-----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, OxrgolXC636CRiyPBAZg+DaXzRprAej0pFmTfiqCm0dqEdg6B06IT2ttEZ5kCihd Cg3G2A/+1QowvL1olfnx1g== 0000898080-98-000039.txt : 19980227 0000898080-98-000039.hdr.sgml : 19980227 ACCESSION NUMBER: 0000898080-98-000039 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980226 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/A SEC ACT: SEC FILE NUMBER: 070-09069 FILM NUMBER: 98549542 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/A 1 AMENDMENT NO. 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- AMENDMENT NO. 4 TO 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 Conectiv, Inc. Conectiv, Inc. 800 King Street 6801 Black Horse Pike Wilmington, Delaware 19899 Egg Harbor Township, New Jersey 08234 (Names and addresses of agents for service) The Commission is requested to send copies of all notices, orders and communications in connection with this Application-Declaration to: -1- Joanne C. Rutkowski, Esq. James M. Cotter, Esq. William S. Lamb, Esq. Vincent Pagano, Jr., Esq. H. Liza Moses, Esq. Simpson Thacher & LeBoeuf, Lamb, Greene & Bartlett MacRae, L.L.P. 425 Lexington Avenue 125 West 55th Street New York, New York 10017 New York, New York 10019 Peter F. Clark, Esq. James E. Franklin II, Esq. Delmarva Power & Light Company Atlantic Energy, Inc. 800 King Street 6801 Black Horse Pike Wilmington, Delaware 19899 Egg Harbor Township, New Jersey 08234 -2- TABLE OF CONTENTS Item 1. Description of Proposed Mergers.......................................1 A. Introduction.......................................................1 1. General Request...............................................2 2. Overview of the Mergers.......................................2 B. Description of the Parties to the Mergers..........................3 1. General Description...........................................3 a. Delmarva..................................................3 b. Atlantic..................................................4 c. Conectiv and its Subsidiaries.............................6 i. Conectiv...........................................6 ii. Delmarva...........................................7 iii. Delmarva's Subsidiaries............................7 iv. ACE................................................7 v. AEE................................................7 vi. AEII...............................................8 vii. Support Conectiv...................................8 viii. DS Sub.............................................8 2. Description of Facilities.....................................9 a. Delmarva..................................................9 i. General............................................9 ii. Electric Generating Facilities and Resources..........................................9 iii. Electric Transmission and Other Facilities........................................10 iv. Gas Facilities....................................11 v. Other.............................................11 b. Atlantic.................................................11 i. General...........................................11 ii. Electric Generating Facilities and Resources.........................................12 iii. Electric Transmission and Other Facilities........................................13 iv. Other.............................................13 3. Nonutility Subsidiaries......................................13 a. Delmarva.................................................13 i. Delmarva Services Company.........................13 ii. DEC...............................................14 iii. CSI...............................................14 b. Conectiv Communications, Inc.............................14 c. DCI......................................................14 d. Solutions................................................15 e. ECNG.....................................................17 4. Atlantic.....................................................17 a. AEII.....................................................17 b. AEE......................................................18 c. Solutions................................................20 C. Description of the Mergers.......................................20 1. Background and Negotiations Leading to the Proposed Mergers.............................................20 2. Merger Agreement.............................................26 D. Benefit Plans....................................................26 -i- Page ---- E. Management and Operations of Conectiv Following the Mergers......................................................27 F. Industry Restructuring Initiatives...............................28 Item 2. Fees, Commissions and Expenses.......................................31 Item 3. Applicable Statutory Provisions......................................31 A. Legal Analysis...................................................32 1. Section 10(b)................................................34 a. Section 10(b)(1).........................................35 i. Interlocking Relationships..........................35 ii. Concentration of Control............................35 b. Section 10(b)(2) -- Fairness of Consideration............................................38 c. Section 10(b)(2) -- Reasonableness of Fees.....................................................40 d. Section 10(b)(3).........................................41 2. Section 10(c)................................................47 a. Section 10(c)(1).........................................48 i. Acquisition of Gas Operations....................48 ii. Direct and Indirect Nonutility Subsidiaries of Conectiv.........................57 b. Section 10(c)(2).........................................58 i. Efficiencies and Economies.......................58 ii. Integrated Public Utility System.................62 3. Section 10(f)................................................68 4. Other Applicable Provisions -- Section 9(a)(1)......................................................68 B. Intra-System Provision of Services...............................69 1. Support Conectiv.............................................70 2. Other Services...............................................72 Item 4. Regulatory Approvals.................................................73 A. Antitrust........................................................73 B. Federal Power Act................................................73 C. Atomic Energy Act................................................74 D. State Public Utility Regulation..................................74 Item 5. Procedure............................................................76 Item 6. Exhibits and Financial Statements....................................76 A. Exhibits.........................................................76 B. Financial Statements.............................................78 Item 7. Information as to Environmental Effects..............................79 -ii- The Form U-1 Application/Declaration in this proceeding originally filed with the Securities and Exchange Commission on July 2, 1997, and previously amended on August 13, 1997, November 26, 1997 and December 19, 1997 is hereby amended and restated in its entirety as follows: Item 1. Description of Proposed Mergers ------------------------------- 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"). The Mergers are expected to produce substantial benefits to the public, investors and consumers, and meet all applicable standards of the Act. Among other things, Delmarva and Atlantic believe that the Mergers will allow the shareholders of each of the companies to participate in a larger, financially stronger company that, through a combination of the equity, management, human resources and technical expertise of each company, will be able to achieve increased financial stability and strength, greater opportunities for earnings growth, reduction of operating costs, efficiencies of operation, better use of facilities for the benefit of customers, improved ability to use new technologies, greater retail and industrial sales diversity and improved capability to make wholesale power purchases and sales. In this regard, Delmarva and Atlantic believe that synergies created by the Mergers will generate substantial cost savings which would not have been available absent the Mergers. Delmarva and Atlantic have estimated the dollar value of certain synergies resulting from the Mergers to be in excess of $500 million over a ten-year period. The expected benefits of the Mergers are discussed in further detail in Item 3.A.2.b.i. below. The shareholders of Delmarva and Atlantic approved the Mergers at their respective meetings held on January 30, 1997. Delmarva and Atlantic have received orders approving the Mergers and/or related matters from their various state and federal regulators. Orders have been received from the Federal Energy - ------------------ 1 Following consummation of the Mergers, Conectiv, Inc. will change its name to Conectiv. -1- Regulatory Commission (the "FERC"), the Maryland Public Service Commission (the "MPSC"), the Delaware Public Service Commission (the "DPSC"), the Virginia State Corporation Commission (the "VSCC"), the New Jersey Board of Public Utilities (the "NJBPU"), the Pennsylvania Public Utility Commission (the "PPUC"), and the Nuclear Regulatory Commission (the "NRC"). Finally, both companies have made the required filings with the Antitrust Division of the U.S. Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the waiting period thereunder has expired. See Item 4 below for additional detail regarding these regulatory approvals. Conectiv seeks to consummate the Mergers by March 1, 1998. In order to permit timely consummation of the Mergers and the realization of the substantial benefits they are expected to produce, Conectiv requests that the Commission's review of this Application/Declaration commence and proceed as expeditiously as practicable, and that the Commission order be issued in no event later than February 25, 1998. 1. General Request --------------- Pursuant to Sections 9(a)(2) and 10 of the Act, Conectiv hereby requests authorization and approval of the Commission to acquire, by means of the Mergers described below, all of the issued and outstanding common stock of Delmarva and Atlantic. Conectiv also hereby requests that the Commission approve: (i) the designation of Support Conectiv ("Support Conectiv," which is now known as "Conectiv Resource Partners, Inc.") as a subsidiary service company in accordance with the provisions of Rule 88 of the Act and the Service Agreement as a basis for Support Conectiv to comply with Section 13 of the Act and the Commission's rules thereunder; (ii) the acquisition by Conectiv of the gas properties of Delmarva and the continued operation of Delmarva as a combination gas and electric utility company; and (iii) the acquisition by Conectiv of the nonutility activities, businesses and investments of Delmarva and Atlantic. 2. Overview of the Mergers ----------------------- Pursuant to an Agreement and Plan of Merger, dated as of August 9, 1996, as amended and restated as of December 26, 1996 (the "Merger Agreement"), DS Sub, Inc., a Delaware -2- corporation and a direct subsidiary of Conectiv ("DS Sub"), will be merged with and into Delmarva, with Delmarva continuing as the surviving corporation (the "Delmarva Merger"), and Atlantic will be merged with and into Conectiv, with Conectiv as the surviving corporation (the "Atlantic Merger"). As a result of the Delmarva Merger and the Atlantic Merger, Delmarva and its subsidiaries and the subsidiaries of Atlantic will become subsidiaries of Conectiv, which will be a holding company within the meaning of the Act. A chart of the proposed corporate structure of Conectiv following consummation of the Mergers is attached hereto as Exhibit E-4. The common shareholders of Delmarva will receive for each issued and outstanding share of common stock, par value $2.25 per share, of Delmarva (the "Delmarva Common Stock"), one share of common stock of Conectiv, par value $.01 per share ("Conectiv Common Stock"). The common shareholders of Atlantic will receive for each issued and outstanding share of common stock, no par value per share, of Atlantic (the "Atlantic Common Stock"), 0.75 shares of Conectiv Common Stock and 0.125 shares of Class A common stock of Conectiv, par value $.01 per share ("Conectiv Class A Common Stock"). Following the Mergers the common shareholders of Delmarva and Atlantic will become common shareholders of Conectiv. (See Item 1.C.2 below.) The Mergers will have no effect on the shares of preferred stock of Delmarva issued and outstanding at the time of the consummation of the Mergers, each series of which and each share of which will remain unchanged. Atlantic has no shares of preferred stock outstanding. A copy of the Merger Agreement is incorporated by reference as Exhibit B-1 hereto. B. Description of the Parties to the Mergers ----------------------------------------- 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 June 30, 1997, Delmarva provided electric utility service to approximately 445,000 customers in an area encompassing about 6,000 square miles in Delaware (255,000 customers), Maryland (170,000 customers) and Virginia (20,000 customers), and gas utility service to approximately 102,000 customers in an area consisting of about 275 square miles in northern Delaware. A map of Delmarva's service territory is attached as Exhibit E-1. Delmarva is subject to regulation as a public utility under the Delaware Public Utilities Act as to retail electric and gas rates and other matters by the DPSC. Delmarva is also subject to regulation by the VSCC and MPSC as to retail electric rates and other matters and to regulation by the PPUC with -3- respect to ownership of generating facilities in Pennsylvania. Delmarva is also subject to regulation by the FERC with respect to the classification of accounts, rates for any wholesale sales of electricity, the interstate transmission of electric power and energy, interconnection agreements, borrowings and issuances of securities not regulated by state commissions and acquisitions and sales of certain utility properties under the Federal Power Act. In addition, Delmarva is subject to limited regulation by the FERC under the Natural Gas Act of 1938, as amended with respect to its ownership of a 4-mile pipeline that crosses state lines and sales for resale made pursuant to FERC blanket marketing certificates. Delmarva is also currently subject to regulation by the NRC in connection with its ownership interests in the Salem Nuclear Generating Station and the Peach Bottom Nuclear Generating Station. The Delmarva Common Stock is listed on the New York Stock Exchange (the "NYSE") and the Philadelphia Stock Exchange and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges. As of June 30, 1997, there were 61,269,320 shares of Delmarva Common Stock and 1,253,548 shares of Delmarva Preferred Stock outstanding. Delmarva's principal executive office is located at 800 King Street, Wilmington, Delaware 19899. A copy of the Restated Certificate and Articles of Incorporation, as amended, of Delmarva is incorporated by reference as Exhibit A-3. Delmarva has a nonutility subsidiary trust, Delmarva Power Financing I ("DPF I"), a Delaware trust, which was formed in 1996 in connection with the issuance by Delmarva of Cumulative Quarterly Income Preferred Securities. For the twelve months ended June 30, 1997, Delmarva's operating revenues on a consolidated basis were approximately $1,256 million, of which approximately $1,018 million were derived from electric operations, $134 million from gas operations and $104 million from other operations. Consolidated assets of Delmarva and its subsidiaries at June 30, 1997 were approximately $2,992 million, consisting of approximately $2,531 million in identifiable electric utility property, plant and equipment; approximately $236 million in identifiable gas utility property, plant and equipment; and approximately $225 million in other corporate assets. A more detailed summary of information concerning Delmarva and its subsidiaries is contained in Delmarva's Annual Report on Form 10-K for the year ended December 31, 1996, a copy of which is incorporated by reference as Exhibit H-1. b. Atlantic -------- Atlantic was incorporated under the laws of the State of New Jersey in 1986 and is a public utility holding company exempt from regulation by the Commission under the Act (except -4- for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the Act and Rule 2 thereunder. Pursuant to Rule 2, Atlantic has filed a statement with the Commission on Form U-3A-2 for the year ended December 31, 1996, which is incorporated by reference as Exhibit H-3 hereto. The principal subsidiary of Atlantic is Atlantic City Electric Company ("ACE"). ACE is a public utility company organized under the laws of the State of New Jersey in 1924 by merger and consolidation of several utility companies. ACE is engaged in the generation, transmission, distribution and sale of electric energy. ACE serves a population of approximately 476,000 customers in a 2,700 square-mile area of southern New Jersey. A map of ACE's service area is attached as Exhibit E-1 hereto. It is a holding company exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(2) of the Act and Rule 2 thereunder, by reason of its public utility company subsidiary, Deepwater Operating Company ("Deepwater"), a New Jersey corporation, that operates generating facilities in New Jersey for ACE. Deepwater owns no physical assets. Prior to the closing of the Mergers, the employees of Deepwater will become employees of ACE, which will cease to be a holding company for purposes of the Act. Thereafter, Deepwater will be dissolved. ACE has a nonutility subsidiary trust, Atlantic Capital I ("ACI"), a Delaware trust, which was formed in 1996 in connection with the issuance by ACE of Cumulative Quarterly Income Preferred Securities. As a public utility under the laws of the State of New Jersey, ACE is regulated by the NJBPU as to its retail rates, services, accounts, depreciation, and acquisitions and sales of utility properties, and in other respects, and to regulation by the PPUC with respect to ownership of generating facilities in Pennsylvania. ACE is also subject to regulation by the FERC with respect to the classification of accounts, rates for any wholesale sales of electricity, the interstate transmission of electric power and energy, interconnection agreements, borrowings and issuances of securities not regulated by state commissions and acquisitions and sales of certain utility properties under the Federal Power Act. In addition, Atlantic is currently subject to regulation by the NRC in connection with its ownership interest in the Salem, Peach Bottom and Hope Creek Nuclear Generating Stations. The Atlantic Common Stock is listed on the New York, Philadelphia and Pacific Stock Exchanges. As of June 30, 1997, there were 52,502,479 shares of Atlantic Common Stock outstanding and no shares of preferred stock. ACE had 839,500 shares of preferred outstanding as of June 30, 1997. Atlantic's principal executive office is located at 6801 Black Horse Pike, -5- Egg Harbor Township, New Jersey 08234. A copy of the Atlantic Restated Certificate of Incorporation is incorporated by reference as Exhibit A-4. On a consolidated basis, Atlantic's operating revenues for the twelve months ended June 30, 1997 were approximately $987 million, and its total assets as of December 31, 1996 were approximately $2,758 million. More detailed information concerning Atlantic is contained in the Annual Reports of Atlantic and ACE on Form 10-K for the year ended June 30, 1997, which is incorporated by reference as Exhibit H-2. c. Conectiv and its Subsidiaries ----------------------------- i. Conectiv -------- Conectiv was incorporated under the laws of the State of Delaware on August 8, 1996 to become a holding company for Delmarva and its direct subsidiaries and certain direct subsidiaries of Atlantic following the Mergers and for the purpose of facilitating the Mergers. Conectiv filed a Restated Certificate of Incorporation on December 24, 1996. Conectiv has, and prior to the consummation of the Mergers will have, no operations other than those contemplated by the Merger Agreement to accomplish the Mergers. Upon consummation of the Mergers, Conectiv will be a public utility holding company and will own directly all of the issued and outstanding common stock of Delmarva, certain of Delmarva's direct subsidiaries, ACE, Atlantic Energy Enterprises, Inc. ("AEE"), Atlantic Energy International, Inc. ("AEII") and Support Conectiv. At present and until consummation of the Mergers, the common stock of Conectiv, which consists of 1,000 issued and outstanding shares, is owned by Delmarva and Atlantic, each of which owns 500 shares. A copy of the Restated Certificate of Incorporation of Conectiv is attached as Exhibit A-1. Following consummation of the Mergers, the common equity of the Company will be divided into two classes: the Conectiv Common Stock and the Conectiv Class A Common Stock. The use of two classes of common stock is designed to address the difference in Delmarva's and Atlantic's evaluations of the growth prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic. Upon the consummation of the Mergers, the Conectiv Common Stock will be issued both to the holders of the Delmarva Common Stock and to the holders of the Atlantic Common Stock while the Conectiv Class A Common Stock will be issued only to the holders of the Atlantic Common Stock, thereby giving the current holders of Atlantic Common Stock a proportionately greater opportunity to share in the growth prospects of, and a proportionately greater exposure to the uncertainties associated with deregulation of, the regulated electric utility business of -6- Atlantic. As discussed infra, Section 7(c)(2)(A) of the Act expressly provides for the issuance of such types of securities "solely ... for the purpose of effecting a merger." As discussed below, upon consummation of the Mergers, and after some additional organizational changes immediately after the Mergers, it is contemplated that Conectiv will have two direct utility subsidiaries, Delmarva and ACE, whose only nonutility subsidiaries would be DPF I and ACI, respectively. The system's other nonutility interests will be held by various direct and indirect subsidiaries of Conectiv. The precise structure of the system's nonutility operations will be determined, in part, by any consolidation, dissolution and/or divestiture of the existing interests of Delmarva and ACE in nonutility businesses prior to the Mergers. ii. Delmarva -------- Following the consummation of the Mergers, Delmarva will become a direct subsidiary of Conectiv. Delmarva's utility operations and facilities are described in Item 1.B.2.a. below and its nonutility subsidiaries and operations are described in Item 1.B.3.a. below. iii. Delmarva's Subsidiaries ----------------------- In conjunction with the Mergers, Delmarva's existing subsidiaries will be reorganized. Delmarva's direct subsidiaries, except DPF I, are not expected to remain subsidiaries of Delmarva but instead to become direct or indirect subsidiaries of Conectiv. At present, these direct subsidiaries of Delmarva are Conectiv Services, Inc., Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI"), Delmarva Service Company, Delmarva Energy Company, Conectiv Solutions LLC and East Coast Natural Gas Cooperative, LLC ("ECNG"). As described below, DCI is a holding company for a variety of non-utility interests. iv. ACE --- Following the consummation of the Mergers, ACE will become a direct subsidiary of Conectiv. ACE's utility operations and facilities are described in Item 1.B.2.b. below. ACE does not currently own any interest in any nonutility subsidiaries other than ACI. v. AEE --- Following the consummation of the Mergers, AEE will become a direct subsidiary of Conectiv. AEE is a holding company for Atlantic's nonutility subsidiaries, including Atlantic Generation, Inc. ("AGI"), Atlantic Southern Properties, Inc. ("ASP"), ATE Investment, Inc. ("ATE"), Atlantic Thermal Systems, -7- Inc. ("ATS"), CoastalComm, Inc. ("CCI") and Atlantic Energy Technology, Inc. ("AET"). vi. AEII ---- Following the consummation of the Mergers, AEII will become a direct subsidiary of Conectiv. AEII was formed in July, 1996 to provide utility consulting services and equipment sales to international markets. The business activities of AEII are being concluded with the expectation that AEII will be inactive by December 31, 1997 and the company dissolved or merged out of existence by June 30, 1998. vii. Support Conectiv ---------------- Prior to the consummation of the Mergers, Support Conectiv will be incorporated in Delaware to serve as the service company for the Conectiv system. Support Conectiv will provide Delmarva, ACE and the other companies of the Conectiv system with a variety of administrative, management, engineering, construction, environmental and support services, either directly or through agreements with associate or nonassociate companies, as needed. Support Conectiv will enter into a service agreement with most, if not all, companies in the Conectiv system (the "Service Agreement"). (A copy of the form of Service Agreement as well as an appendix entitled "Description of Services and Determination of Charges for Services" will be filed as Exhibit B-2). The authorized capital stock of Support Conectiv will consist of up to 3,000 shares of common stock, $1 par value per share. Upon consummation of the Mergers, all issued and outstanding shares of Support Conectiv common stock will be held by Conectiv. viii. DS Sub ------ Solely for the purpose of facilitating the Mergers proposed herein, DS Sub has been incorporated under the laws of the State of Delaware as a direct transitory subsidiary of Conectiv established to effectuate the Delmarva Merger. The authorized capital stock of DS Sub consists of 1000 shares of common stock, $0.01 par value ("DS Sub Common Stock"), all of which is held by Conectiv. DS Sub has not had, and prior to the closing of the Mergers will not have, any operations other than the activities contemplated by the Merger Agreement necessary to accomplish the combination of DS Sub and Delmarva as herein described. -8- 2. Description of Facilities ------------------------- a. Delmarva -------- i. General ------- For the twelve months ended June 30, 1997, Delmarva sold the following amount of electric energy (retail and wholesale) and sold and transported the following amount of natural gas: Electric sales...........................................14,209,549 Mwh Gas sold and transported.................................28,695,000 Mcf ii. Electric Generating Facilities and Resources -------------------------------------------- As of June 30, 1997, Delmarva had a total net installed generating capacity of approximately 2,738 MW available from the following power plants: Edge Moor is located in Wilmington, DE. Delmarva's ownership interest results in a net installed capacity of 696 MW. The major fuel source for 251 MW is coal and the major fuel source for 445 MW is oil. Indian River is located in Millsboro, DE. Delmarva's ownership interest results in a net installed capacity of 743 MW. Its major fuel source is coal. Conemaugh is located in New Florence, PA. Delmarva's ownership interest results in a net installed capacity of 63 MW. Its major fuel source is coal. Keystone is located in Shelocta, PA. Delmarva's ownership interest results in a net installed capacity of 63 MW. Its major fuel source is coal. Vienna is located in Vienna, MD. Delmarva's ownership interest results in a net installed capacity of 151 MW. Its major fuel source is oil. Peach Bottom Nuclear Generating Station is located in Peach Bottom Township, PA. Delmarva owns 7.51 percent of Peach Bottom which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Salem Nuclear Generating Station is located in Lower Alloways Creek Township, NJ. Delmarva owns 7.41 percent of Salem which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Hay Road is located in Wilmington, DE. It is a combustion turbine/combined cycle power plant. Delmarva's -9- ownership interest results in a net installed capacity of 511 MW. Its major fuel source is gas. Delmarva owns (or partially owns) fourteen peaking units, ranging in size from 0.1 MW to 26 MW. These units are located in Delaware, Maryland, Virginia, New Jersey, and Pennsylvania and are fueled with gas, oil, or diesel fuel. Delmarva's ownership interest results in a net installed capacity of 183 MW. In addition to the power plants owned or partially owned by Delmarva listed above, Delmarva purchases capacity from three utilities. At June 30, 1997, Delmarva's purchased capacity totaled 367 MW. Delmarva's total capacity available at June 30, 1997 to serve customers is 3105 MW. Delmarva's 1996 summer peak load, which occurred on July 9, 1996, was 2,569 MW and its 1996 winter peak load, which occurred on January 17, 1997, was 2,587 MW. iii. Electric Transmission and Other Facilities ------------------------------------------ As of June 30, 1997, Delmarva's transmission system consisted of approximately 16 circuit miles of 500 kV lines; 326 circuit miles of 230 kV lines; 453 circuit miles of 138 kV lines; 711 circuit miles of 69 kV lines; 618 circuit miles of 34 kV lines and 5,261 circuit miles of 25 kV lines. As of June 30, 1997, Delmarva's distribution system consisted of 6,706 circuit miles of 12 kV and 4 kV lines. As of December 31, 1996, Delmarva's electric transmission and distribution system includes 1,391 transmission poleline miles of overhead lines, 5 transmission cable miles of underground cables, 6,927 distribution poleline miles of overhead lines and 5,416 distribution cable miles of underground cables. Delmarva is a member of the Pennsylvania-New Jersey- Maryland Interconnection ("PJM" or the "PJM Pool")2. The members of PJM have worked together voluntarily for almost seventy years to create the Nation's largest "tight" power pool - ------------------ 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. -10- with free-flowing ties. With the backing of their regulatory commissions, the members have built an efficient wholesale energy market based on a "split-the-savings" energy exchange, the reciprocal sharing of capacity resources, and a competitive market in transmission entitlements to import energy. Estimates of the savings realized by the PJM Pool range upwards of $1 billion per year. Delmarva's generation and bulk transmission facilities have been operated on an integrated basis with those of other PJM members. Delmarva estimates that its fuels savings associated with energy transactions within the PJM Pool amounted to $9.8 million during 1996. The PJM Interconnection's installed capacity as of December 31, 1996 was 57,283 MW. The PJM Interconnection peak demand during 1996 was 44,302 MW on August 23, 1996, which resulted in a summer reserve margin of 24% (based on installed capacity of 56,865 MW on that date). iv. Gas Facilities -------------- The gas property of Delmarva as of June 30, 1997 consisted of a liquefied natural gas plant located in Wilmington, Delaware with a storage capacity of 3.045 million gallons and a maximum daily sendout capacity of 49,898 Mcf per day. This facility is used primarily as a peak-shaving facility for Delmarva's gas customers. Delmarva also owns four natural gas city gate stations at various locations in its gas service territory. These stations have a total contract sendout capacity of 125,000 Mcf per day. Delmarva has 111 miles of transmission mains (including 11 miles of joint-use gas pipelines that are used 10% for gas distribution and 90% for electricity production), 1,539 miles of distribution mains and 1,091 miles of service lines. The Delmarva gas facilities are located exclusively in New Castle County, Delaware. v. Other ----- Delmarva and its subsidiaries own and occupy office buildings in Wilmington and Christiana, Delaware and Salisbury, Maryland and also own a number of other properties located elsewhere in its service area that are used for office, service and other purposes. In addition, Delmarva owns other property, plant and equipment supporting its electric and gas utility functions. b. Atlantic -------- i. General ------- For the twelve months ended June 30, 1997, ACE sold 8.143 billion kwh of electric energy (at retail and wholesale). -11- ii. Electric Generating Facilities and Resources -------------------------------------------- As of June 30, 1997, ACE had a total net capability of approximately 1679 MW available from the following units: Deepwater is located in Penns Grove, NJ. ACE's ownership interest results in a net installed capacity of 220 MW. Its major fuel sources are oil, coal and gas. B.L. England is located in Beesley Point, NJ. ACE's ownership interest results in a net installed capacity of 439 MW. Its major fuel sources are coal and oil. Keystone is located in Shelocta, PA. ACE's ownership interest results in a net installed capacity of 42 MW. Its major fuel source is coal. Conemaugh is located in New Florence, PA. ACE's ownership interest results in a net installed capacity of 65 MW. Its major fuel source is coal. Peach Bottom Nuclear Generating Station is located in Peach Bottom Township, PA. ACE owns 7.51 percent of Peach Bottom which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Salem Nuclear Generating Station is located in Lower Alloways Creek Township, NJ. ACE owns 7.41 percent of Salem which results in a net installed capacity of 164 MW. Its fuel source is nuclear. Hope Creek Nuclear Generating Station is located in Lower Alloways Creek Township, NJ. ACE's 5% ownership interest results in a net installed capacity of 52 MW. Its fuel source is nuclear. Combustion Turbine Units are located in various locations. ACE's ownership interest results in a net installed capacity of 524 MW. Their major fuel sources are oil and gas. Diesel Units are located in various locations. ACE's ownership interest results in a net installed capacity of 8.7 MW. Their major fuel source is oil. In addition, ACE had firm capacity purchases with a net total, as of June 30, 1997, of 707 MW. ACE's summer peak load for the calendar year 1996, which occurred on August 23, 1996, was 1774 MW and its 1996 winter peak load, which occurred on January 17, 1997 was 1,431 MW. -12- iii. Electric Transmission and Other Facilities ------------------------------------------ As of June 30, 1997, ACE's transmission system consisted of approximately 22 circuit miles of 500 kV lines; 127 circuit miles of 230 kV lines; 209 circuit miles of 138 kV lines; 590 circuit miles of 69 kV lines; 113 circuit miles of 34 kV lines and 197 circuit miles of 23 kV lines. As of December 31, 1996, ACE's distribution system consisted of 10,398 circuit miles of 12 kV and 4 kV lines. ACE's electric transmission and distribution system includes 1,215 transmission poleline miles of overhead lines, 46 transmission cable miles of underground cables, 9,252 distribution poleline miles of overhead lines and 1,146 distribution cable miles of underground cables. ACE is also a member of the PJM Interconnection. ACE's generation and transmission facilities are operated on an integrated basis with those of seven other utilities, including Delmarva, in Pennsylvania, New Jersey, Maryland and the District of Columbia. ACE estimates that its fuel savings associated with energy transactions within the pool amounted to $3.8 million (includes savings for Vineland Municipal Electric Utility) during 1996. iv. Other ----- ACE owns and occupies an office building and a number of operating centers located throughout southern New Jersey. In addition, ACE owns property, plant and equipment supporting its electric utility functions. 3. Nonutility Subsidiaries ----------------------- Both Delmarva and Atlantic currently engage, through subsidiaries and affiliates, in various nonutility activities related to the systems' core utility businesses. a. Delmarva -------- Delmarva has seven direct nonutility subsidiaries: Delmarva Services Company, Delmarva Energy Company ("DEC"), Conectiv Services, Inc. ("CSI"), Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI"), Conectiv Solutions LLC ("Solutions") and East Coast Natural Gas Cooperative, LLC ("ECNG"). i. Delmarva Services Company ------------------------- Delmarva Services Company, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1986 to own and finance an office building that it leases to Delmarva and/or its affiliates. Delmarva Services Company also owns approximately 2.9% of the common stock of Chesapeake Utilities Corporation, a -13- publicly-traded gas utility company with gas utility operations in Delaware, Maryland and Florida. ii. DEC --- DEC, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1975. It is currently engaged, directly and through its subsidiary, in Rule 58 energy marketing activities. (A) Conectiv/CNE Energy Services LLC, a Delaware limited liability company in which DEC holds a 50% interest, was formed in 1997 to engage in Rule 58 energy marketing activities in the New England states. iii. CSI, directly and through subsidiaries, provides a wide --- range of energy-related goods and services to industrial, commercial and residential customers. Many of these services are "energy-related" within the meaning of Rule 58. The remainder have previously been found to be "functionally related" and so retainable under Section 11(b)(1). CSI is engaged in the design, construction and installation, and maintenance of new and retrofit heating, ventilating, and air conditioning ("HVAC"), electrical and power systems, motors, pumps, lighting, water and plumbing systems, and related structures as approved by the Commission. (A) Power Consulting Group, Inc., a Delaware corporation, was formed in 1997 to provide electrical engineering, testing and maintenance services to large commercial and industrial customers. (B) Conectiv Plumbing, LLC, a Delaware limited liability company owned 90% by CSI, provides plumbing services primarily in connection with the CSI HVAC business. Conectiv Plumbing, LLC was formed in 1998 in connection with the acquisition of an HVAC company. Under New Jersey law, an individual with a New Jersey master plumbing license must hold at least a 10% equity interest in a company providing plumbing services in New Jersey. To meet this requirement, the bulk of the acquired company's HVAC business was retained within CSI but the related and incidental plumbing services were spun down to a new subsidiary, Conectiv Plumbing, LLC, that is 10% owned by a master plumber. b. Conectiv Communications, Inc., a Delaware corporation and a direct ------------------------------ subsidiary of Delmarva, was formed in 1996 to provide a full-range of retail and wholesale telecommunications services. c. DCI, a Delaware corporation and a direct subsidiary of Delmarva, --- was formed in 1985 to be a holding company for a variety of unregulated investments. In addition, -14- DCI acts as a vehicle for the development and sale of properties that are not currently used or useful in the utility business i. DCI I, Inc., a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1985 to be involved in passive equity investments in leveraged leases. ii. DCI II, Inc., a Virgin Islands corporation and a wholly-owned foreign sales subsidiary of DCI formed in 1985 to be involved in passive equity investments in leveraged leases. iii. DCTC-Burney, Inc., a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1987 to invest in qualifying facilities. (A) Forest Products, L.P., a Delaware limited partnership, in which DCTC-Burney, Inc. is the sole 1% general partner, and which is a general partner in Burney Forest Products, A Joint Venture. (B) Burney Forest Products, A Joint Venture, a California general partnership which is owned by DCTC-Burney, Inc. and Forest Products, L.P. The partnership owns a wood-burning qualifying facility in Burney, CA. DCTC- Burney, Inc.'s total direct and indirect ownership interest is 45%. iv. Luz Solar Partners, Ltd. IV, a California limited partnership which owns a solar-powered generating station in Southern California in which DCI owns a 4.7% limited partnership interest. v. UAH-Hydro Kennebec, L.P., a New York limited partnership which owns a hydro-electric project in which DCI owns a 27.5% limited partnership interest. vi. Christiana Capital Management, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1987, which owns an office building leased to affiliates. vii. Delmarva Operating Services Company, a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1987, operates and maintains the following qualifying facilities under contracts with the plants' owners: the Delaware City Power Plant in Delaware City, DE; a qualifying facility in Burney, CA; and a qualifying facility in Sacramento, California, owned by the Sacramento Power Authority under a subcontract with Siemens Power Corporation. d. Solutions, a Delaware limited liability company that is jointly --------- owned by Delmarva and Atlantic, was formed in 1997 to provide, directly or through subsidiaries, power systems consulting, end use efficiency services, customized on-site -15- systems services and other energy services to large commercial and industrial customers. Solutions, directly or through subsidiaries, provides Energy Management Services, often on a turnkey basis, which may involve the marketing, sale, installation, operation and maintenance of various products and services related to the business of energy management and demand-side management. Energy Management Services may include energy audits; facility design and process enhancements; construction, maintenance and installation of, and training client personnel to operate energy conservation equipment; design, implementation, monitoring and evaluation of energy conservation programs; development and review of architectural, structural and engineering drawings for energy efficiencies; design and specification of energy consuming equipment; and general advice on programs. Solutions also provides conditioned power services, that is, services designed to prevent, control, or mitigate adverse effects of power disturbances on a customer's electrical system to ensure the level of power quality required by the customer, particularly with respect to sensitive electronic equipment, again as approved by the Commission. Solutions also markets comprehensive Asset Management Services, on a turnkey basis or otherwise, in respect of energy-related systems, facilities and equipment, including distribution systems and substations, transmission facilities, electric generation facilities (stand-by generators and self- generation facilities), boilers, chillers (refrigeration and coolant equipment), HVAC and lighting systems, located on or adjacent to the premises of a commercial or industrial customer and used by that customer in connection with its business activities, as previously permitted by the Commission. Solutions also provides such services to qualifying and non-qualifying cogeneration and small power production facilities under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). Solutions provides Consulting Services to associate and nonassociate companies. The Consulting Services may include technical and consulting services involving technology assessments, power factor correction and harmonics mitigation analysis, meter reading and repair, rate schedule design and analysis, environmental services, engineering services, billing services, risk management services, communications systems, information systems/data processing, system planning, strategic planning, finance, feasibility studies, and other similar or related services. Solutions also offers marketing services to nonassociate businesses in the form of bill insert and automated meter-reading services, as well as other consulting services, such as how to set up a marketing program. Solutions provides service line repair and extended warranties with respect to all of the utility or energy-related service lines that enter a customer's house, as well as utility -16- bill insurance and other similar or related services. Solutions may also provide centralized bill payment centers for "one stop" payment of all utility and municipal bills, and annual inspection, maintenance and replacement of any appliance. Solutions also is engaged in the marketing and brokering of energy commodities, including retail marketing activities. Solutions also provides Other Goods and Services, from time to time, related to the consumption of energy and the maintenance of property by those end-users, where the need for the service arises as a result of, or evolves out of, the above services and the incidental services do not differ materially from the enumerated services. In connection with its activities, Solutions from time to time may form new subsidiaries to engage in the above activities, or acquire the securities or assets of nonassociate companies that derive substantially all of their revenues from the above activities. Provision of the above goods and services, which are closely related to the system's core energy business, is intended to further Conectiv's goal of becoming a full-service energy provider. e. ECNG, a Delaware limited liability company in which Delmarva holds ---- a 1/7th interest, is engaged in gas-related activities. Delmarva participates in ECNG to do bulk purchasing of gas in order to improve the efficiency of its natural gas local distribution operations. Delmarva also has a nonutility subsidiary trust, Delmarva Power Financing I ("DPF I"), which was formed in 1996 in connection with the issuance by Delmarva of Cumulative Quarterly Income Preferred Securities. Together, at December 31, 1996, Delmarva's nonutility subsidiaries and investments constituted approximately 4 percent of the consolidated assets of Delmarva and its subsidiaries. A corporate chart of Delmarva and its subsidiaries is filed as Exhibit E-2. 4. Atlantic -------- Atlantic has four direct nonutility subsidiaries, Atlantic Energy International, Inc. ("AEII"), Atlantic Energy Enterprises, Inc. ("AEE"), and Solutions. a. AEII, a Delaware corporation, is a direct subsidiary of Atlantic ---- formed in 1996 to broker used utility equipment to developing countries and to provide utility consulting services related to the design of sub-stations and other utility infrastructure. This subsidiary is winding down -17- its business and is expected to be dissolved or merged out of existence by June 30, 1998. b. AEE, a New Jersey corporation, is a direct subsidiary of Atlantic --- formed in 1995 to be a holding company for Atlantic's non-regulated subsidiaries. Through its 6 wholly-owned subsidiaries, and 50% equity interest in Enerval, LLC, a natural gas marketing venture, AEE has pursued growth opportunities in energy-related fields, that will complement Atlantic's existing businesses and customer relationships. i. ATE, a New Jersey corporation and a wholly- owned subsidiary of AEE formed in 1986, holds and manages capital resources for AEE. ATE's primary investments are equity investments in leveraged leases of three commercial aircraft and two container ships. ATE owns a 94% limited partnership interest in EnerTech Capital Partners L.P., a limited partnership that will invest in and support a variety of energy technology growth companies. ii. AGI, a New Jersey corporation and a wholly- owned subsidiary of AEE formed in 1986. AGI develops, owns and operates independent power production projects. (A) Pedrick Ltd., Inc., a New Jersey corporation and a wholly-owned subsidiary of AGI, formed in 1989 to hold a 35% limited partnership interest in Pedricktown Cogeneration Limited Partnership. (B) Pedrick Gen., Inc., a New Jersey corporation and a wholly-owned subsidiary of AGI, formed in 1989 to hold a 15% general partnership interest in Pedricktown Cogeneration Limited Partnership. (C) Vineland Limited, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 45% limited partnership interest in Vineland Cogeneration Limited Partnership. (D) Vineland General, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 5% general partnership interest in Vineland Cogeneration Limited Partnership. (E) Binghamton General, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 10% general partnership interest in Binghamton Cogeneration Limited Partnership, whose assets have been sold to a third party. (F) Binghamton Limited, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 35% limited partnership interest in Binghamton -18- Cogeneration Limited Partnership, whose assets have been sold to a third party. iii. ATS, a Delaware corporation and a wholly- owned subsidiary of AEE, formed in 1994. ATS and its subsidiaries develop, own and operate thermal heating and cooling systems. ATS also provides other energy-related services to business and institutional energy users. ATS has made investments in capital expenditures related to district heating and cooling systems to serve the business and casino district in Atlantic City, NJ. ATS is also pursuing the development of thermal projects in other regions of the U.S. (A) Atlantic Jersey Thermal Systems, Inc., a Delaware corporation and wholly-owned subsidiary formed in 1994, that owns a 10% general partnership interest in TELPI (as defined below). (B) ATS Operating Services, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1995 that provides thermal energy operating services. (C) Thermal Energy Limited Partnership I ("TELPI"), a Delaware limited partnership wholly-owned by Atlantic Thermal and Atlantic Jersey Thermal Systems, that holds an investment in the Midtown Energy Center. The Midtown Energy Center, which produces steam and chilled water, represents the initial principal operations of ATS. Currently, TELPI is operating the heating and cooling equipment of several businesses in Atlantic City, NJ. Some of these businesses will be served by the ATS district system once it is in commercial operation and others will continue to be served independently by ATS. (D) Atlantic Paxton Cogeneration, Inc., a wholly-owned subsidiary that is currently inactive and expected to be dissolved sometime in 1998. (E) Atlantic-Pacific Glendale, LLC, a Delaware limited liability company in which ATS holds a 50% interest, was formed in 1997 to construct, own and operate an integrated energy facility to provide heating, cooling and other energy services to DreamWorks Animation, LLC in Glendale, California. (F) Atlantic-Pacific Las Vegas, LLC, a Delaware limited liability company in which ATS holds a 50% interest, was formed in 1997 to finance, own and operate an integrated energy plant to provide heating and cooling services to three affiliated customers in Las Vegas, Nevada. iv. CCI, a Delaware corporation and a wholly- owned subsidiary of AEE formed in 1995 to pursue investments and business opportunities in the telecommunications industry. -19- v. ASP, a New Jersey corporation and a wholly- owned subsidiary of AEE formed in 1970 that owns and manages certain investments in real estate, including a 280,000 square- foot commercial office and warehouse facility in southern New Jersey. Approximately fifty percent of the space in this facility is currently leased to system companies and fifty percent is leased to nonaffiliates. vi. AET, a Delaware corporation and a wholly- owned subsidiary of AEE formed in 1991. AET is currently winding up its sole investment in technology, The Earth Exchange, Inc., which is nominal. There are no future plans for investment activity at this time by AET. vii. Enerval, a Delaware limited liability company. In 1995, AEE and Cenerprise, Inc., a subsidiary of Northern States Power established Enerval, formerly known as Atlantic CNRG Services, LLC. AEE and Cenerprise each own 50 percent of Enerval. Enerval provides energy management services, including natural gas procurement, transportation and marketing. Discussions are underway for the purchase by AEE of Cenerprise's interest. c. Solutions, a Delaware limited liability company that is jointly --------- owned by Delmarva and Atlantic, was formed in 1997 to provide, directly or through subsidiaries, power systems consulting, end use efficiency services, customized on-site systems services and other energy services to large commercial and industrial customers. ACE also has a nonutility subsidiary trust, Atlantic Capital I ("ACI"), which was formed in 1996 in connection with the issuance by ACE of Cumulative Quarterly Income Preferred Securities. At June 30, 1997, Atlantic's nonutility subsidiaries and investments constituted approximately 8.9 percent of the consolidated book value of the assets of Atlantic and its subsidiaries. A corporate chart of Atlantic and its subsidiaries, showing their nonutility interests, is filed as Exhibit E-3. In connection with the Mergers, one or more of the direct and indirect subsidiaries of Atlantic may be merged with and into, or become a subsidiary of, one or more existing direct or indirect subsidiaries of Delmarva or vice versa. C. Description of the Mergers -------------------------- 1. Background and Negotiations Leading to the Proposed Mergers ----------------------------------------------------------- Atlantic and Delmarva are neighboring utilities that have had a variety of working relationships on a wide range of -20- 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 -21- 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 -22- 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 -23- was jointly engaged to assist the communication subgroup in the development of a communication plan and in the preparation of communication materials in connection with the potential transaction. On July 25, 1996, Messrs. Jacobs and Michael J. Chesser, President and Chief Operating Officer of Atlantic were invited to a segment of the Delmarva Board meeting at which D&T Consulting Group, as a part of its assistance to the joint working group, discussed the joint analysis of potential synergies with the Delmarva Board, including the basic structure, process and content of a synergy analysis, generally described the type of synergies identified in other mergers, then explained the results to date of the joint synergies analysis. The evaluation included preliminary estimates of synergies, net of costs to achieve them, in excess of $500 million over a 10-year period that might be obtained from a business combination of the two companies. On July 26, 1996, Messrs. Jacobs and Michael J. Barron, Vice President and Chief Financial Officer, of Atlantic and Mr. Cosgrove and Mrs. Barbara S. Graham, Senior Vice President, Treasurer and Chief Financial Officer, of Delmarva met to conclude the negotiation of management structure issues and to begin to make progress on the parameters of the potential transaction, including the extent to which the merger consideration distributed to Atlantic's shareholders would include letter stock. On August 2, 1996, members of the Delmarva and Atlantic working groups met with D&T Consulting Group to review the final results of the analysis prepared by Delmarva and Atlantic with the assistance of D&T Consulting Group on potential synergies that could result in connection with a business combination of Delmarva and Atlantic. During discussions regarding the proposed merger at the August 5, 1996 Atlantic Board meeting, D&T Consulting Group, as a part of its assistance to the joint working group, discussed the joint analysis of potential synergies with the Atlantic Board. At the Atlantic Board meeting on August 8, 1996, the Atlantic Board was briefed on the status of the negotiations and considered final presentations from management on the rationale for a business combination of Delmarva and Atlantic, including the potential benefits and the similarity of vision and strategy between the two companies. Morgan Stanley made a presentation which included a description of the letter stock and the results of their valuation analysis. At the Atlantic Board meeting of August 9, 1996, detailed presentations were made by Morgan Stanley and management on the status of pricing negotiations. Simpson -24- 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 -25- of Atlantic Common Stock abstained from voting on the approval of the Mergers. 2. Merger Agreement ---------------- The Merger Agreement provides for Atlantic to be merged with and into Conectiv and DS Sub to be merged with and into Delmarva. The Merger Agreement is incorporated by reference as Exhibit B-1. Under the terms of the Merger Agreement, upon consummation of the Mergers: - each issued and outstanding share of Delmarva Common Stock3 shall be converted into the right to receive one share of Conectiv Common Stock (the "Delmarva Conversion Ratio"); - each issued and outstanding share of Atlantic Common Stock4 shall be converted into the right to receive 0.75 of one share of Conectiv Common Stock and 0.125 of one share of Conectiv Class A Common Stock (the "Atlantic Conversion Ratio"); and - all shares of capital stock of Conectiv issued and outstanding immediately prior to the Mergers will be cancelled without consideration and cease to exist. Based on the capitalization and the Delmarva Conversion Ratio and the Atlantic Conversion Ratio the shareholders of Delmarva and Atlantic would own approximately 60.6% and 39.4%, respectively, of the outstanding shares of the Conectiv Common Stock and the shareholders of Atlantic would own 100% of the outstanding shares of Conectiv Class A Common Stock. The Mergers are subject to customary closing conditions, including all necessary governmental approvals, including the approval of the Commission. D. Benefit Plans ------------- Delmarva currently has a long-term incentive plan and Atlantic currently has an equity incentive plan. On January 30, - ---------------- 3 Other than shares owned by Delmarva as treasury stock or by Atlantic or by any direct subsidiary of Delmarva or Atlantic. Such shares will be cancelled and cease to exist and no consideration will be delivered in exchange therefor. 4 Other than shares owned by Atlantic as treasury stock or by Delmarva or by any direct subsidiary of Atlantic or Delmarva. Such shares will be cancelled and cease to exist and no consideration will be delivered in exchange therefor. -26- 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. -27- 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 -28- 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, -29- thereby helping to mitigate the rate impact of stranded cost recovery. Recovery through securitization may occur over a different period of time. The Plan also suggests that a cap may be imposed on the level of the charge as a mechanism to achieve the goal of overall rate reduction. ACE filed a restructuring plan, stranded cost estimates and unbundled rates, with the NJBPU on July 15, 1997. Exhibit D-8. Based on Delmarva's initiative, a formal process has been established in Delaware and an informal forum has been established in Maryland through which the commissions and other interested parties are addressing changes in the regulation of the electric utility industry. During 1996, Delaware and Maryland forum meetings addressed issues such as retail wheeling, stranded costs, environmental matters, social programs, rate redesign, and alternative forms of regulation. In October 1996, the MPSC issued an order instituting a proceeding to continue its review of regulatory and competitive issues affecting the electric industry in Maryland. In consultation with Maryland's electric utilities and other stakeholders, the MPSC staff has been directed to evaluate regulatory and competitive issues facing the electric utility industry, including electric retail competition, developments in federal and state regulation, and the interests of Maryland's customers and utilities. The MPSC instructed its staff to submit their recommendations by May 31, 1997. In December 1996, the forum participants issued to the DPSC and MPSC reports which discussed the issues and the positions of stakeholders, but did not reach any conclusions. While there was consensus on some issues, such as the need for unbundled costs and tariffs, there were many issues where consensus was not reached, such as the need for and benefits of retail wheeling, recovery of stranded costs, environmental and social program issues, franchise and property rights, rate design, and performance-based ratemaking. The issues mentioned above continue to be discussed by Delmarva, the DPSC Staff, and other interested parties. Delmarva expects to develop formal proposals on deregulation which are expected to be filed in mid-1997 with the DPSC. In Maryland, the participants decided in January 1997 to suspend the collaborative process until the MPSC Staff files its report. In response to a directive from the VSCC, the VSCC Staff issued in July 1996 a report on restructuring the electric industry, which included, among other recommendations, a recommendation for a "go slow" approach to restructuring. In November 1996, the VSCC issued an order indicating that more evaluation is necessary to determine what, if any, restructuring may best serve the public interest in Virginia. The VSCC -30- established a new docket and directed its Staff to monitor and file separate studies in 1997 regarding the development of a competitive wholesale market in Virginia, service quality standards, and the results of retail wheeling experiments in other states. Also, several utilities, excluding Delmarva, were directed to file unbundled cost studies and tariffs. Item 2. Fees, Commissions and Expenses ------------------------------ The fees, commissions and expenses to be paid or incurred, directly or indirectly, in connection with the Mergers, including the solicitation of proxies, registration of securities of Conectiv under the Securities Act of 1933, and other related matters, are estimated as follows: Commission filing fee for the Registration Statement on Form S-4............................ $683,187 Accountants' fees............................................. $232,438 Legal fees and expenses LeBoeuf, Lamb, Greene & MacRae, L.L.P............................... $3,227,444 Potter Anderson & Corroon............................ $684,003 Simpson Thacher & Bartlett........................... $886,478 Other legal fees and expenses................................. $502,709 Shareholder communication and proxy solicitation ............................................ $2,639,573 NYSE listing fee.............................................. $200,000 Exchanging, printing and engraving of stock certificates............................................ $90,000 Investment bankers' fees and expenses Merrill Lynch, Pierce, Fenner & Smith Incorporated........................ $4,556,872 Morgan Stanley & Co. Incorporated.................... $5,257,359 Consulting fees and other expenses relating to the Mergers..................................... $357,997 ----------- TOTAL......................................................... $19,318,060 -31- 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 -32- 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 -33- consistent with the Act prior to the 1995 REPORT and thus could be approved without any reference to the 1995 REPORT. However, a number of the recommendations contained in the 1995 REPORT serve to strengthen the Applicants' analysis and support certain requests that would facilitate the creation of a new holding company better able to compete in the rapidly evolving utility industry. The Division's overall recommendation that the Commission "act administratively to modernize and simplify holding company regulation. . . and minimize regulatory overlap, while protecting the interests of consumers and investors,"5 should be used in reviewing this Application/Declaration since, as demonstrated below, the Mergers will benefit both consumers and shareholders of Conectiv and the other federal and state regulatory authorities with jurisdiction over the Mergers will have approved the Mergers as in the public interest. In addition, although discussed in more detail in each applicable item below, the specific recommendations of the Division with regard to utility ownership6 and diversification,7 in particular, are applicable to the Mergers. 1. Section 10(b) ------------- Section 10(b) provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless: - -------------------- 5 Letter of the Division of Investment Management to the Securities and Exchange Commission, 1995 REPORT. 6 The 1995 REPORT recommends that the Commission should apply a more flexible interpretation of the integration requirements under the Act; interconnection through power pools, reliability councils and wheeling arrangements can satisfy the physical interconnection requirement of section 2(a)(29); the geographic requirements of section 2(a)(29) should be interpreted flexibly, recognizing technical advances consistent with the purposes and provisions of the Act; the Commission's analysis should focus on whether the resulting system will be subject to effective regulation; the Commission should liberalize its interpretation of the "A-B-C" clauses and permit combination systems where the affected states agree, and the Commission should "watchfully defer" to the work of other regulators. 1995 REPORT at 71-7. 7 The 1995 REPORT recommended that, for example, the Commission should promulgate rules to reduce the regulatory burdens associated with energy-related diversification and the Commission should adopt a more flexible approach in considering all other requests to enter into diversified activities. 1995 REPORT at 88-90. The recommendations regarding energy-related diversification were incorporated in Rule 58. -34- (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 -35- afford the opportunity to achieve economies of scale and efficiencies which are expected to benefit investors and consumers. AMERICAN ELECTRIC POWER CO., 46 SEC at 1307 (1978). Size: If approved, the Conectiv system will serve approximately 915,000 electric customers in four states and 100,000 gas customers in Delaware. As of and for the year ended December 31, 1996: (1) the combined assets of Delmarva and Atlantic would have totaled approximately $5.65 billion; (2) combined operating revenues of Delmarva and Atlantic would have totaled approximately $2.1 billion; and (3) combined owned generating capacity totaled would have totaled approximately 5514 MW. By comparison, the Commission has approved a number of acquisitions involving significantly larger operating utilities. SEE, E.G., CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994) (combination of Cincinnati Gas & Electric Company and PSI Resources; combined assets at time of acquisition of approximately $7.9 billion); ENTERGY CORP., 55 HCAR No. 25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities; combined assets at time of acquisition in excess of $21 billion); NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990) (acquisition of Public Service of New Hampshire; combined assets at time of acquisition of approximately $9 billion); CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29, 1986) (combination of Cleveland Electric Illuminating Company and Toledo Edison Company; combined assets at time of acquisition of approximately $9.1 billion); AMERICAN ELECTRIC POWER CO., 46 SEC 1299 (1978) (acquisition of Columbus and Southern Ohio Electric Company combined assets at time of acquisition of close to $9 billion). As the following table demonstrates, nearly all of the registered electric, or combination gas and electric, utility holding company systems are larger than Conectiv will be following the Mergers in terms of assets, operating revenues, customers and/or sales of electricity:8 - ------------------ 8 Amounts are as of December 31, 1996 or for the year ended December 31, 1996. [Bracketed numbers are 1995 figures.] The numbers for New Century Energies, Inc. are taken from the Commission's order approving its formation. NEW CENTURY ENERGIES, INC., HCAR No. 26748 (Aug. 1, 1997). -36- Total Operating Electric Sales in System Assets Revenues Customers KWH Total ($ Millions) ($ Millions) (Thousands) (Millions) Southern 30,292 10,358 3,445 153,531 AEP 15,886 5,849 2,942 [120,653] Entergy 22,966 7,163 2,426 106,909 CSW 13,332 5,155 1,704 62,425 GPU 10,941 3,918 1,997 44,448 Northeast 10,742 3,792 [1,695] [39,618] CINergy 8,849 3,243 1,392 [54,220] NCE 7,000 3,000 1,500 7,438(1) Allegheny 6,618 1,013 1,388 59,961 NEES 5,223 2,350 [1,314] 25,194 Conectiv 5,650 2,075 920 21,272 - -------------------------------- (1) This number is in MWH. In addition, Conectiv will be smaller than the registered holding company to be formed as a result of the merger of Union Electric Company and CIPSCO, Inc. (combined 1994 year-end assets of approximately $8,402 million and operating revenues of $2,850 million). Conectiv will be a small registered holding company, and its operations will not exceed the economies of scale of current electric generation and transmission technology or provide undue power or control to Conectiv in the region in which it will provide service. Efficiencies and economies: As noted above, the Commission has rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing the size of the resulting system with reference to the efficiencies and economies that can be achieved through the integration and coordination of utility operations. More recent pronouncements of the Commission confirm that size is not determinative. Thus, in Centerior Energy Corp., HCAR No. 24073 (April 29, 1986), the Commission stated flatly that a "determination of whether to prohibit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of size alone." In addition, in the 1995 REPORT, the Division recommended that the Commission approach its analysis on merger and acquisition transactions in a flexible manner with emphasis on whether the Mergers creates an entity subject to effective regulation and is beneficial for shareholders and customers as opposed to focusing on rigid, mechanical tests.9 - --------------------- 9 1995 REPORT at 73-4. -37- By virtue of the Mergers, Conectiv will be in a position to realize the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" described by the Commission in American Electric Power Co. 46 SEC 1299, 1309. Among other things, the Mergers are expected to yield significant capital expenditure savings through labor cost savings, facilities consolidation, corporate and administrative programs, non-fuel purchasing economies and combined fuel supply and purchased power. These expected economies and efficiencies from the combined utility operations are described in greater detail below and are projected to result in net savings of more than $500 million over the first ten years alone. Competitive Effects: In Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), the Commission stated that "antitrust ramifications of an acquisition must be considered in light of the fact that public utilities are regulated monopolies and that federal and state administrative agencies regulate the rates charged consumers." Delmarva and Atlantic have filed Notification and Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the Mergers on competition in the relevant market and it is a condition to the consummation of the Mergers that the applicable waiting periods under the HSR Act shall have expired or been terminated. In addition, the competitive impact of the Mergers has been fully considered by the FERC pursuant to Section 203 of the Federal Power Act in its review of the Mergers. A detailed explanation of the reasons why the Mergers will not threaten competition in even the most narrowly drawn geographic and product markets is set forth in the prepared testimony of John C. Dalton, filed with the FERC on behalf of Delmarva and Atlantic, a copy of which is filed as Exhibit D-1.2.1. As noted previously, the FERC issued an order on July 30, 1997, approving the Mergers and concluding, among other things, that the Mergers would not significantly affect competition in any relevant market. Exhibit D-1.3. For these reasons, the Mergers will not "tend toward interlocking relations or the concentration of control" of public utility companies, of a kind or to the extent detrimental to the public interest or the interests of investors or customers within the meaning of Section 10(b)(1). b. Section 10(b)(2) -- Fairness of Consideration --------------------------------------------- Section 10(b)(2) requires the Commission to determine whether the consideration to be given by Conectiv to the holders of Delmarva Common Stock and Atlantic Common Stock in connection with the Mergers is reasonable and whether it bears a fair relation to investment in and earning capacity of the utility assets underlying the securities being acquired. Market prices -38- at which securities are traded have always been strong indicators as to values. As shown in the table below, most quarterly price data, high and low, for Delmarva and Atlantic Common Stock provide support for this conversion ratio. Delmarva Atlantic -------- -------- High Low Dividends High Low Dividends ---- --- --------- ---- --- --------- 1994 First Quarter $23 5/8 $20 1/2 $0.38 1/2 $21 3/4 $19 7/8 $0.38 1/2 Second Quarter 21 16 7/8 0.38 1/2 21 1/2 16 3/8 0.38 1/2 Third Quarter 20 17 3/4 0.38 1/2 19 5/8 16 1/8 0.38 1/2 Fourth Quarter 19 1/4 17 5/8 0.38 1/2 18 1/4 16 0.38 1/2 1995 First Quarter 20 17 7/8 0.38 1/2 19 17 3/4 0.38 1/2 Second Quarter 21 1/4 19 1/8 0.38 1/2 19 5/8 17 7/8 0.38 1/2 Third Quarter 23 19 1/2 0.38 1/2 19 7/8 18 1/8 0.38 1/2 Fourth Quarter 23 5/8 21 7/8 0.38 1/2 20 1/8 19 0.38 1/2 1996 First Quarter 23 5/8 21 0.38 1/2 20 16 5/8 0.38 1/2 Second Quarter 21 3/8 19 1/8 0.38 1/2 18 3/4 16 0.38 1/2 Third Quarter 21 1/4 20 0.38 1/2 18 1/2 17 0.38 1/2 Fourth Quarter 21 1/4 19 3/4 0.38 1/2 18 1/8 17 1/8 0.38 1/2 1997 First Quarter 20 1/4 18 3/8 0.38 1/2 17 1/2 16 1/2 0.38 1/2 Second Quarter(1) 18 5/8 16 7/8 0.38 1/2 16 7/8 16 0.38 1/2 - -------------------------- (1) Through the close of business on June 27, 1997. On August 9, 1996, the last full trading day before the public announcement of the execution and delivery of the Merger Agreement, the closing price per share as reported on the NYSE-- Composite Transaction of (i) Delmarva Common Stock was $20 5/8 and (ii) Atlantic Common Stock was $17 1/8, a ratio of 1 to 0.83. In addition, the conversion ratios are the product of extensive and vigorous arms-length negotiations between Delmarva and Atlantic. These negotiations were preceded by months of due diligence, analysis and evaluation of the assets, liabilities and business prospects of the respective companies. See Conectiv Registration Statement on Form S-4 (Exhibit C-1 hereto). - --- Finally, nationally-recognized investment bankers for both Delmarva and Atlantic have reviewed extensive information concerning the companies and analyzed the conversion ratios employing a variety of valuation methodologies, and have opined that the conversion ratios are fair, from a financial point of view, to the respective holders of Delmarva Common Stock and Atlantic Common Stock. The investment bankers' analyses and opinions are attached as Annexes II and III to Conectiv's Registration Statement on Form S-4 and are described on pages 33-43 of the Form S-4 (Exhibit C-1 hereto). In light of these opinions and an analysis of all relevant factors, including the benefits that may be realized as a result of the Mergers, Conectiv believes that the conversion -39- 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 -40- between $150,000 and $250,000 and which is payable in the event the transaction is not consummated, (ii) an announcement fee of $1,000,000 and (iii) a merger fee of $4,230,000 payable upon consummation of the transaction. Any amounts paid or payable to Morgan Stanley as advisory or announcement fees will be credited against the transaction fee. Atlantic agreed also to reimburse Morgan Stanley for the expenses of its counsel and to indemnify Morgan Stanley and its affiliates against certain liabilities and expenses, including liabilities under the federal securities laws. The investment banking fees of Delmarva and Atlantic reflect the competition of the marketplace, in which investment banking firms actively compete with each other to act as financial advisors to merger partners. d. Section 10(b)(3) ---------------- Section 10(b)(3) requires the Commission to determine whether the Mergers will unduly complicate Conectiv's capital structure or will be detrimental to the public interest, the interests of investors or consumers or the proper functioning of Conectiv's system. The capital structure of Conectiv will not be unduly complicated nor will it be detrimental to the public interest, the interests of investors or consumers or the proper functioning of Conectiv's system. As described in Item 1.A.2., Conectiv will have two classes of common stock. Delmarva stockholders will receive one share of Conectiv Common Stock in exchange for each share of Delmarva Common Stock. Atlantic stockholders will receive 0.75 shares of Conectiv Common Stock and 0.125 shares of Conectiv Class A Common Stock in exchange for each share of Atlantic Common Stock. The Company Class A Common Stock, which is a "tracking stock," was proposed during the merger negotiations as a mechanism to address the difference in Delmarva's and Atlantic's evaluations of the overall impact of the growth prospects and uncertainties of the regulated electric utility business of Atlantic. Both the Atlantic Board and the Delmarva Board determined that the Conectiv Class A Common Stock was necessary to bridge a difference in view between Delmarva and Atlantic on the appropriate conversion ratio for a business combination between the two companies. The tracking stock allocates proportionately more of the risks associated with Atlantic's regulated electric utility business to Atlantic's current stockholders and, at the same time, provides them with the opportunity to participate in proportionately more of the growth prospects of Atlantic's regulated electric utility business. Accordingly, the issuance of tracking stock in connection with the Mergers addresses the concerns of the managements of both Delmarva and Atlantic and allows the respective stockholders of Delmarva and Atlantic to gain the level of exposure to the growth -41- prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic that the respective managements have deemed advisable. Specifically, the Conectiv Class A Common Stock has been created to track the performance of a portion of Atlantic's existing businesses. The Conectiv Class A Common Stock is linked to the currently regulated businesses of ACE, Atlantic's regulated electric utility company (the "Targeted Business"). In general terms, after the Initial Period, the earnings attributable to the Conectiv Class A Common Stock will be based on a 30 percent interest in the net earnings of the Targeted Business in excess of $40 million per year. The first $40 million of net earnings and the remaining 70 percent of the net earnings above $40 million will be attributable to holders of Conectiv Common Stock. Through the use of this tracking stock, the holders of Atlantic Common Stock will retain more than half the benefits and risks relating to the Targeted Business after the Mergers. The Targeted Business is described in greater detail on pages 75 to 77 of the Joint Proxy (Exhibit C-2). The Merger Agreement provides, subject to declaration by the Conectiv Board and the obligation of the Conectiv Board to react to the financial condition and regulatory environment of Conectiv and its results of operations, that the dividends declared and paid on the Conectiv Class A Common Stock will be maintained at a level of $3.20 per share per annum until the earlier of July 1, 2001, or the end of the twelfth calendar quarter in which the Mergers become effective ("Initial Period"). After the Initial Period, it is the intention of Conectiv to pay dividends to the holders of the Conectiv Class A Common Stock at a rate equal to 90% of net earnings attributable to the Targeted Business in excess of $40 million per year. The Merger Agreement further provides that if and to the extent that the annual dividends paid on the Conectiv Class A Common Stock during the Initial Period shall have exceeded 100% of Conectiv's earnings attributable to the Targeted Business in excess of $40 million per year during the Initial Period, the Conectiv Board may consider such fact in determining the appropriate annual dividend rate on the Conectiv Class A Common Stock following the Initial Period. The Conectiv Class A Common Stock will be a class of common stock of the parent company, Conectiv, not of ACE. As common stockholders of Conectiv, holders of the Conectiv Class A Common Stock will not have any specific rights or claims against the businesses, assets and liabilities of the Targeted Business, including upon liquidation of Conectiv, other than as common stockholders of Conectiv, and will be subject to risks associated with an investment in Conectiv and all of its businesses, assets and liabilities. Holders of Conectiv Common Stock and holders of Conectiv Class A Common Stock will each be entitled to one vote per share on all matters submitted to a vote at any meetings of stockholders, subject to the rights, if any, of holders of any -42- outstanding class of preferred stock. The holders of Conectiv Common Stock and the holders of Conectiv Class A Common Stock will vote as one class for all purposes, except as may otherwise be required by the laws of the State of Delaware. There are also special provisions governing the conversion and redemption of the Conectiv Class A Common Stock either at the discretion of Conectiv or in the event of a merger, tender offer or disposition of all or substantially all of the assets of the Targeted Business. For a more complete description of the Conectiv Class A Common Stock, see "Description of the Company's Capital Stock" on pages 75 to 97 of the Joint Proxy (Exhibit C-2). Risk factors associated with the dual class capital structure are also discussed extensively in the Joint Proxy on pages 14 to 22 under the heading "Risk Factors." Upon consideration of the totality of circumstances, including the risk factors discussed in the proxy materials, the shareholders of both Delmarva and Atlantic voted overwhelmingly to vote to approve the proposed merger. Both the holders of Conectiv Common Stock and the holders of Conectiv Class A Common Stock will receive the consolidated financial statements of Conectiv. The notes to the consolidated financial statements of Conectiv will include condensed financial information of ACE, including a reconciliation of ACE's total income available to common stockholders to the income of the Targeted Business. In conjunction with the Mergers and the NJ Plan, ACE expects to move all of its presently non-regulated operations out of ACE, resulting in only the Targeted Business remaining in ACE. When the non-regulated businesses of ACE are transferred out of ACE, the financial results of ACE will be identical to the financial results for the Targeted Business, making any reconciliation unnecessary. Complete financial statements of ACE will continue to be filed under the Securities Exchange Act of 1934 and will be available to Conectiv stockholders upon request. Both the Conectiv Class A Common Stock and the Conectiv Common Stock will be publicly traded, will have full voting rights and will be able to be evaluated through regular periodic filings under the Securities Exchange Act of 1934. Conectiv's certificate of incorporation does not require the declaration or payment of any dividends on the Conectiv Class A Common Stock and establishes no priority or preference in favor of the Conectiv Class A Common Stock with respect to the Conectiv Common Stock or any other security Conectiv may issue. Dividends on the Conectiv Class A Common Stock will not be cumulative. Further, the Conectiv Class A Common Stock will have the same priority in liquidation as the Conectiv Common Stock. Although the Commission has not previously considered the use of tracking stocks by a registered holding company, so-called "letter" or tracking stock is not a new phenomenon. The first prominent tracking stock was issued in 1984 by General Motors Corp. when it issued shares of General Motors Class E shares in connection with its acquisition of Electronic Data Systems Corp. Since 1984, -43- tracking stocks have been used by companies in several industries. USX Corp. has created several tracking stocks tied to separate businesses, including steel, oil and natural gas. US West Communications Group and Tele-Communications Inc. have also issued tracking stocks. In the utility area, CMS Energy, in July, 1995, issued CMS Class G stock, which is tied to a 25 percent interest in its natural gas division, Consumers Power Gas Group. The use of two classes of common stock in the instant matter does not present an issue under the Act. Section 7(c)(2)(A) expressly provides for the issuance of securities such as the Conectiv Class A Common Stock "solely . . . for the purpose of effecting a merger."10 As explained in the disclosure materials, the dual class common equity structure will not be detrimental to consumer interests. There will be no effect on the legal title to Conectiv assets or the responsibilities for the liabilities of Conectiv or its subsidiaries. In addition, to the extent that the letter stock could be deemed to affect the interests of investors, the Commission has long held that those interests are adequately protected by the disclosure required under the other federal securities laws.11 As the Commission explained in a 1992 order: Concerns with respect to investors have been largely addressed by developments in the federal securities laws and in the securities markets themselves. Registered holding companies are subject to extensive reporting requirements under the Act. In addition, the securities of those companies are publicly held and are registered under the Securities Act of 1933. The companies are subject to the continuous disclosure requirements of the Securities Exchange Act of 1934. It is important to note that, at the time of the Act's passage, the Securities Act of 1933 and the Securities Exchange Act of 1934 were in their infancy, having been in effect for only one and two years, respectively. The interest of investors is protected not only by the - ------------------- 10 Without conceding that such authority is needed, Conectiv requests authorization under Sections 6 and 7 of the Act for the issuance of Conectiv Class A Common Stock to the extent that the Commission deems such authorization necessary. 11 See Hearings on S. 1869, S. 1870 and S. 1977, to Amend or Repeal the Public --- Utility Holding Company Act of 1935, Before the Subcommittee on Securities of the Senate Committee on Banking, Housing and Urban Affairs, 97th Cong., 2d Sess. 407 (1982) ("investors in a registered public utility companies would remain adequately protected" if the Act were repealed). -44- requirements of this Act but also by the disclosure requirements of these other statutes. Since 1935, Congress has expanded and strengthened the provisions of the Securities Exchange Act. Thus, the quantity and quality of information available to investors under the federal securities laws is significantly greater than that available in 1935.12 Moreover, in the instant matter, the Division of Corporation Finance participated in the determination that the holders of the letter stock would receive adequate disclosure on an ongoing basis. The 1995 REPORT discusses the greater access to information and advances in accounting and recordkeeping requirements that have developed since the adoption of the Securities Act of 1933 and the Securities Exchange Act of 1934.13 In the 1995 REPORT, the Staff noted that the Commission has historically "responded to change by flexible interpretation and rulemaking."14 The tracking stock is a mechanism whereby Delmarva and Atlantic addressed the difference in their evaluations of the overall impact of the growth prospects of, and uncertainties associated with deregulation of, the regulated electric utility business of Atlantic. The issuance of tracking stock in connection with the Mergers addresses the concerns of the managements of both Delmarva and Atlantic and allows the respective stockholders of Delmarva and Atlantic to gain the level of exposure to the growth prospects of, and uncertainties associated with deregulation of, the regulated utility business of Atlantic that the respective managements have deemed advisable. Given the purpose for issuing the Conectiv Class A Common Stock and its favorable attributes, especially the direct link to the performance of the Targeted Business, full voting rights and proposed NYSE listing, Conectiv believes that the use of the tracking stock will not unduly complicate the capital structure of the registered holding company, and will not be detrimental to the public interest, the interests of investors or consumers or the proper functioning of the holding company system. The only voting securities of Conectiv which will be publicly held after the transaction will be Conectiv Common Stock and Conectiv Class A Common Stock. Conectiv will have the ability to issue, subject to the approval of the Commission, preferred stock, the terms of which, including any voting rights, may be set by Conectiv's Board of Directors as has been - ------------ 12 Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992). ------------ 13 1995 REPORT at 34-38. 14 1995 REPORT at 46. -45- authorized by the Commission with regard to other registered holding companies. SEE, E.G., THE COLUMBIA GAS SYSTEM, INC., HCAR No. 26361 (Aug. 25, 1995) (approving restated charter, including preferred stock whose terms, including voting rights, can be established by the board of directors). In addition to common stock of Delmarva, all of which will be held by Conectiv, Delmarva will continue to have 1,253,548 shares (not including 2.8 million shares of Quarterly Income Preferred Securities) of outstanding voting preferred stock. The only class of voting securities of Conectiv's direct and indirect nonutility subsidiaries will be common stock. Set forth below are summaries of the historical capital structure of Delmarva and Atlantic as of June 30, 1997 and the pro forma consolidated capital structure of Conectiv as of June 30, 1997: Delmarva and Atlantic Historical Consolidated Capital Structures (dollars in thousands) Delmarva Atlantic Common Stock Equity $942,322 $782,688 Preferred stock not subject to 89,703 30,000 mandatory redemption Preferred stock subject to 70,000 113,950 mandatory redemption Long-term Debt 923,710 786,187 --------- --------- Total $2,025,735 $1,712,825 Conectiv Pro Forma Consolidated Capital Structure* (dollars in thousands) (unaudited) Conectiv Common Stock (incl. additional $1,461,721 paid in capital) Class A Common Stock 136,840 Retained Earnings 266,630 Preferred stock not subject to 119,703 mandatory redemption (of subsidiaries) Preferred stock subject to 183,950 mandatory redemption (of subsidiaries) -46- Long-term Debt 1,709,897 ---------- Total $3,878,741 * The pro forma consolidated capital structure of Conectiv has been adjusted to reflect future nonrecurring charges directly related to the Mergers, which result in, among other things, the recognition of additional current liabilities and a reduction in retained earnings. Conectiv's pro forma consolidated common equity to total capitalization ratio of 48% comfortably exceeds the "traditionally acceptable 30% level." NORTHEAST UTILITIES, HCAR No. 25221 (Dec. 21, 1990), MODIFIED, HCAR No. 25273 (Mar. 15, 1991), AFF'D SUB NOM. CITY OF HOLYOKE V. SEC, 972 F.2d 358 (D.C. Cir. 1992). Protected interests: As set forth more fully in Item 3.A.2.b.i (Efficiencies and Economies), Item 3.A.2.b.ii (Integrated Public Utility System) and elsewhere in this Application/Declaration, the Mergers are expected to result in substantial cost savings and synergies, and will integrate and improve the efficiency of the Delmarva and Atlantic utility systems. The Mergers will therefore be in the public interest and the interests of investors and consumers, and will not be detrimental to the proper functioning of the resulting holding company system. 2. Section 10(c) ------------- Section 10(c) of the Act provides that, notwithstanding the provisions of Section 10(b), the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11\15; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and - ------------------ 15 By their terms, Sections 8 and 11 only apply to registered holding companies and are therefore inapplicable at present to Conectiv, since it is not now a registered holding company. The following discussion of Sections 8 and 11 is included only because, under the present transaction structure, Conectiv will register as a holding company after consummation of the Mergers. -47- the efficient development of an integrated public utility system. a. Section 10(c)(1) ---------------- Section 10(c)(1) requires that an acquisition be lawful under Section 8. Section 8 prohibits registered holding companies from acquiring, owning interests in or operating both a gas and an electric utility serving substantially the same area if state law prohibits it. As discussed below, the Mergers do not raise any issue under Section 8 or, accordingly, the first clause of Section 10(c)(1). Indeed, Section 8 indicates that a registered holding company may own both gas and electric utilities where, as here, the relevant state utility commissions support such an arrangement. Section 10(c)(1) also requires that an acquisition not be detrimental to carrying out the provisions of Section 11. Section 11(a) of the Act requires the Commission to examine the corporate structure of registered holding companies to ensure that unnecessary complexities are eliminated and voting powers are fairly and equitably distributed. As described above, the Mergers will not result in unnecessary complexities or unfair voting powers. Although Section 11(b)(1) generally requires a registered holding company system to limit its operations "to a single integrated public utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public utility system," a combination integrated gas and electric system within a registered holding company is permissible under Section 8. Additionally, Section 11(b)(1) provides that "one or more additional integrated public utility systems" may be retained if, as here, certain criteria are met. Section 11(b)(2) directs the Commission "to ensure that the corporate structure or continued existence of any company in the holding company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding company system." As detailed below, the Mergers will not be detrimental to the carrying out of the provisions of Section 11. i. Acquisition of Gas Operations ----------------------------- Conectiv's acquisition of the gas operations of Delmarva is lawful under Section 8 of the Act and would not be detrimental to the carrying out of Section 11 of the Act. Section 8: Section 8 of the Act provides that [w]henever a State law prohibits, or requires approval or authorization of, the ownership or operation by a single company of the utility assets of an electric utility company and a gas utility company serving substantially the same territory, it shall be unlawful for a registered holding company, or any subsidiary company thereof . . . (1) to take any step, without the express approval of the state commission of such state, which results in its having a direct or indirect interest in an electric utility company and a gas company serving substantially the same territory; or -48- (2) if it already has any such interest, to acquire, without the express approval of the state commission, any direct or indirect interest in an electric utility company or gas utility company serving substantially the same territory as that served by such companies in which it already has an interest. (emphasis added). A fair reading of this section indicates that, with the approval of the relevant state utility commissions, registered holding company systems can include both electric and gas utility systems. In its recent order approving the formation of the New Century Energies, Inc. registered system, the Commission largely ignored the legislative intent expressed in Section 8. In its report, the Senate Committee on Interstate Commerce noted that the provision in Section 8 concerning combination companies "is concerned with competition in the field of distribution of gas and electric energy -- a field which is essentially a question of State policy, but which becomes a proper subject of Federal action where the extra-State device of a holding company is used to circumvent state policy." THE REPORT OF THE COMMITTEE ON INTERSTATE COMMERCE, S. Rep. No. 621, 74TH Cong., 1st Sess. at 31 (1935)("SENATE REPORT"). It appears that the Supreme Court's apparent rejection of a Section 8 argument in the NEES case was based on a distinction drawn by the statute between the divestiture of properties by a registered holding company in the context of a Section 11 proceeding, and the acquisition of such properties in other contexts. At issue in SEC v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176 (1966) was the continued retention of gas properties that the NEES system, a registered electric system, had owned since its formation in 1926. The Commission in the NEES decision below noted correctly that Section 8, which concerns the acquisition of additional systems, "does not relate to the divestment of properties under the policy embodied in Section 11(b)(1)." NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888, 902 (1964). This matter, in contrast, involves the acquisition of a combination system by a newly-formed registered holding company. The policies and provisions of Section 8 should be considered in the Commission's determinations in this area. Conectiv believes that a reemphasis by the Commission on Section 8, which would allow registered combination companies pending state support, is consistent both with the Act and its policy objectives. Indeed, over time the Commission has in fact emphasized different aspects of Section 8 and its interplay with Section 11 -- initially allowing registered holding companies to own both gas and electric systems under Section 8, then focusing on Section 11 as controlling determinations regarding combination companies, and requiring the second system to meet a strict interpretation of the requirements set forth in clauses A, B and C of Section 11(b)(1). -49- In its early decisions, the Commission adhered to the concept that the decision as to whether or not to allow combination companies is one that states should make (although the Commission might have to implement it in certain cases) and, where such systems were permissible, the role of the Commission was to ensure that both such systems are integrated as defined in the Act. The Commission's most notable decision in this line is AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC 972 (1937). In this case, the Commission approved the applicant's voluntary reorganization plan under Section 11(e) of the Act and permitted the newly reorganized registered holding company to retain its electric and its gas operations, specifically noting that while the Act does not contain a definition of single integrated utility in the context of a combination company: We believe, however, that it is proper to regard such a combined property as a single integrated system, provided that all of the electric properties are integrated and all of the properties, both gas and electric, are in fairly close geographic proximity and are so related that substantial economies may be effectuated by their coordination under common control. The question of public policy as to the common ownership of gas and electric facilities in the same territory is apparently left by the statute to the decision of the states.16 Thus, since the combination company did not violate state policy, there was no need for the Commission to exercise jurisdiction to implement state policy. By the early 1940's, however, the Commission switched its focus to Section 11 and adopted a narrow interpretation of the standards contained therein as the controlling factor with regard to combination registered holding companies.17 In connection with its analysis of combination companies under Section 11, the Commission frequently noted a policy concern existing at that time which advocated separating the management - ------------------ 16 AMERICAN WATER WORKS AND ELECTRIC COMPANY, INCORPORATED, 2 SEC at 983, n.3. 17 SEE, E.G., COLUMBIA GAS & ELECTRIC CORPORATION, 8 SEC 443 at 463 (1941); UNITED GAS IMPROVEMENT COMPANY, HCAR No. 2692 (April 15, 1941); SECURITIES AND EXCHANGE COMMISSION v. NEW ENGLAND ELECTRIC SYSTEM, 384 U.S. 176 (1966). It should be noted that the Commission continued to give primacy to state utility commission determinations in making decisions regarding combination exempt holding companies. SEE, E.G., NORTHERN STATES POWER COMPANY, HCAR No. 12655 (Sept. 16, 1954); DELMARVA POWER & LIGHT CO., 46 SEC 710 (1976); WPL HOLDINGS, HCAR No. 24590 (Feb. 26, 1988). -50- of gas and electric utilities based on the belief that the gas utility business tended to be overlooked by combination company management who focused on the electric utility business. Therefore, gas utilities would benefit from having separate management focused entirely on the gas utility business.18 However, both the legislative history of the Act and recent changes in the utility industry indicate that it is a propitious time for the Commission to reemphasize the provisions of Section 8 of the Act and allow combination registered holding companies where, as in this case, they are permitted under relevant state law. A review of the legislative history of Section 8 clarifies this intent. As noted above, in its report, the Senate Committee on Interstate Commerce noted that the provision in Section 8 concerning combination companies "is concerned with competition in the field of distribution of gas and electric energy -- a field which is essentially a question of State policy, but which becomes a proper subject of Federal action where the extra-State device of a holding company is used to circumvent state policy." SENATE REPORT at 31. In addition, attached to the above-referenced committee report is the Report of the National Power Policy Committee on Public Utility Holding Companies, which sets forth a recommended policy that: "Unless approval of a State commission can be obtained the commission should not permit the use of the holding-company form to combine a gas and electric utility serving the same territory where local law prohibits their combination in a single entity." This recommendation emphasizes the importance of the state determination in this area. Much more recently, in the 1995 REPORT, the Division noted "it does not appear that the SEC's precedent concerning additional systems precludes the SEC from relaxing its interpretation of Section 11(b)(1)(A)" and "that the utility industry is evolving toward the creation of one-source energy companies that will provide their customers with whatever type of energy supply they want, whether electricity or gas," and recommended that the Commission interpret Section 11(b)(1) of the Act to allow registered holding companies to hold both gas and electric operations as long as each affected state utility regulatory commission approves of the existence of such a company.19 This change in the industry whereby, among other things, customers are increasingly seeking the most economic means of meeting their energy needs, and not simply their gas needs or their electric needs, is evidenced by the transformation of traditional utilities into energy service companies as well as - ------------------- 18 SEE, E.G., THE PHILADELPHIA COMPANY, 28 SEC 35, 48 (1948); THE NORTH AMERICAN COMPANY, 11 SEC 169, 179-80 (195); ILLINOIS POWER COMPANY, HCAR No. 16574 (Jan. 2, 1970). 19 1995 REPORT at 15-6. -51- the growth of new energy providers such as marketers, the increase in announced mergers between pure electric and pure gas utilities and even the treatment of energy as a commodity for arbitrage transactions. For example, Consolidated Natural Gas, Unitil Corporation, Eastern Utilities Associates, New England Electric System, Southern Company and Northeast Utilities, each a registered holding company, have been authorized to offer customers multiple fuel options and related energy services through subsidiaries.20 Furthermore, the recent merger of PanEnergy Corp., a large pipeline and electric and gas marketer with Duke Power Company, an electric utility holding company, and the acquisition of Portland General Corporation, an electric utility holding company, by Enron Corporation, a large gas pipeline and electric and gas marketer as well as the acquisition of ENSERCH Corporation, a gas utility company, by Texas Utilities Company, an electric utility holding company, and the acquisition of NorAm Energy, Inc., a gas utility company, by Houston Industries, Inc., an electric utility holding company, demonstrate that market forces are pushing for the convergence of electric and gas operations into full service utility companies. Indeed, the Commission has recently explicitly recognized that "the utility industry is evolving towards a broadly based energy-related business,21 marked by "the interchangeability of different forms of energy, particularly gas and electricity.22 The legislative history of Section 11 offers additional support for focusing on state commission determinations regarding combination companies. The SENATE REPORT makes clear that "the purpose of section 11 is simply to provide a mechanism to create conditions under which effective Federal and State regulation will be possible." SENATE REPORT at 11. This statement underscores the general policy of the Act that local regulators are in the best position to assess the needs of their communities. The Act was never intended to supplant local regulation but, rather, was intended to create conditions under which local regulation was possible. Section 21 of the Act, which further codifies this legislative intent, states: "Nothing in [the Act] shall affect . . . the jurisdiction of any other commission, board, agency, or officer of . . . any State, or political subdivision of any State, over any person, security, or - ------------------ 20 CONSOLIDATED NATURAL GAS COMPANY, HCAR No. 26512 (April 30, 1994) (the "CNG Order"); UNITIL CORPORATION, HCAR No. 26527 (May 31, 1996); NORTHEAST UTILITIES, HCAR No. 26554 (Aug. 13, 1996); NEW ENGLAND ELECTRIC SYSTEM, HCAR No. 26520 (May 23, 1996); and Supplemental Order Releasing Jurisdiction For Certain Retail Electric Marketing Activities, HCAR No. 26519 (May 23, 1996); SEI HOLDINGS, HCAR No. 26581 (September 26, 1996). 21 CNG Order. 22 CNG Order at 11. -52- contract, insofar as such jurisdiction does not conflict with any provision of [the Act] . . . ." The legislative history reveals that Section 21 of the Act was further intended "to insure the autonomy of state commissions [and] nothing in the [Act] shall exempt any public utility from obedience to the requirements of state regulatory law." The Report of the Committee on Interstate Commerce, S. Rep. No. 621 at 10 (1935). Thus, the Act should not be used as a tool to override state policy, particularly when the holding company involved is subject to both state and federal regulation and when the affected state regulatory commissions have indicated their support for the combined electric and gas operations in one holding company system. Finally, this reemphasis on Section 8 fits within the overall regulatory scheme of the Act. First, Section 11 of the Act is flexible and was designed to change as the policy concerns over the regulation of utility holding companies changed.23 As discussed below, the utility industry and the regulation of that industry has changed dramatically in recent years and it is competitive forces (the very thing that the Act was designed to promote) that are pushing holding companies to offer alternative forms of energy. Second, a registered holding company would still be required to demonstrate that any acquisition or transaction by which it would become a combination company would not be detrimental to the carrying out of the provisions of Section 11 of the Act. In other words, its electric system would have to constitute an integrated electric system and that its gas system would have to constitute an integrated gas system and both systems must be capable of being operated efficiently. Thus, the standards of Section 11 would still have to be met, but the construction of those standards should take into account the fundamental policy of the Act and allow local regulators to make the major determination with regard to combination companies. Conectiv as a combination company is permissible pursuant to the terms of Section 8 of the Act and is in the public interest. First, the combination of electric and gas operations in Delmarva is lawful under all applicable state laws. Conectiv will not be using its holding company structure to circumvent any state regulations. Moreover, earlier concerns that a holding company such as Conectiv would be able to greatly emphasize one form of energy over the other based on its own agenda have receded because of the competitive nature of the energy market, which requires utilities to meet customer demand for energy above all else, and because state regulators will have - ------------------ 23 MISSISSIPPI VALLEY GENERATING CO., 36 SEC 159 (1955) (noting that Congress intended the concept of integration to be flexible); UNITIL CORPORATION, HCAR No. 25524 (April 24, 1992) (noting that section 11 contains a flexible standard designed to accommodate changes in the industry). -53- sufficient control over, and would be unlikely to approve, a combination company that attempts to undertake such practices. Even if the Act were not interpreted as generally permitting combination gas and electric systems, Section 11 contains additional provisions that permit the retention by Delmarva of its gas system. Section 11(b)(1) of the Act permits a registered holding company to control one or more additional integrated public utility systems -- i.e., gas as well as electric -- if: (A) each of such additional systems cannot be operated as an independent system without the loss of substantial economies which can be secured by the retention of control by such holding company of such system; (B) all of such additional systems are located in one state, adjoining states, or a contiguous foreign country; and (C) the continued combination of such systems under the control of such holding company is not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. In the 1995 REPORT, the Division recommended that the Commission "liberalize its interpretation of the 'A-B-C' clauses."24 Historically, as a "guide" to determining whether lost economies are "substantial" under Section 11(b)(1)(A), under its previous narrow interpretation of this section, the Commission has given consideration to four ratios, which measure the projected loss of economies as a percentage of: (1) total gas operating revenues; (2) total gas expense or "operating revenue deductions"; (3) gross gas income; and (4) net gas income or net gas utility operating income. Although the Commission has declined to draw a bright-line numerical test under Section 11(b)(1)(A), under its previous narrow interpretation of this Section it indicated that cost increases resulting in a 6.78% loss of operating revenues, a 9.72% increase in operating revenue deductions, a 25.44% loss of gross income and a 42.46% loss of net income would afford an "impressive basis for finding a loss of substantial economies." ENGINEERS PUBLIC SERVICE CO., 12 SEC 41, 59 (1942) (citation omitted). Here, the lost economies that would be experienced if the gas properties of Delmarva were to be operated on a stand-alone basis exceed these numbers, without any increase in benefits to consumers. These lost economies result from the need to replicate services, the loss of economies of scale, the costs - ------------------ 24 1995 REPORT at 74. -54- of reorganization, and other factors, and are described more fully in the Analysis of the Economic Impact of a Divestiture of the Gas Business of DPL (the "Divestiture Study") (Exhibit J-1 hereto). As set forth in the Divestiture Study, divestiture of the gas operations of Delmarva into a stand-alone company would result in lost economies of $14,728,000. These lost economies compare with Delmarva's gas operating revenues of $104,687,000, gas operating revenue deductions of $84,628,000, gas gross income of $20,059,000 and gas net income of $13,910,000. On a percentage basis, Delmarva's lost economies amount to 14.07% of gas operating revenue, 17.40% of gas operating revenue deductions, 73.42% of gross gas income and 105.88% of net gas income for Delmarva. The percent losses in net gas income alone that will be suffered by the Delmarva gas system if operated on a stand-alone basis exceed the 30% loss in the New England Electric System case that the Commission has described as the highest loss of net income in any past divestiture order.25 The percentage loss that would be suffered by Delmarva in gas operating revenue and gross gas income exceeds the percentage loss in the majority of divestiture orders issued by the Commission in the past. Delmarva's lost economies also exceed the lost economies that would have resulted if the divestiture of the gas operations of Public Service Company of Colorado and Cheyenne Light, Fuel and Power Company had been required by the Commission in connection with the approval of the formation of New Century Energies, Inc. The applicable percentages here and in past cases are summarized in Exhibit J-3. In order to recover these lost economies the Delmarva gas division would need to increase its revenue from rates by $15,493,000 or 14.80%. This increase in rate revenues would have a direct and immediate negative impact on the rates charged to consumers for gas services. Moreover, it should be noted that the divestiture of Delmarva's gas business would result in rate increases of 0.79% for Delmarva electric customers. Finally, divestiture of Delmarva's gas operations would cause a significant, although difficult to quantify, amount of damage to Conectiv's customers, Conectiv's regulators and Conectiv's ability to compete in the marketplace. Such non-quantifiable costs to customers involve the additional expenses of doing business with two utilities instead of one (i.e., additional telephone calls for service and billing inquiries, and costs of providing access to meters and other facilities for two utilities) and costs associated with making the entities supply information to shareholders and publish the reports required by the 1934 Act. Similarly, regulatory costs involve additional - ------------------ 25 NEW ENGLAND ELECTRIC SYSTEM, 41 SEC 888 (1964), AFF'D, 384 U.S. 176 (1966) and 390 U.S. 207 (1968). -55- duties for the staffs of the DPSC as a result of dealing with an additional utility. These additional duties would largely be the result of duplicating existing functions, such as separate requests for approval of financing. Conectiv's competitive position in the market would also suffer because as the utility industry moves toward a complete energy services concept, competitive companies must be able to offer customers a range of options to meet their energy needs. Divestiture of gas operations would render Conectiv unable to offer its customers a significant and important option, namely gas services, and could damage Conectiv's long-term competitive potential. Most recently in the NEW CENTURY ENERGIES order, the Commission explained: other factors operated to compound the loss of economies represented by increased costs. The Commission has previously taken notice of developments that have occurred in the electric and gas utility industry in recent years, and has interpreted the Act and analyzed proposed transactions in light of these changed and changing circumstances. In the Commission's view, these developments should be considered in determining whether PSC's and Cheyenne's gas system may be retained. The gas and electric industries are converging, and, in these circumstances, separation of gas and electric businesses may cause the separated entities to be weaker competitors than they would be together. This factor adds to the quantifiable loss of economies caused by increased costs. * * * In the 1960s, when the NEES case was decided, utilities were primarily franchised monopolies with captive ratepayers, and competition between suppliers of gas and electricity, however limited, was virtually the only source of customer choice and was thus deemed beneficial to energy consumers. The fact that other gas utilities of comparable size could operate successfully on an independent basis was evidence that a gas system could operate on its own, a desirable result, without a substantial loss of economies. The empirical basis for these assumptions, however, is rapidly eroding. Although franchised monopolies are still the rule, competition is increasing. Increased expenses of separate operations may no longer be offset, as they were in NEW ENGLAND ELECTRIC SYSTEM, by a gain of qualitative competitive benefits, but rather may be compounded by a loss of such benefits, as the Commission finds in this matter. (footnotes omitted). -56- Accordingly, we urge the Commission to find Clause A satisfied for the reasons set forth above, consistent with its conclusions in the NEW CENTURY ENERGIES order. (B) and (C) clauses: The remaining requirements of Section 11(b)(1) are met because the gas operations of Delmarva are located in only one state (Delaware) and because the continued gas operations under Conectiv are not so large (considering the state of the art and the area or region affected) as to impair the advantages of localized management, efficient operation or the effectiveness of regulation. The gas system is confined to a small area. Finally, as detailed above, the gas operations of Delmarva enjoy substantial economies as part of the Delmarva system, and will realize additional economies as part of the Conectiv System as a result of the Mergers. Far from impairing the advantages of efficient operation, the continuation of the gas operations under Conectiv will facilitate and enhance the efficiency of gas operations. ii. Direct and Indirect Nonutility Subsidiaries of Conectiv ------------------------------------------------------- As a result of the Mergers, the nonutility businesses and interests of Delmarva and Atlantic described in Item 1.B.3 above will become businesses and interests of Conectiv. The total assets of all nonutility investments of Delmarva and Atlantic at June 30, 1997 totaled $403 million. Corporate charts showing the nonutility subsidiaries of Delmarva and Atlantic are filed as Exhibits E-2 and E-3. A corporate chart showing the projected arrangement of these subsidiaries under Conectiv has been filed as Exhibit E-4. Standard for acquisition: Section 11(b)(1) generally limits a registered holding company to acquire "such other businesses as are reasonably incidental, or economically necessary or appropriate, to the operations of [an] integrated public utility system." Although the Commission has traditionally interpreted this provision to require an operating or "functional" relationship between the nonutility activity and the system's core nonutility business, in its recent release promulgating Rule 58, 26 the Commission stated that it "has sought to respond to developments in the industry by expanding its concept of a functional relationship." The Commission added "that various considerations, including developments in the industry, the Commission's familiarity with the particular nonutility activities at issue, the absence of significant risks - ------------------ 26 EXEMPTION OF ACQUISITION BY REGISTERED PUBLIC-UTILITY HOLDING COMPANIES OF SECURITIES OF NONUTILITY COMPANIES ENGAGED IN CERTAIN ENERGY-RELATED AND GAS-RELATED ACTIVITIES, HCAR No. 26667 (Feb. 14, 1997) ("RULE 58 RELEASE"). -57- inherent in the particular venture, the specific protections provided for consumers and the absence of objections by the relevant state regulators, made it unnecessary to adhere rigidly to the types of administrative measures" used in the past. Furthermore, in the 1995 REPORT, the Staff recommended that the Commission replace the use of bright-line limitations with a more flexible standard that would take into account the risks inherent in the particular venture and the specific protections provided for consumers.27 As set forth more fully below, the non-utility business interests that Conectiv will hold directly or indirectly all meet the Commission's standards for retention. Attached as Exhibit J-8 is a description of the specific bases under which the nonutility investments of Delmarva and Atlantic may be retained in the Conectiv holding company system: As noted previously, Delmarva Services Company also owns approximately 2.9% of the common stock of Chesapeake Utilities Corporation ("Chesapeake"), a publicly-traded gas utility company with gas utility operations in Delaware, Maryland and Florida. Conectiv requests that the Commission reserve jurisdiction over the Chesapeake stock for a period of three years from the date of its order to permit Conectiv to effect an orderly disposition of the stock or otherwise comply with the requirements of the Act. b. Section 10(c)(2) ---------------- The Mergers will tend toward the economical and efficient development of an integrated public utility system, thereby serving the public interest, as required by Section 10(c)(2) of the Act. i. Efficiencies and Economies -------------------------- The Mergers will produce economies and efficiencies more than sufficient to satisfy the standards of Section 10(c)(2), described above. Although some of the anticipated economies and efficiencies will be fully realizable only in the longer term, they are properly considered in determining whether the standards of Section 10(c)(2) have been met. SEE AMERICAN ELECTRIC POWER CO., 46 SEC 1299, 1320-1321 (1978). Some potential benefits cannot be precisely estimated; nevertheless they too are entitled to be considered: "[S]pecific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable." CENTERIOR ENERGY CORP., HCAR No. 24073 (April 29, 1986) (citation omitted). - ------------------ 27 1995 REPORT at 81-87, 91-92. -58- 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 -59- 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 -60- 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 -61- overall credit quality and liquidity of the securities and therefore improve Conectiv's ability to fund continued growth. o Regional Platform for Growth -- The combination of Atlantic and Delmarva will create a regional platform in the mid-Atlantic corridor. The corridor is experiencing economic growth that is led by the casino gaming industry in South Jersey and the expansion of the financial services industry in Delaware. Conectiv plans to expand relationships with existing customers and to develop relationships with new customers in the region. Conectiv will use its combined distribution channels to market a portfolio of energy-related products throughout the region and will follow regional relationships to other geographical areas. ii. Integrated Public Utility System -------------------------------- I. Electric System --------------- As applied to electric utility companies, the term "integrated public utility system" is defined in Section 2(a)(29)(A) of the Act as: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operation to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. The Commission has read the definition to establish four standards that must be met before the Commission will find that an integrated public utility system will result from a proposed acquisition of securities: (1) the utility assets of the system are physically interconnected or capable of physical interconnection; (2) the utility assets, under normal conditions, may be economically operated as a single interconnected and coordinated system; (3) the system must be confined in its operations to a single area or region; and -62- (4) the system must not be so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. ENVIRONMENTAL ACTION, INC. V. SECURITIES AND EXCHANGE COMMISSION, 895 F.2d 1255, 1263 (9th Cir. 1990), citing ELECTRIC ENERGY, INC., 38 S.E.C. 658, 668 (1958). The Mergers satisfy each of these requirements. The first requirement, that the assets of the resulting Conectiv electric utility system be "physically interconnected or capable of interconnection" is satisfied because Delmarva and Atlantic jointly own generation and transmission facilities and are members of the same tight power pool, PJM Interconnection, LLC ("PJM"). PJM is the largest, and most sophisticated centrally-dispatched electric control area in North America, and the third largest in the world. PJM became the first operational Independent System Operator in the U.S. on January 1, 1998, managing the PJM Open Access Transmission Tariff and facilitating the Mid-Atlantic Spot Market. PJM's objectives are to ensure reliability of the bulk power transmission system, and to facilitate an open, competitive wholesale electric market. The PJM service territory includes all or part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and the District of Columbia. With the implementation of the PJM Open Access Transmission Tariff, PJM began operating the nation's first regional, bid-based energy market. PJM has become one of the most liquid and active energy markets in the country. PJM enables participants to buy and sell energy, schedule bilateral transactions and reserve transmission service. The PJM staff centrally forecasts, schedules and coordinates the operation of generating units, bilateral transactions, and the spot energy market to meet load requirements. To maintain a reliable and secure electric system, PJM monitors, evaluates and coordinates the operation of over 8,000 miles of high-voltage transmission lines. Operations are closely coordinated with neighboring control areas, and information is exchanged to enable real-time security assessments of the transmission grid. PJM provides accounting services for energy, ancillary services, transmission services, and capacity reserve obligations. The PJM staff coordinates the planning of generation to meet combined peak loads of the control area. They coordinate planning of the interconnected bulk power transmission system to deliver energy reliably and economically to customers. PJM conducts many specialized planning studies within the pool and with surrounding entities. -63- The benefits of PJM membership fall generally into five categories: reliability, adequacy, security, economy and joint maintenance scheduling. Reliability means providing customers with the amount of electricity they need when they want it. Reliability exists when the electric system is in balance between load and generation or can be rapidly brought into balance following any disruption. The ability of an electric system to recover from a disturbance depends on the relative size and responsiveness of the remaining system generation. Operating through PJM provides companies with a larger and more stable supply of reserves that can be achieved by an individual company alone. PJM is dedicated to meeting the reliability criteria and standards of the North American Electric Reliability Council and the Mid Atlantic Area Council. Adequacy is the assurance of sufficient supply of electricity to meet customer's maximum needs. Adequacy exists when the system has sufficient generation and purchased power available to meet the load and reserve requirements. Reserves must be sufficient to accommodate planned and unexpected unit unavailability and errors in load forecasts. Through the PJM interconnection, each energy producer can reduce plant investment through lower reserve requirements that would be necessary if it were operating on a stand-alone basis. Security is the ability of a power system to withstand sudden large and unanticipated disturbances. Security exists when those responsible for operational control of the system can monitor system conditions and anticipate and respond rapidly to disturbances. The PJM dispatch function coordinates individual member operations to assure system security and coordination with adjacent interconnected power systems. Economy in the operation of a system, composed of numerous generators, requires that the units be dispatched in order of increasing marginal bid price regardless of their ownership or location relative to system load. In this way, the operating costs to all customers are minimized. The scheduling of generation resources, interconnected by free-flowing ties, and dispatched in economic order, results in the optimal use of resources for all participants. Joint maintenance scheduling allows companies to perform maintenance on generating units and transmission lines in coordination with other PJM members. A coordinated maintenance plan assures reserve capability and optimal use of resources at all times. The Commission has expressly found that a tight power pool such as PJM could be used to establish the integration of two neighboring utilities for purpose of the 1935 Act. UNITIL Corporation, Holding Co. Act Release No. 25524 (April 24, 1992) See also Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), supplemented, Holding Co. Act Release No. 25273 -64- (March 15, 1991), aff'd sub nom. City of Holyoke Gas & Electric Co. v. SEC, 972 F.2d 358 (D.C. Cir. 1992). In addition, the companies are interconnected through their undivided ownership interests in and/or rights to use the same regional generation facilities and extra-high voltage transmission facilities, as well as through their contractual rights to use the transmission facilities of other members of the PJM regional power pool. Delmarva and ACE each have undivided ownership interests in two nuclear plants: Peach Bottom Nuclear Generating Station located in Pennsylvania, in which each company holds a 7.51 percent interest, and Salem Nuclear Generating Station located in New Jersey, in which each company holds a 7.41 percent interest. Both companies also hold undivided ownership interests in two coal-fired thermal units, the Keystone and Conemaugh generating stations located in Pennsylvania. These four plants together account for a substantial proportion of Conectiv's generation resources, though the plants are located outside Conectiv's traditional service areas. Delmarva and ACE, along with other PJM members, also have undivided interests in, or joint rights to use, certain 500 kv transmission facilities that are used to import power from the west and to deliver power from jointly owned generating plants to their owners' systems. These facilities include a transmission line which provides an aerial crossing of the Delaware River and other extra-high voltage lines that directly connect the jointly-owned power plants with lower voltage lines of the PJM Interconnection. While it would be possible to construct a transmission line directly interconnecting Delmarva and ACE, Conectiv believes that such action is unnecessary since present transmission arrangements provide adequate service. See UNITIL Corp., Holding Co. Act Release No. 25524 (April 24, 1992), citing Electric Energy, Inc., 38 S.E.C. 658, 669 (1953) (direct interconnection not required in circumstances that would have resulted in an uneconomic duplication of transmission facilities). Conectiv also satisfies the second of the Commission's requirements, that utility assets, under normal conditions, may be "economically operated as a single interconnected and coordinated system."28 The Commission has interpreted this language to refer, among other things, to the physical operation of utility assets as a system in which the generation and/or flow of current within the system may be centrally controlled and - ------------------- 28 SEE CITIES SERVICES CO., 14 SEC at 55 (Congress intended that the utility properties be so connected and operated that there is coordination among all parts, and that those parts bear an integral operating relationship to each other). -65- allocated as need or economy directs.29 The Commission has considered advances in technology and the particular operating circumstances in applying the integration standards. In approving the acquisition of Public Service Company of New Hampshire by Northeast Utilities, the Commission noted that "the operation of generating and transmitting facilities of PSNH and the Northeast operating companies is coordinated and centrally dispatched under the NEPOOL Agreement." NORTHEAST UTILITIES CO., HCAR No. 25221 at n. 85. Similarly, in UNITIL, the Commission concluded that the combined electric utility assets of the companies may be operated as a single interconnected and coordinated system through their participation in NEPOOL. In this matter, in addition to coordinated operation through PJM, Conectiv will have a central operating transmission and generation control center in Newark, Delaware (the "Conectiv Control Center"). The Conectiv Control Center will be responsible for the essentially local functions of the Conectiv system, including, among other things, the monitoring of system lines, operation of system breakers, communications with local generators concerning output and with PJM with respect to bulk power transactions. For these reasons, Conectiv is able to operate its utility assets as a single interconnected and coordinated system. The Commission's third requirement is also satisfied. The Conectiv electric system will operate in a single area or region. The system will operate in five contiguous states in the mid-Atlantic region of the United States. It should be noted that in the 1995 REPORT, the Division has stated that the evaluation of the "single area or region" portion of the integration requirement "should be made... in light of the effect of technological advances on the ability to transmit electric energy economically over longer distance, and other developments in the industry, such as brokers and marketers, that affect the concept of geographic integration."30 The 1995 REPORT also recommends primacy be given to "demonstrated economies and efficiencies to satisfy the integration requirements."31 As set forth in Item 3.A.2.b.i, the Mergers will result in economies and efficiencies for the utilities and, in turn, their customers. Finally, with respect to the Commission's fourth requirement, the Conectiv electric system will not be so large as to impair the advantages of localized management, efficient operations, and the effectiveness of regulation. After the Mergers, Conectiv will maintain system headquarters in Wilmington, Delaware. This structure will preserve all the benefits of localized management Delmarva and Atlantic presently enjoy while simultaneously allowing for the efficiencies and - ------------------ 29 NORTH AMERICAN CO., 11 SEC 194, 242 (1942) aff'd, 133 F.2d 148 (2d Cir. ----- 1943), aff'd on constitutional issues, 327 U.S. 686 (1946) (evidence is -------------------------------- necessary to show that in fact isolated territories are or can be so operated in conjunction with the remainder of the system that central control is available for the routing of power within the system). 30 1995 REPORT at 72-74. 31 1995 REPORT at 73. -66- economies that will derive from their strategic alliance. Furthermore, as described earlier, the system will facilitate efficient operation. Additionally, the Conectiv system will not impair the effectiveness of state regulation. Delmarva and ACE will continue their separate existence as before and their utility operations will remain subject to the same regulatory authorities by which they are presently regulated, namely the DPSC, VSCC, NJBPU, PPUC, MPSC, the FERC and the NRC. Delmarva and Atlantic have received the requisite orders from these regulators as a condition precedent to consummating the proposed Mergers. II. Gas Utility System ------------------ Section 2(a)(29)(B) defines an "integrated public utility system" as applied to gas utility companies: [A] system consisting of one or more gas utility companies which are so located and related that substantial economies may be effectuated by being operated as a single coordinated system confined in its operation to a single area or region, in one or more States, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation: Provided, that gas utility companies deriving natural gas from a common source of supply may be deemed to be included in a single area or region. The gas operations of Delmarva, which are very limited in size, currently operate as a single, integrated public utility system in New Castle County, Delaware. The Mergers will not affect that integrated operation. Thus, Conectiv gas utility system will meet the standard set forth in Section 2(a)(29)(B) and, therefore, will satisfy the requirements of Sections 10(c)(1) and (2) and should be approved by the Commission. The Conectiv gas utility system will continue to operate as a coordinated system confined in its operation to a single area or region. 3. Section 10(f) ------------- Section 10(f) provides that: The Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect to such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. -67- As described in Item 4 of this Application/Declaration, and as evidenced by the orders received from the DPSC, VSCC, NJBPU, PPUC and MPSC all relating to the Mergers, Conectiv intends to comply with all applicable state laws related to the proposed transaction. 4. Other Applicable Provisions -- Section 9(a)(1) ---------------------------------------------- Conectiv is also requesting authorization from the Commission under Section 9(a)(1) of the Act for the acquisition by it of the voting securities of Support Conectiv as part of the Mergers. Section 9(a)(1) of the Act requires a registered holding company or any subsidiary thereof to obtain authorization from the Commission before acquiring "any securities or utility assets or any other interest in any business." In order to approve an acquisition under Section 9(a)(1), the Commission must find that such acquisition meets the standards of Section 10 of the Act, which in turn requires compliance with Sections 8 and 11 of the Act. Although Conectiv will not become a registered holding company until consummation of the Mergers and thus Section 9(a)(1) is not applicable to it until that time, because Conectiv will become subject to Section 9(a)(1) and the exact chronology of the formation of Support Conectiv has not been determined, Conectiv is requesting the Commission's authorization for this transaction. The acquisition by Conectiv of the common stock of Support Conectiv, making it a direct subsidiary of Conectiv, will allow Conectiv to create a subsidiary service company and capture economies of scale from the centralization of administrative and general services to be provided to system companies. A portion of the benefits realized as a result of Support Conectiv are expected to be shared with Conectiv's ratepayers. Virtually every registered holding company has a subsidiary service company performing many of the same functions that Support Conectiv will perform. The acquisition of Support Conectiv is in the public interest, will not unduly complicate the capital structure of Conectiv and will not cause the Conectiv system to violate any other provision of the Act. Support Conectiv's only class of authorized stock will be its common stock, all of which will be owned by Conectiv. The operation of Support Conectiv, and the allocation of cost for its operation, is discussed in detail in Item 3.B below. B. Intra-System Provision of Services ---------------------------------- All services provided by Conectiv system companies to other Conectiv system companies will be in accordance with the requirements of Section 13 of the Act and the rules promulgated thereunder. Conectiv is aware that questions concerning the FERC's policy in this area are likely to arise with respect to affiliate transactions involving Atlantic, Delmarva and other companies which are public utilities under the Federal Power Act. -68- The FERC, in its order authorizing the proposed mergers, noted that: in response to the [FERC's] concern under the holding of OHIO POWER CO. v. FERC, 954 F.2d 779 (D.C. Cir.), CERT. DENIED, 498 U.S. 73 (1992), Applicants commit as a condition that, for Commission ratemaking purposes, they will follow the Commission's policy regarding the treatment of costs and revenues associated with inter- company services. The FERC intra-corporate transactions policy, with respect to non-power goods and services, requires that: (1) affiliates or associates of a public utility not sell non-power goods and services to the public utility at a price above market; and (2) sales of non-power goods and services by a public utility to its affiliates or associates be at the public utility's cost for such goods and services or market value for such goods and services, whichever is higher. ATLANTIC CITY ELECTRIC COMPANY AND DELMARVA POWER & LIGHT COMPANY, FERC Docket No. EC-7-000 (slip op., July 30, 1997). Conectiv recognizes that affiliate transactions among the member companies of Conectiv will be subject of the jurisdiction of the SEC under section 13(b) of the Act and the rules and regulations thereunder. Section 13(b) of the Act generally provides that transactions between affiliates in a registered holding company system be "at cost, fairly or equitably allocated among such companies." Conectiv believes that as a practical matter there should not be any irreconcilable inconsistency between the application of the SEC's "at cost" standard and the FERC's policies with respect to intra-system transactions as applied to Conectiv. For example, Support Conectiv will provide non-power goods and services to associate companies within the Conectiv system at cost, but it is anticipated that Support Conectiv will provide only those goods and services where it can meet or better market prices for comparable quality goods and services. In other words, they are anticipating that Support Conectiv "costs" will be at or below the market. On this basis, Conectiv will be able to comply with the requirements of both the FERC and the "at cost" and fair and equitable allocation of cost requirements of Section 13, including Rules 87, 90 and 91 thereunder, for all services, sale and construction contracts between associate companies and with the holding company parent unless otherwise permitted by the Commission by rule or order. -69- 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 -70- of allocating costs to associate companies, or in the scope or character of the services to be rendered subject to Section 13 of the Act, or any rule, regulation or order thereunder, shall be made unless and until Support Conectiv shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the Commission shall notify Support Conectiv within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of Section 13 of the Act, or of any rule, regulation or order thereunder, then the proposed change shall not become effective unless and until Support Conectiv shall have filed with the Commission an appropriate declaration regarding such proposed change and the Commission shall have permitted such declaration to become effective. Any modification of allocation factors with requires filing under 60-day letter procedures based on existing Commission guidelines will be filed on a timely basis. The current guidelines require approval if the change will cause the lesser of $50,000 or a 5% change in the allocation of cost between companies. These guidelines are subject to change. Conectiv believes that the Service Agreement is structured so as to comply with Section 13 of the Act and the Commission's rules and regulations thereunder. Rule 88: Rule 88 provides that "[a] finding by the Commission that a subsidiary company of a registered holding company . . . is so organized and conducted, or to be conducted, as to meet the requirements of Section 13(b) of the Act with respect to reasonable assurance of efficient and economical performance of services or construction or sale of goods for the benefit of associate companies, at cost fairly and equitably allocated among them (or as permitted by Rule 90), will be made only pursuant to a declaration filed with the Commission on Form U-13-1, as specified" in the instructions for that form, by such company or the persons proposing to organize it. Notwithstanding the foregoing language, the Commission has on at least two recent occasions made findings under Section 13(b) based on information set forth in an Application/Declaration on Form U-1, without requiring the formal filing of a Form U-13-1. SEE CINERGY CORP., HCAR No. 26146 (Oct. 21, 1994); UNITIL CORP., HCAR No. 25524 (April 24, 1992). In this Application/ Declaration, Conectiv has submitted substantially the same applicable information as would have been submitted in a Form U-13-1. Accordingly, it is submitted that it is appropriate to find that Support Conectiv is so organized and its business will be so conducted as to meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is unnecessary, or, alternatively, that this Application/Declaration should be deemed to constitute a filing on Form U-13-1 for purposes of Rule 88. 2. Other Services -------------- Delmarva, ACE and other associate companies of Conectiv may, from time to time, enter into leases of office or other space with other associate companies. Any such lease will be in accordance with Rules 87, 90, and 91, except as may be otherwise -71- authorized by the Commission. To the extent necessary, Conectiv requests authority from the Commission to enter into the business of leasing such space between and among associate companies and third parties. The Commission has permitted the leasing of excess office space. SEE, E.G., CENTRAL POWER AND LIGHT COMPANY, HCAR No. 26408 (Nov. 13, 1995); NORTHEAST UTILITIES, HCAR No. 24908 (June 22, 1989). Delmarva and Atlantic may also provide to one another services incidental to their utility businesses, such as power plant maintenance overhauls, power plant and storm outage emergency repairs and services of personnel with specialized expertise related to the operation of the utility (i.e., services by an industrial lighting specialist or waste disposal specialist). These services will be provided at cost in accordance with the standards of the Act and Rules 87, 90 and 91 thereunder. In addition, it is expected that certain assets such as real property used for administrative purposes and information technology equipment and software may be transferred from Delmarva or ACE to Support Conectiv or other Conectiv companies at cost in conjunction with the integration of the two companies after consummation of the Mergers. For example, Delmarva currently owns the building that is likely to be used by Support Conectiv and so may seek to transfer this asset. These transfers may require approval by various public utility commissions. Any such transfers will be in accordance with Section 13 and the rules thereunder. Conectiv further requests authority to transfer at cost and/or combine real property interests and real estate related activities which benefit more than one member of the Conectiv group, and real property interests of Delmarva and Atlantic currently intended for sale to third parties, into a single legal entity through merger of subsidiaries engaged in real estate related activities and transfers of assets and business activities from Delmarva, Atlantic and their subsidiaries to such merged real estate subsidiary. Any such transfers will be in accordance with Rules 87, 90, and 91, except as may be otherwise authorized by the Commission. * * * * * Finally, pursuant to Rule 24 under the Act, Conectiv represents that the transactions proposed in this filing shall be carried out in accordance with the terms and conditions of, and for the purposes stated in, the declaration-application no later than December 31, 2000. -72- Item 4. Regulatory Approvals -------------------- Set forth below is a summary of the regulatory approvals that Conectiv has obtained or expects to obtain in connection with the Mergers. A. Antitrust --------- The HSR Act and the rules and regulations thereunder provide that certain transactions (including the Mergers) may not be consummated until certain information has been submitted to the DOJ and FTC and specified HSR Act waiting period requirements have been satisfied. Delmarva and Atlantic have submitted Notification and Report Forms and all required information to the DOJ and FTC. The applicable waiting period has expired or has been terminated. The expiration of the HSR Act waiting period does not preclude the DOJ or the FTC from challenging the Mergers on antitrust grounds; however, Conectiv believes that the Mergers will not violate Federal antitrust laws. If the Mergers are not consummated within twelve months after the expiration or earlier termination of the initial HSR Act waiting period, Delmarva and Atlantic would be required to submit new information to the DOJ and the FTC, and a new HSR Act waiting period would have to expire or be earlier terminated before the Mergers could be consummated. B. Federal Power Act ----------------- Section 203 of the Federal Power Act as amended (the "Federal Power Act"), provides that no public utility shall sell or otherwise dispose of its jurisdictional facilities or directly or indirectly merge or consolidate such facilities with those of any other person or acquire any security of any other public utility, without first having obtained authorization from the FERC. Delmarva and Atlantic submitted a joint application for approval of the Mergers to the FERC on November 27, 1996. An order was issued approving the Mergers on July 30, 1997. Exhibit D-1.3. C. Atomic Energy Act ----------------- Delmarva and Atlantic hold Nuclear Regulatory Commission ("NRC") licenses with respect to their ownership interests in certain nuclear units. Delmarva and Atlantic each own a 7.41% interest in the Salem Nuclear Generating Station, which consists of two nuclear units, and a 7.51% interest in the Peach Bottom Nuclear Generating Station, which consists of two nuclear units. In addition, Atlantic owns a 5% interest in the Hope Creek Nuclear Generating Station, which consists of one nuclear unit. The Atomic Energy Act currently provides that licenses may not be transferred or in any manner disposed of, directly or indirectly, to any person unless the NRC finds that -73- such transfer is in accordance with the Atomic Energy Act and consents to the transfer. Pursuant to the Atomic Energy Act, Delmarva and Atlantic submitted an application for approval from the NRC on April 30, 1997. See Exhibit D-7.1. An order was issued approving the Mergers on December 18, 1997. See Exhibit D-7.2. D. State Public Utility Regulation ------------------------------- Delaware: Delmarva is incorporated in Delaware and subject to the jurisdiction of the DPSC. Pursuant to Section 215 of the Public Utilities Act, Delmarva must obtain the approval of the DPSC in order to directly or indirectly merge or consolidate with any other person or company. Section 215 also provides that no other entity shall acquire control, either directly or indirectly, of any public utility doing business within Delaware without the prior approval of the DPSC. The DPSC will approve the proposed Mergers when it finds them to be made in accordance with law, for a proper purpose and are in the public interest. Conectiv and Delmarva submitted an application with the DPSC requesting approval of the Mergers on February 24, 1997. See Exhibit D-2.1. The DPSC issued an order approving the Mergers on September 23, 1997. See Exhibit D-2.2. Virginia: Delmarva is also incorporated in Virginia and subject to the jurisdiction of the VSCC. Pursuant to the Utility Transfers Act, no person, whether acting alone or in concert with others, shall, directly or indirectly, acquire control of a public utility without the prior approval of the VSCC and it is unlawful for any public utility, directly or indirectly, to dispose of any utility assets situated within Virginia unless authorized by the VSCC. The VSCC will approve a proposed transaction if satisfied that adequate service to the public at just and reasonable rates will not be impaired or jeopardized by granting an application for approval. Furthermore, except to the extent preempted by the Securities Exchange Commission, the VSCC, pursuant to statutory provisions under which the VSCC regulates relations with affiliated interests, must approve certain contracts or arrangements for certain services, purchases, sales, leases or exchanges, loans and guarantees between a public service company and affiliates. See Exhibit D-3.1. The VSCC issued an order approving the Mergers on August 8, 1997. See Exhibit D-3.2. New Jersey: As the parent company of Atlantic City Electric Company, the transfer of the ownership or control, or the merger of, Atlantic is subject to the jurisdiction of the NJBPU which, pursuant to Title 48 of the New Jersey Statutes Annotated, must give written approval before any person may acquire or seek to acquire control of a public utility directly or indirectly through the medium of an affiliated or parent corporation. In addition, the NJBPU must authorize any transfer of stock to another public utility, or a transfer that vests another corporation with a majority interest in the stock of a public utility. Furthermore, the NJBPU regulates relations between public utilities and affiliated interests, and -74- must approve certain contracts or arrangements for certain services, purchases or loans between a public utility and affiliates. Conectiv and Atlantic submitted an application with the NJBPU requesting approval of the Mergers on February 24, 1997. See Exhibit D-4.1. The NJBPU issued an order approving the Mergers on December 30, 1997. See Exhibit D-4.2. Pennsylvania: Delmarva and Atlantic own fractional interests in the Keystone, Conemaugh and Peach Bottom electric generating stations and related transmission lines located in Pennsylvania. Pursuant to Pennsylvania statute, the transfer to any person or corporation of the stock, including a transfer by merger, of a public utility must be approved by the PPUC. The PPUC will approve such transfers upon a showing that the merger will affirmatively promote the service, accommodation, convenience or safety of the public in some substantial way. Delmarva and Atlantic applied for PPUC approval of the Mergers on March 24, 1997. See Exhibit D-5.1. The PPUC issued an order approving the Mergers on October 3, 1997. See Exhibit D-5.2. Maryland: The MPSC has general authority to supervise and regulate public utilities with operations in Maryland. Delmarva advised the MPSC of the transactions contemplated by the Merger Agreement and that it does not believe that the approval of the MPSC of the Mergers is required. However, the MPSC ruled that it has jurisdiction over the Mergers to determine whether the Mergers will have an adverse effect on the conduct of Delmarva's Maryland franchises and any other matters that properly come before the MPSC at a hearing. See Exhibit D-6.1. The MPSC issued an order approving the Mergers on July 16, 1997. See Exhibit D-6.2. Item 5. Procedure --------- It is submitted that a recommended decision by a hearing or other responsible officer of the Commission is not needed for approval of the proposed Mergers. The Division of Investment Management may assist in the preparation of the Commission's decision. There should be no waiting period between the issuance of the Commission's order and the date on which it is to become effective. Item 6. Exhibits and Financial Statements --------------------------------- A. Exhibits -------- A-1 Restated Certificate of Incorporation of Conectiv (filed as Annex IV to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). A-2 Restated Bylaws of Conectiv (filed as Annex V to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). -75- A-3 Restated Certificate and Articles of Incorporation of Delmarva (filed with Registration No. 33-50453 and incorporated herein by reference). A-4 Restated Certificate of Incorporation of Atlantic (filed as Exhibit 4(a) to the Atlantic Form 10-Q dated September 30, 1987) and Certificate of Amendment to the Restated Certificate of Incorporation of Atlantic (filed as Exhibit 3(ii) to the Atlantic Form S-8 dated May 6, 1994), and both incorporated herein by reference). B-1 Agreement and Plan of Merger, as amended and restated (filed as Annex I to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). B-2 Form of Service Agreement between Support Conectiv and all affiliates. C-1 Registration Statement of Conectiv on Form S-4 (filed on December 26, 1996 (Registration No 333- 18843) and incorporated herein by reference). C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1). D-1.1 Joint Application of Delmarva and Atlantic before the FERC, as amended. D-1.2.1 Testimony of John C. Dalton to the FERC. D-1.3 Order of the FERC. D-2.1 Application of Delmarva to the DPSC. D-2.2 DPSC Order. D-3.1 Application of Delmarva to the VSCC. D-3.2 VSCC Order. D-4.1 Application of Atlantic to the NJBPU. D-4.2 NJBPU Order. D-5.1 Application of Delmarva to the PPUC. D-5.2 PPUC Order. D-6.1 Application of Delmarva to the MPSC. D-6.2 MPSC Order. D-7.1 Applications of Delmarva and Atlantic to the NRC. D-7.2 Orders of the NRC. E-1 Map of service areas of Delmarva and Atlantic. E-2 Delmarva corporate chart. E-3 Atlantic corporate chart. E-4 Conectiv corporate chart. F-1.1 Opinion of James E. Franklin II, Esq., General Counsel, Atlantic Energy, Inc. F-1.2 Opinion of Peter F. Clark, Esq., Associate General Counsel, Delmarva Power & Light Company. F-2 Past-tense opinion of counsel (to be filed by amendment). G-1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (filed as Annex II to the Registration Statement on Form S-4 on December 26, 1996 (Registration No. 333-18843), and incorporated herein by reference). G-2 Opinion of Morgan Stanley & Co. Incorporated (filed as Annex III to the Registration Statement on Form S-4 on December 26, 1996 (Registration -76- No. 333-18843), and incorporated herein by reference). H-1 Quarterly Report of Delmarva on Form 10-Q for the quarter ended March 31, 1997 (filed on May 14, 1997) (File No. 1-01405) and incorporated herein by reference). H-2 Quarterly Report of Atlantic on Form 10-Q for the quarter ended March 31, 1997 (filed on May 13, 1997 (File No. 1-09760) and incorporated herein by reference). H-3 Form U-3A-2 by Atlantic (filed on February 28, 1997) (File No. 069-00337) and incorporated herein by reference). H-4 Schedule of Assets and Revenues of Nonutility Subsidiary Companies. I-1 Proposed Form of Notice. J-1 Analysis of the Economic Impact of a Divestiture of the Gas Business of DPL. J-2 (deleted) J-3 Table of Estimated Losses of Economies in Prior Decisions on Divestiture and Retention of Gas Operations. J-4 Memorandum of Law in Response to The Motion of South Jersey Gas Company. J-5 Certificate of Service, November 26, 1997. J-6 Certificate of Service, December 19, 1997. J-7 FERC Order Denying Rehearing. J-8 Description of Nonutility Businesses. B. Financial Statements -------------------- FS-1 Conectiv Unaudited Pro Forma Condensed Consolidated Balance Sheets as of March 31, 1997. FS-2 Conectiv Unaudited Pro Forma Condensed Consolidated Statements of Income for the twelve months ended March 31, 1997. FS-3 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. FS-4 Atlantic Consolidated Balance Sheet as of March 31, 1997. FS-5 Atlantic Consolidated Statements of Income for the twelve months ended March 31, 1997. FS-6 Delmarva Consolidated Balance Sheet as of March 31, 1997. FS-7 Delmarva Consolidated Statement of Income for the twelve months ended March 31, 1997. FS-8 Atlantic Consolidated Balance Sheet as of December 31, 1997. FS-9 Atlantic Consolidated Statement of Income for the year to date December 31, 1997. FS-10 Delmarva Consolidated Balance Sheet as of December 31, 1997. FS-11 Delmarva Consolidated Statement of Income for the year ended December 31, 1997. FS-12 Delmarva Capital Investments, Inc. Statement of Income for the year ended December 31, 1998 (filed pursuant to a hardship exemption). FS-13 Delmarva Capital Investments, Inc. Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-14 Delmarva Operating Services Company Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-15 Delmarva Operating Services Company Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-16 Delmarva Capital Technology Company Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-17 Delmarva Capital Technology Company Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-18 Delmarva Capital Realty Company Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-19 Delmarva Capital Realty Company Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-20 Atlantic Energy Enterprises, Inc. Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-21 Atlantic Energy Enterprises, Inc. Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-22 Atlantic Generation, Inc. Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-23 Atlantic Generation, Inc. Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-24 Atlantic Thermal Systems Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-25 Atlantic Thermal Systems Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). FS-26 Pine Grove, Inc. Statement of Income for the year ended December 31, 1997 (filed pursuant to a hardship exemption). FS-27 Atlantic Energy Technology, Inc. Balance Sheet as of December 31, 1997 (filed pursuant to a hardship exemption). -77- Item 7. Information as to Environmental Effects --------------------------------------- The Mergers neither involve a "major federal action" nor "significantly affects the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. The only federal actions related to the Mergers pertain to the Commission's declaration of the effectiveness of Conectiv's Registration Statement on Form S-4, the expiration of the applicable waiting period under the HSR Act, approval of the application filed by Conectiv with the FERC under the Federal Power Act, approval of the application filed by Conectiv with the NRC under the Atomic Energy Act, and Commission approval of this Application/Declaration. Consummation of the Mergers will not result in changes in the operations of Delmarva or Atlantic that would have any impact on the environment. No federal agency is preparing an environmental impact statement with respect to this matter. -78- SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Amendment No. 4 to the Application/Declaration of Conectiv, Inc. to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 23, 1998 Conectiv, Inc. By: /s/ B.S. Graham ------------------------------------ Barbara S. Graham President -79- EX-99.1 2 EXHIBIT B-2 SERVICE AGREEMENT This Service Agreement is executed this __ day of _________, 199__, by and between Conectiv Resource Partners, Inc., a Delaware corporation and a mutual service company formed under the terms of the Public Utility Holding Company Act of 1935 ("Service Company") and ________________, a ________________Corporation and an associate company of the Conectiv system ("Client Company" and collectively with other associate companies that have or may in the future execute this form of Service Agreement, the "Client Companies"). WITNESSETH WHEREAS, the Securities and Exchange Commission (hereinafter referred to as the "SEC") has approved and authorized as meeting the requirements of Section 13(b) of the Public Utility Holding Company Act of 1935 (hereinafter referred to as the "Act"), the organization and conduct of the business of the Service Company in accordance herewith, as a wholly-owned subsidiary service company of Conectiv; and WHEREAS, the Service Company and certain Client Companies have entered into this Service Agreement whereby the Service Company agrees to provide and the Client Companies agree to accept and pay for various services as provided herein and determined in accordance with applicable rules and regulations under the Act, which require the Service Company to fairly and equitably allocate costs among all associate companies to which it renders services; and WHEREAS, economies and efficiencies benefiting the Client Companies will result from the performance by Service Company of the services as herein provided: NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties to this Service Agreement covenant and agree as follows: ARTICLE I - SERVICES Section 1.1 The Service Company shall furnish to a Client Company, as requested by a Client Company, upon the terms and conditions hereinafter set forth, such of the services described in Appendix A hereto (as such may be amended from time to time) at such times, for such periods and in such manner as the Client Company may from time to time request and which the Service Company concludes it is equipped to perform. The Service Company shall also provide a Client Company with such special services, in addition to those services described in Appendix A hereto, as may be requested by a Client Company and which the Service Company concludes it is equipped to perform. In supplying such services, the Service Company may arrange, where it deems appropriate, for the services of such experts, consultants, advisors and other persons with necessary qualifications as are required for or pertinent to the provision of such services. Section 1.2 Each Client Company shall take from the Service Company such of the services described in Section 1.1 and such additional general or special services, whether or not now contemplated, as are requested from time to time by such Client Company and which the Service Company concludes it is equipped to perform. Section 1.3 The services described herein shall be directly assigned, distributed or allocated by activity, project, program, work order or other appropriate basis. A Client Company shall have the right from time to time to amend, alter or rescind any activity, project, program or work order provided that (i) any such amendment or alteration which results in a material change in the scope of the services to be performed or equipment to be provided is agreed to by the Service Company, (ii) the cost for the services covered by the activity, project, program or work order shall include any additional expense incurred by the Service Company as a direct result of such amendment, alteration or rescission of the activity, project, program, or work order, and (iii) no amendment, alteration or rescission of an activity, project, program, or work order shall release a Client Company from liability for all costs already incurred by the Service Company pursuant to the activity, project, program, or work order, regardless of whether the services associated with such costs have been completed. ARTICLE II - COMPENSATION Section 2.1. As compensation for the services to be rendered hereunder, each Client Company shall pay to the Service Company all costs which reasonably can be identified and related to particular services performed by the Service Company for or on Client's behalf, such costs to be determined in accordance with Rule 91 and other applicable rules and regulations under the Act. Where more than one Client Company is involved in or has received benefits from a service performed, costs will be directly assigned, distributed or allocated, as set forth in Appendix A hereto, between or among such companies on a basis reasonably related to the service performed. Section 2.2. It is the intent of this Service Agreement that the payment for services rendered by the Service Company to the Client Companies under this Service Agreement shall cover all the costs of its doing business (less the cost of services provided to associated companies not a party to this Service Agreement and other non-associated companies), including but not limited to, salaries and wages, office supplies and expenses, outside services employed, insurance, injuries and damages, employee benefits, miscellaneous general expenses, rents (including property leased from Client Companies for use by the Service Company), maintenance of structures and equipment, depreciation and amortization, and compensation for use of capital (initially one hundred percent debt capital) as permitted by Rule 91 under the Act. Section 2.3. The method of assignment, distribution or allocation of costs described in Appendix A shall be subject to review annually, or more frequently if appropriate. Such method of assignment, distribution or allocation of costs may be modified or changed by the Service Company upon the express approval of the modification by each affected Client Company without the necessity of an amendment to this Service Agreement provided that in each instance, costs of all services rendered hereunder shall be fairly and equitably assigned, distributed or allocated, all in accordance with the requirements of the Act and any orders promulgated thereunder and notice of such change is provided to the Client Company. Section 2.4. The Service Company shall render a monthly statement to each Client Company which shall reflect the billing information necessary to identify the costs charged for that month. By the tenth (10th) calendar day following billing, each Client Company shall remit to the Service Company all charges. Monthly charges may be billed on an estimated basis, but adjustments will be made within ninety (90) days to assure that billings are in accord with Sections 2.1 and 2.2 above. ARTICLE III - TERM Section 3.1 This Service Agreement shall become effective as of the day of above written, and shall continue in force for five (5) years until terminated by either party upon no less than ninety (90) days' prior written notice to the other party. Upon each five (5) year anniversary of this agreement, the parties may extend this agreement, with or without modifications, for an additional five (5) years by mutual written agreement to such an extension. This Service Agreement shall also be subject to termination or modification at any time, without notice, if and to the extent performance under this Service Agreement may conflict with the Act or with any rule, regulation or order of the SEC or any other regulatory body adopted before or after the date of this Service Agreement. ARTICLE IV - MISCELLANEOUS Section 4.1. All accounts and records of the Service Company shall be kept in accordance with the General Rules and Regulations promulgated by the SEC pursuant to the Act and, in particular, the Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies in effect from and after the date hereof, except as specifically approved by the SEC. Section 4.2. Other existing subsidiaries and new direct or indirect subsidiaries of Conectiv which may come into existence after the effective date of this Service Agreement may become additional Client Companies (collectively, the "New Client Companies") subject to this Service Agreement by execution of this form of agreement, as it may be amended at that time. In addition, the parties hereto upon the express approval of each affected Client Company shall make such changes in the scope and character of the services to be rendered and the method of assigning, distributing or allocating costs of such services among the Client Companies and the New Client Companies under this Service Agreement as may become necessary. Section 4.3 The Service Company shall permit a Client Company access to its accounts and records, including the basis and computation of allocations. Section 4.4. This Service Agreement and any amendments hereto shall not be effective until any necessary regulatory approvals have been obtained. IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement to be executed as of the date and year first above written. CONECTIV RESOURCE PARTNERS, INC. By: /s/ --------------------------- [title] [Client Company] By: /s/ --------------------------- [title] Appendix A Page 1 of 17 This appendix describes (i) the Policies and Procedures (see pages 10-17) to be used to accumulate costs of Service Company services and (ii) the direct assignment of costs to Client Companies and allocation of costs to Client Companies that cannot practicably be directly charged. Definitions of the ratios are provided in Appendix B. The Service Company will provide to associate Client Companies the following services: I. Executive Management a. The Executive Management function includes the services of the Chairman/CEO and supporting staff. b. To the extent possible, services will be directly charged using a standard rate per hour as described in the Procedures found on pages 10-17 of Appendix A. Services that are not directly charged will be accumulated in Cost Centers. Each Cost Center's expenses will be allocated among Client Companies based on the blended ratio. II. Procurement and Corporate Services a. The Procurement and Corporate Services function provides security, including asset protection and investigative services; purchasing and storeroom management; procurement and materials management; vehicle resource management, including company vehicle maintenance; general services including mail, graphics, records management and other office services; building services including facilities management and building maintenance; and real estate services, including right-of-way. Appendix A Page 2 of 17 b. To the extent practicable, services will be directly charged using a standard rate per hour, as described in the Policies and Procedures found on pages 10-17, except where another direct charge method is specifically identified. Services that are not directly charged will be allocated based on the following ratios: 1. security - labor $ ratio 2. purchasing and storeroom management and procurement and materials management - materials stock expense ratio. 3. vehicle resource management - vehicle $ ratio. 4. general services - employee ratio 5. building services (facilities cost) - square footage ratio for office space and non-office space 6. real estate - real estate investment ratio III. Financial Services a. The Financial Services function includes corporate planning; strategic planning; budgeting; treasury and finance including risk management, cash management, financing, and funded plans administration; investor relations; accounting services including general ledger, corporate accounting, accounts payable, payroll, plant/property accounting; tax accounting services; regulatory affairs; insurance and claims processing; and insurance and claims administration. Appendix A Page 3 of 17 b. To the extent practicable services will be directly charged using a standard rate per hour as described in the Policies and Procedures found on pages 10-17 of Appendix A, except where another direct charge method is specifically identified. Costs that are not directly charged will be allocated based on the following ratios: 1. insurance administration - blended ratio 2. claims administration - historical claims ratio 3. regulatory affairs - utility asset cost ratio 4. all other financial services - O&M ratio c. Insurance premiums and claims that are not directly charged will be allocated as follows: 1. property insurance and miscellaneous insurance coverage - asset cost ratio 2. general liability insurance - labor $ ratio 3. Directors and Officers insurance - asset cost ratio 4. nuclear insurance - nuclear installed capacity ratio IV. Human Resource and Performance Improvement Services a. The Human Resource and Performance Improvement Services function provides compensation and benefit services; personnel, employment and staffing; employee/labor relations; skills training and management development; performance improvement; and organizational development. Appendix A Page 4 of 17 b. To the extent practicable, services will be directly charged using a standard rate per hour as described in the Policies and Procedures found on pages 10-17 of Appendix A, except where another direct charge method is specifically identified. Costs that are not directly charged will be allocated as follows: 1. cost of benefits - To the extent practicable, each Client Company will be directly charged their cost of employee benefits. Employee benefit costs that cannot be directly charged to Client Companies will be allocated based on the employee ratio. 2. compensation and benefits services - employee ratio 3. personnel, employment and staffing - employee ratio 4. employee / labor relations - employee ratio 5. skills training and management development - Flat fees will be charged for each training class attendee. The fees will be calculated on an annual basis by dividing total estimated training costs by the estimated number of attendees. Any remainder will be allocated based on the distribution of actual fees charged. 6. performance improvement - employee ratio 7. organizational development - employee ratio V. Legal and Internal Audit Services a. The Legal and Internal Audit Services function provides internal audit services and legal counsel related to general corporate issues. Appendix A Page 5 of 17 b. Costs will be charged as follows: 1. legal services - All costs will be directly charged to other Orders, Projects, or Cost Centers at a standard rate per hour. Legal services related to Conectiv corporate activities, such as review of consolidated financial reports, will be charged to the appropriate Service Company Cost Center and included in those functions billed to Client Companies, as discussed on pages 13 and 14 of Appendix A. Any residual resulting from standard rates being different from actual costs will be allocated to the Client Companies based on the actual legal direct labor charges during the prior year. 2. audit services - To the extent practicable, services will be directly charged using a standard rate per hour. Costs that are not directly charged will be allocated based on the O&M ratio. VI. Customer Services a. The Customer Services function includes management of customer care (customer service centers, dispatch, and billing) plus the Special Billing group. The Special Billing group provides billing of non-energy materials and services. b. To the extent practicable, services will be directly charged using a standard rate per hour, as described in the Policies and Procedures found on pages 10-17. Costs not directly charged will be allocated to Client Companies as follows: 1. management of customer care - # customers ratio 2. special billing - # of special bills ratio Appendix A Page 6 of 17 VII. Marketing Services a. The Marketing Services function includes sales; market product and sales planning; market and customer research; direct response marketing; and marketing communication. b. To the extent practicable, services will be directly charged using a standard rate per hour. Costs that are not directly charged are allocated based on the following ratios: 1. regulated sales and marketing services - # utility customers ratio 2. competitive sales and marketing services - revenue ratio VIII. Information Technology a. The Information Technology function provides employee labor, contractors, and other operating support of voice services; solutions management, including applications delivery and support; information management, including data administration and security; operations management mainframe support; help desk; desktop support; network support; consulting services, including business technology management; mid-range operations, support for non-mainframe, non-network systems; general management and administration. b. To the extent practicable, service costs will be directly charged to Orders, Projects, or Cost Centers using a standard rate per hour as described in the Policies and Procedures found on pages 10-17. Orders are used to capture costs of specific systems and applications. Costs that are not directly charged will be allocated as follows: Appendix A Page 7 of 17 1. voice services - telephone ratio 2. solutions management - end user ratio 3. information management - blended ratio 4. operations management - CPU time ratio 5. help desk - end user ratio 6. desktop support - end user ratio 7. network support - end user ratio 8. consulting services - blended ratio 9. general management and administration - blended ratio IX. Communications Services a. The Communications Services function includes general corporate communications; governmental affairs and general corporate advertising/branding. b. To the extent practicable, services will be directly charged using a standard rate per hour. Costs that are not directly charged will be allocated based on the following ratios: 1. communications - employee ratio 2. governmental affairs - O&M ratio 3. general corporate advertising/branding - O&M ratio Appendix A Page 8 of 17 X. Environmental and Safety Services a. The Environmental and Safety Services function includes oversight of environmental concerns related to air, water, land and waste, as well as compliance with relevant regulations. This function also includes reporting and compliance with safety regulations, and oversight of corporate safety awareness programs. b. To the extent practicable, services will be directly charged using a standard rate per hour. Costs that are not directly charged will be allocated based on the following ratios: 1. environmental - O&M ratio 2. safety - employee ratio XI. Regulated Electric and Gas Delivery a. The Regulated Electric and Gas Delivery function includes the following electric and gas delivery services: delivery business planning, including asset management, business planning, financial analysis, distribution planning, engineering standards, interconnection planning and arrangements, transmission planning, and value added services; engineering services including distribution, substation and transmission engineering, system protection, drafting and construction management; system operations services including senior management, finance director and administrative support, electric and energy system operations, distribution operations, and operations planning and analysis; electric maintenance services including non-regional management and administrative support; forestry supervision; meter shop; other delivery services including process improvement, training, safety, performance analysis, benchmarking, and enabling systems. Appendix A Page 9 of 17 b. To the extent practicable, services will be directly charged using a standard rate per hour. All costs that are not directly charged will be allocated based on the following ratios: 1. delivery services - T&D O&M ratio 2. system operations services - Kwh output ratio* 3. maintenance services - Kwh output ratio* 4. other delivery services - T&D O&M ratio * (See Appendix B for gas conversion factor.) XII. Energy Supply a. The Energy Supply function includes services of executive vice president, finance director, generation vice president/general manager and Edgemoor and Hay Road managers. This function also provides non-regulated operations and management; merchant functions including marketing, portfolio management, risk management, and strategic planning; and supply engineering and support including technical support and project management. b. To the extent practicable, services will be directly charged using a standard rate per hour. All costs that are not directly charged will be allocated based on the following ratios: 1. management and administration - Kwh generated ratio 2. merchant functions - merchant cost ratio 3. supply engineering and support - Kwh generated ratio Appendix A Page 10 of 17 Policies and Procedures General Service Company will provide services to Client Companies in accordance with the terms of the Service Agreement. The Service Agreement will be administered in accordance with the Act. Service Level Agreements The Service Company and each Client Company will prepare Service Level Agreements ("SLA") to specify, in general terms, the services to be performed by each department of the Service Company for each business group of a Client Company. The purpose of the SLA is to establish shared services expectations between the Service Company and each Client Company. The SLA is an administrative tool used to facilitate the matching of a Client Company's needs to the capabilities of the Service Company, and therefore, the SLA is not a legally binding contract. Each SLA shall be reviewed and agreed upon at least annually by authorized representatives of the Service Company and each Client Company. In conjunction with this annual review of each SLA, the allocation methods and ratios presented in Appendix A and B shall be reviewed and agreed upon by the parties. An SLA typically contains the following elements: 1. Scope of Services 2. Service Level Expectations 3. Unit Cost Expectations 4. Performance Measures 5. Billing Process 6. Major Contingencies Appendix A Page 11 of 17 Each SLA is approved by the individual(s) authorized to represent the department of the Service Company and the business group of a Client Company related to the services to be provided. Cost Management Service Company will maintain a cost management information system which allows it to accumulate costs via cost objects. Cost objects are collection tools and include: Orders, Projects, and Cost Centers. Orders and Projects constitute a work order system for charging costs to specific jobs. These tools collect costs for a limited amount of time and either transfer the dollars to a cost center, if they are an expense, or to an asset and/or balance sheet account for capitalized costs. Cost Centers collect resource costs and are the final receiver of expenses collected in Orders as described above. This system supports the philosophy of separating costs by business group and legal entity on a fully costed basis. Service Company will use this system to maintain an accounting system to record all costs of operations. The cost of work performed by the Service Company will be collected in Orders, Projects and Cost Centers. Time records and expense statements will be used to track resource consumption. Labor related costs are expected to be the most significant costs for the Service Company. To the extent practicable, the Service Company employees shall be required to directly charge their time to an appropriate cost object through the time reporting system. The following guidelines are provided to ensure accuracy and efficient time keeping by Service Company employees: 1. Time should be entered daily into the appropriate time reporting system. If this is not practical, the employee should prepare manually prepared time records, substantiating later electronic time entry. 2. In no event should time entry be delayed past the end of the pay period. Appendix A Page 12 of 17 3. Employees should keep track of time in one hour increments. 4. Employee time shall be approved by the employee's supervisor using the time reporting system. Costs will be charged to Client Company Cost Centers, Orders or Projects as work is performed and costs are incurred. The billing process agreed upon in the SLA will be used by Service Company personnel to guide the establishment of the necessary cost objects to charge costs to a Client Company. When a service requested by a Client Company was not specified in the most recent SLA, a new cost object may be created. In this instance, the new cost object will be agreed upon by the Service Company department to provide the service and the business group of the Client Company to receive the service. The Controller's department is responsible to ensure that all of the billing methodologies are consistent with the Service Agreement approved by the SEC. The establishment of cost objects within the cost management information system for use by the Service Company will be strictly controlled by the Controller's department. The Controller's department will ensure that all cost objects have been authorized by the appropriate Service Company department and the Client Company business group. Service Company will use a standard costing system. Resource cost centers collect the actual costs of labor and related costs. As products or services are provided by the Service Company cost centers, the services are directly charged to Orders, Projects or other Cost Centers at standard rates. Standard rates, which are calculated annually, are based upon anticipated resource costs and activity levels, e.g. available hours to perform work. Any residual amounts or costs that can not be practicably directly billed remain in the resource cost center to be allocated to Client Companies on an appropriate basis, as defined in the Service Agreement and approved by the SEC. The amount billed to the Client Company is charged to Client Company Orders, Projects and Client Cost Centers created to collect the costs of the services provided to that company. Appendix A Page 13 of 17 Service Company will have a tiered approach to billing Client Companies. First and foremost, costs will be directly charged when practicable. Secondly, costs will be allocated to the appropriate Client Cost Centers using the appropriate allocation ratio. Finally, any residuals will be allocated using the appropriate allocation ratio. A. Direct Charges: Labor related services consumed for an Order, Project or Activity performed specifically for a Client Cost Center will be directly charged to that cost object at a standard rate per unit of labor or unit of services. The standard rate includes direct costs such as labor, materials and supplies, including procurement and storeroom costs, and overhead costs such as vehicle costs, occupancy costs, and benefits and payroll taxes. When identifiable, any non-labor costs, those costs not included in the billed standard rates, will be directly charged to a Client Company Project, Order or Cost Center. Any residuals or variances will be assigned or allocated to the appropriate Client Company. B. Allocations: Costs accumulated that apply to all Client Companies or to a group of Client Companies, which have not been directly charged as described in A, above, will be allocated based on the allocation ratios defined in Appendix B. Allocation ratios will be reevaluated by the Service Company and expressly approved by each Client Company on at least an annual basis. More frequent reevaluations will be made when significant residuals result. Any revisions to allocation methods will be agreed upon with the Client Companies before modifications are implemented. The Controller's department shall be responsible for ensuring that any revisions to allocation methodologies are approved by the Client Companies and the SEC on a timely basis. C. Service Company Cross Charges: Certain Service Company overhead costs, such as the cost of benefits, purchasing and storeroom management, procurement and materials management, and building services are charged to Service Company functions that utilize these services and included in their standard rate for billing to Client Companies. In addition, certain Service Company direct charges, such as information technology services, vehicles and legal are charged to Service Company functions to the extent these Appendix A Page 14 of 17 functions utilize these services. These charges are included in the amounts that these functions bill to Client Companies. Monitoring The Controller's department shall be responsible for reviewing, monitoring, and maintaining the process for the accumulation of Service Company costs charged to Client Companies, either through direct charges or allocations. In connection with this responsibility, the Controller's department shall: 1. Review and approve all SLA's 2. Control the establishment of all cost objects for billing Service Company charges 3. Analyze the reasonableness of charges in the cost management information system. 4. Review and evaluate the reasonableness of the monthly bill to each Client Company The Controller's department shall be responsible for updating all allocations used by the cost management information system. Supporting workpapers will be maintained with the Controller's department. The Controller's department will be responsible to ensure that all allocations are proper, accurate, and current. Also, the Controller's department shall be responsible for ensuring that the allocations methodologies have been approved by the SEC. Any modification of an allocation methodology which requires filing under 60-day letter procedures based on existing SEC guidelines shall be filed on a timely basis. The current guidelines require SEC approval of a modification of an allocation methodology if the change will cause the lesser of $50,000 or five percent (5%) change in the annual allocation of costs among Client Companies. The Controller's department shall be responsible for ensuring to the extent practicable that the allocation methodologies are consistent with any orders or directives issued by utility rate setting regulatory bodies having jurisdiction over the Company. Appendix A Page 15 of 17 Billing Monthly, the Service Company will prepare and submit a bill to each Client Company. The Controller's department shall be responsible for reviewing the monthly bills, as necessary, with the pertinent officers of the Client Companies, or their designees, who are responsible for approval of the bills. Each bill will be approved on a timely basis by the appropriate officer of each Client Company. The monthly bills will contain the following information: 1. The Client Company. 2. The cost of each service billed to the Client Company. 3. For each service, the bill will show each Client Company order, project, or cost center charged for the service. The cost management information system will contain detailed information supporting each service charged to a Client Company. Using the cost management information system, the Controller's department will provide the officer of the Client Company, or his designee, detailed information on direct and allocated charges as may be required in order to approve the bill. Furthermore, each Client Company cost center head and project manager is responsible for validating, in a timely manner, costs charged to their cost center or project, including amounts billed by the Service Company. This validation is a key component of Conectiv's system of internal controls. Using the cost management information system, cost centers are able to drill down on all costs billed to them by the Service Company to determine the specifics of each cost. The Controller's department will assist Client Company cost centers, as necessary, to research and validate charges to their cost centers. Appendix A Page 16 of 17 When an erroneous charge is discovered, the Controller's department is responsible for correction of the error in the subsequent month. Dispute Resolution If there is a dispute between a Client Company and the Service Company concerning the appropriateness of an amount billed to a Client Company, the Controller's department will meet with the appropriate representatives for the Client Company cost center and the Service Company to resolve the dispute. If the dispute cannot be resolved by the Controller's department, the issue will be referred to the Chief Financial Officer and the Service Company Operating Committee for final resolution. Internal Audit The Internal Audit department shall perform an audit of the Service Company billing process within every two years. Computer systems, billings, and source documents will be examined to ensure on a test basis that the services provided are authorized, documented, and accurately recorded in the accounting records. The audits will include an examination of the allocation factors used to ensure that the methodologies have been approved by the SEC. Also, the audits will evaluate the adequacy of the system of internal controls over the billing process and the reasonableness of each allocation methodology used to distribute costs to the Client Companies. Evaluation and Measurement In order to encourage the Service Company to operate efficiently and cost effectively, and provide high quality service, the Service Company will establish benchmarking as well as initiate a customer review process. The customer review process will be based on a customer-oriented service philosophy and measure success based on customer satisfaction. It will allow for customer input into the volume and value of the products and services provided by the Service Appendix A Page 17 of 17 Company, including benchmarking of the cost/quality of the services by the Client Company. These reviews will be part of the annual budget development process and the completion of the Service Level Agreements between the Service Company and its customers. In addition to the review process with customers, the Service Company will establish a benchmarking plan for services where it is practicable to establish external benchmarks within 24 months to continue to improve the effectiveness of services offered to the Client Companies and to ensure that the services offered are cost competitive. Also, Client Companies may request benchmarking of services provided by the Service Company. Appendix B Page 1 of 4 Definition of Service Company Allocation Methods Ratio Title Ratio Description Employee Ratio A ratio the numerator of which is the number of employees of a Client Company, the denominator of which is the number of employees in all Client Companies using the service. This ratio will be calculated quarterly. Square Footage Ratio office space A ratio the numerator of which is the number of square feet of office space occupied by a Client Company, the denominator of which is the total number of square feet of office space occupied by all Client Companies using the service. non-office space A ratio the numerator of which is the number of square feet of non-office space occupied by a Client Company, the denominator of which is the total number of square feet of non-office space occupied by all Client Companies using the service. Telephone Ratio A ratio the numerator of which is the number of telephones used by a Client Company, the denominator of which is the number of telephones used by all Client Companies using the service. CPU Time Ratio A ratio the numerator of which is the number of hours of CPU time used for a particular system application, the denominator of which is the total number of CPU hours used by all companies. Costs are allocated to Orders based on this ratio. That cost is then either included in the cost of other Service Company services or directly routed to the appropriate Client Company. End User Ratio A ratio the numerator of which is the number of users of computer systems within a Client Company, the denominator of which is the total number of users of computer systems within all Client Companies using the service. Appendix B Page 2 of 4 Labor $ Ratio A ratio the numerator of which is the amount of labor $ of a Client Company, the denominator of which is total labor $ for all Client Companies using the service. This ratio will be calculated monthly. Historical Claims A ratio the numerator of which is the total claims Ratio expense of a Client Company, the denominator of which is the total claims expense for all Client Companies using the service. Asset Cost Ratio A ratio the numerator of which is the total cost of assets in a Client Company, the denominator of which is the total costs of assets for all Client Companies using the service. Assets are limited to plant, property and investments. O&M Ratio A ratio the numerator of which is the total direct (i.e., excludes charges allocated by the Service Company) operations and maintenance expense, excluding depreciation and fuel costs, of a Client Company, the denominator of which is total direct operations and maintenance expense, excluding depreciation and fuel costs, of all Client Companies using the service. Revenue Ratio A ratio the numerator of which is the total revenues of a client Company, the denominator of which is the total revenues for all Client Companies using the service. # Customer Ratio A ratio the numerator of which is the number of customers served by a Client Company, the denominator of which is the total number of customers for all the Client Companies using the service. # Utility Customers A ratio the numerator of which is the number of utility Ratio customers served by a Client Company, the denominator of which is the total number of utility customers for all Client Companies using the service. Nuclear Installed A ratio the numerator of which is the nuclear facility Capacity Ratio installed capacity of a Client Company, the denominator of which is the total nuclear facility installed capacity of all Client Companies using the service. Appendix B Page 3 of 4 Materials Stock A ratio the numerator of which is the materials stock Expense Ratio expense of a Client Company, the denominator of which is the total materials stock expense of all Client Companies using the service. Real Estate A ratio the numerator of which is the cost of real estate Investment leases and land and buildings owned by a Client Company, the denominator of which is the total cost of real estate leases and land and buildings for all Client Companies using the service. # of Special Bills A ratio the numerator of which is the number of special Ratio bills issued for a Client Company, the denominator of which is the total number of special bills issued for all Client Companies. Utility Asset Cost A ratio the numerator of which is the total cost of Ratio utility assets in a Client Company, the denominator of which is the total cost of utility assets for all Client Companies using the service. T&D O&M Ratio A ratio the numerator of which is the total direct (i.e., excludes charges allocated by the Service Company), operations and maintenance expense, excluding depreciation and fuel costs, of a Transmission and Distribution Client Company, the denominator of which is total direct operations and maintenance expense, excluding depreciation and fuel costs, of all Transmission and Distribution Client Companies. Kwh Generated Ratio A ratio the numerator of which is the number of kilowatt hours generated by a Client Company, the denominator of which is the total number of kilowatt hours generated by all Client Companies using the service. Kwh Output Ratio A ratio the numerator of which is the number of kilowatt hours purchased and generated by a Client Company, the denominator of which is the total number of kilowatt hours purchased and generated by all Client Companies using the service. Appendix B Page 4 of 4 Merchant Cost Ratio A ratio the numerator of which is the dollar amount of direct charges of the merchant function to a specific Client Company, the denominator of which is the total dollar amount of direct charges of the merchant function to all Client Companies using the service. Vehicle $ Ratio A ratio the numerator of which is the dollar amount of vehicle charges in a specific Client Company, the denominator of which is the total amount of vehicle charges in all Client Companies using the service. Blended Ratio A composite ratio which is comprised of an average of the Employee Ratio, the Labor $ Ratio, and the Asset Cost Ratio, for all Client Companies using the service. Note: Where applicable, the following will be utilized to convert gas sales to equivalent electric sales: 0.303048 cubic feet of gas equals 1 kilowatt-hour of electric sales (Based on electricity at 3412 Btu/Kwh and natural gas at 1034 Btu/cubic foot.) EX-99.2 3 EXHIBIT D-4.2 STATE OF NEW JERSEY Board of Public Utilities Two Gateway Center Newark, NJ 07102 DATE: 12/30/97 ORDER I/M/O THE PETITION OF ATLANTIC ) CITY ELECTRIC COMPANY AND CONECTIV, ) INC. FOR APPROVAL OF A CHANGE IN ) OWNERSHIP AND CONTROL ) BPU Dkt. No. EM97020103 OAL Dkt. No. PUC4935-97 (SERVICE LIST ATTACHED) BY THE BOARD: On February 24, 1997, Atlantic City Electric Company ("ACE"), a corporation of the State of New Jersey and regulated public electric utility with its principal business office located in Egg Harbor Township, New Jersey, and Conectiv, Inc. ("Conectiv"), a corporation of the State of Delaware with its principal business office located in Wilmington, Delaware (collectively "Petitioners"), filed a petition with the New Jersey Board of Public Utilities ("Board") pursuant to N.J.S.A. 48:2-51.1 and 48.3-10, and N.J.A.C. 14:1-5.10, requesting authorization and approval of a transfer on Atlantic Electric Inc.'s ("AEI") books and records of all of the issued and outstanding shares of its common stock, which will result in the change of ownership and control of ACE. AEI, a New Jersey corporation and the parent of ACE, is the sole common shareholder of ACE. ACE provides service to approximately 473,000 residential, commercial and industrial customers within its service territory which encompasses all or parts of eight countries in the southern one-third of New Jersey. Petitioners also filed a copy of the Amended and Restated Agreement and Plan of Merger dated December 26, 1996 ("Agreement") among AEI; Delmarva Power & Light Company ("Delmarva"), a regulated public electric utility servicing approximately 437,500 residential, commercial and industrial customers in Delaware, Maryland and Virginia; Conectiv and DB Sub, Inc., a wholly owned subsidiary of Conectiv incorporated in Delaware solely to effectuate the merger. Currently, the ownership of Conectiv's outstanding capital stock is divided equally between AEI and Delmarva. Ultimately, as a result of several mergers outlined in the Agreement, Conectiv will become the parent of Delmarva, AEI and all AEI's current subsidiaries. The proposed new company, Conectiv, will have a total of 3,700 employees, over 900,000 electric customers, 98,000 gas customers, and a combined service territory of nearly 9,000 sq. miles. The Chairman/Chief Executive Offer of Conectiv will be Howard E. Cosgrove, current Chairman/Chief Executive Officer of Delmarva. The new President of Conectiv will be Merry L. Harlacker who is a Senior Executive Vice President of Atlantic Energy. The proposed corporate headquarters of Conectiv will be located in Wilmington, Delaware, the current headquarters of Delmarva. As described in the Joint Proxy Statement of Delmarva and AEI (Proxy, pp.3-5), petitioners propose to accomplish the merger on the following terms and conditions after receiving all necessary regulatory approvals: (i) DB Sub, Inc. will merge into Delmarva; (ii) AEI will merge with and into Conectiv; (iii) Delmarva common stock owned by Delmarva or AEI or any of their subsidiaries will be canceled; (iv) AEI common stock owned by AEI of Delmarva or any of their subsidiaries will be canceled; (v) Delmarva common stock shares issued and outstanding immediately prior to the consummation of the Delmarva merger will be converted into Conectiv common stock; (vi) AEI common stock shares issued and outstanding immediately prior to the consummation of the AEI merger will be converted into Conectiv common stock, Class A common stock and cash in lieu of fractional shares; (vii) all issued and outstanding shares of DB Sub, Inc. common stock will be converted into shares of Delmarva common stock; and (viii) all shares of Conectiv common stock that are issued and outstanding immediately prior to the mergers will be canceled. The merger will result in holders of Delmarva common stock becoming holders of Conectiv common stock in a 1:1 ratio and holders of AEI common stock becoming holders of both Conectiv common stock in 1:0.75 and 1:0.125 ratios respectively. Delmarva Preferred Stock outstanding when the merger is consummated will remain outstanding with the mergers exerting no effect on said preferred stock. Initially, the Petitioners, the Division of the Ratepayer Advocate ("DRA") and Board staff were designated as parties to the proceeding. On March 27, 1997, South Jersey Gas Company ("SJG") filed a motion to intervene. Given the potential effect of the merger on SJG in its capacity as a competitor, retail customer and supplier of AEI, the board granted SJG intervenor status on May 28, 1997. The Board determined to send the matter to the Office of Administrative Law ("OAL") as a contested case for hearings. OAL Administrative Law Judge ("ALJ") McAfoos conducted a prehearing conference on May 30, 1997. Evidentiary hearings were held at the OAL on July 14, 15 and 18, August 27, 28 and 29 and September 2 -2- and 3, 1997. Initial briefs were filed October 2, 1997 and reply briefs were filed October 10, 1997. The ALJ issued his Initial Decision on November 19, 1997, reflecting his analysis of the testimony, transcripts briefs and reply briefs. Exceptions to the Initial Decision were filed by the parties on December 4, 1997 and reply exceptions were filed on December 11, 1997. The company has urged the Board to complete its review of the merger in 1997 so that savings can begin to be reflected in customer rates and employment uncertainties can be resolved. As of the date of this Order, the merger has been approved by the state utility commissions of Delaware, Maryland, Pennsylvania and Virginia. At the federal level, the Federal Energy Regulatory Commission and the Department of Justice have also approved the merger. The determinations of the Securities and Exchange Commission and the Nuclear Regulatory Commission are expected when the Board completes its review and issues its final Order, thus completing all state approvals. DISCUSSION Because Petitioners seek to form a new holding company which will acquire control of ACE, the proposed transaction falls within the jurisdiction of the Board pursuant to N.J.S.A. 48:2-51.1, which provides that [n]o person shall acquire or seek to acquire control of a public utility directly or indirectly through the medium of an affiliated or parent corporation or organization, or through the purchase of shares, the election of a board of directors, the acquisition of proxies to vote for the election of directors, or through any other manner, without requesting and receiving the written approval of the Board of Public Utilities. Any agreement reached, or any other action taken, in violation of this act shall be void. In considering a request for approval of an acquisition of control, the board shall evaluate the impact of the acquisition on competition, on the rates of ratepayers affected by the acquisition of control, on the employees of the affected public utility or utilities, and on the provision of safe and adequate utility service at just and reasonable rates. The board shall accompany its decision on a request for approval of an acquisition of control, with a written report detailing the basis for its decision, including findings of fact and conclusions of law. It is clear from the above that the Board must evaluate the impact of the merger on (1) rates, (2) employees, (3) competition and (4) the provision of safe and adequate service at reasonable rates. -3- Standard of Review The Board must first determine the standard of review to be used in this case and then apply that standard to an analysis of the impact on competition, rates, employees, and the provision of continued safe and adequate service. However, nothing in the statute suggests how or under what standard of review the Board should conduct its review, and there is no other New Jersey statutory requirement that the Board use a particular standard ownership or control of public utilities. As noted by the ALJ, in recent years the Board has in the vast majority of its cases utilized a "no harm" standard, meaning that it has approved acquisitions and mergers of utilities only after it was satisfied that there would be no adverse impact on the provision of safe, adequate and proper service at just and reasonable rates and no adverse impact on the other factors listed in N.J.S.A. 48:2-51.1. The Board on two occasions has used another test which can be referred to as a "positive benefits" test; also sometimes referred to as a "best interests of the public" test. Even though rarely used, the DRA has argued that the Board should use the"positive benefits" test in this case. This test was first used by the Board in 1969 when it considered a proposed merger of New Jersey Natural Gas Company with Brooklyn Union Gas Company. See Re New Jersey Natural Gas Company, 80 PUR 3d 337 (1969). However, while the Board determined in that case that it would use a "best interest of the public" type test in preference to a "no harm" test, no strong support for this position was provided other than the statement that such a test would be consistent with the Legislature's intent and in keeping with the philosophy of New Jersey utility regulation. Id. at 339. In 1984, citing Re New Jersey Natural Gas Company for support, the Board once again used a "positive benefits" test when reviewing a hostile takeover bid by NUI Corporation. See, In the Matter of the Petition of New Jersey Resources Corporation and New Jersey Natural Gas Company v. NUI Corporation and Elizabethtown Gas Company, Docket No. 8312-1093 (January 31, 1984). Despite the above decisions, the Board has continued to use a "no harm" test for utility transactions involving a change in ownership and control. For example, the Board used "no harm" test when evaluating the formation of utility holding companies which involved a change in ownership of the utility. See, In the Matter of the Petition of Elizabethtown Water Company, Docket No. WM8502238 (August 9, 1985); In the Petition of Elizabethtown Water Company, Docket No. 693-107 (April 17, 1969). Similarly, the Board has approved the merger or acquisition of various telecommunications companies using a "no-harm" or "no adverse impact" test, even thought the ultimate owner was not an in-state utility. See, In the Mater of Metromedia Communications Corporation and Resurgens Communications Group, Inc. for Authorization to transfer Control and Change Name, Request for Relief, Docket No. TM93010016 (September 15, 1993)(provider of intrastate interLATA telecommunications services in New Jersey authorized to merge into out-of-state alternative operator provider and reseller); In the Matter of the Petition of Teleport Communications New York, et al. for Approval of Certain Transactions, Docket No. TM92030301 (October 13, 1992) (change in ownership and control of corporate parent of New Jersey utility); In the Matter of the Application of Worldcom, Inc. for Approval of Agreement and Plan of Merger and Related -4- Transactions, Docket No. TM96090644 (December 5, 1996)(merger of reseller and facilities based operator with parent of provider of intraLATA and interLATA interexchange services and local exchange service in New Jersey). In recent years, the Board has made only one statement which describes the kind of situation which it appeared to believe would cause the Board to utilize a "positive benefits" test. Referring to In re New Jersey Gas Company, supra, and In the Matter of the Petition of New Jersey Resources Corporation, supra, and in an effort to distinguish the case then under review, the Board stated: "[i]n short, these were merger or 'take over' cases affecting the internal structure of existing New Jersey utilities." In the Matter of the Petition of Public Service Electric and Gas Company, at 7-8, Docket No. EM8507774 (January 17, 1986). The Board does not believe that the above language constitutus a statement of policy mandating adherence to a "positive benefits" in all circumstances where changes are made in the internal structure of a utility. As noted above, the Board has on many occasions ruled on mergers without insisting on use of a "positive benefits" test where there was a potential change in the operations of the utility. Therefore, the Board is not convinced that the facts of this case demand that the Board utilize a "positive benefits" standard rather than a "no harm" standard. After review, the Board CONCLUDES that adherence to a "no-harm" standard is reasonable. In this regard, the Board believes that it would be unreasonable to insist in this case that Petitioners prove that positive benefits will accrue as a result of the proposed merger, when the use of the "no harm" standard is sufficient to ensure the continuation of safe, adequate and proper service at reasonable rates and adherence to the other requirements of N.J.S.A., 48:2-51.1. Therefore, for the reasons outlined above and for the reasons given by the ALJ, the Board HEREBY ADOPTS the ALJ's position on standard of review as if fully set forth herein. Impact on Rates: One of the primary issues in controversy in this proceeding is the estimation of merger savings and how much these cost savings can lower rates. Analytically the issue was addressed by the Petitioner through: (1) the measurement of expected merger savings allocable to Atlantic Energy, (2) the allocation of these cost savings between New Jersey ratepayers and company shareholders, and (3) the timing for implementing the rate reductions. A subsidiary but important issue is the extent to which ACE can use the proposed rate reductions to meet the Board's rate reduction goal of 5 to 10 percent set out in its April 30, 1997 report, Restructuring the Electric Power Industry in New Jersey ("Restructuring Report"). Petitioners sponsored a number of witnesses to address the broad issue of expected merger savings and how the savings should be equitably shared. To estimate savings, the company employed the traditional 10-year forecast period for estimating total company savings, allocated savings between the merging companies' subsidiaries based on a detailed -5- study of recent actual operating costs, and proposed a sharing ratio between ratepayers and company shareholders to further allocate savings attributed to the operating utility companies. Labor force reductions constitute the bulk of the savings estimated to result from the proposed merger. Nearly 70 percent of Petitioner's savings estimate is accounted for by an expected labor force reduction of 10 percent of the combined ACE-Delmarva labor force of more than 4,000 employees. When combined with the other cost reducing activities, the Petitioners have estimated net merger savings over 10 years of $509 million with the total annual savings of $21 million attributable to ACE which the Petitioners further adjusted for certain merger costs to produce net ACE annual savings of $18.2 million. Petitioners arrived at an $18.2 million estimate of ACE net annual savings by adjusting ACE's gross share of savings downward to reflect three "costs" incurred by the merging companies in the form of (1) an annual acquisition premium amortization, (2) executive separation payments, and (3) name change costs. Finally, after reviewing ACE's recent financial performance, Petitioners proposed that one-third of ACE's net savings be allocated to ratepayers and two-thirds to shareholders. In response to this filed position, the DRA supported through expert testimony a counterproposal that rejected the company's three proposed cost offsets to ACE's gross share of merger savings and allocated 100 percent of ACE's share of merger savings, without adjustments, to ratepayers. The recommendation was based, in part, on the DRA's view that in a traditional rate-base/rate-of-return regulatory process all cost savings would ultimately flow to ratepayers. Also, the DRA suggested a five-year rate freeze to guarantee that all Board-ordered rate reductions would be assured for at least five years. The Staff, in its initial brief, outlined a merger savings sharing proposal incorporating (a) a 15-year forecasting period for cost savings; (b) an estimate of $918 million in merger savings over that period; (c) rejection of Petitioners' proposed saving offsets for acquisition of goodwill, executive compensation payments and name change costs; (d) annual estimated savings of $24.531 million allocated 100 percent to ratepayers; and (e) a recommendation that ACE be allowed to use the entire rate reduction of 2.6 percent to partially fulfill the Board's Restructuring Report rate reduction requirement of 5 to 10 percent. After the hearings concluded, the Petitioners and the other parties filed briefs and reply briefs that included a thorough discussion of the savings and sharing issues. The ALJ rejected the DRA's five-year rate freeze proposal as an "unworkable constraint on the Company" and also rejected Staff's 15-year forecast period approach. The ALJ ultimately recommended an alternative proposal using the Petitioners' 10-year forecast period; rejected the company's request to offset cost savings by the acquisition premium, the executive separation payments, and the name change cost; and concluded that the annual savings estimate of $21 million was reasonable. The ALJ also recommended that ratepayers should receive 75 percent of the savings in the form of a $15.75 million annual rate reduction (1.7 percent). Under the ALJ's proposal, the rate reduction would be implemented on closing of the merger. He further recommended that the entire rate reduction be treated as a credit to the 5 to 10 percent rate reduction anticipated by the Board in the Restructuring Report. -6- After review, the Board ADOPTS the ALJ's findings on the level of annual savings and the percentage to be allocated to ratepayers. While the ALJ's recommendations in this regard reasonably balance the interests of the parties, the ALJ's proposed annual rate reduction of $15.75 million (1.7 percent), while correctly calculated, must in part be offset by a $5.025 million (0.5 percent) increase in rates attributable to the Board's decision in Docket No. ER97080562 to allow ACE to recover Post-retirement Benefits Other than Pensions (PBOPs). The net result of actions in these two dockets is an approximate 1.2 percent reduction in rates. The Board's determination to simultaneously account for the PBOP rate increase and a portion of the merger-related rate decrease is based on its desire to eliminate unnecessary rate fluctuations within a relatively short period of time. The Board also ADOPTS the ALJ's determination that the entire percentage rate reduction be treated as a credit towards the 5 to 10 percent rate reduction required pursuant to the Restructuring Report. However, as noted above, the actual percentage decrease will be 1.2 percent, rather 1.7 percent, because of the Board's determination herein to implement the Board-approved rate increase under the PBOP proceeding with the merger-related rate reduction approved in this Order. This position is supported by the Restructuring Report which defined the set point against which the Board would measure utilities' achievement of rate reductions as follows: In response to concerns that these targeted rate reductions may be eroded by subsequent upward rate adjustments between now [April 30, 1997] and the date of retail competition, we emphasize that the targeted rate reductions must be in comparison to the current level of rates as of the date of this report. [Restructuring Report at 115.] Since the Board's Restructuring Report requires rate reductions to be measured against rates in effect as of April 30, 1997, the Board believes at this time that the net reduction of 1.2 percent resulting from the simultaneous implementation of the PBOP increase and merger-related decrease in rates should be credited towards the required 5 to 10 percent Restructuring Report rate reduction. Impact on Employees The record demonstrates that approximately 70 percent of the cost savings to be produced by the combination of AEI and Delmarva would come about through a reduction in the total number of employees between the two companies. Petitioners have stated that they planned to target "positions which are rendered redundant or duplicative as a consequence of the merger" and urged that "it is the long term strength of the company, and the opportunities -7- created by that strength, rather than the short term reduction in jobs, due to streamlining which should be evaluated in determining the true impact of the change in control." Pib at 32./1 Conectiv witness Cosgrove testified that as a result of the merger, Petitioners expect to "initially reduce the combined companies' workforce by approximately ten percent, or about 400 positions." Exhibit P-8 at 5. Petitioners witness Flaherty stated that commencing on January 1, 1998, 408 positions will be eliminated between the merging companies. Exhibit P-6 at 23. Petitioners argued for flexibility in final staff determinations and could offer no specific assurances or detail of the relative impact of job reductions on the merging companies beyond Cosgrove's suggestion that positions eliminated "will be in some rough proportion between the two companies." However, he offered a qualifier: "I think that a lot has to do with location, where people live, and then the positions that are available and the people that are making different types of lifestyle decisions." TR, Vol. 4 at 8. With regard to the DRA's arguments referenced below, Petitioners rejected the DRA's call for Petitioners to commit to a precise allocation of job cuts between the merging companies prior to the Board granting merger approval and argued that "[u]ltimately, the kind of mathematical precision that the Ratepayer Advocate proposes is not possible, achievable, or even a sound public policy goal because of the other things that would have to happen to achieve that precision." Pib at 36. Petitioners also argued that any attempt by the Board to regulate or prohibit staff reductions "simply for the sake of preserving jobs" or to impose quotas, would exceed the Board's statutory authority. Prb at 33 and 35. Petitioners saw an inconsistency in Staff's and the DRA's reasoning: "Staff and the Ratepayer Advocate insist on lower rates to customers, and therefore cannot at the same time try to impose conditions which will impair the ability to achieve those savings." Id. at 35. Petitioners offered a caution on any Board effort to control job reductions stating that "the quota proposal would unfairly limit the ability of Atlantic and Conectiv to ensure that the best possible workforce would be able to serve the needs of customers." Petitioners Exceptions at 9. Finally, Petitioners urged the Board to focus on a goal rather than a firm limit in any condition related to jobs to ensure that the merging companies would retain sufficient flexibility to enable them to realize savings and optimize staff resources: "At most, the 140/268 should only be a target that the Board - ------------------------------ 1/ Throughout this Order, the following abbreviations are used to refer to documents of record in BPU Docket No. EM97020103: Sib Staff initial brief Srb Staff reply brief Pib Petitioners initial brief Prb Petitioners reply brief DRAib Divisions of the Ratepayer Advocate initial brief DRArb Division of the Ratepayer Advocate reply brief SJGib South Jersey Gas Company initial brief SJGrb South Jersey Gas Company reply brief TR Transcript (by volume and page) -8- encourages Conectiv to strive to attain, but not be required to strictly adhere to." Petitioners Exceptions at 11. In response to the strong concerns expressed by the parties regarding job impacts, Cosgrove testified that the new combined entity will open operations in New Jersey, not only a facility to maintain the company's presence in Atlantic City, but also a corporate service center in the western part of Southern New Jersey, where billing accounts payable, purchasing and other service functions would be located. TR. Vol. 4 at 5. The DRA focused on the fact that the Merger Agreement does not adequately protect Atlantic's employees from arbitrary or disproportionate treatment in the downsizing effort that will be necessary to achieve the synergy savings. DRAib at 42-45. The DRA argued, "The Board should require that the labor force reductions be implemented on a pro-rata basis starting with each company's pre-merger projected number of employees as of January 1998...A pro-rate reduction would limit the positions eliminated at Atlantic to 140 out of the total 408 projected to be eliminated. The other 268 positions would come from Delmarva." Id. at 42-43. The DRA rejected Petitioners' labeling of its recommended as a rigid quota system, stating "[w]hile the 140 Atlantic/268 Delmarva ration is mathematically accurate, the Ratepayer Advocate would not object to minor fluctuations from the actual numerical ratio, if Atlantic could substantiate the extenuating circumstances that warranted such variation." DRArb at 20. The DRA found any assurances offered by Petitioners on the record to be insufficient and argued for the Board to take a proactive stance in its decisions: "Atlantic's employees will feel more secure knowing that there is a Board-ordered labor force reduction condition to hold Atlantic to its word. Accordingly, the Board should affirm the portion of the Initial Decisions concerning pro-rata labor reductions." DRA Reply to Exceptions at 10. On the issue of merger impact on jobs, SJG argued, "Petitioners have not presented a scintilla of proof that the proposed transaction will not adversely affect employees within the State of New Jersey. One thing is certain about the proposed transaction and its effect on employment. As a result of the proposed transaction, employment in New Jersey will be hurt." SJGib at 8. SJG argued that Staff proposals to cure the Petitioners' deficiencies by imposing job-related conditions on the merger approval was "out of harmony with N.J.S.A. 48:2-51.1" and "simply inadequate under the statute" so that the Petition should be denied. SRGrb at 11-13. Beyond job eliminations, SJG argued that the ALJ's initial decision did not address the impact of job migration on New Jersey employees or the state's economy. SJG Exceptions at 5. According to SJG, "[t]his Board is without any evidence from which it can determine how many employees will be shifted to Delaware; and the impact of these shifts on the State of New Jersey, its economy and tax structure and its impact on the ability of ACE to render safe, adequate and proper service. Without such evidence, the Board cannot discharge its obligations under N.J.S.A. 48:2-51.1, and thus it should not approve the transaction." Id. at 11. Staff argued, "[i]t is evident that AE's workforce has borne the brunt of job reductions in advance of and in anticipation of the merger" and supported the DRA's pro-rata formula stating that any level in excess of 140 layoffs at ACE would constitute an unfair burden on -9- ACE and the economy of South Jersey. Staff recommended a condition to the merger that the Board set the policy that a maximum amount of layoffs for the employees based in New Jersey should not exceed 140 but tempered its recommendation as follows: "[h]owever, Staff recognizes that situations may arise where the 140/268 split may not be appropriate, therefore, Staff would consider deviating from this ratio as long as the Petitioner justifies its actions and that the circumstances were extenuating." Sib at 13 and 20-21. The original merger petition reflected a 10 percent reduction in the combined total workforce of the two companies, some 408 jobs. In agreement with Staff and the DRA, the ALJ imposed a job loss cap on ACE at 140 employees rather than the target of 160 or more proposed by Petitioners. The ALJ agreed with the Staff concerns regarding the split in job reductions between Atlantic and Delmarva and concluded that the company should be required to allocate the job losses based on a staff recommendation of 140 for Atlantic and 268 for Delmarva. This allocation between the two companies would maintain the ratio of estimated employees at January 1, 1998 levels, i.e., each labor force would maintain its initial relative importance in the new company, Conectiv. Based on the latest information available to the Board, the Petitioners have reported the 122 ACE and 191 Delmarva employees have accepted voluntary retirement package offers effective upon closing of the merger. These voluntary labor force reductions in total are close to the numbers of 140 targeted job reductions for ACE and 268 targeted job reductions for Delmarva. The Board clearly prefers these voluntary labor force reductions to meet the Petitioners' target since it limits the disruptive effects of involuntary layoffs which Petitioners have not implemented to date. The Board encourages the Petitioners to exert every effort to similarly meet their remaining work force reduction goals. The ALJ accepted a Staff recommendation (Id. at 21) that Petitioners are allowed an opportunity to ask the Board for flexibility regarding the cap if circumstances dictated a reconsideration of the efficacy of this condition of the Board's merger approval. Id. at 14. Further, the ALJ also concurred in a Staff recommendation that for three years following the merger, the Petitioners would be required to file an annual comprehensive review of merger-related impacts on New Jersey employees with special emphasis on the positions that have an interface with customers and/or field operations. Id. at 14. The Board emphasizes that it shares the specific concern for close monitoring of the customer services element of the overall labor force reductions. After review, the Board FINDS that the ALF's recommendations are reasonable and, therefore, HEREBY ADOPTS the ALJ's findings on labor reductions. However, in adopting the ALJ's decision in this regard, the Board herein emphasizes that changes in the cap as it relates to labor reductions resulting from the merger, will only be allowed by the Board in extraordinary circumstances where failure to do so would result in irreparable harm to Petitioners. However, the Board also recognizes that future management decisions related to compliance with the Board's electric industry restructuring directives may necessitate that ACE take other actions affecting the fundamental structure of the utility and its operations that could cause labor force reductions distinct and apart from merger-related labor force reductions. -10- The Board will take causative factors into account as it reviews any future request by ACE to deviate from the employment goals stated herein by the Board. Finally, the Board notes that Conectiv Chairman Cosgrove testified that Petitioners planned to locate a corporate service center in the western part of Southern New Jersey. TR, Vol. 4 at 5. That facility will be located in Salem County and will be staffed by up to 300 to 400 Conectiv employees providing a variety of services. These employees will include individuals now employed by ACE and Delmarva, as well as employees hired by Conectiv. As a result, under the 140/268 employee ration approved herein, at the end of the transition period necessary to locate operations in the new Salem County facility, the number of Conectiv employees in New Jersey will be at least equal to the number of ACE employees at the time of closing of the merger, less 140 positions. Impact on Competition: Market Power Supply Petitioners did not submit a market power study to address the impact of the merger on competition and stated that "it is difficult to logically see how we together could significantly affect market power in our geographic area, especially since we would control and operate only 6.2% of the capacity in PJM." Exhibit P-7 at 8-9. Petitioners emphasized that (1) the change in ownership and control of ACE will not impair the ability of the Board to exercise the same authority which it now has to prevent anti-competitive behavior and bar cross- subsidization between utility and non-utility businesses and (2) no party demonstrated any "legitimate claim of anti-competitive activity" in this proceeding. Pib at 8, 43 and 50. As to SJG witness Robertson's testimony, Petitioner argued that his evaluation of the energy market was seriously flawed in that he failed to give consideration to other competing firms in either the now-competitive market for sales of natural gas, or the upcoming competitive market for sales of electricity and he was unfamiliar with all of the market activities of South Jersey Gas and its affiliates. Petitioners asserted, "[t]he fact that there are many competitive retail sellers of natural gas, in addition to affiliates of Atlantic or South Jersey, undercuts Dr. Robertson's assertion that affiliates of Atlantic could engage in predatory pricing in the competitive retail gas market." Pib at 46 and Prb at 27. The DRA relied on the analysis of its witness Dr. Wakefield who expressed concern that the combination of load growth and transmission limitations on the ACE system will result in significant market power by ACE, Conectiv, or both. DRAib at 71. Dr. Wakefield stated that there was a potential negative effect of the proposed merger on retail competition in the eastern portion of Atlantic's service territory due to limited transmission capability. Id. at 70-75. Given the fact that Petitioners submitted no analysis to the impact of the proposed merger on retail competition or otherwise established that the merger is in the public interest with regard to competition, the DRA, therefore, urged the Board to adopt four pre-conditions to the merger proposed by DRA witness Wakefield that related to service reliability and transmission system impacts on market power. DRArb at 31. The DRA also emphasized that the Board "must begin the process of addressing the system planning problems now in order to -11- preclude the Petitioners from having undue influence over market power during the start of competition." DRA Reply to Exceptions at 8. The ALJ addressed and adopted the DRA's recommendations in the section of the Initial Decision dealing with service reliability. SJG focused on Petitioners' failure to produce any evidence of the effect of the proposed transaction on competition and the limitations in Petitioners' testimony that addressed only electric-on-electric competition and argued that the Board should "make it clear that once it discharges its duty to examine the competition issues, it may, in fact, unravel the merger at that point." SJGrb at 8, SJG Exceptions at 17 and SJG Reply to Exceptions at 6. As noted above, Petitioners did not submit a market power study as part of the record in this proceeding. Staff has recommended that such a market power study should be submitted by Petitioners as part of the Restructuring proceeding. In this way, the issues would be fully explored in the company's segment of the Board's Restructuring case. After review, the Board agrees with staff's position, and believes that the Board's findings in ACE's restructuring proceeding can be used to impose conditionis if required to assure competition and afford all entities a fair opportunity to compete in the service area. The ALJ essentially found that the interim remedies proposed by SJG's expert be implemented by the Board at this time and then be fully explored when the Board develops its generic standards for market structure, affiliate relations, and conduct in new markets. These interim remedies are set forth at pages 15-16 of the Initial Decision as follows: (1) Conectiv, its affiliates, and its subsidiaries shall not sell gas below cost or in a subsidized bases within the [South Jersey Gas] service territory; (2) Conectiv, its affiliates, and its subsidiaries shall not sell electricity below cost or in a subsidized basis within the [South Jersey Gas] service territory; (3) Conectiv, its affiliates, and its subsidiaries shall not sell HVAC, appliance repair, or other related services below cost or in a subsidized basis within the [South Jersey Gas] service territory; (4) Conectiv, its affiliates, and its subsidiaries shall not sell any service or product, for resale in the [South Jersey Gas] service territory, below cost or on a subsidized basis to any entity affiliated with Conectiv; -12- (5) Conectiv shall adopt a comprehensive set of safeguards that separate Conectiv's regulated and non-regulated activities. With respect to the interim remedies proposed by SJG and adopted by the ALJ, the Board believes that, subject to the Board's review of and ongoing jurisdiction over the cost allocation manual and service company agreement as delineated hereinabove, the interim remedies as proposed by SJG's witness Robertson extend beyond the current bounds of the Board's appropriate interest in these matters. Therefore, the Board HEREBY ADOPTS the Initial Decision, but MODIFIES conditions (1) through (4) above to apply to ACE, the electric public utility operating in New Jersey, or its successors, and not to Conectiv, its affiliates, and its subsidiaries at this time. Modification of the Initial Decision in this manner adequately protects competing utilities by barring the offering of below-cost or cross-subsidized products and services by the operating utility. The Board believes that this approach is consistent with existing Board policies applicable to all regulated utilities operating in New Jersey. The Board concurs that the established standard that products and services offered by regulated utilities must not be sold below cost or on a subsidized basis must be upheld. The Board has found that these safeguards are appropriate for regulated utilities and has applied this standard to utility operations over which the Board exercises jurisdiction over rates. However, historically, the Board has not regulated the rates and pricing of products and services offered by utility affiliates and subsidiaries. In fact, other utilities currently have affiliates that offer products and services free from Board rate regulation. The Board emphasizes that the above modified remedies are interim in nature, and nothing in this Order will restrict the Board in establishing appropriate future regulatory policy aimed at addressing impending industry restructuring encouraging fair competition, and protecting New Jersey ratepayers. The Board also is examining very closely the potential for each of New Jersey's electric utilities to exercise market power in the current electric Restructuring proceedings, including ACE and BPU Docket No. EO97070457. A key part of the Board's current restructuring investigation includes a significant analytical component on market power and competition within New Jersey and within each company's service territory. The Board will examine the focused audit recommendations of the Board's consultants and their computer modeling efforts to assure that no utility will be able to exercise market power to the detriment of the Board's efforts to encourage expanded competition in retail and wholesale electric markets. Conectiv Service Company As part of the merger and attendant restructuring, the new company Conectiv, will create a service company to jointly provide needed services to the regulated operating utilities and other unregulated subsidiaries. However, Petitioners have not as of yet entered into a service company agreement, and rules for funding Conectiv's proposed service company and cost allocation procedures have yet to be finalized. In addition, the service company agreement must be filed with the Securities and Exchange Commission and the Federal Energy -13- Regulatory Commission. The Board notes that the Petitioners have agreed to fully cooperate with the Board when the Board reviews the service company filing and have agreed to provide the Board with appropriate proofs to protect and maintain the Board's current regulatory oversight of ACE. The DRA expressed particular concern over the planned transfer of the system planning function to an unregulated Conectiv service company and the potential anti-competitive effect on retail competition of this structure. The DRA argued that transfer of system planning functions to a Conectiv affiliate in Delaware that is not regulated by the Board would likely result in reduced responsiveness to Board concerns and diminished Board influence and jurisdiction over future system planning in ACE's service territory. DRAib at 72-73. Staff focused its examination on the DRA's concern regarding cost allocation methodology proposed by petitioners to properly account for service company costs, and Petitioners inability at this time to provide a detailed plan for functions and cost centers prior to completing business and employment plans. Staff concurred with the DRA's recommendation that ACE should file a cost allocation manual in addition to any service company agreement and that the Board should closely examine and rule on the appropriateness of cost allocation and accounting in the future Restructuring proceeding. Sib at 33. Petitioners disagreed with the other parties arguments that the service company structure will hamper Board regulation, and argued that other New Jersey utilities have successfully employed this kind of structure. Petitioners also argued that the Board will retain all regulatory authority to access necessary books and records to ensure proper cost treatments. Further, citing other merger cases reviewed by the Board, Petitioner argued that the Board's current merger review as directed by statute should focus on impacts of a change in control of a regulated utility business, and not on energy business or unregulated affiliate business activities. Pib at 38-40. The ALJ concurred with the positions of DRA and Staff and ruled that the Board should condition its approval of the merger on the submission of a cost allocation manual and service company agreement for the Board's review and approval. After review, the Board FINDS that the ALJ's position is reasonable, and HEREBY ADOPTS the ALJ's position on this issue. The Board believes that a review of the cost allocation manual and service company agreement will be critical to a full understanding of the final structure of the merged company, as well as the functions and services proposed to be performed by the utility as opposed to the service company and/or unregulated subsidiaries. Moreover, Board review of the yet-to-be submitted cost allocation manual is critical to the Board's ongoing responsibilities to ensure that unregulated activities are not subsidized by the utility or its ratepayers. Accordingly, the Board further conditions its approval as follows: 1. That the Board shall have full access to all books and records of the service company on an ongoing basis to the extent necessary to continually monitor and ensure that there is no cross-subsidization by the utility of other service company activities and that service company activities do not otherwise impinge -14- upon the utility's ability to provide safe, adequate and proper service at reasonable rates. 2. That, notwithstanding any federal agency review and approvals, Petitioners shall submit the service company agreement and cost allocation manual to the Board for its review and approval, and that further, Petitioners shall abide by Board decisions related thereto for purposes of utility rates and services. Impact on Continued Safe and Adequate Service: Service Reliability Throughout the proceeding, ACE has maintained that the company is committed to providing safe, adequate and proper service in a post-merger environment. In response to a chief concern of the other parties that planned work force reductions resulting from the merger would negatively impact the quality of service delivered by the new Conectiv, ACE emphasized that the savings from the AEI-Conectiv merger will accrue through "the elimination of redundant and duplicative positions, and not through cutting back on essential services." Pib at 24. In testimony, ACE witness Cosgrove suggested that service quality could likely increase in a post-merger, competitive environment because the merging companies will not want to jeopardize current high levels of customer satisfaction. In addition, he maintained that the merger will bring a "wider range of people, talents and other resources" to meet customers' needs in terms of service and reliability. Cosgrove also highlighted the fact that Conectiv may be in an improved position to more effectively deploy storm repair crews because experience demonstrates that storms rarely strike the entire South Jersey-Delmarva peninsula area at once, so from throughout Conectiv's service territory can be dispatched to problem areas. Id. at 25. In response to DRA witnesses' concerns that staff reductions could impair the delivery of customer service and negatively impact low-income customers, Petitioners' witness Flaherty testified that reductions would target "executive, managerial and supervisory job titles which were duplicated as a result of the merger . . . in areas that were unrelated to the direct provision of service or maintenance of service levels and, therefore, any of those reductions due to duplication, overlap or redundancy could not result in any deterioration of service or disruption to service." Pib at 29 and TR, Vol. 8 at 70-71. ACE emphasized that DRA witnesses' concerns of the future service deterioration are not supported by the current experience or any fact of the filing and that low income customers will benefit from rate reductions afforded by merger savings. Prb at 38 and Pib 27. In its reply brief, Petitioners reiterated, "functions that have a direct interface with customers and/or filed operations were not identified as areas where consolidation of operations was to occur." Prb at 38. Lastly, Petitioners asserted that the change in control of ACE to be accomplished through the merger will have no impact on the ability of the Board to continue to regulate New Jersey utility operations and continue to ensure the provision of safe, adequate and proper service. Id. at 39. -15- The DRA argued, among other things, that Petitioners failed to identify with any level of certainty exactly what operational areas will be affected by job costs, so that the record contains insufficient evidence to ensure that the merger will not affect service quality and reliability and will indeed be "in the public interest." The DRA urged that its set of proposed service quality and reliability standards be formally adopted because absent the formal adoption of verifiable standards to monitor service quality and reliability, the merger cannot be deemed to be in the public interest. DRAib at 46-47. The DRA stated that as New Jersey moves to restructure its electric industry concurrent with the merger time frame, the management of the merged company will be under tremendous pressure to achieve the projected cost savings . . . with new competitive pressures and other demands placed on the merged company's finite resources. This scenario, coupled with the absence of a verifiable commitment to customer service and service reliability, places the New Jersey customers of the merged company at great risk. [DRAib at 48.] Therefore, the DRA urged that the following requirements be adopted as pre-conditions to the merger: (1) Petitioners must provide detailed load forecasts for the southeastern New Jersey coastal area under various future scenarios; (2) Petitioners must demonstrate through power flow analyses that its transmission system will be able to adequately serve coastal customers under all reasonable future scenarios; (3) Petitioners must repeat the analysis annually during the restructuring implementation phase; and (4) Petitioners must remedy any deficiencies in the transmission system that could impair the provision of robust retail competition to coastal New Jersey customers. The DRA expressed a number of particular concerns regarding the provision of service to low-income customers in a post-merger environment in which the number of direct customer-company contacts is reduced as is likely under a plan in which merger savings for customer service operations accounts for the third largest number under projected operating and maintenance savings. The DRA sees a problem with such reduced interactions because the low-income population especially can benefit from direct company contact. DRAib at 53-56. To address the problems of low-income customers and assure that the merger will be in the public interest, the DRA argued that the Board should adopt special rate discount and arrearage forgiveness programs for the population as a pre-condition to merger approval and proposed that Conectiv participate in a statewide fuel fund support program and establish weatherization and education programs for the benefit of low-income customers. Id. at 57. SJG maintained that Petitioners failed to sustain their burden of proof that the merger will not negatively impact their ability to provide safe, adequate and proper service to New Jersey customers. SJG pointed to Petitioner's inability to identify the level of employment necessary to ensure continued provision of service consistent with New Jersey statute. Absent such a determination of what level of employment is necessary to maintain service properly and the companion assurance that employment levels in New Jersey will not be reduced below -16- that level, SJG argued that Petitioners cannot demonstrate to the Board that the merger will be in the public interest. SJGib at 15-16. Staff acknowledged the DRA's concerns over system reliability and customer service quality under the plan for Conectiv to acquire of ACE. Staff focused on DRA witness Wakefield's assessment of potential growth and constraints on ACE's transmission system. Staff concluded that the merger will not in any way hinder the Board's ability to effectively regulate New Jersey utility operations but recommended that the Board adopt certain conditions to ensure that the reliability concerns raised by the DRA would not become a problem after the merger. Thus, Staff recommended that the merged utility be required to: (1) continue to meet all applicable requirements of New Jersey statute and code and industry standards; (2) abide by all future standards the Board may impose in conjunction with I/M/O Restructuring the Electric Power Industry in New Jersey (BPU Dkt. No. EX94120585Y); (3) conform with the reliability conditions proposed by the DRA; and (4) file annual reports reflecting pre- and post-merger related figures on performance levels on system reliability and customer service quality. Sib at 25-26. In its reply brief, Staff recommended that the Board order staff to meet with ACE to develop service quality and reliability as a condition to approving the merger. As to the issue of the Board's continuing ability to address problems of service reliability and transmission system deficiencies, the Board believes that N.J.S.A. 48:2-23 and N.J.S.A., 48:3-3 provide the Board with the authority to ensure that utilities provide safe, adequate and proper service. As part of that authority, the Board has historically reviewed utility electric generation and transmission plans to ensure that sufficient capacity exists. As we move nationally towards electric restructuring, both the reliability standards currently in place and the relationship between federal and state jurisdiction over transmission planning are being examined. The federal Department of Energy (DOE), the FERC and the North American Electric Reliability Council (NERC) all have ongoing reviews to develop a national regulatory structure that ensures reliability in a competitive marketplace. Further, the FERC recently approved the creation of an independent system operator (ISO) to oversee the operation of the Pennsylvania-New Jersey-Maryland(PJM) power pool generation and transmission system. While the DOE, the FERC and the NERC study national and regional transmission and reliability concerns, the Board in its Restructuring proceeding is also examining more local transmission system concerns that may impact competition within local markets. The Board has been working and will continue to work with the above-noted entities to ensure a sound regulatory structure in a post-restructuring environment. While the review of electric reliability is taking place, the Board continues to retain the authority to ensure that utilities provide safe, adequate and proper service. This authority includes the ability to require that a regulated utility construct any transmission system upgrades deemed necessary. Subsequent to the proposed merger under consideration herein, the Board will maintain all existing jurisdiction. Therefore, this merger will in no way compromise the Board's existing ability to ensure service reliability in the affected service territory. -17- In terms of service reliability, the ALJ concluded that the company should be required to meet all existing standards and any new standards derived from the Restructuring case, and that Petitioners should file appropriate annual reports to verify that the merger has not impaired service reliability. In doing so, the ALJ adopted the above-referenced DRA and Staff conditions relating to system reliability and customer service quality. Specifically, in his Initial Decision, the ALJ incorporated the following post-merger requirements as a condition of approval: (1) that Atlantic continue to meet the requirement of current law; (2) that Atlantic abide by all future applicable standards and those that the Board may impose as a result of the Board's proceeding in the Restructuring docket; and (3) that Atlantic file annual reports which reflect annual figures on pre- and post-merger-related performance levels affecting systems reliability and customer service quality. [Initial Decision at 19.] Finally, regarding the issue of low-income initiatives raised by the DRA, the ALJ did not support dealing with this concern as a condition for approving the merger and indicated that they would be dealt with more appropriately in a base rate proceeding or in the Board's ongoing Restructuring proceeding. In making this decision, the ALJ acknowledged that the merger will bring certain benefits, such as reduced rates, that will benefit the low-income population. However, the ALJ was troubled by Petitioners' expressed intent to reduce or discontinue certain customer services now available in Atlantic City, and the Bridgeton and Hammonton areas. The ALJ recommended to the Board that it condition approval of the merger on ACE "providing a full study regarding continuation of walk-in customers service facilities in the Atlantic City, Bridgeton and Hammonton areas of its service territory," and also recommended that "[u]ntil such a study is undertaken, customer service centers should remain open to service the needs of the utility's ratepayers." Initial Decision at 24-25. After review, the Board HEREBY ADOPTS the ALJ's findings relative to system reliability and customer service as discussed above, including the directive to continue the operations of customer service centers in Atlantic City, Bridgeton and Hammonton, pending submission by ACE of a study regarding the continuation of those centers and pending the conclusion of the Board's review of said study. The Board DIRECTS Staff to meet the Petitioners for the purpose of determining the parameters of the study regarding ACE's Atlantic City, Bridgeton and Hammonton service centers. -18- Summary: The Board HEREBY ADOPTS in part and HEREBY MODIFIES in the part of the Initial Decision. As stated above, the Board is modifying the Initial Decision wto reflect certain changes to the conditions set forth by the ALJ at pages 15- 16 of the Initial Decision. In all other respects, the Board is adopting the Initial Decision as if fully set forth at length herein. As stated above, the Board will not permit labor force reductions resulting from the merger in excess of the ratio approved by the ALJ except in extraordinary circumstances where there is a showing by Petitioners that these changed circumstances would result in irreparable harm to Petitioners. By this Order, the Board FINDS the merger of AEI with Delmarva to be in the public interest and: (1) APPROVES the transfer by ACE on its books and records all of the issued and outstanding shares of its Common Stock; and (2) APPROVES the acquisition by Conectiv of control of ACE. In approving this merger, the Board retains all of its authority and ability to regulate ACE or its successor electric public utility and its ability to ensure the provision of safe, adequate and proper service to all ratepayers in the affected service territory. IMPLEMENTATION The Board DIRECTS that the rate reduction associated with the merger savings be implemented as follows: (1) The merger driven rate reduction shall be applied on an equal percentage basis across all rate classes. Petitioners proposed reducing rates using the allocation percentages it employed in its 1991 rate case; however, the Board FINDS it is more appropriate to implement the reduction across all classes by a uniform percentage of revenues. (2) The decrease shall be implemented by ACE in two steps: (a) First, effective January 1, 1998, ACE will decrease rates by $5.025 million, an amount equal to the Post Retirement Benefits other than Pensions (PBOP) increase authorized by the Board in Docket No. ER97080562 on December 30, 1997; and (b) Second, ACE will decrease its rate by $9.888 million effective on the closing date of the merger (assuming a closing in March 1998) which amount reflects the benefits to ratepayers of accelerating the merger savings to offset the PBOP increase. -19- Effective January 1, 1999, ACE's rates shall reflect the full annual savings of $15.75 million through implementation of a small downward adjustment in rates equivalent to the value of the accelerated reduction in 1998. This Order is issued subject to the following requirements: (1) This Order shall not affect nor in any way limit the exercise of the authority of the Board or the State of New Jersey in any future petition, or in any proceeding regarding rates, franchises, services, financing, accounting, capitalization, depreciation, or any other matter affecting Petitioners. (2) This Order shall not be construed as directly or indirectly fixing for any purpose whatsoever any value of tangible or intangible assets now owned or hereafter owned by Petitioners. (3) Consummation of the above-referenced transactions must take place no later than ninety (90) days from the date of this Order unless otherwise extended by the Board. (4) Approval of the transactions herein shall not constitute a determination, nor in any way limit, any future determination of the Board, as to the treatment of indebtedness, capital structure and interest expense for rate making purposes in any rate proceeding under state or federal law. DATED: 1-7-98 BOARD OF PUBLIC UTILITIES BY: /s/ Herbert H. Tate HERBERT H. TATE PRESIDENT /s/ Carmen J. Armenti CARMEN J. ARMENTI COMMISSIONER ATTEST: I HEREBY CERTIFY that the within document is a true copy of the original in the files of the Board of Public Utilities. /s/ James A Nappi______ JAMES A. NAPPI SECRETARY Docket No. EM97020103 -20- I/M/O The Petition of Atlantic City Electric Co. and Conectiv, Inc. for Approval of a Change in Ownership and Control Docket No. EM97020103 Service List
Robert Chilton, Director Michael Ambrosia, Louis M. Walters, BPU Division of Energy Elective Director VP - Treas. & Asst. Sec. 2 Gateway Center BPU Atlantic City Electric Co. Newark, NJ 07102 2 Gateway Center 6801 Black Horse Pike Newark, NJ 07102 Egg Harbor Twp., NJ 08234 James A. Nappi, Secretary Ami Morita, Esq. David A. Kindlick, BPU Div. of the Ratepayer Adv. VP - Treas. & Asst. Sec. 2 Gateway Center 31 Clinton Street - 11th Flr. Atlantic City Electric Co. Newark, NJ 07102 Newark, NJ 07101 6801 Black Horse Pike Egg Harbor Twp., NJ 08234 George Riepe, Asst. Dir. Howard E. Cosgrove Ira C. Megdal, Esq. BPU Division of Energy Chairman, President & Ceo Davis Reberkenny & 2 Gateway Center Delmarva Power & Light Co. Abramowitz, P.C. Newark, NJ 07102 800 King Street 499 Cooper Landing Rd Wilmington, DE 19899 P.O. Box 5459 Cherry Hill, NJ 08002 Dr. Fred S. Grygiel Gregory Eisenstark, Esq. Michael J. Barron, Sr. VP Chief Economist Div. of the Ratepayer Adv. Atlantic City Electric Co. BPU 31 Clinton Street - 11th Flr. 6801 Black Horse Pike Gateway Center Newark, NJ 07101 Egg Harbor Twp., NJ 08234 Newark, NJ 07102 Rene Demuynck Richard A. Wakefield Cindy L. Jacobs, Manager BPU Division of Energy CSA Energy Consultants Rates and Tariffs 2 Gateway Center 1901 N. Ft. Myer Dr - 503 South Jersey Gas Company Newark, NJ 07102 Arlington, VA 22209 One South Jersey Plaza Folsom, NJ 08037 Edward Beslow Mona Mosser Rickey Joe Chief Legal Specialist BPU Division of Energy BPU Division of Energy BPU 2 Gateway Center 2 Gateway Center 2 Gateway Center Newark, NJ 07102 Newark, NJ 07102 Newark, NJ 07102 Alice Bator, Bur. Chief Robert Glowacki Mark C. Beyer BPU Division of Energy BPU Division of Energy Office of the Economist 2 Gateway Center 2 Gateway Center BPU Newark, NJ 07102 Newark, NJ 07102 2 Gateway Center Newark, NJ 07102 Peter Yochum, Bur. Chief Naji Ugoji BPU Division of Energy BPU Division of Energy 2 Gateway Center 2 Gateway Center Newark, NJ 07102 Newark, NJ 07102
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Joseph O'Hara Janet Simon Gary L. Hanson, Controller BPU Division of Energy BPU Division of Energy Atlantic City Electric Co. 2 Gateway Center 2 Gateway Center 6801 Black Horse Pike Newark, NJ 07101 Newark, NJ 07101 Egg Harbor Twp., NJ 08234 Michael Kammer Elise Goldblat, Dag Henry Levari, Sr. VP BPU Division of Energy Dept. of Law & Public Safety Atlantic City Electric Co. 2 Gateway Center 124 Halsey Street, 5th Flr. 6801 Black Horse Pike Newark, NJ 07101 Newark, NJ 07101 Egg Harbor Twp., NJ 08234 Blossom A. Peretz, Dir. Eric Andrews, Dag James J. Lees Div. of the Ratepayer Adv. Dept. of Law & Public Safety South Jersey Gas Company 31 Clinton Street - 11th Flr. 124 Halsey Street, 5th Flr. One South Jersey Plaza Newark, NJ 07102 Newark, NJ 07101 Folsom, NJ 08037 Gary Epler, Esq. David Peterson Paul S. Gerritsen, VP Div. of the Ratepayer Adv. Chesapeake Regulatory Corporate Services 31 Clinton Street - 11th Flr. Consultants Delmarva Power & Light Co. Newark, NJ 07101 2880 Dunkirk Way, Ste 303 800 King Street Dunkirk, MD 20754 Wilmington, DE 19899 J. Mack Wathen, Mgr. Pricing Joseph Quirolo, Dag Delmarva Power & Light Co. Dept. of Law & Public Safety 800 King Street 124 Halsey Street, 5th Flr. Wilmington, DE 19899 Newark, NJ 07101 Christine Lin Thomas J. Flaherty BPU Division of Energy Deloitte & Touche 2 Gateway Center 2200 Ross Avenue, Ste 1600 Newark, NJ 07102 Dallas, TX 75201 Julie Huff Reynold Nebel, Jr., Esq. BPU Division of Energy LeBoeuf, Lamb, Greene & 2 Gateway Center MacRae Newark, NJ 07102 One Riverfront Plaza Newark, NJ 07102 Stephen B. Cenzer, Esq. Jacqueline Galka, Bur. Chf. LeBoeuf, Lamb, Greene & BPU Division of Energy MacRae 2 Gateway Center One Riverfront Plaza Newark, NJ 07102 Newark, NJ 07102 Kurt Lewandowski, Esq. Jackie O'Grady Div. of the Ratepayer Adv. BPU Division of Energy 31 Clinton Street - 11th Flr. 2 Gateway Center Newark, NJ 07101 Newark, NJ 07102 Mark L. Mucci, Esq. James E. Franklin, II, Esq. LeBoeuf, Lamb, Greene & Atlantic City Electric Co. MacRae 6801 Black Horse Pike One Riverfront Plaza Egg Harbor Twp., NJ 08234 Newark, NJ 07102
-22- EX-99.3 4 EXHIBIT D-7.2 UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D.C. 20555-0001 December 2, 1997 John H. O'Neill, Jr., Esq. Shaw, Pittman, Potts & Trowbridge 2300 N Street, NW Washington, D.C. 20037 SUBJECT: ENVIRONMENTAL ASSESSMENT AND FINDING OF NO SIGNIFICANT IMPACT AND NOTICE OF CONSIDERATION OF APPROVAL OF APPLICATION REGARDING PROPOSED RESTRUCTURING CONCERNING THE INDIRECT TRANSFER OF CONTROL OF ATLANTIC CITY ELECTRIC COMPANY'S (ACE) AND DELMARVA POWER AND LIGHT COMPANY'S (DP&L) INTERESTS IN PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3 (TAC NOS. M98682 AND M98683) Dear Mr. O'Neill: Enclosed is a copy of the Environmental Assessment and Finding of No Significant Impact and a Notice of Consideration of Approval of Application Regarding Proposed Corporate Restructuring concerning the indirect transfer of control of ACE's and DP&L's possessory interests in the Peach Bottom Atomic Power Station, Units 2 and 3, licenses that would result from the restructuring. The assessment and notice relate to an application filed by ACE and DP&L under cover of your letter dated April 30, 1997, for consent under 10 CFR 50.80 regarding the proposed merger of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L, resulting in the formation of a new holding company, Conectiv, Inc. The assessment and notice are being forwarded to the Office of the Federal Register for publication. Sincerely, /s/ John F. Stolz for L. Mark Padovan, Project Manager Project Directorate I-2 Division of Reactor Projects - I/II Office of Nuclear Reactor Regulation Docket Nos. 50-277 and 50-278 Enclosures: 1. Environmental Assessment 2. Notice of Corporate Restructuring cc w/encls: See next page PECO Energy Company Peach Bottom Atomic Power Station, Units 2 and 3 cc:
J. W. Durham, Sr., Esquire Chief-Division of Nuclear Safety Sr. V.P. & General Counsel PA Dept. of Environmental PECO Energy Company Resources 2301 Market Street, S26-1 P.O. Box 8469 Philadelphia, PA 19101 Harrisburg, PA 17105-8469 PECO Energy Company Board of Supervisors ATTN: Mr. T. N. Mitchell, Peach Bottom Township Vice President R.D. #1 Peach Bottom Atomic Power Station Delta, PA 17314 1848 Lay Road Delta, PA 17314 Public Service Commission of Maryland PECO Energy Company Engineering Division ATTN: Regulatory Engineer, A4-5S Chief Engineer Peach Bottom Atomic Power Station 6 St. Paul Centre 1848 Lay Road Baltimore, MD 21202-6806 Delta, PA 17314 Mr. Richard McLean Resident Inspector Power Plant and Environmental U.S. Nuclear Regulatory Review Division Commission Department of Natural Resources Peach Bottom Atomic Power Station B-3, Tawes State Office Building P.O. Box 399 Annapolis, MD 21401 Delta, PA 17314 Dr. Judith Johnsrud Regional Administrator, Region I National Energy Committee U.S. Nuclear Regulatory Sierra Club Commission 433 Orlando Avenue 475 Allendale Road State College, PA 16803 King of Prussia, PA 19406 Manager-Business & Co-owner Mr. Roland Fletcher Affairs Department of Environment Public Service Electric and Gas 201 West Preston Street Company Baltimore, MD 21201 P.O. Box 236 Hancocks Bridge, NJ 08038-0236 A.F. Kirby, III External Operations - Nuclear Manager-Peach Bottom Licensing Delmarva Power & Light Company PECO Energy Company P.O. Box 231 Nuclear Group Headquarters Wilmington, DE 19899 Correspondence Control Desk P.O. Box No. 195 PECO Energy Company Wayne, PA 19087-0195 Plant Manager Peach Bottom Atomic Power Station James E. Franklin, II, Esq. 1848 Lay Road Sr. V.P. and General Counsel Delta, PA 17314 Atlantic City Electric Company 6801 Blackhorse Pike Egg Harbor Township, NJ 08234-4130
PECO Energy Company Peach Bottom Atomic Power Station, Units 2 and 3
Mr. George A. Hunger, Jr. Dale G. Stoodley, Esq. Director-Licensing, MC 62A-1 V.P. and General Counsel PECO Energy Company Delmarva Power & Light Company Nuclear Group Headquarters 800 King Street Correspondence Control Desk P.O. Box 231 P.O. Box No. 195 Wilmington, DE 19899 Wayne, PA 19087-0195 Mr. Leon R. Eliason Chief Nuclear Officer & President-Nuclear Business Unit Public Service Electric and Gas Company Post Office Box 236 Hancocks Bridge, NJ 08038 Mr. Roy Denmark Environmental Review Coordinator Environmental Protection Agency 841 Chestnut Street Philadelphia, PA 19107
-2- UNITED STATES NUCLEAR REGULATORY COMMISSION PECO ENERGY COMPANY PUBLIC SERVICE ELECTRIC AND GAS COMPANY DELMARVA POWER AND LIGHT COMPANY ATLANTIC CITY ELECTRIC COMPANY PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3 DOCKET NOS. 50-277 AND 50-278 ENVIRONMENTAL ASSESSMENT AND FINDING OF NO SIGNIFICANT IMPACT The U.S Nuclear Regulatory Commission (the Commission) is considering approval, by issuance of an order, under 10 CFR 50.80, of the indirect transfer of control of the interests in the Peach Bottom Atomic Power Station (PBAPS), Units 2 and 3, licenses to the extent effected by a proposed merger of Atlantic Energy, Inc. (the parent holding company of Atlantic City Electric Company (ACE)) and Delmarva Power & Light Company (DP&L), resulting in the formation of a new holding company, Conectiv, Inc. ACE is co-holder of Facility Operating Licenses Nos. DPR-44 and DPR-56, along with Public Service Electric and Gas Company (PSE&G), PECO Energy Company (PECO), and DP&L, issued for operation of the PBAPS, Units 2 and 3, located in Peach Bottom Township, York County, Pennsylvania. ENVIRONMENTAL ASSESSMENT Identification of the Proposed Action: The proposed action would consent to the indirect transfer of the interests in PBAPS to the extent effected by the proposed merger of Atlantic Energy, Inc. and DP&L, resulting in the formation of a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. No direct transfer of the licenses as held by ACE and DP&L would occur. PECO, the licensed operator of the facilities, and PSE&G are not involved in the merger and restructuring. The proposed action is in accordance with an application filed by ACE and DP&L under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, Counsel for ACE and DP&L. The Need for the Proposed Action: The proposed action is required to enable the proposed merger and restructuring of Atlantic Energy, Inc., ACE and DP&L to occur to the extent indirect transfers of control of the licenses will be effected by the merger and restructuring. Environmental Impacts of the Proposed Action: The Commission has completed its evaluation of the proposed action and concludes that there will be no physical or operational changes as a result of the proposed action. The corporate merger and restructuring will not affect the qualifications or organizational affiliation of the personnel who operate the facilities, as PECO, not involved in the merger, will continue to be responsible for the operation of PBAPS, Units 2 and 3. The change will not increase the probability or consequences of accidents, no changes are being made in the types of any effluents that may be released offsite, and there is no -2- significant increase in the allowable individual or cumulative occupational radiation exposure. Accordingly, the Commission concludes that there are no significant radiological environmental impacts associated with the proposed action. With regard to potential nonradiological impacts, the proposed action will not affect nonradiological plant effluents and will have no other environmental impact. Accordingly, the Commission concludes that there are no significant nonradiological environmental impacts associated with the proposed action. Alternatives to the Proposed Action: Since the Commission has concluded there is no measurable environmental impact associated with the proposed action, any alternatives with equal or greater environmental impact need not be evaluated. As an alternative to the proposed action, the staff considered denial of the proposed action. Denial of the application would result in no change in current environmental impacts. The environmental impacts of the proposed action and the alternative action are similar. Alternative Use of Resources: This action does not involve the use of any resources not previously considered in the "Final Environmental Statement Related to the Operation of Peach Bottom Atomic Power Station, Units 2 and 3," April 1973. Agencies and Persons Consulted: In accordance with its stated policy, on September 15, 1997, the staff consulted with the Pennsylvania State official, -3- Mr. S. Maingi of the State of Pennsylvania, Bureau of Radiation Protection, regarding the environmental impact of the proposed action. The State official had no comments. FINDING OF NO SIGNIFICANT IMPACT Based upon the environmental assessment, the Commission concludes that the proposed action will not have a significant effect on the quality of the human environment. Accordingly, the Commission has determined not to prepare an environmental impact statement for the proposed action. For further details with respect to the proposed action, see the application filed by ACE and DP&L under cover of a letter dated April 30, 1997, as supplemented November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge (Counsel for ACE and DP&L), which is available for public inspection at the Commission's Public Document Room, the Gelman Building, 2120 L Street, NW., Washington, DC, and at the local public document room located at the Government Publications Section, State Library of Pennsylvania, (REGIONAL DEPOSITORY) Education Building, Walnut Street and Commonwealth Avenue, Box 1601, Harrisburg, Pennsylvania. Dated at Rockville, Maryland, this 2nd day of December, 1997. FOR THE NUCLEAR REGULATORY COMMISSION /s/ John F. Stolz John F. Stolz, Director Project Directorate I-2 Division of Reactor Projects - I/II Office of Nuclear Reactor Regulation -4- UNITED STATES NUCLEAR REGULATORY COMMISSION PECO ENERGY COMPANY PUBLIC SERVICE ELECTRIC AND GAS COMPANY DELMARVA POWER AND LIGHT COMPANY ATLANTIC CITY ELECTRIC COMPANY PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3 DOCKET NOS. 50-277 AND 50-278 NOTICE OF CONSIDERATION OF APPROVAL OF APPLICATION REGARDING PROPOSED CORPORATE RESTRUCTURING Notice is hereby given that the U.S. Nuclear Regulatory Commission (the Commission) is considering approval, by issuance of an order, under 10 CFR 50.80, of the indirect transfer of control of Atlantic City Electric Company's (ACE) and Delmarva Power and Light Company's (DP&L) interests in the Peach Bottom Atomic Power Station (PBAPS), Units 2 and 3, licenses to the extent effected by a proposed merger and restructuring of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L, resulting in the formation of a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. Atlantic Energy, Inc., will cease to exist. PECO Energy Company, Public Service Electric and Gas Company (PSE&G), DP&L, and ACE are co-holders of Facility Operating Licenses Nos. DPR-44 and DPR-56, issued for operation of PBAPS, Units 2 and 3, located in Peach Bottom Township, York County, Pennsylvania. PECO, the licensed operator of the facilities, and PSE&G are not involved in the proposed merger and restructuring. An application filed by ACE and DP&L under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, Counsel for ACE and DP&L, informed the Commission of the proposed merger and corporate restructuring. According to the proposed plan, there will be no significant change in ownership, management, or sources of funds for operation, maintenance, or decommissioning of PBAPS, Units 2 and 3, due to the corporate restructuring. ACE and DP&L will continue to hold the licenses, and no direct transfer of the licenses will occur. Pursuant to 10 CFR 50.80, the Commission may approve the transfer of control of a license after appropriate notice to interested persons. Such approval is contingent upon the Commission's determination that the holder of the license following the transfer is qualified to hold the license and that the transfer is otherwise consistent with applicable provisions of law, regulations, and orders of the Commission. For further details with respect to the proposed action, see the application filed by ACE and DP&L under cover of a letter dated April 30, 1997, as supplemented November 7, 1997, from John H. O'Neill, Jr., Shaw, Pittman, Potts & Trowbridge (counsel for ACE and DP&L), which is available for public inspection at the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., Washington, DC, and at the local public document room located at the Government Publications Section, State Library of Pennsylvania, (REGIONAL DEPOSITORY) -2- Education Building, Walnut Street and Commonwealth Avenue, Box 1601, Harrisburg, Pennsylvania. Dated at Rockville, Maryland, this 2nd day of December, 1997. FOR THE NUCLEAR REGULATORY COMMISSION /s/ John F. Stolz John F. Stolz, Director Project Directorate I-2 Division of Reactor Projects - I/II Office of Nuclear Reactor Regulation -3- EX-99.4 5 EXHIBIT D-7.2 UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D.C. 20555-0001 December 18, 1997 John H. O'Neill, Jr., Esq. Shaw, Pittman, Potts & Trowbridge 2300 N Street, NW Washington, DC 20037 SUBJECT: ORDER APPROVING APPLICATION REGARDING THE MERGER AGREEMENT BETWEEN ATLANTIC ENERGY INC., PARENT OF ATLANTIC CITY ELECTRIC COMPANY (ACE) AND DELMARVA POWER AND LIGHT COMPANY (DP&L) AFFECTING LICENSE NO. NPF-57, HOPE CREEK GENERATING STATION (TAC NO. M98618) Dear Mr. O'Neill: The enclosed Order responds to the application for approval under 10 CFR 50.80, submitted under cover of your letter of April 30, 1997, concerning the proposed merger of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L, which would result in the formation of a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. The staff's safety evaluation in support of the Order is also enclosed. The Order is being forwarded to the Office of the Federal Register for publication. Sincerely, /s/ John F. Stolz for Brenda L. Mozafari, Project Manager Project Directorate I-2 Division of Reactor Projects - I/II Office of Nuclear Reactor Regulation Docket No. 50-354 Enclosures: 1. Order 2. Safety Evaluation cc w/encls: See next page Public Service Electric & Gas Hope Creek Generating Station Company cc: Jeffrie J. Keenan, Esquire Manager - Joint Generation Nuclear Business Unit - N21 Atlantic Energy P.O. Box 236 6801 Black Horse Pike Hancocks Bridge, NJ 08038 Pleasantville, NJ 08232-4130 Hope Creek Resident Inspector Richard Hartung U.S. Nuclear Regulatory Commission Electric Service Evaluation Drawer 0509 Board of Regulatory Commissioners Hancocks Bridge, NJ 08038 2 Gateway Center, Tenth Floor Newark, NJ 07102 Mr. Louis Storz Sr. Vice President - Nuclear Lower Alloways Creek Township Operations c/o Mary O. Henderson, Clerk Nuclear Department Municipal Building, P.O. Box 236 P.O. Box 157 Hancocks Bridge, NJ 08038 Hancocks Bridge, NJ 08038 General Manager - Mr. Elbert Simpson Hope Creek Operations Senior Vice President- Hope Creek Generating Station Nuclear Engineering P.O. Box 236 Nuclear Department Hancocks Bridge, NJ 08038 P.O. Box 236 Hancocks Bridge, NJ 08038 Manager - Licensing and Regulation Nuclear Business Unit - N21 Mr. Leon R. Eliason P.O. Box 236 Chief Nuclear Officer & President- Hancocks Bridge, NJ 08038 Nuclear Business Unit Public Service Electric and Regional Administrator, Region I Gas Company U.S. Nuclear Regulatory Commission Post Office Box 236 475 Allendale Road Hancocks Bridge, NJ 08038 King of Prussia, PA 19406 Dr. Jill Lipoti, Asst. Director Radiation Protection Programs NJ Department of Environmental Protection and Energy CN 415 Trenton, NJ 08625-0415 James E. Franklin, II, Esq. Sr. V.P. and General Counsel Atlantic City Electric Company 6801 Blackhorse Pike Egg Harbor Township, NJ 08234-4130 -2- UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of ) ) ATLANTIC CITY ELECTRIC COMPANY ) Docket No. 50-354 ) ) (Hope Creek Generating Station) ) ORDER APPROVING APPLICATION REGARDING MERGER AGREEMENT BETWEEN ATLANTIC ENERGY, INC. (PARENT OF ATLANTIC CITY ELECTRIC COMPANY) AND DELMARVA POWER AND LIGHT COMPANY I. Atlantic City Electric Company (ACE) and Public Service Electric and Gas Company (PSE&G) are co-holders of Facility Operating License No. NPF-57, issued by the U.S. Nuclear Regulatory Commission (NRC or Commission) pursuant to Part 50 of Title 10 of the Code of Federal Relations (10 CFR Part 50) for operation of the Hope Creek Generating Station (Hope Creek). Under the license, PSE&G is authorized to possess, use, and operate the facility, and ACE is authorized to possess the facility. Hope Creek is located in Salem County, New Jersey. II. By application filed by ACE under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, attorney for ACE, supplemented by letter dated November 7, 1997, ACE requested the Commission's approval, pursuant to 10 CFR 50.80, of the indirect transfer of the license, to the extent held by ACE, that would result from the consummation of a merger agreement between Atlantic Energy, Inc. (parent of ACE) and Delmarva Power and Light Company (DP&L). Under the merger agreement, Atlantic Energy, Inc. and DP&L would form a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. No direct transfer of the license would occur. PSE&G is not involved in the merger. A Notice of Consideration of Application Regarding Proposed Corporate Restructuring was published in the Federal Register on December 8, 1997 (62 FR 64600), and an Environmental Assessment and Finding of No Significant Impact was published in the Federal Register on December 8, 1997 (62 FR 64603). Under 10 CFR 50.80, no license shall be transferred, directly or indirectly, through transfer of control of the license, unless the Commission gives its consent in writing. Upon review of the information submitted in the letter and application of April 30, 1997, and supplement dated November 7, 1997, the NRC staff has determined that the proposed merger of Atlantic Energy, Inc. and DP&L will not affect the qualifications of ACE as a holder of the license, and that the transfer of control of the license for Hope Creek, to the extent effected by -2- the proposed merger, is otherwise consistent with applicable provisions of law, regulations, and orders issued by the Commission, subject to the conditions stated herein. These findings are supported by a safety evaluation dated December 18, 1997. III. Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic Energy Act of 1954, as amended, 42 USC ss.ss. 2201(b), 2201(i), 2201(o), and 2234, and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the application regarding the proposed merger of Atlantic Energy, Inc. and DP&L subject to the following conditions: (1) ACE shall provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from ACE to its proposed parent or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding 10 percent (10%) of ACE's consolidated net utility plant, as recorded on ACE's books of account; and (2) should the merger of Atlantic Energy, Inc. and DP&L, as described herein, not be completed by December 31, 1998, this Order shall become null and void provided, however, on application and for good cause shown, such date is extended. This Order is effective upon issuance. -3- IV. By January 23, 1998, any person adversely affected by this Order may file a request for a hearing with respect to issuance of the Order. Any person requesting a hearing shall set forth with particularity how that interest is adversely affected by this Order and shall address the criteria set forth in 10 CFR 2.714(d). If a hearing is to be held, the Commission will issue an order designating the time and place of such hearing. The issue to be considered at any such hearing shall be whether this Order should be sustained. Any request for a hearing must be filed with the Secretary of the Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, Attention: Rulemakings and Adjudications Staff, or may be delivered to the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., Washington, DC by the above date. Copies should be also sent to the Office of the General Counsel and to the Director, Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, and to John H. O'Neill, Jr., Shaw, Pittman, Potts & Trowbridge, 2300 N Street, NW., Washington, DC, 20037, attorney for ACE. For further details with respect to this action, see the application filed by ACE under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, as supplemented by a letter dated November 7, 1997, and the safety evaluation dated December 18, 1997, which are -4- available for public inspection at the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., Washington, DC, and at the local public document room at the Pennsville Public Library, 190 South Broadway, Pennsville, NJ. Dated at Rockville, Maryland, this 18th day of December 1997. FOR THE NUCLEAR REGULATORY COMMISSION /s/Samuel J. Collins Samuel J. Collins, Director Office of Nuclear Reactor Regulation -5- UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D.C. 20555-0001 SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION PROPOSED MERGER OF ATLANTIC ENERGY, INC. AND DELMARVA POWER AND LIGHT COMPANY HOPE CREEK GENERATING STATION DOCKET NO. 50-354 1.0 BACKGROUND Under cover of a letter dated April 30, 1997, as supplemented by a letter dated November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, Atlantic City Electric Company (ACE) submitted an application for approval under 10 CFR 50.80, in connection with a proposed merger between Atlantic Energy, Inc. (AEI), which is the parent holding company of ACE, and Delmarva Power & Light Company (DP&L). A new holding company will result from this merger named Conectiv, Inc. (Conectiv). Under the merger agreement, all of AEI's subsidiaries (including ACE) and DP&L will become wholly owned subsidiaries of Conectiv, and AEI will cease to exist. Current holders of AEI and DP&L common stock would become holders of Conectiv common stock pursuant to a formula stipulated in the merger agreement. ACE is a 5-percent owner of the Hope Creek Generating Station (HCGS), a single-unit facility. Public Service Electric & Gas Company (PSE&G) owns the remaining 95 percent. The proposed merger does not involve PSE&G, which is the licensed operator of HCGS. The proposed merger will result in the indirect transfer of control of the interest held by ACE (but not PSE&G's interest) in HCGS's operating license to the proposed new holding company, Conectiv. Accordingly, under the provisions of 10 CFR 50.80, Commission approval is required. In the application for approval dated April 30, 1997, the applicant states on page 10: The purpose of the proposed Merger is to achieve benefits for the shareholders, customers and communities served by ACE and DP&L that would otherwise not be achievable if they were to remain as separate companies. The expected savings related to the Merger are approximately $500 million over the next ten years (1998 to 2007). The savings will come principally from elimination of duplicative activities, increased scale, improved purchasing power, improved operating efficiencies, lower capital costs and, to the extent practicable, by combining the companies' work forces. 2.0 FINANCIAL AND TECHNICAL QUALIFICATIONS On the basis of information submitted in the application, the staff finds that there will be no near-term substantive change in the financial ability of ACE to contribute appropriately to the operations and decommissioning of HCGS as a result of the proposed merger. ACE is, and would remain after the merger, an "electric utility" as defined in 10 CFR 50.2, engaged in the generation and distribution of electricity, the cost of which is recovered through rates established by the New Jersey Board of Public Utilities and the Federal Energy Regulatory Commission. Thus, pursuant to 10 CFR 50.33(f), ACE, as an electric utility, is exempt from further financial qualifications review. However, in view of the NRC's concern that restructuring can lead to a diminution of assets necessary for the safe operation and decommissioning of a licensee's nuclear power plant, the NRC has sought to obtain commitments from its licensees that initiate restructuring actions not to transfer significant assets from the licensee without notifying the NRC. ACE has agreed: to provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of a security interest or liens) from ACE to its proposed parent, or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding 10 percent (10%) of ACE's consolidated net utility plant, as recorded on ACE's books of account. See letter from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge to the NRC, dated November 7, 1997. This commitment, incorporated as a condition to the NRC's consent to the indirect license transfer to the extent effected by the proposed merger and restructuring, will assist the NRC in assuring that ACE will continue to maintain adequate resources to contribute to the safe operation and decommissioning of HCGS. With respect to technical qualifications, the proposed merger will not effect any change in the technical qualifications of the licensed operator, PSE&G, and will not effect any change in the responsibilities and obligations of PSE&G or ACE as set forth in the license. -2- 3.0 ANTITRUST The antitrust provisions of Section 105c of the Atomic Energy Act apply to an application for a license to construct or operate a facility licensed under Section 103 of the Act. Although Connectiv may become the holding company of ACE, a licensee for HCGS, i.e., may indirectly acquire control of the license, it will not be performing activities for which a license is needed. Since approval of the application would not involve the issuance of a license, the procedures under Section 105c do not apply, including the making of any "significant changes" determination. 4.0 FOREIGN OWNERSHIP The application states that for ACE, after the proposed merger, ACE will not "be owned, controlled or dominated by any alien, foreign corporation or foreign government." Also, it states that ACE is not "acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the license." (See page 5 of the application dated April 30, 1997.) The staff does not know or have reason to believe that ACE will be owned, controlled, or dominated by any alien, foreign corporation, or foreign government as a result of the proposed merger. 5.0 CONCLUSIONS In view of the foregoing, the staff concludes that the proposed merger of AEI and DP&L resulting in the formation of a new holding company, Conectiv, will not adversely affect the financial or technical qualifications of ACE with respect to the operation and decommissioning of the HCGS facility. Also, there do not appear to be any problematic antitrust or foreign ownership considerations related to the HCGS license that would result from the proposed merger. Thus, the proposed merger will not affect the qualifications of ACE as a holder of the license, and the transfer of control of the license, to the extent effected by the proposed merger, is otherwise consistent with applicable provisions of law, regulations, and orders issued by the Commission. Accordingly, with the condition discussed above relating to significant asset transfers, the NRC should approve the application regarding the proposed merger. Principal Contributor: A. McKeigney Date: December 18, 1997 -3- EX-99.5 6 EXHIBIT D-7.2 UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D.C. 20555-0001 December 18, 1997 John H. O'Neill, Jr., Esq. Shaw, Pittman, Potts & Trowbridge 2300 N Street, NW Washington, DC 20037 SUBJECT: ORDER APPROVING APPLICATION REGARDING THE MERGER AGREEMENT BETWEEN ATLANTIC ENERGY INC., PARENT OF ATLANTIC CITY ELECTRIC COMPANY (ACE) AND DELMARVA POWER AND LIGHT COMPANY (DP&L) AFFECTING LICENSES NOS. DPR-70 AND DPR-75, SALEM NUCLEAR GENERATING STATION, UNITS 1 AND 2 (TAC NOS. M98634 AND M98635) Dear Mr. O'Neill: The enclosed Order responds to the application for approval under 10 CFR 50.80, submitted under cover of your letter of April 30, 1997, concerning the proposed merger of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L, which would result in the formation of a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. The staff's safety evaluation in support of the Order is also enclosed. The Order is being forwarded to the Office of the Federal Register for publication. Sincerely, /s/ John F. Stolz for Patrick D. Milano, Senior Project Manager Project Directorate I-2 Division of Reactor Projects - I/II Office of Nuclear Reactor Regulation Docket Nos. 50-272 and 50-311 Enclosures: 1. Order 2. Safety Evaluation cc w/encls: See next page Public Service Electric & Gas Salem Nuclear Generating Station Company Units 1 and 2 cc:
Jeffrie J. Keenan, Esquire Richard Hartung Nuclear Business Unit - N21 Electric Service Evaluation P.O. Box 236 Board of Regulatory Commissioners Hancocks Bridge, NJ 08038 2 Gateway Center, Tenth Floor Newark, NJ 07102 General Manager - Salem Operations Salem Nuclear Generating Station Regional Administrator, Region I P.O. Box 236 U.S. Nuclear Regulatory Commission Hancocks Bridge, NJ 08038 475 Allendale Road King of Prussia, PA 19406 Mr. Louis Storz Sr. Vice President - Nuclear Operations Lower Alloways Creek Township Nuclear Department c/o Mary O. Henderson, Clerk P.O. Box 236 Municipal Building, P.O. Box 157 Hancocks Bridge, NJ 08038 Hancocks Bridge, NJ 08038 Senior Resident Inspector Manager-Licensing and Regulation Salem Nuclear Generating Station Nuclear Business Unit - N21 U.S. Nuclear Regulatory Commission P.O. Box 236 Drawer 0509 Hancocks Bridge, NJ 08038 Hancocks Bridge, NJ 08038 Mr. David Wersan Dr. Jill Lipoti, Asst. Director Assistant Consumer Advocate Radiation Protection Programs Office of Consumer Advocate NJ Department of Environmental 1425 Strawberry Square Protection and Energy - CN 415 Harrisburg, PA 17120 Trenton, NJ 08625-0415 Manager - Joint Generation Maryland Office of People's Counsel Atlantic Energy 6 St. Paul St., 21st floor, Suite 2102 6801 Black Horse Pike Baltimore, MD 21202 Egg Harbor Twp., NJ 08234-4130 Ms. R. A. Kankus Carl O. Schaefer Joint Owner Affairs External Operations - Nuclear PECO Energy Company Delmarva Power & Light Company 965 Chesterbrook Blvd., 63C-5 P.O. Box 231 Wayne, PA 19067 Wilmington, DE 19899 Mr. Elbert Simpson Public Service Commission of Maryland Senior Vice President-Nuclear Engineering Engineering Division Nuclear Department Chief Engineer P.O. Box 236 6 St. Paul Centre Hancocks Bridge, NJ 08038 Baltimore, MD 21202-6806
Public Service Electric & Gas Salem Nuclear Generating Station Company Units 1 and 2
Mr. Leon R. Eliason James E. Franklin, II, Esq. Chief Nuclear Officer & President- Sr. V.P. and General Counsel Nuclear Business Unit Atlantic City Electric Company Public Service Electric and Gas Company 6801 Blackhorse Pike Post Office Box 236 Egg Harbor Township, NJ 08234-4130 Hancocks Bridge, NJ 08038 Dale G. Stoodley, Esq. Mr. George A. Hunger, Jr. V.P. and General Counsel Director-Licensing, MC 62A-l Delmarva Power & Light Company PECO Energy Company 800 King Street Nuclear Group Headquarters P.0.Box 231 Correspondence Control Desk Wilmington, DE 19899 P.O. Box No. 195 Wayne, PA 19087-0195
-2- UNITED STATES Of AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of ) ) ATLANTIC CITY ELECTRIC COMPANY ) Docket Nos. 50-272 and 50-311 DELMARVA POWER AND LIGHT ) COMPANY ) ) (Salem Nuclear Generating Station, ) ) Units 1 and 2) ) ORDER APPROVING-APPLICATION REGARDING MERGER AGREEMENT BETWEEN ATLANTIC ENERGY, INC. (PARENT Of ATLANTIC CITY ELECTRIC COMPANY) AND DELMARVA POWER AND LIGHT COMPANY I. Atlantic City Electric Company (ACE) and Delmarva Power and Light Company (DP&L) are co-holders of Facility Operating Licenses Nos. DPR-70 and DPR-75, along with Public Service Electric and Gas Company (PSE&G) and Philadelphia Electric Company [also known as PECO Energy Company], issued by the U.S. Nuclear Regulatory Commission (NRC or Commission) pursuant to Part 50 of Title 10 of the Code of Federal Regulations (10 CFR Part 50), for operation of the Salem Nuclear Generating Station, Units 1 and 2 (Salem). Under the licenses, PSE&G is authorized to possess, use, and operate the facilities, and ACE, DP&L, and Philadelphia Electric Company are authorized to possess the facilities. Salem is located in Salem County, New Jersey. -2- II. By application filed by ACE and DP&L under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, attorney for ACE and DP&L, supplemented by letter dated November 7, 1997, ACE and DP&L requested the Commission's approval, pursuant to 10 CFR 50.80, of the indirect transfer of the licenses, to the extent held by ACE and DP&L, that would result from the consummation of a merger agreement between Atlantic Energy, Inc. (parent of ACE), and DP&L. Under the merger agreement, Atlantic Energy, Inc. and DP&L would form a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. No direct transfer of the licenses would occur. PSE&G and Philadelphia Electric Company are not involved in the merger. A Notice of Consideration of Approval of Application Regarding Proposed Corporate Restructuring was published in the Federal Register on December 8, 1997 (62 FR 64600), and an Environmental Assessment and Finding of No Significant Impact was published in the Federal Register on December 8, 1997 (62 FR 64602). Under 10 CFR 50.80, no license shall be transferred, directly or indirectly, through transfer of control of the license, unless the Commission gives its consent in writing. Upon review of the information submitted in the letter and application of April 30, 1997, and supplement dated November 7, 1997, the NRC staff has determined that the proposed merger of Atlantic Energy, Inc. and DP&L will not affect the qualifications of ACE and DP&L as holders of the licenses, and that the transfer of control of the licenses for Salem, to the extent effected by the proposed merger, is otherwise consistent with applicable provisions of law, -3- regulations, and orders issued by the Commission, subject to the conditions stated herein. These findings are supported by a safety evaluation dated December 18, 1997. III. Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic Energy Act of 1954, as amended, 42 USC ss.ss. 2201(b), 2201(i), 2201(o), and 2234, and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the application regarding the proposed merger of Atlantic Energy, Inc. and DP&L subject to the following conditions: (1) ACE shall provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from ACE to its proposed parent or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding 10 percent (10%) of ACE's consolidated net utility plant, as recorded on ACE's books of account; (2) DP&L shall provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from DP&L to its proposed parent or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding 10 percent (10%) of DP&L's consolidated net utility plant, as recorded on DP&L's books of account; and (3) should the merger of Atlantic Energy, Inc. and DP&L, as described herein, not be completed by December 31, 1998, this Order shall become null and void, provided, however, on application and for good cause shown, such date is extended. This Order is effective upon issuance. -4- IV. By January 23, 1998, any person adversely affected by this Order may file a request for a hearing with respect to issuance of the Order. Any person requesting a hearing shall set forth with particularity how that interest is adversely affected by this Order and shall address the criteria set forth in 10 CFR 2.714(d). If a hearing is to be held, the Commission will issue an order designating the time and place of such hearing. The issue to be considered at any such hearing shall be whether this Order should be sustained. Any request for a hearing must be filed with the Secretary of the Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, Attention: Rulemakings and Adjudications Staff, or may be delivered to the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., Washington, D.C. by the above date. Copies should be also sent to the Office of the General Counsel and to the Director, Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, and to John H. O'Neill, Jr., Shaw, Pittman, Potts & Trowbridge, 2300 N Street, NW., Washington, DC, 20037, attorney for ACE and DP&L. For further details with respect to this action, see the application filed by ACE and DP&L under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, as supplemented by a letter dated November 7, 1997, and the safety evaluation dated December 18, 1997, which are available for public inspection at the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., -5- Washington, DC, and at the local public document room located at the Salem Free Public Library, 112 West Broadway, Salem, NJ. Dated at Rockville, Maryland, this 18th day of December 1997. FOR THE NUCLEAR REGULATORY COMMISSION /s/ Samuel J. Collins Samuel J. Collins, Director Office of Nuclear Reactor Regulator SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION PROPOSED MERGER Of ATLANTIC ENERGY. INC. AND DELMARVA POWER AND LIGHT COMPANY SALEM NUCLEAR GENERATING STATION. UNITS 1 AND 2 DOCKET NOS. 50-272 AND 50-311 1.0 BACKGROUND Under cover of a letter dated April 30, 1997, as supplemented by a letter dated November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, Atlantic City Electric Company (ACE) and Delmarva Power & Light Company (DP&L) submitted an application for approval under 10 CFR 50.80, in connection with a proposed merger between Atlantic Energy, Inc. (AEI), which is the parent holding company of ACE, and DP&L. A new holding company will result from this merger named Conectiv, Inc. (Conectiv). Under the merger agreement, all of AEI's subsidiaries (including ACE) and DP&L will become wholly owned subsidiaries of Conectiv, and AEI will cease to exist. Current holders of AEI and DP&L common stock would become holders of Conectiv common stock pursuant to a formula stipulated in the merger agreement. ACE is a 7.41-percent owner of Unit 1 of the Salem Nuclear Generating Station, a two-unit facility, and DP&L is a 7.41-percent owner of Unit 1. Public Service Electric & Gas Company (PSE&G) owns 42.59 percent of Unit 1 and Philadelphia Electric Company (PECO) owns the remaining 42.59 percent. Each of these four utilities owns the same respective percentages of Unit 2 of Salem. The proposed merger does not involve PSE&G, which is the licensed operator of Salem, or PECO. The proposed merger will result in the indirect transfer of control of the interests held by ACE and DP&L in the Salem station operating licenses to the proposed new holding company, Conectiv. Accordingly, under the provisions of 10 CFR 50.80, Commission approval is required. In the application for approval dated April 30, 1997, the applicants state on page 10: The purpose of the proposed Merger is to achieve benefits for the shareholders, customers and communities served by ACE and DP&L that would otherwise not be achievable if they were to remain as separate companies. The expected savings related to the Merger are approximately $500 million over the next ten years (1998 to 2007). The savings will come principally from elimination of duplicative activities, increased scale, improved purchasing power, improved operating efficiencies, lower capital costs and, to the extent practicable, by combining the companies' work forces. -2- 2.0 FINANCIAL AND TECHNICAL QUALIFICATIONS On the basis of information submitted in the application, the staff finds that there will be no near-term substantive change in the financial ability of ACE and DP&L to contribute appropriately to the operations and decommissioning of the Salem facility as a result of the proposed merger. Each of ACE and DP&L is, and would remain after the merger, an "electric utility" as defined in 10 CFR 50.2, engaged in the generation and distribution of electricity, the cost of which is recovered through rates established by the New Jersey Board of Public Utilities and the Federal Energy Regulatory Commission, in the case of ACE, and the Delaware Public Service Commission, the Maryland Public Service Commission, the State Corporation Commission of Virginia, and the Federal Energy Regulatory Commission, in the case of DP&L. Thus, pursuant to 10 CFR 50.33(f), ACE and DP&L, as electric utilities, are exempt from further financial qualifications review. However, in view of the NRC's concern that restructuring can lead to a diminution of assets necessary for the safe operation and decommissioning of a licensee's nuclear power plant, the NRC has sought to obtain commitments from its licensees that initiate restructuring actions not to transfer significant assets from the licensee without notifying the NRC. ACE and DP&L have agreed: to provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of a security interest or liens) from such licensee to its proposed parent, or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding ten percent (10%) of such licensee's consolidated net utility plant, as recorded on the licensee's books of account. See letter from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge to the NRC dated November 7, 1997. This commitment, incorporated as a condition to the NRC's consent to the indirect license transfers to the extent effected by the proposed merger and restructuring, will assist the NRC in assuring that ACE and DP&L will continue to maintain adequate resources to contribute to the safe operation and decommissioning of the Salem facility. With respect to technical qualifications, the proposed merger will not effect any change in the technical qualifications of the licensed operator, PSE&G, and will not effect any change in the responsibilities and obligations of PSE&G or any other licensee as set forth in the licenses. 3.0 ANTITRUST The antitrust provisions of the Atomic Energy Act in Section 105 of the Act require the Commission to conduct an antitrust review in connection with an application for a license to construct or operate a utilization or production facility under Section 103 of the Act. Salem -3- Units 1 and 2 were licensed under Section 104b and, as a result, are not subject to an antitrust review by the staff in connection with the application regarding the proposed merger. 4.0 FOREIGN OWNERSHIP The application states that for ACE and DP&L, after the proposed merger, neither ACE nor DP&L will "be owned, controlled or dominated by any alien, foreign corporation or foreign government." Also, it states that neither ACE nor DP&L is "acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the license." (See pages 6 and 7 of the application dated April 30, 1997.) The staff does not know or have reason to believe that ACE or DP&L will be owned, controlled, or dominated by any alien, foreign corporation, or foreign government as a result of the proposed merger. 5.0 CONCLUSIONS In view of the foregoing, the staff concludes that the proposed merger of AEI and DP&L resulting in the formation of a new holding company, Conectiv, will not adversely affect the financial or technical qualifications of ACE or DP&L with respect to the operation and decommissioning of Units 1 and 2 of the Salem facility. Also, there do not appear to be any problematic antitrust or foreign ownership considerations related to the Salem Units 1 and 2 licenses that would result from the proposed merger. Thus, the proposed merger will not affect the qualifications of ACE or DP&L as holders of the licenses, and the transfer of control of the licenses, to the extent effected by the proposed merger, is otherwise consistent with applicable provisions of law, regulations, and orders issued by the Commission. Accordingly, with the condition discussed above relating to significant asset transfers, the NRC should approve the application regarding the proposed merger. Principal Contributor: A. McKeigney Date: December 18, 1997 EX-99.6 7 EXHIBIT D-7.2 UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D.C. 20555-0001 December 18, 1997 John H. O'Neill, Jr., Esq. Shaw, Pittman, Potts & Trowbridge 2300 N Street, NW Washington, DC 20037 SUBJECT: ORDER APPROVING APPLICATION REGARDING THE MERGER AGREEMENT BETWEEN ATLANTIC ENERGY INC., PARENT OF ATLANTIC CITY ELECTRIC COMPANY (ACE) AND DELMARVA POWER AND LIGHT COMPANY (DP&L) AFFECTING LICENSES NOS. DPR-44 AND DPR-56, PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3 (TAC NOS. M98682 AND M98683) Dear Mr. O'Neill: The enclosed Order responds to the application for approval under 10 CFR 50.80, submitted under cover of your letter of April 30, 1997, concerning the proposed merger of Atlantic Energy, Inc. (the parent holding company of ACE) and DP&L, which would result in the formation of a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. The staff's safety evaluation in support of the Order is also enclosed. The Order is being forwarded to the Office of the Federal Register for publication. Sincerely, /s/ Joseph F. Williams Joseph F. Williams, Project Manager Project Directorate I-2 Division of Reactor Projects - I/II Office of Nuclear Reactor Regulation Docket Nos. 50-277 and 50-278 Enclosures: 1. Order 2. Safety Evaluation CC w/encls: See next page PECO Energy Company Peach Bottom Atomic Power Station, Units 2 and 3 cc: J. W. Durham, Sr., Esquire Chief-Division of Nuclear Safety Sr. V.P. & General Counsel PA Dept. of Environmental PECO Energy Company Resources 2301 Market Street, S26-1 P.O. Box 8469 Philadelphia, PA 19101 Harrisburg, PA 17105-8469 PECO Energy Company Board of Supervisors ATTN: Mr. T. N. Mitchell, Peach Bottom Township Vice President R.D. #1 Peach Bottom Atomic Power Station Delta, PA 17314 1848 Lay Road Delta, PA 17314 Public Service Commission of Maryland PECO Energy Company Engineering Division ATTN: Regulatory Engineer, A4-5S Chief Engineer Peach Bottom Atomic Power Station 6 St. Paul Centre 1848 Lay Road Balimore, MD 21202-6806 Delta PA 17314 Mr. Richard McLean Resident Inspector Power Plant and Environmental U.S. Nuclear Regulatory Review Division Commission Department of Natural Resources Peach Bottom Atomic Power Station B-3, Tawes State Office Building P.O. Box 399 Annapolis, MD 21401 Delta, PA 17314 Dr. Judith Johnsrud Regional Administrator, Region I National Energy Committee U.S. Nuclear Regulatory Sierra Club Commission 433 Orlando Avenue 475 Allendale Road State College, PA 16803 King of Prussia, PA 19406 Manager-Business & Co-owner Mr. Roland Fletcher Affairs Department of Environment Public Service Electric and Gas 201 West Preston Street Company Baltimore, MD 21201 P.O. Box 236 Hancocks Bridge, NJ 08038-0236 A.F. Kirby, III External Operations - Nuclear Manager-Peach Bottom Licensing Delmarva Power & Light Company PECO Energy Company P.O. Box 231 Nuclear Group Headquarters Wilmington, DE 19899 Correspondence Control Desk P.O. Box No. 195 PECO Energy Company Wayne, PA 19087-0195 Plant Manager Peach Bottom Atomic Power Station 1848 Lay Road Delta, PA 17314 PECO Energy Company Peach Bottom Atomic Power Station, Units 2 and 3 Mr. George A. Hunger, Jr. James E. Franklin, II, Esq. Director-Licensing, MC 62A-l Sr. V.P. and General Counsel PECO Energy Company Atlantic City Electric Company Nuclear Group Headquarters 4801 Blackhorse Pike Correspondence Control Desk Egg Harbor Township, NJ 08234-4130 P.O. Box No. 195 Wayne, PA 19087-0195 Dale G. Stoodley, Esq. V.P. and General Counsel Mr. Leon R. Eliason Delmarva Power & Light Company Chief Nuclear Officer & President- 800 King Street Nuclear Business Unit P.O. Box 331 Public Service Electric and Gas Wilmington, DE 19899 Company Post Office Box 236 Hancocks Bridge, NJ 08038 -2- UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of ) ) ATLANTIC CITY ELECTRIC COMPANY ) Docket Nos. 50-277 and DELMARVA POWER AND LIGHT ) 50-278 COMPANY ) ) (Peach Bottom Atomic Power Station, ) Units 2 and 3) x ORDER APPROVING APPLICATION REGARDING MERGER AGREEMENT BETWEEN ATLANTIC ENERGY, INC. (PARENT OF ATLANTIC CITY ELECTRIC COMPANY) AND DELMARVA POWER AND LIGHT COMPANY I. Atlantic City Electric Company (ACE) and Delmarva Power and Light Company (DP&L) are co-holders of Facility Operating Licenses Nos. DPR-44 and DPR-56, along with Public Service Electric and Gas Company (PSE&G) and PECO Energy Company, issued by the U.S. Nuclear Regulatory Commission (NRC or Commission) pursuant to Part 50 of Title 10 of the Code of Federal Regulations (10 CFR Part 50) for operation of the Peach Bottom Atomic Power Station, Units 2 and 3 (PBAPS). Under the licenses, PECO Energy Company is authorized to possess, use, and operate the facilities, and ACE, DP&L, and PSE&G are authorized to possess the facilities. PBAPS is located in York County, Pennsylvania. II. By application filed by ACE and DP&L under cover of a letter dated April 30, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, attorney for ACE and DP&L, supplemented by letter dated November 7, 1997, ACE and DP&L requested the Commission's approval, pursuant to 10 CFR 50.80, of the indirect transfer of the licenses, to the extent held by ACE and DP&L, that would result from the consummation of a merger agreement between Atlantic Energy, Inc. (parent of ACE) and DP&L. Under the merger agreement, Atlantic Energy, Inc. and DP&L would form a new holding company, Conectiv, Inc., under which ACE and DP&L would become wholly owned subsidiaries. No direct transfer of the licenses would occur. PSE&G and PECO Energy Company are not involved in the merger. A Notice of Consideration of Approval of Application Regarding Proposed Corporate Restructuring was published in the Federal Register on December 8, 1997 (62 FR 64601), and an Environmental Assessment and Finding of No Significant Impact was published in the Federal Register on December 8, 1997 (62 FR 64601). Under 10 CFR 50.80, no license shall be transferred, directly or indirectly, through transfer of control of the license, unless the Commission gives its consent in writing. Upon review of the information submitted in the letter and application of April 30, 1997, and supplement dated November 7, 1997, the NRC staff has determined that the proposed merger of Atlantic Energy, Inc. and DP&L will not affect the qualifications -2- of ACE and DP&L as holders of the licenses, and that the transfer of control of the licenses for PBAPS, to the extent effected by the proposed merger, is otherwise consistent with applicable provisions of law, regulations, and orders issued by the Commission, subject to the conditions stated herein. These findings are supported by a safety evaluation dated December 18, 1997. III. Accordingly, pursuant to Sections 161b, 161i, 161o, and 184 of the Atomic Energy Act of 1954, as amended, 42 USC ss.ss.2201(b), 2201(i), 2201(o), and 2234, and 10 CFR 50.80, IT IS HEREBY ORDERED that the Commission approves the application regarding the proposed merger of Atlantic Energy, Inc. and DP&L subject to the following conditions: (1) ACE shall provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from ACE to its proposed parent or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book -3- value exceeding 10 percent (10%) of ACE's consolidated net utility plant, as recorded on ACE's books of account; (2) DP&L shall provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from DP&L to its proposed parent or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding 10 percent (10%) of DP&L's consolidated net utility plant, as recorded on DP&L's books of account; and (3) should the merger of Atlantic Energy, Inc. and DP&L, as described herein, not be completed by December 31, 1998, this Order shall become null and void, provided, however, on application and for good cause shown, such date is extended. This Order is effective upon issuance. IV. By January 23, 1998, any person adversely affected by this Order may file a request for a hearing with respect to issuance of the Order. Any person requesting a hearing shall set forth with particularity how that interest is adversely affected by this Order and shall address the criteria set forth in 10 CFR 2.714(d). If a hearing is to be held, the Commission will issue an order designating the time and place of such hearing. The issue to be considered at any such hearing shall be whether this Order should be sustained. Any request for a hearing must be filed with the Secretary of the Commission, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001, Attention: Rulemakings and Adjudications Staff, or may be delivered to the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., Washington, DC by the above date. Copies should be also sent to the Office of the General Counsel and to the Director, Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, -4- Washington, DC 20555-0001, and to John H. O'Neill, Jr., Shaw, Pittman, Potts & Trowbridge, 2300 N Street, NW., Washington, DC, 20037, attorney for ACE and DP&L. For further details with respect to this action, see the application filed by ACE and DP&L under cover of a letter dated April 30, 1997, from John H. 0'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, as supplemented by a letter dated November 7, 1997, and the safety evaluation dated December 18, 1997, which are available for public inspection at the Commission's Public Document Room, The Gelman Building, 2120 L Street, NW., Washington, DC, and at the local public document room in the Government Publications Section, State Library of Pennsylvania, (REGIONAL DEPOSITORY) Education Building, Walnut Street and Commonwealth Avenue, Box 1601, Harrisburg, Pennsylvania. Dated at Rockville, Maryland, this 18th day of December 1997. FOR THE NUCLEAR REGULATORY COMMISSION /s/ Samuel J. Collins Samuel J. Collins, Director Office of Nuclear Reactor Regulation -5- UNITED STATES NUCLEAR REGULATORY COMMISSION WASHINGTON, D.C. 20555-0001 SAFETY EVALUATION BY THE OFFICE OF NUCLEAR REACTOR REGULATION PROPOSED MERGER OF ATLANTIC ENERGY, INC. AND DELMARVA POWER AND LIGHT COMPANY PEACH BOTTOM ATOMIC POWER STATION, UNITS 2 AND 3 DOCKET NOS. 50-277 AND 50-278 1.0 BACKGROUND Under cover of a letter dated April 30, 1997, as supplemented by a letter dated November 7, 1997, from John H. O'Neill, Jr., of Shaw, Pittman, Potts & Trowbridge, Atlantic City Electric Company (ACE) and Delmarva Power & Light Company (DP&L) submitted an application for approval under 10 CFR 50.80, in connection with a proposed merger between Atlantic Energy, Inc. (AEI), which is the parent holding company of ACE, and DP&L. A new holding company will result from this merger named Conectiv, Inc. (Conectiv). Under the merger agreement, all of AEI's subsidiaries (including ACE) and DP&L will become wholly owned subsidiaries of Conectiv, and AEI will cease to exist. Current holders of AEI and DP&L common stock would become holders of Conectiv common stock pursuant to a formula stipulated in the merger agreement. ACE is a 7.51-percent owner of Unit 2 of the Peach Bottom Atomic Power Station (PBAPS), a three-unit facility (with Unit 1 in shutdown status), and DP&L is a 7.51-percent owner of Unit 2. Public Service Electric & Gas Company (PSE&G) owns 42.49 percent of Unit 2, and PECO Energy Company owns the remaining 42.49 percent. Each of these four utilities owns the same respective percentages of Unit 3 of PBAPS. The proposed merger does not involve PSE&G or PECO Energy Company. PECO Energy Company is the licensed operator of PBAPS. The proposed merger will result in the Indirect transfer of control of the interests held by ACE and DP&L in the PBAPS operating licenses to the proposed new holding company, Conectiv. Accordingly, under the provisions of 10 CFR 50.80, Commission approval is required. In the application for approval dated April 30, 1997, the applicants state on page 10: The purpose of the proposed Merger is to achieve benefits for the shareholders, customers and co-unities served by ACE and DP&L that would otherwise not be achievable if they were to remain as separate companies. The expected savings related to the Merger are approximately $500 million over the next ten years (1998 to 2007). The savings will come principally from elimination of duplicative activities, increased scale, improved purchasing power, improved operating efficiencies, lower capital costs and, to the extent practicable, by combining the companies' work forces. 2.0 FINANCIAL AND TECHNICAL QUALIFICATIONS On the basis of information submitted in the application, the staff finds that there will be no near-term substantive change in the financial ability of ACE and DP&L to contribute appropriately to the operations and decommissioning of the PBAPS facility as a result of the proposed merger. Each of ACE and DP&L is, and would remain after the merger, an "electric utility" as defined in 10 CFR 50.2, engaged in the generation and distribution of electricity, the cost of which is recovered through rates established by the New Jersey Board of Public Utilities and the Federal Energy Regulatory Commission, in the case of ACE, and the Delaware Public Service Commission, the Maryland Public Service Commission, the State Corporation Commission of Virginia, and the Federal Energy Regulatory Commission, in the case of DP&L. Thus, pursuant to 10 CFR 50.33(f), ACE and DP&L, as electric utilities, are exempt from further financial qualifications review. However, in view of the NRC's concern that restructuring can lead to a diminution of assets necessary for the safe operation and decommissioning of a licensee's nuclear power plant, the NRC has sought to obtain commitments from its licensees that initiate restructuring actions not to transfer significant assets from the licensee without notifying the NRC. ACE and DP&L have agreed: to provide the Director of the Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of a security interest or liens) from such licensee to its proposed parent, or to any other affiliated company, facilities for the production, transmission, or distribution of electric energy having a depreciated book value exceeding ten percent (10%) of such licensee's consolidated net utility plant, as recorded on the licensee's books of account. See the letter from John H. O'Nelll, Jr., of Shaw, Pittman, Potts & Trowbridge to the NRC dated November 7, 1997. This commitment, incorporated as a condition to the NRC's consent to the indirect license transfers to the extent effected by the proposed merger and restructuring, will assist the NRC in assuring that ACE and DP&L will continue to maintain adequate resources to contribute to the safe operation and decommissioning of the PBAPS facility. With respect to technical qualifications, the proposed merger will not effect any change in the technical qualifications of the -2- licensed operator, PECO Energy Company, and will not effect any change in the responsibilities and obligations of PECO Energy Company or any other licensee as set forth in the licenses. 3.0 ANTITRUST The antitrust provisions of the Atomic Energy Act in Section 105 of the Act require the Commission to conduct an antitrust review in connection with an application for a license to construct or operate a utilization or production facility under Section 105 of the Act. PBAPS Units 2 and 3 were licensed under Section 104b and, as a result, are not subject to an antitrust review by the staff in connection with the application regarding the proposed merger. 4.0 FOREIGN OWNERSHIP The application states that for ACE and DP&L, after the proposed merger, neither ACE nor DP&L will "be owned, controlled or dominated by any alien, foreign corporation or foreign government." Also, it states that neither ACE nor DP&L is "acting as an agent or representative of any other person in this request for consent to the indirect transfer of control of the license." (See pages 6 and 7 of the application dated April 30, 1997.) The staff does not know or have reason to believe that ACE or DP&L will be owned, controlled, or dominated by any alien, foreign corporation, or foreign government as a result of the proposed merger. 5.0 CONCLUSIONS In view of the foregoing, the staff concludes that the proposed merger of AEI and DP&L resulting in the formation of a new holding company, Conectiv, will not adversely affect the financial or technical qualifications of ACE or DP&L with respect to the operation and decommissioning of the PBAPS facility. Also, there do not appear to be any problematic antitrust or foreign ownership considerations related to PBAPS licenses that would result from the proposed merger. Thus, the proposed merger will not affect the qualifications of ACE or DP&L as holders of the licenses, and the transfer of control of the licenses, to the extent effected by the proposed merger, is otherwise consistent with applicable provisions of law, regulations, and orders issued by the Commission. Accordingly, with the condition discussed above relating to significant asset transfers, the NRC should approve the application regarding the proposed merger. Principal Contributor: A. McKeigney Date: December 18, 1997 -3- EX-99.7 8 EXHIBIT F-1.1 James E. Franklin II, Esq. General Counsel Atlantic Energy, Inc. 6801 Black Horse Pike Egg Harbor Township, New Jersey 08234-4130 February 24, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Conectiv, Inc. (File No. 70-9069) Ladies and Gentlemen: As General Counsel for Atlantic Energy, Inc., a New Jersey corporation ("Atlantic"), I have acted as counsel to Atlantic with respect to the matters described in the application and declaration (the "Application") on Form U-1 to the Securities and Exchange Commission (the "Commission") filed by Conectiv, Inc., a Delaware corporation (File No. 70-9069). The Application seeks the Commission's authorization under the Public Utility Holding Company Act of 1935, as amended (the "Act"), for a series of transactions (the "Transactions"). I am furnishing this opinion to you in connection with the Application. The Application seeks approval for the merger of Atlantic with and into Conectiv and the merger of DS Sub, Inc., a Delaware corporation and a subsidiary of Conectiv ("DS Sub"), with and into Delmarva Power and Light Company, a Delaware and Virginia corporation ("Delmarva"). The Application also seeks approval for a number of related corporate actions, including: (i) the acquisition by Conectiv of the gas properties of Delmarva; (ii) the continued operation of Delmarva as a combination gas and electric utility company; (iii)the acquisition by Conectiv of the nonutility activities, businesses and investments of Delmarva and Atlantic; and (iv) the designation of Support Conectiv as a subsidiary service company under the Act. As counsel for Atlantic, I am familiar with the nature and character of the proposed Transactions. I am a member of the bar of the State of New Jersey, the state in which Atlantic is incorporated and in it conducts most of its utility operations. In connection with this opinion, I have examined or caused to be examined the Application and various exhibits thereto, the minutes of various meetings of the Board of Directors of Atlantic, the laws of the State of New Jersey, the certificate of incorporation and bylaws of Atlantic and such other documents as I deem necessary for the purpose of this opinion. In such examination I have assumed the genuineness of all signatures and the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to various questions of fact material to such opinions I have, when relevant facts were not independently established, relied upon certificates of officers of Atlantic and other appropriate persons and statements contained in the Application and the exhibits thereto. I assume that the Board of Directors of Atlantic and the officers and other representatives of Atlantic will take all future corporate action necessary to authorize and implement the Transactions contemplated by the Application. I also assume that the Commission will issue an order under the Act as requested in the Application. The opinions expressed below in respect of the transactions described in the Application are subject to the following further assumptions and conditions: (a) The Transactions shall have been duly authorized and approved, to the extent required by the governing corporate documents and applicable state laws, by the Boards of Directors and shareholders of Conectiv, Delmarva, Atlantic and DS Sub and subsidiaries thereof; (b) All required approvals, authorizations, consents, certificates, and orders of, and all filings and registrations with, all applicable federal and state commissions and regulatory authorities with respect to the Transactions shall have been obtained or made, as the case may be, and shall remain in effect (including the approval and authorization of the Commission under the Act, the Federal Energy Regulatory Commission under the Federal Power Act, as amended, the Nuclear Regulatory Commission under the Atomic Energy Act, as amended, the Public Service Commission of the State of Delaware, the State Corporation Commission of the Commonwealth of Virginia, the Board of Public Utilities of the State of New Jersey,1 the Public Utility Commission of the Commonwealth of Pennsylvania and the Public Service Commission of the State of Maryland under the applicable laws of Delaware, Virginia, New Jersey, Pennsylvania and Maryland), and the Transactions shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations; - -------- 1 I note that the appeal period has not expired with respect to the order issued by the Board of Public Utilities of the State of New Jersey on January 7, 1998 ("the New Jersey Order"). The Motion for Reconsideration and Clarification of Certain Issues does not seek, as an item of relief, the denial of the approval of the merger. No stay has been requested or issued with respect to the New Jersey Order, which remains in full force and effect. (c) The Commission shall have duly entered an appropriate order or orders with respect to the Transactions as described in the Application granting and permitting the Application to become effective under the Act and the rules and regulations thereunder; (d) The Registration Statements with respect to the Shares of Conectiv Common Stock and Conectiv Class A Common Stock to be issued in connection with the Transactions shall have become effective pursuant to the Securities Act of 1933, as amended; no stop order shall have been entered with respect thereto; and the issuance of shares of Conectiv Common Stock and Conectiv Class A Common Stock in connection with the transactions shall have been consummated in compliance with the Securities Act of 1933, as amended and the rules and regulations thereunder; (e) The solicitation of proxies from the stockholders of Delmarva and Atlantic with respect to the transactions shall have been made in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder; (f) The parties shall have obtained all consents, waivers and releases, if any, required for the Transactions under all applicable governing corporate documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits; and (g) No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed above. Based upon the foregoing, I am of the opinion that, in the event that the proposed Transactions are consummated in accordance with the Application: 1. All laws of the State of New Jersey applicable to the proposed Transactions will have been complied with; and 2. Atlantic is validly organized and duly existing. I hereby consent to the use of this opinion as an exhibit to the Application. Very truly yours, /s/ James E. Franklin II James E. Franklin II EX-99.8 9 EXHIBIT F-1.2 Peter F. Clark, Esq. Associate General Counsel Delmarva Power & Light Company 800 King Street Wilmington, Delaware 19899 February 23, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Conectiv, Inc. (File No. 70-9069) Ladies and Gentlemen: As Associate General Counsel for Delmarva Power and Light Company, a Delaware and Virginia corporation ("Delmarva"), I have acted as counsel to Delmarva and Conectiv, Inc., a Delaware corporation ("Conectiv"), with respect to Conectiv's application and declaration (the "Application") on Form U-1 to the Securities and Exchange Commission (the "Commission") in File No. 70-9069. The Application seeks the Commission's authorization under the Public Utility Holding Company Act of 1935, as amended (the "Act"), for a series of transactions (the "Transactions"). I am furnishing this opinion to you in connection with the Application. The Application seeks approval for the merger of Atlantic Energy, Inc. ("Atlantic") with and into Conectiv and the merger of DS Sub, Inc., a Delaware corporation and a subsidiary of Conectiv ("DS Sub"), with and into Delmarva. The Application also seeks approval for a number of related corporate actions, including: (i) the acquisition by Conectiv of the gas properties of Delmarva; (ii) the continued operation of Delmarva as a combination gas and electric utility company; (iii) the acquisition by Conectiv of the nonutility activities, businesses and investments of Delmarva and Atlantic; and (iv) the designation of Conectiv Resource Partners, Inc. (sometimes referred to as "Support Conectiv") as a subsidiary service company under the Act. As counsel for Delmarva and Conectiv, I am familiar with the nature and character of the Transactions. I am a member of the bar of the State of Delaware, a state in which Delmarva, Conectiv and DS Sub are incorporated and in which Delmarva conducts most of its utility operations. I am also a member of the bar of the Commonwealth of Virginia, a state in which Delmarva also is incorporated and conducts utility operations. I am not a member of the bars of the State of Maryland, a state in which Delmarva conducts utility operations, or the Commonwealth of Pennsylvania, a state in which Delmarva owns electric generating and related transmission facilities, and do not hold myself out as an expert in the laws of such states, although I have consulted with counsel to Delmarva who are expert in such laws. For purposes of this opinion, I have relied on advice from counsel employed or retained by Delmarva who are members of the bar of the State of Maryland and the Commonwealth of Pennsylvania. In connection with this opinion, I have examined or caused to be examined, the Application and various exhibits thereto, the minutes of various meetings of the Boards of Directors of Delmarva, Conectiv and DS Sub, the laws of the States of Delaware and Maryland and of the Commonwealths of Virginia and Pennsylvania, the certificates of incorporation and bylaws of Delmarva, Conectiv and DS Sub and such other documents as I deem necessary for the purposes of this opinion. In such examination, I have assumed the genuineness of all signatures and the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to various questions of fact material to such opinions I have, when relevant facts were not independently established, relied upon certificates of officers of Delmarva, Conectiv and DS Sub and other appropriate persons and statements contained in the Application and the exhibits thereto. I assume that the Boards of Directors of Delmarva, Conectiv and DS Sub and the officers and other representatives of Delmarva, Conectiv and DS Sub will take all future corporate actions necessary to authorize and implement the Transactions in accordance with any Commission under issued under the Act. I also assume that the Commission will issue an order under the Act as requested in the Application. The opinions expressed below in respect of the Transactions are subject to the following further assumptions and conditions: (a) The Transactions shall have been duly authorized and approved, to the extent required by the governing corporate documents and applicable state laws, by the Boards of Directors and shareholders of Conectiv, Delmarva, Atlantic and DS Sub and subsidiaries thereof; (b) All required approvals, authorizations, consents, certificates, and orders of, and all filings and registrations with, all applicable federal and state commissions and regulatory authorities with respect to the Transactions shall have been obtained or made, as the case may be, and shall remain in effect (including the approval and authorization of the Commission under the Act, the Federal Energy Regulatory Commission under the Federal Power Act, as amended, the Nuclear Regulatory Commission under the Atomic Energy Act, as amended, the Public Service Commission of the State of Delaware, the State Corporation Commission of the Commonwealth of Virginia, the Board of Public Utilities of the State of New Jersey, the Public Service Commission of the State of Maryland and the Public Utility Commission of the Commonwealth of Pennsylvania under the applicable laws of Delaware, Virginia, New Jersey, Maryland and Pennsylvania), and the Transactions shall have been accomplished in accordance with all such approvals, authorizations, consents, certificates, orders, filings and registrations; (c) The Commission shall have duly entered an appropriate order or orders with respect to the Transactions granting and permitting the Application to become effective under the Act and the rules and regulations thereunder; (d) The Registration Statements with respect to the shares of Conectiv Common Stock and Conectiv Class A Common Stock to be issued in connection with the Transactions shall have become effective pursuant to the Securities Act of 1933, as amended; no stop order shall have been entered with respect thereto; and the issuance of shares of Conectiv Common Stock and Conectiv Class A Common Stock in connection with the Transactions shall have been consummated in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder; (e) The solicitation of proxies from the stockholders of Delmarva and Atlantic with respect to the Transactions shall have been made in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder; (f) The parties shall have obtained all consents, waivers and releases, if any required for the transactions under all applicable governing corporate documents, contracts, agreements, debt instruments, indentures, franchises, licenses and permits; and (g) No act or event other than as described herein shall have occurred subsequent to the date hereof which would change the opinions expressed herein. Based upon the foregoing, I am of the opinion that, in the event that the proposed Transactions are consummated in accordance with the Application: 1. All laws of the States of Delaware and Maryland and of the Commonwealths of Virginia and Pennsylvania applicable to the proposed Transactions will have been complied with; 2. Delmarva, Conectiv and DS Sub are validly organized and duly existing; 3. The shares of Conectiv Common Stock and Conectiv Class A Common Stock to be issued in connection with the Transactions will be validly issued, fully paid and nonassessable, and the holders thereof will be entitled to the rights and privileges appertaining thereto set forth in the Restated Certificate of Incorporation of Conectiv; 4. Conectiv will legally acquire (a) the shares of common stock of Delmarva that it will be acquiring as a result of the merger of DS Sub with and into Delmarva and (b) the shares of common stock of Atlantic that it will be acquiring as a result of the merger of Atlantic with and into Conectiv, and Conectiv has legally acquired the shares of common stock of DS Sub issued to it in connection with the organization of DS Sub; and 5. The consummation of the proposed Transactions will not violate the legal rights of the holders of any securities issued by Conectiv or any associate company of Conectiv. I hereby consent to the use of this opinion as an exhibit to the Application. Very truly yours, /s/ Peter F. Clark Peter F. Clark EX-99.9 10 EXHIBIT J-8 EXHIBIT J-8 DESCRIPTION OF NONUTILITY BUSINESSES Both Delmarva and Atlantic currently engage, through subsidiaries and affiliates, in various nonutility activities related to the systems' core utility businesses. A. Delmarva Delmarva has seven direct nonutility subsidiaries: Delmarva Services Company, Delmarva Energy Company ("DEC"), Conectiv Services, Inc. ("CSI"), Conectiv Communications, Inc., Delmarva Capital Investments, Inc. ("DCI"), Conectiv Solutions LLC ("Solutions") and East Coast Natural Gas Cooperative, L.L.C. ("ECNG"). 1. Delmarva Services Company Delmarva Services Company, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1986 to own and finance an office building that it leases to Delmarva and/or its affiliates.1 Delmarva Services Company also owns approximately 2.9% of the common stock of Chesapeake Utilities Corporation, a publicly-traded gas utility company with gas utility operations in Delaware, Maryland and Florida.2 2. DEC DEC, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1975. It is currently engaged, directly and through its subsidiary, in Rule 58 energy marketing activities. a. Conectiv/CNE Energy Services LLC, a Delaware limited liability company in which DEC holds a 50% interest, was formed in 1997 to engage in Rule 58 energy marketing activities in the New England states.3 - -------- 1 See UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992) (subsidiary that had acquired real estate to support the system's utility operations deemed to be retainable under the standards of Section 11(b)(1)). 2 As noted previously, Conectiv has requested that the Commission reserve jurisdiction over the Chesapeake stock for a period of three years from the date of this order to permit Conectiv to effect an orderly disposition of the Chesapeake stock. 3 See Rule 58(b)(1)(v) (subject to certain conditions, no Commission approval is required for a registered holding company to acquire the securities of a company that derives substantially all of its revenues from "the brokering and marketing of energy commodities, including but not limited to electricity or natural or manufactured gas or other combustible fuels"). See also New Century Energies, Inc., Holding Co. Act Release No. 26784 (Aug. 1, 1997); SEI Holdings, Inc., Holding Co. Act Release No. 26581 (Sept 26, 1996); Northeast Utilities, Holding Co. Act Release No. 26654 (Aug. 13, 1996); UNITIL Corp., Holding Co. Act Release No. 26257 (May 31, 1996); New England Electric System, Holding Co. Act Release No. 26520 (May 23, 1996); and Eastern Utilities Associates, Holding Co. Act Release No. 26493 (March 14, 1996). Page 2 3. CSI, directly and through subsidiaries, provides a wide range of energy-related goods and services to industrial, commercial and residential customers. Many of these services are "energy-related" within the meaning of Rule 58. The remainder have previously been found to be "functionally related" and so retainable under Section 11(b)(1). CSI is engaged in the design, construction and installation, and maintenance of new and retrofit heating, ventilating, and air conditioning ("HVAC"), electrical and power systems, motors, pumps, lighting, water and plumbing systems, and related structures as approved by the Commission.4 a. Power Consulting Group, Inc., a Delaware corporation, was formed in 1997 to provide electrical engineering, testing and maintenance services to large commercial and industrial customers.5 b. Conectiv Plumbing, L.L.C., a Delaware limited liability company owned 90% by CSI, provides plumbing services primarily in connection with the CSI HVAC business. Conectiv Plumbing, L.L.C. was formed in 1998 in connection with the acquisition of an HVAC company. Under New Jersey law, an individual with a New Jersey master plumbing license must hold at least a 10% equity interest in a company providing plumbing services in New Jersey. To meet this requirement, the bulk of the acquired company's HVAC business was retained within CSI but the related and incidental plumbing services were spun down to a new subsidiary, Conectiv Plumbing, L.L.C., that is 10% owned by a master plumber. - -------- 4 See Cinergy Corp., Holding Co. Act Release No. 26662 (Feb. 7, 1997) ("Cinergy Solutions Order"). 5 Subject to certain conditions, Rule 53(b)(1)(ii) exempts the acquisition of the securities of a company that derives substantially all of its revenues from "[t]he development and commercialization of electrotechnologies related to energy conservation, storage and conversion, energy efficiency, waste treatment, greenhouse gas reduction, and similar innovations." See also Allegheny Power System, Inc., Holding Co. Act Release No. 26085 (July 14, 1994) (investments in technologies related to power conservation and storage, conservation and load management, environmental and waste treatment, and power-related electronic systems and components). Page 3 4. Conectiv Communications, Inc., a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1996 to provide a full-range of retail and wholesale telecommunications services.6 5. DCI, a Delaware corporation and a direct subsidiary of Delmarva, was formed in 1985 to be a holding company for a variety of unregulated investments. In addition DCI acts as a vehicle for the development and sale of properties that are not currently used or useful in the utility business.7 - -------- 6 Section 34 of the Act provides an exemption from the requirement of prior Commission approval for the acquisition and retention by a registered holding company of interests in companies engaged in a broad range of telecommunications activities and businesses. Section 34 permits ownership of interests in telecommunications companies engaged exclusively in the business of providing telecommunications service upon application to the Federal Communications Commission for a determination of "exempt telecommunications company" status. Conectiv Communications, Inc. is an exempt telecommunications company under Section 34 of the Act. 7 DCI is managing real estate that was acquired for an intended utility purpose which has ceased to exist, or in order for the utility to obtain the necessary rights of way for transmission lines and other utility operations. Unlike many other states, Delaware does not provide a right of condemnation for a franchised electric utility. Rather, the utility is often forced to acquire the underlying fee simple for a larger parcel in order to obtain an easement or right of way. The development and sale of these properties is a means of recovering the costs associated with their acquisition. Such interests are retainable either under Section 11(b)(1) or pursuant to Section 9(c)(3) "in the ordinary course of business" of a registered system. Page 4 a. DCI I, Inc., a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1985 to be involved in passive equity investments in leveraged leases.8 b. DCI II, Inc., a Virgin Islands corporation and a wholly-owned foreign sales subsidiary of DCI formed in 1985 to be involved in passive equity investments in leveraged leases.9 c. DCTC-Burney, Inc., a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1987 to invest in qualifying facilities.10 i. Forest Products, L.P., a Delaware limited partnership, in which DCTC-Burney, Inc. is the sole 1% general partner, and which is a general partner in Burney Forest Products, A Joint Venture. ii. Burney Forest Products, A Joint Venture, a California general partnership which is owned by DCTC-Burney, Inc. and Forest Products, L.P. The partnership owns a wood-burning qualifying facility in Burney, CA. DCTC-Burney, Inc.'s total direct and indirect ownership interest is 45%. d. Luz Solar Partners, Ltd. IV, a California limited partnership which owns a solar-powered generating station in Southern California in which DCI owns a 4.7% limited partnership interest.11 e. UAH-Hydro Kennebec, L.P., a New York limited partnership which owns a hydro-electric project in which DCI owns a 27.5% limited partnership interest.12 - -------- 8 See Central and South West Corporation, Holding Co. Act Release No. 23578 (Jan. 22, 1985) (approving leveraged lease investments by a registered holding company). 9 Id. 10 Subject to certain conditions, Rule 58(b)(1)(viii) exempts the acquisition of the securities of a company that is primarily engaged in "the development, ownership or operation of 'qualifying facilities'..., and any integrated thermal, steam host, or other necessary facility constructed, developed or acquired primarily to enable the qualifying facility to satisfy the useful thermal output requirements under PURPA." See also New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997); Entergy Corp., Holding Co. Act Release No. 26322 (June 30, 1995); Southern Co., Holding Co. Act Release No. 26212 (Dec. 30, 1994); Central and South West Corp., Holding Co. Act Release No. 26156 (Nov. 3, 1994); Central and South West Corp., Holding Co. Act Release No. 26155 (Nov. 2, 1994); and Northeast Utilities, Holding Co. Act Release No. 25977 (Jan. 24, 1994). 11 Id. 12 Id. Page 5 f. Christiana Capital Management, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1987, which owns an office building leased to affiliates.13 g. Delmarva Operating Services Company, a Delaware corporation and a wholly-owned subsidiary of DCI formed in 1987, operates and maintains the following qualifying facilities under contracts with the plants' owners: the Delaware City Power Plant in Delaware City, DE; a qualifying facility in Burney, CA; and a qualifying facility in Sacramento, California, owned by the Sacramento Power Authority under a subcontract with Siemens Power Corporation.14 6. Solutions, a Delaware limited liability company that is jointly owned by Delmarva and Atlantic, was formed in 1997 to provide, directly or through subsidiaries, power systems consulting, end-use efficiency services, customized on-site systems services and other energy services to large commercial and industrial customers.15 Solutions, directly or through subsidiaries, provides Energy Management Services, often on a turnkey basis, which may involve the marketing, sale, installation, operation and maintenance of various products and services related to the business of energy management and demand-side management. Energy Management Services may include energy audits; facility design and process enhancements; construction, maintenance and installation of, and training client personnel to operate energy conservation equipment; design, implementation, monitoring and evaluation of energy conservation programs; development and review of architectural, structural and engineering drawings for energy efficiencies; design and specification of energy consuming equipment; and general advice on programs.16 Solutions also provides conditioned power services, that is, services designed to prevent, control, or mitigate adverse effects of power disturbances on a customer's electrical system to ensure the level of power quality required by the customer, particularly with respect to sensitive electronic equipment, again as approved by the Commission.17 - -------- 13 See Unitil Corp., Holding Co. Act Release No. 25524 (April 24, 1992). 14 See supra note 9. 15 Upon consummation of the proposed transactions, Solutions will become a wholly-owned subsidiary of Conectiv. 16 Subject to certain conditions, Rule 58(b)(1)(i) exempts the acquisition of the securities of a company that derives substantially all of its revenues from "[t]he rendering of energy management services and demand-side management services." See also Eastern Utilities Associates, Holding Co. Act Release No. 26232 (Feb. 15, 1995); Northeast Utilities, Holding Co. Act Release No. 25114-A (July 27, 1990) and New England Electric System, Holding Co. Act Release No. 22719 (Nov. 19, 1982). 17 See supra note 4. Page 6 Solutions also markets comprehensive Asset Management Services, on a turnkey basis or otherwise, in respect of energy-related systems, facilities and equipment, including distribution systems and substations, transmission facilities, electric generation facilities (stand-by generators and self-generation facilities), boilers, chillers (refrigeration and coolant equipment), HVAC and lighting systems, located on or adjacent to the premises of a commercial or industrial customer and used by that customer in connection with its business activities, as previously permitted by the Commission.18 Solutions also provides such services to qualifying and non-qualifying cogeneration and small power production facilities under the Public Utility Regulatory Policies Act of 1978 ("PURPA").19 Solutions provides Consulting Services to associate and nonassociate companies. The Consulting Services may include technical and consulting services involving technology assessments, power factor correction and harmonics mitigation analysis, meter reading and repair, rate schedule design and analysis, environmental services, engineering services, billing services, risk management services, communications systems, information systems/data processing, system planning, strategic planning, finance, feasibility studies, and other similar or related services.20 Solutions also offers marketing services to nonassociate businesses in the form of bill insert and automated meter-reading services, as well as other consulting services, such as how to set up a marketing program.21 - -------- 18 Id. 19 See Rule 58(b)(1)(viii) (an energy-related company can engage in the development, ownership or operation of "qualifying facilities," as defined under PURPA, and any integrated thermal, steam host, or other necessary facility constructed, developed or acquired primarily to enable the qualifying facility to satisfy the useful thermal output requirements of PURPA). Solutions will not undertake any Asset Management Service without further Commission approval if, as a result thereof, Solutions would become a public utility company within the meaning of the Act. 20 See the Cinergy Solutions Order; see also Rule 58(b)(1)(vii) (relating to the sale of technical, operational, management, and other similar kinds of services and expertise, developed in the course of utility operations). 21 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26757 (Aug. 27, 1997) (the "1997 CNG Order"). Page 7 Solutions provides service line repair and extended warranties with respect to all of the utility or energy-related service lines that enter a customer's house, as well as utility bill insurance and other similar or related services.22 Solutions may also provide centralized bill payment centers for "one stop" payment of all utility and municipal bills, and annual inspection, maintenance and replacement of any appliance.23 Solutions also is engaged in the marketing and brokering of energy commodities, including retail marketing activities.24 Solutions also provides Other Goods and Services, from time to time, related to the consumption of energy and the maintenance of property by those end-users, where the need for the service arises as a result of, or evolves out of, the above services and the incidental services do not differ materially from the enumerated services.25 In connection with its activities, Solutions from time to time may form new subsidiaries to engage in the above activities, or acquire the securities or assets of nonassociate companies that derive substantially all of their revenues from the above activities. Provision of the above goods and services, which are closely related to the system's core energy business, is intended to further Conectiv's goal of becoming a full-service energy provider. - -------- 22 See the Cinergy Solutions Order. 23 See Consolidated Natural Gas Co., Holding Co. Act Release No. 26363 (Aug. 28, 1995). 24 See supra note 3. 25 See the 1997 CNG Order. Page 8 7. ECNG, a Delaware limited liability company in which Delmarva holds a 1/7th interest, is engaged in gas-related activities. Delmarva participates in ECNG to do bulk purchasing of gas in order to improve the efficiency of its natural gas local distribution operations.26 Delmarva also has a nonutility subsidiary trust, Delmarva Power Financing I ("DPF I"), which was formed in 1996 in connection with the issuance by Delmarva of Cumulative Quarterly Income Preferred Securities. B. Atlantic Atlantic has three direct nonutility subsidiaries, Atlantic Energy International, Inc. ("AEII"), Atlantic Energy Enterprises, Inc. ("AEE"), and Solutions.27 1. AEII, a Delaware corporation, is a direct subsidiary of Atlantic formed in 1996 to broker used utility equipment to developing countries and to provide utility consulting services related to the design of sub-stations and other utility infrastructure. This subsidiary is winding down its business and will be dissolved or merged out of existence by June 30, 1998. 2. AEE, a New Jersey corporation, is a direct subsidiary of Atlantic formed in 1995 to be a holding company for Atlantic's non-regulated subsidiaries. Through its 6 wholly-owned subsidiaries, and 50% equity interest in Enerval, LLC, a natural gas marketing venture, AEE has pursued growth opportunities in energy-related fields, that will complement Atlantic's existing businesses and customer relationships. - -------- 26 Conectiv will hold an indirect ownership interest in ECNG, which is engaged in gas-related activities. Delmarva participated in the formation of ECNG in order to improve the efficiency of its natural gas local distribution operations. ECNG members provide emergency backup natural gas supplies to other members and jointly undertake the bulk purchase and storage of natural gas for use in their local distribution business. Because these activities are functionally related to the operations of the gas utility business of Delmarva, ECNG is retainable by Conectiv under Section 11(b)(1). Further, upon Commission approval of the Mergers, ECNG will be exempt from all obligations, duties or liabilities imposed upon it by the Act as a subsidiary company or as an affiliate of a registered holding company or of a subsidiary company thereof. See Rule 16 under the Act. 27 ACE has a very small home security business, with annual revenues of less than $10,000, that is located exclusively in its service territory. The business, which has developed from utility operations, incurs very little cost at this point. Accordingly, Conectiv seeks to retain this business under Section 11(b)(1). Although it is currently within ACE, it may be moved to a separate subsidiary of Conectiv. Any such subsidiary will apply for exempt telecommunications company status under Section 34. Page 9 a. ATE, a New Jersey corporation and a wholly-owned subsidiary of AEE formed in 1986, holds and manages capital resources for AEE. ATE's primary investments are equity investments in leveraged leases of three commercial aircraft and two container ships.28 ATE owns a 94% limited partnership interest in EnerTech Capital Partners L.P., a limited partnership that will invest in and support a variety of energy technology growth companies.29 b. AGI, a New Jersey corporation and a wholly-owned subsidiary of AEE formed in 1986. AGI develops, owns and operates independent power production projects.30 i. Pedrick Ltd., Inc., a New Jersey corporation and a wholly-owned subsidiary of AGI, formed in 1989 to hold a 35% limited partnership interest in Pedricktown Cogeneration Limited Partnership. ii. Pedrick Gen., Inc., a New Jersey corporation and a wholly-owned subsidiary of AGI, formed in 1989 to hold a 15% general partnership interest in Pedricktown Cogeneration Limited Partnership. iii. Vineland Limited, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 45% limited partnership interest in Vineland Cogeneration Limited Partnership. iv. Vineland General, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 5% general partnership interest in Vineland Cogeneration Limited Partnership. - -------- 28 See Central and South West Corporation, Holding Co. Act Release No. 23588 (Jan. 22, 1985). 29 Activities involving "the development and commercialization of electrotechnologies related to energy conservation, storage and conversion, energy efficiency, waste treatment, greenhouse gas reduction, and similar innovations" are energy-related activities within the meaning of Rule 58(b)(1)(ii). See also New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997). 30 See supra note 9. Page 10 v. Binghamton General, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 10% general partnership interest in Binghamton Cogeneration Limited Partnership, whose assets have been sold to a third party. vi. Binghamton Limited, Inc., a Delaware corporation and a wholly-owned subsidiary of AGI, formed in 1990 to hold a 35% limited partnership interest in Binghamton Cogeneration Limited Partnership, whose assets have been sold to a third party. c. ATS, a Delaware corporation and a wholly-owned subsidiary of AEE, formed in 1994. ATS and its subsidiaries develop, own and operate thermal heating and cooling systems. ATS also provides other energy-related services to business and institutional energy users. ATS has made investments in capital expenditures related to district heating and cooling systems to serve the business and casino district in Atlantic City, NJ. ATS is also pursuing the development of thermal projects in other regions of the U.S.31 i. Atlantic Jersey Thermal Systems, Inc., a Delaware corporation and wholly-owned subsidiary formed in 1994, that owns a 10% general partnership interest in TELPI (as defined below). ii. ATS Operating Services, Inc., a Delaware corporation and a wholly-owned subsidiary formed in 1995 that provides thermal energy operating services. iii. Thermal Energy Limited Partnership I ("TELPI"), a Delaware limited partnership wholly-owned by Atlantic Thermal and Atlantic Jersey Thermal Systems, that holds an investment in the Midtown Energy Center. The Midtown Energy Center, which produces steam and chilled water, represents the initial principal operations of ATS. Currently, TELPI is operating the heating and cooling equipment of several businesses in Atlantic City, NJ. Some of these businesses will be served by the ATS district system once it is in commercial operation and others will continue to be served independently by ATS. - -------- 31 Subject to certain conditions, Rule 58(b)(1)(vi) exempts the acquisition of the securities of a company that derives substantially all of its revenues from "the production, conversion, sale and distribution of thermal energy products, such as process steam, heat, hot water, chilled water, air conditioning, compressed air and similar products; alternative fuels; and renewable energy resources; and the servicing of thermal energy facilities." See also New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997); Cinergy Corp., Holding Co. Act Release No. 26474 (Feb. 20, 1996). Page 11 iv. Atlantic Paxton Cogeneration, Inc., a wholly-owned subsidiary that is currently inactive and expected to be dissolved sometime in 1998. v. Atlantic-Pacific Glendale, LLC, a Delaware limited liability company in which ATS holds a 50% interest, was formed in 1997 to construct, own and operate an integrated energy facility to provide heating, cooling and other energy services to DreamWorks Animation, LLC in Glendale, California. vi. Atlantic-Pacific Las Vegas, LLC, a Delaware limited liability company in which ATS holds a 50% interest, was formed in 1997 to finance, own and operate an integrated energy plant to provide heating and cooling services to three affiliated customers in Las Vegas, Nevada. d. CCI, a Delaware corporation and a wholly-owned subsidiary of AEE formed in 1995 to pursue investments and business opportunities in the telecommunications industry.32 e. ASP, a New Jersey corporation and a wholly-owned subsidiary of AEE formed in 1970 that owns and manages certain investments in real estate, including a 280,000 square-foot commercial office and warehouse facility in southern New Jersey. Approximately fifty percent of the space in this facility is currently leased to system companies and fifty percent is leased to nonaffiliates.33 f. AET, a Delaware corporation and a wholly-owned subsidiary of AEE formed in 1991. AET is currently winding up its sole investment in technology, The Earth Exchange, Inc., which is nominal. There are no future plans for investment activity at this time by AET. g. Enerval, a Delaware limited liability company. In 1995, AEE and Cenerprise, Inc., a subsidiary of Northern States Power established Enerval, formerly known as Atlantic CNRG Services, LLC. AEE and Cenerprise each own 50 percent of Enerval. Enerval provides energy management services, including natural gas procurement, transportation and marketing. Discussions are underway for the purchase by AEE of Cenerprise's interest.34 - -------- 32 It is contemplated that CCI will be merged with and into Conectiv Communications, Inc. See supra note 5. 33 See Central Power and Light Co., Holding Co. Act Release No. 26408 (Nov. 13, 1995). Page 12 3. Solutions, a Delaware limited liability company that is jointly owned by Delmarva and Atlantic, was formed in 1997 to provide, directly or through subsidiaries, power systems consulting, end use efficiency services, customized on-site systems services and other energy services to large commercial and industrial customers.35 ACE also has a nonutility subsidiary trust, Atlantic Capital I ("ACI"), which was formed in 1996 in connection with the issuance by ACE of Cumulative Quarterly Income Preferred Securities. - -------- 34 See supra note 15. 35 Upon consummation of the proposed transactions, Solutions will become a wholly-owned subsidiary of Conectiv. EX-99.10 11 EXHIBIT FS-8 Atlantic Energy, Inc. Consolidating Balance Sheet December 31, 1997
Consolidating Entries Atlantic Energy, (Debit) Credit Inc. Consolidated ----------------- ----------------- ASSETS: ELECTRIC UTILITY PLANT: IN SERVICE $ 0.00 $ 2,585,286,586.09 LESS ACCUMULATED DEPRECIATION 0.00 934,234,723.71 ----------------- ----------------- NET 0.00 1,651,051,862.38 CONSTRUCTION WORK IN PROGRESS 0.00 95,119,632.88 LAND HELD FOR FUTURE USE 0.00 5,603,813.62 LEASED PROPERTY-NET 0.00 39,729,612.16 ----------------- ----------------- ELECTRIC UTILITY PLANT-NET 0.00 1,791,504,921.04 ----------------- ----------------- INVESTMENTS AND NON-UTILITY PROPERTY INVESTMENT IN LEVERAGED LEASES 0.00 80,448,493.02 DECOMMISSIONING TRUST FUND 0.00 81,649,976.46 NON-UTILITY PROPERTY 0.00 110,963,018.95 LESS ACCUMULATED DEPRECIATION 0.00 5,607,390.07 ----------------- ----------------- NON-UTILITY PROPERTY-NET 0.00 105,355,628.88 INVESTMENT IN SUBSIDIARY CO. (830,679,927.33) 0.00 POLLUTION CONTROL CONSTRUCTION FUNDS 0.00 2,188.62 OTHER INVESTMENTS 0.00 53,856,740.14 ----------------- ----------------- TOTAL INVESTMENTS AND NON-UTILITY PROPERTY (830,679,927.33) 321,313,027.12 ----------------- ----------------- CURRENT ASSETS: CASH & TEMPORARY INVESTMENTS 0.00 17,224,113.27 ACCOUNTS RECEIVABLE-UTILITY 0.00 64,510,691.57 MISCELLANEOUS RECEIVABLES 0.48 42,034,084.66 ALLOWANCE FOR DOUBTFUL ACCOUNTS 0.00 (3,500,000.00) UNBILLED REVENUES 0.00 36,915,000.00 FUEL (AT AVERAGE COST) 0.00 29,241,676.90 MATERIALS & SUPPLIES (AT AVG COST) 0.00 20,892,936.86 WORKING FUNDS 0.00 15,126,393.07 DEFERRED ENERGY COSTS 0.00 27,424,212.19 DEFERRED INCOME TAXES 0.00 0.00 NOTES RECEIVABLE 0.00 1,654,912.00 ADVANCES-ASSOC CO. 0.00 0.00 DIVIDENDS RECEIVABLE-SUBSIDIARIES (20,214,224.41) 0.00 ACCTS RECEIVABLE-ASSOC.CO. (12,411,040.47) 0.00 PREPAYMENTS 0.00 `12,693,290.04 PREPAID STATE EXCISE TAXES 0.00 3,804,488.47 ----------------- ----------------- TOTAL CURRENT ASSETS (32,625,264.40) 268,021,799.03 ----------------- ----------------- DEFERRED DEBITS: UNRECOVERED PURCHASED POWER COSTS 0.00 66,263,759.87 RECOVERABLE FEDERAL INCOME TAXES 0.00 85,858,065.73 UNRECOVERED STATE EXCISE TAXES 0.00 45,153,706.76 UNAMORTIZED LOSS ON REACQUIRED DEBT 0.00 30,001,858.31 UNAMORTIZED DEBT COSTS 0.00 14,945,310.47 OTHER REGULATORY ASSETS 0.00 56,401,417.90 PROPERTY ABANDONMENT COSTS 0.00 5,712,304.23 PRELIMINARY SURVEY & INVESTIGATION 0.00 1,085,244.83 DEFERRED INCOME TAXES 0.00 456,801.76 LICENSE FEES 0.00 26,080,937.51 MISCELLANEOUS DEFERRED DEBITS 0.00 11,085,034.89 ----------------- ----------------- TOTAL DEFERRED DEBITS 0.00 343,044,442.26 TOTAL ASSETS $ (863,305,191.73) $ 2,723,884,189.45 ================= =================
Atlantic Energy, Inc. Consolidating Balance Sheet December 31, 1997 December 31, 1997
Consolidating Entries Atlantic Energy, (Debit) Credit Inc. Consolidated ----------------- ----------------- LIABILITIES & CAPITALIZATION CAPITALIZATION: COMMON SHAREHOLDERS' EQUITY: COMMON STOCK $ (103,724,804.62) $ 563,460,382.06 PREMIUM ON CAPITAL STOCK (231,080,921.36) 0.00 MISC. PAID IN CAPITAL (263,617,447.42) 0.00 CONTRIBUTED CAPITAL (13,448,650.74) 0.00 CAPITAL STOCK EXPENSE 1,537,021.23 0.00 RETAINED EARNINGS (220,345,124.44) 221,622,789.57 UNEARNED COMPENSATION 0.00 0.00 ---------------- ----------------- TOTAL COMMON S/H EQUITY (830,679,927.35) 785,083,171.63 ---------------- ----------------- PREFERRED SECURITIES: CUM P/S NOT SUBJ TO MAND REDEMPTION 0.00 30,000,000.00 CUM P/S SUBJ TO MAND REDEMPTION 0.00 23,950,000.00 QUARTERLY INCOME PREFERRED SECURITIES 0.00 70,000,000.00 LONG TERM DEBT 0.00 889,743,671.11 ---------------- ---------------- TOTAL CAPITALIZATION (830,679,927.35) 1,798,776,842.74 ---------------- ---------------- CURRENT LIABILITIES: CURRENT PORTION: CUM P/S SUBJ TO MAND REDEMPTION 0.00 0.00 LONG TERM DEBT 0.00 147,566,370.65 SHORT TERM DEBT 0.00 55,675,000.00 COMMERCIAL PAPER 0.00 0.00 ACCOUNTS PAYABLE 0.00 65,368,838.72 TAXES ACCRUED 0.00 6,048,854.00 INTEREST ACCRUED 0.00 20,116,187.32 DIVIDENDS DECLARED (20,214,224.41) 21,215,079.44 EMPLOYEE SEPARATION COSTS 0.00 751.59 OBLIGATIONS UNDER CAPITAL LEASES 0.00 653,109.33 NOTES PAYABLE-ASSOCIATED CO. 0.00 0.00 ACCOUNTS PAYABLE-ASSOCIATED CO. (12,411,039.97) 0.00 ADVANCES ASSOC. CO. 0.00 0.00 CUSTOMER DEPOSITS 0.00 7,730,251.34 DEFERRED TAXES 0.00 1,888,339.48 MISC ACCRUED LIABILITIES 0.00 16,263,699.46 ---------------- ---------------- TOTAL CURRENT LIABILITIES (32,625,264.38) 342,526,481.33 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIAB: DEFERRED INCOME TAXES 0.00 439,266,982.47 DEFERRED INVESTMENT TAX CREDITS 0.00 44,043,109.77 OBLIGATIONS UNDER CAPITAL LEASE 0.00 39,076,503.33 CUSTOMER ADVANCES FOR CONSTRUCTION 0.00 1,146,377.62 OTHER DEFERRED CREDITS 0.00 55,124,292.15 OPERATING RESERVES 0.00 3,923,600.04 ---------------- ---------------- TOTAL DEFD CREDITS & OTHER LIAB 0.00 582,580,865.38 ---------------- ---------------- TOTAL LIABILITIES & CAPITAL $ (863,305,191.73) $ 2,723,884,189.45 ================ ================
EX-99.11 12 EXHIBIT FS-9 Atlantic Energy, Inc. Consolidating Income Statement For the Year to Date December 31, 1997
Consolidating Atlantic Entries Energy, Inc. (Debit) Credit Consolidated Rounded Operating Revenues: Electric Revenues $ (6,547,811.81) $ 989,941,360.69 $ 989,941 Other Revenues (24,037,688.26) 0.00 0 ------------------ ----------------- --------------- Total Operating Revenues (30,585,500.07) 989,941,360.69 989,941 ------------------ ----------------- --------------- Operating Expenses: Net Energy 0.00 222,671,569.62 222,672 Purchased Power 0.00 197,386,367.72 197,386 Operations 23,623,939.29 163,246,683.41 163,247 Maintenance 284,797.16 32,603,657.36 32,604 Depreciation & Amortization 673,715.99 83,276,335.85 83,276 State Excise Taxes 0.00 103,990,923.19 103,991 State Income Taxes 178,518.16 0.00 0 Federal Income Taxes (621,948.09) 43,801,652.86 43,801 Other Taxes 323,199.01 7,292,760.56 7,293 ----------------- ----------------- --------------- Total Operating Expenses: 24,462,221.52 854,269,950.57 854,270 ----------------- ----------------- --------------- Total Operating Income (55,047,721.59) 135,671,410.12 135,671 Other income: Nonutility Revenues & Gains 24,840,136.22 24,840,136.22 24,840 Nonutility Expenses, including interest & income taxes (24,029,048.08) (24,029,048.08) (24,029) ------------------ ------------------ ---------------- Net Earnings from Nonutility Companies 811,088.14 811,088.14 811 Net Earnings from Subsidiary Companies (83,329,164.81) 0.00 0 Net Earnings from Joint Venture (803,619.00) (803) Net Earnings from Investees *1,866,400.45 0.00 0 AFDC - Equity Funds 0.00 815,420.56 815 Other income (2,707,807.16) 12,004,675.98 12,005 Other (Expense) 35,177.99 0.00 0 ----------------- ----------------- --------------- Total Other Income (83,324,305.39) 12,827,565.66 12,828 ------------------ ----------------- --------------- Income before Utility Interest Charges & Preferred Dividends (138,372,026.98) 148,498,975.80 148,499 ------------------ ----------------- --------------- Utility Interest Charges: Interest on Long Term Debt 2,719,706.66 59,597,319.59 59,597 Interest on Short Term Debt 3,075,516.67 4,430,403.98 4,430 Other Interest Expense 323,195.80 473,194.75 473 ----------------- ----------------- --------------- Total Interest Charges 6,118,419.13 64,500,918.32 64,501 AFDC - Borrowed Funds 0.00 1,002,685.41 1,003 ----------------- ----------------- --------------- Net Interest Charges 6,118,419.13 63,498.232.91 63,498 Preferred Dividends of Subsidiary 5,775,000.00 0.00 0 ----------------- ----------------- --------------- Income Before Preferred Dividends of Subsidiary (150,265,446.11) 85,000,742.89 85,001 ------------------ ----------------- --------------- Preferred Dividends of Subsidiary (5,775,000.00) 10,595,650.00 10,596 Net Income (Loss) (144,490,446.11) 74,405,092.89 74,405 ------------------ ----------------- --------------- Preferred Dividend Requirements 4,820,650.00 0.00 0 ----------------- ----------------- --------------- Income Available for Common Stock $ (149,311,096.11) 74,405,092.89 $ 74,405 ================= ================= =============== Earnings Per Share $ 1.4184 ================ Retained Earnings, Beginning of Period $ 222,800,889.93 $ 227,629,668.69 Net Income (Loss) 83,329,164.81 74,405,092.89 Dividends - Common Stock (80,856,127.64) (80,856,127.64) Dividends - Preferred Stock (4,820,650.00) 0.00 Preferred Stock Expense (108,152.68) 0.00 Other Charges 0.02 444,115.63 ----------------- ---------------- Retained Earnings, End of Period $ 220,345,124.44 $ 221,622,789.57 ================ ================ Average Shares (Diluted) Consolidated Earnings Per Share - Reported $ 1.42 * Includes 1996 Enerval Audit Adjustment ($2,537,868.50)
EX-99.12 13 EXHIBIT FS-10 DELMARVA POWER AND LIGHT COMPANY CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997 ($ in Thousands) Eliminations Consolidated ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 35,339 Accounts receivable $ (13,145) 197,561 Inventories, at average cost: Fuel(coal, oil, and gas) 37,425 Materials and supplies 40,518 Prepayments (4,286) 11,255 Deferred energy costs 18,017 Deferred income taxes, net (448) 776 -------------- ------------ (17,879) 340,891 -------------- ------------ NONUTILITY PROPERTY AND INVESTMENTS Nonutility property, net 93,528 Investment in leveraged leases 46,375 Funds held by trustee 38,642 Other investments (184,707) 9,500 -------------- ------------ (184,707) 188,045 -------------- ------------ UTILITY PLANT, AT ORIGINAL COST Electric 3,083,910 Gas 241,580 Common 154,826 ------------- ------------ 0 3,480,316 Less: Accumulated depreciation 1,364,232 ------------- ------------ Net utility plant in service 2,116,084 Construction work- in-progress 93,017 Leased nuclear fuel, at amortized cost 31,031 ------------- ------------ 0 2,240,132 ------------- ------------ DEFERRED CHARGES AND OTHER ASSETS Prepaid employee benefit costs 58,111 Unamortized debt expense 12,911 Deferred debt refinancing costs 18,760 Deferred recoverable income taxes 88,683 Other 67,948 ------------- ------------ 0 246,413 ------------- ------------ TOTAL ASSETS $ (202,586) $ 3,015,481 ============== ============ CAPITALIZATION AND LIABILITIES CURRENT LIABILITIES Short-term debt $ 23,254 Long-term debt due within one year 33,318 Variable rate demand bonds 71,500 Accounts payable ($12,991) 103,607 Taxes accrued (4,286) 10,723 Interest accrued 19,902 Dividends declared (154) 23,775 Current capital lease obligation 12,516 Deferred income taxes, net 0 Other 35,819 ------------- ------------ (17,431) 334,414 -------------- ------------ DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes, net (448) 492,792 Deferred investment tax credits 39,942 Long-term capital lease obligation 19,877 Other 30,585 ------------- ------------ (448) 583,196 -------------- ------------ CAPITALIZATION Common stock, $2.25 par value; 90,000,000 shares authorized; shares outstanding: 1997--61,210,262, 1996--60,682,719 (2,179) 139,116 -------------- ------------ Additional paid-in capital (108,349) 526,812 Retained earnings 5,143 300,757 ------------- ------------ (105,385) 966,685 Treasury shares, at cost: 1997-616,788 shares, 1996--101,831 shares (7,157) (11,687) Unearned compensation (502) ------------- ------------- Total common stock- holders' equity (112,542) 954,496 Cumulative preferred stock 89,703 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures 70,000 Long-term debt (72,165) 983,672 -------------- ------------ (184,707) 2,097,871 -------------- ------------ TOTAL CAPITALIZATION AND LIABILITIES $ (202,586) $ 3,015,481 ============== ============ EX-99.13 14 EXHIBIT FS-11 DELMARVA POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1997 (Dollars in Thousands) Eliminations Consolidated - ---------------------- ------------ ------------ OPERATING REVENUES Electric $ 1,092,144 Gas 204,057 Other services $ (2,730) 127,301 -------------- ------------- (2,730) 1,423,502 -------------- ------------- OPERATING EXPENSES Electric fuel and purchased power 416,640 Gas purchased 153,027 Other services' cost of sales 85,192 Purchased electric capacity 28,470 Operation and maintenance (2,730) 331,770 Depreciation 136,340 Taxes other than income taxes 37,634 -------------- ------------- (2,730) 1,189,073 -------------- ------------- OPERATING INCOME - 234,429 -------------- ------------- OTHER INCOME Allowance for equity funds used during construction 1,337 Equity in earnings of consolidated subsidiaries (10,103) 0 Other income (6,171) 28,187 -------------- ------------- (16,274) 29,524 -------------- ------------- INTEREST EXPENSE Interest charges (5,863) 83,398 Allowance for borrowed funds used during construction and capitalized interest (2,996) -------------- ------------- (5,863) 80,402 -------------- ------------- DIVIDENDS ON PREFERRED SECURITIES OF A SUBSIDIARY TRUST - 5,687 -------------- ------------- INCOME BEFORE INCOME TAXES (10,411) 177,864 -------------- ------------- INCOME TAXES 72,155 -------------- ------------- NET INCOME (10,411) 105,709 DIVIDENDS ON PREFERRED STOCK - 4,491 -------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK $ (10,411) $ 101,218 ============== ============= -----END PRIVACY-ENHANCED MESSAGE-----