ 81,857 4 $ 60,481 $ 21,941 $ 18,946 $ 82,422 $ 79,427 5 $ 58,052 $ 21,941 $ 18,946 $ 79,992 $ 76,998 6 $ 55,622 $ 21,941 $ 18,946 $ 77,563 $ 74,568 7 $ 53,193 $ 21,941 $ 18,946 $ 75,133 $ 72,138 8 $ 50,763 $ 21,941 $ 18,946 $ 72,704 $ 69,709 9 $ 48,333 $ 21,941 $ 18,946 $ 70,274 $ 67,279 10 $ 45,904 $ 21,941 $ 18,946 $ 67,844 $ 64,850 11 $ 43,474 $ 21,941 $ 18,946 $ 65,415 $ 62,420 12 $ 41,045 $ 21,941 $ 18,946 $ 62,985 $ 59,990 13 $ 38,615 $ 21,941 $ 18,946 $ 60,556 $ 57,561 14 $ 36,186 $ 21,941 $ 18,946 $ 58,126 $ 55,131 15 $ 33,756 $ 21,941 $ 18,946 $ 55,697 $ 52,702 16 $ - $ - $ 18,946 $ - $ 18,946 17 $ - $ - $ 18,946 $ - $ 18,946 18 $ - $ - $ 18,946 $ - $ 18,946 19 $ - $ - $ 18,946 $ - $ 18,946 20 $ - $ - $ 18,946 $ - $ 18,946 ------------------------------------------------------------------------------------------------- $ 761,446 $ 329,109 $ 378,915 $ 1,090,555 $ 1,140,361 =================================================================================================
($000's) Table 2 - Securitization Transaction Options Rev Req Combined 15 Year Combined 15 Year Nuclear/ 20 Year Nuclear - 15 Year NUGS - 15 Year NUGS - 20 Year Nuclear/NUG NUG ------------------------------------------------------------------------------------------------- Year 1 $ 44,297 $ 22,275 $ 17,981 $ 66,573 $ 62,635 2 $ 37,122 $ 18,663 $ 15,035 $ 55,785 $ 52,447 3 $ 39,637 $ 19,923 $ 16,030 $ 59,560 $ 55,971 4 $ 40,137 $ 20,170 $ 16,206 $ 60,308 $ 56,643 5 $ 41,002 $ 20,601 $ 16,532 $ 61,603 $ 57,833 6 $ 41,815 $ 21,005 $ 16,840 $ 62,820 $ 58,953 7 $ 42,449 $ 21,320 $ 17,099 $ 63,769 $ 59,845 8 $ 43,119 $ 21,653 $ 17,374 $ 64,772 $ 60,790 9 $ 43,798 $ 21,990 $ 17,656 $ 65,787 $ 61,751 10 $ 44,389 $ 22,284 $ 17,916 $ 66,673 $ 62,602 11 $ 45,012 $ 22,594 $ 18,190 $ 67,606 $ 63,499 12 $ 45,666 $ 22,919 $ 18,480 $ 68,585 $ 64,443 13 $ 46,314 $ 23,241 $ 18,771 $ 69,554 $ 65,375 14 $ 46,819 $ 23,492 $ 19,010 $ 70,312 $ 66,080 15 $ 47,361 $ 23,761 $ 19,269 $ 71,122 $ 66,841 16 $ (5,177) $ (2,591) $ 20,232 $ (7,768) $ 11,983 17 $ - $ - $ 20,560 $ - $ 21,213 18 $ - $ - $ 20,821 $ - $ 20,075 19 $ - $ - $ 21,157 $ - $ 20,630 20 $ - $ - $ 21,492 $ - $ 20,930 21 $ (2,507) $ (3,839) ------------------------------------------------------------------------------------------------- $ 643,761 $ 323,299 $ 364,145 $ 967,060 $ 1,006,700 =================================================================================================
Page 1 of 3
($000's) Table 3 - Securitization Savings Combined 15 Year Combined 15 Year Nuclear/ 20 Year Nuclear - 15 Year NUGS - 15 Year NUGS - 20 Year Nuclear/NUG NUG ------------------------------------------------------------------------------------------------- Year 1 $ 23,473 $ (335) $ 965 $ 23,138 $ 24,081 2 $ 28,219 $ 3,278 $ 3,911 $ 31,497 $ 31,840 3 $ 23,274 $ 2,017 $ 2,915 $ 25,291 $ 25,886 4 $ 20,344 $ 1,770 $ 2,739 $ 22,114 $ 22,784 5 $ 17,049 $ 1,340 $ 2,414 $ 18,389 $ 19,165 6 $ 13,807 $ 936 $ 2,105 $ 14,743 $ 15,615 7 $ 10,743 $ 621 $ 1,847 $ 11,364 $ 12,293 8 $ 7,644 $ 288 $ 1,572 $ 7,932 $ 8,919 9 $ 4,536 $ (49) $ 1,290 $ 4,487 $ 5,529 10 $ 1,515 $ (343) $ 1,030 $ 1,172 $ 2,248 11 $ (1,538) $ (653) $ 755 $ (2,191) $ (1,079) 12 $ (4,621) $ (978) $ 465 $ (5,599) $ (4,453) 13 $ (7,699) $ (1,300) $ 175 $ (8,999) $ (7,814) 14 $ (10,634) $ (1,551) $ (65) $ (12,185) $ (10,949) 15 $ (13,605) $ (1,821) $ (323) $ (15,426) $ (14,139) 16 $ 5,177 $ 2,591 $ (1,287) $ 7,768 $ 6,963 17 $ - $ - $ (1,614) $ - $ (2,267) 18 $ - $ - $ (1,875) $ - $ (1,130) 19 $ - $ - $ (2,211) $ - $ (1,684) 20 $ - $ - $ (2,546) $ - $ (1,985) 21 $ - $ - $ 2,507 $ - $ 3,839 ------------------------------------------------------------------------------------------------- $ 117,685 $ 5,809 $ 14,770 $ 123,495 $ 133,662 =================================================================================================
($000's) Table 4 - NPV@ 7.76% Combined 15 Year Combined 15 Year Nuclear/ 20 Year Nuclear - 15 Year NUGS - 15 Year NUGS - 20 Year Nuclear/NUG NUG ------------------------------------------------------------------------------------------------- Year 1 $ 21,783 $ (311) $ 895 $ 21,473 $ 22,348 2 $ 24,303 $ 2,823 $ 3,368 $ 27,126 $ 27,421 3 $ 18,602 $ 1,612 $ 2,330 $ 20,214 $ 20,689 4 $ 15,090 $ 1,313 $ 2,032 $ 16,403 $ 16,899 5 $ 11,736 $ 922 $ 1,662 $ 12,658 $ 13,192 6 $ 8,820 $ 598 $ 1,345 $ 9,418 $ 9,975 7 $ 6,369 $ 368 $ 1,095 $ 6,737 $ 7,288 8 $ 4,205 $ 158 $ 865 $ 4,364 $ 4,907 9 $ 2,316 $ (25) $ 658 $ 2,291 $ 2,823 10 $ 718 $ (163) $ 488 $ 555 $ 1,065 11 $ (676) $ (287) $ 332 $ (963) $ (475) 12 $ (1,886) $ (399) $ 190 $ (2,285) $ (1,817) 13 $ (2,915) $ (492) $ 66 $ (3,408) $ (2,959) 14 $ (3,737) $ (545) $ (23) $ (4,282) $ (3,848) 15 $ (4,437) $ (594) $ (105) $ (5,031) $ (4,611) 16 $ 1,567 $ 784 $ (389) $ 2,351 $ 2,107 17 $ - $ - $ (453) $ - $ (637) 18 $ - $ - $ (489) $ - $ (294) 19 $ - $ - $ (535) $ - $ (407) 20 $ - $ - $ (572) $ - $ (446) 21 $ - $ - $ 522 $ - $ 800 ------------------------------------------------------------------------------------------------- $ 101,856 $ 5,763 $ 13,283 $ 107,619 $ 114,020 =================================================================================================
Page 2 of 3 Exhibit A Atlantic City Electric Company Net Present Value of Securitization Savings Assumptions 1. Capital Structure Used for Nuclear Non-Securitization Analysis
Coupon Rate Making 3/31/2002 Nominal Weighted Pre-Tax AfterTax Capital Structure Percentage Cost Cost WACC Cost - --------------------------------------------------------------------------------------------- Debt 49.38% 6.76% A 3.34% 3.34% 1.97% Senior Equity 7.90% 8.61% B 0.68% 0.74% 0.44% Common Equity 42.73% 12.50% B 5.34% 9.03% 5.34% ---------- ---------- ---------- Total Capital Cost 100.00% 9.36% 13.11% 7.76% ---------- ---------- ---------- Federal Tax Rate 40.00% State Tqx Rate 9.00% ---------- Effective Tax Rate 40.85% ----------
Notes A - cost rate of debt B - these costs are actually after tax since they are set by NJBPU 2. Debt Rates Used for NUG Non-Securitization Analysis Assumptions: Recovery Period (yrs.) 20 Principal Amount $142,887 After Tax 20 yr. Debt Rate 4.73% Pre Tax 20 yr. Debt Rate 8.00% Assumptions: Recovery Period (yrs.) 15 Principal Amount $142,887 After Tax 15 yr. Debt Rate 4.14% Pre Tax 15 yr. Debt Rate 7.00% 3. Securitization Assumptions Duration Weighted Coupon: 15 yr Nuclear/ 20 yr NUG Contract 5.62% Page 3 of 3 Exhibit B Debt Design Debt Design Variables: Original Principal 440,000,000 Overcollateralization 0.50% 2,200,000 Issuance Costs 19,167,000 Use of Funds Cost - Deductible 0 Use of Funds Cost - Non-Deductible 0 SPE Equity 0.50% 2,200,000 Federal Income Tax Rate 35.00% State Income Tax Rate 9.00% Trustee & Other Fees (Admin Fees) 350,000 Servicing Fee (Annual) 0.10% Interest Rate 5.62%
1 2 3 4 5 6 7 TBC Charge Sales Tax TBC Charge TBC Charge Billed Billed Billed Collected Admin Year (including Sales Tax) (excluding Sales Tax) (excluding Sales Tax) Interest Principal Fees - ------------------------------------------------------------------------------------------------------------------------------------ 1 48,449,899 2,742,447 45,707,452 41,392,561 22,735,228 17,757,333 350,000 2 43,889,779 2,484,327 41,405,452 41,602,708 22,032,337 18,670,371 350,000 3 45,030,386 2,548,890 42,481,496 41,968,279 21,437,789 19,630,489 350,000 4 45,336,922 2,566,241 42,770,681 42,315,288 20,775,165 20,640,123 350,000 5 45,746,164 2,589,405 43,156,758 42,688,961 20,087,128 21,701,833 350,000 6 46,113,686 2,610,209 43,503,478 43,034,035 19,315,722 22,818,313 350,000 7 46,203,610 2,615,299 43,588,311 43,137,672 18,245,274 23,992,398 350,000 8 46,282,108 2,619,742 43,662,366 43,210,980 17,083,911 25,227,069 350,000 9 46,336,645 2,622,829 43,713,816 43,263,919 15,838,458 26,525,461 350,000 10 46,233,183 2,616,973 43,616,210 43,178,978 14,388,104 27,890,875 350,000 11 46,115,187 2,610,294 43,504,893 43,069,871 12,843,092 29,326,778 350,000 12 45,992,107 2,603,327 43,388,780 42,955,317 11,218,494 30,836,824 350,000 13 45,801,503 2,592,538 43,208,965 42,782,323 9,457,474 32,424,850 350,000 14 45,325,898 2,565,617 42,760,281 42,359,266 7,364,369 34,094,896 350,000 15 44,823,284 2,537,167 42,286,117 41,891,933 5,140,720 35,851,213 350,000 16 11,778,285 666,695 11,111,589 13,438,922 3,138,706 9,400,216 350,000 17 14,669,371 830,342 13,839,029 13,484,342 2,653,880 9,930,462 350,000 18 14,283,296 808,488 13,474,808 13,365,883 1,975,265 10,490,619 350,000 19 14,216,209 804,691 13,411,518 13,279,679 1,297,308 11,082,372 350,000 20 14,105,477 798,423 13,307,054 13,179,504 571,999 11,707,505 350,000 ------------------------------------------------------------------------------------------------------------------------------ Total 756,732,999 42,833,943 713,899,055 705,600,424 247,600,424 440,000,000 7,000,000 ==============================================================================================================================
11 12 13 Aggregate TBC 8 9 10 Customer Charge per for TBC plus column 1 MTC -Tax Billed Servicing Over- Debt Balance MTC -Tax above (including Sales Tax) Year Fee collateralization Outstanding (including Sales Tax) - ---------------------------------------------------------------------------------------------------------------------------- 440,000,000 1 440,000 110,000 422,242,667 66,393,266 48,449,899 17,943,367 2 440,000 110,000 403,572,296 55,593,533 43,889,779 11,703,753 3 440,000 110,000 383,941,806 59,329,221 45,030,386 14,298,835 4 440,000 110,000 363,301,684 60,041,946 45,336,922 14,705,024 5 440,000 110,000 341,599,851 61,302,570 45,746,164 15,556,406 6 440,000 110,000 318,781,538 62,489,728 46,113,686 16,376,041 7 440,000 110,000 294,789,140 63,435,975 46,203,610 17,232,365 8 440,000 110,000 269,562,072 64,437,028 46,282,108 18,154,920 9 440,000 110,000 243,036,610 65,455,535 46,336,645 19,118,890 10 440,000 110,000 215,145,736 66,357,746 46,233,183 20,124,563 11 440,000 110,000 185,818,957 67,309,410 46,115,187 21,194,223 12 440,000 110,000 154,982,134 68,310,086 45,992,107 22,317,979 13 440,000 110,000 122,557,284 69,297,016 45,801,503 23,495,513 14 440,000 110,000 88,462,388 70,045,177 45,325,898 24,719,279 15 440,000 110,000 52,611,174 70,851,263 44,823,284 26,027,979 16 440,000 110,000 43,210,958 12,701,924 11,778,285 923,639 17 440,000 110,000 33,280,495 22,485,641 14,669,371 7,816,270 18 440,000 110,000 22,789,877 21,279,953 14,283,296 6,996,657 19 440,000 110,000 11,707,505 21,867,380 14,216,209 7,651,171 20 440,000 110,000 0 22,186,227 14,105,477 8,080,750 ---------------------------------------------------------------------------------------------------------------------- Total 8,800,000 2,200,000 1,071,170,624 756,732,999 314,437,625 ======================================================================================================================
14 15 16 Total Total MTC - Tax MTC - Tax MTC -Tax Related Billed Collected Sales Tax (excluding (excluding Year Billed Sales Tax) Sales Tax) - ------------------------------------------------------------ 1 1,015,662 16,927,705 15,329,689 2 662,477 11,041,277 11,493,998 3 809,368 13,489,467 13,161,458 4 832,360 13,872,664 13,702,287 5 880,551 14,675,855 14,464,151 6 926,946 15,449,096 15,231,478 7 975,417 16,256,948 16,028,100 8 1,027,637 17,127,283 16,884,359 9 1,082,201 18,036,689 17,781,522 10 1,139,126 18,985,437 18,717,513 11 1,199,673 19,994,550 19,711,607 12 1,263,282 21,054,698 20,756,946 13 1,329,935 22,165,578 21,852,524 14 1,399,204 23,320,074 22,991,830 15 1,473,282 24,554,697 24,207,587 16 52,281 871,358 2,716,650 17 442,430 7,373,839 6,789,546 18 396,037 6,600,620 6,593,831 19 433,085 7,218,086 7,096,122 20 457,401 7,623,349 7,513,865 ------------------------------------------------------ Total 17,798,356 296,639,269 293,025,064 ======================================================
Exhibit B TBC Development
Year 1 Year 2 Year 3 Year 4 Year 5 --------------- -------------------------------------------------------------------- Principal 17,757,333 18,670,371 19,630,489 20,640,123 21,701,833 Interest 22,735,228 22,032,337 21,437,789 20,775,165 20,087,128 Administration Fees 350,000 350,000 350,000 350,000 350,000 Servicing Fees 440,000 440,000 440,000 440,000 440,000 Over-collateralization 110,000 110,000 110,000 110,000 110,000 --------------- -------------------------------------------------------------------- A Transition Bond Periodic Payment Requirement 41,392,561 41,602,708 41,968,279 42,315,288 42,688,961 B Less TBC Billed & Expected to be N/A 3,858,950 3,244,093 3,327,848 3,349,879 Collected During the Upcoming Period --------------- -------------------------------------------------------------------- C Transition Bond Debt Service to be Collected During the Period 41,392,561 37,743,759 38,724,186 38,987,440 39,339,082 D True-up Adjustment for Under/(Over) Collections of Prior Period N/A --------------- -------------------------------------------------------------------- E Total TBC to be Billed and Collected During the Period 41,392,561 37,743,759 38,724,186 38,987,440 39,339,082 F Projected Kwh's to be Delivered, 8,935,292,434 9,832,485,684 9,972,043,801 10,108,808,512 10,244,698,489 Billed, & Cash Collected During the Period G TBC Rate per Kwh Before Sales Tax ($ per Kwh) 0.004632 0.003839 0.003883 0.003857 0.003840 H TBC Rate per Kwh Including Sales Tax ($ per Kwh) 0.004910 0.004069 0.004116 0.004088 0.004070 Kwh's Billed 9,866,735,480 10,786,379,794 10,939,606,032 11,089,741,336 11,238,899,294 TBC Charged 45,707,452 0 41,405,452 42,481,496 42,770,681 43,156,758 Year 6 Year 7 Year 8 Year 9 Year 10 -------------------------------------------------------------------------------------- Principal 22,818,313 23,992,398 25,227,069 26,525,461 27,890,875 Interest 19,315,722 18,245,274 17,083,911 15,838,458 14,388,104 Administration Fees 350,000 350,000 350,000 350,000 350,000 Servicing Fees 440,000 440,000 440,000 440,000 440,000 Over-collateralization 110,000 110,000 110,000 110,000 110,000 -------------------------------------------------------------------------------------- A Transition Bond Periodic Payment Requirement 43,034,035 43,137,672 43,210,980 43,263,919 43,178,978 B Less TBC Billed & Expected to be 3,379,447 3,406,177 3,412,304 3,418,347 3,422,375 Collected During the Upcoming Period -------------------------------------------------------------------------------------- C Transition Bond Debt Service to be Collected During the Period 39,654,589 39,731,495 39,798,675 39,845,573 39,756,604 D True-up Adjustment for Under/(Over) Collections of Prior Period -------------------------------------------------------------------------------------- E Total TBC to be Billed and Collected During the Period 39,654,589 39,731,495 39,798,675 39,845,573 39,756,604 F Projected Kwh's to be Delivered, 10,378,452,082 10,512,278,213 10,642,832,674 10,775,868,083 10,910,566,434 Billed, & Cash Collected During the Period G TBC Rate per Kwh Before Sales Tax ($ per Kwh) 0.003821 0.003780 0.003739 0.003698 0.003644 H TBC Rate per Kwh Including Sales Tax ($ per Kwh) 0.004050 0.004006 0.003964 0.003920 0.003862 Kwh's Billed 11,385,788,525 11,532,726,004 11,676,048,302 11,821,998,906 11,969,773,892 TBC Charged 43,503,478 43,588,311 43,662,366 43,713,816 43,616,210 Year 11 Year 12 Year 13 Year 14 Year 15 -------------------------------------------------------------------------------------- Principal 29,326,778 30,836,824 32,424,850 34,094,896 35,851,213 Interest 12,843,092 11,218,494 9,457,474 7,364,369 5,140,720 Administration Fees 350,000 350,000 350,000 350,000 350,000 Servicing Fees 440,000 440,000 440,000 440,000 440,000 Over-collateralization 110,000 110,000 110,000 110,000 110,000 -------------------------------------------------------------------------------------- A Transition Bond Periodic Payment Requirement 43,069,871 42,955,317 42,782,323 42,359,266 41,891,933 B Less TBC Billed & Expected to be 3,414,733 3,406,018 3,396,928 3,382,850 3,347,722 Collected During the Upcoming Period -------------------------------------------------------------------------------------- C Transition Bond Debt Service to be Collected During the Period 39,655,138 39,549,299 39,385,396 38,976,416 38,544,211 D True-up Adjustment for Under/(Over) Collections of Prior Period -------------------------------------------------------------------------------------- E Total TBC to be Billed and Collected During the Period 39,655,138 39,549,299 39,385,396 38,976,416 38,544,211 F Projected Kwh's to be Delivered, 11,046,948,514 11,185,035,371 11,324,848,313 11,466,408,917 11,609,739,028 Billed, & Cash Collected During the Period G TBC Rate per Kwh Before Sales Tax ($ per Kwh) 0.003590 0.003536 0.003478 0.003399 0.003320 H TBC Rate per Kwh Including Sales Tax ($ per Kwh) 0.003805 0.003748 0.003686 0.003603 0.003519 Kwh's Billed 12,119,396,066 12,270,888,517 12,424,274,623 12,579,578,056 12,736,822,781 TBC Charged 43,504,893 43,388,780 43,208,965 42,760,281 42,286,117 Year 16 Year 17 Year 18 Year 19 Year 20 -------------------------------------------------------------------------------------- Principal 9,400,216 9,930,462 10,490,619 11,082,372 11,707,505 Interest 3,138,706 2,653,880 1,975,265 1,297,308 571,999 Administration Fees 350,000 350,000 350,000 350,000 350,000 Servicing Fees 440,000 440,000 440,000 440,000 440,000 Over-collateralization 110,000 110,000 110,000 110,000 110,000 -------------------------------------------------------------------------------------- A Transition Bond Periodic Payment Requirement 13,438,922 13,484,342 13,365,883 13,279,679 13,179,504 B Less TBC Billed & Expected to be 3,310,600 869,931 1,083,464 1,054,949 1,049,994 Collected During the Upcoming Period -------------------------------------------------------------------------------------- C Transition Bond Debt Service to be Collected During the Period 10,128,323 12,614,411 12,282,420 12,224,731 12,129,510 D True-up Adjustment for Under/(Over) Collections of Prior Period -------------------------------------------------------------------------------------- E Total TBC to be Billed and Collected During the Period 10,128,323 12,614,411 12,282,420 12,224,731 12,129,510 F Projected Kwh's to be Delivered, 11,754,860,766 11,901,796,526 12,050,568,982 12,201,201,095 12,353,716,108 Billed, & Cash Collected During the Period G TBC Rate per Kwh Before Sales Tax ($ per Kwh) 0.000862 0.001060 0.001019 0.001002 0.000982 H TBC Rate per Kwh Including Sales Tax ($ per Kwh) 0.000913 0.001123 0.001080 0.001062 0.001041 Kwh's Billed 12,896,033,066 13,057,233,480 13,220,448,898 13,385,704,509 13,553,025,816 TBC Charged 11,111,589 13,839,029 13,474,808 13,411,518 13,307,054
A = Total Annual Transition Bond Debt Service Requirement and Fees Related to Debt Service (See Exhibit C-1) B = TBC revenues billed in the prior period and expected to be collected in the current period. (prior period G times kwh's billed during the prior period less actual period collections and expected uncollectable accounts) C = Amount of Total Debt service required to be funded through TBC collections during the period. (A minus B) D = Amount of Under or (Over) collection of the prior period TBC as computed under the methodology described in Exhibit C-3. E = total amount required to be collected during the upcoming period through the TBC (C plus D). F = Projected kwh's that will be sold, delivered, billed, and collected during the upcoming period. This amount is computed by multiplying forecasted kwh sales on a monthly basis times a percentage expected to be collected in cash each month subsequent to the sale. The collection percentage is developed based on historical collection experience inherent in ACE's electric sales. See Exhibit C-4. G = TBC before statutory addition of sales tax (E divided by F). H = TBC including statutory addition of sales tax (G times 1.06).
Kwh's Billed Year 1 Year 2 Year 3 Year 4 Year 5 ----------------------------- -------------------------------------------------------------------- Residential 3,868,332,873 4,098,874,211 4,133,816,807 4,166,706,316 4,199,181,568 Commercial 4,801,738,667 5,440,065,246 5,555,304,365 5,669,370,173 5,782,916,857 Industrial 1,196,663,940 1,247,440,337 1,250,484,860 1,253,664,847 1,256,800,869 --------------- -------------------------------------------------------------------- 9,866,735,480 10,786,379,794 10,939,606,032 11,089,741,336 11,238,899,294 =============== ==================================================================== Kwh's Billed Year 6 Year 7 Year 8 Year 9 Year 10 --------------------------------------------------------------------------------------------------- Residential 4,230,102,772 4,260,902,102 4,311,011,773 4,364,899,421 4,419,460,663 Commercial 5,896,290,679 6,009,704,973 6,088,130,453 6,164,232,084 6,241,284,985 Industrial 1,259,395,074 1,262,118,928 1,276,906,075 1,292,867,401 1,309,028,244 -------------------------------------------------------------------------------------- 11,385,788,525 11,532,726,004 11,676,048,302 11,821,998,906 11,969,773,892 ====================================================================================== Kwh's Billed Year 11 Year 12 Year 13 Year 14 Year 15 ---------------------------------------------------------------------------------------------------- Residential 4,474,703,922 4,530,637,721 4,587,270,692 4,644,611,576 4,702,669,220 Commercial 6,319,301,047 6,398,292,310 6,478,270,964 6,559,249,351 6,641,239,968 Industrial 1,325,391,097 1,341,958,485 1,358,732,966 1,375,717,129 1,392,913,593 -------------------------------------------------------------------------------------- 12,119,396,066 12,270,888,517 12,424,274,623 12,579,578,056 12,736,822,781 ====================================================================================== Kwh's Billed Year 16 Year 17 Year 18 Year 19 Year 20 ---------------------------------------------------------------------------------------------------- Residential 4,761,452,586 4,820,970,743 4,881,232,877 4,942,248,288 5,004,026,392 Commercial 6,724,255,468 6,808,308,661 6,893,412,520 6,979,580,176 7,066,824,928 Industrial 1,410,325,013 1,427,954,075 1,445,803,501 1,463,876,045 1,482,174,495 -------------------------------------------------------------------------------------- 12,896,033,066 13,057,233,480 13,220,448,898 13,385,704,509 13,553,025,816 ======================================================================================
Page 1 of 3 Exhibit B MTC-Tax Charge Development & True-Up
Year 1 Year 2 Year 3 Year 4 Year 5 ---------------- ------------------------------------------------------------- A Forecasted TBC Billed (excluding sales tax) 45,707,452 41,405,452 42,481,496 42,770,681 43,156,758 (TBC Rate times forecasted kwh sales) B Forecasted MTC-Tax Billed (excluding sales tax) 16,927,705 11,041,277 13,489,467 13,872,664 14,675,855 (MTC-Tax Rate times forecasted kwh sales) ---------------- ------------------------------------------------------------- C Total Taxable Revenue 62,635,156 52,446,729 55,970,963 56,643,345 57,832,613 Less Deductible Expenses: Interest on Transition Bonds 22,735,228 22,032,337 21,437,789 20,775,165 20,087,128 Amortization of Transition Bond Issuance Expense 958,350 958,350 958,350 958,350 958,350 Uncollectables 624,799 528,959 565,832 576,900 589,175 Administration and Servicing Fees 790,000 790,000 790,000 790,000 790,000 Other - - - - - ---------------- ------------------------------------------------------------- D Total Deductions 25,108,377 24,309,646 23,751,971 23,100,415 22,424,654 E Taxable Income 37,526,780 28,137,083 32,218,992 33,542,930 35,407,959 F Tax Rate 40.85% 40.85% 40.85% 40.85% 40.85% ---------------- ------------------------------------------------------------- G Tax Obligation 15,329,689 11,493,998 13,161,458 13,702,287 14,464,151 H Less MTC-Tax Billed and expected to be 1,429,158 865,078 1,056,717 1,086,533 collected during the upcoming period ---------------- ------------------------------------------------------------- I Tax to be billed & collected 15,329,689 10,064,841 12,296,381 12,645,570 13,377,618 J Projected kwh's to be delivered, billed and 8,935,292,434 9,832,485,684 9,972,043,801 10,108,808,512 10,244,698,489 cash collected during the period K MTC -Tax Charge before sales tax ($ per kwh) 0.001716 0.001024 0.001233 0.001251 0.001306 L MTC-Tax Charge including sales tax ($ per kwh) 0.001819 0.001085 0.001307 0.001326 0.001384 Year 6 Year 7 Year 8 Year 9 Year 10 ------------------------------------------------------------------------------- A Forecasted TBC Billed (excluding sales tax) 43,503,478 43,588,311 43,662,366 43,713,816 43,616,210 (TBC Rate times forecasted kwh sales) B Forecasted MTC-Tax Billed (excluding sales tax) 15,449,096 16,256,948 17,127,283 18,036,689 18,985,437 (MTC-Tax Rate times forecasted kwh sales) ------------------------------------------------------------------------------- C Total Taxable Revenue 58,952,573 59,845,259 60,789,649 61,750,505 62,601,647 Less Deductible Expenses: Interest on Transition Bonds 19,315,722 18,245,274 17,083,911 15,838,458 14,388,104 Amortization of Transition Bond Issuance Expense 958,350 958,350 958,350 958,350 958,350 Uncollectables 602,142 615,159 624,807 634,880 645,088 Administration and Servicing Fees 790,000 790,000 790,000 790,000 790,000 Other - - - - - ------------------------------------------------------------------------------- D Total Deductions 21,666,214 20,608,783 19,457,068 18,221,688 16,781,542 E Taxable Income 37,286,359 39,236,476 41,332,581 43,528,817 45,820,105 F Tax Rate 40.85% 40.85% 40.85% 40.85% 40.85% ------------------------------------------------------------------------------- G Tax Obligation 15,231,478 16,028,100 16,884,359 17,781,522 18,717,513 H Less MTC-Tax Billed and expected to be 1,149,212 1,209,612 1,272,673 1,340,903 1,412,101 collected during the upcoming period ------------------------------------------------------------------------------- I Tax to be billed & collected 14,082,266 14,818,488 15,611,686 16,440,619 17,305,412 J Projected kwh's to be delivered, billed and 10,378,452,082 10,512,278,213 10,642,832,674 10,775,868,083 10,910,566,434 cash collected during the period K MTC -Tax Charge before sales tax ($ per kwh) 0.001357 0.001410 0.001467 0.001526 0.001586 L MTC-Tax Charge including sales tax ($ per kwh) 0.001438 0.001494 0.001555 0.001617 0.001681 Year 11 Year 12 Year 13 Year 14 Year 15 ------------------------------------------------------------------------------- A Forecasted TBC Billed (excluding sales tax) 43,504,893 43,388,780 43,208,965 42,760,281 42,286,117 (TBC Rate times forecasted kwh sales) B Forecasted MTC-Tax Billed (excluding sales tax) 19,994,550 21,054,698 22,165,578 23,320,074 24,554,697 (MTC-Tax Rate times forecasted kwh sales) --------------- -------------------------------------------------------------- C Total Taxable Revenue 63,499,443 64,443,478 65,374,543 66,080,355 66,840,814 Less Deductible Expenses: Interest on Transition Bonds 12,843,092 11,218,494 9,457,474 7,364,369 5,140,720 Amortization of Transition Bond Issuance Expense 958,350 958,350 958,350 958,350 958,350 Uncollectables 654,373 664,037 674,168 684,087 692,046 Administration and Servicing Fees 790,000 790,000 790,000 790,000 790,000 Other - - - - - --------------- -------------------------------------------------------------- D Total Deductions 15,245,815 13,630,880 11,879,992 9,796,806 7,581,115 E Taxable Income 48,253,628 50,812,597 53,494,552 56,283,549 59,259,699 F Tax Rate 40.85% 40.85% 40.85% 40.85% 40.85% --------------- -------------------------------------------------------------- G Tax Obligation 19,711,607 20,756,946 21,852,524 22,991,830 24,207,587 H Less MTC-Tax Billed and expected to be 1,486,379 1,565,382 1,648,382 1,735,353 1,825,739 collected during the upcoming period --------------- -------------------------------------------------------------- I Tax to be billed & collected 18,225,229 19,191,564 20,204,142 21,256,477 22,381,848 J Projected kwh's to be delivered, billed and 11,046,948,514 11,185,035,371 11,324,848,313 11,466,408,917 11,609,739,028 cash collected during the period K MTC -Tax Charge before sales tax ($ per kwh) 0.001650 0.001716 0.001784 0.001854 0.001928 L MTC-Tax Charge including sales tax ($ per kwh) 0.001749 0.001819 0.001891 0.001965 0.002044 Year 16 Year 17 Year 18 Year 19 Year 20 --------------- -------------------------------------------------------------- A Forecasted TBC Billed (excluding sales tax) 11,111,589 13,839,029 13,474,808 13,411,518 13,307,054 (TBC Rate times forecasted kwh sales) B Forecasted MTC-Tax Billed (excluding sales tax) 871,358 7,373,839 6,600,620 7,218,086 7,623,349 (MTC-Tax Rate times forecasted kwh sales) --------------- -------------------------------------------------------------- C Total Taxable Revenue 11,982,947 21,212,869 20,075,428 20,629,604 20,930,403 Less Deductible Expenses: Interest on Transition Bonds 3,138,706 2,653,880 1,975,265 1,297,308 571,999 Amortization of Transition Bond Issuance Expense 958,350 958,350 958,350 958,350 958,350 Uncollectables 445,586 189,963 210,243 212,780 216,260 Administration and Servicing Fees 790,000 790,000 790,000 790,000 790,000 Other - - - - - --------------- -------------------------------------------------------------- D Total Deductions 5,332,641 4,592,193 3,933,858 3,258,437 2,536,609 E Taxable Income 6,650,306 16,620,676 16,141,570 17,371,167 18,393,794 F Tax Rate 40.85% 40.85% 40.85% 40.85% 40.85% --------------- -------------------------------------------------------------- G Tax Obligation 2,716,650 6,789,546 6,593,831 7,096,122 7,513,865 H Less MTC-Tax Billed and expected to be 1,922,399 68,219 577,301 516,766 565,107 collected during the upcoming period --------------- -------------------------------------------------------------- I Tax to be billed & collected 794,251 6,721,327 6,016,530 6,579,356 6,948,758 J Projected kwh's to be delivered, billed and 11,754,860,766 11,901,796,526 12,050,568,982 12,201,201,095 12,353,716,108 cash collected during the period K MTC -Tax Charge before sales tax ($ per kwh) 0.000068 0.000565 0.000499 0.000539 0.000562 L MTC-Tax Charge including sales tax ($ per kwh) 0.000072 0.000599 0.000529 0.000572 0.000596
Page 2 of 3 Exhibit B MTC-Tax Charge Development & True-Up Line Item Descriptions A = Total forecasted taxable revenue from the TBC equal to the TBC rate (excluding sales tax) multiplied by forecasted kwh sales for the period. B = Total forecasted taxable revenue from the MTC - Tax Charge equal to the MTC - Tax Rate (excluding sales tax) times forecasted kwh sales for the period. Note that this computation is circular since this amount is used in developing the MTC - Tax Charge Rate. Therefore the amount of the MTC - Tax Charge Rate and the forecasted taxable revenue must be solved simultaneously in an iterative computation. C = Total taxable revenue associated with the transition bonds (A plus B) (See Exhibit C-1 of Petition). D = All deductible expenses associated with the transition bonds (See Exhibit C-1 of Petition). Amortization (See Ex. C-1 of Petition.) Amortization of transition bond issuance costs equals issuance costs divided by term of the transition bonds. Deduction for uncollectable accounts is estimated based on historical collection experience. E = Taxable Income (C minus D). F = Effective Tax Rate (NJ Corporate Business Tax Rate = 9%, Federal Tax Rate = 35%). G = Total Income Tax obligation (E times F). H = MTC -Tax Charge revenues billed in the prior period and expected to be collected in the current period (prior period K times kwh billed during the prior period less actual prior period collections and expected uncollectable accounts). I = Amount of Total Income Tax obligation required to be funded through MTC - Tax collections during the period. J = Projected kwh's that will be sold, delivered, billed, and collected during the upcoming period. The amount is computed by multiplying forecasted kwh sales on a monthly basis times a percentage expected to be collected in cash each month subsequent to the sale. The collection percentage is developed based on historical collection experience. This methodology takes into account the collection lag and uncollectable experience inherent in ACE's electric sales (See Exhibit C-4 of the Petition). K = MTC -Tax Charge Rate before statutory addition of sales tax (I divided by J). L = MTC - Tax Charge Rate including statutory addition of sales tax (K times 1.06). Page 3 of 3 In the Matter of the Petition of Atlantic City Electric Company for a Bondable Stranded Costs Rate Order in Accordance with N.J.S.A. 48:3-49 et seq. BPU Docket No. EF 01060394 - -------------------------------------------------------------------------------- Dr. Fred Grygiel, Chief Economist Ray Lamboy, DAG Office of the Economist Department of Law & Public Safety Board of Public Utilities Division of Law Two Gateway Center 124 Halsey Street, P.O. Box 45029 Newark, NJ 07102 Newark, NJ 07101 Phone: (973) 648-3860 Phone: (973) 648-4726 Fax: (973) 648-4410 Fax: (973) 648-3879 Mark Beyer, Manager Seema M. Singh, Director Office of the Economist Division of Ratepayer Advocate Board of Public Utilities 31 Clinton Street, 11th Fl., Two Gateway Center P.O. Box 46005 Newark, NJ 07102 Newark, NJ 07101 Phone: (973) 648-3414 Phone: (973) 648-7112 Fax: (973) 648-4410 Fax: (973) 624-1047 Nusha Wyner, Director Badrhn Ubushin, Esq. Division of Energy Division of Ratepayer Advocate Board of Public Utilities 31 Clinton Street, 11th Fl., Two Gateway Center P.O. Box 46005 Newark, NJ 07102 Newark, NJ 07101 Phone: (973) 648-7290 Phone: (973) 648-2690 Fax: (973) 648-2467 Fax: (973) 624-1047 George Riepe Stephen B. Genzer, Esq. Division of Energy LeBoeuf, Lamb, Greene & MacRae, LLP Board of Public Utilities One Riverfront Plaza, 6th Floor Two Gateway Center Newark, NJ 07102-5490 Newark, NJ 07102 Phone: (973) 643-8000 Phone: (973) 648-2160 Fax: (973) 643-6111 Fax: (973) 648-2467 Mark L. Mucci, Esq. Elise Goldblat, SDAG LeBoeuf, Lamb, Greene & MacRae, LLP Department of Law & Public Safety One Riverfront Plaza, 6th Floor Division of Law Newark, NJ 07102-5490 124 Halsey Street, P.O. Box 45029 Phone: (973) 643-8000 Newark, NJ 07101 Fax: (973) 643-6111 Phone: (973) 648-3174 Fax: (973) 648-3879 Colleen A. Foley, Esq. Geoffrey Hurley, Esq. LeBoeuf, Lamb, Greene & MacRae, LLP Latham & Watkins One Riverfront Plaza, 6th Floor 885 Third Avenue Newark, NJ 07102-5490 New York, NY 10022 Phone: (973) 643-6662 Phone: (212) 906-1243 Fax: (973) 643-6111 Jack Kattan Charles F. Morgan Morgan Stanley Manager, Regulatory Restructuring 1585 Broadway Conectiv Power Delivery New York, NY 10036 5100 Harding Highway, Suite 155 Phone: (212) 761-1850 Mays Landing, NJ 08330 Fax: (212) 761-0872 Phone: (609) 625-5856 Fax: (609) 625-5838 Andrea Zana Morgan Stanley Donna Kinzel 1585 Broadway Assistant Treasurer New York, NY 10036 Conectiv 800 King Street David Rush P.O. Box 231 Wilmington, DE 19899 Bear Stearns & Co., Inc. Phone: (302) 429-3004 245 Park Avenue Fax: (302) 429-3188 New York, NY 10167 Jay Ziminsky, Finance Manager James A. Rothschild Treasury Department Rothschild Financial Consulting Conectiv 115 Scarlet Oak Drive 800 King Street Wilton, CT 06897 P.O. Box 231 Wilmington, DE 19899 Phone: (302) 429-3115 Fax: (302) 429-3006 Thomas P. Dwyer, Esq. Special Counsel Conectiv 800 King Street P.O. Box 231 Wilmington, DE 19899 Phone: (302) 429-3045 Fax: (302) 429-3188 -----END PRIVACY-ENHANCED MESSAGE-----