-----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, FVtB8dgopGmnhADuOfYwGx2e/gEDF+keci4s1/A4PKxArjMNyIjoYMUIIFwcOqhn 5EIzOIdenTee8sv/iHOi+A== 0000898080-97-000169.txt : 19970703 0000898080-97-000169.hdr.sgml : 19970703 ACCESSION NUMBER: 0000898080-97-000169 CONFORMED SUBMISSION TYPE: U-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970702 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONECTIV INC CENTRAL INDEX KEY: 0001029590 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 510379417 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1 SEC ACT: 1935 Act SEC FILE NUMBER: 070-09069 FILM NUMBER: 97635687 BUSINESS ADDRESS: STREET 1: 800 KING STREET P O BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19801 BUSINESS PHONE: 3024293017 MAIL ADDRESS: STREET 1: 800 KING ST STREET 2: P O BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19801 U-1 1 FORM U-1 File No. 70- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM U-1 APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 --------------------------------- Conectiv, Inc. 800 King Street Wilmington, Delaware 19899 ---------------------------------- (Name of company filing this statement and address of principal executive offices) None ---------------------------------- (Name of top registered holding company parent) Barbara S. Graham Michael J. Barron President Vice President 800 King Street 6801 Black Horse Pike Wilmington, Delaware 19899 Egg Harbor Township, New Jersey 08234 (Names and addresses of agents for service) The Commission is requested to send copies of all notices, orders and communications in connection with this Application- Declaration to: William S. Lamb, Esq. James M. Cotter, Esq. H. Liza Moses, Esq. Vincent Pagano, Jr., Esq. Joanne C. Rutkowski, Esq. Simpson Thacher & LeBoeuf, Lamb, Greene & Bartlett MacRae, L.L.P. 425 Lexington Avenue 125 West 55th Street New York, New York 10017 New York, New York 10019 Dale Stoodley, Esq. James E. Franklin II, Esq. Delmarva Power & Light Company Atlantic Energy, Inc. 800 King Street 6801 Black Horse Pike Wilmington, Delaware 19899 Egg Harbor Township, New Jersey 08234 TABLE OF CONTENTS Page Item 1. Description of Proposed Mergers......................................1 A. Introduction.....................................................1 1. General Request..............................................2 2. Overview of the Mergers......................................2 B. Description of the Parties to the Mergers........................3 1. General Description..........................................3 a. Delmarva.................................................3 b. Atlantic.................................................4 c. Conectiv and its Subsidiaries............................6 i. Conectiv (6); ii. Delmarva (7); iii. Delmarva's Subsidiaries (7); iv. ACE (7); v. AEE (7); vi. AEII (7); vii. Support Conectiv (8); viii. DS Sub (8) 2. Description of Facilities....................................8 a. Delmarva.................................................8 i. General (8); ii. Electric Generating Facilities and Resources (8); iii. Electric Transmission and Other Facilities (10); iv. Gas Facilities (11); v. Other (11) b. Atlantic................................................11 i. General (11); ii. Electric Generating Facilities and Resources (12); iii. Electric Transmission and Other Facilities (13); iv. Other (13) 3. Nonutility Subsidiaries.....................................13 a. Delmarva................................................13 b. Atlantic................................................17 C. Description of the Mergers......................................20 1. Background and Negotiations Leading to the Proposed Mergers.20 2. Merger Agreement............................................25 D. Benefit Plans...................................................26 E. Management and Operations of Conectiv Following the Mergers.....26 F. Industry Restructuring Initiatives..............................28 Item 2. Fees, Commissions and Expenses......................................30 Item 3. Applicable Statutory Provisions.....................................31 A. Legal Analysis..................................................32 1. Section 10(b)...............................................34 a. Section 10(b)(1)........................................35 i. Interlocking Relationships (35); ii. Concentration of Control (35) b. Section 10(b)(2) -- Fairness of Consideration...........38 c. Section 10(b)(2) -- Reasonableness of Fees..............39 d. Section 10(b)(3)........................................40 2. Section 10(c)...............................................48 a. Section 10(c)(1)........................................49 i. Retention of Gas Operations (50); ii. Direct and Indirect Nonutility Subsidiaries of Conectiv (57) b. Section 10(c)(2)........................................67 i. Efficiencies and Economies (67); ii. Integrated Public Utility System (71) 3. Section 10(f)...............................................76 4. Other Applicable Provisions -- Section 9(a)(1)..............77 B. Intra-System Provision of Services..............................77 1. Support Conectiv............................................79 2. Other Services..............................................80 C. Transfer of Utility Assets......................................81 Item 4. Regulatory Approvals................................................81 A. Antitrust.......................................................81 B. Federal Power Act...............................................82 C. Atomic Energy Act...............................................82 D. State Public Utility Regulation.................................82 Item 5. Procedure...........................................................84 Item 6. Exhibits and Financial Statements...................................84 A. Exhibits.......................................................84 B. Financial Statements...........................................86 Item 7. Information as to Environmental Effects.............................86 Item 1. Description of Proposed Mergers A. Introduction This Application/Declaration seeks approvals relating to the proposed combination of Delmarva Power & Light Company ("Delmarva") and Atlantic Energy, Inc. ("Atlantic"), pursuant to which Delmarva and its direct subsidiaries and the direct subsidiaries of Atlantic will become direct subsidiaries of Conectiv, Inc. ("Conectiv"), a new Delaware holding company (the "Mergers").1 Following the consummation of the Mergers, Conectiv will register with the Securities and Exchange Commission (the "SEC" or "Commission") as a holding company under the Public Utility Holding Company Act of 1935 (the "Act"). - -------- 1 Following consummation of the Mergers, Conectiv, Inc. will change its name to Conectiv. The Mergers are expected to produce substantial benefits to the public, investors and consumers, and meet all applicable standards of the Act. Among other things, Delmarva and Atlantic believe that the Mergers will allow the shareholders of each of the companies to participate in a larger, financially stronger company that, through a combination of the equity, management, human resources and technical expertise of each company, will be able to achieve increased financial stability and strength, greater opportunities for earnings growth, reduction of operating costs, efficiencies of operation, better use of facilities for the benefit of customers, improved ability to use new technologies, greater retail and industrial sales diversity and improved capability to make wholesale power purchases and sales. In this regard, Delmarva and Atlantic believe that synergies created by the Mergers will generate substantial cost savings which would not have been available absent the Mergers. Delmarva and Atlantic have estimated the dollar value of certain synergies resulting from the Mergers to be in excess of $500 million over a ten-year period. The expected benefits of the Mergers are discussed in further detail in Item 3.A.2.b.i. below. The shareholders of Delmarva and Atlantic both approved the Mergers at their respective meetings held on January 30, 1997. Delmarva and Atlantic have submitted applications requesting approval of the Mergers and/or related matters to (i) the Delaware Public Service Commission (the "DPSC"), (ii) the Virginia State Corporation Commission (the "VSCC"), (iii) the New Jersey Board of Public Utilities (the "NJBPU"), (iv) the Pennsylvania Public Utility Commission (the "PPUC"), (v) the Maryland Public Service Commission (the "MPSC"), (vi) the Federal Energy Regulatory Commission (the "FERC"), and (vii) the Nuclear Regulatory Commission (the "NRC"). Finally, both companies have made the required filings with the Antitrust Division of the U.S. Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). See Item 4 below for additional detail regarding these regulatory approvals. Apart from the approval of the Commission under the Act, the foregoing approvals are the only regulatory approvals required for the Mergers. In order to permit timely consummation of the Mergers and the realization of the substantial benefits they are expected to produce, Conectiv requests that the Commission's review of this Application/ Declaration commence and proceed as expeditiously as practicable. 1. General Request Pursuant to Sections 9(a)(2) and 10 of the Act, Conectiv hereby requests authorization and approval of the Commission to acquire, by means of the Mergers described below, all of the issued and outstanding common stock of Delmarva and Atlantic. Conectiv also hereby requests that the Commission approve: (i) the designation of Support Conectiv ("Support Conectiv") as a subsidiary service company in accordance with the provisions of Rule 88 of the Act and the Service Agreement as a basis for Support Conectiv to comply with Section 13 of the Act and the Commission's rules thereunder; (ii) the retention by Conectiv of the gas properties of Delmarva and the continued operation of Delmarva as a combination utility; (iii) the retention by Conectiv of the nonutility activities, businesses and investments of Delmarva and Atlantic; (iv) the investment by Conectiv, directly or indirectly, of up to an additional $100 million (exclusive of guarantees) through the period ending December 31, 2000 for the further development, including through acquisitions, of its HVAC, consumer services and customer financing businesses (generally, "Consumer Services"); and (v) the continuation of all outstanding intrasystem financing arrangements. 2. Overview of the Mergers Pursuant to an Agreement and Plan of Merger, dated as of August 9, 1996, as amended and restated as of December 26, 1996 (the "Merger Agreement"), DS Sub, Inc., a Delaware corporation and a direct subsidiary of Conectiv ("DS Sub"), will be merged with and into Delmarva, with Delmarva continuing as the surviving corporation (the "Delmarva Merger"), and Atlantic will be merged with and into Conectiv, with Conectiv as the surviving corporation (the "Atlantic Merger"). As a result of the Delmarva Merger and the Atlantic Merger, Delmarva and its direct subsidiaries and certain direct subsidiaries of Atlantic will become direct subsidiaries of Conectiv, and Conectiv will be a holding company within the meaning of the Act. A chart of the proposed corporate structure of Conectiv following consummation of the Mergers is attached hereto as Exhibit E-4. The common shareholders of Delmarva will receive for each issued and outstanding share of common stock, par value $2.25 per share, of Delmarva (the "Delmarva Common Stock"), one share of common stock of Conectiv, par value $.01 per share ("Conectiv Common Stock"). The common shareholders of Atlantic will receive for each issued and outstanding share of common stock, no par value per share, of Atlantic (the "Atlantic Common Stock"), 0.75 shares of Conectiv Common Stock and 0.125 shares of Class A common stock of Conectiv, par value $.01 per share ("Conectiv Class A Common Stock"). Following the Mergers the common shareholders of Delmarva and Atlantic will become common shareholders of Conectiv. (See Item 1.C.2 below). The Mergers will have no effect on the shares of preferred stock of Delmarva issued and outstanding at the time of the consummation of the Mergers, each series of which and each share of which will remain unchanged. Atlantic has no shares of preferred stock outstanding. A copy of the Merger Agreement is incorporated by reference as Exhibit B-1 hereto. B. Description of the Parties to the Mergers 1. General Description a. Delmarva Delmarva was incorporated under the laws of the State of Delaware in 1909 and in Virginia in 1979 and is a public utility company engaged in providing electric service in Delaware, Maryland and Virginia and gas service in Delaware. As of December 31, 1996, Delmarva provided electric utility service to approximately 442,000 customers in an area encompassing about 6,000 square miles in Delaware, Maryland and Virginia, and gas utility service to approximately 100,000 customers in an area consisting of about 275 square miles in northern Delaware. A map of Delmarva's service territory is attached as Exhibit E-1. Delmarva is subject to regulation as a public utility under the Delaware Public Utilities Act as to retail electric and gas rates and other matters by the DPSC. Delmarva is also subject to regulation by the VSCC and MPSC as to retail electric rates and other matters and to regulation by the PPUC with respect to ownership of generating facilities in Pennsylvania. Delmarva is also subject to regulation by the FERC with respect to the classification of accounts, rates for any wholesale sales of electricity, the interstate transmission of electric power and energy, interconnection agreements, borrowings and issuances of securities not regulated by state commissions and acquisitions and sales of certain utility properties under the Federal Power Act. In addition, Delmarva is subject to limited regulation by the FERC under the Natural Gas Act of 1938, as amended with respect to its ownership of a 4-mile pipeline that crosses state lines and sales for resale made pursuant to FERC blanket marketing certificates. Delmarva is also currently subject to regulation by the NRC in connection with its ownership interests in the Salem Nuclear Generating Station and the Peach Bottom Nuclear Generating Station. The Delmarva Common Stock is listed on the New York Stock Exchange (the "NYSE") and the Philadelphia Stock Exchange and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges. As of December 31, 1996, there were 60,682,719 shares of Delmarva Common Stock and 1,253,548 shares of Delmarva preferred stock outstanding. Delmarva's principal executive office is located at 800 King Street, Wilmington, Delaware 19899. A copy of the Restated Certificate and Articles of Incorporation, as amended, of Delmarva is incorporated by reference as Exhibit A-3. Delmarva has a nonutility subsidiary trust, Delmarva Power Financing I ("DPF I"), a Delaware trust, which was formed in 1996 in connection with the issuance by Delmarva of Cumulative Quarterly Income Preferred Securities. For the year ended December 31, 1996, Delmarva's operating revenues on a consolidated basis were approximately $1,160 million, of which approximately $981 million were derived from electric operations, $114 million from gas operations and $65 million from other operations. Consolidated assets of Delmarva and its subsidiaries at December 31, 1996 were approximately $2,979 million, consisting of approximately $2,536 million in identifiable electric utility property, plant and equipment; approximately $219 million in identifiable gas utility property, plant and equipment; and approximately $224 million in other corporate assets. A more detailed summary of information concerning Delmarva and its subsidiaries is contained in Delmarva's Annual Report on Form 10-K for the year ended December 31, 1996, a copy of which is incorporated by reference as Exhibit H-1. b. Atlantic Atlantic was incorporated under the laws of the State of New Jersey in 1986 and is a public utility holding company exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder. Pursuant to Rule 2, Atlantic has filed a statement with the Commission on Form U-3A-2 for the year ended December 31, 1996, which is incorporated by reference as Exhibit H-3 hereto. The principal subsidiary of Atlantic is Atlantic City Electric Company ("ACE"). ACE is a public utility company organized under the laws of the State of New Jersey in 1924 by merger and consolidation of several utility companies. It is a holding company exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act and Rule 2 thereunder, and is engaged in the generation, transmission, distribution and sale of electric energy. ACE serves a population of approximately 476,000 customers in a 2,700 square-mile area of Southern New Jersey. A map of ACE's service area is attached as Exhibit E-1 hereto. ACE currently has one utility subsidiary, Deepwater Operating Company ("Deepwater"), a New Jersey corporation, that operates generating facilities in New Jersey for ACE. Deepwater owns no physical assets. Prior to the closing of the Mergers, Deepwater will be either merged into ACE or made a subsidiary of Atlantic Energy Enterprises, Inc. ("AEE"). In either event, it will no longer operate utility assets. ACE has a nonutility subsidiary trust, Atlantic Capital I ("ACI"), a Delaware trust, which was formed in 1996 in connection with the issuance by ACE of Cumulative Quarterly Income Preferred Securities. As a public utility under the laws of the State of New Jersey, ACE is regulated by the NJBPU as to its retail rates, services, accounts, depreciation, and acquisitions and sales of utility properties, and in other respects. ACE is also subject to regulation by the FERC with respect to the classification of accounts, rates for any wholesale sales of electricity, the interstate transmission of electric power and energy, interconnection agreements, borrowings and issuances of securities not regulated by state commissions and acquisitions and sales of certain utility properties under the Federal Power Act. In addition, Atlantic is currently subject to regulation by the NRC in connection with its ownership interest in the Salem, Peach Bottom and Hope Creek Nuclear Generating Stations. The Atlantic Common Stock is listed on the New York, Philadelphia and Pacific Stock Exchanges. As of December 31, 1996, there were 52,502,479 shares of Atlantic Common Stock outstanding and no shares of preferred stock. Atlantic's principal executive office is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234. A copy of the Atlantic Restated Certificate of Incorporation is incorporated by reference as Exhibit A-4. On a consolidated basis, Atlantic's operating revenues for the calendar year ended December 31, 1996 were approximately $980 million, and its total assets as of December 31, 1996 were approximately $2,671 million. More detailed information concerning Atlantic is contained in the Annual Reports of Atlantic and ACE on Form 10-K for the year ended December 31, 1996, which is incorporated by reference as Exhibit H-2. c. Conectiv and its Subsidiaries i. Conectiv Conectiv was incorporated under the laws of the State of Delaware on August 8, 1996 to become a holding company for Delmarva and its direct subsidiaries and certain direct subsidiaries of Atlantic following the Mergers and for the purpose of facilitating the Mergers. Conectiv filed a Restated Certificate of Incorporation on December 24, 1996. Conectiv has, and prior to the consummation of the Mergers will have, no operations other than those contemplated by the Merger Agreement to accomplish the Mergers. Upon consummation of the Mergers, Conectiv will be a public utility holding company and will own directly all of the issued and outstanding common stock of Delmarva, certain of Delmarva's direct subsidiaries, ACE, AEE, Atlantic Energy International, Inc. ("AEII") and Support Conectiv. At present and until consummation of the Mergers, the common stock of Conectiv, which consists of 1,000 issued and outstanding shares, is owned by Delmarva and Atlantic, each of which owns 500 shares. A copy of the Restated Certificate of Incorporation of Conectiv is attached as Exhibit A-1. Following consummation of the Mergers, the common equity of the Company will be divided into two classes: the Conectiv Common Stock and the Conectiv Class A Common Stock. The use of two classes of common stock is designed to address the difference in Delmarva's and Atlantic's evaluations of the growth prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic. Upon the consummation of the Mergers, the Conectiv Common Stock will be issued both to the holders of the Delmarva Common Stock and to the holders of the Atlantic Common Stock while the Conectiv Class A Common Stock will be issued only to the holders of the Atlantic Common Stock, thereby giving the current holders of Atlantic Common Stock a proportionately greater opportunity to share in the growth prospects of, and a proportionately greater exposure to the uncertainties associated with deregulation of, the regulated electric utility business of Atlantic. At present, Conectiv is considering how to structure its nonutility businesses in light of regulatory requirements, tax and other legal considerations. As explained more fully herein, Conectiv requests authority to restructure and realign its nonutility interests in a manner consistent with its authority under the Act, without the need to apply for or receive further Commission approval. ii. Delmarva Following the consummation of the Mergers, Delmarva will become a direct subsidiary of Conectiv. Delmarva's utility operations and facilities are described in Item 1.B.2.a. below and its nonutility subsidiaries and operations are described in Item 1.B.3.a. below. iii. Delmarva's Subsidiaries In conjunction with the Mergers, Delmarva's existing subsidiaries will be reorganized. Several direct subsidiaries of Delmarva, including Conectiv Services, Inc. and Conectiv Communications, Inc., are expected to become direct subsidiaries of Conectiv. Certain other subsidiaries will remain subsidiaries of Delmarva until they are dissolved, divested or until they are transferred to, merge with, or become direct or indirect subsidiaries of Conectiv. iv. ACE Following the consummation of the Mergers, ACE will become a direct subsidiary of Conectiv. ACE's utility operations and facilities are described in Item 1.B.2.b. below. ACE does not currently own any interest in any nonutility subsidiaries other than ACI v. AEE Following the consummation of the Mergers, AEE will become a direct subsidiary of Conectiv. AEE is a holding company for Atlantic's nonutility subsidiaries, including Atlantic Generation, Inc. ("AGI"), Atlantic Southern Properties, Inc. ("ASP"), ATE Investment, Inc. ("ATE"), Atlantic Thermal Systems, Inc. ("ATS"), CoastalComm, Inc. ("CCI") and Atlantic Energy Technology, Inc. ("AET"). vi. AEII Following the consummation of the Mergers, AEII will become a direct subsidiary of Conectiv. AEII was formed in July, 1996 to provide utility consulting services and equipment sales to international markets. The business activities of AEII are being concluded with the expectation that AEII will be inactive by December 31, 1997. vii. Support Conectiv Prior to the consummation of the Mergers, Support Conectiv will be incorporated in Delaware to serve as the service company for the Conectiv system. Support Conectiv will provide Delmarva, ACE and the other companies of the Conectiv system with a variety of administrative, management and support services. Support Conectiv will enter into a service agreement with most, if not all, companies in the Conectiv system (the "Service Agreement"). (A copy of the form of Service Agreement as well as an appendix entitled "Description of Services and Determination of Charges for Services" will be filed as Exhibit B-2). The authorized capital stock of Support Conectiv will consist of up to 3,000 shares of common stock, $1 par value per share. Upon consummation of the Mergers, all issued and outstanding shares of Support Conectiv common stock will be held by Conectiv. viii. DS Sub Solely for the purpose of facilitating the Mergers proposed herein, DS Sub has been incorporated under the laws of the State of Delaware as a direct transitory subsidiary of Conectiv established to effectuate the Delmarva Merger. The authorized capital stock of DS Sub consists of 1000 shares of common stock, $0.01 par value ("DS Sub Common Stock"), all of which is held by Conectiv. DS Sub has not had, and prior to the closing of the Mergers will not have, any operations other than the activities contemplated by the Merger Agreement necessary to accomplish the combination of DS Sub and Delmarva as herein described. 2. Description of Facilities a. Delmarva i. General For the year ended December 31, 1996, Delmarva sold the following amount of electric energy (retail and wholesale) and sold and transported the following amount of natural gas: Electric sales..........................................15,780,826 Mwh Gas sold and transported................................24,157,866 Mcf ii. Electric Generating Facilities and Resources As of December 31, 1996, Delmarva had a total net installed generating capacity of approximately 2,738 MW available from the following power plants: Edge Moor is located in Wilmington, DE. Delmarva's ownership interest results in a net installed capacity of 696 MW. The major fuel source for 251 MW is coal and the major fuel source for 445 MW is oil. Indian River is located in Millsboro, DE. Delmarva's ownership interest results in a net installed capacity of 743 MW. Its major fuel source is coal. Conemaugh is located in New Florence, PA. Delmarva's ownership interest results in a net installed capacity of 63 MW. Its major fuel source is coal. Keystone is located in Shelocta, PA. Delmarva's ownership interest results in a net installed capacity of 63 MW. Its major fuel source is coal. Vienna is located in Vienna, MD. Delmarva's ownership interest results in a net installed capacity of 151 MW. Its major fuel source is oil. Peach Bottom Nuclear Generating Station is located in Peach Bottom Township, PA. Delmarva owns 7.51 percent of Peach Bottom which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Salem Nuclear Generating Station is located in Lower Alloways Creek Township, NJ. Delmarva owns 7.41 percent of Salem which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Hay Road is located in Wilmington, DE. It is a combustion turbine/combined cycle power plant. Delmarva's ownership interest results in a net installed capacity of 511 MW. Its major fuel source is gas. Delmarva owns (or partially owns) fourteen peaking units, ranging in size from 0.1 MW to 26 MW. These units are located in Delaware, Maryland, Virginia, New Jersey, and Pennsylvania and are fueled with gas, oil, or diesel fuel. Delmarva's ownership interest results in a net installed capacity of 183 MW. In addition to the power plants owned or partially owned by Delmarva listed above, Delmarva purchases capacity from three utilities. At year end 1996, Delmarva's purchased capacity totaled 390 MW. Delmarva's total capacity available at year end 1996 to serve customers is 3128 MW. Delmarva's 1996 summer peak load, which occurred on July 9, 1996, was 2,569 MW and its 1996 winter peak load, which occurred on January 17, 1997, was 2,587 MW. iii. Electric Transmission and Other Facilities As of December 31, 1996, Delmarva's transmission system consisted of approximately 16 circuit miles of 500 kV lines; 326 circuit miles of 230 kV lines; 453 circuit miles of 138 kV lines; 711 circuit miles of 69 kV lines; 618 circuit miles of 34 kV lines and 5,261 circuit miles of 25 kV lines. As of December 31, 1996, Delmarva's distribution system consisted of 6,706 circuit miles of 12 kV and 4 kV lines. As of December 31, 1996, Delmarva's electric transmission and distribution system includes 1,391 transmission poleline miles of overhead lines, 5 transmission cable miles of underground cables, 6,927 distribution poleline miles of overhead lines and 5,416 distribution cable miles of underground cables. Delmarva is a member of the Pennsylvania-New Jersey- Maryland Interconnection ("PJM" or the "PJM Pool")2. The members of PJM have worked together voluntarily for almost seventy years to create the Nation's largest "tight" power pool with free-flowing ties. With the backing of their regulatory commissions, the members have built an efficient wholesale energy market based on a "split-the-savings" energy exchange, the reciprocal sharing of capacity resources, and a competitive market in transmission entitlements to import energy. Estimates of the savings realized by the PJM Pool range upwards of $1 billion per year. Delmarva's generation and bulk transmission facilities have been operated on an integrated basis with those of other PJM members. Delmarva estimates that its fuels savings associated with energy transactions within the PJM Pool amounted to $9.8 million during 1996. - -------- 2 Atlantic is also a member of the PJM Interconnection, as described in Item b.iii below. Historically, the other members have been Baltimore Gas and Electric Company, Jersey Central Power & Light Company, Metropolitan Edison Company, Pennsylvania Electric Company, PECO Energy Company, Pennsylvania Power & Light Company, Potomac Electric Power Company and Public Service Electric and Gas Company. Recent changes in FERC policy have resulted in a restructuring of the PJM Interconnection into a limited liability corporation and expanded membership including nonutility power marketers and brokers, and utilities whose retail service territories are outside the PJM Pool geographic boundaries. Many of the rules governing the use of the nation's transmission system are changing. In FERC Order No. 888, FERC directed all transmission-owning public utilities to file tariffs that offer comparable open transmission service to others. As a member of PJM, Delmarva submitted a filing on December 31, 1996 to comply with the requirements of FERC's Order No. 888 applicable to tight power pools. This included a Transmission Owners Agreement, the pool-wide PJM Open Access Transmission Tariff, and an amended PJM Interconnection Agreement. FERC issued an order in this case on February 28, 1997. Delmarva has been, and will continue to be, involved with the restructuring of PJM and the related filings before FERC. The PJM Interconnection's installed capacity as of December 31, 1996 was 57,283 MW. The PJM Interconnection peak demand during 1996 was 44,302 MW on August 23, 1996, which resulted in a summer reserve margin of 24% (based on installed capacity of 56,865 MW on that date). iv. Gas Facilities The gas property of Delmarva as of December 31, 1996 consisted of a liquefied natural gas plant located in Wilmington, Delaware with a storage capacity of 3.045 million gallons and a maximum daily sendout capacity of 49,898 Mcf per day. Delmarva also owns four natural gas city gate stations at various locations in its gas service territory. These stations have a total contract sendout capacity of 125,000 Mcf per day. Delmarva has 111 miles of transmission mains (including 11 miles of joint-use gas pipelines that are used 10% for gas distribution and 90% for electricity production), 1,539 miles of distribution mains and 1,091 miles of service lines. v. Other Delmarva and its subsidiaries own and occupy office buildings in Wilmington and Christiana, Delaware and Salisbury, Maryland and also own a number of other properties located elsewhere in its service area that are used for office, service and other purposes. In addition, Delmarva owns other property, plant and equipment supporting its electric and gas utility functions. b. Atlantic i. General For the year ended December 31, 1996, ACE sold 8.347 billion kwh of electric energy (at retail and wholesale). ii. Electric Generating Facilities and Resources As of December 31, 1996, ACE had a total net capability of approximately 1679 MW available from the following units: Deepwater is located in Penns Grove, NJ. ACE's ownership interest results in a net installed capacity of 220 MW. Its major fuel sources are oil, coal and gas. B.L. England is located in Beesley Point, NJ. ACE's ownership interest results in a net installed capacity of 439 MW. Its major fuel sources are coal and oil. Keystone is located in Shelocta, PA. ACE's ownership interest results in a net installed capacity of 42 MW. Its major fuel source is coal. Conemaugh is located in New Florence, PA. ACE's ownership interest results in a net installed capacity of 65 MW. Its major fuel source is coal. Peach Bottom Nuclear Generating Station is located in Peach Bottom Township, PA. ACE owns 7.51 percent of Peach Bottom which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Salem Nuclear Generating Station is located in Lower Alloways Creek Township, NJ. ACE owns 7.41 percent of Salem which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Hope Creek Nuclear Generating Station is located in Lower Alloways Creek Township, NJ. ACE's 5% ownership interest results in a net installed capacity of 52 MW. Its fuel source is nuclear. Combustion Turbine Units are located in various locations. ACE's ownership interest results in a net installed capacity of 524 MW. Their major fuel sources are oil and gas. Diesel Units are located in various locations. ACE's ownership interest results in a net installed capacity of 8.7 MW. Their major fuel source is oil. In addition, ACE had firm capacity purchases with a net total, as of December 31, 1996, of 707 MW. ACE's summer peak load for the calendar year 1996, which occurred on August 23, 1996, was 1774 MW and its 1996 winter peak load, which occurred on January 17, 1997 was 1,431 MW. iii. Electric Transmission and Other Facilities As of December 31, 1996, ACE's transmission system consisted of approximately 22 circuit miles of 500 kV lines; 127 circuit miles of 230 kV lines; 209 circuit miles of 138 kV lines; 590 circuit miles of 69 kV lines; 113 circuit miles of 34 kV lines and 197 circuit miles of 23 kV lines. As of December 31, 1996, ACE's distribution system consisted of 10,398 circuit miles of 12 kV and 4 kV lines. ACE's electric transmission and distribution system includes 1,215 transmission poleline miles of overhead lines, 46 transmission cable miles of underground cables, 9,252 distribution poleline miles of overhead lines and 1,146 distribution cable miles of underground cables. ACE is also a member of the PJM Interconnection. ACE's generation and transmission facilities are operated on an integrated basis with those of seven other utilities, including Delmarva, in Pennsylvania, New Jersey, Maryland and the District of Columbia. ACE estimates that its fuel savings associated with energy transactions within the pool amounted to $3.8 million (includes savings for Vineland Municipal Electric Utility) during 1996. iv. Other ACE owns and occupies an office building and a number of operating centers located throughout southern New Jersey. In addition, ACE owns property, plant and equipment supporting its electric utility functions. 3. Nonutility Subsidiaries a. Delmarva Delmarva has seven direct nonutility subsidiaries: Delmarva Industries, Inc., Delmarva Services Company, Delmarva Energy Company, Conectiv Services, Inc., Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI") and East Coast Natural Gas Cooperative, L.L.C. ("ECNG") Delmarva Industries, Inc., a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1981 to be a partner in a joint venture oil and gas exploration and development program in New York, Ohio and Pennsylvania. This subsidiary is winding down its business. Delmarva Services Company, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1986 to own and finance an office building that it leases to Delmarva and/or its affiliates. Delmarva Services Company also owns approximately 2.9% of the common stock of Chesapeake Utilities Corp., a publicly-traded gas utility company with gas utility operations in Delaware, Maryland and Florida. Delmarva Energy Company, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1975 to participate in gas and oil exploration and development opportunities. This subsidiary is winding down its business. Conectiv Services, Inc., a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1996 to acquire and operate service businesses involving heating, ventilation and air conditioning ("HVAC") sales, installation and servicing. Conectiv Communications, Inc., a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1996 to provide a full-range of retail and wholesale telecommunications services. ECNG, a Delaware limited liability company in which Delmarva holds a 1/7 th interest, is engaged in gas related activities. Delmarva is a member of ECNG to do bulk purchasing of gas in order to improve the efficiency of its natural gas local distribution operations. Delmarva Capital Investments, Inc. ("DCI"), a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1985 to be a holding company for a variety of unregulated investments. DCI's subsidiaries are: DCI I, Inc., a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1985 to be involved in equity investments in leveraged leases of aircraft. DCI II, Inc., a Virgin Islands corporation and a wholly-owned foreign sales subsidiary of DCI formed in 1985 to be involved in lease investments. Delmarva Capital Technology Company ("DCTC"), a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1986 to be involved in projects related to the development of new technologies and alternative energy resources. DCTC's subsidiaries are: Pine Grove, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1988 to hold interests in municipal solid waste landfill and hauling businesses. Pine Grove, Inc.'s subsidiaries are: Pine Grove Landfill, Inc., a Pennsylvania corporation and a wholly-owned subsidiary formed in 1985 that owns and operates a municipal solid waste landfill in Pine Grove, PA. Pine Grove Hauling Company, a Pennsylvania corporation and a wholly-owned subsidiary that owns and operates a waste hauling and recycling business. DCTC-Glendon, Inc., a Delaware corporation and a wholly-owned subsidiary of DCTC formed in 1987 to invest in a waste-to-energy business that was proposed to be located in Glendon, PA. The facility was never built. DCTC-Burney, Inc., a Delaware corporation and a wholly-owned subsidiary of DCTC formed in 1987 to invest in Burney Forest Products, A Joint Venture, as a general partner. DCTC-Burney, Inc.'s subsidiaries are: Pine Grove Gas Development, L.L.C., a limited liability company formed in 1995 to develop a use for methane gas produced at the municipal solid waste landfill owned and operated by Pine Grove Landfill, Inc. DCTC- Burney owns a 49% interest in the limited liability company. DelBurney Corporation, a Delaware corporation and a wholly-owned subsidiary of DCTC-Burney, Inc. formed in 1989 to act as the sole 1% general partner of Forest Products, L.P., which is a partner in Burney Forest Products, A Joint Venture. Forest Products, L.P., a Delaware limited partnership which is a general partner in Burney Forest Products, A Joint Venture. Burney Forest Products, A Joint Venture, a California general partnership which is owned by DCTC-Burney, Inc. and Forest Products, L.P. The partnership constructed and owns a power plant and sawmill in Burney, CA. DCTC-Burney, Inc.'s total direct and indirect ownership interest is 45%. DCTC is a limited partner in: Luz Solar Partners, Ltd. IV, a California limited partnership which owns a solar-powered generating station in Southern California in which DCTC owns a 4.7% limited partnership interest. UAH-Hydro Kennebec, L.P., a New York limited partnership which owns a hydro-electric project in which DCTC owns a 27.5% limited partnership interest. Delmarva Capital Realty Company ("DCRC"), a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1986 to invest in real estate projects. It is a vehicle for the sale of properties not used or useful for the utility business. DCRC's Subsidiaries are: Christiana Capital Management, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1987 to own and finance an office building leased to affiliates. Post and Rail Farms, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1987 to develop and sell a residential housing development. Delmarva Operating Services Company, a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1987 as a holding company for utility operation and maintenance companies. Delmarva Operating Service Company's subsidiaries are: DelStar Operating Company, a Delaware corporation and a wholly-owned subsidiary formed in 1992 to operate and maintain the Delaware City Power Plant in Delaware City, DE under a contract with the plant's current owner. DelWest Operating Company, a Delaware corporation and a wholly-owned subsidiary formed in 1993 to operate and maintain a power plant in Burney, CA, under a contract with the plant's owner, Burney Forest Products, A Joint Venture (an investment of DCTC-Burney, Inc.). DelCal Operating Company, a Delaware corporation and a wholly-owned subsidiary formed in 1996 to operate and maintain a power plant in Sacramento, California, owned by the Sacramento Power Authority under a subcontract with Siemens Power Corporation. Together, at December 31, 1996, Delmarva's nonutility subsidiaries and investments constituted approximately 4 percent of the consolidated assets of Delmarva and its subsidiaries. In connection with the Mergers, one or more of the direct and indirect subsidiaries of Delmarva may be merged with and into, or become a subsidiary of, one or more existing direct or indirect subsidiaries of Atlantic or vice versa. A corporate chart of Delmarva and its subsidiaries, showing their nonutility interests, is filed as Exhibit E-2. b. Atlantic Atlantic has two direct nonutility subsidiaries, AEII and AEE. AEII, a Delaware corporation, is a direct subsidiary of Atlantic formed in 1996 to broker used utility equipment to developing countries and to provide utility consulting services related to the design of sub-stations and other utility infrastructure. This subsidiary is winding down its business. AEE, a New Jersey corporation, is a direct subsidiary of Atlantic formed in 1995 to be a holding company for Atlantic's non-regulated subsidiaries. Through its 6 wholly-owned subsidiaries, and 50% equity interest in Enerval, L.L.C., a natural gas marketing venture, AEE has consolidated assets totaling $217 million. These 7 subsidiaries pursue growth opportunities in energy-related fields, particularly those that will complement Atlantic's existing businesses and customer relationships. AEE's active subsidiaries are: ATE, a New Jersey corporation and a wholly-owned subsidiary of AEE formed in 1986. ATE holds and manages capital resources for AEE. ATE's primary investments are equity investments in leveraged leases of three commercial aircraft and two container ships. In August, 1996, ATE joined with an unaffiliated company to create EnterTech Capital Partners, L.P., an equity limited partnership that will invest in and support a variety of energy-related technology growth companies. ATE also owns 94% of EnterTech Capital Partners L.P. At December 31, 1996, ATE had invested $7.3 million in this partnership. At December 31, 1996, ATE's total equity amounted to $11.1 million. It has outstanding financing arrangements of $10.0 million with ASP and $14.1 million with AEE. AGI, a New Jersey corporation and a wholly-owned subsidiary of AEE formed in 1986. AGI develops, owns and operates independent power production projects. AGI's investments in power projects consist of the following: Pedrick Ltd., Inc., a New Jersey corporation and a wholly-owned subsidiary of AGI, formed in 1989 to hold a 35% limited partnership interest in Pedricktown Cogeneration Limited Partnership. Pedrick Gen., Inc., a New Jersey corporation and a wholly-owned subsidiary of AGI, formed in 1989 to hold a 15% general partnership interest in Pedricktown Cogeneration Limited Partnership. Vineland Limited, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 45% limited partnership interest in Vineland Cogeneration Limited Partnership. Vineland General, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 5% general partnership interest in Vineland Cogeneration Limited Partnership. ATS, a Delaware corporation and a wholly-owned subsidiary of AEE, formed in 1994. ATS and its wholly-owned subsidiaries develop, own and operate thermal heating and cooling systems. ATS also provides other energy-related services to business and institutional energy users. ATS plans to make an investment in capital expenditures related to district heating and cooling systems to serve the business and casino district in Atlantic City, NJ. ATS is also pursuing the development of thermal projects in other regions of the U.S. ATS's subsidiaries are: Atlantic Jersey Thermal Systems, Inc., a Delaware corporation and wholly-owned subsidiary formed in 1994, that provides operating services for thermal heating and cooling systems. ATS Operating Systems, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1995 that provides thermal energy operating services. Thermal Energy Limited Partnership I ("TELPI"), a Delaware limited partnership wholly-owned by Atlantic Thermal and Atlantic Jersey Thermal Systems, that holds an investment in the Midtown Energy Center. The Midtown Energy Center, which produces steam and chilled water, will represent the initial principal operations of ATS. It is expected to be commercial by mid-1997. Currently, TELPI is operating the heating and cooling equipment of several businesses in Atlantic City, NJ. Some of these businesses will be served by the ATS district system once it is in commercial operations and others will continue to be served independently by ATS. CCI, a Delaware corporation and a wholly-owned subsidiary of AEE formed in 1995 to pursue investments and business opportunities in the telecommunications industry. ASP, a New Jersey corporation and a wholly-owned subsidiary of AEE formed in 1970 that owns and manages a 280,000 square-foot commercial office and warehouse facility in southern New Jersey. Approximately fifty percent of the space is presently leased to system companies and fifty percent is leased to nonaffiliates. AET, a Delaware corporation and a wholly-owned subsidiary of AEE formed in 1991. AET is currently winding up its sole investment which is nominal. There are no future plans for investment activity at this time by AET. Enerval, L.L.C. ("Enerval"), a Delaware limited liability company. In 1995, AEE and Cenerprise, Inc., a subsidiary of Northern States Power established Enerval, formerly known as Atlantic CNRG Services, L.L.C.. AEE and Cenerprise each own 50 percent of Enerval. Enerval provides energy management services, including natural gas procurement, transportation and marketing. At December 31, 1996, Atlantic's nonutility subsidiaries and investments constituted approximately 8.2 percent of the consolidated book value of the assets of Atlantic and its subsidiaries. A corporate chart of Atlantic and its subsidiaries, showing their nonutility interests, is filed as Exhibit E-3. In connection with the Mergers, one or more of the direct and indirect subsidiaries of Atlantic may be merged with and into, or become a subsidiary of, one or more existing direct or indirect subsidiaries of Delmarva or vice versa. C. Description of the Mergers 1. Background and Negotiations Leading to the Proposed Mergers Atlantic and Delmarva are neighboring utilities that have had a variety of working relationships on a wide range of matters over many years. These included joint minority ownership in a number of electric production facilities and membership in the PJM Interconnection. The Energy Policy Act of 1992 (the "1992 Act"), which enhanced the authority of the FERC to order electric utilities to provide transmission service, has prompted new developments in the electric utility industry. The 1992 Act also created a new class of power producers, exempt wholesale generators, which are exempt from regulation under the Act. This exemption has increased the number of entrants into the wholesale electric generation market and increased competition in the wholesale segment of the electric utility industry. Pursuant to its authority under the 1992 Act, the FERC issued a number of orders in specific cases commencing in December 1993 directing utilities to provide transmission services. The FERC's actions have increased the availability of transmission services, thus creating significant competition in the wholesale power market. Other developments have resulted from policies at the SEC, which has liberalized its interpretation and administration of the Act in ways that have made mergers between utility companies less burdensome, thereby facilitating the creation of larger industry competitors. In the fall of 1995, following a number of general discussions between Atlantic's senior management and its financial advisors and legal counsel, among others, regarding the potential strategic value of acquisitions, alliances and mergers in the restructuring utility and energy services industry, Atlantic began investigations of strategic alternatives. Atlantic's long-term advisors, corporate counsel at Simpson Thacher & Bartlett ("Simpson Thacher") and financial advisors at Morgan Stanley & Co. Incorporated ("Morgan Stanley"), were alerted to Atlantic's interest in pursuing discussions with individual target companies. During 1995, Delmarva's senior management team participated in a series of retreats focused on the future direction of the industry and its implications for the company. Over the course of the last 12-18 months Delmarva consulted with various advisors, including its long-term legal advisor, LeBoeuf, Lamb, Greene & MacRae, L.L.P. ("LeBoeuf"), regarding strategic opportunities including, among other things, alliances, joint ventures and acquisitions. Over the course of their long business relationship, Mr. Howard E. Cosgrove, Chairman, President and Chief Executive Officer of Delmarva, and Mr. Jerrold L. Jacobs, Chairman of the Board and Chief Executive Officer of Atlantic, regularly met to discuss industry issues. At one such meeting, on February 21, 1996, Mr. Cosgrove raised the possibility of a merger of the two companies. At the time, Mr. Jacobs declined to pursue the discussions, primarily because Atlantic was in the process of investigating other alternatives. Later, Atlantic decided not to continue to consider these alternatives. On March 4, 1996, Mr. Jacobs called Mr. Cosgrove to indicate his interest in commencing discussions that could lead to a merger or other business combination of the two companies. They met on March 7, 1996 to conduct exploratory discussions. At a regularly scheduled Atlantic Board meeting on March 14, 1996, Mr. Jacobs advised the Atlantic Board of the possibility of a merger or other business combination with Delmarva. At a regularly scheduled Delmarva Board meeting on March 28, 1996, Mr. Cosgrove advised the Delmarva Board of his discussions with Mr. Jacobs and interest in pursuing a possible merger or other business combination. On April 4, 1996, Messrs. Jacobs and Cosgrove met with the Delmarva and Atlantic working groups, representatives of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Morgan Stanley to commence preliminary discussions of benefits at a conceptual level and the identification of issues that would need to be resolved before proceeding with a merger of the two companies. After multiple meetings between Delmarva and Atlantic and their respective advisors, including Delmarva's long-term legal advisor Potter Anderson & Corroon ("Potter Anderson"), there was a consensus that discussions of a potential business combination between Delmarva and Atlantic should continue but that there was need for further study of issues requiring resolution, including the emerging regulatory environment and general valuation issues. A joint regulatory subgroup of the Delmarva and Atlantic working groups met on May 2, 1996 to hear a presentation from The NorthBridge Group ("NorthBridge"), an economic consulting firm specializing in the utility industry, about the scope of a stranded cost review. The companies decided after the presentation to have their counsel jointly engage NorthBridge to do an evaluation of potential stranded costs arising in each of the companies. NorthBridge presented its preliminary stranded costs review to the joint working group on May 15, 1996. Following this period of intense review of the potential obstacles to a merger of Atlantic and Delmarva, representatives of the two companies met with Merrill Lynch and Morgan Stanley on May 29, 1996. Discussions were held on the status of the regulatory analysis, the analysis of general stand-alone valuation issues and the likely reaction of the capital markets to an announcement of a combination of the two companies. The companies' working groups and advisors laid out a number of options, including having as a component of the merger consideration a "second security" (i.e., a security in addition to the conventional common stock of the new company) that would be distributed to the shareholders of Atlantic to reflect the growth prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic. The parties were considering the use of such a second security as a mechanism to address the difference in Delmarva's and Atlantic's evaluations of the overall impact of these growth prospects and uncertainties on the regulated electric utility business of Atlantic. The parties considered that the second security could take the form either of a "letter stock," i.e., a common stock to be issued by the holding company that, following the Mergers, would own the businesses of both Delmarva and Atlantic, the performance of which would be tied in some manner to that of the regulated New Jersey electric utility business of Atlantic, or of a preferred stock that was in some way tied to the performance of such business. On July 3, 1996, members of both working groups and Morgan Stanley, LeBoeuf and Potter Anderson held a teleconference. Teams were formed to address a range of due diligence issues; accounting, tax and financial systems; asset evaluation and operations; communication and information systems; human resources; marketing, communications and public relations; litigation; corporate documents; and environmental and real estate. During the July 3, 1996 teleconference, a decision was made to have counsel for Delmarva and Atlantic jointly engage Deloitte & Touche Consulting Group ("D&T Consulting Group"), a nationally recognized consulting firm with experience in utility mergers and acquisitions that is a division of Deloitte & Touche LLP, to assist Delmarva and Atlantic management in identifying and quantifying the potential cost savings that could result from a business combination between the two companies. During July and in early August, intensive due diligence activities, including the exchange of documents between Delmarva and Atlantic and a series of meetings, were conducted by Delmarva and Atlantic. Through a series of conference calls held July 15 through July 18, 1996 that included representatives of Delmarva and Atlantic and representatives of Merrill Lynch, Morgan Stanley, LeBoeuf, Potter Anderson and Simpson Thacher, agreement was reached that the second security would take the form of a letter stock, i.e., a common equity security, rather than a preferred stock. During a joint meeting of the communications subgroups of the Delmarva and Atlantic teams on July 16, 1996, a decision was made that it was timely to engage Abernathy MacGregor & Associates ("Abernathy"), a communications advisor knowledgeable in merger-related communications. On July 23, 1996, Abernathy was jointly engaged to assist the communication subgroup in the development of a communication plan and in the preparation of communication materials in connection with the potential transaction. On July 25, 1996, Messrs. Jacobs and Michael J. Chesser, President and Chief Operating Officer of Atlantic were invited to a segment of the Delmarva Board meeting at which D&T Consulting Group, as a part of its assistance to the joint working group, discussed the joint analysis of potential synergies with the Delmarva Board, including the basic structure, process and content of a synergy analysis, generally described the type of synergies identified in other mergers, then explained the results to date of the joint synergies analysis. The evaluation included preliminary estimates of synergies, net of costs to achieve them, in excess of $500 million over a 10-year period that might be obtained from a business combination of the two companies. On July 26, 1996, Messrs. Jacobs and Michael J. Barron, Vice President and Chief Financial Officer, of Atlantic and Mr. Cosgrove and Mrs. Barbara S. Graham, Senior Vice President, Treasurer and Chief Financial Officer, of Delmarva met to conclude the negotiation of management structure issues and to begin to make progress on the parameters of the potential transaction, including the extent to which the merger consideration distributed to Atlantic's shareholders would include letter stock. On August 2, 1996, members of the Delmarva and Atlantic working groups met with D&T Consulting Group to review the final results of the analysis prepared by Delmarva and Atlantic with the assistance of D&T Consulting Group on potential synergies that could result in connection with a business combination of Delmarva and Atlantic. During discussions regarding the proposed merger at the August 5, 1996 Atlantic Board meeting, D&T Consulting Group, as a part of its assistance to the joint working group, discussed the joint analysis of potential synergies with the Atlantic Board. At the Atlantic Board meeting on August 8, the Atlantic Board was briefed on the status of the negotiations and considered final presentations from management on the rationale for a business combination of Delmarva and Atlantic, including the potential benefits and the similarity of vision and strategy between the two companies. Morgan Stanley made a presentation which included a description of the letter stock and the results of their valuation analysis. At the Atlantic Board meeting of August 9, 1996, detailed presentations were made by Morgan Stanley and management on the status of pricing negotiations. Simpson Thacher reviewed in detail with the Atlantic Board the terms of the Merger Agreement. The joint communication plan that would be put in place upon an approved merger was presented to the Atlantic Board by management and a representative of Abernathy. Morgan Stanley made a presentation which included a summary of the terms of the transaction, a further description of the letter stock and the results of their valuation analysis. Morgan Stanley rendered to the Atlantic Board its oral opinion, which was subsequently confirmed in writing, to the effect that as of the date of such meeting the Atlantic Conversion Ratio taking into account the Delmarva Conversion Ratio (each, as hereinafter defined), was fair from a financial point of view to the holders of Atlantic Common Stock. The Atlantic Board then approved the terms of the Merger Agreement, which was subsequently executed. At the Delmarva Board meeting on the same day, management noted that due diligence had been concluded and that no issues had been identified that would preclude management's recommending that Delmarva proceed with the proposed merger; management further noted that the synergies analysis was finalized. Representatives of Merrill Lynch reviewed various financial and other information and rendered to the Delmarva Board its opinion that, as of such date and based upon and subject to the matters discussed therein, the Delmarva Conversion Ratio was fair to Delmarva and its shareholders from a financial point of view. The Delmarva Board approved the terms of the Merger Agreement and the Merger Agreement was subsequently executed. Additional information regarding the background of the Mergers is set forth in the Conectiv Registration Statement on Form S-4 (Exhibit C-1 hereto). On January 30, 1997, at a special meeting of stockholders of Delmarva, the holders of Delmarva Common Stock voted to approve the Mergers. Out of 60,754,568 shares of Delmarva Common Stock issued and outstanding and entitled to vote, 51,621,008.553 shares (84.97%) were represented in person or by proxy at the special meeting. 49,681,023.314 shares (81.77%) of Delmarva Common Stock voted for, 1,399,949.695 shares (2.30%) of Delmarva Common Stock voted against, and 540,035.544 (.89%) shares of Delmarva Common Stock abstained from voting on the approval of the Mergers. On January 30, 1997, at a special meeting of stockholders of Atlantic, the holders of Atlantic Common Stock, voted to approve the Mergers. Out of 52,704,052 shares of Atlantic Common Stock issued and outstanding and entitled to vote, 39,648,046 shares (75.23%) were represented in person or by proxy at the special meeting. 37,843,067 shares (71.80%) of Atlantic Common Stock voted for, 1,539,886 shares (2.92%) of Atlantic Common Stock voted against, and 265,093 (0.50%) shares of Atlantic Common Stock abstained from voting on the approval of the Mergers. 2. Merger Agreement The Merger Agreement provides for Atlantic to be merged with and into Conectiv and DS Sub to be merged with and into Delmarva. The Merger Agreement is incorporated by reference as Exhibit B-1. Under the terms of the Merger Agreement, upon consummation of the Mergers: - each issued and outstanding share of Delmarva Common Stock3 shall be converted into the right to receive one share of Conectiv Common Stock (the "Delmarva Conversion Ratio"); - each issued and outstanding share of Atlantic Common Stock4 shall be converted into the right to receive 0.75 of one share of Conectiv Common Stock and 0.125 of one share of Conectiv Class A Common Stock (the "Atlantic Conversion Ratio"); and - all shares of capital stock of Conectiv issued and outstanding immediately prior to the Mergers will be cancelled without consideration and cease to exist. Based on the capitalization and the Delmarva Conversion Ratio and the Atlantic Conversion Ratio the shareholders of Delmarva and Atlantic would own approximately 60.6% and 39.4%, respectively, of the outstanding shares of the Conectiv Common Stock and the shareholders of Atlantic would own 100% of the outstanding shares of Conectiv Class A Common Stock. The Mergers are subject to customary closing conditions, including all necessary governmental approvals, including the approval of the Commission. - -------- 3 Other than shares owned by Delmarva as treasury stock or by Atlantic or by any direct subsidiary of Delmarva or Atlantic. Such shares will be cancelled and cease to exist and no consideration will be delivered in exchange therefor. 4 Other than shares owned by Atlantic as treasury stock or by Delmarva or by any direct subsidiary of Atlantic or Delmarva. Such shares will be cancelled and cease to exist and no consideration will be delivered in exchange therefor. D. Benefit Plans Delmarva currently has a long-term incentive plan and Atlantic currently has an equity incentive plan. On January 30, 1997, the shareholders of Delmarva and Atlantic approved the Conectiv Incentive Compensation Plan, a comprehensive cash and stock compensation plan providing for the grant of annual incentive awards as well as long-term incentive awards such as restricted stock, stock options, stock appreciation rights, performance units, dividend equivalents and any other types of awards as the committee of the board of directors of Conectiv which will administer the plan deems appropriate. Upon the consummation of the Mergers, it is intended that the Conectiv Incentive Compensation Plan will replace the Delmarva long-term incentive plan and the Atlantic equity incentive plan. The maximum number of shares of Conectiv Common Stock available for issuance under the plan is five million. Conectiv will seek approval from the Commission for the issuance of shares in connection with the Conectiv Incentive Compensation Plan in another application/declaration. E. Management and Operations of Conectiv Following the Mergers Pursuant to the Merger Agreement, the Delmarva Board will be entitled to nominate ten members and the Atlantic Board will be entitled to nominate eight members to serve on the Conectiv Board upon consummation of the Mergers. The Delmarva Board and the Atlantic Board will each take all action necessary to cause each member of the Delmarva Board and each member of the Atlantic Board serving in such capacity immediately prior to the consummation of the Mergers to have the opportunity to serve as a member of the Conectiv Board. The Conectiv Board will be divided into three classes so that each class, to the extent possible, has the same proportion of directors nominated by each of the Delmarva Board and the Atlantic Board. In addition, at the consummation of the Mergers, the Conectiv Board will establish an Audit Committee consisting of an equal number of directors nominated by the Delmarva Board and the Atlantic Board. At the consummation of the Mergers, Howard E. Cosgrove will be the Chief Executive Officer of Conectiv and Chairman of the Conectiv Board, Jerrold L. Jacobs (who will retire from active employment after the consummation of the Mergers) will be Vice Chairman of the Conectiv Board and Michael J. Chesser will be the President and Chief Operating Officer of Conectiv. Jerrold L. Jacobs will serve as Vice Chairman of the Conectiv Board until the second anniversary of the consummation of the Mergers and, during his term as Vice Chairman, will be a member of the Executive Committee of the Conectiv Board. The Audit Committee of the Conectiv Board will be charged with the responsibility of advising the Conectiv Board with respect to certain intercompany transactions and other fiduciary matters that may relate to the Conectiv Class A Common Stock. Conectiv and its subsidiaries and affiliates will be subject to extensive federal and state regulation governing dealings among their utility and nonutility operations. Accordingly, any management policies adopted by the Conectiv Board must adhere to any procedural, substantive, record-keeping, accounting and other requirements imposed by such regulations. Conectiv and its subsidiaries will honor all prior contracts, agreements, collective bargaining agreements and commitments with current or former employees or current or former directors of Delmarva or Atlantic and their respective subsidiaries, in accordance with the respective terms of such contracts, agreements and commitments, subject to Conectiv's right to enforce them in accordance with their terms (including any reserved right to amend, modify, suspend, revoke or terminate them). Conectiv will provide charitable contributions and community support within the service areas of Delmarva and Atlantic and each of their respective subsidiaries at levels substantially comparable to the historical levels of charitable contribution and community support provided by Delmarva, Atlantic and their respective subsidiaries within their service areas. Both the holders of Conectiv Common Stock and the holders of Conectiv Class A Common Stock will receive the consolidated financial statements of Conectiv. Since upon consummation of the Mergers, the financial results of ACE will be substantially identical to the financial results for the Targeted Business, the notes to the consolidated financial statements of Conectiv will at such time include condensed financial information of ACE, including a reconciliation of ACE's income available to common shareholders to earnings applicable for Conectiv Class A Common Stock. Complete financial statements of ACE will continue to be filed under the Exchange Act and will be available to shareholders upon request. The Merger Agreement provides that Conectiv shall maintain (i) its corporate headquarters and principal executive offices in Wilmington, DE and (ii) a significant presence in New Jersey. Following consummation of the Mergers, the activities of Conectiv will be governed by its Restated Certificate of Incorporation and Restated Bylaws, attached hereto as Exhibits A-1 and A-2 respectively. F. Industry Restructuring Initiatives On April 30, 1997, the NJBPU issued its findings and recommendations on restructuring the electric industry in New Jersey (the "Plan"). In the Plan, the NJBPU recommended that retail customers in New Jersey should have the ability to choose their electric energy supplier beginning in October 1998 using a phase-in plan that will include all retail customers by July 2000. Customers would be able to sign an agreement with a third-party energy supplier and each electric utility, including ACE, would continue to be responsible for providing distribution service. Price and service quality for such distribution service would continue to be regulated by the NJBPU. Under the proposed Plan, beginning in October 1998, costs for electric service, which consist of power generation, transmission, distribution, metering and billing will need to be unbundled. Transmission service would be provided by an independent system operator which would be responsible for maintaining a regional power grid that would continue to be regulated by FERC. The Plan states that the NJBPU is committed to assuring that a fully competitive marketplace exists prior to the ending of its economic regulation of power supply. At a minimum, utility generating assets and functions must be separated and operate at arms length from the transmission, distribution and customer service functions of the electric utility. The NJBPU reserves final judgment on the issue of requiring divestiture of utility generating assets until detailed analyses of the potential for market power abuses by utilities have been performed. The Plan addresses the issue of "stranded" costs related to the generating capacity currently in utility rates. High costs of construction and operations incurred by the jointly-owned nuclear power plants and the long-term high cost supply contracts with independent power producers are two significant contributing factors. The report proposes recovery of stranded costs over a four to eight year period, through a specific market transition charge which will be a separate component of a customer's bill. Determination of the recoverability of costs will be on a case by case basis with no guarantee for 100% recovery of eligible stranded costs. The Plan provides that the opportunity for full recovery of such eligible costs is contingent upon and may be constrained by the utility meeting a number of conditions, including achievement of a NJBPU goal of delivering a near term rate reduction to customers of five to ten percent. The Plan states that the costs of contracts with independent power producers must be eligible for stranded cost recovery. The Plan further states that utilities are obligated to take all reasonably available measures to mitigate stranded costs caused by the introduction of retail competition. The Plan further notes that New Jersey is studying the securitization of stranded costs as a means of financing these costs at interest rates lower than the utility cost of capital, thereby helping to mitigate the rate impact of stranded cost recovery. Recovery through securitization may occur over a different period of time. The Plan also suggests that a cap may be imposed on the level of the charge as a mechanism to achieve the goal of overall rate reduction. Each electric utility in New Jersey is to file a complete restructuring plan, stranded cost estimates and unbundled rates no later than July 15, 1997. Based on Delmarva's initiative, a formal process has been established in Delaware and an informal forum has been established in Maryland through which the commissions and other interested parties are addressing changes in the regulation of the electric utility industry. During 1996, Delaware and Maryland forum meetings addressed issues such as retail wheeling, stranded costs, environmental matters, social programs, rate redesign, and alternative forms of regulation. In October 1996, the MPSC issued an order instituting a proceeding to continue its review of regulatory and competitive issues affecting the electric industry in Maryland. In consultation with Maryland's electric utilities and other stakeholders, the MPSC staff has been directed to evaluate regulatory and competitive issues facing the electric utility industry, including electric retail competition, developments in federal and state regulation, and the interests of Maryland's customers and utilities. The MPSC instructed its staff to submit their recommendations by May 31, 1997. In December 1996, the forum participants issued to the DPSC and MPSC reports which discussed the issues and the positions of stakeholders, but did not reach any conclusions. While there was consensus on some issues, such as the need for unbundled costs and tariffs, there were many issues where consensus was not reached, such as the need for and benefits of retail wheeling, recovery of stranded costs, environmental and social program issues, franchise and property rights, rate design, and performance-based ratemaking. The issues mentioned above continue to be discussed by Delmarva, the DPSC Staff, and other interested parties. Delmarva expects to develop formal proposals on deregulation which are expected to be filed in mid-1997 with the DPSC. In Maryland, the participants decided in January 1997 to suspend the collaborative process until the MPSC Staff files its report. In response to a directive from the VSCC, the VSCC Staff issued in July 1996 a report on restructuring the electric industry, which included, among other recommendations, a recommendation for a "go slow" approach to restructuring. In November 1996, the VSCC issued an order indicating that more evaluation is necessary to determine what, if any, restructuring may best serve the public interest in Virginia. The VSCC established a new docket and directed its Staff to monitor and file separate studies in 1997 regarding the development of a competitive wholesale market in Virginia, service quality standards, and the results of retail wheeling experiments in other states. Also, several utilities, excluding Delmarva, were directed to file unbundled cost studies and tariffs. Item 2. Fees, Commissions and Expenses The fees, commissions and expenses to be paid or incurred, directly or indirectly, in connection with the Mergers, including the solicitation of proxies, registration of securities of Conectiv under the Securities Act of 1933, and other related matters, are estimated as follows: Commission filing fee for the Registration Statement on Form S-4..................................$653,004.84 Accountants' fees................................................... * Legal fees and expenses LeBoeuf, Lamb, Greene & MacRae, L.L.P..................................... * Potter Anderson & Corroon.................................. * Simpson Thacher & Bartlett................................. * Other legal fees and expenses....................................... * Shareholder communication and proxy solicitation...................................................... * NYSE listing fee.................................................... * Exchanging, printing and engraving of stock certificates.................................................. * Investment bankers' fees and expenses Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................. * Morgan Stanley & Co. Incorporated.......................... * Consulting fees relating to the Mergers .................................................. * TOTAL * To be filed by amendment. Item 3. Applicable Statutory Provisions The following sections of the Act and the Commission's rules thereunder are or may be directly or indirectly applicable to the proposed transaction: Section of the Act Transactions to which section or rule is or may be applicable 4, 5 Registration of Conectiv as a holding company following the consummation of the Mergers 9(a)(2), 10 Acquisition by Conectiv of common stock of Atlantic and by DS Sub of common stock of Delmarva 9(a)(1), 10 Acquisition by Conectiv of stock of Support Conectiv; authorization for additional investments in Conectiv Services, Inc. 8, 11(b), 21 Retention by Conectiv of gas operations and other businesses of Delmarva and Atlantic 13 Approval of the Service Agreement and services provided to affiliates thereunder by Support Conectiv; approval of the performance of certain services between other Conectiv system companies Rules 16 Exemption of certain subsidiaries 80-91 Pricing of affiliate transactions 88 Approval of Support Conectiv as a subsidiary service company 93, 94 Accounts, records and annual reports by Support Conectiv To the extent that other sections of the Act or the Commission's rules thereunder are deemed applicable to the Mergers, such sections and rules should be considered to be set forth in this Item 3. A. Legal Analysis Section 9(a)(2) makes it unlawful, without approval of the Commission under Section 10, "for any person . . . to acquire, directly or indirectly, any security of any public utility company, if such person is an affiliate . . . of such company and of any other public utility or holding company, or will by virtue of such acquisition become such an affiliate." Under the definition set forth in Section 2(a)(11)(A), an "affiliate" of a specified company means "any person that directly or indirectly owns, controls, or holds with power to vote, 5 per centum or more of the outstanding voting securities of such specified company," and "any company 5 per centum or more of whose outstanding voting securities are owned, controlled, or held with power to vote, directly or indirectly, by such specified company." Delmarva and ACE are public utility companies as defined in Section 2(a)(5) of the Act. Because Conectiv, directly or indirectly, will acquire more than five percent of the voting securities of each of Delmarva and Atlantic as a result of the Mergers, and thus will become an "affiliate" as defined in Section 2(a)(11)(A) of the Act of both Delmarva and Atlantic as a result of the Mergers, Conectiv must obtain the approval of the Commission for the Mergers under Sections 9(a)(2) and 10 of the Act. The statutory standards to be considered by the Commission in evaluating the proposed transaction are set forth in Sections 10(b), 10(c) and 10(f) of the Act. As set forth more fully below, the Mergers comply with all of the applicable provisions of Section 10 of the Act and should be approved by the Commission. Thus: - the consideration to be paid in the Mergers is fair and reasonable; - the Mergers will not create detrimental interlocking relations or concentration of control; - the Mergers will not result in an unduly complicated capital structure for the Conectiv system; - the Mergers are in the public interest and the interests of investors and consumers; - the Mergers are consistent with Sections 8 and 11 of the Act; - the Mergers tend towards the economical and efficient development of an integrated public utility system; and - the Mergers will comply with all applicable state laws. Furthermore, the Mergers provide an opportunity for the Commission to follow certain of the interpretive recommendations made by the Division of Investment Management (the "Division") in the report issued by the Division in June 1995 entitled "THE REGULATION OF PUBLIC UTILITY HOLDING COMPANIES" (the "1995 REPORT"). The Mergers and the requests contained in this Application/Declaration are well within the precedent of transactions approved by the Commission as consistent with the Act prior to the 1995 REPORT and thus could be approved without any reference to the 1995 REPORT. However, a number of the recommendations contained in the 1995 REPORT serve to strengthen the Applicants' analysis and support certain requests that would facilitate the creation of a new holding company better able to compete in the rapidly evolving utility industry. The Division's overall recommendation that the Commission "act administratively to modernize and simplify holding company regulation. . . and minimize regulatory overlap, while protecting the interests of consumers and investors,"5 should be used in reviewing this Application/Declaration since, as demonstrated below, the Mergers will benefit both consumers and shareholders of Conectiv and the other federal and state regulatory authorities with jurisdiction over the Mergers will have approved the Mergers as in the public interest. In addition, although discussed in more detail in each applicable item below, the specific recommendations of the Division with regard to financing transactions,6 utility ownership7 and diversification8 are applicable to the Mergers. - -------- 5 Letter of the Division of Investment Management to the Securities and Exchange Commission, 1995 REPORT. 6 The 1995 REPORT addresses, for example, reduced regulatory burdens associated with routine financings. 1995 REPORT at 50. 7 The 1995 REPORT recommends that the Commission should apply a more flexible interpretation of the integration requirements under the Act; interconnection through power pools, reliability councils and wheeling arrangements can satisfy the physical interconnection requirement of section 2(a)(29); the geographic requirements of section 2(a)(29) should be interpreted flexibly, recognizing technical advances consistent with the purposes and provisions of the Act; the Commission's analysis should focus on whether the resulting system will be subject to effective regulation; the Commission should liberalize its interpretation of the "A-B-C" clauses and permit combination systems where the affected states agree, and the Commission should "watchfully defer" to the work of other regulators. 1995 REPORT at 71-7. 8 The 1995 REPORT recommended that, for example, the Commission should promulgate rules to reduce the regulatory burdens associated with energy-related diversification and the Commission should adopt a more flexible approach in considering all other requests to enter into diversified activities. 1995 REPORT at 88-90. The recommendations regarding energy-related diversification were incorporated in Rule 58. 1. Section 10(b) Section 10(b) provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless: (1) such acquisition will tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interests of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or (3) such acquisition will unduly complicate the capital structure of the holding company system of the applicant or will be detrimental to the public interest or the interests of investors or consumers or the proper functioning of such holding company system. a. Section 10(b)(1) i. Interlocking Relationships By its nature, any merger results in new links between theretofore unrelated companies. However, these links are not the types of interlocking relationships targeted by Section 10(b)(1), which was primarily aimed at preventing business combinations unrelated to operating synergies. The Merger Agreement provides for the Board of Directors of Conectiv to be composed of members drawn from the Boards of Directors of both Delmarva and Atlantic. This is necessary to integrate Delmarva and Atlantic fully into the Conectiv system and will therefore be in the public interest and the interests of investors and consumers. Forging such relations is beneficial to the protected interests under the Act and thus are not prohibited by Section 10(b)(1). ii. Concentration of Control Section 10(b)(1) is intended to avoid "an excess of concentration and bigness" while preserving the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" afforded by the coordination of local utilities into an integrated system. AMERICAN ELECTRIC POWER CO., 46 SEC 1299, 1309 (1978). In applying Section 10(b)(1) to utility acquisitions, the Commission must determine whether the acquisition will create "the type of structures and combinations at which the Act was specifically directed." VERMONT YANKEE NUCLEAR CORP., 43 SEC 693, 700 (1968). As discussed below, the Mergers will not create a "huge, complex, and irrational system," but rather will afford the opportunity to achieve economies of scale and efficiencies which are expected to benefit investors and consumers. AMERICAN ELECTRIC POWER CO., 46 SEC at 1307 (1978). Size: If approved, the Conectiv system will serve approximately 915,000 electric customers in four states and 100,000 gas customers in Delaware. As of and for the year ended December 31, 1996: (1) the combined assets of Delmarva and Atlantic would have totaled approximately $5.65 billion; (2) combined operating revenues of Delmarva and Atlantic would have totaled approximately $2.1 billion; and (3) combined owned generating capacity totaled would have totaled approximately 5514 MW. By comparison, the Commission has approved a number of acquisitions involving significantly larger operating utilities. SEE, E.G., CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994) (combination of Cincinnati Gas & Electric Company and PSI Resources; combined assets at time of acquisition of approximately $7.9 billion); ENTERGY CORP., 55 HCAR No. 25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities; combined assets at time of acquisition in excess of $21 billion); NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990) (acquisition of Public Service of New Hampshire; combined assets at time of acquisition of approximately $9 billion); CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29, 1986) (combination of Cleveland Electric Illuminating Company and Toledo Edison Company; combined assets at time of acquisition of approximately $9.1 billion); AMERICAN ELECTRIC POWER CO., 46 SEC 1299 (1978) (acquisition of Columbus and Southern Ohio Electric Company combined assets at time of acquisition of close to $9 billion). As the following table demonstrates, nearly all of the registered electric, or combination gas and electric, utility holding company systems are larger than Conectiv will be following the Mergers in terms of assets, operating revenues, customers and/or sales of electricity:9 Total Operating Electric Sales in System Assets Revenues Customers KWH Total ($ Millions) ($ Millions) (Thousands) (Millions) Southern 30,292 10,358 3,445 153,531 AEP 15,886 5,849 2,942 [120,653] Entergy 22,966 7,163 2,426 106,909 CSW 13,332 5,155 1,704 62,425 GPU 10,941 3,918 1,997 44,448 Northeast 10,742 3,792 [1,695] [39,618] CINergy 8,849 3,243 1,392 [54,220] Allegheny 6,618 1,013 1,388 59,961 NEES 5,223 2,350 [1,314] 25,194 Conectiv 5,650 2,075 920 21,272 - -------- 9 Amounts are as of December 31, 1996 or for the year ended December 31, 1996. [Bracketed numbers are 1995 figures.] In addition, Conectiv will be smaller than at least two of the registered holding companies to be formed as a result of recently announced mergers, specifically: the merger of Public Service Company of Colorado and Southwestern Public Service (combined 1994 year-end assets of approximately $6,018 million and operating revenues of $2,881 million); and Union Electric Company and CIPSCO, Inc. (combined 1994 year-end assets of approximately $8,402 million and operating revenues of $2,850 million). Conectiv will be a mid- to small-sized registered holding company, and its operations would not exceed the economies of scale of current electric generation and transmission technology or provide undue power or control to Conectiv in the region in which it will provide service. Efficiencies and economies: As noted above, the Commission has rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing the size of the resulting system with reference to the efficiencies and economies that can be achieved through the integration and coordination of utility operations. More recent pronouncements of the Commission confirm that size is not determinative. Thus, in Centerior Energy Corp., HCAR No. 24073 (April 29, 1986), the Commission stated flatly that a "determination of whether to prohibit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of size alone." In addition, in the 1995 REPORT, the Division recommended that the Commission approach its analysis on merger and acquisition transactions in a flexible manner with emphasis on whether the Mergers creates an entity subject to effective regulation and is beneficial for shareholders and customers as opposed to focusing on rigid, mechanical tests.10 - -------- 10 1995 REPORT at 73-4. By virtue of the Mergers, Conectiv will be in a position to realize the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" described by the Commission in American Electric Power Co. 46 SEC 1299, 1309. Among other things, the Mergers are expected to yield significant capital expenditure savings through labor cost savings, facilities consolidation, corporate and administrative programs, non-fuel purchasing economies and combined fuel supply and purchased power. These expected economies and efficiencies from the combined utility operations are described in greater detail below and are projected to result in net savings of more than $500 million over the first ten years alone. Competitive Effects: In Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), the Commission stated that "antitrust ramifications of an acquisition must be considered in light of the fact that public utilities are regulated monopolies and that federal and state administrative agencies regulate the rates charged consumers." Delmarva and Atlantic have filed Notification and Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the Mergers on competition in the relevant market and it is a condition to the consummation of the Mergers that the applicable waiting periods under the HSR Act shall have expired or been terminated. In addition, the competitive impact of the Mergers will be fully considered by the FERC pursuant to Section 203 of the Federal Power Act before it approves the Mergers. A detailed explanation of the reasons why the Mergers will not threaten competition in even the most narrowly drawn geographic and product markets is set forth in the prepared testimony of John C. Dalton, filed with the FERC on behalf of Delmarva and Atlantic, a copy of which is filed as Exhibit D-1.2.1. The application filed by Delmarva and Atlantic with the FERC is filed as Exhibit D-1.1 and incorporated herein. For these reasons, the Mergers will not "tend toward interlocking relations or the concentration of control" of public utility companies, of a kind or to the extent detrimental to the public interest or the interests of investors or customers within the meaning of Section 10(b)(1). b. Section 10(b)(2) -- Fairness of Consideration Section 10(b)(2) requires the Commission to determine whether the consideration to be given by Conectiv to the holders of Delmarva Common Stock and Atlantic Common Stock in connection with the Mergers is reasonable and whether it bears a fair relation to investment in and earning capacity of the utility assets underlying the securities being acquired. Market prices at which securities are traded have always been strong indicators as to values. As shown in the table below, most quarterly price data, high and low, for Delmarva and Atlantic Common Stock provide support for this conversion ratio. Delmarva Atlantic High Low Dividends High Low Dividends 1994 First Quarter $23 5/8 $20 1/2 $0.38 1/2 $21 3/4 $19 7/8 $0.38 1/2 Second Quarter 21 16 7/8 0.38 1/2 21 1/2 16 3/8 0.38 1/2 Third Quarter 20 17 3/4 0.38 1/2 19 5/8 16 1/8 0.38 1/2 Fourth Quarter 19 1/4 17 5/8 0.38 1/2 18 1/4 16 0.38 1/2 1995 First Quarter 20 17 7/8 0.38 1/2 19 17 3/4 0.38 1/2 Second Quarter 21 1/4 19 1/8 0.38 1/2 19 5/8 17 7/8 0.38 1/2 Third Quarter 23 19 1/2 0.38 1/2 19 7/8 18 1/8 0.38 1/2 Fourth Quarter 23 5/8 21 7/8 0.38 1/2 20 1/8 19 0.38 1/2 1996 First Quarter 23 5/8 21 0.38 1/2 20 16 5/8 0.38 1/2 Second Quarter 21 3/8 19 1/8 0.38 1/2 18 3/4 16 0.38 1/2 Third Quarter 21 1/4 20 0.38 1/2 18 1/2 17 0.38 1/2 Fourth Quarter 21 1/4 19 3/4 0.38 1/2 18 1/8 17 1/8 0.38 1/2 1997 First Quarter 20 1/4 18 3/8 0.38 1/2 17 1/2 16 1/2 0.38 1/2 Second Quarter(1) 18 5/8 16 7/8 0.38 1/2 16 7/8 16 0.38 1/2 -------------------------------- (1) Through the close of business on June 27, 1997.
On August 9, 1996, the last full trading day before the public announcement of the execution and delivery of the Merger Agreement, the closing price per share as reported on the NYSE-- Composite Transaction of (i) Delmarva Common Stock was $205/8 and (ii) Atlantic Common Stock was $171/8, a ratio of 1 to 0.83. In addition, the conversion ratios are the product of extensive and vigorous arms-length negotiations between Delmarva and Atlantic. These negotiations were preceded by months of due diligence, analysis and evaluation of the assets, liabilities and business prospects of the respective companies. See Conectiv Registration Statement on Form S-4 (Exhibit C-1 hereto). Finally, nationally-recognized investment bankers for both Delmarva and Atlantic have reviewed extensive information concerning the companies and analyzed the conversion ratios employing a variety of valuation methodologies, and have opined that the conversion ratios are fair, from a financial point of view, to the respective holders of Delmarva Common Stock and Atlantic Common Stock. The investment bankers' analyses and opinions are attached as Annexes II and III to Conectiv's Registration Statement on Form S-4 and are described on pages 33-43 of the Form S-4 (Exhibit C-1 hereto). In light of these opinions and an analysis of all relevant factors, including the benefits that may be realized as a result of the Mergers, Conectiv believes that the conversion ratios fall within the range of reasonableness, and the consideration for the Mergers bears a fair relation to the sums invested in, and the earning capacity of, the utility assets of Delmarva and Atlantic. c. Section 10(b)(2) -- Reasonableness of Fees Conectiv believes that the overall fees, commissions and expenses incurred and to be incurred in connection with the Mergers are reasonable and fair in light of the size and complexity of the Mergers relative to other transactions and the anticipated benefits of the Mergers to the public, investors and consumers; that they are consistent with recent precedent; and that they meet the standards of Section 10(b)(2). As set forth in Item 2 of this Application/Declaration, Delmarva and Atlantic together expect to incur a combined total of approximately $18 million in fees, commissions and expenses in connection with the Mergers. By contrast, Cincinnati Gas & Electric Company and PSI Resources incurred $47.12 million in fees in connection with their reorganization as subsidiaries of CINergy. Northeast Utilities alone incurred $46.5 million in fees and expenses in connection with its acquisition of Public Service of New Hampshire and Entergy alone incurred $38 million in fees in connection with its recent acquisition of Gulf States Utilities -- which amounts all were approved as reasonable by the Commission. See CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994); NORTHEAST UTILITIES, HCAR No. 25548 (June 3, 1992); ENTERGY CORP., HCAR No. 25952 (Dec. 17, 1993). With respect to financial advisory fees, Delmarva and Atlantic believe that the fees payable to their investment bankers are fair and reasonable for similar reasons. Pursuant to the terms of Merrill Lynch's engagement, Delmarva agreed to pay Merrill Lynch for its services in connection with the Mergers: (i) a financial advisory retainer fee of $150,000 and an additional fee of $1,125,000 upon the execution of the Merger Agreement. In addition, Delmarva agreed to pay Merrill Lynch a fee of $1,125,000 upon the approval of the Mergers by the stockholders of Delmarva and a fee of $2,250,000 upon consummation of the Mergers, to which the $150,000 retainer fee already paid will be credited. Delmarva also agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses, including all reasonable fees and disbursements of its legal counsel, and to indemnify Merrill Lynch and certain related persons against certain liabilities in connection with its engagement, including certain liabilities under the federal securities laws. Pursuant to the engagement letter between Atlantic and Morgan Stanley, Morgan Stanley is entitled to the following amounts: (i) an advisory fee for its time and efforts expended in connection with the engagement which is estimated to be between $150,000 and $250,000 and which is payable in the event the transaction is not consummated, (ii) an announcement fee of $1,000,000 and (iii) a merger fee of $4,230,000 payable upon consummation of the transaction. Any amounts paid or payable to Morgan Stanley as advisory or announcement fees will be credited against the transaction fee. Atlantic agreed also to reimburse Morgan Stanley for the expenses of its counsel and to indemnify Morgan Stanley and its affiliates against certain liabilities and expenses, including liabilities under the federal securities laws. The investment banking fees of Delmarva and Atlantic reflect the competition of the marketplace, in which investment banking firms actively compete with each other to act as financial advisors to merger partners. d. Section 10(b)(3) Section 10(b)(3) requires the Commission to determine whether the Mergers will unduly complicate Conectiv's capital structure or will be detrimental to the public interest, the interests of investors or consumers or the proper functioning of Conectiv's system. The capital structure of Conectiv will not be unduly complicated nor will it be detrimental to the public interest, the interests of investors or consumers or the proper functioning of Conectiv's system. As described in Item 1.A.2., Conectiv will have two classes of common stock. Delmarva stockholders will receive one share of Conectiv Common Stock in exchange for each share of Delmarva Common Stock. Atlantic stockholders will receive 0.75 shares of Conectiv Common Stock and 0.125 shares of Conectiv Class A Common Stock in exchange for each share of Atlantic Common Stock. Although it is not common for registered holding companies to have more than one class of common stock, the use of two classes of common stock in this case is consistent with the Act because both securities will be publicly traded, will have full voting rights and will be able to be evaluated through regular periodic filings under the Securities Exchange Act of 1934. The Conectiv Class A Common Stock has been created to track the performance of a portion of Atlantic's existing businesses. The Conectiv Class A Common Stock is specifically linked to the currently regulated businesses of ACE, Atlantic's regulated electric utility company (the "Targeted Business"). In general terms, after the Initial Period, the earnings attributable to the Conectiv Class A Common Stock will be based on a 30 percent interest in the net earnings of the Targeted Business in excess of $40 million per year. The first $40 million of net earnings and the remaining 70 percent of the net earnings above $40 million will be attributable to holders of Conectiv Common Stock. Through the use of this tracking stock, the holders of Atlantic Common Stock will retain more than half the benefits and risks relating to the Targeted Business after the Mergers. The Targeted Business is described in greater detail on pages 75 to 77 of the Joint Proxy (Exhibit C-2). The Merger Agreement provides, subject to declaration by the Conectiv Board and the obligation of the Conectiv Board to react to the financial condition and regulatory environment of Conectiv and its results of operations, that the dividends declared and paid on the Conectiv Class A Common Stock will be maintained at a level of $3.20 per share per annum until the earlier of July 1, 2001, or the end of the twelfth calendar quarter in which the Mergers become effective ("Initial Period"). After the Initial Period, it is the intention of Conectiv to pay dividends to the holders of the Conectiv Class A Common Stock at a rate equal to 90% of net earnings attributable to the Targeted Business in excess of $40 million per year. The Merger Agreement further provides that if and to the extent that the annual dividends paid on the Conectiv Class A Common Stock during the Initial Period shall have exceeded 100% of Conectiv's earnings attributable to the Targeted Business in excess of $40 million per year during the Initial Period, the Conectiv Board may consider such fact in determining the appropriate annual dividend rate on the Conectiv Class A Common Stock following the Initial Period. The Company Class A Common Stock, which is a "tracking stock," was proposed during the merger negotiations as a mechanism to address the difference in Delmarva's and Atlantic's evaluations of the overall impact of the growth prospects and uncertainties of the regulated electric utility business of Atlantic. Both the Atlantic Board and the Delmarva Board determined that the Conectiv Class A Common Stock was necessary to bridge a difference in view between Delmarva and Atlantic on the appropriate conversion ratio for a business combination between the two companies. The tracking stock allocates proportionately more of the risks associated with Atlantic's regulated electric utility business to Atlantic's current stockholders and, at the same time, provides them with the opportunity to participate in proportionately more of the growth prospects of Atlantic's regulated electric utility business. Accordingly, the issuance of tracking stock in connection with the Mergers addresses the concerns of the managements of both Delmarva and Atlantic and allows the respective stockholders of Delmarva and Atlantic to gain the level of exposure to the growth prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic that the respective managements have deemed advisable. The Conectiv Class A Common Stock will be a class of common stock of the parent company, Conectiv, not of ACE. As common stockholders of Conectiv, holders of the Conectiv Class A Common Stock will not have any specific rights or claims against the businesses, assets and liabilities of the Targeted Business, including upon liquidation of Conectiv, other than as common stockholders of Conectiv, and will be subject to risks associated with an investment in Conectiv and all of its businesses, assets and liabilities. Holders of Conectiv Common Stock and holders of Conectiv Class A Common Stock will each be entitled to one vote per share on all matters submitted to a vote at any meetings of stockholders, subject to the rights, if any, of holders of any outstanding class of preferred stock. The holders of Conectiv Common Stock and the holders of Conectiv Class A Common Stock will vote as one class for all purposes, except as may otherwise be required by the laws of the State of Delaware. There are also special provisions governing the conversion and redemption of the Conectiv Class A Common Stock either at the discretion of Conectiv or in the event of a merger, tender offer or disposition of all or substantially all of the assets of the Targeted Business. For a more complete description of the Conectiv Class A Common Stock, see "Description of the Company's Capital Stock" on pages 75 to 97 of the Joint Proxy (Exhibit C-2). Risk factors associated with the dual class capital structure are also discussed extensively in the Joint Proxy on pages 14 to 22 under the heading "Risk Factors." Both the holders of Conectiv Common Stock and the holders of Conectiv Class A Common Stock will receive the consolidated financial statements of Conectiv. The notes to the consolidated financial statements of Conectiv will include condensed financial information of ACE, including a reconciliation of ACE's total income available to common stockholders to the income of the Targeted Business. In conjunction with the Mergers and the NJ Plan, ACE expects to move all of its presently non-regulated operations out of ACE, resulting in only the Targeted Business remaining in ACE. When the non-regulated businesses of ACE are transferred out of ACE, the financial results of ACE will be identical to the financial results for the Targeted Business, making any reconciliation unnecessary. Complete financial statements of ACE will continue to be filed under the Securities Exchange Act of 1934 and will be available to Conectiv stockholders upon request. The issuance of tracking stocks such as the Conectiv Class A Common Stock is not a new phenomenon. The first prominent tracking stock was issued in 1984 by General Motors Corp. when it issued shares of General Motors Class E shares in connection with its acquisition of Electronic Data Systems Corp. Since 1984, tracking stocks have been used by companies in several industries. USX Corp. has created several tracking stocks tied to separate businesses, including steel, oil and natural gas. US West Communications Group and TeleCommunications Inc. have also issued tracking stocks. In the utility area, CMS Energy issued a tracking stock in July 1995. The CMS Class G stock is tied to a 25 percent interest in its natural gas division, Consumers Power Gas Group. Although the corporate capital structure of Conectiv after the Mergers will be slightly more complex than the capital structures of existing registered holding companies because of the issuance of Conectiv Class A Common Stock to the current Atlantic stockholders in connection with the Mergers, the use of tracking stock in this case is consistent with the standards of Section 10(b)(3) and Section 11(b)(2) of the Act. The tracking stock will not unduly complicate the capital structure of Conectiv, and will not be detrimental to the public interest, the interests of investors or consumers or the proper functioning of the holding company system. The Conectiv Class A Common Stock will also not unfairly or inequitably distribute voting power among security holders. Simplification of holding company capital structures was clearly a primary objective of the Act. As the Commission recently stated, By 1932, approximately 49% of the investor-owned utilities were controlled by three holding companies. Virtually all the holding company systems were characterized by extremely complex capital structures that made it difficult, if not impossible, for investors to analyze the quality of earnings and the financial condition of the companies in which they were investing. In the early 1930s, many of the holding companies collapsed, leaving investors with billions of dollars of losses.11 The Act's concern with complicated capital structures focuses on the use of an inordinate number of different securities having different preferences, dividends, voting rights and other special characteristics12 and the resulting difficulty in understanding the factors determining the performance of a security and voting control of the issuer. Section 1(b)(1) of the Act identifies utility securities being "issued upon the basis of fictitious or unsound asset values having no fair relation to the sums invested in or the earning capacity of the properties and upon the basis of paper profits from intercompany transactions, or in anticipation of excessive revenues from subsidiary public utility companies" as abusive. Section 1(b)(3) of the Act highlights problems resulting from "when control of [utility holding] companies is exerted through disproportionately small investment," i.e., pyramiding. The primary objective of Section 10(b)(3) and Section 11(b)(2) is to prevent an unfair allocation of actual voting power in utility holding companies through an unduly complicated capital structure. Indeed, earlier decisions of the Commission interpreting the standards of Section 10(b)(3) and Section 11(b)(2) focused primarily on publicly-held minority stock interests.13 Conectiv does not believe that the Conectiv Class A Common Stock constitutes a minority interest for purposes of the Act. However, even if it were, the existence of the Conectiv Class A Common Stock would not constitute an undue complication of Conectiv's capital structure. In its 1992 amendments to Rule 52, the Commission eliminated its traditional limitation on the issuance of common stock to the public by public utility company subsidiaries of registered holding companies, noting that such a prohibition was "no longer necessary to protect investors and shareholders."14 - -------- 11 NORTHEAST UTILITIES, HCAR No. 25273 (March 15, 1991), at note 13. 12 An example of a holding company with an unduly complicated capital structure was Associated Gas & Electric Co., which had consolidated assets of $6 million in 1923 that grew to $1 billion in 1929. Prior to its bankruptcy, it had the following securities outstanding (plus warrants and options): 3 classes of common stock, 6 classes of preferred stock, 4 classes of preference stock, 24 classes of debentures (some convertible), 7 issues of secured notes and 4 issues of investment certificates. SEE HAWES, UTILITY HOLDING COMPANIES, Section 2.04 (1987). 13 SEE UTAH POWER & LIGHT COMPANY, HCAR No. 13748 (May 6, 1958) and ILLINOIS POWER COMPANY, HCAR No. 16574 (January 2, 1970). 14 EXEMPTION OF ISSUANCE AND SALE OF CERTAIN SECURITIES BY PUBLIC-UTILITY SUBSIDIARY COMPANIES OF REGISTERED PUBLIC- UTILITY HOLDING COMPANIES, HCAR No. 25573 (July 7, 1992). Section 10(b)(3) and Section 11(b)(2) were designed to eliminate the abusive holding company structures that predated the adoption of the 1935 Act. These provisions were needed at that time given the immature nature of other federal securities law protections available to investors. In the 1995 REPORT, the Staff extensively discussed the greater access to information and advances in accounting and recordkeeping requirements that have developed since the adoption of the Securities Act of 1933 and the Securities Exchange Act of 1934.15 Given these advances, there is clearly no concern that the issuance of the Conectiv Class A Common Stock would unduly complicate Conectiv's capital structure. In addition to federal law protections, under Delaware law the Conectiv Board has a duty to act with due care and in the best interests of all of Conectiv's stockholders, including the holders of Conectiv Common Stock and Conectiv Class A Common Stock. The management of Conectiv is aware that the existence of the Conectiv Common Stock and the Conectiv Class A Common Stock may give rise to occasions when the interests of the holders of Conectiv Common Stock and Conectiv Class A Common Stock may diverge or appear to diverge, just as the Commission has recognized that potential conflicts of interest exist within all registered holding company systems.16 In such instances, the Conectiv Board will be required to act on behalf of Conectiv and its stockholders taken as a whole. The existence of, and risks that may be associated with, such potential conflict have been fully disclosed. For a detailed discussion of this issue, see "The Company Following the Mergers" on page 145 of the Joint Proxy (Exhibit C-2). - -------- 15 1995 REPORT at 34-38. 16 SEE ILLINOIS POWER COMPANY, HCAR No. 16574 (January 2, 1970). It is anticipated that the regulatory environment in which Delmarva and ACE will be conducting their respective utility operations following the consummation of the Mergers will help to ensure that dealings between ACE's regulated electric utility business and the remainder of Conectiv's businesses will be appropriate under the foregoing standard. In addition, the Audit Committee of the Conectiv Board will advise the Conectiv Board with respect to certain intercompany transactions and other fiduciary matters that may relate to the Conectiv Class A Common Stock. The Conectiv Board will exercise from time to time its judgment as to how best to obtain information regarding the divergence (or potential divergence) of interests, under what circumstances to seek the assistance of outside advisers and how to assess which available alternative is in the best interests of Conectiv and all of its stockholders. The Conectiv Class A Common Stock will have full voting rights with the Conectiv Common Stock, which will avoid the creation of an inequitable distribution of power. In addition, the Conectiv Class A Common Stock will be publicly traded on the NYSE and the information necessary to evaluate the performance of the Targeted Business will be publicly available in the quarterly filings of Conectiv and ACE under the Securities Exchange Act of 1934.17 Finally, there are safeguards in place, including regulatory protections and the involvement of the Audit Committee of the Conectiv Board, to mitigate potential conflicts of interest. The use of tracking stock in this instance does not create an unduly complicated capital structure making it difficult for investors to discern the value or prospects of the Targeted Business. Rather, it has been designed specifically to create a firm linkage between the performance of the Targeted Business and shareholder earnings. Thus, there is no concern with the capital structure of Conectiv under Section 1(b)(1) of the Act. As illustrated above, the issuance of tracking stock in this case is consistent with the standards of Section 10(b)(3) and Section 11(b)(2) under the Act. The proposed issuance of tracking stock by Conectiv is, to our knowledge, a question of first impression for the Commission. In the 1995 REPORT, the Staff noted that the Commission has historically "responded to change by flexible interpretation and rulemaking."18 The tracking stock is a mechanism whereby Delmarva and Atlantic addressed the difference in their evaluations of the overall impact of the growth prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic. The issuance of tracking stock in connection with the Mergers addresses the concerns of the managements of both Delmarva and Atlantic and allows the respective stockholders of Delmarva and Atlantic to gain the level of exposure to the growth prospects of, and uncertainties associated with deregulation of, the regulated utility business of Atlantic that the respective managements have deemed advisable. Given the purpose for issuing the Conectiv Class A Common Stock and its favorable attributes, especially the direct link to the performance of the Targeted Business, full voting rights and proposed NYSE listing, the Applicants hereby seek Commission approval for the inclusion of the tracking stock in the Conectiv capital structure as a flexible response to changes in the utility industry. - -------- 17 As discussed above, the notes to the consolidated financial statements of Conectiv will include condensed financial information for ACE. Complete financial statements of ACE will continue to be filed under the Securities Exchange Act of 1934 and will be available to Conectiv stockholders upon request. 18 1995 REPORT at 46. The only voting securities of Conectiv which will be publicly held after the transaction will be Conectiv Common Stock and Conectiv Class A Common Stock. Conectiv will have the ability to issue, subject to the approval of the Commission, preferred stock, the terms of which, including any voting rights, may be set by Conectiv's Board of Directors as has been authorized by the Commission with regard to other registered holding companies. SEE, E.G., THE COLUMBIA GAS SYSTEM, INC., HCAR No. 26361 (Aug. 25, 1995) (approving restated charter, including preferred stock whose terms, including voting rights, can be established by the board of directors). In addition to common stock of Delmarva, all of which will be held by Conectiv, Delmarva will continue to have 1,253,548 shares (not including 2.8 million shares of Quarterly Income Preferred Securities) of outstanding voting preferred stock. The only class of voting securities of Conectiv's direct and indirect nonutility subsidiaries will be common stock. Set forth below are summaries of the historical capital structure of Delmarva and Atlantic as of December 31, 1996 and the pro forma consolidated capital structure of Conectiv as of December 31, 1996: Delmarva and Atlantic Historical Consolidated Capital Structures (dollars in thousands) Delmarva Atlantic Common Stock Equity $934,913 $787,394 Preferred stock not subject to 89,703 30,000 mandatory redemption Preferred stock subject to 70,000 113,950 mandatory redemption Long-term Debt 904,033 829,745 --------- --------- Total $1,998,649 $1,761,089 Conectiv Pro Forma Consolidated Capital Structure* (dollars in thousands) (unaudited) Conectiv Common Stock (incl. additional $1,449,158 paid in capital) Class A Common Stock 136,835 Retained Earnings 285,337 Preferred stock not subject to 119,703 mandatory redemption (of subsidiaries) Preferred stock subject to 183,950 mandatory redemption (of subsidiaries) Long-term Debt 1,733,778 ---------- Total $3,908,761 * The pro forma consolidated capital structure of Conectiv has been adjusted to reflect future nonrecurring charges directly related to the Mergers, which result in, among other things, the recognition of additional current liabilities and a reduction in retained earnings. Conectiv's pro forma consolidated common equity to total capitalization ratio of 48% comfortably exceeds the "traditionally acceptable 30% level." NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990), MODIFIED, HCAR No. 25273 (Mar. 15, 1991), AFF'D SUB NOM. CITY OF HOLYOKE V. SEC, 972 F.2d 358 (D.C. Cir. 1992). Protected interests: As set forth more fully in Item 3.A.2.b.i (Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System) and elsewhere in this Application/Declaration, the Mergers are expected to result in substantial cost savings and synergies, and will integrate and improve the efficiency of the Delmarva and Atlantic utility systems. The Mergers will therefore be in the public interest and the interests of investors and consumers, and will not be detrimental to the proper functioning of the resulting holding company system. 2. Section 10(c) Section 10(c) of the Act provides that, notwithstanding the provisions of Section 10(b), the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 1119; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and the efficient development of an integrated public utility system . . . . - -------- 19 By their terms, Sections 8 and 11 only apply to registered holding companies and are therefore inapplicable at present to Conectiv, since it is not now a registered holding company. The following discussion of Sections 8 and 11 is included only because, under the present transaction structure, Conectiv will register as a holding company after consummation of the Mergers. a. Section 10(c)(1) Section 10(c)(1) requires that an acquisition be lawful under Section 8. Section 8 prohibits registered holding companies from acquiring, owning interests in or operating both a gas and an electric utility serving substantially the same area if state law prohibits it. As discussed below, the Mergers do not raise any issue under Section 8 or, accordingly, the first clause of Section 10(c)(1). Indeed, Section 8 indicates that a registered holding company may own both gas and electric utilities where, as here, the relevant state utility commissions support such an arrangement. Section 10(c)(1) also requires that an acquisition not be detrimental to carrying out the provisions of Section 11. Section 11(a) of the Act requires the Commission to examine the corporate structure of registered holding companies to ensure that unnecessary complexities are eliminated and voting powers are fairly and equitably distributed. As described above, the Mergers will not result in unnecessary complexities or unfair voting powers. Although Section 11(b)(1) generally requires a registered holding company system to limit its operations "to a single integrated public utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public utility system," a combination integrated gas and electric system within a registered holding company is permissible under Section 8. Additionally, Section 11(b)(1) provides that "one or more additional integrated public utility systems" may be retained if, as here, certain criteria are met. Section 11(b)(2) directs the Commission "to ensure that the corporate structure or continued existence of any company in the holding company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding company system." As detailed below, the Mergers will not be detrimental to the carrying out of the provisions of Section 11. i. Retention of Gas Operations Conectiv's retention of the gas operations of Delmarva is lawful under Section 8 of the Act and would not be detrimental to the carrying out of Section 11 of the Act. Section 8: Section 8 of the Act provides that [w]henever a State law prohibits, or requires approval or authorization of, the ownership or operation by a single company of the utility assets of an electric utility company and a gas utility company serving substantially the same territory, it shall be unlawful for a registered holding company, or any subsidiary company thereof . . . (1) to take any step, without the express approval of the state commission of such state, which results in its having a direct or indirect interest in an electric utility company and a gas company serving substantially the same territory; or (2) if it already has any such interest, to acquire, without the express approval of the state commission, any direct or indirect interest in an electric utility company or gas utility company serving substantially the same territory as that served by such companies in which it already has an interest. (emphasis added). A fair reading of this section indicates that, with the approval of the relevant state utility commissions, registered holding company systems can include both electric and gas utility systems. Conectiv believes that a reemphasis by the Commission on Section 8, which would allow registered combination companies pending state support, is consistent both with the Act and its policy objectives. Indeed, over time the Commission has in fact emphasized different aspects of Section 8 and its interplay with Section 11 -- initially allowing registered holding companies to own both gas and electric systems under Section 8, then focusing on Section 11 as controlling determinations regarding combination companies, and requiring the second system to meet a strict interpretation of the requirements set forth in clauses A, B and C of Section 11(b)(1). In its early decisions, the Commission adhered to the concept that the decision as to whether or not to allow combination companies is one that states should make (although the Commission might have to implement it in certain cases) and, where such systems were permissible, the role of the Commission was to ensure that both such systems are integrated as defined in the Act. The Commission's most notable decision in this line is AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC 972 (1937). In this case, the Commission approved the applicant's voluntary reorganization plan under Section 11(e) of the Act and permitted the newly reorganized registered holding company to retain its electric and its gas operations, specifically noting that while the Act does not contain a definition of single integrated utility in the context of a combination company: We believe, however, that it is proper to regard such a combined property as a single integrated system, provided that all of the electric properties are integrated and all of the properties, both gas and electric, are in fairly close geographic proximity and are so related that substantial economies may be effectuated by their coordination under common control. The question of public policy as to the common ownership of gas and electric facilities in the same territory is apparently left by the statute to the decision of the states.20 Thus, since the combination company did not violate state policy, there was no need for the Commission to exercise jurisdiction to implement state policy. By the early 1940's, however, the Commission switched its focus to Section 11 and adopted a narrow interpretation of the standards contained therein as the controlling factor with regard to combination registered holding companies.21 In connection with its analysis of combination companies under Section 11, the Commission frequently noted a policy concern existing at that time which advocated separating the management of gas and electric utilities based on the belief that the gas utility business tended to be overlooked by combination company management who focused on the electric utility business. Therefore, gas utilities would benefit from having separate management focused entirely on the gas utility business.22 However, both the legislative history of the Act and recent changes in the utility industry indicate that it is a propitious time for the Commission to reemphasize the provisions of Section 8 of the Act and allow combination registered holding companies where, as in this case, they are permitted under relevant state law. - -------- 20 AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC at 983, n.3. 21 SEE, E.G., COLUMBIA GAS & ELECTRIC CORPORATION, 8 SEC 443 at 463 (1941); UNITED GAS IMPROVEMENT COMPANY, HCAR No. 2692 (April 15, 1941); SECURITIES AND EXCHANGE COMMISSION v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176 (1966). It should be noted that the Commission continued to give primacy to state utility commission determinations in making decisions regarding combination exempt holding companies. SEE, E.G., NORTHERN STATES POWER COMPANY, HCAR No. 12655 (Sept. 16, 1954); DELMARVA POWER & LIGHT CO., 46 SEC 710 (1976); WPL HOLDINGS, HCAR No. 24590 (Feb. 26, 1988). 22. SEE, E.G., THE PHILADELPHIA COMPANY, 28 SEC 35, 48 (1948); THE NORTH AMERICAN COMPANY, 11 SEC 169, 179-80 (195); ILLINOIS POWER COMPANY, HCAR No. 16574 (Jan. 2, 1970). A review of the legislative history of Section 8 clarifies this intent. In its report, the Senate Committee on Interstate Commerce noted that the provision in Section 8 concerning combination companies "is concerned with competition in the field of distribution of gas and electric energy -- a field which is essentially a question of State policy, but which becomes a proper subject of Federal action where the extra-State device of a holding company is used to circumvent state policy." THE REPORT OF THE COMMITTEE ON INTERSTATE COMMERCE, S. Rep. No. 621, 74TH Cong., 1st Sess. at 31 (1935). In addition, attached to the above-referenced committee report is the Report of the National Power Policy Committee on Public Utility Holding Companies, which sets forth a recommended policy that: "Unless approval of a State commission can be obtained the commission should not permit the use of the holding-company form to combine a gas and electric utility serving the same territory where local law prohibits their combination in a single entity." This does not prohibit combination companies where such approvals can be obtained. Much more recently, in the 1995 REPORT, the Division noted "it does not appear that the SEC's precedent concerning additional systems precludes the SEC from relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility industry is evolving toward the creation of one-source energy companies that will provide their customers with whatever type of energy supply they want, whether electricity or gas," and recommended that the Commission interpret Section 11(b)(1) of the Act to allow registered holding companies to hold both gas and electric operations as long as each affected state utility regulatory commission approves of the existence of such a company.23 This change in the industry whereby, among other things, customers are increasingly seeking the most economic means of meeting their energy needs, and not simply their gas needs or their electric needs, is evidenced by the transformation of traditional utilities into energy service companies as well as the growth of new energy providers such as marketers, the increase in announced mergers between pure electric and pure gas utilities and even the treatment of energy as a commodity for arbitrage transactions. For example, Consolidated Natural Gas, Unitil Corporation, Eastern Utilities Associates, New England Electric System, Southern Company and Northeast Utilities, each a registered holding company, have been authorized to offer customers multiple fuel options and related energy services through subsidiaries.24 Furthermore, the proposed merger of PanEnergy Corp., a large pipeline and electric and gas marketer with Duke Power Company, an electric utility holding company, and the proposed acquisition of Portland General Corporation, an electric utility holding company, by Enron Corporation, a large gas pipeline and electric and gas marketer as well as the acquisition of ENSERCH Corporation, a gas utility company, by Texas Utilities Company, an electric utility holding company, and the acquisition of NorAm Energy, Inc., a gas utility company, by Houston Industries, Inc., an electric utility holding company, demonstrate that market forces are pushing for the convergence of electric and gas operations into full service utility companies. Indeed, the Commission has recently explicitly recognized that "the utility industry is evolving towards a broadly based energy-related business,25 marked by "the interchangeability of different forms of energy, particularly gas and electricity.26 - -------- 23 1995 REPORT at 15-6. 24 CONSOLIDATED NATURAL GAS COMPANY, HCAR No. 26512 (April 30, 1994) (the "CNG Order"); UNITIL CORPORATION, HCAR No. 26527 (May 31, 1996); NORTHEAST UTILITIES, HCAR No. 26554 (Aug. 13, 1996); NEW ENGLAND ELECTRIC SYSTEM, HCAR No. 26520 (May 23, 1996); and Supplemental Order Releasing Jurisdiction For Certain Retail Electric Marketing Activities, HCAR No. 26519 (May 23, 1996); SEI HOLDINGS, HCAR No. 26581 (September 26, 1996). 25 CNG Order. 26 CNG Order at 11. Another important factor in favor of focusing on state commission determinations regarding combination companies is that one of the primary goals of Congress in enacting the Act was to simplify the corporate structures of holding company systems to enable states to regulate the production and distribution of energy. Section 8 provides that the Act may be used as a tool to further state policy when state policy prohibits combined electric and gas operations, and implicitly allows such combination companies where consistent with state policy. This is consistent with the general policy of the Act that local regulators are in the best position to assess the needs of their communities. The Act was never intended to supplant local regulation but, rather, was intended to create conditions under which local regulation was possible. Section 21 of the Act, which further codifies this legislative intent, states: "Nothing in [the Act] shall affect . . . the jurisdiction of any other commission, board, agency, or officer of . . . any State, or political subdivision of any State, over any person, security, or contract, insofar as such jurisdiction does not conflict with any provision of [the Act] . . . ." The legislative history reveals that Section 21 of the Act was further intended "to insure the autonomy of state commissions [and] nothing in the [Act] shall exempt any public utility from obedience to the requirements of state regulatory law." The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 10 (1935). Thus, the Act should not be used as a tool to override state policy, particularly when the holding company involved is subject to both state and federal regulation and when the affected state regulatory commissions have indicated their support for the combined electric and gas operations in one holding company system. Finally, this reemphasis on Section 8 fits within the overall regulatory scheme of the Act. First, Section 11 of the Act is flexible and was designed to change as the policy concerns over the regulation of utility holding companies changed.27 As discussed below, the utility industry and the regulation of that industry has changed dramatically in recent years and it is competitive forces (the very thing that the Act was designed to promote) that are pushing holding companies to offer alternative forms of energy. Second, a registered holding company would still be required to demonstrate that any acquisition or transaction by which it would become a combination company would not be detrimental to the carrying out of the provisions of Section 11 of the Act. In other words, its electric system would have to constitute an integrated electric system and that its gas system would have to constitute an integrated gas system and both systems must be capable of being operated efficiently. Thus, the standards of Section 11 would still have to be met, but the construction of those standards should take into account the fundamental policy of the Act and allow local regulators to make the major determination with regard to combination companies. - -------- 27 MISSISSIPPI VALLEY GENERATING CO., 36 SEC 159 (1955) (noting that Congress intended the concept of integration to be flexible); UNITIL CORPORATION, HCAR No. 25524 (April 24, 1992) (noting that section 11 contains a flexible standard designed to accommodate changes in the industry). Conectiv as a combination company is permissible pursuant to the terms of Section 8 of the Act and is in the public interest. First, the combination of electric and gas operations in Delmarva is lawful under all applicable state laws. Conectiv will not be using its holding company structure to circumvent any state regulations. Moreover, earlier concerns that a holding company such as Conectiv would be able to greatly emphasize one form of energy over the other based on its own agenda have receded because of the competitive nature of the energy market, which requires utilities to meet customer demand for energy above all else, and because state regulators will have sufficient control over, and would be unlikely to approve, a combination company that attempts to undertake such practices. Even if the Act were not interpreted as generally permitting combination gas and electric systems, Section 11 contains additional provisions that permit the retention by Delmarva of its gas system. Section 11(b)(1) of the Act permits a registered holding company to control one or more additional integrated public utility systems -- i.e., gas as well as electric -- if: (A) each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control by such holding company of such system; (B) all of such additional systems are located in one state, adjoining states, or a contiguous foreign country; and (C) the continued combination of such systems under the control of such holding company is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. In the 1995 REPORT, the Division recommended that the Commission "liberalize its interpretation of the 'A-B-C' clauses."28 Historically, as a "guide" to determining whether lost economies are "substantial" under Section 11(b)(1)(A), under its previous narrow interpretation of this section, the Commission has given consideration to four ratios, which measure the projected loss of economies as a percentage of: (1) total gas operating revenues; (2) total gas expense or "operating revenue deductions"; (3) gross gas income; and (4) net gas income or net gas utility operating income. Although the Commission has declined to draw a bright-line numerical test under Section 11(b)(1)(A), under its previous narrow interpretation of this Section it indicated that cost increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in operating revenue deductions, a 25.44% loss of gross income and a 42.46% loss of net income would afford an "impressive basis for finding a loss of substantial economies." ENGINEERS PUBLIC SERVICE CO., 12 SEC 41, 59 (1942) (citation omitted). - -------- 28 1995 REPORT at 74. Here, the lost economies that would be experienced if the gas properties of Delmarva were to be operated on a stand-alone basis exceed these numbers, without any increase in benefits to consumers. These lost economies result from the need to replicate services, the loss of economies of scale, the costs of reorganization, and other factors, and are described more fully in the Analysis of the Economic Impact of a Divestiture of the Gas Business of DPL (the "Divestiture Study") (Exhibit J-1 hereto). As set forth in the Divestiture Study, divestiture of the gas operations of Delmarva into a stand-alone company would result in lost economies of $14,728,000. These lost economies compare with Delmarva's gas operating revenues of $104,687,000, gas operating revenue deductions of $84,628,000, gas gross income of $20,059,000 and gas net income of $13,910,000. On a percentage basis, Delmarva's lost economies amount to 14.07% of gas operating revenue, 17.40% of gas operating revenue deductions, 73.42% of gross gas income and 105.88% of net gas income for Delmarva. The percent losses in net gas income alone that will be suffered by the Delmarva gas system if operated on a stand-alone basis exceed the 30% loss in the New England Electric System case that the Commission has described as the highest loss of net income in any past divestiture order.29 The percentage loss that would be suffered by Delmarva in gas operating revenue and gross gas income exceeds the percentage loss in the majority of divestiture orders issued by the Commission in the past. Delmarva's lost economies also exceed the lost economies that would result if the divestiture of the gas operations of Public Service Company of Colorado and Cheyenne Light, Fuel and Power Company were required by the Commission in connection with the approval of the formation of New Century Energies, Inc. The applicable percentages here and in past cases are summarized in Exhibit J-3. - -------- 29 NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888 (1964), AFF'D, 384 U.S. 176 (1966) and 390 U.S. 207 (1968). In order to recover these lost economies the Delmarva gas division would need to increase its revenue from rates by $15,493,000 or 14.80%. This increase in rate revenues would have a direct and immediate negative impact on the rates charged to consumers for gas services. Moreover, it should be noted that the divestiture of Delmarva's gas business would result in rate increases of 0.79% for Delmarva electric customers. Finally, divestiture of Delmarva's gas operations would cause a significant, although difficult to quantify, amount of damage to Conectiv's customers, Conectiv's regulators and Conectiv's ability to compete in the marketplace. Such non- quantifiable costs to customers involve the additional expenses of doing business with two utilities instead of one (i.e., additional telephone calls for service and billing inquiries, and costs of providing access to meters and other facilities for two utilities) and costs associated with making the entities supply information to shareholders and publish the reports required by the 1934 Act. Similarly, regulatory costs involve additional duties for the staffs of the DPSC as a result of dealing with an additional utility. These additional duties would largely be the result of duplicating existing functions, such as separate requests for approval of financing. Conectiv's competitive position in the market would also suffer because as the utility industry moves toward a complete energy services concept, competitive companies must be able to offer customers a range of options to meet their energy needs. Divestiture of gas operations would render Conectiv unable to offer its customers a significant and important option, namely gas services, and could damage Conectiv's long-term competitive potential. (B) and (C) clauses: The remaining requirements of Section 11(b)(1) are met because the gas operations of Delmarva are located in only one state (Delaware) and because the continued gas operations under Conectiv are not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation or the effectiveness of regulation. The gas system is confined to a small area. Finally, as detailed above, the gas operations of Delmarva enjoy substantial economies as part of the Delmarva system, and will realize additional economies as part of the Conectiv System as a result of the Mergers. Far from impairing the advantages of efficient operation, the continuation of the gas operations under Conectiv will facilitate and enhance the efficiency of gas operations. For further discussion of the requirements of Section 11(b)(1)(C), see the legal memorandum filed as Exhibit J-2 hereto. ii. Direct and Indirect Nonutility Subsidiaries of Conectiv As a result of the Mergers, the nonutility businesses and interests of Delmarva and Atlantic described in Item 1.B.3 above will become businesses and interests of Conectiv. The total assets of all nonutility investments of Delmarva and Atlantic at December 31, 1996 totaled $294 million, constituting 5.2% of the pro forma consolidated assets of Conectiv. Corporate charts showing the nonutility subsidiaries of Delmarva and Atlantic are filed as Exhibits E-2 and E-3. A corporate chart showing the projected arrangement of these subsidiaries under Conectiv is filed as Exhibit E-4. Standard for retention: Section 11(b)(1) permits a registered holding company to retain "such other businesses as are reasonably incidental, or economically necessary or appropriate, to the operations of [an] integrated public utility system." Although the Commission has traditionally interpreted this provision to require an operating or "functional" relationship between the nonutility activity and the system's core nonutility business, in its recent release promulgating Rule 58,30 the Commission stated that it "has sought to respond to developments in the industry by expanding its concept of a functional relationship." The Commission added "that various considerations, including developments in the industry, the Commission's familiarity with the particular nonutility activities at issue, the absence of significant risks inherent in the particular venture, the specific protections provided for consumers and the absence of objections by the relevant state regulators, made it unnecessary to adhere rigidly to the types of administrative measures" used in the past. Furthermore, in the 1995 REPORT, the Staff recommended that the Commission replace the use of bright-line limitations with a more flexible standard that would take into account the risks inherent in the particular venture and the specific protections provided for consumers.31 As set forth more fully below, the non-utility business interests that Conectiv will hold directly or indirectly all meet the Commission's standards for retention. - -------- 30 EXEMPTION OF ACQUISITION BY REGISTERED PUBLIC-UTILITY HOLDING COMPANIES OF SECURITIES OF NONUTILITY COMPANIES ENGAGED IN CERTAIN ENERGY-RELATED AND GAS-RELATED ACTIVITIES, HCAR No. 26667 (Feb. 14, 1997) ("RULE 58 RELEASE"). 31 1995 REPORT at 81-87, 91-92. The following is a description of the specific bases under which the nonutility investments of Delmarva and Atlantic may be retained in the Conectiv holding company system: Development and commercialization of electrotechnologies: The business activities of the following companies, either directly or through subsidiaries, are energy-related activities within the meaning of Rule 58(b)(1)(ii), involving "the development and commercialization of electrotechnologies related to energy conservation, storage and conversion, energy efficiency, waste treatment, greenhouse gas reduction, and similar innovations," and so retainable under Section 11(b)(1) of the Act:32 DCTC-Glendon, Inc. was formed to invest in a waste-to- energy business that was proposed to be located in Glendon, PA. The facility was never built. Pine Grove Gas Development, L.L.C. is involved in developing a use for methane gas produced at the municipal solid waste landfill owned and operated by Pine Grove Landfill, Inc. ATE is an investor in EnterTech Capital Partners, L.P., a limited partnership that will invest in and support a variety of energy technology growth companies. - -------- 32 Rule 58 explicitly permits indirect investment in energy- related companies through project parents. Although Rule 58 was adopted pursuant to Section 9(c)(3) of the Act, businesses permissible under the rule are retainable under Section 11. See Michigan Consolidated Gas Co., 44 S.E.C. 361 (1970), aff'd, 444 F.2d 931 (D.C. Cir. 1971) (Section 9(c)(3) may not be used to circumvent Section 11). Brokering and marketing of energy commodities: The business activities of the following company are energy-related activities within the meaning of Rule 58(b)(1)(v), involving "the brokering and marketing of energy commodities, including but not limited to electricity or natural or manufactured gas or other combustible fuels," and so retainable under Section 11(b)(1) of the Act: Enerval, L.L.C. ("Enerval") provides energy management services, including natural gas procurement, transportation and marketing. Thermal energy products: The business activities of the following companies (directly or through subsidiaries) are energy-related activities within the meaning of Rule 58(b)(1)(vi), involving "the production, conversion, sale and distribution of thermal energy products, such as process steam, heat, hot water, chilled water, air conditioning, compressed air and similar products; alternative fuels; and renewable energy resources; and the servicing of thermal energy facilities," and so retainable subsidiaries of a registered holding company under Section 11(b)(1) of the Act: ATS develops, owns and operates thermal heating and cooling systems. It is also exempt as a holding company over the following companies engaged in the same type of activities: Atlantic Jersey Thermal Systems, Inc. provides operating services for thermal heating and cooling systems. ATS Operating Systems, Inc. provides thermal energy operating services. Thermal Energy Limited Partnership I holds an investment in the Midtown Energy Center, which produces steam and chilled water ("TELPI"). Ownership and operation of QFs: The business activities of the following companies, directly or through subsidiaries, are energy-related activities within the meaning of Rule 58(b)(1)(viii), involving "the development, ownership or operation of 'qualifying facilities'..., and any integrated thermal, steam host, or other necessary facility constructed, developed or acquired primarily to enable the qualifying facility to satisfy the useful thermal output requirements under PURPA," and so retainable under Section 11(b)(1) of the Act: Delmarva Operating Services Company ("DOSC") is retainable as a holding company over the following companies engaged in the operation and maintenance of qualifying facilities: DelWest Operating Company operates and maintains a qualifying facility in Burney, CA, under a contract with the plant's owner, Burney Forest Products, Joint Venture (an investment of DCTC- Burney, Inc.). DelCal Operating Company operates and maintains a qualifying facility in Sacramento, California owned by the Sacramento Power Authority under a subcontract with Siemens Power Corporation. DelStar Operating Company operates and maintains the Delaware City Power Plant, a qualifying facility in Delaware City, Delaware under a contract with the plant's owner. DCTC-Burney, Inc. is retainable as a holding company over investments in Pine Grove Gas Development, L.L.C. (discussed above under subsection 1) and the following companies engaged in the operation and ownership of qualifying facilities: DelBurney Corporation is an intermediate holding company over an investment in a qualifying facility. Forest Products, L.P. is a general partner in a joint venture that owns a qualifying facility and related sawmill. Burney Forest Products, Joint Venture owns a qualifying facility and related sawmill in Burney, CA. AGI is retainable as a holding company over the following companies engaged in the operation and ownership of qualifying facilities: Pedrick Ltd., Inc. holds a limited partnership interest in Pedricktown Cogeneration Limited Partnership, a qualifying facility. Pedrick Gen., Inc. holds a general partnership interest in Pedricktown Cogeneration Limited Partnership, a qualifying facility. Vineland Limited, Inc. holds a limited partnership interest in Vineland Cogeneration Limited Partnership, a qualifying facility. Vineland General, Inc. holds a general partnership interest in Vineland Cogeneration Limited Partnership, a qualifying facility. Telecommunications facilities: Section 34 of the Act provides an exemption from the requirement of prior Commission approval the acquisition and retention by a registered holding company of interests in companies engaged in a broad range of telecommunications activities and businesses. Section 34 permits ownership of interests in telecommunications companies engaged exclusively in the business of providing telecommunications service upon application to the Federal Communications Commission for a determination of "exempt telecommunications company" status. Conectiv Communications, Inc. and CCI will file for status as exempt telecommunications companies under Section 34 of the Act prior to consummation of the Mergers. Real estate: In prior orders, the Commission has approved the purchase of real estate which is incidentally related to the operations of a registered holding company. See UNITIL Corporation et al., Holding Co. Act Release No. 25524 (Apr. 24, 1992) (Commission noted that UNITIL Realty Corporation, a subsidiary of the registered holding company, UNITIL, which acquired real estate to support utility operations, engaged in activities which were within the confines of the Act). Consequently, since the real estate held by the following companies is substantially similar to that owned by UNITIL Realty Corporation, the companies are retainable subsidiaries of a registered holding company under Section 11(b)(1) of the Act: Delmarva Services Company was formed to own and finance an office building leased to Delmarva and/or affiliates. Christiana Capital Management, Inc. was formed to own and finance an office building leased to affiliates. ASP owns and manages a commercial office and warehouse facility in southern New Jersey. Fifty percent of the space is presently leased to system companies and fifty percent is leased to a high school and a day care center. There are two additional real estate subsidiaries which the Applicants seek approval to retain. These companies have total assets of less than $5 million. Given the de minimis size of the investment and that the Applicants are seeking only to retain the existing assets, the Commission should approve retention of the following two companies: Delmarva Capital Realty Company is a vehicle for the sale of properties not used or useful for the utility business. Post and Rail Farms, Inc. is engaged in the development and sale of a residential housing development. Leveraged leases: The Commission has approved investments by registered holding companies in leveraged leases under Section 9(c)(3), which exempts from Section 9(a) and Section 10, "such commercial paper and other securities, within such limitations, as the Commission may by rules and regulations or order prescribe as appropriate in the ordinary course of business of a registered holding company or subsidiary company thereof and as not detrimental to the public interest or the interest of investors or consumers." Central and South West Corporation, HCAR 23588 (Jan. 22, 1985). As the Commission noted in Central and South West, title held by the lessor in such circumstances is insufficient to make lessor an "owner" under Section 2(a)(3)(4) of the Act. Moreover, attempting to reduce one's tax liability through leveraged lease investments is within the ordinary course of business. Consequently, since the leveraged lease investments held by the following companies and related activities of the companies are substantially similar to those discussed above, the companies are retainable subsidiaries of a registered holding company under 11(b)(1) of the Act: DCI I, Inc. makes equity investments in leveraged leases of aircraft. DCI II, Inc. is a foreign sales subsidiary formed to obtain certain tax benefits from leveraged lease investments by DCI I, Inc. ATE's primary investments are equity investments in leveraged leases of three commercial aircraft and two container ships. The other activities of ATE Investment, Inc. are (i) its investment in EnterTech Capital Partners, L.P., which, as discussed above, is retainable pursuant to Rule 58(b)(1)(ii) and (ii) certain financing arrangements with affiliates. Solid Waste Management: The Applicants also seek approval to retain certain de minimis investments in the solid waste management business. These companies were originally acquired in connection with a proposed investment in a waste-to-energy facility that was never constructed. These companies have total assets of less than $35 million. Given the de minimis size of the investment and that the Applicants are seeking only to retain, and maintain, the existing assets, the Commission should approve retention of the following two companies: Pine Grove, Inc. is a holding company over the following investments: Pine Grove Landfill, Inc. owns and operates a municipal solid waste landfill. Pine Grove Hauling Company owns and operates a waste hauling and recycling business. Gas-related Activities: Conectiv will hold an indirect ownership interest in East Coast Natural Gas Cooperative, L.L.C. ("ECNG"), which is engaged in gas-related activities. Delmarva participated in the formation of ECNG in order to improve the efficiency of its natural gas local distribution operations. ECNG members provide emergency backup natural gas supplies to other members and jointly undertake the bulk purchase and storage of natural gas for use in their local distribution business. Because these activities are functionally related to the operations of the gas utility business of Delmarva, ECNG is retainable by Conectiv under Section 11(b)(1). Further, upon Commission approval of the Mergers, ECNG will be exempt from all obligations, duties or liabilities imposed upon it by the Act as a subsidiary company or as an affiliate of a registered holding company or of a subsidiary company thereof. SEE RULE 16. Nonutility Holding Companies: In addition to the companies discussed above which are engaged in a single type of business activity, Conectiv will have several other direct and indirect holding company subsidiaries, which are holding companies for subsidiaries engaged in a variety of businesses. The following holding companies are retainable because all of their investments are in companies which are retainable, as outlined above: Delmarva Capital Investments, Inc. ("DCI") is the holding company over DCI I, Inc., DCI II, Inc. and Delmarva Capital Technology Company. Delmarva Capital Technology Company ("DCTC") is the holding company over Pine Grove, Inc., DCTC-Glendon, Inc. and DCTC-Burney, Inc. AEE is holding company over ATE, AET, AGI, ATS, CCI, ASP and Enerval. Home Security Business: The home security business of ACE, which is located exclusively in its service territory has annual revenues of less than $10,000. It is a small operation that developed from utility operations and incurs very little cost at this point. Accordingly, Conectiv seeks to retain this business under Section 11(b)(1). Although it is currently within ACE, it may be moved to a separate subsidiary of Conectiv. Any such subsidiary will apply for exempt telecommunications company status under Section 34. Consumer Services: Conectiv Services, Inc. currently provides heating, ventilation and air conditioning ("HVAC") sales, installation and servicing. Since 1996, it has acquired 6 HVAC service companies. The Applicants hereby seek authority for Conectiv Services, Inc. to acquire additional HVAC companies through December 31, 2000. The HVAC services provided by Conectiv Services, Inc. are energy-related appliance sales activities that fall within the exemptive requirements of Rule 58. Because Conectiv Services, Inc. intends to engage in additional activities, however, it does not appear that Conectiv Services, Inc. would be an energy-related company for purposes of Rule 58. Nonetheless, these activities are clearly retainable under Commission precedent. Conectiv Services, Inc. also seeks approval to provide directly, or through one or more subsidiaries, a variety of energy-related services and products to residential and commercial customers ("Consumer Services"). While the precise list of services is still under consideration, it is anticipated that Consumer Services may include: (1) service lines repair/extended warranties - repair of underground utility services lines owned by and located on the customer's property and extended service warranties covering the cost of such repairs; (2) surge protection - meter-based and plug-in equipment to protect customer household appliances and electronic equipment from power surges, including due to lightning; (3) appliance merchandising/repair/extended warranties - marketing of HVAC and other energy-related household appliances and, in connection therewith or separately, marketing of appliance inspection and repair services and extended service warranties covering the cost of repairing customers' appliances; (4) utility bill insurance utility bill payment protection, for a monthly fee for a specified number of months, in the event the customer becomes unemployed, disabled or dies; and (5) incidental and reasonably necessary products and services related to the choice, purchase or consumption of any such products and services. Conectiv Services, Inc. also seeks approval to furnish its own financing or to broker nonassociate third-party financing, directly or indirectly, to commercial, industrial and residential customers to support purchases by its customers of HVAC and Consumer Services. Conectiv Services, Inc. may also provide financing for goods and services sold by its affiliates. Customer financing may take the form of direct loans, installment purchases, operating or finance lease arrangements (including sublet arrangements) and loan guarantees. Interest on loans and imputed interest on lease payments will be based on prevailing market rates. The obligations will have terms of one to thirty years and will be secured or unsecured. Conectiv Services, Inc. may also assign obligations acquired from customers to banks, leasing companies or other financial institutions, with or without recourse. Rule 40(a)(4) provides an exemption from Section 9(a) with respect to the acquisition: In the ordinary course of the acquiring company's business (other than the business of a holding company or investment company as such), [of] any evidence of indebtedness executed by its customers in consideration of utility or other services by such company or executed in connection with the sale of goods or real property other than utility assets. It appears that, to the extent that financing transactions support Conectiv Services, Inc.'s sales activities, they would be exempt pursuant to Rule 40(a)(4). In the alternative, we note that the Commission has previously approved customer financing activities by registered holding company systems. SEE CINERGY CORP., HCAR No. 26662 (Feb. 7, 1997). In connection with the HVAC business, Consumer Services and customer financing, the Applicants seek approval for Conectiv Services to invest up to an additional $100 million, exclusive of guarantees, through the period ending December 31, 2000. As detailed above, many of the nonutility activities of Conectiv and its affiliates fall within the ambit of newly adopted Rule 58. Rule 58 also provides (in section (a)(1)(ii)) that investments in nonutility activities that are exempt under Rule 58 cannot exceed 15% of the consolidated capitalization of the registered holding company. In its statement supporting the adoption of the Rule, the Commission stated: The Commission believes that all amounts that have actually been invested in energy-related companies pursuant to commission order prior to the date of effectiveness of the Rule should be excluded from the calculation of aggregate investment under Rule 58. The Commission also believes it is appropriate to exclude from the calculation all investments made prior to that date pursuant to available exemptions. RULE 58 RELEASE at 50-51. Because Conectiv is not yet a registered holding company, none of the investments in nonutility activities that are described herein are the subject of a Commission order. However, since all of the activities of Delmarva were outside the ambit of the Act and since the nonutility investments of Atlantic, an exempt holding company, were not subject to limitations under the Act, investments made by Delmarva and Atlantic prior to the effective date of the Mergers, should not count in the calculation of the 15% limit for purposes of Rule 58. The same reasoning that led the Commission to grandfather prior investments for registered holding companies justifies exempting from the 15% calculation the existing investments of a company prior to registration. All additional investments made in energy-related companies subsequent to the effective date of the Mergers would, of course, be included in the 15% test. Conectiv requests authority to restructure and realign its existing nonutility interests after the Mergers in a manner consistent with the Act, without the need to apply for or receive further Commission approval. Conectiv also requests authority to form subsidiaries and enter into joint ventures and other arrangements with nonaffiliates in the businesses described above without need for further Commission approval in an amount not to exceed $100 million, exclusive of guarantees. b. Section 10(c)(2) The Mergers will tend toward the economical and efficient development of an integrated public utility system, thereby serving the public interest, as required by Section 10(c)(2) of the Act. i. Efficiencies and Economies The Mergers will produce economies and efficiencies more than sufficient to satisfy the standards of Section 10(c)(2), described above. Although some of the anticipated economies and efficiencies will be fully realizable only in the longer term, they are properly considered in determining whether the standards of Section 10(c)(2) have been met. SEE AMERICAN ELECTRIC POWER CO., 46 SEC 1299, 1320-1321 (1978). Some potential benefits cannot be precisely estimated; nevertheless they too are entitled to be considered: "[S]pecific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable." CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29, 1986) (citation omitted). Delmarva and Atlantic have estimated the nominal dollar net value of synergies from the Mergers to be in excess of $500 million over the first 10-year period, from 1998 to 2007. The geographical locations of the respective service territories of Delmarva and ACE, which operate in contiguous states separated by the Delaware River and whose headquarters are within 90 miles of one another, provide an opportunity to integrate efficiently their utility operations. Delmarva's operating entities already have existing electrical interconnections with Atlantic through 500kv transmission lines. The combined system can be operated as a single, larger cohesive system, with virtually no modification needed with respect to existing generating and transmission facilities. There are five general areas where presently quantifiable savings can be realized through the combination of the companies: (1) corporate, operations and generation support labor; (2) facilities consolidation; (3) corporate and administrative programs; (4) non-fuel purchasing economies; and (5) fuel supply and purchased power. The amount of savings currently estimated in each of these categories, on a nominal dollar basis, is summarized in the table below: Category Amount (in millions) Labor $346 Facilities Consolidation 26 Corporate and Administrative Programs 125 Non-Fuel Purchasing Economies 56 Fuel Supply and Purchased Power 28 Less: Costs to Achieve 72 ---- Net Total Estimated Savings $509 These expected savings far exceed the savings claimed in a number of recent acquisitions approved by the Commission. SEE, E.G., KANSAS POWER AND LIGHT CO., HCAR No. 25465 (Feb. 5, 1992) (expected savings of $140 million over five years); IE INDUSTRIES, HCAR No. 25325 (June 3, 1991) (expected savings of $91 million over ten years); MIDWEST RESOURCES, HCAR No. 25159 (Sept. 26, 1990) (estimated savings of $25 million over five years). These savings categories are described in greater detail below. Corporate, Operations and Generation Support Labor: Savings will be realized through labor reductions related to redundant positions. Many of these reductions will be in areas where payroll costs are relatively fixed and do not vary with an increase or decrease in the number of customers served. These areas include legal services, finance, sales, support services, transmission and distribution, customer service, accounting, human resources and information services. Overall, Conectiv expects a reduction of approximately 10% (or 400 positions) in the combined company's workforce. Conectiv would also have the ability to consolidate certain customer business offices and service centers in the eastern Delaware/western New Jersey area where Delmarva and Atlantic have contiguous or geographically close service territories. Facilities Consolidation: Savings will be realized through the combination of neighboring business offices or service centers. Specifically, due to the workforce reductions, consolidation of operations at the Delmarva headquarters in Wilmington, Delaware will allow for the possible sale or lease of Atlantic's corporate headquarters in Egg Harbor Township, N.J. and other potential consolidations. Corporate and Administrative Programs: Savings will be realized through economies of scale and cost avoidance in those areas where both Delmarva and Atlantic incur many costs for items which relate to the operation of each company, but which are not directly attributable to customers. Ten such areas have been identified: administrative and general overhead; benefits administration; insurance; information services; professional services; shareholder services; advertising; association dues; credit facilities; directors' fees; and vehicles. Achieving cost savings through greater efficiencies and economies of scale will permit each of the operating utilities to offer more competitively-priced electric service and energy-related products and services than would otherwise be possible. Non-Fuel Purchasing Economies: Savings will be realized through increased order quantities and the enhanced utilization of inventory for materials and supplies. Currently, Delmarva and Atlantic independently maintain separate purchasing departments responsible for maintaining materials and supplies used by employees at various storeroom locations. In addition, both companies procure contract services independently. As a direct result of the combination, savings can be realized through the procurement of both materials and services, as well as in costs associated with the maintenance of inventory levels. Fuel Supply and Purchased Power: Savings will be realized through the bundling of commodity fuels and bulk power purchases in the form of larger quantities or volumes. Fuel supply savings were analyzed in the following areas: coal, gas, oil and rail transportation. Conectiv will be able to take advantage of commodity savings based on higher total volumes of coal and natural gas acquisition. Rail transportation costs for coal could also be renegotiated at a lower per ton cost. No savings were identified in oil procurement because both companies are purchasing through commodity markets under short term and spot contracts. This results in competitive market prices for both entities and will not result in significant savings in commodity or transportation. The total potential savings from fuel supply and purchased power are estimated to be $28 million over the ten-year period. Savings from these sources are offset by the costs that must be incurred for activities essential to achieving the savings. Costs to Achieve: Costs to achieve the identified savings are estimated at approximately $72 million for such items as relocation, retraining and system consolidation. Additional Expected Benefits: In addition to the benefits described above, there are other benefits which, while presently difficult to quantify, are nonetheless substantial. These other benefits include: o Increased Scale-- As competition intensifies within the industry, Atlantic and Delmarva believe scale will be one parameter that will contribute to overall business success. Scale has importance in many areas, including utility operations, product development, advertising and corporate services. The Mergers are expected to improve the profitability of the combined company by roughly doubling the customer base and providing increased economies of scale in all of these areas. o Competitive Prices and Services-- Sales to industrial, large commercial and wholesale customers are considered to be at greatest near-term risk as a result of increased competition in the electric utility industry. The Mergers will enable Conectiv to meet the challenges of the increased competition and will create operating efficiencies through which Conectiv will be able to provide more competitive prices to customers. o More Balanced Customer Base-- The Mergers will create a larger company with less reliance on the chemical and financial services industries, from Delmarva's perspective, and on casino gaming, tourism and recreation, from Atlantic's perspective. The combined service territories of Delmarva and Atlantic will be more diverse than their individual service territories, reducing Conectiv's exposure to adverse changes in any sector's economic and competitive conditions. o Financial Flexibility -- By roughly doubling the market capitalization of Conectiv compared with the individual companies, the Mergers should improve Conectiv's overall credit quality and liquidity of the securities and therefore improve Conectiv's ability to fund continued growth. o Regional Platform for Growth-- The combination of Atlantic and Delmarva will create a regional platform in the mid-Atlantic corridor. The corridor is experiencing economic growth that is led by the casino gaming industry in South Jersey and the expansion of the financial services industry in Delaware. Conectiv plans to expand relationships with existing customers and to develop relationships with new customers in the region. Conectiv will use its combined distribution channels to market a portfolio of energy-related products throughout the region and will follow regional relationships to other geographical areas. ii. Integrated Public Utility System I. Electric System As applied to electric utility companies, the term "integrated public utility system" is defined in Section 2(a)(29)(A) of the Act as: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operation to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. On the basis of this statutory definition, the Commission has established four standards that must be met before the Commission will find that an integrated public utility system will result from a proposed acquisition of securities: (1) the utility assets of the system are physically interconnected or capable of physical interconnection; (2) the utility assets, under normal conditions, may be economically operated as a single interconnected and coordinated system; (3) the system must be confined in its operations to a single area or region; and (4) the system must not be so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. ENVIRONMENTAL ACTION, INC. V. SECURITIES AND EXCHANGE COMMISSION, 895 F.2d 1255, 1263 (9th Cir. 1990), citing ELECTRIC ENERGY, INC., 38 SEC 658, 668 (1958). The Mergers satisfy all four of these requirements. It should be noted that in the 1995 REPORT, the Division recommended that the Commission "respond realistically to the changes in the utility industry and interpret more flexibly each piece of the integration requirement."33 - -------- 33 1995 REPORT at 71. Conectiv satisfies each of these requirements for an integrated system. The Commission has determined that the first and second requirements are satisfied when the merging companies jointly own generation and transmission facilities and are members of the same tight power pool. UNITIL CORP., HCAR No. 25524 (April 24, 1992); NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990). In these cases, the Commission found that the utilities in the holding company systems were physically capable of supplying power to each other through wheeling or power pool arrangements. In addition, the companies are interconnected through their undivided ownership interests in and/or rights to use the same regional generation facilities and extra-high voltage transmission facilities, as well as through their contractual rights to use the transmission facilities of other members of the PJM regional power pool. Delmarva and ACE each have undivided ownership interests in two nuclear plants: Peach Bottom Nuclear Generating Station located in Pennsylvania, in which each company holds a 7.51 percent interest, and Salem Nuclear Generating Station located in New Jersey, in which each company holds a 7.41 percent interest. Both companies also hold undivided ownership interests in two coal-fired thermal units, the Keystone and Conemaugh generating stations located in Pennsylvania. These four plants together account for a substantial proportion of Conectiv's generation resources, though the plants are located outside Conectiv's traditional service areas. Delmarva and ACE both are members of the PJM Pool, which is the largest single control area and tight power pool in the country.34 In order to achieve economy and reliability in bulk power supply within the PJM region, PJM members coordinate the planning and operation of their systems, share installed and operating reserves to reduce installed generator requirements, and participate in centralized unit commitment, coordinated bilateral transactions, and instantaneous real-time dispatch of energy resources to meet customer load requirements throughout the PJM Interconnection. Most of the electricity produced by Delmarva's and ACE's generating facilities, other than generation required to support local reliability, is committed to pool dispatch. - -------- 34 Comparable tight pools are the New York Power Pool ("NYPP") and the New England Power Pool ("NEPOOL"). Delmarva and ACE, along with other PJM members, also are owners in common or have joint rights to use certain 500 kv transmission facilities that are used to import power from the west and to deliver power from jointly owned generating plants to their owners' systems. These facilities include a transmission line which provides an aerial crossing of the Delaware River and other extra-high voltage lines that directly connect the jointly- owned power plants with lower voltage lines of the PJM Interconnection. Thus, Conectiv is able to integrate its generation resources to serve Delmarva's and ACE's customers pursuant to ownership and contractual rights to use regional transmission facilities of the PJM Interconnection.35 The Commission previously has found that the physical interconnection requirement of the Act was satisfied on the basis of contractual rights to use third-parties' transmission lines when the merging companies both were members of the same tight power pool.36 In UNITIL, the companies, Unitil's public utility subsidiary companies and Fitchburg Gas and Electric Light Company were indirectly interconnected through New England Power Pool ("NEPOOL") designated facilities and other nonaffiliate transmission facilities pursuant to the NEPOOL Agreement. While there was no particular transmission line through which transfers of power would be made among the Unitil companies, power would be delivered through a nonaffiliate system and a transmission charge would be paid to the owners of the facilities. The Commission found that the Unitil companies' contractual arrangements for transmission service established that the Unitil electric system would satisfy the physical interconnection requirement of the Act. For the same reasons, Conectiv satisfies the physical interconnection requirement of the Act. While Delmarva and ACE now achieve integration comparable to that found in UNITIL and NORTHEAST UTILITIES under the current PJM Interconnection Agreement, PJM members are restructuring their organization in ways that will expand the available mechanisms for integrating the Conectiv system. In compliance with Order 888 37 issued by the FERC in 1996, the members of the PJM Pool filed a pool-wide open access transmission tariff ("Tariff") and certain additional agreements intended to implement a restructuring of the PJM Pool.38 Under the Tariff, Delmarva and ACE (as well as other transmission- owning members of PJM and non-members purchasing network transmission service) can obtain network integration transmission service throughout the PJM control area to deliver capacity and energy from designated generation resources to the utility's electric customers. The PJM members also filed with the FERC an amended PJM Interconnection Agreement, which, like the previous PJM Interconnection Agreement, provides for coordination of electric system loads, electric generating capacities and electric transmission facilities. The amended PJM Interconnection Agreement provides that the members will establish a bid-based wholesale energy market in which any participant may buy and sell energy, and for the PJM control center to schedule and dispatch generation on the basis of least- cost, security-constrained dispatch and the prices and operating characteristics offered by sellers in order to serve the energy purchase requirements of customers. Though there are differences of opinion among PJM members as to the appropriate rules for governing the structure of the energy market, there is substantial agreement that an energy exchange should be implemented. - -------- 35 The fact that two facilities may be separated by other facilities that are not owned by the holding company does not change the fact that they are capable of physical connection and of supplying power to one another as needed. CITY OF NEW ORLEANS V. SEC, 969 F.2d 1163, 1165 (D.C. Cir. 1992). 36 SEE, E.G., NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990) at n. 85, MODIFIED HCAR No. 25273 (March 15, 1991), AFF'D SUB NOM. CITY OF HOLYOKE V. SEC, 972 F.2d 358 (D.C. Cir. 1992); CENTERIOR ENERGY CORP., HCAR No. 24073 (1986); CITIES SERVICES CO., 14 SEC 28, 53 n. 44. SEE ALSO YANKEE ATOMIC ELECTRIC CO., 36 SEC 552, 563 (1955); CONNECTICUT YANKEE ATOMIC POWER CO., 41 SEC 705, 710 (1963) (authorizing various New England companies to acquire interests in a commonly-owned nuclear power company and finding the interconnection requirement met because the New England transmission grid already interconnected the companies). 37 PROMOTING WHOLESALE COMPETITION THROUGH OPEN ACCESS NON- DISCRIMINATORY TRANSMISSION SERVICES BY PUBLIC UTILITIES AND RECOVERY OF STRANDED COSTS BY PUBLIC UTILITIES AND TRANSMITTING UTILITIES, Order No. 888, 61 Fed. Reg. 21540 (May 10, 1996), III FERC Stats. & Regs., Regulations Preambles 1991-1996 P. 31,036 (1996) "Order 888"). 38 COMPLIANCE OF THE PENNSYLVANIA-NEW JERSEY-MARYLAND INTERCONNECTION WITH ORDER No. 888, Docket No. OA97-261-000 (filed Dec. 31, 1996). Conectiv also satisfies the second of the Commission's requirements, that utility assets, under normal conditions, may be "economically operated as a single interconnected and coordinated system."39 The Commission has interpreted this language to refer, among other things, to the physical operation of utility assets as a system in which the generation and/or flow of current within the system may be centrally controlled and allocated as need or economy directs.40 The Commission has considered advances in technology and the particular operating circumstances in applying the integration standards. In approving the acquisition of Public Service Company of New Hampshire by Northeast Utilities, the Commission noted that "the operation of generating and transmitting facilities of PSNH and the Northeast operating companies is coordinated and centrally dispatched under the NEPOOL Agreement." NORTHEAST UTILITIES CO., HCAR No. 25221 at n. 85. Similarly, in UNITIL, the Commission concluded that the combined electric utility assets of the companies may be operated as a single interconnected and coordinated system through their participation in NEPOOL. For the same reasons, Conectiv is able to operate its utility assets as a single interconnected and coordinated system. - -------- 39 SEE CITIES SERVICES CO., 14 SEC at 55 (Congress intended that the utility properties be so connected and operated that there is coordination among all parts, and that those parts bear an integral operating relationship to each other). 40 NORTH AMERICAN CO., 11 SEC 194, 242 (1942) aff'd, 133 F.2d 148 (2d Cir. 1943), aff'd on constitutional issues, 327 U.S. 686 (1946) (evidence is necessary to show that in fact isolated territories are or can be so operated in conjunction with the remainder of the system that central control is available for the routing of power within the system). The Commission's third requirement is also satisfied. The Conectiv electric system will operate in a single area or region. The system will operate in five contiguous states in the mid-Atlantic region of the United States. It should be noted that in the 1995 REPORT, the Division has stated that the evaluation of the "single area or region" portion of the integration requirement "should be made... in light of the effect of technological advances on the ability to transmit electric energy economically over longer distance, and other developments in the industry, such as brokers and marketers, that affect the concept of geographic integration."41 The 1995 REPORT also recommends primacy be given to "demonstrated economies and efficiencies to satisfy the integration requirements."42 As set forth in Item 3.A.2.b.i, the Mergers will result in economies and efficiencies for the utilities and, in turn, their customers. - -------- 41 1995 REPORT at 72-74. 42 1995 REPORT at 73. Finally, with respect to the Commission's fourth requirement, the Conectiv electric system will not be so large as to impair the advantages of localized management, efficient operations, and the effectiveness of regulation. After the Mergers, Conectiv will maintain system headquarters in Wilmington, Delaware. This structure will preserve all the benefits of localized management Delmarva and Atlantic presently enjoy while simultaneously allowing for the efficiencies and economies that will derive from their strategic alliance. Furthermore, as described earlier, the system will facilitate efficient operation. Additionally, the Conectiv system will not impair the effectiveness of state regulation. Delmarva and ACE will continue their separate existence as before and their utility operations will remain subject to the same regulatory authorities by which they are presently regulated, namely the DPSC, VSCC, NJBPU, PPUC, MPSC, the FERC and the NRC. Delmarva and Atlantic are working closely with the DPSC, VSCC, NJBPU, PPUC and MPSC as well as the FERC and the NRC to ensure they are well informed about these Mergers and these Mergers will not be consummated unless all required regulatory approvals are obtained. Pursuant to the recommendations contained in the 1995 REPORT, this last factor is significant as the Division stated therein "when the affected state and local regulators concur, the [Commission] should interpret the integration standard flexibly to permit non-traditional systems if the standards of the Act are otherwise met,"43 especially since these Mergers will result in a system similar to the traditional registered holding company system. - -------- 43 1995 REPORT at 74. II. Gas Utility System Section 2(a)(29)(B) defines an "integrated public utility system" as applied to gas utility companies: [A] system consisting of one or more gas utility companies which are so located and related that substantial economies may be effectuated by being operated as a single coordinated system confined in its operation to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation: Provided, that gas utility companies deriving natural gas from a common source of supply may be deemed to be included in a single area or region. The gas operations of Delmarva currently operate as a single, integrated public utility system. The Mergers will not affect that integrated operation. Thus, Conectiv gas utility system will meet the standard set forth in Section 2(a)(29)(B) and, therefore, will satisfy the requirements of Sections 10(c)(1) and (2) and should be approved by the Commission. The Conectiv gas utility system will continue to operate as a coordinated system confined in its operation to a single area or region. 3. Section 10(f) Section 10(f) provides that: The Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect to such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. As described in Item 4 of this Application/Declaration, and as evidenced by the applications before the DPSC, VSCC, NJBPU, PPUC and MPSC all relating to the Mergers, Conectiv intends to comply with all applicable state laws related to the proposed transaction. 4. Other Applicable Provisions -- Section 9(a)(1) Conectiv is also requesting authorization from the Commission under Section 9(a)(1) of the Act for the acquisition by it of the voting securities of Support Conectiv as part of the Mergers. Section 9(a)(1) of the Act requires a registered holding company or any subsidiary thereof to obtain authorization from the Commission before acquiring "any securities or utility assets or any other interest in any business." In order to approve an acquisition under Section 9(a)(1), the Commission must find that such acquisition meets the standards of Section 10 of the Act, which in turn requires compliance with Sections 8 and 11 of the Act. Although Conectiv will not become a registered holding company until consummation of the Mergers and thus Section 9(a)(1) is not applicable to it until that time, because Conectiv will become subject to Section 9(a)(1) and the exact chronology of the formation of Support Conectiv has not been determined, Conectiv is requesting the Commission's authorization for this transaction. The acquisition by Conectiv of the common stock of Support Conectiv, making it a direct subsidiary of Conectiv, will allow Conectiv to create a subsidiary service company and capture economies of scale from the centralization of administrative and general services to be provided to system companies. A portion of the benefits realized as a result of Support Conectiv are expected to be shared with Conectiv's ratepayers. Virtually every registered holding company has a subsidiary service company performing many of the same functions that Support Conectiv will perform. The acquisition of Support Conectiv is in the public interest, will not unduly complicate the capital structure of Conectiv and will not cause the Conectiv system to violate any other provision of the Act. Support Conectiv's only class of authorized stock will be its common stock, all of which will be owned by Conectiv. The operation of Support Conectiv, and the allocation of cost for its operation, is discussed in detail in Item 3.B below. B. Intra-System Provision of Services All services provided by Conectiv system companies to other Conectiv system companies will be in accordance with the requirements of Section 13 of the Act and the rules promulgated thereunder. Conectiv is aware that questions concerning the FERC's policy in this area are likely to arise with respect to affiliate transactions involving Atlantic, Delmarva and other companies which are public utilities under the Federal Power Act. The FERC, in its order in Public Service Company of Colorado and Southwestern Public Service Company, 75 FERC Para.61,325 (1996), gave Public Service Company of Colorado and Southwestern Public Service Company the choice of following its affiliate pricing standards or having a hearing on the issue of whether the proposed merger would impair effective regulation. The FERC articulated its standards in that order as follows: (1) affiliates or associates of a public utility not sell non-power goods and services to the public utility at a price above market; and (2) sales of non-power goods and services by a public utility to its affiliates or associates be at the public utility's cost for such goods and services or market value for such goods and services, whichever is higher. Conectiv recognizes that affiliate transactions among the member companies of Conectiv will be subject of the jurisdiction of the SEC under section 13(b) of the Act and the rules and regulations thereunder. Section 13(b) of the Act generally provides that transactions between affiliates in a registered holding company system be "at cost, fairly or equitably allocated among such companies." Conectiv believes that as a practical matter there should not be any irreconcilable inconsistency between the application of the SEC's "at cost" standard and the FERC's policies with respect to intra-system transactions as applied to Conectiv. For example, Support Conectiv will provide non-power goods and services to associate companies within the Conectiv system at cost-based prices, but it is anticipated that Support Conectiv will provide only those goods and services where it can meet or better market prices for comparable quality goods and services. In other words, they are anticipating that Support Conectiv "costs" will be at or below the market. In any event, even if some inconsistency were to develop, Conectiv understands that FERC will continue to have full authority to disallow, for purposes of FERC-jurisdictional wholesale power and transmission rates, any charge to the extent of any inconsistency between the SEC "at cost" and FERC "cost or market" standards. On this basis, Conectiv will be able to comply with the requirements of both the FERC and the "at cost" and fair and equitable allocation of cost requirements of Section 13, including Rules 87, 90 and 91 thereunder, for all services, sale and construction contracts between associate companies and with the holding company parent unless otherwise permitted by the Commission by rule or order. 1. Support Conectiv As described in Item 1.B.1.c.vii, Support Conectiv will provide all system companies, pursuant to the Service Agreement, with a variety of administrative, management and support services, including services relating to electric power planning, electric system operations, materials management, facilities and real estate, accounting, budgeting and financial forecasting, finance and treasury, rates and regulation, legal, internal audit, corporate communications, environmental, fuel procurement, corporate planning, investor relations, human resources, marketing and customer services, information systems and general administrative and executive management services. In accordance with the Service Agreement, Exhibit B-2, services provided by Support Conectiv will be directly assigned, distributed or allocated by activity, project, program, work order or other appropriate basis. To accomplish this, employees of Support Conectiv will record transactions utilizing the existing data capture and accounting systems of each client company. Costs of Support Conectiv will be accumulated in accounts of Support Conectiv and directly assigned, distributed and allocated to the appropriate client company in accordance with the guidelines set forth in the Service Agreement. Atlantic and Delmarva are currently developing the system and procedures necessary to implement the Service Agreement. It is anticipated that Support Conectiv will be staffed by transfer of personnel from Delmarva, Atlantic and their subsidiaries. Support Conectiv's accounting and cost allocation methods and procedures are structured so as to comply with the Commission's standards for service companies in registered holding-company systems. Support Conectiv's billing system will use the "Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies" established by the Commission for service companies of registered holding-company systems, as may be adjusted to use the FERC uniform system of accounts. As compensation for services, the Service Agreement will provide for the client companies to: "pay to Support Conectiv all costs which reasonably can be identified and related to particular services performed by Support Conectiv for or on its behalf." Where more than one company is involved in or has received benefits from a service performed, the Service Agreement will provide that "costs will be directly assigned, distributed or allocated, between or among such companies on a basis reasonably related to the service performed to the extent reasonably practicable," in accordance with the methods set forth in Appendix A to the Service Agreement. Thus, for financial reporting purposes, charges for all services provided by Support Conectiv to affiliates will be on an "at cost" basis as determined under Rules 90 and 91 of the Act. No change in the organization of Support Conectiv, the type and character of the companies to be serviced, the methods of allocating costs to associate companies, or in the scope or character of the services to be rendered subject to Section 13 of the Act, or any rule, regulation or order thereunder, shall be made unless and until Support Conectiv shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the Commission shall notify Support Conectiv within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of Section 13 of the Act, or of any rule, regulation or order thereunder, then the proposed change shall not become effective unless and until Support Conectiv shall have filed with the Commission an appropriate declaration regarding such proposed change and the Commission shall have permitted such declaration to become effective. Conectiv believes that the Service Agreement is structured so as to comply with Section 13 of the Act and the Commission's rules and regulations thereunder. Rule 88: Rule 88 provides that "[a] finding by the Commission that a subsidiary company of a registered holding company . . . is so organized and conducted, or to be conducted, as to meet the requirements of Section 13(b) of the Act with respect to reasonable assurance of efficient and economical performance of services or construction or sale of goods for the benefit of associate companies, at cost fairly and equitably allocated among them (or as permitted by Rule 90), will be made only pursuant to a declaration filed with the Commission on Form U-13-1, as specified" in the instructions for that form, by such company or the persons proposing to organize it. Notwithstanding the foregoing language, the Commission has on at least two recent occasions made findings under Section 13(b) based on information set forth in an Application/Declaration on Form U-1, without requiring the formal filing of a Form U-13-1. SEE CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994); UNITIL CORP., HCAR No. 25524 (April 24, 1992). In this Application/ Declaration, Conectiv has submitted substantially the same applicable information as would have been submitted in a Form U-13-1. Accordingly, it is submitted that it is appropriate to find that Support Conectiv is so organized and its business will be so conducted as to meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is unnecessary, or, alternatively, that this Application/Declaration should be deemed to constitute a filing on Form U-13-1 for purposes of Rule 88. 2. Other Services Delmarva, ACE and other associate companies of Conectiv may, from time to time, enter into leases of office or other space with other associate companies. Any such lease will be in accordance with Rules 87, 90, and 91, except as may be otherwise authorized by the Commission. To the extent necessary, Conectiv requests authority from the Commission to enter into the business of leasing such space between and among associate companies and third parties. The Commission has permitted the leasing of excess office space. SEE, E.G., CENTRAL POWER AND LIGHT COMPANY, HCAR No. 26408 (Nov. 13, 1995); NORTHEAST UTILITIES, HCAR No. 24908 (June 22, 1989). Delmarva and Atlantic may also provide to one another services incidental to their utility businesses, such as power plant maintenance overhauls, power plant and storm outage emergency repairs and services of personnel with specialized expertise related to the operation of the utility (i.e., services by an industrial lighting specialist or waste disposal specialist). These services will be provided at cost in accordance with the standards of the Act and Rules 87, 90 and 91 thereunder. C. Transfer of Utility Assets It is expected that certain assets such as real property used for administrative purposes and information technology equipment and software may be transferred from Delmarva, ACE, or other Conectiv companies at cost to Support Conectiv in conjunction with the integration of the two companies after consummation of the Mergers. These transfers may require approval by various public utility commissions. The Applicant requests authorization to transfer assets with remaining recorded value (assets less depreciation and amortization) totaling up to $100 million to Support Conectiv. It is also requested that this authorization be for a period of 24 months from the effective date of the Mergers. Item 4. Regulatory Approvals Set forth below is a summary of the regulatory approvals that Conectiv has obtained or expects to obtain in connection with the Mergers. A. Antitrust The HSR Act and the rules and regulations thereunder provide that certain transactions (including the Mergers) may not be consummated until certain information has been submitted to the DOJ and FTC and specified HSR Act waiting period requirements have been satisfied. Delmarva and Atlantic have submitted Notification and Report Forms and all required information to the DOJ and FTC and the Mergers will not be consummated unless the applicable waiting period has expired or has been terminated. The expiration of the HSR Act waiting period does not preclude the DOJ or the FTC from challenging the Mergers on antitrust grounds; however, Conectiv believes that the Mergers will not violate Federal antitrust laws. If the Mergers are not consummated within twelve months after the expiration or earlier termination of the initial HSR Act waiting period, Delmarva and Atlantic would be required to submit new information to the DOJ and the FTC, and a new HSR Act waiting period would have to expire or be earlier terminated before the Mergers could be consummated. B. Federal Power Act Section 203 of the Federal Power Act as amended (the "Federal Power Act"), provides that no public utility shall sell or otherwise dispose of its jurisdictional facilities or directly or indirectly merge or consolidate such facilities with those of any other person or acquire any security of any other public utility, without first having obtained authorization from the FERC. Delmarva and Atlantic submitted a joint application for approval of the Mergers to the FERC on November 27, 1996. See Exhibit D-1.1. C. Atomic Energy Act Delmarva and Atlantic hold Nuclear Regulatory Commission ("NRC") licenses with respect to their ownership interests in certain nuclear units. Delmarva and Atlantic each own a 7.41% interest in the Salem Nuclear Generating Station, which consists of two nuclear units, and a 7.51% interest in the Peach Bottom Nuclear Generating Station, which consists of two nuclear units. In addition, Atlantic owns a 5% interest in the Hope Creek Nuclear Generating Station, which consists of one nuclear unit. The Atomic Energy Act currently provides that licenses may not be transferred or in any manner disposed of, directly or indirectly, to any person unless the NRC finds that such transfer is in accordance with the Atomic Energy Act and consents to the transfer. Pursuant to the Atomic Energy Act, Delmarva and Atlantic submitted an application for approval from the NRC on April 30, 1997. See Exhibit D-7.1. D. State Public Utility Regulation Delaware: Delmarva is incorporated in Delaware and subject to the jurisdiction of the DPSC. Pursuant to Section 215 of the Public Utilities Act, Delmarva must obtain the approval of the DPSC in order to directly or indirectly merge or consolidate with any other person or company. Section 215 also provides that no other entity shall acquire control, either directly or indirectly, of any public utility doing business within Delaware without the prior approval of the DPSC. The DPSC will approve the proposed Mergers when it finds them to be made in accordance with law, for a proper purpose and are in the public interest. Conectiv and Delmarva submitted an application with the DPSC requesting approval of the Mergers on February 24, 1997. See Exhibit D-2.1. Virginia: Delmarva is also incorporated in Virginia and subject to the jurisdiction of the VSCC. Pursuant to the Utility Transfers Act, no person, whether acting alone or in concert with others, shall, directly or indirectly, acquire control of a public utility without the prior approval of the VSCC and it is unlawful for any public utility, directly or indirectly, to dispose of any utility assets situated within Virginia unless authorized by the VSCC. The VSCC will approve a proposed transaction if satisfied that adequate service to the public at just and reasonable rates will not be impaired or jeopardized by granting an application for approval. Furthermore, except to the extent preempted by the Securities Exchange Commission, the VSCC, pursuant to statutory provisions under which the VSCC regulates relations with affiliated interests, must approve certain contracts or arrangements for certain services, purchases, sales, leases or exchanges, loans and guarantees between a public service company and affiliates. Conectiv and Delmarva submitted an application with the VSCC requesting approval of the Mergers on February 25, 1997. See Exhibit D-3.1. New Jersey: As the parent company of Atlantic City Electric Company, the transfer of the ownership or control, or the merger of, Atlantic is subject to the jurisdiction of the NJBPU which, pursuant to Title 48 of the New Jersey Statutes Annotated, must give written approval before any person may acquire or seek to acquire control of a public utility directly or indirectly through the medium of an affiliated or parent corporation. In addition, the NJBPU must authorize any transfer of stock to another public utility, or a transfer that vests another corporation with a majority interest in the stock of a public utility. Furthermore, the NJBPU regulates relations between public utilities and affiliated interests, and must approve certain contracts or arrangements for certain services, purchases or loans between a public utility and affiliates. Conectiv and Atlantic submitted an application with the NJBPU requesting approval of the Mergers on February 24, 1997. See Exhibit D-4.1. Pennsylvania: Delmarva and Atlantic own fractional interests in the Keystone, Conemaugh and Peach Bottom electric generating stations and related transmission lines located in Pennsylvania. Pursuant to Pennsylvania statute, the transfer to any person or corporation of the stock, including a transfer by merger, of a public utility must be approved by the PPUC. The PPUC will approve such transfers upon a showing that the merger will affirmatively promote the service, accommodation, convenience or safety of the public in some substantial way. Delmarva and Atlantic applied for PPUC approval of the Mergers on March 24, 1997. See Exhibit D-5.1. Maryland: The MPSC has general authority to supervise and regulate public utilities with operations in Maryland. Delmarva advised the MPSC of the transactions contemplated by the Merger Agreement and that it does not believe that the approval of the MPSC of the Mergers is required. However, the MPSC ruled that it has jurisdiction over the Mergers to determine whether the Mergers will have an adverse effect on the conduct of Delmarva's Maryland franchises and any other matters that properly come before the MPSC at a hearing. Delmarva will seek to show that the Mergers will not have an adverse effect on the conduct of its Maryland franchises. See Exhibit D-6.1. Item 5. Procedure The Commission is respectfully requested to issue and publish not later than August 1, 1997 the requisite notice under Rule 23 with respect to the filing of this Application, such notice to specify a date not later than August 26, 1997 by which comments may be entered and a date not later than September 30, 1997 as the date after which an order of the Commission granting and permitting this Application to become effective may be entered by the Commission. It is submitted that a recommended decision by a hearing or other responsible officer of the Commission is not needed for approval of the proposed Mergers. The Division of Investment Management may assist in the preparation of the Commission's decision. There should be no waiting period between the issuance of the Commission's order and the date on which it is to become effective. Item 6. Exhibits and Financial Statements A. Exhibits A-1 Restated Certificate of Incorporation of Conectiv (filed as Annex IV to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). A-2 Restated Bylaws of Conectiv (filed as Annex V to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). A-3 Restated Certificate and Articles of Incorporation of Delmarva (filed with Registration No. 33-50453 and incorporated herein by reference). A-4 Restated Certificate of Incorporation of Atlantic (filed as Exhibit 4(a) to the Atlantic Form 10-Q dated September 30, 1987) and Certificate of Amendment to the Restated Certificate of Incorporation of Atlantic (filed as Exhibit 3(ii) to the Atlantic Form S-8 dated May 6, 1994), and both incorporated herein by reference). B-1 Agreement and Plan of Merger, as amended and restated (filed as Annex I to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). B-2 Form of Service Agreement between Support Conectiv and all affiliates. (to be filed by amendment) C-1 Registration Statement of Conectiv on Form S-4 (filed on December 26, 1996 (Registration No 333- 18843) and incorporated herein by reference). C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1). D-1.1 Joint Application of Delmarva and Atlantic before the FERC, as amended. D-1.2.1 Testimony of John C. Dalton to the FERC. D-1.3 Order of the FERC. (to be filed by amendment) D-2.1 Application of Delmarva to the DPSC. D-2.2 DPSC Order. (to be filed by amendment) D-3.1 Application of Delmarva to the VSCC. D-3.2 VSCC Order. (to be filed by amendment) D-4.1 Application of Atlantic to the NJBPU. D-4.2 NJBPU Order. (to be filed by amendment) D-5.1 Application of Delmarva to the PPUC. D-5.2 PPUC Order. (to be filed by amendment) D-6.1 Application of Delmarva to the MPSC (to be filed by amendment) D-6.2 MPSC Order. (to be filed by amendment) D-7.1 Applications of Delmarva and Atlantic to the NRC. D-7.2 Order of the NRC. (to be filed by amendment) E-1 Map of service areas of Delmarva and Atlantic. (to be filed by amendment) E-2 Delmarva corporate chart. (to be filed by amendment) E-3 Atlantic corporate chart. (to be filed by amendment) E-4 Conectiv corporate chart. (to be filed by amendment) F-1 Opinion of counsel. (to be filed by amendment) F-2 Past-tense opinion of counsel. (to be filed by amendment) G-1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (filed as Annex II to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). G-2 Opinion of Morgan Stanley & Co. Incorporated (filed as Annex III to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). H-1 Quarterly Report of Delmarva on Form 10-Q for the quarter ended March 31, 1997 (filed on May 14, 1997) (File No. 1-01405) and incorporated herein by reference). H-2 Quarterly Report of Atlantic on Form 10-Q for the quarter ended March 31, 1997 (filed on May 13, 1997 (File No. 1-09760) and incorporated herein by reference). H-3 Form U-3A-2 by Atlantic (filed on February 28, 1997) (File No. 069-00337) and incorporated herein by reference). I-1 Proposed Form of Notice. J-1 Analysis of the Economic Impact of a Divestiture of the Gas Business of DPL. (to be filed by amendment) J-2 Legal Memorandum of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (to be filed by amendment) J-3 Table of Estimated Losses of Economies in Prior Decisions on Divestiture and Retention of Gas Operations. (to be filed by amendment) B. Financial Statements FS-1 Conectiv Unaudited Pro Forma Condensed Consolidated Balance Sheets as of March 31, 1997. FS-2 Conectiv Unaudited Pro Forma Condensed Consolidated Statements of Income for the twelve months ended March 31, 1997. FS-3 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. FS-4 Atlantic Consolidated Balance Sheet as of March 31, 1997. FS-5 Atlantic Consolidated Statements of Income for the twelve months ended March 31, 1996. FS-6 Delmarva Consolidated Balance Sheet as of March 31, 1997. FS-7 Delmarva Consolidated Statement of Income for the twelve months ended March 31, 1996. Item 7. Information as to Environmental Effects The Mergers neither involve a "major federal action" nor "significantly affects the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. The only federal actions related to the Mergers pertain to the Commission's declaration of the effectiveness of Conectiv's Registration Statement on Form S-4, the expiration of the applicable waiting period under the HSR Act, approval of the application filed by Conectiv with the FERC under the Federal Power Act, approval of the application filed by Conectiv with the NRC under the Atomic Energy Act, and Commission approval of this Application/Declaration. Consummation of the Mergers will not result in changes in the operations of Delmarva or Atlantic that would have any impact on the environment. No federal agency is preparing an environmental impact statement with respect to this matter. SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Application/Declaration of Conectiv, Inc. to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 2, 1997 Conectiv, Inc. By: /s/ B. S. Graham Barbara S. Graham President EX-99.1 2 EXHIBIT D-1.1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Atlantic City Electric Company ) ) Docket No. EC97-___-000 Delmarva Power & Light Company ) JOINT APPLICATION OF ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY FOR AUTHORIZATION AND APPROVAL OF MERGER ------------------------------------- VOLUME 1 OF 2 APPLICATION, APPENDICES AND EXHIBITS ------------------------------------- I. INTRODUCTION Atlantic City Electric Company ("Atlantic") and Delmarva Power & Light Company ("Delmarva") (collectively, "the Applicants") submit this Joint Application under Section 203 of the Federal Power Act ("the Act") and Part 33 of the Commission's Regulations to obtain authorization and approval to merge the Applicants' facilities that are subject to this Commission's jurisdiction. The merger of the facilities will be accomplished by a corporate merger of equals through affiliation of Atlantic and Delmarva as subsidiaries of a new company, temporarily named DS, Inc. (hereinafter referred to as "Newco"), which will be a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA").1 Newco will be the sole owner of Atlantic's and Delmarva's common shares. Upon consummation of the merger, Newco will have four direct subsidiaries, Atlantic, Delmarva, a service company and a company engaged in non-utility activities. The projected closing date of the merger is December 31, 1997, some 13 months hence. Applicants request approval of the merger upon this Application without hearing. If a hearing is established, Applicants request that such a hearing be limited to specific, identified issues and under procedural guidelines that ensure a final order on the merits by November 26, 1997. This application includes the exhibits required under Section 33.3 of the Commission's regulations. The Agreement and Plan of Merger of August 9, 1996 is included in this filing as Exhibit H. - -------- 1 The application to the SEC for authorization to create the registered holding company is under development and will be supplied to the Commission promptly after filing with the SEC. II. THE APPLICANTS Applicant Atlantic is an electric utility incorporated in New Jersey serving retail load throughout the southern one-third of the state. It has 473,000 retail customers and one interconnection customer, the City of Vineland, New Jersey. Atlantic's annual peak load in 1995 was 2,042 MW and its energy sales in that year were 8.1 million MW hours. Its 1995 electric revenues were $953 million. The company has owned generation of 1,679 MW and contracted generation of 670 MW, which represents 4.2% of the generating capability of the Pennsylvania-New Jersey-Maryland Interconnection Association ("PJM"), of which Atlantic is a member. Atlantic is a wholly owned subsidiary of Atlantic Energy, Inc. ("Atlantic Energy"), an exempt holding company under PUHCA, whose stock is publicly held. Atlantic is subject to retail rate regulation by the New Jersey Board of Public Utilities. Applicant Delmarva is an electric utility incorporated in Delaware and Virginia serving wholesale and retail electric loads in Delaware and the Eastern Shore of Maryland and Virginia. The company has 437,000 retail electric customers, 10 wholesale customers, and two interconnection customers, the City of Dover, Delaware and the Town of Easton, Maryland.2 Delmarva's annual peak load in 1995 was 2,364 MW, and its energy sales in that year were 12.3 million MW hours. Its 1995 electric revenues were $995 million. Delmarva has owned generation of 2,728 MW and contracted generation of 105 MW, which represents 5.0% of the generating capability of PJM, of which Delmarva, too, is a member. Delmarva's common stock is publicly held. It is subject to retail regulation by the Public Service Commissions of Delaware and Maryland and the State Corporation Commission of Virginia. A map of the Applicants' service areas appears in Exhibit I. - -------- 2 Delmarva's wholesale sales customers are the Old Dominion Electric Cooperative ("ODEC") and the Cities or Towns of Berlin, MD; Clayton, DE; Lewes, DE; Middletown, DE; Milford, DE; Newark, DE; New Castle, DE; Seaford, DE; and Smyrna, DE. ODEC has three cooperative members served by Delmarva: Delaware Electric Cooperative, A&N Cooperative, and Choptank Electric Cooperative. All of Delmarva's wholesale sales customers are eligible to receive transmission services. Delmarva also provides natural gas sales and transportation services to approximately 100,000 natural gas customers, all of whom are retail customers located in New Castle County, Delaware. Delmarva's gas business is described in more detail below in section IV.B.5.(d). In compliance with Order No. 888, Atlantic and Delmarva have open-access, comparable transmission service tariffs which were filed in Docket Nos. OA96-159-000 and OA96-165-000, respectively. Both companies are "supporting companies" of the PJM restructuring refiling, Docket Nos. ER96-2516-000, et al., with accompanying filed transmission tariffs. Both companies' systems are centrally dispatched by PJM. Neither company holds any hydroelectric licenses. III. THE MERGER PROCEDURES The merger will be achieved among four corporations: the two Applicants, the previously mentioned newly-formed holding company, Newco (whose permanent name will be selected after market studies are performed), and a new corporation named DS Sub, Inc., which will serve the sole purpose of effecting the merger and will not survive the merger. At the closing, Atlantic Energy will merge into Newco, and DS Sub, Inc. will merge into Delmarva. Also at the closing, each share of Delmarva common stock (other than certain canceled common stock) will be converted into the right to receive one share of Newco common stock, and each share of Atlantic Energy common stock (other than certain canceled common stock) will be converted into the right to receive 0.75 shares of Newco Common Stock and 0.125 shares of Class A Common Stock, par value $0.01 per share (the latter common stock is so-called Letter Stock). Further, each share of DS Sub, Inc. common stock, par value of $0.01 per share, issued and outstanding immediately prior to the closing will be converted into one share of common stock of Newco. The shares of Atlantic and Delmarva preferred stock will be unchanged and remain outstanding after the merger. The result of the above procedures will be that the former shareholders of Atlantic and Delmarva will become the shareholders of Newco, and Newco will become the sole shareholder of Atlantic and Delmarva. The merger will not affect any long-term or short-term debt securities of Delmarva, Atlantic, or any of their affiliates. The registered holding company resulting from the merger will have four subsidiaries. Delmarva and Atlantic will be separate, first-tier utility operating subsidiaries and will not lose their individual corporate existence. The non- utility subsidiaries of Atlantic Energy, Inc. will be consolidated under one first-tier, non-utility subsidiary, Atlantic Energy Enterprises, Inc.3 Finally, a Service Company will be created as the fourth and final first-tier subsidiary. The Service Company will provide management, accounting, financial, legal, and other support services to the two operating utilities, the holding company and the non-utility subsidiaries. A comprehensive description of the various services that will be provided by the Service Company will be included in the Applicants' filing with the Securities and Exchange Commission ("SEC") to establish the registered holding company. As previously noted, the Applicants will provide copies of that filing to the Commission promptly after filing with the SEC. - -------- 3 Delmarva also owns non-utility subsidiaries, and it is currently expected that, initially, those subsidiaries would remain as subsidiaries of Delmarva. At some point, all non- utility subsidiaries may be consolidated under a first-tier subsidiary of the registered holding company. IV. THE MERGER IS CONSISTENT WITH THE PUBLIC INTEREST (18 C.F.R. ss. 33.2(j)) A. Introduction The Commission's approval of a proposed acquisition and merger requires a finding that such a transaction "will be consistent with the public interest." 16 U.S.C. ss. 824(b). As stated in IES Industries, Inc., et al., 65 FERC P. 62,191 at 64,416 (1993) (footnote omitted): An applicant need not show that a positive benefit will result from a proposed merger or disposition of facilities in order to support a public interest finding. Rather, an applicant is required to make a full disclosure of all material facts and to show that the disposition is consistent with the public interest. This public interest finding thus requires only a showing of consistency or compatibility with the public interest, not that the transaction is the only means of achieving the public interest.4 The Commission has established a list of six factors generally applied to determine whether the public interest requirement has been met in the context of a merger or acquisition. Commonwealth Edison Co., 36 F.P.C. 927, 931 (1966), aff'd sub nom., Utilities Users League v. F.P.C., 394 F.2d 16 (7th Cir.), cert. denied, 393 U.S. 953 (1968). The Applicants address each of these factors below. As set out in Washington Power Co. and Sierra Pacific Power Co., 73 FERC P. 61,218 at 61,595 (1995), those factors are: - -------- 4 Pacific Power & Light Co. v. FPC, 111 F.2d 1014, 1016 (9th Cir. 1940); Northeast Utilities Service Co. v. FERC, 993 F.2d 937, 951 (1st Cir. 1993), quoted in Entergy Services, Inc. and Gulf States Utilities Co., 65 FERC P. 61,332 at 62,471 (1993). There is no requirement that applicants make a showing of a "positive benefit of the merger." Utah Power & Light Co., 47 FERC P. 61,209 at 61,750 (1989), remanded on other grounds, Environmental Action v. FERC, 939 F.2d 1057 (D.C. Cir. 1991); Entergy Services, Inc., 62 FERC P. 61,073 at 61,370 (1993) (footnotes and citations omitted). (1) The effect of the proposed Acquisition and Merger on the Applicants' costs and rate levels; (2) The proposed accounting treatment; (3) The reasonableness of the purchase price; (4) Whether the proposed Acquisition and Merger involves coercion; (5) The effect the proposed Acquisition and Merger may have on the existing competitive situation; and (6) Whether the proposed Acquisition and Merger will impair effective regulation by this Commission or by the appropriate state regulatory authorities. The Commission in a later order establishing hearing procedures in Public Service Company of Colorado and Southwestern Public Service Co., 75 FERC P. 61,325 at 62,046 (1996), elaborated upon the last of the above factors, as follows: Currently, the Commission has authority to review all of the costs incurred by the companies if they seek to recover those costs in wholesale power rates. Under Applicants' proposed registered holding company structure, however, they can avoid Commission authority to review all of their costs. If a public utility subsidiary of the registered holding company chose to enter into a service, sale or construction contract (i.e., a contract for non-power goods or services) with an associate company, and obtained SEC approval of that contract, the Commission would not have authority to determine whether and to what extent the utility should be allowed to recover, in its FERC- jurisdictional wholesale power and transmission rates, the costs incurred under the contract [footnote omitted]. The costs would be flowed through to ratepayers, even if the goods or services were obtained at an above-market price or the costs were imprudently incurred. Because the Commission may not be able to adequately protect ratepayers from affiliate abuse in the Applicants' proposed registered holding company structure, we will give the Applicants two options, and direct them to inform us of their choice within 15 days of the date of this order. The Applicants either may elect to have a hearing on the issue of whether the proposed registered holding company structure will impair effective regulation by this Commission, or they may elect to abide by this Commission's policies with respect to intracorporate transactions within the newly-formed registered holding company structure [footnote omitted]. B. The Six Public Interest Factors 1. Factor 1: The Effect of the Transaction on the Applicants' Operating Costs and Rate Levels Through the elimination of duplicative activities, increased scale and improved purchasing power, the companies expect to capture merger-related savings net of transaction costs in excess of $500 million in the first ten years after the merger (1998 to 2007). These cost savings, estimated by Mr. Thomas Flaherty of Deloitte & Touche Consulting Group in his testimony and related exhibits (see Volume 2, herein), are attributable strictly to the merger and do not include savings that might be achieved without the merger. The estimated savings reflect the creation of cost reduction or cost avoidance opportunities through the affiliation of previously stand-alone corporations within the holding company structure. As competition intensifies within the industry, scale will increasingly contribute to overall business success. Scale has importance in many areas, including utility operations, product development, advertising and corporate services. The merger is expected to improve the profitability of the combined company by roughly doubling the customer base and providing increased economies of scale in a widespread range of activities and operations. Sales to industrial, large commercial and wholesale customers are considered to be at greatest near-term risk as a result of increased competition in the electric utility industry. The merger will enable Newco to compete to retain and grow its load in these customer groups. Atlantic and Delmarva will hold harmless their existing wholesale requirements customers from the effects of the merger on resale base rates that become effective after the merger. In any base rate change proceeding commenced by either Delmarva or Atlantic requesting an increase in any resale base rate, the companies will not request the recovery of any merger-related costs, unless such costs are at least offset by merger-related benefits. This hold-harmless provision shall remain in place through the expiration or termination of the respective resale customer service agreements over the years 2001 to 2004, as further explained in Mr. Paul S. Gerritsen's testimony (see Volume 2). 2. Factor 2: The Proposed Accounting Treatment The merger of Atlantic and Delmarva is a merger of equals that for accounting purposes will be treated as a purchase and will be recorded using the purchase method of accounting for business combinations in accordance with Accounting Principles Board ("APB") Opinion No. 16. For the merger accounting, Delmarva will be treated as the acquiring company and Atlantic Energy will be treated as the acquired company. The merger does not, however, satisfy at least one of the conditions required by APB Opinion No. 16 for the pooling of interests method of accounting. That condition is that a corporation offer and issue only common stock with rights identical to those of the majority of its outstanding voting common stock in exchange for substantially all of the voting common stock interest of another company at the date the plan of combination is consummated. Since the common stockholders of Atlantic Energy will receive a second security (i.e., Class A common stock) that is not identical to the majority of outstanding common stock, that condition of eligibility for the use of the pooling method of accounting is not met and therefore the purchase method of accounting is used. The Commission has approved the use of the purchase method of accounting where that method is required by generally accepted accounting principles without undue detriment to regulatory principles.5 Since the utility operating subsidiaries of Newco have publicly held debt and preferred stock, "push down" accounting will not be utilized (i.e., the economic effects of the merger will not be pushed down to the books and records of the subsidiary companies).6 Separate financial statements, essentially identical to the current financial statements of each merging public utility, will continue to be issued for those utilities. - -------- 5 See Entergy Services, Inc. and Gulf States Utilities Co., Opinion No. 385, 65 FERC P. 61,332 (1993), order on reh'g., Opinion No. 385-A, 67 FERC P. 61,192 (1994); El Paso Electric Co. and Central and Southwest Services, Inc., 68 FERC P. 61,181 (1994). 6 Although the Applicants do not intend to "push down" any portion of the acquisition premium (goodwill) to the books and records of Atlantic or Delmarva, the Applicants reserve the right to seek rate recovery in future rate proceedings of the acquisition premium upon a showing of specific benefits to ratepayers in accordance with the Commission's policy. No rate recovery of the acquisition premium is being sought in this proceeding. Minnesota Power & Light Co. and Northern States Power Co., 43 FERC P. 61,104 at 61,342 (1988), reh'g. denied, 43 FERC P. 61,502 (1988); SunShine Interstate Transmission Co., 67 FERC P. 61,299 at 61,710 (1994). The assets of Atlantic and Delmarva, the regulated utility operating companies, will continue to be recorded on their books and records at the same values as before the merger. The utility plant assets will continue to be recorded based on historical cost (original cost) less accumulated depreciation. Also, there will be no adjustment to the jurisdictional companies' books and records to restate common equity amounts or to record the premium (goodwill) paid to Atlantic Energy's common stockholders. Instead, the holding company, Newco, will record the consideration paid to Atlantic Energy's common stockholders as an investment in subsidiaries. In consolidation, Newco will eliminate its investment in subsidiaries, adjust the common equity accounts accordingly, adjust any non-utility assets or liabilities to their acquired fair values as appropriate, and recognize the goodwill acquired in the acquisition of Atlantic Energy. Newco will amortize the goodwill over 40 years. The Applicants' proposed accounting described above is consistent with the Commission's decision in Opinion No. 385. Entergy Services, Inc. and Gulf States Utilities Co., 65 FERC P. 61,332 at 62,532-540 (1993). In that proceeding, the Commission decided that, under the purchase method of accounting, a public utility holding company can properly record an acquisition premium. Also, since the books and records of the two jurisdictional utility companies will not reflect "push down" accounting, the Applicants will maintain records so that the accounting that would have resulted from the use of the pooling method can be reconstructed. Delmarva is deferring the merger transaction costs -- the direct costs incurred to acquire Atlantic Energy -- in Account 186, Miscellaneous Deferred Debits. At the time of the merger, the direct acquisition costs deferred in that account by Delmarva will be transferred to Newco. For Atlantic, the direct merger transaction costs will be expensed as incurred, consistent with APB Opinion No. 16, on the books and records of Atlantic's exempt holding company parent, Atlantic Energy, Inc., which will not survive the merger. For both Atlantic and Delmarva, indirect costs and internal company labor costs related to the merger are being expensed as incurred. 3. Factor 3: Reasonableness of the Purchase Price The purchase price involves no cash payouts, except payments for fractional shares of common stock and for appraisals under appraisal rights of dissenters, if any, who own certain classes of preferred stock. As stated previously, each share of common stock of each company will be converted to stock of the holding company, Newco. The conversion ratios of common stock of the existing companies for stock of Newco were negotiated at arms-length by Atlantic Energy and Delmarva. Also as stated previously, the conversion ratio for Atlantic Energy common stock to Newco is 1 to 0.75 and an additional 0.125 shares of Class A common stock, and the conversion ratio for Delmarva common stock to Newco common stock is 1 to 1. The Class A common stock is to reflect the growth prospects of, and uncertainties associated with the possible deregulation of, the regulated electric business of Atlantic. The conversion ratios were negotiated at arms-length and have been approved unanimously by each company's Board of Directors, including outside directors. Each company was assisted by its own outside investment banker in the negotiation process. The "Fairness Opinion" of each investment broker is attached as Appendix A-1. Because the conversion ratios were negotiated at arms-length, the purchase price is presumptively reasonable. Baltimore Gas and Electric Co. and Potomac Edison Power Co., 76 FERC P. 61,111 at 61,575-76 (1996); Public Service Co. of Colorado and Southwestern Public Service Co., 75 FERC P. 61,325 at 62,046-047 (1996); and Wisconsin Electric Power Co. and Northern States Power Co., 74 FERC P. 61,069 at 61,192 (1996). 4. Factor 4: Possible Coercion of the Acquired Utility by the Acquiring Utility Neither utility is being acquired by the other; both utilities are being acquired by a holding company that will be owned by their former shareholders. In any event, neither party was subject to any coercion by the other; nor did either party have the ability to subject the other to coercion. The transaction is strictly one of a voluntary association of equals for their mutual benefit. Moreover, the proposed merger must be approved by a vote of Atlantic Energy's and Delmarva's shareholders, a requirement that insures that a majority of each group considers that the transaction is beneficial to their respective interests. Consequently, the Commission need not "consider the effect of the purchase price on the shareholders." Southern California Edison Co., 47 FERC P. 61,196 at 61,673 n. 20 (1989). In the event of shareholder complaints, "the federal and state securities laws provide[ ] a mechanism to address these concerns." Id. 5. Factor 5: The Effect of the Acquisition and Merger on the Existing Competitive Situation (a) No Market Power In Generation Attached in Volume 2 is the testimony and related report of Mr. John C. Dalton of Reed Consulting Group. Mr. Dalton's study concludes that the proposed merger would result in no significant reduction in competition. The study examines the effects on competition using both a Herfindahl-Hirschman Index analysis and other economic measures of market power. In brief, Mr. Dalton concludes that: 1. A merged Atlantic and Delmarva will not be able to exercise market power in the short-term firm bulk power markets. In fact, the merged company will not have any uncommitted capacity during any of the first four years after the merger, calendar years 1998 to 2001, which constitute the period of the short-run market in firm bulk power. 2. Competition is sufficient in power supply in the relevant geographic markets that sellers will be unable to coordinate pricing and output in order to exercise market power collectively. That conclusion is based on two factors. First, differences in production costs and the amount of available generating capacity will produce significant divergent interests that will forestall coordinated behavior. Second, since in the existing market the participants may be buyers one day and sellers the next, a higher price in the market may not serve various sellers' perceived overall best interests. 3. Under current market structures (i.e., before any restructuring of PJM), the merged company's highest share of installed or total capacity in the relevant geographic markets will be 14.5%. That market share is well below the 20% market share that the Commission has found to be the threshold of concern for purposes of screening market-based rate applications. Further, this 14.5% market share is less than half of the 35% "leading edge indicator" used by the Department of Justice Antitrust Division for such purposes. In addition, the merged companies' market share will be consistently below all other investor-owned utilities' market shares in the relevant markets, except in a capacity constrained evaluation where the merged companies were still smaller than the two dominant market competitors. 4. The merged company's market share in the restructured PJM market, for the relevant geographic markets evaluated and all of the capacity measures considered, remains well below the 20% level. The merged company's increase in market power measured under the Department of Justice/Federal Trade Commission Herfindahl-Hirschman Index for identifying anticompetitive increases in market power resulting from mergers is also below the "safe harbor" levels for all geographic markets and all capacity measures evaluated, with one exception. That exception occurs in the most narrowly drawn geographic market, which is a relevant market for the approximately 4% of the year that power flows are constrained on the 500 kV facilities from the western and central PJM areas across the so-called "Eastern Interface" into the eastern portion of PJM where Atlantic and Delmarva are located. Even in this narrowly drawn market, the merged companies have a maximum market share of 16.9% and would be competing with much larger utilities in the region -- PECO Energy, Public Service Electric and Gas, and GPU acting through one or more of its affiliates. 5. Coordinated behavior among suppliers to increase prices is likely to be difficult in any proposed restructured PJM pool because of the difficulty in reliably forecasting industry demand, output levels and prices and because there are significant incentives provided by the bilateral market for rivals to "cheat" on any tacit pricing agreements. 6. In the long-run bulk power markets, the merging companies control no evident barriers to entry that would allow them to exercise market power in such markets. There is, in fact, ample evidence of active, effective competition in that market. 7. Neither Atlantic nor Delmarva exercises exclusionary control over new generating facilities or fuel sources or fuel transportation. (b) No Market Power in Transmission 1. In the transmission market, there is no market power because the merged company will not control any alternative transmission paths that currently provide participants access to customers or suppliers. Atlantic and Delmarva have filed tariffs under Order No. 888 affording open access transmission of wholesale power. 2. As discussed in detail in the testimony of Messrs. Morgan T. Morris, III and William C. Mitchell (attached in Volume 2), both Atlantic and Delmarva have joint rights to use the transmission facilities that comprise the three jointly-owned 500 kV Systems within PJM. Delmarva receives electricity off the 500 kV Systems through its Keeney substation, which has a first contingency transfer capability of 1300 MVA. During periods where exceptionally high transfers are expected, PJM constrains the power flow through Keeney to 1300 MVA and schedules generation that would not otherwise be dispatched by PJM ("off-cost generation"). Over the six years of 1990-95, PJM has constrained the Keeney transfer capability less than 4% of the time, about 2,000 hours out of 52,600. In other words, during less than 4% of the hours in the last six years, there was generation that had to be run within the Delmarva Peninsula and, in some instances, by other PJM companies on the eastern side of PJM, to meet customer loads that, absent the constraint, would have been met via the 500 kV Systems from generation located off the Peninsula. As more fully described in the testimony of Messrs. Morris and Mitchell, to eliminate this situation, Delmarva, at an estimated cost of between $16.5 million and $18 million, is constructing an additional 500-230 kV transformer rated at 800 MVA at its existing Red Lion substation. That transformer is scheduled for operation on or before May 31, 1997, and the transfer capability from the 500 kV Systems will then be 2100 MVA. After the installation of the Red Lion substation, even upon a failure of a 500-230 kV transformer (either at Keeney or Red Lion), the number of constrained hours per year is estimated to be zero at least through the year 2008 based on currently projected increases in load. Atlantic and Delmarva do not have any other constraints on their systems that affect wholesale or transmission customers under normal operating conditions. Because the Applicants are members of the Mid-Atlantic Area Council ("MAAC") and meet MAAC reliability requirements, each of the Applicants' transmission systems has been and will be designed in conjunction with existing generation assets, such that reliability is assured consistent with good utility practices under reasonably anticipated conditions. As with any electric system, occasional constraints may arise in abnormal circumstances where a combination of heavy electric demand, unavailable generators, and/or transformers and/or transmission lines may occur at the same time. Any foreseeable constraints that might arise under such conditions would be short-term and resolvable by returning the facilities to service or by redispatching other generating units in the constrained area. (c) Provision of Open Access Transmission A usual requirement of approval of a merger is that the Applicants offer a joint rate over their merged transmission facilities. Based on the November 13, 1996, Order in the PJM restructuring case, Atlantic City Electric Co., et al., Docket Nos. ER96-2516-000, EC96-28-000 and EL96-69-000, this requirement will likely be met through the implementation on an interim basis of a PJM pool-wide tariff and, subsequently, through a restructured PJM. In its November 13, 1996, Order, the Commission provided guidance to the PJM Companies, which include Atlantic and Delmarva, to amend their proposal to restructure the PJM pool consistent with the discussion in the body of that Order. The PJM Companies were also directed to file a joint pool-wide pro forma open access transmission tariff in accordance with FERC Order No. 888. The Commission also discussed numerous modifications which must be made in the PJM Open Access Tariff to make it consistent with the provisions contained in the Commission's pro forma FERC Order No. 888 transmission tariff. Delmarva and Atlantic believe the modifications to the PJM tariffs will address the Commission's desire for comparable access and non-pancaked rates. This pool-wide tariff is expected to become effective well before the estimated time for closing the merger proposed here, December 31, 1997. In the event that, for any reason, the PJM joint pool-wide tariff would not become effective by the date of closing of the merger, the Applicants have included in this filing a joint Order 888 compliance tariff applicable to their systems to be made effective as of the merger closing date. (See Exhibit No. (PSG-4) attached in Volume 2 to the testimony of Mr. Paul S. Gerritsen.) (d) No Market Power Over Electric Generation Fuel Inputs The Applicants do not have market power regarding fuel used or transportation of fuel to generate electricity. Atlantic and Delmarva do not own or operate coal mines, railroad, barge or trucking equipment used to transport coal or oil products. Atlantic does not own or operate natural gas facilities. Delmarva, through subsidiaries, owns a minor interest in a small number of gas and oil leases. Delmarva does provide retail gas service in a small portion of its electric service area, but it has no market power to control either the price of natural gas or access to natural gas on the Delmarva Peninsula. First, Delmarva's retail gas service area is located solely within northern New Castle County, Delaware, and comprises about 275 square miles, compared to the 6,700 square miles of the Delmarva Peninsula and parts of Delmarva's electric service territory not on the Peninsula. Natural gas service available on the remainder of the Delmarva Peninsula is provided by Chesapeake Utilities Corporation and its pipeline subsidiary, Eastern Shore Natural Gas Company. Eastern Shore is currently in the process of becoming an open-access pipeline, Docket No. CP96-128-000. Thus, within most of the Delmarva Peninsula, Delmarva would not be the supplying company for any potential competitor seeking to generate electricity using natural gas. Even within Delmarva's limited gas service area, Delmarva does not use its gas-related assets to restrict the access of natural gas to any potential competitor. In conjunction with its last Request for Proposals for long-term electric supply, Delmarva developed a gas transportation rate based on a fully allocated embedded cost approach for rate design. Of the seven gas-fired combined cycle projects that submitted bids, only one project requested local transportation to be provided by Delmarva. The other six projects developed alternative supply and transportation arrangements that included direct purchases from an interstate pipeline. Delmarva did not require bidders to use its gas facilities or prevent bypass of its system. Furthermore, the provision of retail gas sales and transportation service is regulated by the Delaware Public Service Commission and Delmarva would be unable to limit access to gas service within its service territory, except to the extent permitted by the Delaware Commission. Delmarva also does not use its gas-related assets to provide any price advantage to its Electric Division relative to potential competitors. The costs of facilities used to deliver gas from the citygate to Delmarva's gas- fired powerplants are separately accounted for and reflected in Delmarva's electric rate base. Over 90% of the gas consumed for electric generation is purchased by different staff and independent of gas purchased for the retail gas business. The remaining amount of gas consumed for electric generation is supplied under a cost formula approved by the Maryland and Delaware Public Service Commissions. 6. Factor 6: The Effect of the Proposed Merger on the Effectiveness of State and Federal Regulation and, in Particular, on this Commission's Jurisdiction Because Atlantic and Delmarva will continue as separate utility operating companies, each of the states that currently regulates the retail rates of the Applicants will continue to regulate those rates. Likewise, the wholesale sales and transmission services of each of the Applicants and the joint transmission tariff herein filed will remain subject to this Commission's regulation after the merger to the same extent as before. Also, power sales between the merging utilities will remain as fully subject to this Commission's jurisdiction as before. Newco will be subject to regulation by the SEC as a registered holding company under PUHCA, but the Applicants commit as a condition of approval of the merger that, for Commission ratemaking purposes, the Applicants will follow the Commission's policy regarding the treatment of the costs and revenues of inter-company transactions. This commitment eliminates the potential concern of the Commission regarding loss of jurisdiction to the SEC under the holding of Ohio Power Co. v. FERC, 954 F.2d 779, 782-786 (D.C. Cir. 1992), cert. denied, 498 U.S. 73 (1992). C. Other Factors Supporting the Application 1. More Balanced Customer Base The combined service territories of Atlantic and Delmarva will be more diverse than their individual service territories, reducing Newco's exposure to adverse changes in any sector's economic and competitive conditions. Delmarva will be less reliant on the chemical and financial services industries, and Atlantic will be less reliant on casino gaming, tourism and recreation. The geographical and economic diversity will improve the stability of Newco's revenue stream. 2. Financial Flexibility By roughly doubling the market capitalization of Newco compared to that of the individual companies, the merger will improve the merged company's overall credit quality and the liquidity of its securities and thereby improve its ability to fund continued growth at lower costs, permitting it to compete more effectively. 3. Regional Platform for Growth The combination of Atlantic and Delmarva will create a regional platform for growth in the mid-Atlantic corridor. The corridor is experiencing economic growth that is led by the casino gaming industry and related services in southern New Jersey and the expansion of the financial services industry in Delaware. The merged company plans to expand relationships with existing customers and to develop relationships with new customers in the region. It will use its combined distribution channels to market a portfolio of energy-related products and services throughout the region and will follow regional relationships into other geographical areas. 4. Improved Cost Accounting Delmarva has contracted for the design and installation of a computerized cost accounting system so that Delmarva will be better able to track and report costs across business functions, among regulated/non-regulated activities, and on a cost-center by cost-center basis. Under this project, known as the Management Information Process Redesign ("MIPR"), administrative functions such as legal, financial and accounting, human resources and information systems will be billed out to various cost centers on a business function basis. Direct cost assignment will continue for operations within generating stations and other non-administrative functions, but the level of cost detail will be enhanced. The methods for billing out and assigning costs will be published as part of a cost accounting manual that will be submitted to the state regulatory agencies and this Commission later this year or early in 1997. MIPR, which is to become operational on January 1, 1997, is highly flexible and, after the merger, will be modified to track costs of goods and services among and between the Applicants and affiliated entities. MIPR will operate well in the registered holding company structure contemplated by the proposed merger, which includes the establishment of a service corporation that would provide and bill out various services to each of the operating utilities. Because of MIPR's high degree of flexibility with respect to gathering, tracking and reporting costs, the SEC, this Commission and the various state commissions will be able readily to audit transfers of goods and services among the affiliated entities. The extension of MIPR to Atlantic's operations will be another benefit of the merger. V. INFORMATION SUBMITTED UNDER THE ACQUISITION AND MERGER FILING REQUIREMENTS OF 18 C.F.R. ss. 33.2(a) Through (i) A. Names and Addresses of Principal Business Offices (18 C.F.R. ss. 33.2(a)) Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 Delmarva Power & Light Company 800 King Street Post Office Box 231 Wilmington, DE 19899-0231 B. Names and Addresses of Persons Authorized to Receive Notices and Communications (18 C.F.R. ss. 33.2(b)) James E. Franklin, II Senior Vice President, Secretary and General Counsel Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 Dale G. Stoodley Vice President and General Counsel Randall V. Griffin Senior Counsel Delmarva Power & Light Company 800 King Street Post Office Box 231 Wilmington, DE 19899-0231 George F. Bruder, Esq. Carmen L. Gentile, Esq. Bruder, Gentile & Marcoux, L.L.P. 1100 New York Avenue, N.W. Suite 510 East Washington, DC 20005-3934 C. Designation of Territories Served by County and State (18 C.F.R. ss.33.2(c)) The states and counties served in whole or in part by the Applicants are: Atlantic City Electric Company New Jersey: Atlantic, Burlington, Camden, Cape May Cumberland, Gloucester, Ocean, Salem Delmarva Power & Light Company Delaware: New Castle, Kent, Sussex Maryland: Caroline, Cecil, Dorchester, Harford, Kent, Queen Anne's, Somerset, Talbot, Wicomico, Worcester Virginia: Accomack, Northampton D. Brief Description of the Facilities Owned or Operated for Transmission of Electric Energy in Interstate Commerce or the Sale of Electric Energy at at Wholesale (18 C.F.R. ss.33.2(d)) 1. Atlantic City Electric Company Transmission Facilities Atlantic currently owns approximately 963 miles of transmission line facilities in New Jersey at the voltages set forth below: Transmission Line Miles 500 kV 0 230 kV 127 138 kV 209 69 kV 627 Total 963 Atlantic owns 71 substations operating at primary voltages at or above 69 kV. 2. Delmarva Power & Light Company Transmission Facilities Delmarva currently owns approximately 1,508 miles of transmission line facilities on the Delmarva Peninsula at the voltages set forth below: Transmission Line Miles 500 kV 16 230 kV 326 138 kV 449 69 kV 717 Total 1,508 Delmarva owns 110 substations operating at primary voltages at or above 69 kV. As previously noted, Delmarva is installing an additional 500 kV-230 kV transformer at a substation near Red Lion, Delaware, which will greatly enhance Delmarva's transfer capability of electricity from the 500 kV transmission lines to the rest of Delmarva's system. The Red Lion substation transformer has been built and tested. The transformer will be in operation on or before May 31, 1997. 3. Joint-Use Facilities Atlantic and Delmarva are signatories to several agreements that permit the joint use of 500 kV transmission lines and related substations within the states of Delaware, Maryland, New Jersey and Pennsylvania. These transmission facilities interconnect with Atlantic and Delmarva and other utilities that are members of PJM. These facilities also electrically interconnect with generating units that are partially owned by Atlantic and Delmarva. A more detailed description of these joint-use facilities is set out in the testimony and exhibits of Messrs. Morris and Mitchell attached in Volume 2. E. Description of Transaction and Consideration (18 C.F.R. ss. 33.2(e)) 1. Transaction The transaction is described above in Section III, Merger Procedures. 2. Consideration The consideration in the merger is that which is inherent in the treatment at closing of shares as negotiated at arms-length between the parties (see Article II of the Agreement and Plan of Merger). That treatment is as follows: a. The following shares are to be canceled: (1) Delmarva common stock owned by Delmarva as treasury stock or by Atlantic Energy or any wholly owned subsidiary of Delmarva or Atlantic Energy, (2) Atlantic Energy common stock, no par value, owned by Atlantic Energy as treasury stock or by Delmarva or any wholly owned subsidiary as treasury stock, and (3) Newco common stock that is owned by Delmarva, Atlantic Energy or any of their wholly owned subsidiaries. b. Each share of Delmarva common stock is to be converted into one share of Newco common stock, and each share of Atlantic Energy common stock is to be converted into 0.75 shares of Newco common stock and 0.125 shares of Newco Class A common stock, par value $0.01 (the Letter Stock). c. Each share of DS Sub, Inc. common stock, par value $.01 per share, issued and outstanding immediately prior to the effective time shall be converted into one share par value $2.25 of Newco common stock. The above treatment of shares at the closing was negotiated by the parties at arms-length and separately evaluated for fairness by each party. The parties did not establish a mutually agreed-upon methodology to determine the fairness of the consideration to each. In the negotiations, each party had access to analyses and advice prepared by its own investment banking advisors. The merger must be approved by vote of Atlantic Energy and Delmarva's shareholders. F. Statement of Jurisdictional Facilities to be Disposed of or Merged (18 C.F.R. ss. 33.2(f)) No jurisdictional facilities are to be disposed of. The facilities to be merged under Section 203 of the Federal Power Act are all jurisdictional facilities of Atlantic and Delmarva. The merger is to be achieved through the ultimate joint ownership and control of the facilities by Newco through its operating company subsidiaries, Atlantic and Delmarva. Legal title to the facilities will be unchanged from the companies that now own them. G. Cost of Facilities Involved in Merger (18 C.F.R. ss. 33.2(g)) The required information setting forth Atlantic's and Delmarva's costs of merged facilities is attached hereto as Exhibit C. H. Statement of Effects on Any Contract for the Purchase, Sale or Interchange of Electric Energy (18 C.F.R. ss. 33.2(h)) 1. Because Atlantic and Delmarva will continue their corporate existence, the merger will not affect any contract for the purchase, sale, or interchange of electric energy of either Atlantic or Delmarva. 2. Each of the Applicants has an open-access tariff in effect pursuant to Order No. 888, and the Applicants have submitted herewith in Volume 2 a joint open access Order No. 888 tariff to be effective upon the date of the merger if joint service is not then available under a PJM rate. The joint tariff adopts for the combined transmission system the lower of each company's rates for network, point-to-point and ancillary services. 3. The merger will not affect reliability or service to the Applicants' existing wholesale sales or transmission customers. 4. The Applicants are not proposing any changes to their separate fuel adjustment clauses, and are not proposing to reallocate power production costs among jurisdictions or levelize their wholesale or retail rates. The Applicants commit, as a condition for approval of the merger, that their wholesale rates will be held harmless from merger-related cost increases, as described in more detail in the testimony of Mr. Paul S. Gerritsen attached in Volume 2. I. Statement Regarding Other Required Filings (18 C.F.R. ss. 33.2(i)) The Delaware Public Service Commission, the New Jersey Board of Public Utilities and the Virginia State Corporation Commission must approve the merger. The Pennsylvania Public Utility Commission will be requested to issue a limited approval with respect to jointly-owned production and transmission facilities located in Pennsylvania. The Maryland Public Service Commission does not have jurisdiction to approve or disapprove the proposed merger. The SEC must authorize creation of Newco as a registered holding company under PUHCA and the arrangements within the holding company system. A notification of the merger to the Federal Trade Commission ("FTC") will be filed pursuant to the Hart-Scott-Rodino Act, relating to any antitrust implications of the proposed acquisition and merger. No objection by the FTC or the Department of Justice to the merger is expected. The Nuclear Regulatory Commission must approve the merger with respect to financial commitments regarding nuclear facilities owned in part by Atlantic and Delmarva. Again, no objection is anticipated. VI. ACQUISITION AND MERGER REQUIRED EXHIBITS UNDER 18 C.F.R. ss. 33.3 Attached are Exhibits A through I. Exhibit G requires inclusion of all other state and federal regulatory applications in connection with the transaction and certified copies of any orders issued. Exhibit G will be supplemented with copies of the applications made to the Securities and Exchange Commission, the Federal Trade Commission, the Department of Justice, the Nuclear Regulatory Commission, and the state commissions of Delaware, New Jersey, Virginia and Pennsylvania, as those applications are filed. As observed earlier, the Maryland Public Service Commission does not have jurisdiction to approve the merger. VII. DOCUMENTS SUBMITTED UNDER 18 C.F.R.ss.33.2 (k) and (l) A. Statement of Franchises Held (18 C.F.R. ss. 33.2(k)) Attached as Appendix A-2. B. Form of Notice for the Federal Register (18 C.F.R. ss. 33.2(l)) Attached as Appendix A-3. VIII. PROCEDURAL MATTERS A. Request for Approval Without Hearing The Applicants' request that the Commission approve the merger without hearing on the basis of the considerations and circumstances listed below indicating, individually and collectively, that a hearing is not needed. 1. As the market power study submitted in volume 2 herewith shows, the merger of the two smallest utilities in PJM will not result in the Newco system's attaining any degree of market power in generation that is anticompetitive or contrary to the public interest. Moreover, the merger, by forestalling potential mergers of each utility with a larger one, producing a greater concentration of market power than the proposed merger, will tend to preserve competition in regional power supply markets. 2. The parties have addressed market power in transmission by including herewith a proposed joint Order No. 888 tariff and by continuing to support a PJM pool-wide tariff. The only significant transmission constraint on the merging electric systems is the one that is being currently addressed by Delmarva's transformer addition at its Red Lion substation, a project which, before the merger, will entirely eliminate the transmission constraint and provide abundant transmission capacity for future load growth. 3. In Docket Nos. ER96-2516-000, et al., the Applicants have joined in the comprehensive restructuring proposal of nine of the 10 members of PJM. That comprehensive restructuring proposal would result in the creation of an ISO, which would administer a pool-wide transmission tariff. The Commission, clearly, will require that any rates approved in that proceeding will eliminate pancaking of transmission rates and will reduce any market power that PJM members, including the Applicants, may have. 4. The merger will not cause loss of jurisdiction by any of the four state commissions over the retail rates of either of the Applicants. The wholesale rates of the Applicants are currently regulated by this Commission and will continue to be so regulated after the merger. B. Closing Date The Applicants intend to close on the transactions required to effect the merger as soon as practicable after receiving the last of the required regulatory approvals. The Applicants will advise the Commission of the closing date promptly upon its occurrence. IX. CONCLUSION The Applicants jointly request the following: A. Findings 1. The merger will not produce any aggregation of market power which is inconsistent with the public interest under the Federal Power Act. 2. The merger will produce significant savings in the cost of service to both of the merging utilities and thereby either reduce their regulated retail and wholesale rates under a rate regulation regime or render the utilities more effective competitors under any superseding competitive market regime. In either case, the ultimate consumers of power will benefit. 3. The Commission properly may consider both the level of the aggregated market share after the merger as well as the merits of the merger in preserving competitive market shares as consolidation in the industry goes forward. 4. The Applicants have fulfilled all applicable requirements for authorization of the merger under Section 203 of the Federal Power Act and Part 33 of its Regulations. B. Requested Commission Actions The Applicants request the following actions: 1. Approval of the merger, to the full extent required by law, of Atlantic and Delmarva as subsidiaries of a newly formed registered public utility holding company and any other authorizations or approvals that might be required incidental thereto; 2. Approval on the merger on the Application and pleadings, without hearing; 3. If a hearing is found to be necessary, procedures (such as a paper hearing) that would permit the approval of the acquisition and merger to be granted as expeditiously as possible; and 4. Waivers of any filing requirements or other regulations as the Commission may find necessary or appropriate to allow this Application to be accepted for filing and granted. Respectfully submitted on behalf of: Atlantic City Electric Company and Delmarva Power & Light Company By: _______________________________ Dale G. Stoodley Vice President and General Counsel Randall V. Griffin Senior Counsel Delmarva Power & Light Company James E. Franklin, II Senior Vice President, Secretary and General Counsel Atlantic City Electric Company George F. Bruder Carmen L. Gentile Bruder, Gentile & Marcoux, L.L.P. Attorneys for the Applicants EX-99.2 3 EXHIBIT D-1.2.1 Atlantic City Electric Company Delmarva Power & Light Company Docket No. EC97-___-000 Ex.__________ UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION TESTIMONY OF JOHN C. DALTON FILED ON BEHALF OF ATLANTIC CITY ELECTRIC COMPANY DELMARVA POWER & LIGHT COMPANY 1. Q: Please state your name, occupation, and business address. A: My name is John C. Dalton. I am a Vice President and Principal of Reed Consulting Group (RCG), 200 Wheeler Road, Burlington, Massachusetts 01803. 2. Q: Please describe your educational background and professional qualifications. A: I graduated from Brown University with a Bachelor of Arts Degree in Economics in 1980 and received a Masters in Business Administration from Boston University in 1987. From 1981 to 1984, I was employed by the Massachusetts Department of Environmental Protection as an environmental planner and staff economist. In 1984, I joined the Massachusetts Energy Facilities Siting Council (Siting Council) as a staff economist responsible for reviewing the demand forecasts and supply plans of Massachusetts electric and natural gas utilities. In 1987, I joined R.J. Rudden, a management consulting firm specializing in energy matters, as a consultant. In 1988, I left R.J. Rudden with others to form RCG. While at RCG, I have managed many of RCG's market power analysis assignments. Specifically, I have served as Responsible Officer or Project Manager in our market power consulting assignments for Orange & Rockland Utilities, Inc., the Province of Ontario's Advisory Committee on Competition in Ontario's Electricity Sector, Ocean State Power, NORSTAR Energy Limited Partnership, Delmarva Power & Light Company, Avoca Natural Gas Storage, Steuben Gas Storage Company, the Cove Point LNG Limited Partnership, and Pacific Gas & Electric. Exhibit ___(JCD-2) reviews my professional experience and background. 3. Q: Have you testified before any regulatory agencies prior to this case? A: Yes. I have testified before the Massachusetts Department of Public Utilities, the Massachusetts Siting Council, and the Rhode Island Public Utilities Commission on various matters pertaining to electric utility resource planning and procurement. In addition, I have prepared a number of reports and affidavits for market power analyses that have been submitted to the Federal Energy Regulatory Commission (FERC or Commission). 4. Q: What is the purpose of your testimony? A: RCG has been engaged by Delmarva Power & Light Company (DP&L) and Atlantic City Electric Company (AE) to evaluate whether their proposed merger as subsidiaries under a holding company (Newco) would significantly lessen competition in their relevant markets as a result of the consolidation of their generation and transmission facilities. My testimony summarizes the various analyses that I performed to evaluate the implications of the merger on competition in the relevant markets that would be affected by the merger. I prepared the report attached hereto as Exhibit ____ (JCD-1), which is an "Assessment of the Competitive Implications of the Proposed Merger between Delmarva Power & Light Company and Atlantic City Electric Company." This report presents my findings on the impact of the merger on the competitiveness of the markets in which DP&L and AE currently operate. In light of proposals to restructure the Pennsylvania-New Jersey-Maryland (PJM) Interconnection, in which both DP&L and AE are members, I also assessed the impact of the merger on a market that is restructured consistent with the general framework outlined in these proposals. I found that the proposed merger will not lessen competition either in the restructured PJM Pool or under the existing market structure. 5. Q: Please summarize your conclusions on the competitive implications of the DP&L and AE merger. A: As described in detail in my attached report, I have found the following: 1. The proposed merger between DP&L and AE will not lessen competition in any of the merged company's relevant markets. 2. During the short-run period, which consists of the first four years after the merger is completed, i.e., 1998 to 2001, the merged company is projected to have no uncommitted capacity, which is an indicator of a supplier's ability to make firm bulk power sales. Therefore, the proposed merger will have no effect on market concentration in the merged company's short-run firm bulk power markets and will not lessen competition in these markets. 3. My analysis of the non-firm energy markets indicates that the merger will not lessen competition in these markets. This analysis evaluated the merged company's non-firm energy markets using the Commission's traditional hub and spoke analysis framework and an analysis, i.e., the Eastern PJM analysis, which reflected both increased transmission access through the PJM 500 kV facilities and the influence of transmission constraints on the scope of the geographic market. (This Eastern PJM analysis recognizes that there is a constraint on power flows on the 500 kV facilities from the western and central portions of PJM across the so-called Eastern Interface into the eastern portion of PJM where DP&L and AE are located.) Most importantly, the merged company's highest share of installed capacity in its relevant geographic markets is projected to be 14.5%, which is well below the 20% market share that the Commission has used as an indicator of the lack of market power. Furthermore, the increases in the market concentration levels for the non-firm energy markets suggest that the merger will not reduce competition within the merged company's relevant markets, given the conservative market definitions utilized, and the divergent interests among electric utilities. 4. In the restructured PJM markets, for both relevant geographic markets evaluated and all of the capacity measures considered, the merged company's market share is below the 20% level that the FERC has found to be an indicator of a lack of market power. This indicates that the unilateral exercise of market power by the merged company is unlikely. Furthermore, the collective exercise of market power is unlikely given the difficulty of reliably forecasting industry demand, output levels, and the prices to be offered by competitors and the significant incentives provided by the bilateral market for rivals to cheat on any tacit or explicit pricing arrangements. Finally, the markets are moderately concentrated and the increases in market concentration from the merger are below the safe harbor thresholds identified by the Department of Justice (DOJ) and the Federal Trade Commission (FTC) in their Horizontal Merger Guidelines in all cases except for one of four capacity measures evaluated. This one exception occurs in the most narrowly defined market, which is a relevant market only during those limited periods when the PJM's Eastern Interface is constrained. For all other periods, a broader market definition would be appropriate. In light of the factors discussed above, the merged company would not be able to exercise unilaterally any market power even in the most narrowly- drawn geographic market for this one capacity measure. Therefore, I found that, with respect to all relevant markets, the merger will not lessen competition in a restructured PJM market. 5. The merging companies do not control any barriers to entry and, as such, the proposed merger will not reduce the competitiveness of the long-run bulk power market. 6. FERC's open access transmission tariff requirement, the joint Order No. 888 tariff submitted by DP&L and AE, the limited strategic value of the merging companies' transmission facilities, and the proposed ISO for the PJM Pool will ensure that the merged company is unable to use its transmission facilities to exercise market power. Therefore, the merger will not provide the merged company with market power in the transmission market. 7. The proposed merger will not have a significant effect on retail competition. 6. Q: What methods of assessing the competitive effects of the merger did you use? A: As "threshold" or "screening" measures of market power, I used the following methods: (1) For market share, I compared the merged company's market share to the 20% threshold which has been applied in the past by the FERC as an indicator of the lack of market power; and to DOJ's 35% leading firm standard; and (2) For market concentration, I utilized DOJ's and the Federal Trade Commission's (FTC) "1992 Horizontal Merger Guidelines" and have calculated market concentrations using the Herfindahl-Hirschman Index (HHI). The merger passed this initial screen: if the market was unconcentrated; moderately concentrated and the change in HHI due to the merger was less than 100; or heavily concentrated and the change in HHI due to the merger was less than 50. In addition to assessing market shares and market concentration to determine the competitive effects of a merger, I also considered the following factors: (1) the likelihood that sellers can effectively coordinate their behavior to achieve an uncompetitive result; (2) the degree to which the market definition applied accurately reflects the competitive alternatives that are likely to be available to the utilities in the relevant market; and (3) the relative ease of market entry. Each of these issues is discussed in greater detail, as appropriate, in my report. 7. Q: What are the relevant product markets that you analyzed? A: As more fully described in my report, I found the following to be the relevant product markets for the merged company: (1) The short-run bulk power market, including the four years 1998-2001; and (2) The long-run bulk power market, including any period extending beyond the short-run period. Because the PJM Pool is in the midst of a potential restructuring, I performed analyses for both the existing PJM market structure and for a restructured PJM market. I subdivided the bulk power market into two different types of products, consistent with FERC precedent: (1) Firm Bulk Power Transactions, which I assessed using uncommitted capacity as an indicator of a seller's ability to make firm power sales; and (2) Non-Firm Energy Transactions, where I used installed capacity as a measure of a seller's ability to make these sales. 8. Q: How did you define the relevant geographic markets for the DP&L and AE merger? A: I followed the FERC's prior merger analyses and adopted a "Hub and Spoke" approach, including first and second tier suppliers, for the existing PJM market structure. As described in my report, this method determined four "hubs" to be analyzed: PSE&G, PECO, GPU and the Transmission Dependent Utilities (TDUs). As explained in my report, the analyses would be the same for each TDU, and, thus, each of the TDU markets is validly described by a single analysis. To assess the influence of transmission constraints on the scope of the relevant geographic market, I conducted an additional analysis of the Eastern PJM market that reflects the Eastern Interface transmission constraint. For the restructured PJM market, I conservatively focused on the Eastern Zone of PJM because there is a transmission constraint that limits the flow of electricity into the Eastern Zone portion of PJM about 4% of the time, based on historic data. I also analyzed the entire PJM as a geographic market, which would represent the market during the roughly 96% of the year when constraints do not exist on the Eastern Interface. 9. Q: Starting with the existing market structure, what are the results of your analyses? A: For the Short-Run Firm Bulk Power Market, neither DP&L nor AE has any uncommitted capacity in the four years 1998-2001 (they both are "short" on capacity). Therefore, the merger won't affect market concentration and won't reduce competition in any geographic market. For the Non-Firm Energy Market, using the hub and spoke framework, my market concentration analysis to define the geographic market indicated the following: Newco HHI HHI Market Pass Hub Market Market Share Post-Merger Increase Concentration Screen PECO - without BGE/PEPCO Merger 10.0% 1771 48 Moderately Yes - with BGE/PEPCO Merger 8.8% 1809 37 Heavily Yes PSE&G 9.4% 1688 42 Moderately Yes GPU 9.5% 1339 43 Moderately Yes TDUs 14.5% 2640 102 Heavily No
The first four of these markets easily pass the screening test used by the DOJ/FTC. The TDU market hub does not pass the screen, which is an increase of 50 or less in the HHI for a "heavily concentrated" market. However, I believe that the reported increases in HHIs under the hub and spoke analysis overstate the true level of increase in market concentration from the proposed merger, since the market definition that I applied in this analysis is conservative and results in a narrow market definition. I conservatively assumed that the merger would not increase the geographic scope of the market and only considered the non-firm energy that would be available to the market hub utility from other PJM members that are directly interconnected with the market hub or that the market hub could access through the merged company's open access tariff. An analysis of the non-firm energy transactions for the investor-owned market hub utilities indicates that over 50% of their purchases from utilities were from utilities that were outside of the geographic market definition that I used. This verifies the reasonableness of applying a less conservative approach that would broaden the geographic market and, thus, reduce the calculated change in market concentration as a result of the merger. For the Eastern PJM analysis, the increase in the HHI is 96 and the market is considered to be a heavily concentrated market. The Eastern PJM market definition that I employed also represents a narrow definition of the merged company's relevant market and understates the alternatives that are available to the Eastern PJM utilities. Specifically, the analysis only considered the transfer capability of the 500 kV system, i.e., 6,900 MW. For planning purposes, the PJM uses a total transfer capability over the Eastern Interface which is approximately 10,000 MW, which would reduce the merged company's market share and consequently reduce the increase in the HHI from the merger to 80. Finally, this Eastern PJM market represents a relevant market for the merged company only during the period that the Eastern Interface is constrained. When the Eastern Interface is unconstrained, a broader geographic market definition is appropriate. Based on historic data, a broader market definition would be appropriate for approximately 96% of the year. Another indication of the narrowness of the market definition that I employed for the hub and spoke and Eastern PJM analyses is that no consideration was given to the non-firm energy that would be available from power marketers, independent power producers, and other prospective suppliers, even though these entities represent a significant presence in the market as demonstrated by recent deals with various power marketers to supply power to the City of Dover, Town of Easton and Old Dominion Electric Cooperative, all of which are TDUs receiving transmission service from DP&L. Nonetheless, assuming that these reported increases in HHI were a valid indication of the actual increase in market concentration as a result of the proposed merger, I believe that these increases in the HHI reported for the TDU hub and Eastern PJM markets would not suggest that the merger will lessen competition within the merging companies' relevant markets when other relevant factors are considered. Specifically, there are several aspects of the existing market structure that make it unlikely that suppliers will be able to coordinate their pricing and output decisions in an effort to collectively exercise market power. First of all, the differences among suppliers' production costs and the amount of available generating capacity are likely to result in significant divergent interests which make coordinated behavior unlikely. Furthermore, under the existing market structure, an electric utility that is a seller one day may be a buyer the next. Therefore, a higher market price would not necessarily be in its best interests. Furthermore, a significant portion of the merged company's installed capacity would be in generating units in which it is a joint owner and has a minority interest and, as such, it would be unable to unilaterally use this capacity to attempt to exercise market power. These factors suggest that the reported market shares for the merged company and for other suppliers in the market overstate their true influence with the market and that the resulting market concentration levels and increases in HHI from the proposed merger are overstated. Therefore, I believe that the calculated increases in the HHI from the merger should not be considered reliable indicators of reduced competition within the merged company's non-firm markets. I also note the maximum market share for the merged company for the four hub and spoke and the transmission constraint based geographic markets is only 14.5%, well below the FERC's 20% threshold. Thus, the merged company has little ability to exercise any market power unilaterally. Since passage of the Energy Policy Act of 1992, the competition from nearby, much larger, utilities with DP&L and AE to serve the TDUs further supports my conclusion that exercise of market power through collusion with these dominant players in the market is unlikely. 10. Q: Turning now to your analysis of a restructured PJM market, what are your results? A: As noted above, the merged company has no uncommitted capacity. To the degree that there is a firm bulk power market in a restructured PJM, the merged company is unlikely to have any uncommitted capacity that it could make available to this market; therefore, the merger would not lessen competition in these PJM and Eastern Zone markets. Regarding the market for energy, I evaluated the impact of the merger on competition for energy under a restructured PJM in the entire PJM area and in the Eastern Zone of PJM. For the entire PJM geographic market, I found the following results: Newco HHI Post- HHI Market Pass Capacity Measure Mkt. Share Merger Increase Concentration Screen Total 7.9% 1185 30 Moderately Yes Intermediate 6.3% 1450 19 Moderately Yes Base & Intermediate 5.3% 1141 14 Moderately Yes Intermediate & Peaking 9.7% 1276 44 Moderately Yes
My results for the Eastern PJM geographic market are as follows: Newco HHI Post- HHI Market Pass Capacity Measure Mkt. Share Merger Increase Concentration Screen Total 14.1% 1435 76 Moderately Yes Intermediate 9.3% 920 0 Unconcentrated Yes Base & Intermediate 7.1% 1139 12 Moderately Yes Intermediate & Peaking 16.9% 1609 119 Moderately No
My analysis of the restructured PJM for both of the merged company's relevant geographic markets indicates that the proposed merger will result in an increase in market concentration as measured by the HHI that is just above the safe harbor threshold of 100 for a moderately concentrated market specified in the Horizontal Merger Guidelines for just one capacity measure, i.e., intermediate and peaking capacity. And this is for the most narrowly defined market, the Eastern PJM market, which is a relevant market only during those periods when the Eastern Interface is constrained. When the Eastern Interface is unconstrained, a broader geographic market definition is appropriate and, based on historic data, a broader market definition would be appropriate for approximately 96% of the year. Furthermore, my Eastern PJM analysis is extremely conservative because I have only considered the 6,900 MW transfer capability of the 500 kV system. PJM estimates a total transfer capability over the Eastern Interface for all transmission facilities of approximately 10,000 MW, which would reduce the increase in HHI for this market from 119 to 105. Possibly the most clear cut evidence that the merged company will not be able to exercise market power is that, for both relevant geographic markets and all of the capacity measures considered, the merged company's market share is below the 20% level that the FERC found in Public Service Co. of Indiana was an indicator of a lack of market power. As noted above in connection with the existing market structure analysis, this small market share indicates that the unilateral exercise of market power by the merged company is unlikely. 11. Q: What other factors did you consider regarding the competitive effects of the merger on the restructured PJM market? A: If the merged company will not be able to unilaterally exercise market power, the only way in which the merger could lessen competition would be if it would make the collective exercise of market power more likely. However, there are several aspects of the restructured PJM market that indicate that an increase in the HHI that is just above the safe harbor threshold does not indicate that suppliers would be able to collude in an effort to increase market prices. In general, for suppliers to collude successfully and, by doing so, to increase market prices, they must be able to reach terms of coordination that are profitable to the suppliers involved and to detect and punish deviations that would undermine the coordinated action. Factors that tend to facilitate collusion are: (1) a frequently repeated auction for a homogenous product under similar demand and supply conditions; (2) intimate knowledge of a rival's operating costs; and (3) almost immediate knowledge of a rival's actions. The first two factors facilitate collusion by making it easier to anticipate a rival's likely actions and the third factor limits the ability of suppliers to cheat on any tacit or formal agreements, since rivals would be able to quickly respond to any cheating and, as a consequence, to limit the profitability of cheating or undercutting market prices. Coordinated behavior among suppliers that produces an increase in market prices is likely to be difficult in the restructured PJM market, given the difficulty of reliability forecasting industry demand, output levels, and the prices to be offered by competitors and the significant incentives provided by the bilateral market for rivals to cheat on any tacit or explicit pricing agreements. Therefore, given the insignificant increase in market concentration from the merger in all cases but one, the merged company's relatively small market share in all cases, and the many factors that promote competition within the restructured PJM market, I find that the proposed merger would not lessen competition in a restructured PJM market. 12. Q: Are there other factors which indicate that the merger will not have anticompetitive effects in either the current PJM market of the future restructured PJM market? A: To the limited extent the HHIs in the market analyses I have developed exceed safe harbor levels or are in the area raising competitive concerns, they do so for very limited periods of the year and only on a border line basis. As shown in my report (Exh. No. ____ (JCD-1) at pages III-3 and 4), these HHIs are far below the levels which have caused DOJ to file objections to mergers on the basis that the merger would substantially lessen competition. Such treatment confirms my own analysis provided above that this proposed merger will not have anticompetitive consequences. In connection with the HHI data and the market share data, I also note the small size of the merged company on a post-merger basis relative to the other PJM members. The large size of these other utilities (and not the small size of the merged company) accounts for the market concentration results. In this respect, rejection of the merger based on relatively small HHI increases would elevate form over substance and have the effect of dampening rather than promoting competition. The reasons are simple. First, the merged company has a much better chance of remaining independent of its larger neighbors than either DP&L or AE on an unmerged basis. Second, with its combined resources, the merged company will be better positioned to compete with its large utility neighbors than would either DP&L or AE standing alone. Thus, the merged company will promote the existence of robust competition in the PJM region, and denial of the merger would actually have the opposite effect and reduce the level of competition in the PJM region. Denial of the merger would cause this loss of competition and would be inappropriate given certain other factors which show that the merger could not cause anticompetitive harm. These include the following. The higher HHIs occur only during brief periods of the year for limited products. There is ease of entry into the generation market at least on a longer term (four year) basis. The TDUs in DP&L's service area have been extremely successful in obtaining power from non- DP&L sources within PJM with the result that actual market experience demonstrates that DP&L, in fact, lacks market power over its TDUs. Those TDUs which continue to take sales service from DP&L do so under contracts which remain in effect until after the end of the four year entry period and are covered by a "hold harmless" commitment by DP&L and AE; thus, they are insulated from any possible exercise by the merged company of market power. In short, this merger will produce procompetitive benefits without causing any anticompetitive harm. 13. Q: Have you also analyzed the Long-Run Bulk Power Market? A: Yes, I have. In Appendix B to my report, I have evaluated the competitiveness of the long-run bulk power market and assessed whether the merging companies were able to erect or maintain any barriers to entry. I found that the merging companies could not control any barriers to entry and a significant amount of empirical evidence that indicates a competitive long-run bulk power market. Therefore, the proposed merger will not reduce the competitiveness of the long-run bulk power market. 14. Q: What did you find when you analyzed the merged company's market power as a buyer? A: The proposed merger will not cause the merged company to have any market power as a buyer in the short-run or long-run bulk power markets. First of all, the merged company will represent a relatively small portion of the market with its load representing approximately 9% of the 1995 peak load in the PJM area. Furthermore, the merged company's joint comparable services transmission tariff will ensure that it is unable to exert any market power over any supplier that is located or intends to locate in the merged company's service territory. Finally, under a restructured PJM, the merged company will be unable to exert market power as a buyer, because suppliers will be free to offer their output to an Independent System Operator (ISO) or to other load serving entities under a bilateral contract. Clearly, the merged company will be unable to exercise market power as a buyer in either the short-run or long-run bulk power markets. 15. Q: Have you also analyzed Transmission Market Power? A: Yes. Both DP&L and AE have filed open access transmission tariffs that conform with FERC Order No. 888, and in granting both these companies authority to charge market-based rates for generation services, the FERC found that the companies meet "the Commission's transmission market power standard for approval of market-based rates." Therefore, FERC's open access transmission tariff requirement and the joint open access tariff submitted herein mitigate sufficiently any concerns regarding market power in the transmission services market. Furthermore, I find that, in general, the transmission facilities owned by DP&L and AE do not represent strategic transmission paths that prior to the merger provided prospective customers or competitors with an alternative to the transmission services offered by the other merging company. To a large degree, both DP&L and AE are geographically isolated. Given their location at the eastern end of the PJM pool with no utilities connected to the east and the majority of the PJM pool generation to the west, their transmission facilities do not represent major transmission paths that are used by other electric utilities to access bulk power supplies. Their transmission facilities are used instead to connect the two companies to adjacent electric utilities and are used primarily to move their generation in jointly-owned units located outside of their service territories. Finally, under PJM restructuring, it is likely that all major transmission facilities will be controlled by an ISO. Thus, even if these facilities were of strategic value, the merged company would not be able to use them to attempt to limit access to competitors. Therefore, the merger will not provide the merged company with market power in the transmission market or adversely affect the competitiveness of the bulk power markets in which the merging companies compete. 16. Q: Did you also review the merger's implications on retail competition? A: Yes, I did. In general, there are five primary areas of retail competition that exist under the current market structure which potentially could be affected by this merger. These areas, which are discussed in more detail in my report, include: industrial location competition; fringe area competition; interfuel competition; franchise competition; and yardstick competition. Finally, in testimony submitted in the Docket pertaining to the proposed merger between PEPCO and BG&E (Docket Nos. EC96-10-000 and ER96-784-000), a staff witness evaluated the impact of the proposed merger on "retail access", i.e., competition between suppliers to sell power to retail customers. Therefore, I also addressed whether such an analysis is appropriate in light of the current retail market structure. For reasons explained in my report, I found that, the merger of the two utilities in this case will not have a significant effect on retail competition, either in the region or within the two utilities' service areas. 17. Q: Does this conclude your testimony? A: Yes, it does. Atlantic City Electric Company & Delmarva Power & Light Company FERC Docket No. EC97-7-000 Supplemental Testimony of John C. Dalton Exhibit No. __ (JCD-3) - -------------------------------------------------------------------------------- UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION SUPPLEMENTAL TESTIMONY OF JOHN C. DALTON FILED ON BEHALF OF ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY 1. Q: Are you the same John Dalton who has previously offered testimony in this proceeding? A: I am. 2. Q: What is the purpose of your present testimony? A: I describe the significance of interconnected PJM operation under a PJM open-access tariff to the competitiveness of the markets in which the merger applicants, Atlantic and Delmarva, operate. I also sponsor and explain a new competitive analysis, Exhibit No. ___ (JCD-4), which I prepared in accordance with the requirements of Appendix A of the Commission's Merger Policy Statement. I also address additional considerations which relate to curbs on market power which were discussed in the Commission's Policy Statement and the Department of Justice/Federal Trade Commission Merger Guidelines. 3. Q: Have you reviewed the PJM transmission tariff as sponsored by the nine "Supporting Companies" and as filed with the Commission on December 31, 1996? A: I have. The Commission issued an order on February 28, 1997 allowing the Supporting Companies' Tariff to become effective subject to a single exception and subject to a hearing. 4. Q: What is the effect of that tariff on the dimensions of the geographic market for use in your market power analyses? A: That tariff, together with the three revised 500 kV transmission facility agreements, transforms PJM into a networked open-access transmission highway for all utilities located within and adjacent to the PJM Interconnection. The filing contains the following features of particular relevance to the size of the geographic market: Elimination of rate pancaking: PJM is divided into ten zones encompassing the transmission service areas of the ten PJM members with 10 zonal rates based on the respective transmission costs of the ten members. However, there will be no pancaking of rates for inter-zonal transactions. Any inter-zonal transaction will pay a single zonal rate. This will be a destination rate; i.e., the transmission charge will be the rate for the zone to which the power is delivered. This single zonal rate, either a network rate or a point-to-point rate, will apply to all energy deliveries to a load in that zone, regardless of the number of zones which are traversed and regardless of whether the power originates within or outside of PJM. The network rate will be based on a load ratio share of the annual transmission revenue requirement in the zone. The firm point-to-point transmission rate is a pool-wide postage stamp rate based on a sum of the individual zones' annual revenue requirements divided by the sum of the 12 coincident peak demands in each zone. Ancillary services will also be supplied on a non-pancaked basis within the PJM Control Area. Network and point-to-point rates: The PJM tariff provides for both network and point-to-point rates, each computed as described above. The network rate is an umbrella transmission rate that encompasses the totality of the network user's purchases. Point-to- point rates would apply to users who prefer to purchase transmission services on a transaction-by-transaction basis. Elimination of charges for non-firm point-to-point service: PJM will provide non-firm point-to-point transmission service without a transmission charge. Elimination of charges for pancaked losses: There will be no pancaking of losses from utility to utility or from zone to zone. Open-access 500 kV agreements: The three 500 kV agreements: the Lower Delaware Valley ("LDV") Agreement, the Extra-High Voltage ("EHV") Agreement, and the Susquehanna Eastern ("SE") Agreement would be modified to eliminate previously effective conditions on the use of those facilities, establish that use is to be determined in accordance with the PJM open-access tariff, and provide for the recovery of each owning utility's 500 kV costs through that utility's zonal rate. 5. Q: What are the specific effects of these changes on your market power analyses? A: These changes have two parallel specific, tangible effects on the Atlantic and Delmarva TDUs. Under PJM network service, Vineland -- Atlantic's only TDU -- will incur the same transmission cost and incur the same transmission losses whether it purchases power from Conectiv or from the most geographically remote PJM generating resource. Also, Delmarva's several TDUs will incur the same transmission cost and incur the same transmission losses whether they purchase power from Conectiv or from the most geographically remote PJM generating resource. 6. Q: What do these changes signify with respect to the transmission cost element of the delivered price test you have performed? A: For purposes of transmission cost, Atlantic and Delmarva and the other PJM members have converted PJM into a single integrated power market. 7. Q: Does the new PJM tariff provide for bid-based pricing? A. It does, subject to two conditions. First, bids must be based on costs. Second, members must bid all their units; i.e., no unit can be withheld from the market. As a consequence, no member may exert market power within PJM by withholding supply to the PJM market. 8. Q: May non-PJM members bid into the PJM dispatch? A: Yes. They may do so on a price basis if they have market-based rate authority and on a cost basis if they lack that authority. 9. Q: How will PJM handle transmission constraints? A: When a constraint occurs, PJM will invoke congestion pricing, which along with the requirement that bids be based on costs, will prevent any participant from obtaining or exerting market power over a constrained interface. In addition, the tariff provides mechanisms to facilitate the construction of transmission facilities. 10. Q: Please explain. A: Congestion pricing will limit any supplier's ability to control prices. When congestion occurs, PJM-established congestion prices apply to all generating units and loads in the congested zone. 11. Q: Did you consider congestion pricing in your market study? A: Yes, indirectly. Under the congestion pricing framework that has been proposed by the Supporting Companies, congestion prices would be based on differences between locational marginal prices. In our analysis, we have recognized that the Eastern Interface represents a limit on the transfer of power from the central and western PJM zones into eastern PJM. As discussed, we have considered this limit in our analyses and recognized that once this interface is constrained the Eastern PJM represents a separate market and that while economic capacity from the west and central zones will continue to be supplied to Eastern PJM, the delivered price that this capacity receives will be different than that received by Eastern PJM capacity. 12. Q: Did the Commission allow the Supporting Companies' congestion proposal to become effective immediately? A: No. This is the single exception I referred to earlier. The Commission ordered PJM to implement the PECO Energy congestion proposal "for interim implementation" only because of unresolved questions on how to implement the Supporting Companies' proposal. 13. Q: Does the Commission's temporary implementation of PECO Energy's congestion proposal affect your conclusion that Conectiv could not exercise market power during periods of constraint? A: No, for two reasons. First, the PECO Energy congestion proposal, along with bidding rules, will also prevent Conectiv from exploiting constraints to exercise market power. Second, the Commission order indicates that the Supporting Companies' proposal is likely to be adopted after a conference is convened to explore and resolve certain technical issues. 14. Q: Does PJM intend to evolve eventually to bidding based on price rather than cost? A: Yes. It is contemplated that PJM will evolve toward true price- based dispatch, but that change would take place on or after the next PJM restructuring filing submission and only with Commission approval. I have explained at length in my original report (Exh. No. ___ (JCD-1) at IV-22 to IV-25) that Conectiv will not be able to exercise market power in such an arrangement. Also, the initiation of price-based dispatch in PJM will require and be subject to a specific Commission finding that the PJM bid-based pricing arrangement will not give any participant, including Conectiv, the opportunity to manipulate prices or exercise market power in any other way. 15. Q: In your original report, you described two of your studies as based on the PJM restructuring proposal. Since the PJM restructuring filing was not accepted by the Commission, are those studies valid? A: Yes. Even with only the transmission component of the PJM restructuring plan in place as a result of the Commission's February 28th order and without the other PJM restructuring components, my analyses are valid due to the previously discussed PJM tariff features, including the elimination of rate and loss pancaking, and the fact that PJM is centrally dispatched based on least cost. However, while those studies continue to be valid, they are not in all respects the kind of analysis required by Appendix A to the Merger Policy Statement. Therefore, I rely only on the uncommitted capacity analysis from Exhibit No. ___ (JCD-1). 16. Q: What is Exhibit No. ___ (JCD-4)? A: This is my updated competitive analysis prepared in accordance with the Commission's Merger Policy Statement and its January 15, 1997 directive that the Applicants submit a competitive analysis meeting the requirements of Appendix A to that Statement. 17. Q: Will the merger of the Applicants have anticompetitive consequences? A: It will not. The proposed merger will not lessen competition in any of Conectiv's relevant markets. In fact, the merger will promote competition because it will strengthen the ability of Atlantic and Delmarva to compete with their larger PJM neighbors. 18. Q: Will the merger reduce the competitiveness of the long-run capacity markets? A: No, it will not. As shown in my original report, Exhibit No. ___ (JCD-2) at pages B-1 through B-8, there are no entry barriers to the markets in which the Applicants operate. Hence, the proposed merger will not reduce the competitiveness of the long-run capacity markets. 19. Q: Will the merger reduce the competitiveness of the short-run firm capacity markets for sales of a year or more? A: No, it will not. The Applicants are projected to not have any uncommitted capacity during the short-run period, which consists of the first four years after the merger is completed, i.e., 1998 to 2001. All the Applicants' capacity will be needed to serve their own and contractual loads. Indeed, each Applicant must purchase from others in order to have enough capacity to meet its service requirements. As a consequence, the Applicants have a zero share of this market. 20. Q: Did you evaluate whether the proposed merger would lessen competition in the non-firm energy markets? A: Yes. I used the merger policy statement's competitive screen analysis to determine whether the proposed merger would lessen competition in Conectiv's relevant geographic markets for this product. After first identifying the relevant product as non-firm energy, I then identified the customers likely to be affected by the merger (at pages 2-5 and Tables 1-3). The next step was to perform the delivered price test using variable production cost data from the FERC Form No. 1 to determine the suppliers who are within the geographic market (at pages 5-6 and Tables 4 and 5). 21. Q: How did transmission and ancillary services charges affect the delivered price test? A: As noted above, the PJM tariff eliminates the pancaking of transmission charges and losses and also makes ancillary services available through the Pool. Thus, suppliers from within PJM seeking to serve a specific market within PJM will incur the same transmission and ancillary service charges and the same level of losses regardless of where the supplier is located. Thus, these factors do not affect the delivered price test as applied to suppliers located within PJM (see page 7 and Table 6). Of course, these factors do affect suppliers outside of PJM such as Consolidated Edison. 22. Q: Are there restrictions on the physical deliverability of power within PJM? A: Yes. Constraints arise at certain infrequent periods at different load levels, as discussed at pages 7 and 8 of my report. These constraints occur at unique transmission points or at interfaces such as the so-called Eastern Interface which divides the eastern subregion of PJM from PJM's central and western zones. These constraints, when they occur, limit the amount of power which may be imported to the eastern PJM utilities from western PJM markets, and cause the eastern PJM subregion to become a distinct geographic market. The constraints do not shut off eastern PJM from the western and central PJM zones. However, the constraints do limit the amount of power from central and western PJM that can supply the eastern PJM market, and thus require off-cost dispatching of eastern generation or importing energy from New York to meet some limited part of that eastern PJM load. 23. Q: How does your determination of transfer capability in your present report differ from the determination in your original November 1996 report? A: It differs in two key respects. First, the original report focused primarily on 6,900 MW, the transfer capability of the Eastern Interface 500 kV facilities, and considered the combined transfer capability of both the 500 kV facilities and the below 500 kV facilities only in sensitivity analyses. However, both a valid application of the delivered price test and recognition of the effect of the new PJM tariff required that in this report we assess the transfer capability of the Eastern Interface as a whole inclusive of both the 500 kV facilities and the below 500 kV facilities. Second, in the first report we employed a static transfer capability. In this report, we recognize that the transfer capability of a voltage maintained interface varies depending on system conditions such as load, available generation, location of generation resources, and the use of certain capacitor banks. 24. Q: How did you determine the transfer capability of the interface? A: I evaluated the transfer capability of the interface at different load levels through an equation which is explained in Appendix 1 to my report. In the equation, we used load as the variable to predict changes in transfer capability. The electronic file included with this filing containing the source data for Appendix 1 plus other documents pertinent to Appendix 1 is entitled TCF/cast. 25. Q: How does load affect the transfer capability of the interface? A: Load reflects the conditions which affect Eastern Interface transfer capability. We used 56% of total PJM load to represent the Eastern PJM load based on information supplied by Mr. Mitchell and Mr. Morris and also because as load in PJM increases, load in the east typically grows at the same rate. If eastern generation dispatch follows the load increase thereby supporting system voltage, then the Eastern Interface capability also increases as a consequence of the strengthening of system voltage. Also, generally, as load increases, the lines making up the interface are more evenly used and that distribution of use tends to increase the interface capability. In addition, the PJM system operators will, as needed, utilize the capacitor bank capability referred to in the Mitchell and Morris testimony to improve flows, and therefore, increase the interface transfer capability. There are 33 capacitors at the Eastern Interface which can increase transfer capability by 1,450 MW. Since the capacitors are used as needed to serve the load, the load data reflect this capacitor use. Finally, as explained in the testimony of Mr. Mitchell and Mr. Morris, the impact of generation on transfer capability is affected by the actual units on line and their location within PJM. Therefore, there is likely to be greater variability in the transfer capability associated with a specific generation level than for load. 26. Q: Please explain Exhibit No. ___ (JCD-5). A: This exhibit was developed for the convenience of the parties to show on a single page the load levels and transfer capabilities used in the Exhibit No. ___ (JCD-4) analyses. As noted above, the transfer capability values which are shown in Columns (c) and (d) were developed through the formula set forth in Appendix 1 to Exhibit No. ___ (JCD-4). 27. Q: Please explain the "best estimate". A: The"best estimate" forecast reflects our best estimate of what the transfer capability will be for a specific load level. This best estimate was developed by applying our forecast of load for 1998 for the Eastern PJM to the equation presented in Appendix 1 of Exhibit No. ___ (JCD-4). Our load forecast was based on the actual 1995 load data and the 3% projected growth in net energy forecast in the Mid Atlantic Area Council Regional Reliability Council EIA-411 Report dated April 1, 1996. 28. Q: What is the purpose of the 95% confidence data shown in Exhibit No. ___ (JCD-5)? A: To reflect variations in the transfer capability of the Eastern Interface, we also developed a conservative estimate of the transfer capability based on a 95% confidence level. Because lower values for the transfer capability of the Eastern Interface reduce the amount of capacity offered by competitors in the relevant markets, we used in our analysis only the lower limit estimate of the transfer capability provided by this 95% confidence interval. This 95% confidence interval lower bound estimate of the transfer capability was developed by multiplying the forecast standard error by the appropriate value for the confidence interval desired and subtracting this number from the best estimate forecast. 29. Q: Do you have any additional comments regarding the "best estimate" and 95% confidence interval estimates? A: Yes. Three aspects of these transfer capability forecasts should be emphasized. First, the 95% confidence interval analysis recognizes that variations from the best estimate forecast can result in transfer capabilities that are above as well as below the best estimate forecast. We ignored the confidence interval transfer capability values above the best estimate values since use of those higher values would provide cumulative and redundant evidence that the merger will not have anticompetitive effects. Second, a 95% confidence interval indicates a 5% probability that the actual transfer capability is above or below the best estimate. Therefore, the probability that the actual transfer values will not be less than those resulting from the analysis is 97 1/2%, i.e., 95% + ((5%) (50%)). Third, we are not suggesting that the values shown in Exhibit No. ___ (JCD 5) resulting from the confidence interval analysis will apply 95% (or 97 1/2%) of the time. We believe that the best estimate will apply most of the time, and that there is a 97 1/2% probability that any variations from the best estimate will not result in transfer values less than we have used in our analysis. 30. Q: What additional support do you have for the use of these transfer capabilities? A: Off-cost generation occurs for multiple reasons. Although our earlier analysis of off-cost generation on the eastern side of the Eastern Interface indicated that it runs about 4% of the time (see Exhibit No. ___ (JCD-2), p. IV-18), our current analyses indicate that the Eastern Interface constraint causes off-cost generation to be run only approximately 1% of the time. Presented below are revised figures for the total number of hours that off-cost generation was run as a result of the Eastern Interface being constrained. 1994 1995 Jan-June 1996 ---- New Value 0 57 125 Old Value 597 109 254 Also, a comparison of the historic experience regarding the total number of hours that the Eastern Interface is constrained suggests that our 95% confidence level estimate of the transfer capability for the interface overstates the amount of time that the interface is likely to be constrained. Mr. Mitchell and Mr. Morris present PJM load flow data and provide engineering testimony supporting these transfer capability values. 31. Q: Aside from your best estimate and 95% confidence level estimate of the Eastern Interface transfer capability, what other data are shown on Exhibit No. ___ (JCD-5)? A: In Columns (e), (f) and (g), I show the PJM operator estimates of Eastern Interface capabilities at the specified Columb (b) load levels within a plus or minus 50 MW range. Column (e) contains the average of all operator estimates at each load level (not the average of the low and the high estimate at each load level). Column (f) shows the lowest operator estimate and Column (g) the highest operator estimate at each load level. Mr. Mitchell and Mr. Morris describe the process under which these operator estimates were made and demonstrate that these estimates tend to understate actual transfer values. Exhibit No. ___ (JCD-5) provides a side-by- side comparison of my estimates with the PJM operator estimates. 32. Q: Why are no PJM operator transfer capability estimates shown for Increments 10 through 14? A: The Appendix 1 equation, which was developed to generate the best estimate and 95% confidence level estimates as shown in Appendix 1 to my report, was applied to the entire PJM supply curve. Therefore, the best estimate and 95% confidence level estimate of the Eastern Interface transfer capability was provided for all segments of the supply curve, even the increments which represent extreme load conditions. Also, the total supply curve includes not only the generating capacity to meet the PJM load but also the generating capacity to meet the typical 15-25% reserve requirement. Thus, this portion of the supply curve reflects generating reserves which are used to maintain system reliability and are available to operate during peak periods when lower costs units are not available. The reason that there is no PJM operator transfer capability data shown for Increments 10 through 14 is that actual Eastern PJM load in 1995 did not reach the load levels indicative of Increments 10 through 14. Nevertheless, our analysis evaluated Increments 10 through 14 to reflect the transfer capability for the full range of existing resources in the supply curve and to reflect conditions which may occur under extreme load conditions as well as reserve requirements. This represents a more conservative and rigorous approach than the Commission has outlined in its Policy Statement, and as the Commission stated it is important to analyze market shares for all generating units at a price close to the competitive price in the relevant market. In that regard, the merging companies do own generating capacity within this portion of the supply curve. For those reasons, our analysis evaluated the entire supply curve and has shown that the merging companies will be unable to exercise market power anywhere along the supply curve. 33. Q: Could you explain the results presented in Exhibit No. ___ (JCD-5)? A: Exhibit No. ___ (JCD-5) shows that both the best estimate and 95% confidence level estimate of the Eastern Interface transfer capability are reasonable estimates of the transfer capability as compared to PJM operator estimates. In all but one case, the best estimate forecast is well within the range of the minimum and maximum PJM operator estimates of transfer capabilities at each increment. The only increment in which the best estimate forecast is not within the range of the PJM operator estimates is Increment 9; however, our analysis has also evaluated the impact of the transfer capability at the lower bound of a 95% confidence level estimate and the Eastern Interface remains unconstrained. In addition, the 95% confidence level estimate for Increment 9 is below the minimum PJM operator estimate transfer capability. Therefore, our analysis is even more conservative than the PJM operator estimates would suggest is necessary. The 95% confidence level estimate of the transfer capability also compares favorably to the PJM operator estimates of the transfer capability. The 95% confidence level estimate of the transfer capability is lower than the actual minimum PJM estimate of the transfer capability for all but three increments (Increments 2, 3 and 7). However, if the minimum PJM operator estimate is used rather than the 95% confidence level estimate at those three increments, the results are the same (e.g., the Eastern Interface remains unconstrained and the post-merger HHI and increase in HHI analysis is the same) (see Exhibit No. ___ (JCD-6)). Therefore, the 95% confidence level estimate of the transfer capability is also a reasonable analysis compared to the operator estimates, and in most instances, is even more conservative than the minimum operator estimate. 34. Q: Please explain Exhibit No. ___ (JCD-6). A: I discussed earlier the difference between the operator estimate of transfer values and my own best estimate and 95% confidence interval transfer values. Exhibit No. ___ (JCD-6) is a counterpart to Table 8 of Exhibit No. ___ (JCD-4), and documents my earlier testimony that the substitution of the minimum operator estimate of transfer values for Increments 2, 3 and 7 for my 95% confidence interval estimate does not result in a change in the HHIs. This is a significant result. Exhibit No. ___ (JCD-6) takes the lower of either my 95% confidence interval estimate or the lowest operator estimate and still shows a lack of anticompetitive effect resulting from the merger. These results assume even greater significance when it is considered that the operator estimate of transfer values is conservative and that the average of the operator estimates is appreciably higher than the operator's lowest estimate. Thus, Exhibit No. ___ (JCD-6) in combination with Exhibit No. ___ (JCD-5) and my principal Exhibit No. ___ (JCD-4) shows that our estimate of the transfer capability of the Eastern Interface is reasonable, and that even using the lowest operator estimate for the transfer capability at a specific increment, the merger will not confer any market power on Delmarva or Atlantic or on the two utilities combined. 35. Q: Please continue your explanation of your delivered price test. A: As more fully explained in my report (at pages 8-9), we developed a supply curve based on the delivered cost of generation for each of the suppliers in the market. We considered a supplier as "in the market" only if it could offer a delivered price which did not exceed by more than 5% the delivered price established by the Applicants' plants. 36. Q: For what capacity measures did you perform this analysis? A: I discuss capacity measures at pages 11 and 12 of the report. We performed the delivered price test for economic capacity, available economic capacity and total capacity. We did not perform a new test for uncommitted capacity because Atlantic and Delmarva do not have any uncommitted capacity. The results of this analysis for economic capacity are discussed at pages 12 to 15 of my report and shown on Tables 7-8. We developed this analysis based on a best estimate and a conservative estimate of Eastern Interface transfer capability at various load levels. Based on the same analysis, 1,700 MW of capacity was available from suppliers in New York State. 37. Q: Is 1,700 MW of capacity available from New York suppliers? A: Yes. While actual historic import levels are below this level, this amount of capacity is available for delivery to eastern PJM (see page 13, ftn. 16 of Exhibit No. ___ (JCD-4)). The critical fact in competitive analyses is not only the historic imports but the ability of a supplier physically and economically to access a market. If the supplier has that ability, the potential of the supplier to enter the market affects and modifies the behavior of market participants and, in particular, limits their ability to raise prices above competitive market price levels. A comparison of variable production costs in New York and PJM indicates that New York suppliers would actually be able to deliver in excess of 1,700 MW of economic capacity to PJM that is competitive with PJM economic capacity at the load levels shown in my exhibit. Thus, this level of capacity is properly considered as a resource that diminishes any market power that Conectiv could have. 38. Q: Are the HHIs resulting from this analysis within safe harbor levels? A: Yes, they are in every instance. The merged companies' market shares are also within acceptable levels as established by the Department of Justice's 35% leading firm standard and this Commission's 20% standard as employed in market-based rate cases. The highest combined market share for the merging companies is 15.7%. 39. Q: Where are the results of the available economic capacity analysis explained? A: They are explained at pages 15-17 of my report and shown on Tables 10 and 11. The merging companies' share of available economic capacity is negligible. 40. Q: Please comment on your total capacity analysis. A: The analysis is explained on pages 17 and 18 of the report and the results are shown on Tables 12 and 13. The results of this analysis are also within safe harbor levels and Conectiv's market share is only 12.4%. 41. Q: What overall conclusion do you reach from these analyses? A: This merger is unlikely to reduce competition in any of the merging companies' relevant markets. 42. Q: How do the results of your November Report compare with the results of the present analyses that you performed for the different capacity measures identified in Appendix A of the Merger Policy Statement? A: The analyses that we performed of a restructured PJM in our November 1996 Report provide results which are generally consistent with those achieved for the economic capacity analysis in our most recent report. See pages IV-34 through IV-38 of Exhibit No. ___ (JCD-2) for the results of our restructured market analysis presented in our November Report. I do note one difference. In our November analysis of the Eastern PJM market (for which we assumed a transfer capability of 6,900 MW for the Eastern Interface), the intermediate and peaking capacity measure produced an increase in the HHI of 119, which is higher than the safe harbor thresholds identified in the Horizontal Merger Guidelines. By contrast, the increases in HHIs for our economic capacity analyses that we performed in Exhibit No. ___ (JCD-3) were all below the safe harbor thresholds. The difference between these two analyses is explained by two factors. First, in our November analysis, we assumed a transfer capability for the Eastern Interface which is well below the level one would expect when intermediate and peaking capacity is being called upon. Secondly, in that analysis we were evaluating intermediate and peaking capacity only and did not consider the baseload capacity owned by suppliers. To profit from the withdrawal of intermediate or peaking capacity in an effort to increase market- clearing prices, a supplier must own a significant share of the operating capacity which has costs that are below the market- clearing price. By not considering the amount of baseload capacity controlled by Conectiv in the November analysis, we did not consider an important factor which is likely to influence whether the withdrawal of capacity is profitable. 43. Q: What would have been the effect of considering baseload capacity in the November report? A: Conectiv has a relatively limited amount of baseload capacity. Therefore, had we considered the baseload capacity in the analysis, the increase in HHI as shown in our November 1996 report would have been considerably less. This point can be seen by comparing the results of that November analysis using the intermediate and peaking capacity and the total capacity measure, which combines baseload capacity with intermediate and peaking capacity. The increase in HHI from the proposed merger for the total capacity measure was 76 for a moderately concentrated market post-merger, compared to 119 for the intermediate and peaking capacity measure, which was also a moderately concentrated market post-merger. 44. Q: How does the economic capacity measure outlined by the Commission in its Merger Policy Statement aggregate these different types of capacity? A: The economic capacity measure looks at all capacity controlled by suppliers that has a delivered price which is no more than 5% above the market price. Therefore, during peak periods when higher-cost peaking units would be expected to be establishing the market- clearing price, under the economic capacity measure, the vast majority of capacity controlled by the suppliers, including their baseload capacity, would likely be considered when determining the suppliers' economic capacity. 45. Q: Does the policy statement require additional analysis if safe harbor levels are not exceeded? A: It does not. Since the merger will not result in HHI increases in excess of safe harbor levels, there is no need to provide that analysis. 46. Q: Would you nevertheless comment on the policy statement's treatment of short-lived market concentrations arising from temporary constraints? A: Yes. The Commission has stated that short-lived concentrations could be acceptable if the merged utility cannot control prices during those periods of concentration or if there are multiple sellers in the market. 47. Q: Could Conectiv control prices during periods of transmission constraint? A: It could not for two reasons. First, as I have already testified, Conectiv's relevant markets will be workably competitive even during periods of constraint. Second, as I have already testified, PJM rules and bidding requirements would also prevent any utility, including Conectiv, from exercising market power during periods of constraint. 48. Q: During periods of constraint, are there multiple sellers into the eastern PJM market? A: As shown on Tables 7-10 of my report, Conectiv's market share will be small under all scenarios. This indicates that multiple sellers would be present in the market. 49. Q: Does the policy statement refer to de minimis concentrations? A: Yes. The statement does refer to de minimis concentrations, although it does not define what constitutes de minimis. Based on the analyses I have performed, Conectiv has no market power, even in de minimis amounts for very brief periods. 50. Q: Please summarize your testimony regarding short-lived concentrations. A: The policy statement indicates that short-lived HHIs above the Department of Justice screening levels are not an indication of market power and may be tolerated if there are other sellers in the congested market or if the merged company cannot control prices. In this instance, both policy statement criteria are satisfied: the merged company has a relatively small share of the congested non-firm energy markets, and further will have no control over pricing in those markets when they are congested. 51. Q: Does the policy statement also advise that additional analysis based on considerations cited in the Department of Justice merger guidelines could also establish that a merger will not harm competition even if concentration levels exceed safe harbor levels? A: It does. I have conducted such an analysis even though in this instance concentration levels are comfortably below safe harbor levels. For example, in our November 1996 Report (Exh. No. ___ (JCD-1)), I addressed the potential for entry and found that there were no barriers to entry that could be used by Conectiv to limit competition in the long-run. 52. Q: Do the merger guidelines view a relatively small market share as reducing the effect of high HHIs? A: Yes. As noted above, the merged company's highest market share is 15.7% under one capacity measure and is below this Commission's 20% and the Department of Justice's 35% market share test for indicating market power. Companies with relatively small shares of the total market will not easily be able to influence prices, even where markets are highly concentrated. Thus, under the Department of Justice guidelines, a relatively high increase in the HHI is offset when the merged company has a relatively small share of the market. 53. Q: Is the opportunity to collude a relevant factor? A: Yes. The threat to competition is regarded as reduced where there is little risk of collusive behavior by the merged company and others. There is no opportunity for Conectiv to collude with other suppliers. As noted above, prior to conversion to bid-based dispatch based on price, dispatch will be based on costs without the opportunity to withhold generation from the market. A future conversion to bid-based dispatch based on price cannot occur except by order of the Commission after a Commission determination that price based dispatch will not create the potential to engage in collusive behavior (see Exhibit No. ___ (JCD-1) at IV-12 and IV-13, App. A at A-3 to A-5). 54. Q: Will Conectiv have control over its entire portfolio of generation? A: No. A significant portion of the generating capacity of Delmarva (16.1%) and Atlantic (26%), the two smallest PJM members, is in the form of small shares in very large generating units (i.e., minority interests which effectively preclude Delmarva and Atlantic from being able to control the operation of these units) -- the Keystone and Conemaugh coal stations and the Peach Bottom, Salem and Hope Creek nuclear stations. These units are operated by PJM's much larger members (see Gerritsen Testimony at 21 and Table 14 of Exhibit No. ___ (JCD-4)). The Applicants have no control over the electric output of these stations and no way of limiting that output as a way of influencing prices. While I have counted the Applicants' ownership shares of the jointly-owned generating capacity in computing market share and market concentration data, the consequence is to overstate the Applicants' market influence (see Exhibit No. ___ (JCD-1) at IV-13). 55. Q: Does the actual market experience of the Conectiv transmission dependent utilities demonstrate the existence of competition? A: Yes. Atlantic's only TDU, Vineland, and two of Delmarva's TDUs, Dover and Easton, are not requirements customers. In the immediate past, these TDUs have operated under Interconnection Agreements pursuant to which (i) they had the opportunity to share in many of the benefits of the PJM pool, and (ii) they have been able to make and, in fact, for several years have made, many of their own power supply arrangements. The DEMEC members and ODEC are partial requirements customers who have made extensive power purchases from non-Delmarva sources, which shows that Delmarva lacks market power over those TDUs. These factors and the contracts they have been able to negotiate with Delmarva are described in Mr. Gerritsen's initial testimony. 56. Q: Do the guidelines recognize that a merger can produce procompetitive benefits? A: Yes. The guidelines also recognize that "the pricing benefit of mergers to the economy is their efficiency-enhancing potential which can increase the competitiveness of firms and results in lower prices to consumers" and that "[s]ome mergers that the Agency otherwise might challenge may be reasonably necessary to achieve significant net efficiencies" (Guidelines at ss.4). The Commission also observes in the merger policy statement (at 20) that "some merger proposals may strengthen weak firms and create stronger competition." Atlantic and Delmarva are the two smallest PJM members and the two utilities combined will still be the smallest in the PJM pool. Nevertheless, with its merged resources, Conectiv will be better able to competitively challenge the much larger PJM participants. Thus, the merger will promote competition rather than suppress it. In addition, Conectiv has a much better prospect of remaining an independent competitive force in PJM than Atlantic and Delmarva operating separately. The net effect of denying the merger could be to cause both utilities to be lost as independent participants in the PJM market through takeover by their much larger PJM neighbors. 57. Q: Please comment on the policy statement's mitigation analysis. A: The Commission has indicated that an otherwise objectionable merger can be approved if the merger applicants adopt steps to mitigate their market power. Even though this merger satisfies safe harbor criteria, the policy statement's mitigation analysis provides additional support for approval of this merger. 58. Q: What remedial steps have Delmarva and Atlantic already taken? A: Delmarva has already undertaken the expansion of the Red Lion Substation, which will be completed by May 31, 1997, which will decisively increase the access of on-Peninsula loads to off-Peninsula generating sources. Applicants have joined in the December 31, 1996 filing of a PJM-wide tariff. That filing does not prohibit the merged company from using congested transmission paths, which is a mitigation measure considered by the policy statement. However, the PJM filing meets the objective of the Policy Statement in that it deprives the merged company of any control over the use of a congested path, over the pricing of transmission service over the congested path and over the pricing of generation sold over the congested path. 59. Q: Does the new PJM tariff produce any other mitigation benefits? A: As I have already mentioned, the requirement that bids be based on costs and that all generation be bid in the new PJM tariff will prevent the merged company from exercising any control over prices during periods of constraint, and a conversion to price based dispatch will not occur except upon a Commission finding that the conditions associated with price base dispatch will not create anticompetitive effects. In addition, PJM pricing rules emulate some of the benefits derivable from real-time pricing as described in the Policy Statement. Therefore, the PJM tariff has the same counterbalancing effect on market power as real-time pricing. The Commission has also stated that remedial steps should directly address market power over the provision on generating services. The PJM tariff and the cost-based bidding requirement eliminates any potential Conectiv might have to exercise market power in the short-run energy markets during periods of transmission constraint. The PJM tariff, through elimination of pancaking of rates and losses and through making the PJM 500 kV facilities available on an open- access basis, has created a true open-access transmission arrangement which extends over one of the largest population areas in the country. Greatly expanding the boundaries of the geographic market, the tariff converts the entire PJM interconnection into a massive competitive arena. 60. Q: Have Delmarva and Atlantic committed to the formation of a PJM ISO? A: They have. The Commission regards an ISO as a major mitigation measure. 61. Q: Please summarize pages 20 to 27 of your testimony. A: I have considered various factors, as well as mitigation measures, which are viewed as having the effect of mitigating the effect of HHI scores that exceed safe harbor levels. Although this type of analysis is not needed for the Conectiv merger, since HHI scores do not exceed safe harbor levels, the analysis nevertheless provides an additional basis for approval of the merger. 62. Q: Do you have any other summary comment on your testimony? A: Yes. The screening analysis prepared at the direction of the Commission provides a conclusive showing that these two utilities, the smallest PJM members on a stand alone basis or on a combined basis, have no market power. The PJM tariff converts PJM into one of the largest electricity markets in the world. All of the HHI and market share results for the entire PJM market show that the merged companies have no market power. The Eastern Interface constraints, which occur only 1% of the hours of the year, do not change that result. Thus, with Eastern PJM viewed as a separate market, the merged companies still have no market power. The voltage affected transfer capability of the Eastern Interface has been accounted for in our analysis through our own estimates of transfer capability, and has been shown to be reasonable when compared to the PJM operator transfer capability estimates which understate the interface's actual transfer capability. Even on the basis of the lower of the values in my own analysis or in the system operator estimates, the results show that the merging companies lack market power and that the proposed merger will not adversely affect the competitiveness of the Eastern PJM market, the narrowest conceivable geographic market definition. These companies as they are now constituted or as they will be constituted post-merger are simply too small relative to other PJM members and operate in too large a market to possess market power or to adversely affect the competitiveness of their relevant markets. As I previously testified, the effect of this merger on competition will not be to diminish it, but rather to enhance it. 63. Q: Does that complete your supplemental testimony? A: It does. EX-99.3 4 EXHIBIT D-2.1 BEFORE THE PUBLIC SERVICE COMMISSION OF THE STATE OF DELAWARE IN THE MATTER OF THE APPLICATION ) OF DELMARVA POWER & LIGHT COMPANY ) AND CONECTIV, INC., FOR APPROVALS ) Docket No. 97-___ UNDER 26 DEL. C. ss. 215 ) (Filed February 24, 1997) ) APPLICATION OF DELMARVA POWER & LIGHT COMPANY AND CONECTIV, INC. FOR APPROVALS UNDER 26 DEL. C. ss. 215 Delmarva Power & Light Company ("Delmarva") hereby seeks all requisite authority and necessary Commission approvals under Delaware law for the merger of Delmarva and DS Sub, Inc. ("DS Sub"), which is part of an overall transaction with Atlantic Energy, Inc. ("AEI") and its wholly-owned subsidiary, Atlantic City Electric Company ("Atlantic Electric"). As part of the same transaction, Conectiv, Inc. ("Conectiv"), a newly-formed holding company incorporated in Delaware, hereby seeks all requisite authority and necessary Commission approvals under Delaware law for acquiring control of Delmarva. Applicants request approval within 60 days after filing and further request that, if approvals cannot be obtained within that period, the Commission establish expedited procedures to ensure that a final decision is made well before December 31, 1997. In support of this Application, Delmarva and Conectiv respectfully represent: I. PARTIES AFFECTED BY THE PROPOSED TRANSACTIONS DESCRIBED IN THE APPLICATION 1. Delmarva is a corporation organized under the laws of the State of Delaware and the Commonwealth of Virginia. Delmarva is engaged in the generation, transmission, distribution and sale of electric energy to approximately 437,500 residential, commercial and industrial customers in Delaware, Maryland and Virginia. Delmarva's retail electric service rates are established by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission. Delmarva's service territory covers all or portions of the State of Delaware, ten primarily Eastern Shore counties in Maryland, and two counties which comprise the Eastern Shore of Virginia. Delmarva also provides gas service to approximately 98,000 customers located in northern New Castle County, Delaware. Delmarva's principal business office is at 800 King Street, P.O. Box 231, Wilmington, Delaware 19899. 1. Conectiv, Inc. ("Conectiv") is a corporation organized under the laws of the State of Delaware. 50% of Conectiv's outstanding capital stock is currently owned by Delmarva, and 50% of Conectiv's outstanding capital stock is currently owned by AEI. Conectiv owns 100% of the outstanding capital stock of DS Sub, Inc. ("DS Sub"). After consummation of the transactions described herein, Conectiv will own 100% of the outstanding common stock of Delmarva and Atlantic Electric, and Conectiv will be a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). Conectiv's principal business office is at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899. 2. Atlantic Electric is a corporation organized under the laws of the State of New Jersey. Atlantic Electric is engaged in the generation, transmission, distribution and sale of electric energy to approximately 473,000 residential, commercial and industrial customers in the State of New Jersey. Atlantic Electric's retail rates are established by the New Jersey Board of Public Utilities. Atlantic Electric's service territory is principally the southern third of New Jersey and covers all or portions of eight counties in New Jersey. Atlantic Electric is a wholly-owned subsidiary of AEI. Atlantic Electric's principal business office is at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130. 3. AEI is a corporation organized under the laws of the State of New Jersey and is an exempt holding company under PUHCA. The stock of AEI is publicly held. AEI is the sole common shareholder of Atlantic Electric. AEI's principal business office is at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130. 4. DS Sub is a corporation organized under the laws of the State of Delaware. DS Sub was formed solely for the purpose of facilitating the proposed transactions. DS Sub will merge into Delmarva, with Delmarva as the surviving corporation. II. DESCRIPTION OF THE PROPOSED TRANSACTIONS 5. AEI, Delmarva, Conectiv and DS Sub are parties to an Agreement and Plan of Merger, dated August 9, 1996, as amended and restated as of December 26, 1996 (the "Merger Agreement" or the "Agreement"). The Merger Agreement is attached to this Application as Annex 1 to the Joint Proxy Statement of Delmarva Power & Light Company and AEI, Inc., dated December 26, 1996, (the "Proxy Statement")(Exhibit A). The Proxy Statement and the attached testimony of Barbara S. Graham provide a more detailed description of the transactions summarized below. 6. After receiving all required regulatory approvals, and on the terms and conditions set forth in the Merger Agreement: (i) AEI will merge with Conectiv, with Conectiv as the surviving corporation; and (ii) DS Sub will merge with Delmarva, with Delmarva as the surviving corporation. (iii) Together, these transactions result in a change in control over Atlantic Electric and Delmarva, both of which will become wholly-owned subsidiaries of Conectiv. (Collectively, the above transactions, including the change in control, are referred to herein and in testimony as the "Merger".) Exhibit B compares the pre- and post-Merger corporate structures of the entities involved in these transactions. 7. Upon consummation of the Merger, except for fractional, treasury, and affiliate-owned shares (if any), each share of the common stock of Delmarva will be converted into the right to receive one share of Conectiv common stock, and each share of the common stock of AEI will be converted into the right to receive 0.75 shares of Conectiv common stock and 0.125 shares of Conectiv Class A common stock. 8. As a result of these share exchanges, the holders of Delmarva and AEI common stock will hold approximately 60.6% and 39.4%, respectively, of Conectiv's common stock (based on the capitalization of each company as of September 30, 1996). Holders of AEI common stock will hold 100% of Conectiv Class A common stock. Shares of Conectiv common stock will represent approximately 94% of the voting power of the common stock, and shares of Conectiv Class A common stock will represent approximately 6% of that voting power. 9. The Merger will not affect the debt securities or preferred stock of either Delmarva or Atlantic Electric. 10. The Merger Agreement required the approval of the holders of shares of common stock in both Delmarva and AEI. The shareholders of Delmarva and AEI approved the Merger Agreement on January 30, 1997. 11. Upon consummation of the Merger, Conectiv will have five first-tier subsidiaries consisting of: two operating utilities (Delmarva and Atlantic Electric); a service company that will provide services (including, for example, accounting, financial, and legal services) to the operating utilities and other affiliates; and two existing non-utility subsidiaries of AEI. 12. Consummation of the Merger is contingent upon obtaining certain required regulatory approvals, including approvals from this Commission. In addition to this filing, filings have been, or will be, made with the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities and Exchange Commission ("SEC"), the U.S. Department of Justice and Federal Trade Commission, the New Jersey Board of Public Utilities, the Maryland Public Service Commission, the Virginia State Corporation Commission, and the Pennsylvania Public Utility Commission. 13. Delmarva and Conectiv request that the Commission approve this Application within 60 days. The target date for receiving all necessary regulatory approvals, fulfilling all other conditions of the Merger Agreement, and closing on the Merger is December 31, 1997. Delays beyond that time would likely increase the total transaction and transition costs while delaying the realization of Merger-related benefits. Delmarva and Conectiv, therefore, request that the Commission expedite consideration of this Application. III. THE PROPOSED MERGER AND CHANGE OF CONTROL IS IN ACCORDANCE WITH LAW, FOR A PROPER PURPOSE AND CONSISTENT WITH THE PUBLIC INTEREST 14. The Commission has jurisdiction over the proposed transactions pursuant to 26 Del. C. ss.ss. 215(a)(1) and (b), which, respectively, require Commission approval: (1) prior to the merger of Delmarva with any other person or company, i.e., the merger with DS Sub; and (2) prior to any other company, in this case, Conectiv, acquiring control over Delmarva. As set forth in 26 Del. C. ss. 215(d): The Commission shall approve any such proposed merger . . . or acquisition when it finds that the same is to be made in accordance with law, for a proper purpose and is consistent with the public interest. 15. Attached as Exhibit C is an opinion of Delaware counsel that, upon meeting the conditions set forth in the Merger Agreement, including receiving the necessary approvals of this Commission, the proposed transactions will be in accord with the statutory standard. Further support as to the proposed transactions' consistency with the public interest is described below and more thoroughly addressed in testimony attached hereto. 16. As explained in the attached testimony of Mr. Howard E. Cosgrove, the primary purpose of the Merger is to create a regional company from two companies that share a common vision of the strategic path necessary to succeed in the increasingly competitive utility and energy services marketplace. 17. The Merger is expected to produce benefits, including cost savings through greater efficiencies and economies of scale, a more diverse customer base, improved credit quality and liquidity of securities, and a regional platform for growth. More specifically: (i) Achieving cost savings through greater efficiencies and economies of scale will permit each of the operating utilities to offer more competitively-priced electric service and energy-related products and services than would otherwise be possible. Scale has importance in many areas, including utility operations, product development, advertising and corporate services. (ii) Enhancing geographic and customer diversity will improve the stability of revenues to Conectiv as a whole. (iii) Improving overall credit quality and liquidity of securities will permit each of the operating utilities to fund continued growth at lower cost. (iv) Creating a regional platform for marketing utility and non-utility products and services in the mid- Atlantic region and beyond will strengthen the ability of the combined company to offer additional products and services to customers. 18. The Merger will not increase Delmarva's Delaware electric retail base or fuel rates. Delmarva and Atlantic Electric plan to remain separate operating utilities with separate non-blended base and fuel rates as is the case today. 19. The Merger will not have an adverse effect on competition among suppliers of utility services. Even after the Merger, the combined company will be the smallest member of the Pennsylvania-New Jersey-Maryland Interconnection Association. To the extent that retail competition is permitted to occur by the Commission, the existence of these larger utilities in the region will ensure that the combined companies have no market power over electricity supplies in their traditional service territories. The combined companies will also have enhanced ability to compete in retail markets in the region. 20. The Merger will not adversely affect service to Delmarva's Delaware customers. Both companies are committed to maintaining and potentially improving their existing high standards of reliability and customer service. Merger-related savings will be obtained primarily through achieving economies of scale, such as elimination of duplicative departments and systems and reductions in the total number of employees. 21. The combined companies will continue to maintain a significant local workforce in each of the States in which they operate. Overall, Conectiv expects a reduction of approximately 10% (or 400 positions) in the combined utilities' workforce. As further explained by Mr. Cosgrove, the combined companies recognize that a local workforce is necessary to maintain excellent customer service levels and to respond to the particular needs within each of the States that the operating utilities will serve. In New Jersey, for example, meeting the special needs of the casino industry, recreational communities and local farming will continue to be a priority. On the Delmarva Peninsula, the special needs of the financial services and chemical sectors of the economy, along with recreational and farming communities, will remain a priority. Although some current employees of Atlantic Electric are expected to relocate their offices to Delaware, where Conectiv's headquarters will be located, Atlantic Electric will retain a significant number of employees in New Jersey, Delmarva will retain a significant number of employees throughout the Delmarva Peninsula, and expected reductions in duplicative staff will be handled fairly and even-handedly. 22. The proposed change of control over Delmarva and the resulting holding company structure avoids further multiple incorporation in New Jersey, Delaware and Virginia, simplifies contract and franchise issues, and facilitates the process of maintaining separate utility base and fuel rates. IV. TREATMENT OF MERGER SAVINGS 23. The Merger is expected to save approximately $500 million (net of transaction and transition costs) over the first ten years after the Merger is consummated. The estimated cost savings are supported by Mr. Thomas Flaherty of Deloitte & Touche Consulting Group in his attached testimony and related exhibits. The methodology for determining how merger-related costs and savings are assigned is supported by the testimony of Messrs. David G. Dougher and William R. Moore, Jr. 24. Delmarva and Atlantic Electric are proposing in their applications before their respective retail regulatory commissions that one-third of each State's allocable share of estimated average annual net merger savings over the first 10 years after consummation of the Merger be available for sharing with customers. The precise method to implement this sharing should be established by each regulatory agency, consistent with the goals and objectives of the particular State. 25. As described in more detail in the testimony of Mr. Paul S. Gerritsen, Delmarva and Conectiv specifically propose that one-third of the allocated net merger savings be used to reduce Delaware retail electric and gas rates, effective when the Merger closes. Other alternative uses, instead of a rate decrease, that would also be acceptable to Delmarva and Conectiv include: (i) using this amount to reduce Delmarva's stranded costs, (ii) using this amount to fund societal programs, such as demand-side management programs or low income weatherization programs, or to fund economic development activities, or (iii) any combination of any of the above or other uses that the Commission determines to be appropriate. 26. Delmarva would be at risk to achieve the level of projected savings and customers would benefit as proposed even if achieved savings are less than projected. If, on the other hand, actually achieved savings are greater than projected, with the result that Delmarva's actual earnings rise above authorized levels, the Commission retains the authority to adjust base rates accordingly, consistent with traditional statutory and regulatory practices. V. ACCOUNTING AND MISCELLANEOUS INFORMATION ABOUT THE MERGER 27. For accounting purposes, the Merger is treated as an acquisition by Delmarva of AEI. As such, the Merger will be recorded using the "purchase method" of accounting for business combinations in accordance with Accounting Principles Board ("APB") Opinion No. 16. Since Delmarva and Atlantic Electric have publicly-held debt securities and preferred stock, so-called "push down" accounting will not be utilized (i.e., the acquisition premium will appear on Conectiv's books and not "pushed down" to Delmarva's or Atlantic Electric's books). Separate financial statements, substantially the same as the current financial statements of Delmarva and Atlantic Electric, will continue to be issued. The assets of Delmarva and Atlantic Electric will continue to be recorded on their books and records at the same values as before the Merger, with no adjustment to restate common equity amounts or to record any acquisition premium. The direct transaction costs of the Merger are being recorded by Delmarva in Account 186 (Miscellaneous Deferred Debits), which will be transferred to Conectiv upon Closing, and have been expensed as incurred by AEI. Both Delmarva and AEI are expensing indirect costs and internal labor costs as incurred. Pro forma combined and consolidated balance sheets and statements of income, including explanatory notes, for Delmarva, AEI and Conectiv are contained in Exhibit A at 115-140. The testimony of Mr. David G. Dougher further explains the intended accounting treatment for the transactions. 28. Delmarva and Conectiv commit that the transaction and transition costs of the Merger, including the acquisition premium, will not be reflected in retail rates except to the extent that those items are at least offset by Merger-related savings. 29. Conectiv's service company subsidiary (the "Service Company") will include many employees who are currently employed by Delmarva or Atlantic Electric. The SEC has oversight over the arrangements by which Service Company costs are charged and assigned to the related utilities and affiliates. When the Service Company arrangements are finalized for filing with the SEC, copies will be provided to this Commission. Delmarva and Conectiv also commit to submit to this Commission's jurisdiction any issues regarding the ratemaking treatment of any Service Company costs assigned or allocated to Delmarva. Because the bulk of the expected cost savings are in administrative-type functions that will be performed by the Service Company, it is expected that these cost assignment issues will involve how best to allocate a lower overall cost structure. 30. Attached hereto are the following Exhibits: Exhibit A Proxy Statement of December 26, 1996, including as Annex I the Agreement and Plan of Merger, dated August 9, 1996, as amended and restated as of December 26, 1996. Exhibit B Corporate Structures Prior to and After Transaction. Exhibit C Opinion of Delaware Counsel Exhibit D Maps 31. Attached hereto in support of this Application and on behalf of both Delmarva and Conectiv are the testimony and exhibits of the following: Howard E. Cosgrove Barbara S. Graham Thomas J. Flaherty David G. Dougher Paul S. Gerritsen William R. Moore, Jr. 32. Attached is a draft public notice for Commission consideration. 33. Communications and correspondence relating to the proceedings herein should be sent to: Paul S. Gerritsen Delmarva Power & Light Company 800 King Street, P. O. Box 231 Wilmington, Delaware 19899 Randall V. Griffin, Esq. Delmarva Power & Light Company 800 King Street, P. O. Box 231 Wilmington, Delaware 19899 James E. Franklin, II, Esq. Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234 VII. REQUESTED APPROVALS WHEREFORE, Delmarva Power & Light Company and Conectiv, Inc. request that the Commission: A. Order the publication of public notice; B. Approve the merger of DS Sub into Delmarva; C. Approve the acquisition of control of Delmarva by Conectiv; D. Grant all other authority and approvals required from the Commission under Delaware law for the transactions described herein; E. Take the above actions within 60 days and otherwise expedite review and consideration of the proposed transactions so that closing may occur on or before December 31, 1997; and F. With respect to all such authority and approvals, grant them subject to the closing of the transactions contemplated by the Merger Agreement. Respectfully submitted, By: _______________________ Corporate Secretary Delmarva Power & Light Company By: ________________________ President Conectiv, Inc. Counsel for Delmarva and Conectiv: Dale G. Stoodley, Esq. Randall V. Griffin, Esq. Delmarva Power & Light Company P. O. Box 231 Wilmington, DE 19899 302/429-3757 Dated: February 24, 1997 EX-99.4 5 EXHIBIT D-3.1 BEFORE THE COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION IN THE MATTER OF THE APPLICATION ) OF DELMARVA POWER & LIGHT COMPANY ) AND CONECTIV, INC. FOR APPROVALS ) Case No. PUA UNDER VA. CODE ss.56-88.1 ) AND CHAPTER 4 OF TITLE ) 56 OF THE CODE OF VIRGINIA ) APPLICATION Delmarva Power & Light Company ("Delmarva") and Conectiv, Inc. ("Conectiv") hereby seek all requisite authority and necessary Commission approvals under Virginia law for Conectiv's acquiring control of Delmarva and for transactions between Delmarva and a service company to be formed by Conectiv. In support of this Application, Delmarva and Conectiv respectfully state: I.PARTIES AFFECTED BY THE PROPOSED TRANSACTIONS DESCRIBED IN THIS APPLICATION 1. Delmarva is a corporation organized under the laws of the State of Delaware and the Commonwealth of Virginia. Delmarva is engaged in the generation, transmission, distribution, and sale of electric energy to approximately 19,000 retail customers and one wholesale customer in Virginia's two Eastern Shore counties. The Company's Virginia customers produce approximately 3% of Delmarva's annual electric revenues. The remainder of Delmarva's 437,500 residential, commercial, and industrial customers are located in Delaware and ten primarily Eastern Shore counties in Maryland. Delmarva's retail electric service rates are established by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission. Delmarva also provides natural gas service to approximately 98,000 customers located in northern New Castle County, Delaware. Delmarva's principal business office is located at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899. 2. Atlantic City Electric Company ("Atlantic Electric") is a corporation organized under the laws of the State of New Jersey. Atlantic Electric is engaged in the generation, transmission, distribution, and sale of electric energy to approximately 473,000 residential, commercial, and industrial customers in the State of New Jersey. Atlantic Electric's retail rates are established by the New Jersey Board of Public Utilities. Atlantic Electric's service territory is principally the southern one-third of New Jersey and covers all or portions of eight counties in New Jersey. Atlantic Electric is a wholly-owned subsidiary of Atlantic Energy, Inc. ("AEI"). Atlantic Electric's principal business office is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234. 3. AEI is a corporation organized under the laws of the State of New Jersey and is an exempt holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). The common stock of AEI is publicly held. AEI is the sole common shareholder of Atlantic Electric. AEI's principal business office is located at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234. 4. Conectiv is a corporation organized under the laws of the State of Delaware. Conectiv was formed in mid-1996 in connection with the transactions described in this Application. 50% of Conectiv's outstanding capital stock is currently owned by Delmarva, and 50% of Conectiv's outstanding capital stock is currently owned by AEI. Conectiv owns 100% of the outstanding capital stock of DS Sub, Inc. ("DS Sub"). After consummation of the transactions described herein (the "Merger"), Conectiv will own 100% of the outstanding common stock of Delmarva and Atlantic Electric, and Conectiv will be a registered holding company under PUHCA. Conectiv's principal business office is located at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899. 5. DS Sub is a corporation organized under the laws of the State of Delaware. DS Sub was formed solely for the purpose of facilitating the Merger. DS Sub will merge into Delmarva, with Delmarva as the surviving corporation. II. DESCRIPTION OF THE PROPOSED TRANSACTIONS 6. Delmarva, Conectiv, AEI, and DS Sub are parties to an Agreement and Plan of Merger, dated as of August 9, 1996, as amended and restated as of December 26, 1996 (the "Merger Agreement" or the "Agreement"). The Merger Agreement is attached to this Application as Annex 1 to the Joint Proxy Statement of Delmarva Power & Light Company and AEI, Inc., dated December 26, 1996 (the "Proxy Statement")(Exhibit A). The Proxy Statement provides a more detailed description of the transactions summarized below. 7. After receiving all required regulatory approvals, and on the terms and conditions set forth in the Merger Agreement: (i) AEI will merge with Conectiv, with Conectiv as the surviving corporation; and (ii) DS Sub will merge with Delmarva, with Delmarva as the surviving corporation. (iii) Together, these transactions result in a change in control over Delmarva and Atlantic Electric, both of which will become wholly-owned subsidiaries of Conectiv. Exhibit B compares the pre- and post-Merger corporate structures of the entities involved in these transactions. 8. Upon consummation of the Merger, except for fractional, treasury, and affiliate-owned shares (if any), each share of the common stock of Delmarva will be converted into the right to receive one share of Conectiv common stock, and each share of the common stock of AEI will be converted into the right to receive 0.75 shares of Conectiv common stock and 0.125 shares of Conectiv Class A common stock. 9. As a result of these share exchanges, the holders of Delmarva and AEI common stock will hold approximately 60.6% and 39.4%, respectively, of Conectiv's common stock (based on the capitalization of each company as of September 30, 1996). Holders of AEI common stock will hold 100% of Conectiv Class A common stock. Shares of Conectiv common stock will represent approximately 94% of the voting power of the common stock, and shares of Conectiv Class A common stock will represent approximately 6% of that voting power. 10. The Merger will not affect the debt securities or preferred stock of either Delmarva or Atlantic Electric. 11. The Merger Agreement required the approval of the holders of shares of common stock in both Delmarva and AEI. The shareholders of Delmarva and AEI approved the Merger Agreement on January 30, 1997. 12. Upon or shortly after consummation of the Merger, Conectiv will have five first-tier subsidiaries consisting of: two operating utility companies (Delmarva and Atlantic Electric); a service company that will provide services (including, for example, accounting, financial, and legal services) to the operating utility companies and other affiliates; and two existing non-utility subsidiaries of AEI. 13. Consummation of the Merger is contingent upon obtaining certain required regulatory approvals, including approvals from this Commission. In addition to this filing, filings have been, or will be, made with the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities and Exchange Commission, the U. S. Department of Justice and Federal Trade Commission, the Delaware Public Service Commission, the Maryland Public Service Commission, the New Jersey Board of Public Utilities, and the Pennsylvania Public Utility Commission. 14. The target date for receiving all necessary regulatory approvals, fulfilling all other conditions in the Merger Agreement, and closing on the Merger is December 31, 1997. Delays beyond that time would likely increase total transaction and transition costs while delaying realization of the benefits of the Merger. Delmarva and Conectiv therefore request that the Commission expedite consideration of this Application. III. APPROVALS SOUGHT 15. Conectiv's acquisition of control over Delmarva requires the Commission's prior approval under the Utility Transfers Act, Va. Code ss.56-88 et seq. Va. Code ss.56-88.1 provides, in pertinent part, that: No person . . . shall, directly or indirectly, acquire . . . control of (i) a public utility within the meaning of this chapter . . . without the prior approval of the Commission. For purposes of this section, "control" means (i) the acquisition of twenty-five percent or more of the voting stock or (ii) the actual exercise of any substantial influence over the policies and actions of any public utility . . . . 16. The Commission shall approve a person's acquiring control over a public utility in the Commonwealth if it finds that "adequate service to the public at just and reasonable rates will not be impaired or jeopardized" by permitting such a transaction to occur. Va. Code ss.56-90. 17. Delmarva and Conectiv also seek approvals under the Affiliates Act, Va. Code ss.56-76 et seq., for transactions between Delmarva and the service company to be formed by Conectiv, since Delmarva and the service company are expected to be affiliates within the meaning of the Affiliates Act. At this juncture, however, detailed information about transactions between Delmarva and the service company is not yet available. Delmarva and Conectiv will supplement this Application and submit such detailed information as soon as it is available. Delmarva and Conectiv respectfully request that the Commission begin its consideration of the Merger-related aspects of this Application prior to the submission of detailed information related to approvals required under the Affiliates Act. 18. Delmarva and Conectiv also seek any other necessary approvals under Virginia law for the proposed transactions described in this Application, except that Delmarva shall separately seek any approvals required under the Virginia Stock Corporation Act at the time of the closing on the Merger. IV. THERE WILL BE NO IMPAIRMENT OF ADEQUATE SERVICE TO THE PUBLIC AT JUST AND REASONABLE RATES 19. Conectiv's acquiring control of Delmarva on the terms and conditions set forth in the Merger Agreement satisfies the applicable statutory standard. 20. The primary purpose of the Merger is to create a regional company from two companies that share a common vision of the strategic path necessary to succeed in the increasingly competitive utility and energy services marketplace. 21. The Merger is expected to produce benefits, including cost savings, through greater efficiencies and economies of scale, a more diverse customer base, improved credit quality and liquidity of securities, and a regional platform for growth. More specifically: (i) Achieving cost savings through greater efficiencies and economies of scale will permit each of the operating utility companies to offer more competitively-priced electric service and energy-related products and services than would otherwise be possible. Scale has importance in many areas, including utility operations, product development, advertising and corporate services. (ii) Enhancing geographic and customer diversity will improve the stability of revenues for Conectiv as a whole. (iii) Improving the overall credit quality and liquidity of securities will permit each of the operating utility companies to fund continued growth at lower cost. (iv) Creating a regional platform for marketing utility and non-utility products and services in the mid-Atlantic region and beyond will strengthen the ability of the combined company to offer additional products and services to customers. 22. The Merger will not increase Delmarva's Virginia retail electric base or fuel rates. Conectiv expects to retain Delmarva and Atlantic Electric as separate operating utility companies, with separate base and fuel rates, as is the case today. 23. The Merger will not have an adverse effect on competition among suppliers of utility services. Even after the Merger, the combined companies will be the smallest member of the Pennsylvania-New Jersey-Maryland Interconnection Association. To the extent that retail competition is permitted to occur by the Commission or by the regulatory agencies in other states, the existence of these larger utilities in the region will ensure that the combined companies have no market power over electricity supplies in their traditional service territories. The combined companies will also have enhanced ability to compete in the retail markets in the region. 24. The Merger will not adversely affect service to Delmarva's Virginia customers. Both companies are committed to maintaining and potentially improving their existing high standards of service reliability and customer service. Merger-related savings will be obtained primarily through achieving economies of scale, such as elimination of duplicative departments and systems and reductions in the total number of employees. 25. Overall, an expected reduction of approximately 10% (or 400 positions) may occur as a result of the Merger. The combined companies recognize, however, that a local workforce is necessary to maintain high-quality customer service levels and to respond to the particular needs within each of the States in which the operating utilities will provide electric service. In New Jersey, for example, meeting the special needs of the casino industry, recreational communities, and farming communities will continue to be a priority. On the Delmarva Peninsula, the special needs of the financial services and chemical sectors of the economy, along with the recreational and farming communities served by Delmarva, will remain a priority. Although some current employees of AEI and Atlantic Electric are expected to relocate their offices to Delaware, where Conectiv's headquarters will be located, Atlantic Electric will have a significant number of employees in New Jersey, Delmarva will have a significant number of employees throughout the Delmarva Peninsula, and expected reductions in duplicative staff will be handled fairly and even-handedly. 26. The proposed change of control over Delmarva and the resulting holding company structure avoids further multiple incorporation, simplifies contract and franchise issues, and facilitates the process of maintaining separate utility base and fuel rates. 27. The Merger is expected to save approximately $500 million (net of transaction and transition costs) over the first ten years after the Merger is consummated. 28. The operating utility companies are proposing in each State that one-third of each State's allocable share of estimated average annual net Merger savings over the first 10 years after consummation of the Merger be available for sharing with customers immediately following the Merger. The precise method for implementing this sharing concept should be established by each regulatory agency, consistent with the goals and objectives of the State in which the operating utility company provides service. In Delaware and Virginia, Delmarva is proposing that one-third of the allocable share of estimated average annual net Merger-related savings be used to reduce the base rates of Delmarva's retail electric service customers immediately upon consummation of the Merger. Other alternative uses of such savings include reducing stranded costs in advance of the advent of competition among electricity suppliers and/or funding programs that might benefit customers, such as low income energy assistance, weatherization programs, or economic development efforts. 29. Delmarva would be at risk to achieve the projected level of Merger-related savings, and customers would benefit under Delmarva's proposal even if achieved savings are less than projected, or the realization of estimated savings is delayed. If, on the other hand, actual achieved Merger-related savings are higher than projected, with the result that Delmarva's actual earnings rise above authorized levels, the Commission retains the authority to adjust base rates accordingly, consistent with traditional statutory and regulatory practices. 30. To effect the proposed post-Merger base rate reduction, Delmarva proposes that the base rates for each class of Virginia electric retail customers be reduced by the same percentage on a total revenue basis (less any taxes). Within each rate class, revenue decrease dollars would be used to reduce each current base rate component (after excluding fuel costs included in base rates) by the same percentage. Using this method, every customer's bill would decrease. V. ACCOUNTING AND MISCELLANEOUS INFORMATION ABOUT THE MERGER 31. For accounting purposes, the Merger is treated as an acquisition of AEI by Delmarva. As such, the Merger will be recorded using the "purchase method" of accounting for business combinations, in accordance with Accounting Principles Board ("APB") Opinion No. 16. Since Delmarva and Atlantic Electric have publicly-held debt securities and preferred stock, so-called "push down" accounting will not be utilized (i.e., the acquisition premium will appear on Conectiv's books and not "pushed down" to the books of Delmarva or Atlantic Electric). Separate financial statements, substantially the same as the current financial statements of Delmarva and Atlantic Electric, will continue to be issued. The assets of Delmarva and Atlantic Electric will continue to be recorded on their books and records at the same values as before the Merger, with no adjustment to restate common equity amounts or to record any acquisition premium. The direct transaction costs of the Merger are being recorded by Delmarva in Account 186 (Miscellaneous Deferred Debits), which will be transferred to Conectiv upon Closing, and have been expensed as incurred by AEI. Delmarva and AEI are expensing indirect costs and internal labor costs as incurred. Pro forma combined and consolidated balance sheets and statements of income, including explanatory notes, for Delmarva, AEI, and Conectiv are contained in Exhibit A at Pages 115-140. 32. Delmarva and Conectiv commit that the transaction and transition costs of the Merger, including the acquisition premium, will not be reflected in retail rates except to the extent that those items are at least offset by Merger-related savings. 33. The service company to be formed by Conectiv will include many employees who are currently employed by Delmarva or Atlantic Electric. The Securities and Exchange Commission has oversight over the arrangements by which service company costs are charged and assigned to related operating utility companies and affiliates. Delmarva and Conectiv commit to submit to this Commission's jurisdiction any issues regarding the ratemaking treatment of any service company costs assigned or allocated to Delmarva. Because the bulk of the expected Merger-related savings are in administrative-type functions that will be performed by the service company, it is expected that these cost assignment and allocation issues will involve how best to allocate a lower overall cost structure. 34. Attached as Exhibit C are maps showing the electric service territories of Delmarva and Atlantic Electric. Attached as Exhibit D is a calculation of the Virginia retail share of estimated annual average net Merger-related savings, including the amount by which Delmarva proposes that Virginia retail electric base rates be reduced upon consummation of the Merger. 35. Except for pleadings, which should be sent to counsel, communications and correspondence relating to this Application should be sent to: Paul S. Gerritsen, Vice President, Delmarva Power & Light Company, 800 King Street, P. O. Box 231, Wilmington, DE 19899, with copies to counsel and to James E. Franklin, II, Esquire, Atlantic City Electric Company, 6801 Black Horse Pike, Egg Harbor Township, NJ 08234. V. PRAYER FOR RELIEF WHEREFORE, Delmarva Power & Light Company and Conectiv, Inc. request that the Commission: A. Expedite consideration of the Merger-related aspects of this Application; B. Approve Conectiv's acquiring control of Delmarva as a result of the transactions contemplated by the Merger Agreement on the terms and conditions set forth in the Merger Agreement and this Application pursuant to Va. Code ss.56-88.1; C. Upon submission of detailed information concerning transactions between Delmarva and the service company to be formed by Conectiv, approve such transactions under the Affiliates Act; D. Grant all other authority and approvals required under Virginia law for the transactions described herein, except for approvals required under the Virginia Stock Corporation Act; and E. With respect to all such authority and approvals, grant them subject to the condition that the closing on the transactions contemplated by the Merger Agreement occur. Respectfully submitted, DELMARVA POWER & LIGHT COMPANY By ______________________________ Corporate Secretary CONECTIV, INC. By ______________________________ President Peter F. Clark Legal Department P. O. Box 231 -- 800 King Street Wilmington, DE 19899 302/429-3069 Guy T. Tripp, III Hunton & Williams Riverfront Plaza -- East Tower 951 East Byrd Street Richmond, VA 23219 804/788-8328 Dated: February 25, 1997 STATE OF DELAWARE ) ) ss. COUNTY OF NEW CASTLE ) On this 24th day of February, 1997, personally came before me, the subscriber, a Notary Public in and for the state and county aforesaid, Donald P. Connelly, an officer of Delmarva Power & Light Company, a corporation existing under the laws of the State of Delaware and the Commonwealth of Virginia, party to this Application, known to me personally to be such, and acknowledged this Application to be his act and deed and the act and deed of such corporation, that the signature of such officer is in his own proper handwriting, and that the facts set forth in this Application are true and correct to the best of his knowledge, information, and belief. ------------------------ Subscribed and sworn before me this 24th day of February, 1997. ------------------------- Notary Public My Commission Expires:____/____/____ STATE OF DELAWARE ) ) ss. COUNTY OF NEW CASTLE ) On this 24th day of February, 1997, personally came before me, the subscriber, a Notary Public in and for the state and county aforesaid, Barbara S. Graham, an officer of Conectiv, Inc., a corporation existing under the laws of the State of Delaware, party to this Application, known to me personally to be such, and acknowledged this Application to be her act and deed and the act and deed of such corporation, that the signature of such officer is in her own proper handwriting, and that the facts set forth in this Application are true and correct to the best of her knowledge, information, and belief. ------------------------ Subscribed and sworn before me this 24th day of February, 1997. ------------------------ Notary Public My Commission Expires:____/____/____ EX-99.5 6 EXHIBIT D-4.1 STATE OF NEW JERSEY BOARD OF PUBLIC UTILITIES - ------------------------------------: : IN THE MATTER OF THE PETITION : OF ATLANTIC CITY ELECTRIC : PETITION : COMPANY AND CONECTIV, INC. : FOR APPROVAL UNDER : N.J.S.A.ss.48:2-51.1 AND : N.J.S.A. ss. 48:3-10 OF A CHANGE : IN OWNERSHIP AND CONTROL : - ------------------------------------: TO THE HONORABLE COMMISSIONERS OF THE NEW JERSEY BOARD OF PUBLIC UTILITIES: 1. Petitioner, Atlantic City Electric Company ("Atlantic Electric") is a corporation organized under the laws of the State of New Jersey. Atlantic Electric is engaged in the generation, transmission, distribution and sale of electric energy to approximately 473,000 residential, commercial and industrial customers in the State of New Jersey. Atlantic Electric's service territory is principally the southern third of New Jersey and covers all or portions of eight counties in New Jersey. Atlantic Electric is a wholly-owned subsidiary of Atlantic Energy, Inc. ("AEI"). Atlantic Electric's principal business office is at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130. Co-Petitioner, Conectiv, Inc. ("Conectiv"), is a corporation organized under the laws of the State of Delaware. 50% of Conectiv's outstanding capital stock is currently owned by AEI and 50% of Conectiv's outstanding capital stock is currently owned by Delmarva Power & Light Company ("Delmarva"). Conectiv's principal business office is at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899. 2. Communications and correspondence relating to the proceedings herein should be sent to: Stephen B. Genzer, Esq. Reynold Nebel, Jr., Esq. LeBoeuf, Lamb, Greene & MacRae, L.L.P. One Riverfront Plaza Newark, New Jersey 07102-5490 with copies to Petitioner at the following address: James E. Franklin, II, Esq. Louis M. Walters Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 and copies to Delmarva at the following address: Paul S. Gerritsen Delmarva Power & Light Company 800 King Street, P. O. Box 231 Wilmington, Delaware 19899 3. Atlantic Electric and Conectiv respectfully submit this Petition pursuant to N.J.S.A. ss.ss. 48:2-51.1 and 48:3-10 and N.J.A.C. ss. 14:1-5.10 to obtain authorization and approval of a transfer upon Atlantic Electric's books and records all of the issued and outstanding shares of its common stock, which will result in the change of ownership or control of Atlantic Electric. 4. AEI is a corporation organized under the laws of the State of New Jersey and is an exempt holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). The stock of AEI is publicly held. AEI is the sole common shareholder of Atlantic Electric. AEI's principal business office is at 6801 Black Horse Pike, Egg Harbor Township, New Jersey 08234-4130. 5. Delmarva is a corporation organized under the laws of the State of Delaware and the Commonwealth of Virginia. Delmarva is engaged in the generation, transmission, distribution and sale of electric energy to approximately 437,500 residential, commercial and industrial customers in Delaware, Maryland and Virginia. Delmarva's electric service retail rates are established by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission. Delmarva's service territory covers all or portions of the State of Delaware, ten primarily Eastern Shore counties in Maryland, and two counties which comprise the Eastern Shore of Virginia. Delmarva also provides gas service to approximately 98,000 customers located in northern New Castle County, Delaware. Delmarva's principal business office is at 800 King Street, P. O. Box 231, Wilmington, Delaware 19899. 6. Conectiv owns 100% of the outstanding capital stock of DS Sub, Inc. ("DS Sub"). DS Sub is a corporation organized under the laws of the State of Delaware. After consummation of the transactions described herein (the "Merger"), Conectiv will own 100% of the outstanding common stock of Delmarva and Atlantic Electric, and Conectiv will be a registered holding company under PUHCA. DS Sub was formed solely for the purpose of facilitating the Merger. DS Sub will merge into Delmarva, with Delmarva as the surviving company. 7. AEI, Delmarva, Conectiv and DS Sub are parties to an Agreement and Plan of Merger, dated August 9, 1996, as amended and restated as of December 26, 1996 (the "Merger Agreement" or the "Agreement"). The Merger Agreement is attached to this Application as Annex 1 to the Joint Proxy Statement of Delmarva Power & Light Company and AEI, Inc., dated December 26, 1996, (the "Proxy Statement") (Exhibit A). The Proxy Statement, and the attached testimony of Michael J. Barron provide a more detailed description of the transactions summarized below. 8. After receiving all required regulatory approvals, and on the terms and conditions set forth in the Merger Agreement: (i) AEI will merge with Conectiv, with Conectiv as the surviving corporation; and (ii) DS Sub will merge with Delmarva, with Delmarva as the surviving corporation. Together, these transactions result in a change in control over Atlantic Electric and Delmarva, both of which will become wholly-owned subsidiaries of Conectiv. 9. Upon consummation of the Merger, Conectiv will have five first-tier subsidiaries consisting of: two operating utilities (Delmarva and Atlantic Electric); a service company that will provide services (including, for example, accounting, financial, and legal services) to the operating utilities and other affiliates; and two existing non-utility subsidiaries of AEI. Exhibit B compares the pre- and post-Merger corporate structures of the entities involved in these transactions. 10. Upon consummation of the Merger, except for fractional, treasury, and affiliate-owned shares (if any), each share of the common stock of Delmarva will be converted into the right to receive one share of Conectiv common stock, and each share of the common stock of AEI will be converted into the right to receive 0.75 shares of Conectiv common stock and 0.125 shares of Conectiv Class A common stock. 11. As a result of these share exchanges, the holders of Delmarva and AEI common stock will hold approximately 60.6% and 39.4%, respectively, of Conectiv's common stock (based on the capitalization of each company as of September 30, 1996). Holders of AEI common stock will hold 100% of Conectiv Class A common stock. Shares of Conectiv common stock will represent approximately 94% of the voting power of the common stock, and shares of Conectiv Class A common stock will represent approximately 6% of that voting power. 12. The Merger will not affect the debt securities or preferred stock of either Delmarva or Atlantic Electric. 13. The Merger Agreement required the approval of the holders of shares of common stock in both Delmarva and AEI. The shareholders of Delmarva and AEI approved the Merger Agreement on January 30, 1997. 14. Consummation of the Merger is contingent upon obtaining certain required regulatory approvals, including approvals from this Board. In addition to this filing, filings have been, or will be, made with the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Securities and Exchange Commission, the U.S. Department of Justice and Federal Trade Commission, the Delaware Public Service Commission, the Maryland Public Service Commission, the Virginia State Corporation Commission, and the Pennsylvania Public Utility Commission. 15. The target date for receiving all necessary regulatory approvals, fulfilling all other conditions of the Merger Agreement, and closing the Merger is December 31, 1997. Delays beyond that time would likely increase the total transaction and transition costs while delaying the benefits of the Merger. Atlantic Electric, therefore, requests that the Board expedite consideration of this Application. As the BPU has done in the past with respect to changes in the ownership or control of New Jersey utilities, Petitioner and Co-Petitioner ask that the BPU retain this matter, and not transmit this matter as a contested case to the Office of Administrative Law. 16. As explained in the attached testimony of Mr. Howard E. Cosgrove, the primary purpose of the Merger is to create a regional company from two companies that share a common vision of the strategic path necessary to succeed in the increasingly competitive utility and energy services marketplace. 17. The Merger is expected to produce benefits, including cost savings through greater efficiencies and economies of scale, a more diverse customer base, improved credit quality and liquidity of securities, and a regional platform for growth. More specifically: (i) Achieving cost savings through greater efficiencies and economies of scale will permit each operating utility to offer more competitively-priced electric service and energy-related products and services than would otherwise be possible. Scale has importance in many areas, including utility operations, product development, advertising and corporate services. (ii) Enhancing geographic and customer diversity should improve the stability of revenues to Conectiv as a whole. (iii) Improving overall credit quality and liquidity of securities will permit each operating utility to fund continued growth at lower cost. (iv) Creating a regional platform for marketing utility and non-utility services in the mid-Atlantic region and beyond will strengthen the ability of the combined company to offer additional services to customers. 18. The Merger itself will have no immediate effect on Atlantic Electric's rates for electric service. Delmarva and Atlantic Electric plan to remain separate operating utilities with separate rate structures as is the case today. 19. The Merger will not have an adverse effect on competition among suppliers of electric utility services. Even after the Merger, the combined companies will still be the smallest member of the Pennsylvania-New Jersey-Maryland Interconnection Association. As the Board of Public Utilities moves forward with its Energy Master Plan process and the restructuring of the electric industry in this State, Petitioner expects that it will be better able to contribute to the new competitive environment, as a result of the AEI/Delmarva combination. The end result will be a benefit to electric competition in New Jersey, as changes come to the industry. At the same time, the existence of the larger utilities in the region will ensure that the combined companies have no market power over electricity supplies in their traditional service territories. The combined companies will also have enhanced ability to compete in the retail markets in the region. 20. The Merger of AEI and Delmarva will not adversely affect Atlantic Electric's service to its customers in New Jersey. The companies are committed to maintaining and potentially improving their existing high standards of reliability and customer service. Merger-related savings will be obtained primarily through achieving economies of scale, such as elimination of duplicative departments and systems and reductions in the total number of employees. As a result, the Merger will not have an adverse effect on the provision of safe, adequate and proper utility service at just and reasonable rates. 21. Atlantic Electric will continue to maintain a significant local workforce. Overall, Conectiv expects a reduction of approximately 10% (or 400 positions) in the combined companies' workforces. As further explained by Mr. Cosgrove in his testimony, the combined companies recognize that a local workforce is necessary to maintain excellent customer service levels and to respond to the particular needs within each of the States that the operating utilities will serve. In New Jersey, for example, meeting the special needs of the casino industry, recreational communities and local farming will continue to be a priority. On the Delmarva Peninsula, the special needs of the financial services and chemical sectors of the economy, along with recreational and farming communities will remain a priority. Although some current employees of Atlantic Electric are expected to relocate their offices to Delaware, where Conectiv's headquarters will be located, Atlantic Electric will retain a significant number of employees in New Jersey, Delmarva will retain a significant number of employees throughout the Delmarva Peninsula, and expected reductions in duplicative staff will be handled fairly and even-handedly. 22. The Merger is expected to save approximately $500 million (net of transaction and transition costs) over the ten years after the Merger is consummated. The estimated cost savings are supported by Mr. Thomas Flaherty of Deloitte & Touche Consulting Group in his attached testimony and related exhibits. The testimonies of Mr. Gary Hanson and Mr. Louis M. Walters describe in more detail how the net savings are calculated for New Jersey ratemaking purposes. 23. Atlantic Electric and Delmarva are proposing, in their respective States, that one-third of each State's allocable share of average annual estimated net merger savings over the first 10 years after consummation of the Merger be available for sharing with customers. The precise method to implement this sharing should be established by each regulatory agency, consistent with the goals and objectives of the particular State. For example, to meet the goals and objectives of New Jersey's Energy Master Plan, Atlantic Electric is proposing that the treatment of one-third of New Jersey's allocable share be determined in conjunction with the goals of the BPU enunciated through the implementation of the Energy Master Plan, taking into consideration Atlantic Electric's financial condition, including its earnings relative to authorized levels. 24. Atlantic Electric would be at risk to achieve the level of projected savings and customers would benefit as proposed even if the achieved savings are less than projected. If, on the other hand, actually achieved savings are greater than projected, with the result that the operating utility's actual earnings rise above its authorized level, the Board retains the power to adjust base rates accordingly, consistent with traditional statutory and regulatory practices. 25. For accounting purposes, the Merger is treated as an acquisition by Delmarva of AEI. As such, the Merger will be recorded using the "purchase method" of accounting for business combinations in accordance with Accounting Principles Board ("APB") Opinion No. 16. Since Delmarva and Atlantic Electric have publicly-held debt securities and preferred stock, so-called "push down" accounting will not be utilized (i.e., the acquisition premium will appear on Conectiv's books and not "pushed down" to Delmarva's or Atlantic Electric's books). Separate financial statements, substantially the same as the current financial statements of Delmarva and Atlantic Electric, will continue to be issued. The assets of Delmarva and Atlantic Electric will continue to be recorded on their books and records at the same values as before the Merger, with no adjustment to restate common equity amounts or to record any acquisition premium. The direct transaction costs of the Merger are being recorded by Delmarva in Account 186 (Miscellaneous Deferred Debits), which will be transferred to Conectiv upon Closing, and have been expensed as incurred by AEI. Both Delmarva and AEI are expensing indirect costs and internal labor costs as incurred. Pro forma combined and consolidated balance sheets and statements of income, including explanatory notes, for Delmarva, AEI and Conectiv are contained in Exhibit A at 115-140. The attached testimony of Mr. Gary Hanson further explains the intended accounting treatment for the transaction. 26. Atlantic Electric and Conectiv commit that the transaction and transition costs of the Merger, including the acquisition premium, will not be reflected in retail rates except to the extent that those items are at least offset by Merger-related savings. 27. Conectiv's service company subsidiary (the "Service Company") will include many employees who are currently employed by Delmarva or Atlantic Electric. The Securities and Exchange Commission has oversight over the arrangements by which Service Company costs are charged and assigned to the related utilities and affiliates. Atlantic Electric and Conectiv commit to submit to the Board's jurisdiction any issues regarding the ratemaking treatment of any Service Company costs assigned or allocated to Atlantic Electric. Because the bulk of the expected cost savings are in administrative-type functions that will be performed by the Service Company, it is expected that these cost assignment issues will involve how best to allocate a lower overall cost structure. When the Service Company agreement is finalized, Atlantic Electric will file that agreement with the Board for review under N.J.S.A. 48:3-7.1. 28. Attached hereto, and made a part hereof by reference, are the following Exhibits: A. Proxy Statement, including the Merger Agreement between AEI and Delmarva on Plan of Merger, dated August 9, 1996, as amended December 26, 1996, which includes a copy of the Certificates of Incorporation of Conectiv, Inc, and Changes to the Boards of Directors. B. Comparison of pre- and post-Merger corporate structure. C. Copies of corporate resolutions of stockholders of each of the corporations authorizing the transaction. D. Copies of the Certificates of Incorporation of both AEI and Delmarva. 29. In support of the Petition, the following testimony is being submitted: -- Howard E. Cosgrove, Chairman, President and CEO, Delmarva; Chairman and CEO, Conectiv, Inc. -- Thomas J. Flaherty, National Partner - Utilities Consulting, Deloitte & Touche Consulting Group. -- Michael J. Barron, Vice President and Chief Financial Officer, AEI; Senior Vice President and CFO, Atlantic City Electric Company. -- Gary L. Hanson, Controller, AEI and Atlantic City Electric Company. -- Louis M. Walters, Vice President - Treasurer and Assistant Secretary, Atlantic City Electric Company; Treasurer, AEI. 30. In conclusion, Petitioner and Co-Petitioner respectfully submit that the merger of AEI with Delmarva will not have an adverse impact on competition in the electric industry, on either Atlantic Electric's rates or the ability of the BPU to regulate those rates, on Atlantic Electric's obligations to its employees, or on the provision of safe, adequate and proper service at just and reasonable rates. Accordingly, Petitioner and Co-Petitioner respectfully request the approval of the BPU under N.J.S.A. 48:2-51.1 and 48:3-10. WHEREFORE, Atlantic City Electric Company and Conectiv request that the Board of Public Utilities: (1) approve the transfer by Atlantic City Electric Company on its books and records of all of the issued and outstanding shares of its Common Stock; (2) approve the acquisition by Conectiv of control of Atlantic City Electric Company, (3) retain this matter for final disposition before the BPU; and (4) grant such other relief as may be reasonable and necessary. Respectfully submitted, ATLANTIC CITY ELECTRIC COMPANY 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 By:________________________________________ James E. Franklin, II, Esq. LeBouef, Lamb, Greene & MacRae One Riverfront Plaza Newark, New Jersey 07102-5490 Attorneys for Petitioner Atlantic City Electric Company By:________________________________________ Stephen B. Genzer, Esq. Dated: February 24, 1997 EX-99.6 7 EXHIBIT D-5.1 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION -------------------------------------- DOCKET NO. IN RE JOINT APPLICATION OF ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY AND CONECTIV, INC. FOR THE TRANSFER OF CONTROL OF ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY TO CONECTIV, INC. Robert C. Gerlach Ballard Spahr Andrews & Ingersoll 1735 Market Street, 51st Floor Philadelphia, PA 19103 (215) 864-8526 Dated: March 24, 1997 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION In Re: Joint Application of : Atlantic City Electric Company : and Delmarva Power & Light : Company and Conectiv, Inc. : For the Transfer of Control of : Atlantic City Electric Company : Docket No. and Delmarva Power & Light : Company to Conectiv, Inc. : TO PENNSYLVANIA PUBLIC UTILITY COMMISSION: The names and address of Applicants are: Atlantic City Electric Company 6801 Black Horse Pike Egg Harbor Township, NJ 08234-4130 Delmarva Power & Light Company 800 King Street P.O. Box 231 Wilmington, DE 19899 Conectiv, Inc. 800 King Street P.O. Box 231 Wilmington, DE 19899 The name and address of Applicants' attorney is: Robert C. Gerlach Ballard Spahr Andrews & Ingersoll 1735 Market Street, 51st Floor Philadelphia, PA 19103 THE PARTIES Atlantic City Electric Company, a New Jersey corporation ("ACE"), is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy in the southern one-third of New Jersey. ACE is a wholly owned subsidiary of Atlantic Energy, Inc., a New Jersey corporation ("AE"). ACE owns undivided interests in certain generating and transmission facilities in the Commonwealth of Pennsylvania. Delmarva Power & Light Company, a Delaware and Virginia corporation ("Delmarva"), is an investor owned public utility that provides predominantly electric service in Delaware, ten primarily Eastern Shore counties in Maryland, and the Eastern Shore area of Virginia and gas service in northern Delaware. Delmarva owns undivided interests in certain generating and transmission facilities in the Commonwealth of Pennsylvania. Conectiv, Inc. ("Conectiv") was incorporated under the laws of the State of Delaware on August 8, 1996. AE and Delmarva each owns 50% of the capital stock of Conectiv. Upon consummation of the Mergers described below, Delmarva will become a direct wholly owned subsidiary of Conectiv and AE will cease to exist and AE's direct subsidiaries, including ACE, will become direct subsidiaries of Conectiv. DS Sub, Inc., a Delaware corporation ("DS Sub"), is a wholly owned subsidiary of Conectiv formed solely to effectuate a merger with and into Delmarva. THE PROPOSED MERGERS AE, Delmarva, Conectiv and DS Sub entered into an Agreement and Plan of Merger dated as of August 9, 1996, as amended and restated as of December 26, 1996 (the "Merger Agreement"), pursuant to which, among other things: (i) DS Sub will be merged with and into Delmarva (the "Delmarva Merger"), with Delmarva as the surviving corporation; (ii) AE will be merged with and into Conectiv (the "AE Merger" and together with the Delmarva Merger, the "Mergers"), with Conectiv as the surviving corporation; and (iii) Delmarva and ACE will become wholly owned subsidiaries of Conectiv. As a result of the Mergers, (i) each issued and outstanding share of Delmarva common stock, par value $2.25 per share, will be converted into one share of Conectiv common stock, par value $.01 per share (the "Conectiv Common Stock"); and (ii) each issued and outstanding share of AE common stock, no par value per share, will be converted into 0.75 shares of the Conectiv Common Stock and 0.125 shares of the Class A common stock, par value $.01 per share (the "Conectiv Class A Common Stock). Upon the consummation of the Mergers, the current common shareholders of AE will own 39.4% of the Conectiv Common Stock and 100% of the Conectiv Class A Common Stock and the current common shareholders of Delmarva will own 60.6% of the Conectiv Common Stock (based on the capitalization of each company as of September 30, 1996). Shares of Conectiv Common Stock will represent approximately 94% of the voting power of the common stock, and shares of Conectiv Class A Common Stock will represent approximately 6% of that voting power. The Mergers will not affect the debt securities or preferred stock of either Delmarva or ACE. Although both ACE and Delmarva will continue to exist as wholly owned operating subsidiaries of Conectiv and their respective businesses, properties and assets will not be physically transferred to Conectiv, the Mergers will result in a transfer of control of each of ACE and Delmarva, through a stock transfer, to Conectiv. Such transfer of control in each utility constitutes the transfer of utility property within the meaning of Section 1102(a)(3) of Title 66, Pennsylvania Consolidated Statutes (the "Code"), thereby requiring the approval of the Pennsylvania Public Utility Commission (the "Commission"). The Merger Agreement required the approval of the holders of shares of common stock in Delmarva and AE. The shareholders of Delmarva and AE approved the Merger Agreement on January 30, 1997. The Mergers will be consummated after certain regulatory approvals described below are received and other conditions are satisfied or waived. AE and Delmarva anticipate that the effective date of the Mergers will occur on or about December 31, 1997. The proposed Mergers are more fully described in the Joint Proxy Statement/Prospectus dated December 26, 1996 of AE and Delmarva attached hereto as Appendix A. BUSINESS OF THE PARTIES ACE is a public utility primarily engaged in the generation, transmission, distribution and sale of electric energy to approximately 473,000 residential, commercial and industrial customers in the State of New Jersey. ACE's service territory is principally the southern one-third of New Jersey and covers all or portions of eight counties in New Jersey. ACE is a public utility holding company that is exempt under Section 3(a)(2) of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"), pursuant to Rule 2 thereunder. ACE is a wholly owned subsidiary of AE, which is a public utility holding company under the 1935 Act and which has claimed an exemption from substantially all of the provisions of the 1935 Act pursuant to Section 3(a) of the 1935 Act. ACE also is qualified to do business in the Commonwealth of Pennsylvania where it owns (i) a 2.47% undivided interest in the Keystone Generating Station and related facilities located in Armstrong and Indiana Counties, Pennsylvania (the "Keystone Generating Station"), (ii) a 3.83% undivided interest in the Conemaugh Generating Station and related facilities located in Indiana County, Pennsylvania (the "Conemaugh Generating Station"), (iii) an 8% undivided interest in the Conemaugh-Conastone EHV Transmission Line located in Adams, Bedford, Blair, Cambria, Cumberland, Franklin, Huntingdon, Indiana, Westmoreland and York Counties, Pennsylvania (the "Conemaugh-Conastone EHV Transmission Line"), and (iv) a 7.51% undivided interest in the Peach Bottom Atomic Power Station and related facilities located in Drumore and Fulton Townships, Lancaster County, Pennsylvania (the "Peach Bottom Station"). ACE is a member of the Pennsylvania-New Jersey-Maryland Interconnection ("PJM"). Delmarva is predominantly a public utility that is engaged in the generation, transmission, distribution and sale of electric energy to approximately 437,500 residential, commercial and industrial customers in Delaware, Maryland and Virginia. Delmarva's service territory covers all or portions of the State of Delaware, ten primarily Eastern Shore counties in Maryland, and two counties which comprise the Eastern Shore of Virginia. Delmarva also provides gas service to approximately 98,000 customers in northern New Castle County, Delaware. Delmarva also is qualified to do business in the Commonwealth of Pennsylvania where it owns (i) a 3.70% undivided interest in the Keystone Generating Station, (ii) a 3.72% undivided interest in the Conemaugh Generating Station, (iii) a 9% undivided interest in the Conemaugh-Conastone EHV Transmission Line, and (iv) a 7.51% undivided interest in the Peach Bottom Station. Delmarva also is a member of the PJM. JURISDICTION OF THE COMMISSION As stated above, ACE owns an undivided interest in each of the Keystone Generating Station, the Conemaugh Generating Station, the Conemaugh-Conastone EHV Transmission Line and the Peach Bottom Station in Pennsylvania, and is a member of the PJM. ACE has no retail utility customers in Pennsylvania, receives no gross operating revenue for service rendered pursuant to tariffs filed with the Commission for intrastate service within the Commonwealth of Pennsylvania, and operates in the Commonwealth no facilities for electric generation, electric or gas transmission or electric or gas distribution. The sole business of ACE subject to the jurisdiction of the Commission in Pennsylvania is the ownership of the undivided interests described above. As a result of the AE Merger, ACE will become a wholly owned subsidiary of Conectiv, a new holding company, rather than AE. Therefore, the AE Merger will result in a transfer of control of ACE, through a stock transfer, constituting the transfer of utility property within the intendment of Section 1102(a)(3) of the Code. Since ACE will continue to exist as an operating company, none of its undivided interests described above will be physically transferred to Conectiv. Applications of ACE filed with the Commission at its Application Dockets Nos. 91674, 93233, 94225 and 96379 for approval of the commencement by ACE of the exercise of rights within Pennsylvania as a foreign public utility, as and to the limited extent set forth therein, were granted by Orders and Certificates of Public Convenience issued by the Commission on November 25, 1964, July 25, 1966, April 24, 1968 and June 21, 1971, respectively. As stated above, Delmarva owns an undivided interest in each of the Keystone Generating Station, the Conemaugh Generating Station, the Conemaugh-Conastone EHV Transmission Line and the Peach Bottom Station in Pennsylvania and is a member of the PJM. Delmarva has no retail utility customers in Pennsylvania, receives no gross operating revenue pursuant to tariffs filed with the Commission for intrastate service within the Commonwealth of Pennsylvania, and operates in the Commonwealth no facilities for electric generation, transmission or distribution. The sole business of Delmarva subject to the jurisdiction of the Commission in Pennsylvania is the ownership of the undivided interests described above. As a result of the Delmarva Merger, Delmarva will become a wholly owned subsidiary of Conectiv, a new holding company. Therefore, the Delmarva Merger will result in a transfer of control of Delmarva, through a stock transfer, constituting the transfer of utility property within the intendment of Section 1102(a)(3) of the Code. Since Delmarva will continue to exist as an operating company, none of its undivided interests described above will be physically transferred to Conectiv. Applications of Delmarva filed with the Commission at its Application Dockets Nos. 91675, 93235, 94227 and 96380 for approval of Delmarva's commencement of the exercise of rights within Pennsylvania as a foreign public utility, as and to the limited extent set forth therein, were granted by Orders and Certificates of Public Convenience issued by the Commission on November 25, 1964, July 25, 1966, April 24, 1968 and June 21, 1971, respectively. JURISDICTION OF OTHER ADMINISTRATIVE AGENCIES ACE is currently subject to the jurisdiction of the New Jersey Board of Public Utilities (the "NJBPU"). The transfer of the ownership or control from AE to Conectiv is also subject to the jurisdiction of the NJBPU. Accordingly, ACE and Conectiv are seeking the approval of the NJBPU in connection with the transfer of control contemplated by the Mergers. Delmarva is incorporated in Delaware and Virginia, and its electric retail rates are established by the Delaware Public Service Commission (the "DPSC"), the Maryland Public Service Commission (the "MPSC") and the Virginia State Corporation Commission (the "VSCC"). Under Delaware law, Delmarva must obtain the approval of the DPSC in order to directly or indirectly merge or consolidate with any other person or company. The DPSC also must approve any acquisition of any direct or indirect control of any public utility doing business in Delaware. Accordingly, Delmarva and Conectiv are seeking the approval of the DPSC for the proposed Delmarva Merger and the acquisition of control by Conectiv. Under Virginia law, any direct or indirect acquisition of control of a public utility or any direct or indirect disposition of any utility assets by any public utility must be approved by the VSCC. Except to the extent preempted by the Securities Exchange Commission (the "SEC"), the VSCC must also approve any affiliated transactions, such as certain contracts or arrangements for certain services, purchases, sales, leases or exchanges, loans and guarantees between a public utility and its affiliates. Accordingly, Delmarva and its affiliates are seeking the approvals of the VSCC for the transactions contemplated by the Mergers. The MPSC has general authority to supervise and regulate public utilities with operations in the State of Maryland. The MPSC has advised Delmarva that it has jurisdiction to determine whether the Mergers will have a material effect on Delmarva's Maryland franchises or rights thereunder and any other matters that may properly come before the MPSC at the hearing. Delmarva will seek to show that the Mergers will not have such an effect. Conectiv is required to obtain the SEC's approval under Section 9(a)(2) of the 1935 Act in connection with the Mergers. An application for approval of the Mergers will be filed by Conectiv shortly. Upon consummation of the Mergers, Conectiv must register as a holding company under the 1935 Act because it will not qualify for any exemptions available under the 1935 Act. Consequently, Conectiv will be subject to various restrictions imposed under the 1935 Act with respect to the operations of registered holding company systems. Approval of the Mergers by the Federal Energy Regulatory Commission ("FERC") is required pursuant to Section 203 of the Federal Power Act. ACE and Delmarva have filed a joint application with FERC requesting that FERC approve the Mergers under Section 203 of the Federal Power Act. Delmarva and ACE each own a 7.41% interest in the Salem Nuclear Generating Station, which consists of two nuclear units, and a 7.51% interest in the Peach Bottom Station, which consists of two nuclear units. In addition, ACE owns a 5% interest in the Hope Creek Nuclear Generating Station, which consists of one nuclear unit. Delmarva and ACE hold Nuclear Regulatory Commission (the "NRC") licenses with respect to their ownership interests in these nuclear units. Delmarva and ACE will seek approval from the NRC to the extent that the Mergers may constitute transfers of control of ownership interests in the operating licenses for the units which would require approval by the NRC as an amendment to the facility operating licenses. A notification of the Mergers to the Federal Trade Commission ("FTC") and the U.S. Department of Justice will be filed pursuant to the Hart-Scott-Rodino Act, relating to any antitrust implications of the proposed Mergers. No objection by the FTC or the U.S. Department of Justice is expected. Receipt of all required regulatory approvals is a condition precedent to the effectiveness of the Mergers. TRANSACTION FOR WHICH APPROVAL IS SOUGHT; PURPOSE AND EFFECT OF THE MERGERS AE and Delmarva believe that the Mergers will provide opportunities to achieve benefits for their respective shareholders, customers, employees and communities that would not be available if they were to remain separate companies. The benefits to be achieved through the Mergers include: increased scale; cost savings; competitive prices and services; and a more balanced customer base. In addition, the combined entities under Conectiv's new holding company system will have increased financial flexibility and greater access to the regional market. As a result of the Mergers, AE will cease to exist with its current subsidiaries, including ACE, becoming direct wholly owned subsidiaries of Conectiv. After the Mergers, Delmarva will become a direct wholly owned subsidiary of Conectiv and Delmarva's subsidiaries will become indirect subsidiaries of Conectiv. The businesses and assets, tangible and intangible, and liabilities of each of ACE and Delmarva will remain with ACE and Delmarva, respectively. Thus, the Mergers will only result in the transfers of control of ACE and Delmarva. Such transfers of control of ACE and Delmarva, under Section 1102(a)(3) of the Code, are deemed to constitute the transfers of utility property. The consolidated balance sheets of ACE and its subsidiary as of December 31, 1995 and 1994 and the related consolidated statements of income, changes in common shareholder's equity and cash flows for each of the three-years in the period ended December 31, 1995, together with the report thereon of Deloitte & Touche LLP, independent auditors, are included in the AE's and ACE's Annual Report to the SEC on Form 10-K for the year ended December 31, 1995 included as Appendix B. The consolidated balance sheets and statements of capitalization of Delmarva as of December 31, 1995 and 1994 and the related consolidated statements of income, changes in common stockholders' equity and cash flows for each of the three-years in the period ended December 31, 1995, together with the report thereon of Coopers & Lybrand L.L.P., independent accountants, are included in Delmarva's Annual Report to the SEC on Form 10-K for the year ended December 31, 1995 included as Appendix C. Unaudited pro forma combined financial statements of Conectiv combining the historical financial information of AE and Delmarva giving effect to the Mergers is included in the Joint Proxy Statement/Prospectus dated December 26, 1996 of AE and Delmarva attached as Appendix A. RELIEF REQUESTED Based on the foregoing, ACE and Delmarva respectfully request (1) approval under Section 1102(a)(3) of the Code for the transfer of control of ACE to Conectiv in connection with the AE Merger and for the transfer of control of Delmarva to Conectiv in connection with the Delmarva Merger, and (2) entry of an Order granting all relief appropriate under Chapter 21, Title 66, of the Code. WHEREFORE, the undersigned applicant prays your Honorable Commission to approve the aforesaid application and grant the relief requested. ATLANTIC CITY ELECTRIC COMPANY By: __________________________ Dated: March , 1997 AFFIDAVIT ____________________ being duly sworn according to law, deposes and says that he is ________________________ of Atlantic City Electric Company; that he is authorized to and does make this affidavit for it; and that the facts set forth above are true and correct (or are true and correct to the best of his knowledge, information and belief) and he expects the said Atlantic City Electric Company to be able to provide the same at any hearing hereof. ------------------------------ Sworn to and subscribed before me this _____ day of ______________, 1997 - ----------------------------------- My Commission Expires: WHEREFORE, the undersigned applicant prays your Honorable Commission to approve the aforesaid application and grant the relief requested. DELMARVA POWER & LIGHT COMPANY By: __________________________ Dated: March , 1997 AFFIDAVIT ____________________ being duly sworn according to law, deposes and says that he is ________________________ of Delmarva Power & Light Company; that he is authorized to and does make this affidavit for it; and that the facts set forth above are true and correct (or are true and correct to the best of his knowledge, information and belief) and he expects the said Delmarva Power & Light Company to be able to provide the same at any hearing hereof. ------------------------------ Sworn to and subscribed before me this _____ day of ______________, 1997 - ----------------------------------- My Commission Expires: WHEREFORE, the undersigned applicant prays your Honorable Commission to approve the aforesaid application and grant the relief requested. CONECTIV, INC. By: __________________________ Dated: March , 1997 AFFIDAVIT ____________________ being duly sworn according to law, deposes and says that he is ________________________ of Conectiv, Inc.; that he is authorized to and does make this affidavit for it; and that the facts set forth above are true and correct (or are true and correct to the best of his knowledge, information and belief) and he expects the said Conectiv, Inc. to be able to provide the same at any hearing hereof. ------------------------------ Sworn to and subscribed before me this _____ day of ______________, 1997 - ----------------------------------- My Commission Expires: EX-99.7 8 EXHIBIT D-7.1 April 30, 1997 UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of Atlantic City Electric Company ) and Delmarva Power & Light Company ) ) Salem Nuclear Generating Station ) Units 1 and 2 ) Docket Nos. 50-272, 50-311, ) 50-277 and 50-278 Peach Bottom Atomic Power Station ) Units 2 and 3 ) APPLICATION FOR TRANSFER OF CONTROL REGARDING OPERATING LICENSES NOS. DPR-70 AND DPR-75 FOR THE SALEM NUCLEAR GENERATING STATION AND OPERATING LICENSES NOS. DPR-44 AND DPR-56 FOR THE PEACH BOTTOM ATOMIC POWER STATION INTRODUCTION AND BACKGROUND Atlantic City Electric Company t/a Atlantic Electric ("ACE"), Delmarva Power & Light Company ("DP&L"), Public Service Electric & Gas Company ("PSE&G") and PECO Energy Company ("PECO") are the holders of Facility Operating License No. DPR-70 dated August 13, 1976 ("Operating License DPR-70"). Operating License DPR-70 authorizes the holders to possess the Salem Nuclear Generating Station Unit 1 ("Salem Unit 1") and authorizes PSE&G to use and operate Salem Unit 1 in accordance with the procedures and limitations set forth in the Operating License. ACE, DP&L, PSE&G and PECO are the holders of Facility Operating License No. DPR-75, dated May 20, 1981 ("Operating License DPR-75"). Operating License DPR-75 authorizes the holders to possess the Salem Nuclear Generating Station Unit 2 ("Salem Unit 2") and authorizes PSE&G to use and operate Salem Unit 2 in accordance with the procedures and limitations set forth in the Operating License. ACE, DP&L, PSE&G and PECO are the holders of Facility Operating License No. DPR-44, dated December 14, 1973 ("Operating License DPR-44"). Operating License No. DPR-44 authorizes the holders to possess the Peach Bottom Atomic Power Station Unit 2 ("Peach Bottom Unit 2") and authorizes PECO to use and operate Peach Bottom Unit 2 in accordance with the procedures and limitations set forth in the Operating License. ACE, DP&L, PSE&G and PECO are the holders of Facility Operating License No. DPR-56, dated July 2, 1974 ("Operating License DPR-56"). Operating License No. DPR-56 authorizes the holders to possess the Peach Bottom Atomic Power Station Unit 3 ("Peach Bottom Unit 3") and authorizes PECO to use and operate Peach Bottom Unit 3 in accordance with the procedures and limitations set forth in the Operating License. The respective percentage ownership interests of ACE, DP&L and each of the other license holders in the licensed units hereinabove referred to are as follows: ACE(%) DP&L (%) PSE&G(%) PECO(%) Salem Unit 1-DPR-70 7.41 7.41 42.59 42.59 Salem Unit 2-DPR-75 7.41 7.41 42.59 42.59 Peach Bottom Unit 2-DPR-44 7.51 7.51 42.49 42.49 Peach Bottom Unit 3-DPR-56 7.51 7.51 42.49 42.49 This Application is submitted in support of a request for the consent of the Nuclear Regulatory Commission ("NRC") in accordance with 10 C.F.R. ss.50.80 to the indirect transfers of control of interests in the above-captioned Operating Licenses which will occur as a result of a proposed merger of Atlantic Energy, Inc. ("AEI"), of which ACE is a wholly owned subsidiary, and DP&L (the "Merger"). The Merger will result in the indirect transfer of control of the interests held by ACE and DP&L as licensees, through the creation of a new holding company, Conectiv, Inc. ("Conectiv") to be formed through the Merger. A copy of the Joint Proxy Statement and Prospectus is filed with this Application as Exhibit A and includes, as an exhibit, "The Agreement and Plan of Merger, Dated as of August 9, 1996 as Amended and Restated as of December 26, 1996 by and among Delmarva Power & Light Company, Atlantic Energy, Inc., Conectiv, Inc. and DS Sub., Inc." (the "Merger Agreement"). Conectiv will be a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"), and will become the sole owner of all issued and outstanding shares of common stock of ACE and DP&L. Both ACE and DP&L will be direct subsidiaries of Conectiv. The additional direct subsidiaries of Conectiv will include a service company and a company(ies) engaged in non-utility activities. As a result of the Merger, ACE and DP&L expect to achieve cost savings and efficiencies, principally through the elimination of duplicative activities, increased scale and improved purchasing power, reducing the operating costs of ACE and DP&L to the benefit of their customers, shareholders and the communities they serve. By roughly doubling the market capitalization of Conectiv, compared to that of the individual companies (ACE and DP&L), the Merger should also improve both the overall credit quality of the merged company and the liquidity of its securities. Conectiv's ability to fund continued growth at lower costs will enhance the financial resources of DP&L and ACE to possess their respective interests in the applicable nuclear generating plants. The Merger will have no adverse effect on either the technical management or operation of the Peach Bottom or Salem nuclear generating plants. In each instance, PSE&G or PECO -- neither of which is involved in the Merger -- will remain responsible for the operation and maintenance of the respective plants for which they currently have operating responsibility. Therefore, the Merger cannot affect the technical qualifications of the responsible operating entities. The Operating Licenses for the units which are subject of this Application were issued pursuant to Section 104(b) of the Atomic Energy Act. Consequently, the NRC has no antitrust jurisdiction with respect to those units. Notwithstanding the lack of jurisdiction by the NRC, the antitrust implications of the proposed Merger, and the competitive aspects thereof, will be considered by other federal agencies reviewing the Merger, including the Federal Energy Regulatory Commission ("FERC"), the Securities and Exchange Commission ("SEC"), the U.S. Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). Part I below sets forth the information required by 10 C.F.R. ss.50.80 with respect to the proposed transfers. Part II discusses the effective date for the license transfers. PART I. - INFORMATION FOR TRANSFERS OF CONTROL A. General Information Regarding Organization and Management of the Merged Company At the effective time of the Merger, the Merger Agreement contemplates that the members of the Board of Directors of DP&L will be entitled to nominate ten (10) members to serve on the Board of Directors of Conectiv, and the AEI Board will be entitled to nominate eight (8) members. The Conectiv Board will be divided into three (3) classes so that each class, to the extent possible, has the same proportion of directors nominated by each of the DP&L and AEI Boards. The Merger Agreement further provides that at the consummation of the Merger, Howard E. Cosgrove (Chairman of the Board, President and Chief Executive Officer of DP&L) will be the Chief Executive Office and Chairman of the Board of Conectiv. Jerrold L. Jacobs (Chairman and Chief Executive Officer of AEI) will retire from active employment with AEI after the consummation of the Merger and will serve as Vice Chairman of the Board of Conectiv until the second anniversary of the consummation of the Merger. B. General Information Concerning Atlantic City Electric Company t/a Atlantic Electric 1. Name and Address Atlantic City Electric Company t/a Atlantic Electric 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 2. Description of Business ACE is a wholly owned subsidiary of AEI, an exempt holding company under PUHCA, whose stock is publicly held. Following the Merger, ACE will be a wholly owned subsidiary of Conectiv. Its purpose will remain the same as it is now, which is to engage principally in the generation, transmission, distribution and sale of electric energy in the southern portion of the State of New Jersey to residential, commercial and industrial customers for their own use, and in New Jersey and elsewhere to wholesale customers for resale. 3. Organization and Management ACE is - and after the Merger will remain - a corporation organized and existing under the laws of the State of New Jersey. All of ACE's directors and principal officers are citizens of the United States. All of the directors and principal officers of AEI are also citizens of the United States. Following the proposed Merger, ACE will not be owned, controlled or dominated by an alien, foreign corporation or foreign government. ACE is not acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the licenses. C. General Information Concerning Delmarva Power & Light Company 1. Name and Address Delmarva Power & Light Company 800 King Street P.O. Box 231 Wilmington, Delaware 19899 2. Description of Business Following the Merger, DP&L will be a wholly owned subsidiary of Conectiv. Its business operations will generally remain the same as they are now, i.e., engaging principally in the generation, transmission, distribution and sale of electric energy on the Delmarva peninsula in Delaware, Maryland and Virginia; and the distribution and sale of gas energy in New Castle County, Delaware. The sales will be to residential, commercial and industrial customers for their own use, and in Delaware, Maryland, Virginia and elsewhere, to wholesale customers for resale. 3. Organization and Management DP&L is - and after the Merger will remain - a corporation organized and existing under the laws of the State of Delaware and the Commonwealth of Virginia. All of DP&L's directors and principal officers are citizens of the United States. Following the proposed Merger, DP&L will not be owned, controlled or dominated by an alien, foreign corporation or foreign government. Moreover, DP&L is not acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the licenses. D. Technical Qualifications The proposed Merger involves no change to either the management organization or technical personnel of PSE&G, the entity responsible for operating and maintaining the Salem Nuclear Generating Station Units 1 and 2. PSE&G is not involved in the Merger. Therefore, the technical qualifications of PSE&G to carry out its responsibilities under the Operating Licenses remain unchanged, and will not be adversely affected by the proposed Merger. Likewise, the proposed Merger involves no change to either the management organization or technical personnel of PECO, the entity responsible for operating and maintaining the Peach Bottom Atomic Power Station Units 2 and 3. PECO is not involved in the Merger. Therefore, the technical qualifications of PECO to carry out its responsibilities under the Operating Licenses remain unchanged, and will not be adversely affected by the proposed Merger. E. Financial Qualifications ACE and DP&L are - and after the Merger will remain - electric utilities within the definition set out in 10 C.F.R. ss.50.2. Each company provides electric service on a retail and wholesale basis. DP&L also provides gas service on a retail and wholesale basis. After the proposed Merger, ACE will continue to generate and distribute electricity and recover the cost of the electricity through rates authorized by the New Jersey Board of Public Utilities ("NJBPU") and by the FERC. Therefore, ACE will continue to meet the definition of an "electric utility" set forth in 10 C.F.R. ss.50.2. After the proposed Merger, DP&L will also continue to generate and distribute electricity and recover the cost of this electricity through rates authorized by the Delaware Public Service Commission, the Maryland Public Service Commission, the State Corporation Commission of Virginia and the FERC. DP&L will therefore continue to meet the definition of an "electric utility" as set forth in the regulations. Thus, the financial qualifications of ACE and DP&L are presumed by 10 C.F.R. ss.50.33(f), and no specific demonstration of financial qualifications is required. F. Decommissioning NRC regulations require information showing "reasonable assurance . . . that funds will be available to decommission the facility." 10 C.F.R. ss.50.33(k). ACE and DP&L have each filed decommissioning reports with the NRC under 10 C.F.R. ss.50.75(b) and are providing financial assurance for decommissioning their respective ownership interests in each of the above-captioned plants in accordance with those reports through external nuclear decommissioning trusts in which deposits are made at least annually. After the Merger, ACE and DP&L will remain responsible for the decommissioning liabilities associated with their respective ownership interests in the above-captioned nuclear generating plants, and will continue to fund their respective decommissioning trusts in accordance with NRC regulations. G. Antitrust Considerations Operating Licenses DPR-44, DPR-56, DPR-70 and DPR-75 were each issued under Section 104(b) of the Atomic Energy Act. As such, the units which are subject of this Application are not subject to antitrust review by the NRC. However, competitive aspects of the Merger, including antitrust considerations associated therewith, will be reviewed by other federal agencies including the FERC, the SEC, the DOJ and the FTC. H. Statement of Purposes for the Transfer and the Nature of the Transaction Necessitating or Making the License Transfer Desirable The purpose of the proposed Merger is to achieve benefits for the shareholders, customers and communities served by ACE and DP&L that would otherwise not be achievable if they were to remain as separate companies. The expected savings related to the Merger are approximately $500 million over the next ten years (1998 to 2007). The savings will come principally from elimination of duplicative activities, increased scale, improved purchasing power, improved operating efficiencies, lower capital costs and, to the extent practicable, by combining the companies' work forces. I. Restricted Data This application does not contain any Restricted Data or other classified defense information, and it is not expected that any such data will become involved in the licensed activities. However, in the event such information should become involved, ACE and DP&L agree that they will safeguard such information and will not permit any person to have access to Restricted Data until the Office of Personnel Management (as successor to the Civil Service Commission) shall have made an investigation and reported to the NRC on the character, associations and loyalty of such person, and the NRC shall have determined that permitting such person to have access to Restricted Data will not endanger the common defense and security of the United States. J. No Environmental Impact The Merger does not involve any change to the nuclear plant operations or equipment and does not change any environmental impact previously evaluated in the Final Environmental Statement of each of the subject plants. Accordingly, no environmental impact is associated with this Application or the consequences of the Merger. PART II. - EFFECTIVE DATE The proposed Merger of AEI and DP&L is subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and requires the approval of other federal regulatory authorities as described above. Transfer upon ACE's books and records of all of the issued and outstanding shares of its common stock which will result in the change of ownership or control of ACE is also subject to review and approval by the NJBPU. The transfer of DP&L's stock will similarly be subject to review and approval by the Delaware Public Service Commission, the Virginia State Corporation Commission and, in limited fashion, by the Maryland Public Service Commission. The approval of the Pennsylvania Public Utilities Commission will also be requested with respect to the limited issue of transfer of jointly-owned production and transmission facilities located in that Commonwealth. Approval of the Merger has been obtained from the shareholders of both AEI and DP&L at a Special Meeting of Shareholders of each of the companies held for that purpose on January 30, 1997. Until all such approvals have been obtained, the Merger cannot be consummated. AEI and DP&L intend to consummate the Merger as soon as practicable following receipt of all necessary approvals. The projected closing date of the Merger is December 31, 1997. Therefore, the NRC is requested to review this Application on a schedule that will permit it to act on and provide its final consent to the proposed indirect transfers of control that would be effectuated by the Merger as promptly as possible, and in any event not later than September 30, 1997. CONCLUSION For the foregoing reasons, the NRC is requested to consent to the indirect transfers of control of the interests held by ACE and DP&L in Operating Licenses Nos. DPR-70 and DPR-75 for the Salem Nuclear Generating Station Units and Operating Licenses Nos. DPR-44 and DPR-56 for the Peach Bottom Atomic Power Station Units that would result from the Merger. C E R T I F I C A T I O N I, JAMES E. FRANKLIN II, being duly sworn, state that: (1) I am Senior Vice President, Secretary and General Counsel of Atlantic City Electric Company; (2) I am duly authorized to execute and file this certification on behalf of Atlantic City Electric Company; and (3) The statements set forth in the attached application are true and correct to the best of my information, knowledge and belief. --------------------------------------- JAMES E. FRANKLIN II SWORN and subscribed to before me this 30th day of April, 1997. - -------------------------------- C E R T I F I C A T I O N I, DALE G. STOODLEY, being duly sworn, state that: (1) I am Vice President and General Counsel of Delmarva Power & Light Company; (2) I am duly authorized to execute and file this certification on behalf of Delmarva Power & Light Company; and (3) The statements set forth in the attached application are true and correct to the best of my information, knowledge and belief. --------------------------------------- DALE G. STOODLEY SWORN and subscribed to before me this 30th day of April, 1997. - -------------------------------- APPLICATION FOR TRANSFER OF CONTROL REGARDING OPERATING LICENSE NOS. DPR-70 AND DPR-75 FOR THE SALEM NUCLEAR GENERATING STATION AND OPERATING LICENSE NOS. DPR-44 AND DPR-56 FOR THE PEACH BOTTOM ATOMIC POWER STATION E X H I B I T A JOINT PROXY STATEMENT/PROSPECTUS April 30, 1997 UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of Atlantic City Electric Company ) ) Hope Creek Generating Station ) Unit 1-Operating License No. NPF-57 ) Docket No. 50-354 APPLICATION FOR TRANSFER OF CONTROL REGARDING OPERATING LICENSE NO. NPF-57 FOR THE HOPE CREEK NUCLEAR GENERATING STATION INTRODUCTION AND BACKGROUND Atlantic City Electric Company t/a Atlantic Electric ("ACE") and Public Service Electric & Gas Company ("PSE&G") are the holders of Facility Operating License No. NPF-57, dated July 25, 1986 ("Operating License NPF-57"). Operating License NPF-57 authorizes the holders to possess the Hope Creek Generating Station Unit 1 ("Hope Creek Unit 1") and authorizes PSE&G to use and operate Hope Creek Unit 1 in accordance with the procedures and limitations set forth in the Operating License. The percentage ownership interest of ACE and the other license holder in Hope Creek Unit 1 is as follows: ACE(%) PSE&G(%) Hope Creek Unit 1 5.00 95.00 This application is submitted in support of a request for the consent of the Nuclear Regulatory Commission ("NRC") to the indirect transfer of control of interest in the above-captioned Operating License that will occur as a result of a proposed merger of Atlantic Energy, Inc. ("AEI") and Delmarva Power & Light Company ("DP&L") (the "Merger"). ACE is a wholly owned subsidiary of AEI. The Merger will result in the indirect transfer of control of the five percent (5%) interest held by ACE as a Licensee due to the creation of a holding company, Conectiv, Inc. ("Conectiv") to be formed for the Merger. Conectiv will become a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"), and will become the sole owner of all issued and outstanding shares of common stock of ACE and DP&L. Both ACE and DP&L will be direct subsidiaries of Conectiv. The additional direct subsidiaries of Conectiv will include a service company and a company(ies) engaged in non-utility activities. A copy of the Joint Proxy Statement and Prospectus is filed with this Application as Exhibit A and includes, as an exhibit, "The Agreement and Plan of Merger, dated as of August 9, 1996 as Amended and Restated as of December 26, 1996 by and among Delmarva Power & Light Company, Atlantic Energy, Inc., Conectiv, Inc. and DS Sub., Inc." (the "Merger Agreement"). As a result of the Merger, ACE expects to achieve cost savings and efficiencies, principally through the elimination of duplicative activities, increased scale and improved purchasing power. These changes will reduce the operating costs of ACE to the benefit of its customers, shareholders and the communities it serves. By roughly doubling the market capitalization of Conectiv, compared to that of the individual companies (ACE and DP&L), the Merger should also improve both the overall credit quality of the merged company and the liquidity of its securities. Conectiv's ability to fund continued growth at lower cost will enhance ACE's financial resources to possess its interest in the nuclear generating plant which is the subject of this Application. The Merger will have no adverse effect on either the technical management or operation of the Hope Creek Generating Station. PSE&G is not involved in the Merger and will remain responsible for the operation and maintenance of the Hope Creek Generating Station for which it currently has operating responsibility. Therefore, the Merger can have no effect on the technical qualifications of the responsible operating entity. In addition to NRC review, the Merger will be reviewed by other federal agencies, including the Federal Energy Regulatory Commission ("FERC"), the Securities and Exchange Commission ("SEC"), the U.S. Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). Among the issues to be considered by those agencies are the potential competitive aspects of the proposed Merger, which will include antitrust considerations. Part I below sets forth the information required by 10 C.F.R. ss.50.80 with respect to the proposed transfer. Part II discusses the effective date for the license transfer. PART I. - INFORMATION FOR TRANSFER OF CONTROL A. General Information Concerning Atlantic City Electric Company t/a Atlantic Electric 1. Name and Address Atlantic City Electric Company t/a Atlantic Electric 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 2. Description of Business ACE is a wholly owned subsidiary of AEI, an exempt holding company under PUHCA, whose stock is publicly held. Following the Merger, ACE will be a wholly owned subsidiary of Conectiv. Its purpose will remain the same as it is now, which is to engage principally in the generation, transmission, distribution and sale of electric energy in the southern portion of the State of New Jersey to residential, commercial and industrial customers for their own use, and in New Jersey and elsewhere to wholesale customers for resale. 3. Organization and Management ACE is - and after the Merger will remain - a corporation organized and existing under the laws of the State of New Jersey. All of ACE's directors and principal officers are citizens of the United States. All of the directors and principal officers of AEI are also citizens of the United States. At the effective time of the Merger, the Merger Agreement contemplates that the members of the Board of Directors of AEI will be entitled to nominate eight (8) members to serve on the Board of Directors of Conectiv, and the DP&L Board will be entitled to nominate ten (10) members. The Conectiv Board will be divided into three (3) classes so that each class, to the extent possible, has the same proportion of directors nominated by each of the AEI Board and the DP&L Board. The Merger Agreement provides that, at the consummation of the Merger, Howard E. Cosgrove (Chairman of the Board, President and Chief Executive Officer of DP&L) will be the Chief Executive Officer and Chairman of the Board of Conectiv. Jerrold L. Jacobs (now Chairman and Chief Executive Officer with AEI) will retire from active employment with AEI after the consummation of the Merger and will serve as Vice Chairman of the Board of Conectiv until the second anniversary of the consummation of the Merger. Following the proposed Merger, ACE will not be owned, controlled or dominated by an alien, foreign corporation or foreign government. Furthermore, ACE is not acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the license. B. Technical Qualifications The proposed Merger involves no change to either the management organization or technical personnel of PSE&G, the entity responsible for operating and maintaining the Hope Creek Generating Station. PSE&G is not involved in the Merger. Therefore, the technical qualifications of PSE&G to carry out its responsibilities under the Operating License remain unchanged, and will not be adversely affected by the proposed Merger. C. Financial Qualifications ACE is - and after the Merger will remain - an electric utility within the definition set out in 10 C.F.R. ss.50.2. ACE provides electric service on a retail and wholesale basis. After the proposed Merger, ACE will continue to generate and distribute electricity and recover the cost of the electricity through rates authorized by the New Jersey Board of Public Utilities ("NJBPU") and by the FERC. Therefore, ACE will continue to meet the definition of an "electric utility" as set forth in 10 C.F.R. ss.50.2. D. Decommissioning NRC regulations require information showing "reasonable assurance . . . that funds will be available to decommission the facility." 10 C.F.R. ss.50.33(k). ACE has filed decommissioning reports with the NRC under 10 C.F.R. ss.50.75(b) and is providing financial assurance for decommissioning its ownership interest in the above-captioned plant in accordance with those reports through an external nuclear decommissioning trust in which deposits are made at least annually. After the Merger, ACE will remain responsible for the decommissioning liabilities associated with its ownership interest in the above-captioned nuclear generating plant, and will continue to fund its respective decommissioning trust in accordance with NRC regulations. E. Antitrust Considerations The Hope Creek Generating Station is a nuclear unit licensed by the NRC under Section 103 of the Atomic Energy Act, as amended (the "Act") and, as such, the NRC and the Attorney General previously conducted an antitrust review under Section 105 of the Act. No antitrust conditions on the Hope Creek license were deemed necessary as a result of that review. Additionally, in 1986, in connection with the issuance of the Operating License for Hope Creek, the NRC concluded that there had been no significant changes warranting further antitrust review. The NRC does not need to conduct a further antitrust review with respect to the pending Application because no significant changes will have occurred upon consummation of the Merger since its prior review of this license. ACE is, and will remain, a licensee and owner of a 5% interest in the Hope Creek Unit. Similarly, PSE&G is unaffected by the Merger and will continue to own its 95% share of Hope Creek. The NRC has stated that three criteria are relevant to determine whether significant changes have occurred: (1) Whether one or more changes have occurred since the date of the previous NRC antitrust review; (2) Whether changes are reasonably attributable to the licensee(s); and (3) Whether the changes "have antitrust implications that would likely warrant some Commission remedy." South Carolina Electric & Gas Company (Virgil C. Summer Nuclear Station, Unit 1), CLI-81-14, 13 NRC 862, 872 (1981) (Emphasis in original). The Commission has held that application of the third criterion -- whether the changes "have antitrust implications that would likely warrant some Commission remedy" -- "should result in termination of NRC antitrust reviews where the changes are pro-competitive or have de minimus anti-competitive effects." Summer, supra, CLI-81-14, 13 NRC at 872 (Emphasis in original). The Commission further explained that, under the third criterion, "changes would be considered 'significant' only when the competitive structure, as changed, would likely warrant and be susceptible to a greater than de minimus license modification." Summer, CLI-81-14, 13 NRC at 864, note 3 (Emphasis supplied). In other words, the NRC should undertake an additional antitrust review only if "there is a genuine likelihood that the outcome of [the] antitrust review, were it to occur, would be a greater than inconsequential alteration or adjustment in furtherance of policies underlying the antitrust laws. Otherwise stated, we believe it was intended that we not undertake the process without an expectation that it would have greater than de minimus results." In the Matter of South Carolina Electric and Gas, CLI-80-28, 11 NRC 817, 835 (1980) (Emphasis supplied). Applying this standard, it is clear that no additional antitrust review in connection with the proposed AEI and DP&L Merger is warranted. ACE will remain the owner of its 5% interest in Hope Creek and will continue to distribute the electricity generated by its 5% interest and recover the costs of that electricity (and other electricity) through rates authorized by the NJBPU and by the FERC. Neither DP&L nor Conectiv will acquire any direct interest in the subject license or the electricity generated by ACE's 5% interest. PSE&G, as the 95% owner of Hope Creek, will also continue to have "exclusive responsibility and control over the physical construction, operation and maintenance of the facility," as well as the distribution and sale of the electricity generated by its 95% ownership share in the facility. See Public Service Electric & Gas Company and Atlantic City Electric Company, Docket No. 50-354 Hope Creek Generating Station Facility Operating License, License No. NPF-57, P. 1.E. (July 25, 1986). Therefore, there is no change in the competitive structure, and the Merger cannot have even a de minimus antitrust effect insofar as the NRC's antitrust responsibilities are concerned. Accordingly, the NRC should properly conclude that no further antitrust review is required with respect to the Merger. Furthermore, ACE and DP&L have each filed open-access tariffs with the FERC that comply with FERC's Order 888 (which requires utilities to provide other entities access to their transmission lines on terms comparable to their own use). In addition, both ACE and DP&L are participants in an application pending before the FERC which has been filed by the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM-IA) in compliance with FERC's Order 888 which, upon approval, will result in the implementation of an independent system operator for the combined transmission network of the PJM Pool. This will enhance the ability of alternative suppliers of wholesale power to make available their power to other utilities within PJM. It will also eliminate multiple, cumulative transmission charges reducing the cost of alternative power sources for other utilities located within the PJM area. Both the open transmission access currently provided by ACE and Delmava and the future implementation of an independent system operator for the PJM pool assure a pro-competitive environment in which Hope Creek is operated. The competitive effects of the Merger will also be thoroughly reviewed by other federal agencies, including the FERC. Since the NRC does not possess plenary antitrust jurisdiction, the antitrust role of the NRC is more limited than that of the FERC. Consistent with Regulatory Guide 9.1, Regulatory Staff Position Statement on Antitrust Matters, the NRC should not duplicate the FERC's role of comprehensively evaluating the potential competitive effects of the Merger, and there is no reason to do so.1 Instead, the NRC should rely upon the FERC's consideration of competitive and antitrust considerations to confirm that there are no significant antitrust changes arising from the Merger that would require further or additional NRC antitrust review. - -------- 1 Regulatory Guide 9.1 provides, in relevant part, as follows: "In general, reliance will be placed on the exercise of Federal Power Commission [now FERC] and State agency jurisdiction regarding the specific terms and conditions of the sale of power, rates of transmission services and such other matters as may be within the scope of their jurisdiction". In addition to FERC review, the proposed Merger of AEI and DP&L is subject to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Consequently, both the Federal Trade Commission and the Antitrust Division of the United States Department of Justice will be provided an opportunity to evaluate the antitrust implications, if any, of the proposed Merger. In addition, the State agency jurisdiction will continue over each of the subject operating utility companies. The State agencies include the NJBPU, the Delaware Public Service Commission, the Maryland Public Service Commission and the State Corporation Commission of Virginia. In conclusion, the proposed Merger of AEI and DP&L will not result in a significant change in the competitive environment in which Hope Creek operates. Therefore, no additional antitrust review by the NRC is warranted in connection with its review of this Application. F. Statement of Purposes for the Transfer and the Nature of the Transaction Necessitating or Making the License Transfer Desirable The purpose of the proposed Merger is to achieve benefits for the shareholders, customers and communities served by ACE, through a Merger of AEI and DP&L, that would otherwise not be achievable if they were to remain as separate companies. The expected savings related to the Merger of AEI and DP&L have been approximated at $500 million over the next ten years (1998 to 2007). The savings will come from the elimination of duplicative activities, increased scale and improved purchasing power, improved operating efficiencies, lower capital costs and, to the extent practicable, by combining the companies' work forces. G. Restricted Data This Application does not contain any Restricted Data or other classified defense information, and it is not expected that any such data will become involved in the licensed activities. However, in the event such information should become involved, ACE agrees that it will safeguard such information and will not permit any person to have access to Restricted Data until the Office of Personnel Management (as successor to the Civil Service Commission) shall have made an investigation and reported to the NRC on the character, associations and loyalty of such person, and the NRC shall have determined that permitting such person to have access to Restricted Data will not endanger the common defense and security of the United States. H. No Environmental Impact The Merger does not involve any change to the nuclear plant operations or equipment and does not change any environmental impact previously evaluated in the plant's Final Environmental Statement. Accordingly, no significant environmental impact is associated with this Application or the consequences of the Merger. PART II. - EFFECTIVE DATE The proposed Merger of AEI and DP&L is subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and requires the approval of other federal regulatory authorities as described above. Transfer upon ACE's books and records of all of the issued and outstanding shares of its common stock which will result in the change of ownership or control of ACE is also subject to review and approval by the NJBPU. The transfer of Delmarva's stock will be similarly subject to review and approval by the Delaware Public Service Commission, the Virginia State Corporation Commission and, in a limited fashion, by the Maryland Public Service Commission. The approval of the Pennsylvania Public Utility Commission will also be requested with respect to the limited issue of transfer of jointly-owned production and transmission facilities located in that Commonwealth. Approval of the Merger has been obtained from the shareholders of AEI and DP&L at a Special Meeting of Shareholders of each of the companies held for that purpose on January 30, 1997. Until all such approvals have been obtained, the Merger cannot be consummated. AEI intends to consummate the Merger with DP&L as soon as practicable following receipt of all necessary approvals. The projected closing date of the Merger is December 31, 1997. Therefore, the NRC is requested to review this Application on a schedule that will permit it to act on and provide its final consent to the proposed indirect transfer of control that would be effectuated by the Merger as promptly as possible, and in any event not later than September 30, 1997. CONCLUSION For the foregoing reasons, the NRC is requested to consent to the indirect transfers of control that would result from the Merger of AEI and DP&L regarding the interests held by ACE in Operating License No. NPF-57 for the Hope Creek Generating Station. C E R T I F I C A T I O N I, JAMES E. FRANKLIN II, being duly sworn, state that: (1) I am Senior Vice President, Secretary and General Counsel of Atlantic City Electric Company; (2) I am duly authorized to execute and file this certification on behalf of Atlantic City Electric Company; and (3) The statements set forth in the attached Application are true and correct to the best of my information, knowledge and belief. --------------------------------------- JAMES E. FRANKLIN II SWORN and subscribed to before me this 30th day of April, 1997. - -------------------------------- APPLICATION FOR TRANSFER OF CONTROL REGARDING OPERATING LICENSE NO. NPF-57 FOR THE HOPE CREEK GENERATING STATION E X H I B I T A JOINT PROXY STATEMENT/PROSPECTUS EX-99.8 9 PROPOSED FORM OF NOTICE SECURITIES AND EXCHANGE COMMISSION (Release No. 35- ) Filing under the Public Utility Holding Company Act of 1935 __________, 1997 Conectiv, Inc. (70-_______) Conectiv, Inc. (Conectiv), 800 King Street, Wilmington, Delaware 19899, a Delaware corporation not currently subject to the Act, has filed an application-declaration under sections 4, 5, 8, 9(a)(1), 9(a)(2), 10, 11(b), 13, 21 and rules 16, 80-91 and 93-94 thereunder. The application-declaration seeks approvals relating to the proposed mergers (the "Mergers") of Delmarva Power & Light Company ("Delmarva"), a combination electric and gas public- utility company incorporated in the State of Delaware and the Commonwealth of Virginia, and Atlantic Energy, Inc. ("Atlantic"), a public-utility company incorporated in the State of New Jersey, exempt from regulation under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder, by which Delmarva and its subsidiaries and the direct subsidiaries of Atlantic, would become wholly-owned subsidiaries of Conectiv. In addition, Atlantic's electric public-utility subsidiary, Atlantic City Electric Company ("ACE"), a New Jersey corporation, would become a direct wholly-owned subsidiary of Conectiv. Following the Mergers, Conectiv would register with the Commission under the Act. Conectiv also seeks approval in connection with services to be rendered by Support Conectiv ("Support Conectiv"), Conectiv's newly formed service company subsidiary. Conectiv also seeks approvals with regard to the retention by Conectiv of the gas properties of Delmarva and the continued operation of Delmarva as a combination utility; the retention by Conectiv of the present nonutility activities, businesses and investments of Delmarva and Atlantic; the investment by Conectiv, directly or indirectly, of up to an additional $100 million (exclusive of guarantees) through the period ending December 31, 2000 for the further development, including through acquisitions, of its heating, ventilation and air conditioning ("HVAC"), consumer services and customer financing businesses; and the continuation of all outstanding intrasystem financing arrangements. Delmarva and Atlantic are primarily engaged in providing electric and gas service in Delaware, Maryland, New Jersey and Virginia. As of December 31, 1996, Delmarva provided electric utility service to 442,000 customers and gas utility service to approximately 100,000 customers, and Atlantic provided electric utility service to 476,000 customers. As of December 31, 1996, there were 60,682,719 shares of Delmarva common stock and 1,253,548 shares of Delmarva preferred stock outstanding. Delmarva's principal executive office is located in Wilmington, Delaware. On a consolidated basis, for the year ended December 31, 1996, Delmarva's operating revenues were approximately $1,160 million, of which approximately $981 million were derived from electric operations, $114 million from gas operations and $65 million from other operations. Consolidated assets of Delmarva and its subsidiaries were approximately $2,979 million, consisting of $2,536 million in identifiable electric utility property, plant, and equipment, $219 million in identifiable gas utility property, plant, and equipment, and $224 million in other corporate assets. Delmarva has seven direct nonutility subsidiaries, six of which are wholly-owned. The nonutility companies are: Delmarva Industries, Inc., which was formed to be a partner in a joint venture oil and gas exploration and development program and is winding down its business; Delmarva Services Company, which leases an office building to Delmarva and/or its affiliates and owns approximately 2.9% of Chesapeake Utilities Corp., a publicly-traded gas utility company; Delmarva Energy Company, which was formed to participate in gas and oil exploration and development opportunities and is winding down its business; Conectiv Services, Inc., which was formed to acquire and operate service businesses involving HVAC sales, installation and servicing; Conectiv Communications, Inc., which was formed to provide a full range of retail and wholesale telecommunications services; East Coast Natural Gas Cooperative, L.L.C., which is engaged in gas-related activities, including bulk purchasing; and Delmarva Capital Investments, Inc., which was formed to be a holding company for a variety of investments. Atlantic is a public utility holding company exempt from regulation under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder. The principal subsidiary of Atlantic is ACE, a public utility company incorporated in New Jersey. It is a holding company exempt from regulation under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act and Rule 2 thereunder, and is engaged in the generation, transmission, distribution and sale of electric energy. It serves a population of approximately 476,000 in a 2,700 square-mile area of southern New Jersey. ACE currently has one utility subsidiary, Deepwater Operating Company, a New Jersey corporation, that operates generating facilities in New Jersey for ACE. As of December 31, 1996 there were 52,502,479 shares of Atlantic common stock. Atlantic's principal corporate office is located in Egg Harbor Township, New Jersey. On a consolidated basis, for the year ended December 31, 1996, Atlantic's operating revenues were approximately $980 million, and its total assets were approximately $2,671 million. Atlantic has two direct, nonutility subsidiaries, Atlantic Energy Enterprises, Inc. ("AEE") and Atlantic Energy International, Inc. ("AEII"), both of which are wholly-owned. AEE was formed to be a holding company for Atlantic's non-regulated subsidiaries. AEII was formed to broker used utility equipment to developing countries and to provide utility consulting services related to the design of sub-stations and other utility infrastructure. AEII is winding down its business. Conectiv was incorporated in Delaware on August 8, 1996 to become a holding company for Delmarva and its direct subsidiaries and certain direct subsidiaries of Atlantic following the Mergers and for the purpose of facilitating the Mergers. At present and until consummation of the Mergers, the common stock of Conectiv, which consists of 1000 issued and outstanding shares, is owned by Delmarva and Atlantic. Each company owns 500 shares. DS Sub Inc. ("DS Sub") has been incorporated under the laws of the State of Delaware solely for the purpose of facilitating the Mergers. The authorized capital stock of DS Sub consists of 1000 shares of common stock, $0.01 par value and all outstanding shares are held by Conectiv. DS Sub has not had, and prior to the closing of the Mergers will not have, any operations other than the activities contemplated by the Merger Agreement necessary to accomplish the combination of DS Sub and Delmarva. Pursuant to an Agreement and Plan of Merger, dated as of August 9, 1996, as amended and restated on December 26, 1996 (the "Merger Agreement"), DS Sub, a direct subsidiary of Conectiv, will be merged with and into Delmarva with Delmarva continuing as the surviving corporation and Atlantic will be merged with and into Conectiv, with Conectiv as the surviving corporation. As a result of the Mergers, Delmarva and its direct subsidiaries and certain direct subsidiaries of Atlantic will become direct subsidiaries of Conectiv, and Conectiv will be a holding company within the meaning of the Act. Specifically, upon consummation of the Mergers, the common shareholders of Delmarva will receive for each issued and outstanding share of common stock, par value $2.25 per share of Delmarva (the "Delmarva Common Stock"), one share of common stock of Conectiv, par value $.01 per share ("Conectiv Common Stock"). The common shareholders of Atlantic will receive for each issued and outstanding share of common stock, no par value per share, of Atlantic (the "Atlantic Common Stock"), 0.75 shares of Conectiv Common Stock and 0.125 shares of Class A common stock of Conectiv, par value $.01 per share ("Conectiv Class A Common Stock"). Following the Mergers, the common shareholders of Delmarva and Atlantic will become common shareholders of Conectiv. The Mergers will have no effect on the shares of preferred stock of Delmarva issued and outstanding at the time of the consummation of the Mergers, each series of which and each share of which will remain unchanged. Atlantic has no shares of preferred stock outstanding. Following the Mergers, Delmarva, ACE, AEE and AEII will become direct subsidiaries of Conectiv. Several direct subsidiaries of Delmarva, including Conectiv Services, Inc. and Conectiv Communications, Inc., are also expected to become direct subsidiaries of Conectiv. The Merger Agreement provides that Conectiv's principal corporate office will be in Wilmington, Delaware. Conectiv's board of directors will consist of a total of 18 directors, 10 of whom will be designated by Delmarva and 8 of whom will be designated by Atlantic. Conectiv also requests authorizations with respect to the activities of Support Conectiv, which will be incorporated in Delaware to serve as the service company for the Conectiv system after the Mergers. Support Conectiv will provide companies in the Conectiv system with a variety of administrative, management, and support services. It is anticipated that Support Conectiv will be staffed by a transfer of personnel from Delmarva, Atlantic, and their subsidiaries. Support Conectiv's accounting and cost allocation methods and procedures will comply with the Commission's standards for service companies in registered holding-company systems, and that Support Conectiv's billing system will use the Commission's "Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies." Except as permitted by the Act or the Commission, all services provided by Support Conectiv to affiliated companies will be on an "at cost" basis as determined by Rules 90 and 91 of the Act. Conectiv Services, Inc. currently provides HVAC sales, installation and servicing. Since 1996, it has acquired 6 HVAC service companies. The HVAC services provided by Conectiv Services, Inc. are energy-related appliance sales activities that fall within the exemptive requirements of Rule 58. Conectiv Services, Inc. intends to engage in additional activities that may be outside those authorized under Rule 58. These proposed activities, however, are clearly retainable under Commission precedent. Accordingly, Conectiv is seeking approval for Conectiv Services, Inc. to acquire additional HVAC companies through December 31, 2000. Conectiv also seeks approval for Conectiv Services, Inc. to provide directly, or through one or more subsidiaries, a variety of energy-related services and products to residential and commercial customers ("Consumer Services"). While the precise list of services is still under consideration, it is anticipated that Consumer Services may include: (1) service lines repair/extended warranties - repair of underground utility services lines owned by and located on the customer's property and extended service warranties covering the cost of such repairs; (2) surge protection - meter-based and plug-in equipment to protect customer household appliances and electronic equipment from power surges, including due to lightning; (3) appliance merchandising/repair/extended warranties - marketing of HVAC and other energy-related household appliances and, in connection therewith or separately, marketing of appliance inspection and repair services and extended service warranties covering the cost of repairing customers' appliances; (4) utility bill insurance utility bill payment protection, for a monthly fee for a specified number of months, in the event the customer becomes unemployed, disabled or dies; and (5) incidental and reasonably necessary products and services related to the choice, purchase or consumption of any such products and services. Conectiv also seeks approval for Conectiv Services, Inc. to furnish its own financing or to broker nonassociate third-party financing, directly or indirectly, to commercial, industrial and residential customers to support purchases by its customers of HVAC and Consumer Services. Conectiv Services, Inc. may also provide financing for goods and services sold by its affiliates. Customer financing may take the form of direct loans, installment purchases, operating or finance lease arrangements (including sublet arrangements) and loan guarantees. Interest on loans and imputed interest on lease payments will be based on prevailing market rates. The obligations will have terms of one to thirty years and will be secured or unsecured. Conectiv Services, Inc. may also assign obligations acquired from customers to banks, leasing companies or other financial institutions, with or without recourse. In connection with the HVAC business, Consumer Services and customer financing, Conectiv seeks approval for Conectiv Services, Inc. to invest up to an additional $100 million, exclusive of guarantees, through the period ending December 31, 2000. For the Commission, by the Division of Investment Management, pursuant to delegated authority. EX-99.9 10 EXHIBIT FS-1 CONECTIV PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 (Dollars in Thousands) (Unaudited) ASSETS
Delmarva Atlantic Pro Forma Conectiv As Adjusted As Adjusted Adjustments Pro Forma --------------- ---------------- ---------------- ------------------ Utility Plant, At Cost Electric 2,966,254 2,517,704 - 5,483,958 Gas 229,655 - - 229,655 Common 167,577 - - 167,577 --------------- ---------------- ---------------- ------------------ 3,363,486 2,517,704 - 5,881,190 Less: Accumulated depreciation 1,319,101 876,107 - 2,195,208 --------------- ---------------- ---------------- ------------------ Net utility plant in service 2,044,385 1,641,597 - 3,685,982 Construction work-in-progress 106,568 114,940 - 221,508 Leased property, 31,753 38,254 - 70,007 net Cost in excess of net assets acquired, 75,367 - 230,663 (f) 306,030 net --------------- ---------------- ---------------- ------------------ 2,258,073 1,794,791 230,663 4,283,527 --------------- ---------------- ---------------- ------------------ Investments and Nonutility Property - Nonutility property, net 79,076 54,931 - 134,007 Investment in leveraged 46,897 79,887 - 126,784 leases Funds held by trustee 35,604 86,646 - 122,250 Other investments 4,204 38,536 - 42,740 --------------- ---------------- ---------------- ------------------ 165,781 260,000 - 425,781 --------------- ---------------- ---------------- ------------------ Current Assets Cash and cash equivalents 42,859 15,548 - 58,407 Accounts 158,044 124,664 - 282,708 receivable Deferred energy costs 24,230 30,347 - 54,577 Inventories, at average cost: Fuel (coal, oil, and gas) 31,009 28,058 - 59,067 Materials and supplies 43,324 38,497 - 81,821 Prepayments 12,512 75,883 - 88,395 Other - 6,729 - 6,729 --------------- ---------------- ---------------- ------------------ 311,978 319,726 - 631,704 --------------- ---------------- ---------------- ------------------ Deferred Charges and Other Assets Unrecovered purchased power costs - 79,120 - 79,120 Deferred recoverable income taxes 134,138 85,858 - 219,996 Unrecovered state excise - 52,324 - 52,324 taxes Deferred debt refinancing 20,715 29,412 - 50,127 costs Other regulatory assets 31,133 60,482 - 91,615 Prepaid employee benefit 35,966 7,759 20,901 (g) 64,626 costs Unamortized debt expense 13,708 14,484 - 28,192 Other 23,797 38,876 (7,764) (i) 54,909 --------------- ---------------- ---------------- ------------------ 259,457 368,315 13,137 640,909 --------------- ---------------- ---------------- ------------------ Total Assets 2,995,289 2,742,832 243,800 5,981,921 =============== ================ ================ ==================
The accompanying notes to the unaudited pro forma condensed consolidated balance sheet and statements of income are an integral part of this statement. CONECTIV PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 (Dollars in Thousands) (Unaudited) CAPITALIZATION AND LIABILITIES
Delmarva Atlantic Pro Forma Conectiv As Adjusted As Adjusted Adjustments Pro Forma --------------- ---------------- ---------------- ------------------ Capitalization Common stock 137,665 562,656 (699,318) (a) 1,003 Class A common stock - - 66 (a) 66 Additional paid-in capital - common stock 515,283 - 939,587 (b)(k) 1,454,870 Additional paid-in capital - Class A common stock - - 136,769 (b) 136,769 Retained earnings 294,794 226,047 (239,674) (d) 281,167 --------------- ---------------- ---------------- ------------------ 947,742 788,703 137,430 1,873,875 Treasury shares, at cost (4,387) - 4,387 (e) - Unearned compensation (358) (2,799) 3,157 (k) - --------------- ---------------- ---------------- ------------------ Total common stockholders' equity 942,997 785,904 144,974 1,873,875 Preferred stock not subject to mandatory redemption 89,703 - (89,703) (p) - Preferred stock of subsidiaries: Not subject to mandatory redemption - 30,000 89,703 (p) 119,703 Subject to mandatory redemption 70,000 113,950 - 183,950 Long-term debt 950,159 844,585 - 1,794,744 --------------- ---------------- ---------------- ------------------ 2,052,859 1,774,439 144,974 3,972,272 --------------- ---------------- ---------------- ------------------ Current Liabilities Short-term debt 33,077 127,500 - 160,577 Preferred stock redemption requirement - 10,000 - 10,000 Long-term debt due within one year 27,547 112,675 - 140,222 Variable rate demand bonds 85,000 - - 85,000 Accounts payable 76,495 50,708 - 127,203 Taxes accrued 9,847 19,577 (1,464) (k) 27,960 Interest accrued 22,497 17,905 - 40,402 Dividends declared 23,763 21,624 - 45,387 Current capital lease 12,623 715 - 13,338 obligation Deferred income taxes, net 5,431 1,560 - 6,991 Other 31,756 27,120 82,251 (h)(i) 141,127 --------------- ---------------- ---------------- ------------------ 328,036 389,384 80,787 798,207 --------------- ---------------- ---------------- ------------------ Deferred Credits and Other Liabilities Deferred income taxes, net 522,906 434,067 (36,957) (l) 920,016 Deferred investment tax 41,861 45,944 - 87,805 credits Long-term capital lease obligations 19,546 37,538 - 57,084 Postretirement obligations - 34,109 54,996 (g) 89,105 Other 30,081 27,351 - 57,432 --------------- ---------------- ---------------- ------------------ 614,394 579,009 18,039 1,211,442 --------------- ---------------- ---------------- ------------------ Total Capitalization and Liabilities 2,995,289 2,742,832 243,800 5,981,921 =============== ================ ================ ==================
The accompanying notes to the unaudited pro forma condensed consolidated balance sheet and statements of income are an integral part of this statement. EX-99.10 11 EXHIBIT FS-2 CONECTIV PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED MARCH 31, 1997 (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Delmarva Atlantic Pro Forma Conectiv As Adjusted As Adjusted Adjustments Pro Forma ---------------- --------------- ---------------- ------------------ Operating Revenues Electric $ 1,001,375 $ 970,340 $ - $ 1,971,715 Gas 124,710 - - 124,710 Other services 86,950 12,935 - 99,885 ---------------- --------------- ---------------- ------------------ 1,213,035 983,275 - 2,196,310 ---------------- --------------- ---------------- ------------------ Operating Expenses Electric fuel and purchase energy 348,587 221,042 - 569,629 Gas purchased 73,218 - - 73,218 Purchased electric capacity 29,582 194,624 - 224,206 Operation and maintenance 349,644 208,169 - 557,813 Depreciation and amortization 130,997 81,896 5,767 (j) 218,660 State excise taxes - 102,752 - 102,752 Other taxes 36,177 9,863 - 46,040 ---------------- --------------- ---------------- ------------------ 968,205 818,346 5,767 1,792,318 ---------------- --------------- ---------------- ------------------ Operating Income 244,830 164,929 (5,767) 403,992 ---------------- --------------- ---------------- ------------------ Other Income Allowance for equity funds used during construction 1,113 922 - 2,035 Other income 8,270 8,302 - 16,572 ---------------- --------------- ---------------- ------------------ 9,383 9,224 - 18,607 ---------------- --------------- ---------------- ------------------ Interest Expense Interest charges 76,273 69,235 - 145,508 Allowance for borrowed funds used during construction and capitalized interest (4,363) (906) - (5,269) ---------------- --------------- ---------------- ------------------ 71,910 68,329 - 140,239 ---------------- --------------- ---------------- ------------------ Dividends on Preferred Securities of a Subsidiary Trust 2,812 11,177 - 13,989 ---------------- --------------- ---------------- ------------------ Income Before Income Taxes 179,491 94,647 (5,767) 268,371 Income Taxes 72,653 32,785 - 105,438 ---------------- --------------- ---------------- ------------------ Net Income 106,838 61,862 (5,767) 162,933 Dividends on Preferred Stock 7,711 - - 7,711 ---------------- --------------- ---------------- ------------------ Earnings Applicable to Common Stock: Common stock 99,127 61,862 (14,142) 146,847 Class A common stock - - 8,375 (m) 8,375 ---------------- --------------- ---------------- ------------------ $ 99,127 $ 61,862 $ (5,767) $ 155,222 ================ =============== ================ ================== Average common shares outstanding (000): Common stock 60,723 52,653 (13,276) (n) 100,100 Class A common stock - - 6,563 (n) 6,563 Earnings per average share outstanding of: Common stock $ 1.63 $ 1.17 - $ 1.47 Class A common stock $ - $ - - $ 1.28 Dividends declared per share of: Common stock $ 1.54 $ 1.54 - $ 1.54 Class A common stock $ - $ - - $ 3.20
The accompanying notes to the unaudited pro forma condensed consolidated balance sheet and statements of income are an integral part of this statement. EX-99.11 12 EXHIBIT FS-3 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (a) Adjustments to record the estimated par value at $0.01 per share of the Company Common Stock and the Company Class A Common Stock to be issued and outstanding. The number of shares of the Company stock was estimated using the number of Delmarva and Atlantic Common Stock shares outstanding as of March 31, 1997. Each outstanding share of Delmarva Common Stock was converted into one share of the Company Common Stock and each outstanding share of Atlantic Common Stock was converted into 0.75 of one share of the Company Common Stock plus 0.125 of one share of the Company Class A Common Stock. The adjustments are summarized below. As of March 31, 1997 Common Stock: Number of Atlantic Common Stock shares outstanding 52,502,479 Conversion Ratio 0.75 Number of Common Stock shares to be issued to Atlantic Common Stockholders 39,376,859 Number of Common Stock shares to be issued to Delmarva Common Stockholders (Equal to the number of Delmarva Common Stock shares outstanding) 60,972,957 ---------------- Total number of Common Stock shares to be issued 100,349,816 Par value per share $ 0.01 ---------------- (In Thousands of Dollars) Adjusted par value of total number of Common Stock shares to be issued $1,003 Delmarva's Common Stock, as previously reported (137,665) Atlantic's Common Stock, as previously reported (562,656) ---------------- Adjustment to Common Stock $(699,318) ================ Class A Common Stock: Number of Atlantic Common Stock shares outstanding 52,502,479 Conversion Ratio 0.125 Number of Class A Common Stock shares to be issued to Atlantic Common Stockholders 6,562,810 Par value per share $0.01 ---------------- Par value (In Thousands of Dollars) $66 ================ (b) Adjustments to record additional paid-in-capital to reflect the following: As of March 31, 1997 (Dollars in Thousands) Additional Paid-In-Capital--Common Stock: Cancellation of the Delmarva Treasury Stock cost in excess of par value $(3,911) Adjustment to par value of Delmarva Common Stock outstanding 136,579 Consideration to be paid to Atlantic's Common Stockholders in the form of the Company Common Stock in excess of par value 807,816 Estimated registration and issuance costs (1,750) ------------- $938,734 ============= Additional Paid-In-Capital--Class A Common Stock: Consideration to be paid to Atlantic's Common Stockholders in the form of the Company Class A Common Stock in excess of par value $136,769 ============= (c) The total consideration to be paid to the Atlantic Common Stockholders was measured by the average daily closing market price of Atlantic's Common Stock for the ten trading days following the public announcement of the Merger Agreement on August 12, 1996. Delmarva's Common Stockholders will receive one share of Company Common Stock for each share of Delmarva Common Stock. Therefore, the average daily market price of Delmarva's Common Stock for the same ten day period following the public announcement of the Merger Agreement was used to measure the market value of Company Common Stock to be paid to Atlantic's Common Stockholders. Delmarva's average market price per share was multiplied by the Atlantic conversion ratio for Company Common Stock to determine the estimated market value per share of Atlantic Common Stock attributed to Company Common Stock. This market value per share was multiplied by the number of Atlantic Common Stock shares outstanding at March 31, 1997 to estimate the consideration to be paid to Atlantic Common Stockholders in the form of Company Common Stock. The difference between the total compensation to be paid to Atlantic's Common Stockholders and the portion attributed to Company Common Stock was attributed to Company Class A Common Stock. The schedules below show the calculation of the total consideration to be paid to Atlantic's Common Stockholders and the allocation of the total consideration to be paid between Company Common Stock and Company Class A Common Stock: Amounts Average market price per share of Atlantic Common Stock used to determine consideration to be paid $18.00 Number of Atlantic Common Stock shares outstanding as of March 31, 1997 52,502,479 ---------------- Total consideration to be paid to Atlantic Common Stockholder (In Thousands of Dollars) $945,045 ================ Average market price per share of Delmarva Common Stock for the ten trading days following the public announcement of the Merger Agreement $20.525 Conversion ratio of Company Common Stock for each share of Atlantic Common Stock 0.75 ---------------- Estimated market value per share of Atlantic Common Stock attributed to Company Common Stock $15.39375 Number of Atlantic Common Stock shares outstanding as of March 31, 1997 52,502,479 ---------------- Consideration to be paid to Atlantic's Common Stockholders in the form of Company Common Stock (In Thousands of Dollars) $808,210 ============= (In Thousands of Dollars) Total consideration to be paid to Atlantic Common Stockholders $945,045 Portion of total consideration attributed to Company Common Stock 808,210 ------------ Portion of total consideration attributed to Company Class A Common Stock $136,835 (d) Adjustments to retained earnings as follows: Amounts (Dollars in Thousands) Eliminate retained earnings of Atlantic $(224,228) Charges to expense of $21.5 million ($12.9 million after tax) for nonrecurring employee separation costs related to Delmarva employees and employee retraining costs [see note (h)] (12,900) Charge to expense to eliminate unearned income [see Note (k)] (2,546) ---------------- Total adjustment $(239,674) ================ Prior to elimination, the retained earnings of Atlantic, as reported in its Form 10-Q for the quarter ended March 31, 1997, of $226,047,000 was reduced by $1,819,000, which is Atlantic's after tax portion of the expense recognized that was related to employee incentive plans [see Note (k)]. (e) Adjustment to reflect the cancellation of the Delmarva treasury stock as a condition of the Mergers. (f) The schedule below shows the calculation of the cost of acquiring Atlantic and the allocation of the total acquisition cost to identifiable tangible and intangible assets and liabilities. Cost of Acquiring Atlantic Amounts (Dollars in Thousands) Consideration to be paid to Atlantic's Common Stockholders [see Note (c)] $945,045 Add: Estimated direct costs of acquisition to be incurred by Delmarva 25,015 Less: Registration and issuance costs (1,750) ---------------- Total acquisition cost $968,310 Less assets acquired: Electric utility plant - net $1,794,791 Investments and nonutility property 260,000 Current assets 319,726 Deferred debits 368,315 ---------------- Total assets acquired $2,742,832 ================ Add liabilities acquired: Preferred stock of subsidiaries $143,950 Long-term debt 844,585 Current liabilities 388,404 Deferred credits and other liabilities 579,009 ---------------- Total liabilities acquired $1,955,948 ---------------- Costs incurred and liabilities assumed in connection with the Mergers $49,237 ------------ Cost in excess of net assets acquired $230,663 ================ The current liabilities of Atlantic as of March 31, 1997 included in net assets acquired was adjusted to reflect transactions to be recorded by Atlantic prior to the Mergers as shown below: As of March 31, 1997 (Dollars in Thousands) Current liabilities of Atlantic as adjusted [see Note (p)] $ 389,384 Accrued tax benefit [see Note (k)] (980) --------------- Current liabilities acquired $ 388,404 ================ The fair value of the utility assets of Atlantic is their book value due to the ratemaking process. Utility assets are recognized for ratemaking purposes at their book values in determining utility revenue requirements. Accordingly, the economic substance is that fair value of the utility assets is their book value. (g) Adjustments to record additional pension prepayment ($20.9 million) and postretirement benefit liabilities ($55.0 million), assumed in the acquisition of Atlantic in accordance with Statements of Financial Accounting Standards (SFAS) Nos. 87 and 106. (h) Adjustment to record an estimated liability of $43.5 million which is included in the acquisition cost, for employee separation and relocation costs, and facilities integration costs related to Atlantic's employees and facilities and a liability of $21.5 million, which will be expensed, for employee separation costs related to Delmarva's employees and employee retraining costs. The Unaudited Pro Forma Combined Statement of Income for the twelve months ended March 31, 1997 does not reflect the nonrecurring estimated expenses of $21.5 million before taxes ($12.9 million after taxes) for employee separation costs related to Delmarva's employees and employee retraining costs. (i) Adjustment to record the estimated direct costs of the Mergers of $25.0 million. These costs are included in the cost to acquire Atlantic. As of March 31, 1997 (Dollars in Thousands) Other current liabilities $ 17,251 ================ Deferred debits ($ 7,764) ================ (j) Adjustment to reflect the amortization of goodwill acquired over forty (40) years. (k) Adjustment to recognize a pretax expense of $4.0 million to eliminate unearned and deferred compensation costs payable under employee incentive plans at the time of the Mergers. The adjustment is summarized below: As of March 31, 1997 (Dollars in Thousands) Decrease in retained earnings: Atlantic $(1,819) Delmarva (727) ---------- Total decrease in retained earnings $(2,546) ========== Accrued tax benefit: Atlantic $(980) Delmarva (484) ---------- Total decrease in accrued taxes $(1,464) ========== Eliminate unearned and deferred compensation $3,157 ========= Additional paid-in capital - common stock $853 ========= The Unaudited Pro Forma Condensed Consolidated Statement of Income for the twelve months ended March 31, 1997 does not reflect the nonrecurring estimated expense of $4.0 million before taxes ($2.5 million after taxes). (l) Adjustment to record additional deferred income taxes for the following temporary differences:
(Dollars in Thousands) Temporary Deferred Differences Income Taxes Additional pension prepayment [see Note (g)] $20,901 ($7,315) Additional postretirement benefit liabilities [see Note (g)] 54,996 19,249 Liabilities for employee separation, relocation, and retraining costs and facilities integration costs [see Note (h)] 65,000 23,825 Liability for a portion of DP&L direct acquisition costs that are deemed to be tax deductible [see Note (i)] 3,000 1,198 ------- Total deferred income taxes $36,957
In accordance with SFAS No. 109, deferred income taxes were not recorded on goodwill for which the amortization is not deductible for tax purposes. (m) Adjustment to present earnings applicable to the Class A Common Stock. The Class A Common Stock is intended to reflect the growth prospects and regulatory environment of Atlantic's regulated electric utility business. When the Mergers are consummated, the shares of Class A Common Stock received by holders of Atlantic Common Stockholders will represent, in aggregate, a 30% interest in any earnings of Atlantic's regulated electric utility business in excess of $40 million per year. The calculation of the pro forma earnings applicable to the Class A Common Stock for the twelve months ended March 31, 1997 is shown below (in thousands): Atlantic City Electric Company (ACE) and Subsidiary Income Available for Common Stockholders $67,647 Add: Net Losses of Nonutility Activities Specifically Excluded 269 Less: Fixed Amount of $40 million per year (40,000) ------- Subtotal 27,916 Percentage Applicable to Class A Common Stock 30% ------- Earnings Applicable to Class A Common Stock $ 8,375 ======= (n) Adjustments to decrease the weighted average number of Common Stock shares outstanding based on the conversion ratio of 0.75 to 1 of the Company Common Stock to be issued to holders of Atlantic Common Stock and reflect the issuance of Class A Common Stock shares to holders of Atlantic Common Stock. The number of shares of Company Common Stock and Class A Common Stock estimated to be issued to holders of Atlantic Common Stock for the acquisition were deemed to be issued and outstanding for the entire period. (o) The Merger Agreement provides, subject to certain conditions, that the dividends declared and paid on the class A Common Stock will be maintained at a level of $3.20 per share per annum from the Effective Date until the earlier of July 1, 2001 or the end of the twelfth calendar quarter following the calendar quarter in which the Effective Date occurs. Thereafter, it is the intention of the Company, subject to certain conditions, to pay annual dividends on the Class A Common Stock in an aggregate amount (including the amount credited to the Intergroup Interest as provided in the Company Charter) equal to 90% of the Company Net Income Attributable to the Atlantic Utility Group. The Merger Agreement further provides that if and to the extent that the annual dividends paid on the Class A Common Stock during the Initial Period (including the aforesaid amount) shall have exceeded 100% of Company Net Income Attributable to the Atlantic Utility Group during such period, the Company Board may consider such fact in determining the appropriate annual dividend rate on the Class A Common Stock following the Initial Period. The pro forma Class A Common Stock dividends per share exceed the pro forma Class A Common Stock earnings per share for the twelve months ended March 31, 1997. (p) Adjustment to reflect Delmarva's preferred stock as preferred stock of a subsidiary. q) As necessary for fair presentation of the pro forma financial statements, amounts previously reported by Atlantic and Delmarva have been reclassified for consistency of presentation. The following schedules show the amounts reclassified. EX-99.12 13 EXHIBIT FS-4 ATLANTIC ENERGY, INC. CONSOLIDATED BALANCE SHEET MARCH 31, 1997 (Dollars in Thousands) (Unaudited) ASSETS
Reported Reclass Adjusted Amount Adjustments Amount -------------- ---------------- -------------- Electric utility plant In 2,512,100 5,604 (1) 2,517,704 service -------------- ---------------- -------------- 2,512,100 5,604 2,517,704 Less: Accumulated depreciation 876,107 - 876,107 -------------- ---------------- -------------- Net utility plant in service 1,635,993 5,604 1,641,597 Construction work-in-progress 114,940 - 114,940 Land Held for Future Use 5,604 (5,604) (1) - Leased property, net 38,254 - 38,254 -------------- ---------------- -------------- 1,794,791 - 1,794,791 -------------- ---------------- -------------- Investments and Nonutility Property Nonutility property, net 54,931 - 54,931 Investment in leveraged leases 79,887 - 79,887 Funds held by trustee 73,935 12,711 (2) 86,646 Other investments 51,247 (12,711) (2) 38,536 -------------- ---------------- -------------- 260,000 - 260,000 -------------- ---------------- -------------- Current Assets Cash and cash equivalents 15,071 477 (3) 15,548 Accounts receivable 93,188 31,476 (4) 124,664 Unbilled revenues 31,476 (31,476) (4) - Deferred energy 30,347 - 30,347 costs Inventories, at average cost: Fuel (coal, oil, and gas) 28,058 - 28,058 Materials and supplies 23,447 15,050 (3) 38,497 Working funds 15,527 (15,527) (3) - Prepayments 75,883 - 75,883 Other 15,313 (8,584) (5) 6,729 -------------- ---------------- -------------- 328,310 (8,584) 319,726 -------------- ---------------- -------------- Deferred Charges and Other Assets Unrecovered purchased power costs 79,120 - 79,120 Deferred recoverable income taxes 85,858 - 85,858 Unrecovered state excise taxes 52,324 - 52,324 Deferred debt refinancing costs 43,896 (14,484) (6) 29,412 Other regulatory assets 60,482 - 60,482 Prepaid employee benefit costs - 7,759 (5) 7,759 Unamortized debt expense - 14,484 (6) 14,484 Other 38,876 - 38,876 -------------- ---------------- -------------- 360,556 7,759 368,315 -------------- ---------------- -------------- Total Assets 2,743,657 (825) 2,742,832 ============== ================ ==============
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. ATLANTIC ENERGY, INC. CONSOLIDATED BALANCE SHEET MARCH 31, 1997 (Dollars in Thousands) (Unaudited) CAPITALIZATION AND LIABILITIES
Reported Reclass Adjusted Amount Adjustments Amount -------------- ---------------- -------------- Capitalization Common stock 562,656 - 562,656 Retained earnings 226,047 - 226,047 -------------- ---------------- -------------- 788,703 - 788,703 Unearned compensation (2,799) - (2,799) -------------- ---------------- -------------- Total common stockholders' equity 785,904 - 785,904 Preferred stock of subsidiaries: Not subject to mandatory redemption 30,000 - 30,000 Subject to mandatory redemption 113,950 - 113,950 Long-term debt 844,585 - 844,585 -------------- ---------------- -------------- 1,774,439 - 1,774,439 -------------- ---------------- -------------- Current Liabilities Short-term debt 127,500 - 127,500 Preferred stock redemption requirement 10,000 - 10,000 Long-term debt due within one year 112,675 - 112,675 Accounts payable 50,708 - 50,708 Taxes accrued 19,577 - 19,577 Interest accrued 17,905 - 17,905 Dividends declared 21,624 - 21,624 Current capital lease obligation 715 - 715 Deferred income taxes, net 1,560 - 1,560 Other 27,945 (825)(5) 27,120 -------------- ---------------- -------------- 390,209 (825) 389,384 -------------- ---------------- -------------- Deferred Credits and Other Liabilities Deferred income taxes, net 434,067 - 434,067 Deferred investment tax credits 45,944 - 45,944 Long-term capital lease obligations 37,538 - 37,538 Postretirement obligations - 34,109 (7) 34,109 Other 61,460 (34,109) (7) 27,351 -------------- ---------------- -------------- 579,009 - 579,009 -------------- ---------------- -------------- Total Capitalization and 2,743,657 (825) 2,742,832 Liabilities ============== ================ ==============
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. (1) Transfer "Land held for future use" to electric utility plant in service. (2) Transfer $12,711 for investment in Bond Escrow Trust from "Other investments" to "Funds held by trustee." (3) Transfer "Working funds" to "Cash" and to "Materials and supplies," as appropriate. (4) Transfer "Unbilled revenues" to "Accounts receivable." (5) Transfer prepaid pension cost to a separate line. (6) Transfer unamortized debt costs from "Deferred debt refinancing costs" to "Unamortized debt expense." (7) Transfer other post-retirement benefits from "Other" to a separate line. EX-99.13 14 EXHIBIT FS-5 ATLANTIC ENERGY, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED MARCH 31, 1997 (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Reported Reclass Adjusted Amount Adjustments Amount --------------- ---------------- --------------- Operating Revenues Electric $ 970,340 $ - $ 970,340 Other services - 12,935 (1) 12,935 --------------- ---------------- --------------- 970,340 12,935 983,275 --------------- ---------------- --------------- Operating Expenses Electric fuel and purchase energy 221,042 - 221,042 Purchased electric capacity 194,624 - 194,624 Operation and maintenance 190,589 17,580 (1) 208,169 Depreciation and amortization 81,157 739 (1) 81,896 State excise taxes 102,752 - 102,752 Other taxes 9,863 - 9,863 --------------- ---------------- --------------- 800,027 18,319 818,346 --------------- ---------------- --------------- Operating Income 170,313 (5,384) 164,929 --------------- ---------------- --------------- Other Income Allowance for equity funds used during construction 922 - 922 Other income 1,880 6,422 (1) 8,302 --------------- ---------------- --------------- 2,802 6,422 9,224 --------------- ---------------- --------------- Interest Expense Interest charges 64,768 4,467 (1) 69,235 Allowance for borrowed funds used during construction and capitalized interest (906) - (906) --------------- ---------------- --------------- 63,862 4,467 68,329 --------------- ---------------- --------------- Dividends on Preferred Securities of a Subsidiary 11,177 - 11,177 Trust --------------- ---------------- --------------- Income Before Income Taxes 98,076 (3,429) 94,647 Income Taxes 36,214 (3,429) (1) 32,785 --------------- ---------------- --------------- Net Income $ 61,862 $ - 61,862 =============== ================ =============== Average shares outstanding (000) 52,653 - 52,653 Earnings per average share $ 1.17 $ - $ 1.17 Dividends declared $ 1.54 $ - $ 1.54
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. (1) Transfer net earnings of nonutility subsidiaries from "Other income" to appropriate lines. EX-99.14 15 EXHIBIT FS-6 DELMARVA POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEET MARCH 31, 1997 (Dollars in Thousands) (Unaudited) ASSETS
Reported Reclass Adjusted Amount Adjustments Amount -------------- ---------------- -------------- Utility Plant, At Cost Electric 3,043,239 (76,985) (1)(2) 2,966,254 Gas 229,655 - 229,655 Common 170,383 (2,806) (2) 167,577 -------------- ---------------- -------------- 3,443,277 (79,791) 3,363,486 Less: Accumulated depreciation 1,322,252 (3,151) (2) 1,319,101 -------------- ---------------- -------------- Net utility plant in service 2,121,025 (76,640) 2,044,385 Construction work-in-progress 106,568 - 106,568 Leased property, net 30,480 1,273 (2) 31,753 Cost in excess of net assets acquired, net - 75,367 (1) 75,367 -------------- ---------------- -------------- 2,258,073 - 2,258,073 -------------- ---------------- -------------- Investments and Nonutility Property Nonutility property, net 79,076 - 79,076 Investment in leveraged leases 46,897 - 46,897 Funds held by trustee 35,604 - 35,604 Other investments 4,204 - 4,204 -------------- ---------------- -------------- 165,781 - 165,781 -------------- ---------------- -------------- Current Assets Cash and cash equivalents 42,859 - 42,859 Accounts receivable 158,044 - 158,044 Deferred energy costs 24,230 - 24,230 Inventories, at average cost: Fuel (coal, oil, and gas) 31,009 - 31,009 Materials and supplies 43,324 - 43,324 Prepayments 12,512 - 12,512 -------------- ---------------- -------------- 311,978 - 311,978 -------------- ---------------- -------------- Deferred Charges and Other Assets Deferred recoverable income taxes 134,138 - 134,138 Deferred debt refinancing costs 20,715 - 20,715 Other regulatory assets - 31,133 (3) 31,133 Prepaid employee benefit costs 35,966 - 35,966 Unamortized debt expense 13,708 - 13,708 Other 54,930 (31,133) (3) 23,797 -------------- ---------------- -------------- 259,457 - 259,457 -------------- ---------------- -------------- Total Assets 2,995,289 - 2,995,289 ============== ================ ==============
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. DELMARVA POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEET MARCH 31, 1997 (Dollars in Thousands) (Unaudited) CAPITALIZATION AND LIABILITIES
Reported Reclass Adjusted Amount Adjustments Amount -------------- ---------------- -------------- Capitalization Common stock 137,665 - 137,665 Additional paid-in capital - common stock 515,283 - 515,283 Retained earnings 294,794 - 294,794 -------------- ---------------- -------------- 947,742 - 947,742 Treasury shares, at cost (4,387) - (4,387) Unearned compensation (358) - (358) -------------- ---------------- -------------- Total common stockholders' equity 942,997 - 942,997 Preferred stock not subject to mandatory redemption 89,703 - 89,703 Preferred stock of subsidiaries: Subject to mandatory redemption 70,000 - 70,000 Long-term debt 950,159 - 950,159 -------------- ---------------- -------------- 2,052,859 - 2,052,859 -------------- ---------------- -------------- Current Liabilities Short-term debt 33,077 - 33,077 Long-term debt due within one year 27,547 - 27,547 Variable rate demand bonds 85,000 - 85,000 Accounts payable 76,495 - 76,495 Taxes accrued 9,847 - 9,847 Interest accrued 22,497 - 22,497 Dividends declared 23,763 - 23,763 Current capital lease obligation 12,623 - 12,623 Deferred income taxes, net 5,431 - 5,431 Other 31,756 - 31,756 -------------- ---------------- -------------- 328,036 - 328,036 -------------- ---------------- -------------- Deferred Credits and Other Liabilities Deferred income taxes, net 522,906 - 522,906 Deferred investment tax credits 41,861 - 41,861 Long-term capital lease obligations 19,546 - 19,546 Other 30,081 - 30,081 -------------- ---------------- -------------- 614,394 - 614,394 -------------- ---------------- -------------- Total Capitalization and 2,995,289 - 2,995,289 Liabilities ============== ================ ==============
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. (1) Transfer goodwill from Electric plant to "Cost in excess of net assets acquired, net." (2) Transfer capital leases, net to "Leased property, net." (3) Transfer regulatory assets from "Other" to "Other regulatory assets." EX-99.15 16 EXHIBIT FS-7 DELMARVA POWER AND LIGHT COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED MARCH 31, 1997 (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Reported Reclass Adjusted Amount Adjustments Amount --------------- ---------------- --------------- Operating Revenues Electric $1,001,375 $ - $1,001,375 Gas 124,710 - 124,710 Other services 86,950 - 86,950 --------------- ---------------- --------------- 1,213,035 - 1,213,035 --------------- ---------------- --------------- Operating Expenses Electric fuel and purchase energy 348,587 - 348,587 Gas purchased 73,218 - 73,218 Purchased electric capacity 29,582 - 29,582 Operation and maintenance 349,644 - 349,644 Depreciation and amortization 130,997 - 130,997 Other taxes 36,177 - 36,177 --------------- ---------------- --------------- 968,205 - 968,205 --------------- ---------------- --------------- Operating Income 244,830 - 244,830 --------------- ---------------- --------------- Other Income Allowance for equity funds used during construction 1,113 - 1,113 Other income 8,270 - 8,270 --------------- ---------------- --------------- 9,383 - 9,383 --------------- ---------------- --------------- Interest Expense Interest charges 76,273 - 76,273 Allowance for borrowed funds used during construction and capitalized interest (4,363) - (4,363) --------------- ---------------- --------------- 71,910 - 71,910 --------------- ---------------- --------------- Dividends on Preferred Securities of a Subsidiary 2,812 - 2,812 Trust --------------- ---------------- --------------- Income Before Income Taxes 179,491 - 179,491 Income Taxes 72,653 - 72,653 --------------- ---------------- --------------- Net Income 106,838 - 106,838 Dividends on Preferred Stock 7,711 - 7,711 --------------- ---------------- --------------- Earnings Applicable to Common Stock $ 99,127 - $ 99,127 =============== ================ =============== Average shares outstanding (000): 60,723 - 60,723 Earnings per average share $ 1.63 $ - $ 1.63 Dividends declared $ 1.54 $ - $ 1.54
The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement. -----END PRIVACY-ENHANCED MESSAGE-----