[Federal Register Volume 63, Number 42 (Wednesday, March 4, 1998)]
[Notices]
[Pages 10657-10667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-5488]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 35-26832; 70-9069]
Conectiv, Inc.; Order Authorizing Acquisition of Public Utility
Companies and Related Transactions; Approving Organization of Service
Company Subsidiary; Authorizing Certain Affiliate Transactions;
Approving Service Agreements; and Reserving Jurisdiction
February 25, 1998.
Conectiv, Inc. (``Conectiv''), a Delaware corporation not currently
subject to the Public Utility Holding Company Act of 1935, as amended
(``Act''), has filed an application-declaration, as amended, under
sections 6(a), 7, 9, 10, 11 and 13 of the Act, and rules 80 through 91,
93 and 94, seeking approvals related to the proposed combination of
Delmarva Power & Light Company (``Delmarva''), a Delaware and Virginia
public utility company, and Atlantic Energy, Inc. (``Atlantic''), a New
Jersey public utility holding company exempt by order under section
3(a)(1) from all provisions of the Act, except section 9(a)(2).
Conectiv requests, among other things, an order under sections 9(a)(2)
and 10 of the Act authorizing its acquisition of all of the issued and
outstanding common stock of Delmarva and Atlantic by means of the
mergers described below. Following the transactions, Conectiv will
register as a holding company under section 5 of the Act.\1\
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\1\ Conectiv will file a notification of registration on Form
U5A within 30 days of the merger and will file a registration
statement on Form U5B within 90 days.
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The Commission issued a notice of the filing on October 3, 1997
(Holding Co. Act Release No. 26763). The Commission received a request
for a hearing dated October 27, 1997, from South Jersey Gas Company
(``South Jersey''), a New Jersey public utility company engaged in the
transmission, distribution, transportation and sale of natural and
mixed gases in New Jersey.
[[Page 10658]]
South Jersey filed supplemental comments on November 7, 1997. By letter
dated December 22, 1997, South Jersey withdrew its request for a
hearing.
I. Background
Delmarva provides 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 of about 275 square miles in northern Delaware.
Delmarva's gas facilities are located exclusively in New Castle
County, Delaware. Delmarva owns gas property consisting of a liquefied
natural gas plant in Wilmington, Delaware with a storage capacity of
3.045 million gallons and a maximum daily sendout capacity of 49,898
Mcf per day.\2\ Delmarva also owns four natural gas city gate stations
at various locations in its gas service territory. The 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.
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\2\ The facility is used primarily as a peak-shaving facility
for Delmarva's gas customers.
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Delmarva is engaged indirectly, through subsidiaries and
affiliates, in various nonutility activities. In general, these
activities include: acquisition and operation of service businesses
primarily involving heating, ventilation and air conditioning sales,
installation and servicing, and other energy-related activities;
provision of a full-range of retail and wholesale telecommunications
services; ownership and financing of an office building that its leased
to Delmarva and/or its affiliates; oil and gas exploration and
development; ownership of 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;\3\ gas-
related activities; and a variety of unregulated investments. These
activities, and the subsidiaries through which they are engaged, are
described in detail in Appendix A to this order. On June 30, 1997,
Delmarva's nonutility subsidiaries and investments constituted
approximately 7.5% of the consolidated assets of Delmarva and its
subsidiaries.
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\3\ The application requests the Commission to reserve
jurisdiction over Conectiv's acquisition of the common stock of
Chesapeake Utilities Corporation for a period of three years from
the date of this order to permit Conectiv to effect an orderly
disposition of the stock or otherwise comply with the requirements
of the Act.
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On June 30, 1997, there were 61,269,320 shares of Delmarva Common
Stock, par value $2.25 per share, outstanding and 1,253,548 shares of
Delmarva preferred stock outstanding. For the fiscal year 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 electric utility
property, plant and equipment; approximately $236 million in gas
utility property, plant and equipment; and approximately $225 million
in other corporate assets.
Atlantic's principal subsidiary is Atlantic City Electric Company
(``ACE''), a public utility company 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.\4\
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\4\ ACE is also a holding company by reason of its ownership of
Deepwater Operating Company (``Deepwater''), a public utility
company. Deepwater owns no physical assets. It operates generating
facilities in New Jersey for ACE.
ACE claims exemption from registration under section 3(a)(1) of
the Act by rule 2. Prior to the consummation of the proposed
mergers, Deepwater will be either merged into ACE or made a
subsidiary of Atlantic Energy Enterprises, Inc., a holding company
for Atlantic's nonutility subsidiaries.
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Delmarva and ACE have undivided ownership interests in two nuclear
plants: Peach Bottom Nuclear Generating Station, a Pennsylvania
facility in which each company holds a 7.51 percent interest, and Salem
Nuclear Generating Station, a New Jersey facility in which each company
holds a 7.41 percent interest. Delmarva and ACE also hold undivided
ownership interests in two Pennsylvania coal-fired thermal units, the
Keystone and Conemaugh generating stations.\5\
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\5\ The application states that the four plants in which ACE and
Delmarva hold ownership interests will account for a substantial
proportion of Conectiv's generation resources, although the plants
are located outside the utilities' traditional service areas.
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Atlantic is engaged indirectly, through subsidiaries and
associates, in a variety of nonutility activities. In general, these
activities include: brokering of used utility equipment to developing
countries; provision of utility consulting services related to the
design of substations and other utility infrastructure; investment in
leveraged leases of commercial aircraft and container ships;
development and operation of independent power production projects;
ownership and operation of thermal heating and cooling system; and
provision of other energy-related services to business and
institutional energy users. These activities, and the subsidiaries
through which they are engaged, are described in detain in Appendix B
to this order. As of June 30, 1997, Atlantic's nonutility subsidiaries
and investments constituted approximately 8.9% of the consolidated book
value of the assets of Atlantic and its subsidiaries.
As of June 30, 1997, there were 52,502,479 shares of Atlantic
Common Stock, no par value, outstanding and no shares of preferred
stock outstanding. For the year ended June 30, 1997, Atlantic had
operating revenues on a consolidated basis of approximately $987
million. Total assets as of June 30, 1997 were approximately $2,758
million.
The electric service territories of ACE and Delmarva are not
contiguous, and the companies are not directly interconnected. However,
Delmarva and ACE, together with other members of PJM Interconnection,
LLC (``PJM''), a regional power pool described below, 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 power plants to their owner's systems. These
facilities include a transmission line over the Delaware River and
other extra-high voltage lines that directly connect the jointly owned
power plant with lower voltage lines of PJM.
PJM is a ``tight'' power pool.\6\ The application describes PJM as
the largest
[[Page 10659]]
and most sophisticated centrally dispatched electric control area in
North America, and the third largest in the world.\7\ The PJM service
territory includes all or part of Pennsylvania, New Jersey, Maryland,
Delaware, Virginia and the District of Columbia. PJM's objectives are
to ensure reliability of the bulk power transmission system and to
facilitate an open-competitive wholesale electric market.
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\6\ The Commission noted in Untili Corp., Holding Co. Act
Release No. 25524 (April 24, 1992):
Generally, a tight power pool consists of two or more electric
systems which coordinated the planning and/or operation of their
bulk power facilities for the purpose of achieving greater economy
and reliability in accordance with a contractual agreement that
establishes each member's responsibilities.
Tight power pools have centralized dispatch of generating
facilities, whereby energy and operating reserves are interchanged
among the participant systems and transferred over facilities owned
by the individual participants. Participants have contractual
requirements relating to generating capacity and operating reserves,
together with specific financial penalties if these requirements are
not met. Sufficient transmission capacity is made available to
realize the full value of operating and planning coordination.
Id. at 10, n.22.
\7\ Comparable tight pools are the New York Power Pool and the
New England Power Pool (``NEPOOL'').
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PJM became the first operational Independent System Operator \8\ in
the United States on January 1, 1998, managing the PJM Open Access
Transmission Tariff and facilitating the Mid-Atlantic spot market. With
the implementation of the Tariff, PJM began operating the nation's
first regional, bid-based energy market.
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\8\ Independent system operators are generally established to
coordinate access to and delivery of electric power generated by a
number of sources. The U.S. Department of Energy in an August 1997
report entitled Electricity Prices in a Competitive Environment:
Marginal Cost Pricing of Generation Services and Financial Status of
Electric Utilities, defines an ``Independent System Operator'' as
``[a] neutral operator responsible for maintaining an instantaneous
balance of the grid system. The Independent System Operator performs
its function by controlling the dispatch of flexible plants to
ensure that loads match resources available to the system.'' Id. at
106.
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In order to achieve economy and reliability in the bulk power
supply within the PJM region, PJM members coordinate the planning and
operation of their systems, share installed and operating reserves to
reduce installed generator requirements, and participate in centralized
unit commitment, coordinated bilateral transactions, and instantaneous
real-time dispatch of energy resources to meet customer load
requirements throughout PJM. Within the PJM pool, there is a wholesale
energy market based on a ``split-the-savings'' energy exchange. There
is also a reciprocal sharing of capacity resources and a competitive
market is transmission entitlements to import energy.
Delmarva's generation and bulk transmission, and ACE's generation
and transmission facilities are operated on an integrated basis with
those of other PJM members. The PJM staff centrally forecasts,
schedules and coordinates the operation of generating units, bilateral
transactions and the spot energy market to meet load requirements.\9\
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.
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\9\ 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.
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Conectiv was formed to become a holding company for Delmarva and
Atlantic following consummation of the proposed mergers, as
contemplated by a merger agreement dated as of August 9, 1996, as
amended and restated as of December 26, 1996 (``Merger Agreement''). At
present, Conectiv's common stock, consisting of 1,000 issued and
outstanding shares, is owned by Delmarva and Atlantic, each of which
owns 500 shares. The shareholders of Delmarva and Atlantic approved the
proposed mergers at their respective meetings held on January 30, 1997.
Conectiv will serve approximately 921,000 electric customers in New
Jersey, Delaware, Maryland and Virginia, and 102,000 gas customers in
Delaware. The service territory of the Conectiv system will extend from
the Virginia portion of the Delmarva Peninsula north to Atlantic City,
New Jersey and west to Wilmington, Delaware. As of, and for the fiscal
year ended, June 30, 1997, the combined assets of Delmarva and Atlantic
would have totalled approximately $5.75 billion, the combined operating
revenues would have totaled approximately $2.24 billion and the
combined installed generating capacity would have totaled 4417 MW.
Conectiv believes that the mergers will lead to economies of scale
through the elimination of duplicate facilities and positions,
integration of corporate and administrative programs, improved
purchasing and production capacity and reserves, and generally more
efficient operations. Conectiv estimates that the mergers could result
in net cost savings of more than $500 million during the ten-year
period following the mergers. Conectiv expects approximately 59.55% of
the savings to occur through labor reductions in redundant positions,
4.48% from reduced facilities, 21.51% from economies of scale and cost
avoidance in corporate and administrative programs, 9,64% from
purchasing economies for non-fuel materials and supplies, and 4.82%
from purchasing economies for fuel and power purchases.
Under the Merger Agreement, DS Sub, Inc., a Delaware direct
subsidiary of Conectiv formed for purposes of the merger,\10\ will be
merged with and into Delmarva, with Delmarva as the surviving
corporation (``Delmarva Merger''), and Atlantic will be merged with and
into Conectiv, with Conectiv as the surviving corporation (``Atlantic
Merger'' and, together with Delmarva Merger, ``Mergers''). As a result
of the Mergers, Delmarva and its direct subsidiaries and certain direct
subsidiaries of Atlantic will become direct subsidiaries of Conectiv,
and Conectiv will be a holding company within the meaning of the Act.
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\10\ The authorized capital stock of DS Sub consists of 1000
shares of common stock, $0.01 par value, all of which is held by
Conectiv.
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Upon consummation of the Mergers, each issued and outstanding share
of Delmarva Common Stock will be converted into the right to receive
one share of Conectiv common stock (``Conectiv Common Stock'')
(``Delmarva Conversion Ratio''). Each issued and outstanding share of
Atlantic common stock (``Atlantic Common Stock'') will be converted
into the right to receive 0.75 shares of Conectiv Common Stock
(``Atlantic Conversion Ratio'') and 0.125 shares of Class A common
stock of Conectiv (``Conectiv Class A Common Stock'').\11\ Based on the
capitalization and the Delmarva Conversion Ratio and the Atlantic
Conversion Ratio, the shareholders of Delmarva and Atlantic would own
securities representing 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
the Conectiv Class A Common Stock.
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\11\ The outstanding shares of preferred stock of Delmarva and
Atlantic will not be affected.
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The Conectiv Class A Common Stock is a ``letter'' or ``tracking''
stock, designed to track the performance of the currently regulated
electric utility business of ACE (``Targeted Business'').\12\ The
application states that the Conectiv Class A Common Stock, which will
be issued only to the holders
[[Page 10660]]
of the Atlantic Common Stock, allocates proportionately more of the
risks associated with the Targeted Business to Atlantic's current
stockholders and, at the same time, provides them the opportunity to
participate in proportionately more of the growth prospects of the
Targeted Business. The Merger Agreement provides, subject to
declaration by the Conectiv Board of Directors, and its obligation to
react to the financial condition and regulatory environment of the
company 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 $3.30 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''). The application-declaration states,
that after the Initial Period, Conectiv intends 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.\13\ Through the use of the 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.
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\12\ In conjunction with the Mergers and the findings and
recommendations of the New Jersey Commission on April 30, 1997, on
the restructuring of the New Jersey electric industry, ACE expects
to move all of its currently nonregulated operations out of ACE. ACE
would retain only the Targeted Business.
\13\ 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 exceeds 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 this fact in determining the appropriate annual dividend
rate on the Conectiv Class A Common Stock following the Initial
Period.
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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, other than as common stockholders
of Conectiv. Holders will be subject to risks associated with an
investment in Conectiv and all of its businesses, assets and
liabilities. Both holders of Conectiv Common Stock and holders of
Conectiv Class A Common Stock will be entitled to one vote per share on
all matters submitted to a vote at any meetings of stockholders,
subject to the rights, if any, of holders of any outstanding class of
preferred stock. The holders of Conectiv Common Stock and the holders
of Conectiv Class A Common Stock will vote as one class for all
purposes, except as may otherwise be required by the laws of
Delaware.\14\
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\14\ 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. A more complete description of the Conectiv Class
A Common Stock is provided in the ``Description of the Company's
Capital Stock'' on pages 75 to 97 of the Joint Proxy filed as
Exhibit C-2 to the application. 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.''
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Both the Class A Common Stock and the 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.\15\ The Conectiv Class A Common Stock will have no preference or
accrual rights. Further, the Conectiv Class A Common Stock will have
the same priority in liquidation as the Common Stock.
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\15\ The notes to the consolidated financial statements of
Conectiv will include condensed financial information of ACE.
Complete financial statements of ACE will continue to be filed with
the Commission under the Securities Exchange Act of 1934 and will be
available to Conectiv stockholders upon request.
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The application explains that the use of two classes of Conectiv
common stock was proposed during the merger negotiations as a means to
address the merger partners' differing evaluations of the growth
prospects of, and uncertainties associated with deregulation of, ACE's
regulated electric utility business. The Boards of Delmarva and
Atlantic determined that the use of tracking stock was necessary to
bridge the companies' differing views concerning the appropriate
conversion ratio for a business combination.
Delmarva currently has in place a long-term incentive plan and
Atlantic has in place an equity incentive plan. Upon completion of the
Mergers, a Conectiv plan will replace both plans.\16\ The Conectiv plan
provides for a maximum number of five million shares of Conectiv Common
Stock available for issuance under the plan.
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\16\ On January 30, 1997, the shareholders of Delmarva and
Atlantic approved the Conectiv Incentive Compensation Plan, a
comprehensive cash and stock compensation plan providing for the
grant of annual incentive awards as well as long-term incentive
awards such as restricted stock, stock options, stock appreciation
rights, performance units, dividend equivalents and other types of
awards as the committee of the Conectiv Board that will administer
the plan deems appropriate.
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Prior to the consummation of the Mergers, Conectiv will form a
subsidiary service company, Conectiv Resource Partners, Inc.
(``Conectiv Resource'') (formerly Support Conectiv, Inc.), to serve the
Conectiv system companies.\17\ Conectiv Resource will provide a variety
of administrative, management, engineering, construction, environmental
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 matters, fuel procurement,
corporate planning, investor relations, human resources, marketing and
customer services, information systems and general administrative and
executive management services.\18\
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\17\ Conectiv Resource's authorized capital stock will consist
of up to 3,000 shares of common stock, $1 par value per share.
Conectiv requests authorization to acquire the voting securities of
Conectiv Resource as part of the Mergers. Conectiv will hold all
issued and outstanding shares of Conectiv Resource common stock.
\18\ No change in the organization of Conectiv Resource, the
type and character of the companies to receive services, the methods
of allocating costs to associate companies, or the scope or
character of services shall be made unless and until Conectiv
Resource has given the Commission written notice of the proposed
change not less than 60 days prior to the proposed effectiveness of
the change. If, upon receipt of such notice, the Commission notifies
Conectiv Resource 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 related rules, Conectiv Resource will be
required to file a declaration and the proposed change shall not
become effective until authorized by order of the Commission.
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Conectiv Resource will enter into a service agreement with each
associate company to which it renders services (``Service
Agreement'').\19\ In accordance with the Service Agreement, services
provided by Conectiv Resource will be directly assigned, distributed or
allocated to an associate company by activity, project, program, work
order or other appropriate basis. Employees of Conectiv Resource will
record transactions utilizing the existing data capture and accounting
systems of each client associate company. Costs of Conectiv Resource
will be accumulated in accounts of Conectiv Resource and directly
assigned, distributed and allocated to the appropriate client company
in accordance with the guidelines set forth in the Service Agreement.
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\19\ See Exhibit B-2 to the application.
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It is anticipated that Conectiv Resource will be staffed by the
transfer of current personnel of Delmarva, Atlantic and their
subsidiaries. Conectiv Resource's accounting and cost allocation
methods and procedures will be structured so as to comply with the
Commission's standards for service companies in registered holding
company systems. Conectiv states that the Service Agreement is
structured so as to comply with section 13 of the Act and the
Commission's rules and regulations under the Act. Thus, charges for all
services provided by Conectiv Resource to associate companies will be
[[Page 10661]]
on an at-cost basis, as determined under rules 90 and 91 under the Act.
The interested state regulatory authorities have approved the
proposed Mergers and/or related matters. The Virginia State Corporation
Commission approved the Mergers by order dated August 6, 1997. The
Delaware Public Service Commission approved the Mergers by order dated
September 23, 1997, the Pennsylvania Public Utility Commission, by
order dated October 2, 1997, authorized the transfer of control of ACE
and Delmarva to Conectiv through a transfer of stock. The New Jersey
Board of Public Utilities approved the Mergers by order dated December
30, 1997. The Maryland Public Service Commission approved the Mergers
by order dated July 16, 1997. The Federal Energy Regulatory Commission
(``FERC'') approved the proposed Mergers on July 30, 1997.\20\ The
Nuclear Regulatory Commission approved the transfer of the nuclear
power licenses to Conectiv by order dated December 18, 1997. Delmarva
and Atlantic filed Premerger Notification and Report Forms with the
Antitrust Division of the U.S. Department of Justice and the Federal
Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976. The applicable waiting period expired on August 25, 1997
without any comments being provided on the filing.
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\20\ See Atlantic City Power Electric Company and Delmarva Power
& Light Company, Dkt. No. EC97-7-01 (July 30, 1997).
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Fees and expenses in the estimated amount of $19,318,060 are
anticipated in connection with the proposed transaction.
II. Discussion
The proposed acquisition by Conectiv of all of the issued and
outstanding common stock of Delmarva and of Atlantic requires prior
Commission approval under sections 9(a)(2) and 10 of the Act. The
various issuances and sales of securities,\21\ and related acquisitions
of securities, involved in the Mergers are subject to sections 6(a) and
7, and 9(a)(1) and 10 respectively, of the Act.The proposed service
agreements are subject to section 13 of the Act and rules 80-91, 93 and
94. The Commission has reviewed the proposed transactions and finds
that the requirements of the Act are satisfied, except as to the matter
over which jurisdiction is reserved.
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\21\ These transactions include the issuance of Conectiv Common
Stock in exchange for shares of Delmarva and Atlantic Common Stock
and the issuance of Conectiv Class A Common Stock for Atlantic
Common Stock.
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A. Statutory Integration Requirements
As a preliminary matter, it is necessary to determine the extent to
which the proposed principal system of Conectiv, i.e., the combined
electric properties of Delmarva and Atlantic, is an integrated public
utility system within the meaning of section 2(a)(29)(A) of the Act.
The Commission's application of the integration requirements of section
10(c)(1) of the Act, and by reference, section 11(b)(1), is central to
its authorization of the proposed acquisition by Conectiv of Delmarva
and Atlantic. Once this question is decided, it is necessary to
consider whether Conectiv may own the Delmarva gas integrated system as
an additional system.
1. Integration Standards
Section 10(c)(1) requires the Commission not to approve an
acquisition that ``would be detrimental to the carrying out of the
provisions of section 11.'' \22\ Section 11(b)(1) of the Act, in turn,
generally confines the utility properties of a registered holding
company to a ``single integrated public-utility system,'' either gas or
electric, as discussed below.\23\
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\22\ The Commission has interpreted this provision to bar a
utility acquisition by a registered (or to-be-registered) holding
company that would not be permissible under section 11(b)(1) of the
Act. See, e.g., Electric Bond and Share Co., 33 S.E.C. 21, 31,
(1952).
Section 10(c)(1) further prohibits Commission approval of an
acquisition that ``is unlawful under the provisions of section 8.''
Section 8 prohibits an acquisition by a registered holding company
of an interest in an electric utility and a gas utility serving
substantially the same territory without the express approval of the
state commission when the state's law prohibits or requires approval
of the acquisition.
New Jersey, Virginia, Delaware and Pennsylvania law do not
prohibit the proposed ownership by Conectiv of both gas and electric
properties. As previously noted, all of the interested state utility
commissions have approved the proposed merger and/or related
matters.
\23\ The limitation in intended to eliminate evils that Congress
found to exist ``when the growth and extension of holding companies
bears no relation to * * * the integration and coordination of
related operating properties.'' Section 1(b)(4) of the Act. Congress
believed that, ``in the absence of clearly overriding considerations
a utility system should have a management single-mindedly devoted to
advancing the interests of its investors and consumers and not
engaged, through the means of the holding company device, in
operating other utility or non-utility businesses.'' New England
Electric System, 41 S.E.C. 888 (1964), rev'd, SEC v. New England
Electric System, 346 F.2d 399 (1st Cir. 1966), rev'd and remanded,
384 U.S. 176 (1965), on remand, 376 F.2d 107 (1st Cir. 1967), rev'd,
390 U.S. 207 (1968).
The ``other business'' clauses of section 11(b)(1) further limit
the nonutility businesses of a registered holding company to those
that are ``reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility
system,'' on a finding by the Commission that the interests are
``necessary or appropriate in the public interest or for the
protection of investors of consumes and not detrimental to the
proper functioning'' of the integrated system.
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Section 2(a)(29)(A) defines an integrated public-utility system, as
applies to electric utility properties, to mean:
a system consisting of one or more units of generating plants and/or
transmission lines or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a
single interconnected and coordinated system confined in its
operations to a single area or region, in one or more States, not so
large as to impair * * * the advantages of localized management,
efficient operations, and the effectiveness of regulation.
Section 2(a)(29)(B) defines an integrated public-utility system, as
applied to gas utility properties, to mean:
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
operations to a single area or region, in one or more States, not so
large as to impair * * * the advantages of localized management,
efficient operations, 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.
In view of the separate definitions and their differing criteria, the
Commission has long held that gas and electric properties do not
together constitute an integrated system.\24\
---------------------------------------------------------------------------
\24\SEC v. New England Electric System, 384 U.S. at 178, n.7 and
the cases cited in the decision.
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2. The Combined Electric Properties
On the basis of the statutory definition of an electric integrated
public utility system, the Commission has established four standards
that must be met before the Commission will find that an integrated
public system will result from a proposed acquisition of securities:
(1) The utility assets of the system are physically
interconnected or capable of physical interconnection;
(2) The utility assets, under normal conditions, may be
economically operated as a single interconnected and coordinated
system;
(3) The system must be confined in its operations to a single
area or region; and
(4) The system must not be so large as to impair (considering
the state of the art and the area or region affected) the advantages
of
[[Page 10662]]
localized management, efficient operation, and the effectiveness of
regulation.\25\
\25\ Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th
Cir. 1990), citing Electric Energy, Inc., 38 S.E.C. 658, 668 (1958).
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The combined electric properties satisfy each of these four
requirements.
The Commission has previously determined that the physical
interconnection requirement of the Act can be satisfied on the basis of
contractual rights to use third parties' transmission lines, when the
merging companies are members of a tight power pool.\26\ In addition,
Delmarva and ACE are interconnected through their undivided ownership
interests in, and/or rights to use, the same regional generation
facilities and extra-high voltage facilities, as well as through their
contractual rights to use the transmission facilities of other members
of the PJM regional power pool. Although it would be possible to
construct a transmission line directly interconnecting Delmarva and
ACE, Conectiv believes that such action is unnecessary because present
transmission arrangements provide adequate service.\27\
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\26\ Unitil Corp., Holding Co. Act Release No. 25524 (Apr. 24,
1992).
\27\ See Unitil Corp., Holding Co. Act Release No. 25524, citing
Electric Energy Inc., 38 S.E.C. at 669 (direct interconnection not
required in circumstances that would have resulted in an uneconomic
duplication of transmission facilities).
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The proposed Mergers also satisfy the requirement that the 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 to the physical operation of utility
assets as a system in which, among other things, the generation and/or
flow of current within the system may be centrally controlled and
allocated as need or economy directs.\29\ 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.'' \30\ Similarly,
in Unitil Corp., 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.\31\ In this matter, in addition to coordinated operation
through PJM, Conectiv will have a central operating transmission and
generation control center in Newark, Delaware. For these reasons,
Conectiv will be able to operate its combined electric utility assets
as a single interconnected and coordinated system.
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\28\ See Cities Services Co., 14 S.E.C. 28, 55 (1943) (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 one other).
\29\ North American Co., 11 S.E.C. 194, 242 (1942), aff'd on
constitutional issues, 327 U.S. 686 (1946). The Commission explained
that ``even though we find physical interconnection exists or may be
effected, evidence is necessary that in fact the 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.'' Id.
\30\ Northeast Utilities, Holding Co. Act Release No. 25221 at
n.85, modified, Holding Co. Act Release No. 25273 (Mar. 15, 1991),
aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir.
1992).
\31\ Unitil Corp., Holding Co. Act Release No. 25524.
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The Commission's third and fourth requirements are also satisfied.
The Conectiv electric system will operate in a single area or region in
four contiguous states in the Mid-Atlantic region.\32\ The 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 the benefits of localized
management and the system, as described above, will facilitate
efficient operations. Delmarva and ACE will continue to exist as
subsidiaries of Conectiv, and their utility operations will remain
subject to their respective state commissions. Delmarva and Atlantic
have received the requisite orders from these regulators as a condition
precedent to consummating the proposed Mergers.
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\32\ While Conectiv will have ownership interests in
Pennsylvania, its service area will be limited to Virginia,
Maryland, Delaware and New Jersey.
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The Commission finds that the combined electric properties of
Delmarva and Atlantic will constitute an integrated public utility
system. The Commission has further determined that the proposed
acquisition by Conectiv of this electric integrated system will
``ten[d] towards the economical and efficient development of an
integrated public-utility system,'' and so satisfy the requirement of
section 10(c)(2) of the Act.
B. Proposed Ownership of Delmarva's Gas Operations
In addition to the principal electric integrated electric system,
Conectiv proposes to acquire and retain the integrated gas public
utility system of Delmarva.\33\ Although section 11(b)(1) generally
limits a registrant to ownership of a single integrated system, an
exception to this requirement is provided in section 11(b)(1)(A)-(C)
(``ABC clauses''). A registered holding company may own one or more
additional systems, if each system meets the criteria of these clauses.
Specifically, the Commission must find that (A) the additional system
``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) the additional system is
located in one or adjoining states, and (C) the combination of systems
under the control of a single holding company is ``not so large * * *
as to impair the advantages of localized management, efficient
operation, or the effectiveness of regulation.''\34\ The Commission has
repeatedly held that a registered holding company cannot own properties
that are not part of its principal integrated system unless they
satisfy the ABC clauses.\35\ Only clause A is at issue here.\36\
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\33\ As noted previously, Conectiv requests the Commission to
reserve jurisdiction over Conectiv's acquisition of the Chesapeake
Utilities Corporation stock for a period of three years from the
date of this order to permit Conectiv to effect an orderly
disposition of the stock or otherwise comply with the requirements
of the Act.
\34\ North American Co., 11 S.E.C. at 206; and New Century
Energies, Inc., Holding Co. At Release No. 26748 (Aug. 1, 1997).
\35\ See, e.g. United Gas International Co., 9 S.E.C. 52, 65
(1941) (section 11(b)(1) permits more than one integrated system
only if the additional system or systems meets the standards of the
ABC clauses; a utility subsidiary is not retainable as part of an
additional system unless those clauses are satisfied). See also
Philadelphia Co., 28 S.E.C. 35, 46 (1948), aff'd, 177 F.2d 720 (D.C.
Cir. 1949). Accord New Century Energies, Inc., Holding Co. Act
Release No. 26748.
\36\ As explained below, the proposed acquisition of the gas
integrated system does not raise any issues under clauses B or C.
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1. Requirements of Clause A
The Commission has construed the provisions of clause A to require
an affirmative showing by a registrant that an additional system could
not be operated under separate ownership without a loss of economies
``so important as to cause a serious impairment of that system,'' and
``substantial in the sense that they were important to the ability of
the additional system to operate soundly.''\37\ The Commission has
applied this standard
[[Page 10663]]
to the additional system in question, in light of the relevant facts
and circumstances. In his matter, based on the relevant facts and
circumstances, the Commission finds that the additional system may be
owned and operated by Conectiv after the Mergers are consummated.\38\
---------------------------------------------------------------------------
\37\ New England Electric System, 41 S.E.C. at 892-93. The
Commission has variously phrased the rule under clause A. See SEC v.
New England Electric System, 384 U.S. at 181 (citing, among other
orders, Philadelphia Co., 28 S.E.C. at 46 (``For the economies to be
`substantial,' they must be `important' in the sense that they are
of such nature that their loss would cause a serious economic
impairment of the system.'').
\38\ See New England Electric System, 41 S.E.C. at 893 (``a
registrant seeking to retain an additional system has the burden of
showing by clear and convincing evidence that such additional system
cannot be operated under separate ownership without the loss of
economies so important as to cause a serious impairment of that
system'').
---------------------------------------------------------------------------
Conectiv prepared and submitted a supplemental severance study
(``Severance Study'') with respect to the gas operations. The analysis
focuses upon the increases in operating costs that would result from
divestiture.
In New England Electric System and earlier cases, the Commission
took the approach of examining the substantiality of the estimated loss
in relation to total revenues, expenses and income resulting from
divestiture. The Commission suggested in an early leading decision 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.''\39\ The Severance Study
indicates that the ratios in this matter are significantly higher than
guidelines established in Commission precedent and thus would result in
greater loss of economies if the gas system were severed. The record
indicates that the cost increases that would result from severance of
the gas operations here would satisfy, and in all instances exceed,
those thresholds.\40\ As set forth in the Severance Study, divestiture
of the gas operation into a stand-alone company would result in lost
economies of $14.7 million. On a percentage basis, the Severance Study
indicates that divestiture of the gas operations would amount to 14.07%
of gas operating revenues, 17.4% of gas operating revenue deductions,
73.42% of gross gas income and 105.88% of net gas income.
---------------------------------------------------------------------------
\39\ Engineers Public Service Co., 12 S.E.C. 41 (1942), rev'd on
other grounds and remanded. 138 F.2d 936 (D.C. Cir. 1943), vacated
as moot, 332 U.S. 788 (1947).
\40\ See Exhibit J-I to the application.
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In order to recover these lost economies, the Severance Study
indicates that the new stand-alone company would need to increase
customer rates by about 14.8% ($15.5 million) in order to provide an
9.36% rate of return on rate base.\41\ In the absence of rate relief,
the Severance Study concludes that the lost economies would result in a
3.35% rate of return on rate base for the gas operations, a rate
greater than the 2.01% projected stand-alone rate of return in Unitil
Corp., where retention was authorized.\42\
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\41\ 9.36% is the effective cost of capital for the stand-alone
gas business, based on use of the weighted average approximate costs
for capital of Delmarva as of September 30, 1996.
\42\ See Unitil Corp., Holding Co. Act Release No. 25524.
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To the extent that competition between competing sources of energy
remains a concern, the Commission notes that section 10(b)(1) of the
Act, among other things, prohibits an acquisition that would result in
``the concentration of control of public-utility companies, of a kind
or to an extent detrimental to the public interest or the interest of
investors or consumers.'' The Commission's analysis under section
10(b)(1) includes consideration of federal antitrust policies. In
addition, the FERC and the Antitrust Division of the U.S. Department of
Justice, which typically have concomitant jurisdiction over merger
transactions, consider the anticompetive consequences of the proposed
transaction.\43\ As previously noted, the FERC gas approved the
proposed Mergers and no comments were received in conjunction with the
Hart-Scott-Rodino filing.
---------------------------------------------------------------------------
\43\ Under section 203 of the Federal Power Act, the FERC
``shall approve'' a merger if it is ``consistent with the public
interest.'' See Gulf States Utilities Co. v. FPC, 422 U.S. 747, 758
(1973).
---------------------------------------------------------------------------
The Commission finds that the requirements of clause A are
satisfied with respect to Conectiv's ownership of the Delmarva gas
operations as an additional integrated system.
2. Requirements of Clauses B and C
The proposed acquisition of the gas integrated system does not
raise any issues under clauses B or C. With respect to clause B, the
principal electric system to Conectiv will be located in New Jersey,
Delaware, Maryland and Virginia; the additional gas system will be
located in an adjoining state--Delaware. As required by clause C, the
combination of systems under the ownership of Connectiv will not be
``so large * * * as to impair the advantages of localized management,
efficient operation, or the effectiveness of regulation.''
C. Proposed Nonutility Interests of Conectiv
Section 11 (b)(1) limits the nonutility interests of a registered
holding company to those that are ``reasonably incidental, or
economically necessary or appropriate to the operations of such
integrated public-utility system.'' The Commission must find that the
interests are ``necessary or appropriate in the public interest or for
the protection of investors or consumers and not detrimental to the
proper functioning'' of the integrated system. The Commission has
interpreted these provisions to require the existence of an operating
or functional relationship between the utility operations of the
registered holding company and its nonutility activities.\44\ With
respect to new acquisitions, the Commission has interpreted section
10(c)(1) of the Act to mean that ``any property whose disposition would
be required under section 11(b)(1) may not be acquired.''\45\
---------------------------------------------------------------------------
\44\ See generally Michigan Consolidated Gas Co., 444 F.2d 913
(D.C. Cir. 1971).
\45\ Texas Utilities Co., 21 S.E.C. 827, 829 (1946) (denying
approval to acquisition of transportation company by registered
holding company).
---------------------------------------------------------------------------
The Commission has examined the various nonutility interests that
Conectiv seeks to acquire and has concluded that the statutory
requirements for ownership are satisfied. The Commission has further
concluded that Delmarva's and Atantic's existing investments in these
activities, as of the date of consummation of the Mergers, should be
disregarded for purposes of calculating the dollar limitation upon
investment in energy-related companies under new rule 58.\46\ As in
previous similar matters involving to-be-registered holding companies,
the Commission reaches this conclusion in view of the fact that the
Mergers partners were not subject to the restrictions that section
11(b)(1) and relevant Commission precedent places upon the nonutility
investments of registered system companies.\47\
---------------------------------------------------------------------------
\46\ See Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62
FR 7900 (Feb. 20 1997) (adopting rule 58).
\47\ See, e.g., New Century Energies, Inc., Holding Co. Act
Release No. 26748 (proposed combination of utility and exempt
holding company and stand-along utility). The Act is silent
concerning nonutility diversification by exempt holding companies,
such as Atlantic, and the Commission has never determined the limits
upon diversification by these companies. See, e.g., Pacific Lighting
Corp., 45 S.E.C. 152 (1973) (two commissioners held that the
nonutility activities of exempt holding companies should complement
the utility operations; two other commissioners proposed guidelines
under which utility activities would be separated from nonutility
activities).
---------------------------------------------------------------------------
D. Proposed Dual Class of Equity Stock of Conectiv
As discussed previously, the Merger Agreement contemplates that
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 a tracking stock,
[[Page 10664]]
Conectiv Class A Common Stock, in exchange for each share of Atlantic
Common Stock.
As explained above, the proposed issuance of tracking stock in this
matter represents a means by which 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 use of tracking
stock in connection with the Mergers addresses the concerns of the
managements of the merger partners and allows the respective
stockholders of Delmarva and Atlantic to gain, as shareholders of
Conectiv, the level of exposure that the companies' managements have
deemed advisable to the growth prospects of the regulated utility
business of Atlantic and the uncertainties associated with deregulation
of that business.
Conectiv seeks authorization for issuance of the Conectiv Class A
Common Stock under Section 7(c)(2)(A) of the Act. Section 7(c)(2)(A)
provides for the issuance of securities ``solely * * * for the purpose
of effecting a merger.'' \48\ Section 7(d) of the Act provides in
pertinent part, that if the requirements of section 7(c) are satisfied,
the Commission shall permit a declaration regarding the issue or sale
of a security to become effective unless the Commission finds that:
\48\ The Commission notes that section 7(c)(1) provides that a
declaration regarding the issuance of securities by a registered
holding company cannot become effective unless it relates to certain
specified types of securities including ``a common stock * * * being
without preference as to dividends or distribution over * * * any
outstanding security of the [holding company].'' Because
authorization of the issuance of the Class A Common Stock is sought
under section 7(c)(2), the Commission does not have to reach the
question of whether the dividend rate of the stock constitutes a
``preference as to dividends'' for purposes of section 7(c)(1).
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(1) The security is not reasonably adapted to the security
structure of the declarant and other companies in the same holding
company system;
(2) The security is not reasonably adapted to the earning power
of the declarant;
(3) Financing by the issue and sale of the particular security
is not necessary or appropriate to the economical and efficient
operation of a business in which the applicant lawfully is engaged
or has an interest; [or]
* * * * *
(6) The terms and conditions of the issue or sale of the
security are detrimental to the public interest or the interest of
investors or consumers.\49\
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\49\ Section 7(d)(4) requires the Commission to find that the
fees, commissions, or other remuneration, to whomsoever paid,
directly or indirectly, in connection with the issue, sale, or
distribution of the security are not reasonable. Section 7(c)(5)
addresses the issuance of a guarantee or other assumption of
liability.
The Commission has also considered whether the Class A Common Stock
would give rise to any abuse that the Act is intended to prevent.\50\
Various provisions of the Act are intended to ensure that a holding
company system does not have an unnecessarily complicated capital
structure or that voting power is unfairly or inequitably distributed
among system security holders.\51\ In these respects, it does not
appear that the issuance of the Class A Common Stock would be
detrimental to the interests of investors or consumers. There will be
no effect on the legal title to Conectiv assets or the responsibilities
for the liabilities of Conectiv or its subsidiaries.\52\ The Class A
Common Stock will be directly linked to the performance of the Targeted
Business and thus adapted to the earning power of Conectiv. The Class A
Common Stock will be subject to the requirements of the other federal
securities laws and will be listed on the New York Stock Exchange.\53\
The Class A Common Stock has all of the attributes of common stock,
particular voting rights.\54\ The only voting securities of Conectiv
that will be publicly held after the Mergers will be Common Stock and
Class A Common Stock. In addition to common stock of Delmarva, all of
which will be held by Conectiv, Delmarva will continue to have
1,253,548 shares of outstanding voting preferred stock (not including
2.8 million shares of Quarterly Income Preferred Securities). The only
class of voting securities of Conectiv's direct and indirect nonutility
subsidiaries will be common stock. The shareholders of both Delmarva
and Atlantic approved the proposed Mergers.
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\50\ Section 1(c) of the Act directs the Commission to interpret
all the provisions of the Act to meet the problems and eliminate the
evils enumerated in section 1(a).
\51\ See sections 10(b) of the Act (Commission is not to approve
an acquisition that ``will unduly complicate the capital structure
of the holding-company system'' or be ``detrimental to the public
interest, the interests of investors or consumers or the proper
functioning of [the] holding-company system''); 10(c)(1) (Commission
is not to approve an acquisition that would be detrimental to the
carrying out of the provisions of section 11''); and 11(b)(2)
(Commission is to ensure that the corporate structure of a
registered holding company ``does not unduly complicate the
structure, or unfairly or inequitably distribute voting power among
security holders''). See, e.g., American Power & Light Co. v. SEC,
329 U.S. 90 (1946) (upholding constitutionality of section 11(b)(2)
and affirming orders requiring the dissolution of two subholding
company subsidiaries of a registered holding company on the grounds
of undue capital complexity).
\52\ Pennsylvania was the only state to exercise jurisdiction
over the transfer of stock involved in the Mergers. The order of the
Pennsylvania Public Utility Commission approved the issuance of the
Conectiv Class A Common Stock.
\53\ The Commission has noted that: 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. * * * The interest of
investors is protected not only by the requirements of this Act but
also by the disclosure requirements of these other statutes.
Southern Co., Holding Co. Act Release No 25639 (Sept. 23, 1992).
\54\ Compare Cities Service Co., 34 S.E.C. 28, 33-34 (1956)
(Commission found an unfair and inequitable distribution of voting
power in conflict with the standards of section 11(b)(2) where Class
A stock represented approximately 46% of the combined common and
Class A equity of the company, and the public holdings of Class A
stock alone amounted to 35% of the combined equity, but the Class A
had no voting power).
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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 mandatory
redemption................................... 89,703 30,000
Preferred stock subject to mandatory
redemption................................... 70,000 113,950
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 paid in capital)............ $1,461,721
Class A Common Stock....................................... 136,840
Retained Earnings.......................................... *266,630
Preferred stock not subject to mandatory redemption (of
subsidiaries)............................................. 119,703
Preferred stock subject to mandatory redemption (of
subsidiaries)............................................. 183,950
Long-term Debt............................................. 1,709,897
------------
[[Page 10665]]
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.'' \55\
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\55\ Northeast Utilities, Holding Co. Act Release No. 25221.
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In view of all these considerations, the Commission has concluded
that sections 7(d), 10(b) and 10(c) of the Act do not require any
negative findings.
III. Conclusion
The Commission has carefully examined the application under the
applicable standards of the Act, and has concluded that the proposed
issuances, sales and acquisitions and related transactions are
consistent with those standards. The Commission has reached these
conclusions on the basis of the complete record before it.
Due notice of the filing of the application-declaration has been
given in the manner prescribed in rule 23 under the Act, and no hearing
has been requested of or ordered by the Commission. Upon the basis of
the facts in the record, it is hereby found that, except as to the
matter over which jurisdiction has been reserved, the applicable
standards of the Act and rules are satisfied, and that no adverse
findings are necessary:
It is ordered, under the applicable provisions of the Act and rules
under the Act, that, except as to the matter over which jurisdiction
has been reserved, the application-declaration, as amended, is, granted
and become effectively immediately, subject to the terms and conditions
prescribed in rule 24 under the Act;
It is further ordered, that jurisdiction is reserved over
Conectiv's ownership of Chesapeake Utilities Corporation for up to
three years from the date of this order; and
It is further ordered, that Conectiv will file a post-effective
amendment no later than the end of that three-year period requesting
the Commission to dispose of the matter over which jurisdiction is
reserved, in the event that the matter is not moot.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
Appendix 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\
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\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.
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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.
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\
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\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).
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3. CSI, directly and through subsidiaries, provides a wide range
of energy-related goods and services to industrial, commercial and
residential customers. 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\
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\4\ See Cinergy Corp., Holding Co. Act Release No. 26662 (Feb.
7, 1997) (``Cinergy Solutions Order'').
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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\
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\5\ Subject to certain conditions, rule 58(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).
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b. Conectiv Plumbing, L.L.C., a Delaware limited liability
company owned 90% by CSI, provides plumbing services primarily in
connection with the CSA 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. Conectiv Communications, Inc., A Delaware corporation and a
direct sibsidiary of Delmarva, was formed in 1996 to provide a full-
range of retail and wholesale telecommunications services.\6\
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\6\ Section 34 of the Act provides an exemption from the
requirement of prior Commission approval for the ownership 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.
---------------------------------------------------------------------------
5. DCI, a Delaware corporation and a direct subsidiary of
Delmarva, was formed in 1985 to be a holding company for the
following 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\
---------------------------------------------------------------------------
\7\ DCI is managing real estate that was acquired for an
intended utility purpose that has ceased to exist, to enable 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.
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a. DCI I, Inc., a Delaware corporation and a wholly owned
subsidiary of DCI formed in 1985 to invest in leveraged leases.\8\
---------------------------------------------------------------------------
\8\ See Central and South West Corp., Holding Co. Act Release
No. 23578 (Jan. 22, 1985) (approving leveraged lease investments by
a registered holding company)
---------------------------------------------------------------------------
b. DCI II, Inc., a Virgin Islands corporation and a wholly owned
foreign sales subsidiary of DCI formed in 1985 to be involved in
equity investments in leveraged leases.\9\
---------------------------------------------------------------------------
\9\ Id.
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[[Page 10666]]
c. DCTC-Burney, Inc., a Delaware corporation and a wholly owned
subsidiary of DCI formed in 1987 to invest in ``qualifying
facilities.'' \10\
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\10\ A ``qualifying facility'' is defined under the Public
Utility Regulatory Policies Act of 1978, as amended (``PURPA'').
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).
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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\
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\11\ Id.
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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\
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\12\ Id.
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f. Christiana Capital Management, Inc., a Delaware corporation
and a wholly owned subsidiary formed in 1987, which owns an office
building leased to associates.\13\
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\13\ See Unitil Corp., Holding Co. Act Release No. 25524 (Apr.
24, 1992).
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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\
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\14\ See supra note 9.
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6. Solutions, a Delaware limited liability company, is jointly
owned by Delmarva and Atlantic. Solutions 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. Energy
management services 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, and
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\
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\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.
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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 these services to
qualifying and non-qualifying cogeneration and small power
production facilities under the Public Utility Regulatory Policies
Act of 1978 (``PURPA'').\19\
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\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.
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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 offer marketing services to nonassociate business 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\
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\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'').
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Solutions provides service Line repair and extended warranties
with respect to all of the utility or energy-related services 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\
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\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.
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Solutions also provides other goods and services, from time to
time, related to the consumption of energy and 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\
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\25\ See the 1997 CNG Order.
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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.
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 make bulk purchases of gas in order
to improve the efficiency of its natural gas local distribution
operations.\26\
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\26\ 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. See rule 16 under the Act.
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[[Page 10667]]
Delmarva also has a nonutility subsidiary trust, Delmarva Power
Financing I (``DPFI''), which was formed in 1996 in connection with
the issuance by Delmarva of Cumulative Quarterly Income Preferred
Securities.
Appendix B
Atlantic
Atlantic has three direct nonutility subsidiaries, Atlantic
Energy International, Inc. (``AEII''), Atlantic Energy Enterprises,
Inc. (``AEE''), and Solutions.\1\
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\1\ 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 incurs few costs at this point.
Accordingly, Conectiv seeks to retain this business under section
11(b)(1). Although it is currently operated within ACE, it may be
moved to a separate subsidiary of Conectiv. If this occurs, the
subsidiary will apply for exempt telecommunications company status
under section 34.
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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 will wind down its business 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 six 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.
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.\2\ 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.\3\
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\2\ See Central and South West Corp., Holding Co. Act Release
No. 23588 (Jan. 22, 1985).
\3\ 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).
---------------------------------------------------------------------------
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.\4\
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\4\ See supra note 9.
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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.
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.\5\
---------------------------------------------------------------------------
\5\ 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).
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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.
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.\6\
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\6\ It is contemplated that CCI will be merged with and into
Conectiv Communications, Inc. See supra note 5.
---------------------------------------------------------------------------
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.\7\
---------------------------------------------------------------------------
\7\ See Central Power and Light Co., Holding Co. Act Release No.
26408 (Nov. 13, 1995).
---------------------------------------------------------------------------
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,
transporation and marketing. Disucssions are underway for the
purchase of AEE of Cenerprise's interest.\8\
---------------------------------------------------------------------------
\8\ See supra note 15.
---------------------------------------------------------------------------
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.\9\
---------------------------------------------------------------------------
\9\ Upon consummation of the proposed transactions, Solutions
will become a wholly owned subsidiary of Conectiv.
---------------------------------------------------------------------------
ACE also has a nonutility subsidiary trust, Atlantic Capital I
(``ACT''), which was formed in 1996 in connection with the issuance
by ACE of Cumulative Quarterly Income Preferred Securities.
[FR Doc. 98-5488 Filed 3-3-98; 8:45 am]
BILLING CODE 8010-01-M
