[Federal Register Volume 67, Number 74 (Wednesday, April 17, 2002)]
[Notices]
[Pages 18955-18962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9313]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27516]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

April 10, 2001.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by May 6, 2002, to the Secretary, Securities and Exchange 
Commission, Washington, DC 20549-0609, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in the case of an attorney at law, 
by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After May 6, 2002, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

Pepco Holdings Inc. et al. (70-9947)

    Pepco Holdings Inc. (``PHI''), a company not currently subject to 
the Act; PHI's parent company, Potomac Electric Power Company 
(``Pepco''), an electric public utility company; Pepco's direct and 
indirect nonutility subsidiaries (``Pepco Nonutilities''), all located 
at 701 Ninth Street, 10th Floor, Suite 1300, Washington, DC 20068; 
Conectiv, a registered public utility holding company; Conectiv's 
wholly owned electric and gas public utility subsidiaries, Delmarva 
Power & Light Company (``Delmarva'') and Atlantic City Electric Company 
(``ACE''); Conectiv Energy Holding Company (``CEH''), a registered 
holding company subsidiary of Conectiv; CEH's wholly owned electric 
public utility subsidiaries, Conectiv Delmarva Generation, Inc. 
(``CDG'') and Conectiv Pennsylvania Generation, Inc. (``CPGI''); ACE 
REIT, Inc. (``ACE REIT''), a registered holding company subsidiary of 
CEH; ACE REIT's wholly owned electric public utility subsidiary 
Conectiv Atlantic Generation, LLC (``CAG''); Conectiv Energy Supply, 
Inc. (``CESI'') a nonutility holding company subsidiary of CEH and 
Conectiv's direct and indirect nonutility subsidiaries (``Conectiv 
Nonutilities''), all located at 800 King Street, Wilmington, Delaware 
19801 (collectively, ``Applicants''), have filed a joint application-
declaration (``Application'') under sections 6(a), 7, 9(a), 10, 12(b), 
12(c), 13(b), 32, and 33 of the Act, and rules 42, 43, 45, 46, 52, 53, 
54, 90 and 91 under the Act in connection with various proposed 
transactions.

I. Introduction

    In a separate file, Applicants request authority for Conectiv and 
Pepco to merge and situate PHI as a holding company above them 
(``Merger'').\1\ Following the Merger, PHI will register as a holding 
company under section 5 of the Act. After the Merger is complete, PHI 
and its subsidiaries (``Subsidiaries,'' and together with PHI, ``PHI 
System'') request authority to engage in various financing through June 
30, 2005 (``Authorization Period'') including: (i) Issuance by PHI of 
common stock, preferred stock and preferred stock equivalent 
securities, long- and short-term debt and guarantees; (ii) issuance of 
securities by Pepco and Delmarva; (iii) acquisition of up to $1.5 
billion of utility assets by the direct and indirect utility 
subsidiaries of CEH; (iv) issuance by the Conectiv and Pepco 
Nonutilities (collectively, ``Nonutility Subsidiaries'') of securities 
and guarantees; (v) transactions to manage interest rate risk 
(``Hedging Transactions''); (vi) the formation of a money pool (``Money 
Pool''); (vii) the formation and issuance of securities by financing 
entities; (viii) payment of dividends out of capital surplus; (ix) 
changes in capital stock of wholly owned subsidiaries and (x) 
investment in exempt wholesale generators (``EWGs''), as defined in 
section 32 of the Act and foreign utility companies (``FUCOs''), as 
defined in section 33 of the Act.
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    \1\ See HCAR No. 27511 (March 26, 2002) and file number 70-9913.
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II. Financing Parameters

    The proposed transactions will be subject to the following general 
terms and conditions (``Financing Parameters''):
     The effective cost of money on long-term debt borrowings 
will not exceed the greater of (i) 500 basis points over the 
comparable-term U.S. Treasury securities or (ii) a gross spread over 
U.S. Treasuries that is consistent with similar securities of 
comparable credit quality and maturities issued by other companies.
     The effective cost of money on short-term debt borrowings 
will not exceed the greater of (i) 500 basis points over the 
comparable-term London Interbank Offered Rate (``LIBOR'') or (ii) a 
gross spread over LIBOR that is consistent with similar securities of 
comparable credit quality and maturities issued by other companies.
     The dividend rate on any series of preferred securities 
will not exceed the greater of (i) 500 basis points over the yield to 
maturity of a U.S. Treasury security having a remaining term equal to 
the term of the series of preferred securities or (ii) a rate that is 
consistent with similar securities of comparable credit quality and 
maturities issued by other companies.
     The maturity of indebtedness will not exceed fifty years. 
Preferred securities may not have any mandatory redemption provisions.

[[Page 18956]]

I. External Financings

A. PHI

    Applicants request authority for PHI to issue equity, preferred 
securities and debt securities in an aggregate amount not to exceed 
$3.5 billion outstanding at any time through the Authorization Period 
(``External Limit''). Applicants seek authority for PHI to issue short-
term debt securities in an aggregate amount not to exceed $2.5 billion 
(``Short-Term Limit''). Any short-term debt issued through the 
Authorization Period will count against the External Limit. In 
addition, Applicants request authority for PHI to issue up to twenty 
million shares of common stock or options to purchase shares under 
stock purchase/dividend reinvestment plans and stock-based management 
incentive and employee benefit plans (``Common Stock Plan Limit'').
1. General
    Applicants request authority for PHI to issue common stock in an 
aggregate amount outstanding not to exceed the External Limit at any 
time during the Authorization Period. Specifically, Applicants propose 
that PHI issue and sell common stock, options, warrants or other stock 
purchase rights exercisable for common stock. Common stock issuances 
may be through (i) underwriting agreements of a type generally standard 
in the industry; (ii) negotiation with underwriters, dealers or agents; 
(iii) competitive bidding among underwriters; (iv) private placements 
or other non-public offerings to one or more persons; (v) directly to 
employees through employee benefit plans (or to trusts established for 
their benefit) or (vi) directly to shareholders and others through 
PHI's stock purchase/dividend reinvestment plans and stock-based 
management incentive. All common stock sales will be at rates or 
prices, and under conditions negotiated, based upon, or otherwise 
determined by, competitive capital markets. Underwriters may resell 
common stock from time to time in one or more transactions, including 
negotiated transactions, at a fixed public offering price or at varying 
prices determined at the time of sale. PHI also may grant underwriters 
a ``green shoe'' option permitting common stock to be offered solely 
for the purpose of covering over-allotments.
    Applicants also propose that PHI issue common stock or options, 
warrants, or other stock purchase rights exercisable for common stock 
in public or privately negotiated transactions as consideration for the 
equity securities or assets of other companies, provided that the 
acquisition of any equity securities or assets has been authorized in 
this proceeding or a separate proceeding, or is exempt under the Act or 
rules under the Act.
2. Stock Based Management and Employee Benefit Plans
    Applicants request authority for PHI to establish a stock purchase/
dividend reinvestment plan that is expected to incorporate the existing 
features of the plans currently offered by Pepco and Conectiv. Upon 
consummation of the Merger, the stock purchase/dividend reinvestment 
plans of Pepco and Conectiv will be terminated (or one company's plan 
will be adopted by PHI) and participants will be eligible to become 
participants in PHI's new or adopted plan. Applicants propose that PHI, 
from time to time during the Authorization Period, issue and/or acquire 
in open market transactions, or other acceptable method, shares of 
common stock under stock-based management incentive and employee 
benefit plans and under a stock purchase/dividend reinvestment plan in 
an amount not to exceed the Common Stock Plan Limit.
    PHI common stock issued to participants in the existing Pepco and 
Conectiv plans at the time of the Merger will not be included in the 
calculation of the Common Stock Plan Limit. PHI common stock issued on 
an ongoing basis to participants in the PHI stock purchase/dividend 
reinvestment plan will not be included in the calculation of the 
External Limit.
3. Preferred Securities
    Applicants also request authority for PHI to issue preferred 
securities (including its authorized preferred stock, trust preferred 
securities or monthly income preferred securities) directly or 
indirectly through one or more financing subsidiaries. Preferred 
securities may be convertible or exchangeable into shares of PHI common 
stock or unsecured indebtedness. Preferred securities may be sold 
directly through underwriters or dealers in connection with an 
acquisition in a manner similar to that described for common stock 
above.
4. Long-Term Debt
    Applicants propose that PHI issue unsecured long-term debt 
securities that may include, but not be limited to, medium-term notes 
or debentures, under one or more indentures or long-term indebtedness 
under agreements with banks or other institutional lenders. Any long-
term debt security would have a designated aggregate principal amount, 
maturity, interest rate or methods of determining the same, terms of 
payment of interest, redemption provisions, sinking fund terms and 
other terms and conditions as PHI may determine at the time of 
issuance. Any long-term debt: (i) May be convertible into any other 
authorized securities of PHI; (ii) will have maturities ranging from 
one to fifty years; (iii) may be subject to optional and/or mandatory 
redemption, in whole or in part, at par or at various premiums above 
the principal amount; (iv) may be entitled to mandatory or optional 
sinking-fund provisions; (v) may provide for reset of the coupon 
pursuant to a remarketing arrangement; (vi) may be subject to tender or 
the obligation of the issuer to repurchase at the election of the 
holder or upon the occurrence of a specified event; (vii) may be called 
from existing investors by a third party or (viii) may be entitled to 
the benefit of financial or other covenants.
    Specific terms of any borrowings, such as maturity dates, interest 
rates, redemption and sinking fund provisions, tender or repurchase and 
conversion features, if any, with respect to the long-term securities 
of a particular series, will be determined by PHI at the time of 
issuance and will comply in all regards with the Financing Parameters. 
Associated placement, underwriting or selling agent fees, commissions 
and discounts, if any, will be established by negotiation or 
competitive bidding.
5. Short-Term Debt
    Applicants seek authority for PHI to issue short-term debt in an 
aggregate amount not to exceed the Short-Term Debt Limit. Short-term 
debt may include (i) borrowings under one or more revolving credit 
facilities or bank loans; (ii) commercial paper; (iii) short-term notes 
and (iv) bid notes. Specific terms of any short-term borrowings will be 
determined by PHI at the time of issuance and will comply in all 
regards with the Financing Parameters. If the notional maturity of 
short-term debt is greater than 364 days, the debt security will 
include put options at appropriate points in time to cause the security 
to be accounted for as a current liability under United States 
generally accepted accounting principles (``GAAP''). Applicants propose 
that PHI issue other types of short-term debt securities generally 
available in the credit markets, money markets or capital markets, 
whose specific terms, in all cases, will comply in all regards with the 
Financing Parameters. Applicants state that all short-term debt issued 
by PHI will be unsecured.

[[Page 18957]]

    Applicants request authority for PHI to sell commercial paper, from 
time to time, in established domestic or European commercial paper 
markets. Commercial paper would be sold directly to investors or sold 
to dealers at the discount rate or the coupon rate per annum prevailing 
at the date of issuance for commercial paper of comparable quality and 
maturities. It is expected that the dealers acquiring commercial paper 
from PHI will reoffer this paper at a discount to corporate, 
institutional and, with respect to European commercial paper, 
individual investors. Institutional investors are expected to include 
commercial banks, insurance companies, pension funds, investment 
trusts, foundations, colleges and universities and finance companies.
    Applicants propose that PHI sell short-term notes through one or 
more private placements or public offerings primarily to traditional 
money market investors. Specific terms of any borrowings will be 
determined by PHI at the time of issuance and will comply in all 
regards with the Financing Parameters.
    PHI proposes to enter into individual agreements (``Bid Note 
Agreements'') with one or more commercial banks that may be lenders 
under PHI credit facilities. The Bid Note Agreements would permit PHI 
to negotiate with one or more banks (``Bid Note Lenders'') on any given 
day for the Bid Note Lender, or any affiliate or subsidiary of the 
lender, to purchase promissory notes directly from PHI.
6. Guarantees
    Applicants request authority for PHI to issue guarantees (``PHI 
Guarantees''), to third parties, obtain letters of credit, enter into 
support or expense agreements, or otherwise provide credit support with 
respect to the obligations of Subsidiaries, as may be appropriate in 
the ordinary course of their respective businesses, and to enter into 
guarantees of non-affiliated third parties' obligations in the ordinary 
course of PHI's business in an aggregate amount not to exceed $3.5 
billion (``PHI Guarantee Limit'').
    A portion of the PHI Guarantees may be in connection with the 
business of CESI or Pepco Energy Services, Inc. (``PES''), both wholly 
owned indirect subsidiaries of PHI. CESI conducts power marketing and 
trading operations and PES provides energy efficiency contracting, 
building and systems operation and maintenance, as well as conducting 
gas and electric marketing. In addition, PHI may wish to provide credit 
support in connection with the trading positions of CESI and PES 
entered into in the ordinary course of CESI's and PES's energy 
marketing and trading businesses. PHI may also provide credit support 
for PES' construction obligations entered into in the ordinary course 
of PES's energy contracting business. The portion of the PHI Guarantee 
Limit to be used on behalf of the trading activities of CESI and PES 
allows only for a modest increase over the Authorization Period.
    Certain of the PHI Guarantees may be in support of obligations that 
are not capable of exact quantification. In these cases, PHI will 
determine the exposure under a guarantee for purposes of measuring 
compliance with the PHI Guarantee Limit by appropriate means, including 
estimation of exposure based on loss experience or potential payment 
amounts. PHI proposes to charge each Subsidiary a fee for any guarantee 
provided on its behalf that is not greater than the cost, if any, of 
obtaining the liquidity necessary to perform the guarantee for the 
period of time the guarantee remains outstanding.
7. Risk Management
    Applicants request authority for PHI to enter into, perform, 
purchase and sell financial instruments intended to reduce or manage 
the volatility of interest rates, including but not limited to, 
interest rate swaps, caps, floors, collars and forward agreements or 
any other similar agreements. Hedges may also include the issuance of 
structured notes (i.e., a debt instrument in which the principal and/or 
interest payments are indirectly linked to the value of an underlying 
asset or index), or transactions involving the purchase or sale, 
including short sales, of U.S. Treasury or agency (e.g., Federal 
National Mortgage Association) obligations or LIBOR based swap 
instruments (collectively, ``Hedge Instruments''). Applicants state 
that the transactions would be for fixed periods and stated notional 
amounts. PHI would employ interest rate derivatives as a means of 
prudently managing the risk associated with any of its outstanding debt 
issued under this authorization or under an applicable exemption by, in 
effect, synthetically (i) converting variable-rate debt to fixed-rate 
debt; (ii) converting fixed-rate debt to variable-rate debt and (iii) 
limiting the impact of changes in interest rates resulting from 
variable-rate debt. In no case will the notional principal amount of 
any interest rate swap exceed that of the underlying debt instrument 
and related interest rate exposure. Applicants state that they will not 
engage in any speculative transactions. Applicants state that 
transactions will be entered into for a fixed or determinable period. 
PHI will only enter into agreements with counterparties whose senior 
debt ratings, as published by a nationally recognized rating agency are 
greater than or equal to ``BBB,'' or an equivalent rating (``Approved 
Counterparties'').
    In addition, Applicants request authority for PHI to enter into 
interest rate Hedging Transactions with respect to anticipated debt 
offerings (``Anticipatory Hedges''), subject to certain limitations and 
restrictions. These Anticipatory Hedges would only be entered into with 
Approved Counterparties, and would be utilized to fix and/or limit the 
interest rate risk associated with any new issuance through (i) a 
forward sale of exchange-traded Hedge Instruments (``Forward Sale''); 
(ii) the purchase of put options on Hedge Instruments (``Put Options 
Purchase''); (iii) a Put Options Purchase in combination with the sale 
of call options Hedge Instruments (``Zero Cost Collar''); (iv) 
transactions involving the purchase or sale, including short sales, of 
Hedge Instruments or (v) some combination of a Forward Sale, Put 
Options Purchase, Zero Cost Collar and/or other derivative or cash 
transactions, including, but not limited to, structured notes, caps and 
collars, appropriate for the Anticipatory Hedges. Anticipatory Hedges 
may be executed on-exchange (``On-Exchange Trades'') with brokers 
through the opening of futures and/or options positions traded on the 
Chicago Board of Trade, the opening of over-the-counter positions with 
one or more counterparties (``Off-Exchange Trades''), or a combination 
of On-Exchange Trades and Off-Exchange Trades. PHI will determine the 
optimal structure of each Anticipatory Hedge transaction at the time of 
execution. PHI may decide to lock in interest rates and/or limit its 
exposure to interest rate increases.

B. Pepco and Delmarva External Financing

    In addition to the following requests for financing authority, 
Applicants request authority for Pepco to maintain its existing 
financing arrangements described in exhibit K-1 to the Application.
1. Short-Term Debt
    Applicants request authority for Pepco and Delmarva to issue short-
term debt securities in aggregate amounts not to exceed $300 million 
and $275 million for Pepco and Delmarva, respectively, outstanding at 
any one time during the Authorization Period. Applicants request 
authority for Pepco and Delmarva to issue the same type of short-term 
debt securities with the same

[[Page 18958]]

financing parameters as requested for PHI in section III.A.5, above.
2. Long-Term Debt and Preferred Securities
    Applicants request authority for Pepco to issue an aggregate of up 
to $800 million in long-term debt securities and preferred securities 
during the Authorization Period. Applicants propose that Pepco will 
issue the same types of long-term debt securities and preferred 
securities under the same terms as requested for PHI in III.A.4, above, 
except that Pepco may issue secured as well as unsecured debt 
securities. It is anticipated that any secured long-term debt issued by 
Pepco will be under a Mortgage and Deed of Trust Dated July 1, 1936, as 
amended and supplemented, between Potomac Electric Power Company and 
The Bank of New York, as Successor Trustee to Riggs National Bank of 
Washington, D.C. However, Pepco may enter into other similar secured 
financing arrangements, such as a new mortgage indenture, a fallaway 
indenture, pursuant to which Pepco would issue debt securities that 
would be secured by a new series of mortgage bonds until such time as 
its mortgage indenture was terminated or it secured financing 
agreements with banks or institutional lenders (i.e., accounts 
receivable financing or a sale/leaseback of utility property not 
subject to the mortgage lien). Unsecured long-term debt securities that 
Pepco may issue, include, but are not limited to, notes, medium-term 
notes or debentures, under one or more indentures or long-term 
indebtedness under agreements with banks or other institutional 
lenders.
3. Guarantees
    Applicants request authority for Pepco to enter into guarantees 
(``Pepco Guarantees'') under the same conditions as requested for the 
PHI Guarantees. The Pepco Guarantees will count against the PHI 
Guarantee Limit, exclusive of any guarantees and other forms of credit 
support that are exempt under rule 45(b) and rule 52(b); provided 
however, that the amount of Nonutility Guarantees in respect of 
obligations of any subsidiaries acquired under rule 58 (``Rule 58 
Subsidiaries'') shall remain subject to the limitation of rule 
58(a)(1). Applicants state that certain of the guarantees may be in 
support of obligations that are not capable of exact quantification. In 
these cases, Pepco will determine the exposure under a guarantee for 
purposes of measuring compliance with the PHI Guarantee Limit by 
appropriate means including estimation of exposure based on loss 
experience or potential payment amounts. Applicants request authority 
for Pepco to charge its associate company a fee for each guarantee 
provided on its behalf determined in the same manner as specified above 
for guarantees issued by PHI.
4. Risk Management
    Applicants request authority for Pepco and Delmarva to enter into, 
perform, purchase and sell Hedge Instruments and Anticipatory Hedges 
according to the same limitations and requirements applicable to PHI 
described above, to the extent not exempt under rule 52.

C. CEH

    Applicants request authority for CEH, a subsidiary of CEH or a 
financing entity established by CEH (``collectively, ``CEH Companies'') 
to fund the generation activities of the CEH Companies during the 
Authorization Period to issue preferred securities, long-term debt and 
short-term debt in an aggregate amount not to exceed $1.5 billion 
outstanding at any time during the Authorization Period (``Genco 
Limit''). Any issuance of securities by the CEH Companies to unrelated 
third parties will count towards the PHI Financing Limit, except those 
issued by associate companies or the PHI System Money Pool. Any then 
outstanding short-term debt issued by the CEH Companies will be 
included in the calculation of the PHI Short-Term Debt Limit.
1. Preferred Securities
    Applicants request authority for the CEH Companies to issue 
preferred stock or other types of preferred securities in one or more 
series with rights, preferences and priorities as may be designated in 
the instrument creating each series. Dividends or distributions on 
preferred securities will be made periodically and to the extent funds 
are legally available for such purpose, but may be made subject to 
terms that allow the issuer to defer dividend payments for specified 
periods. Preferred Securities may be sold directly through underwriters 
or dealers in connection with an acquisition in a manner similar to 
that described for common stock above.
2. Long-Term Debt
    Applicants propose that the CEH Companies issue long-term debt 
securities including, but not limited to, notes, medium-term notes or 
debentures under one or more indentures, or long-term indebtedness 
under agreements with banks or other institutional lenders. Long-term 
debt may be secured by the CEH Companies' generation assets or 
unsecured. Any long-term debt security would have a designation of 
aggregate principal amount, maturity, interest rate(s) or methods of 
determining the same, terms of payment of interest, redemption 
provisions, sinking fund terms, and other terms and conditions as the 
CEH Companies may determine at the time of issuance. Any long-term debt 
(i) may be convertible into any authorized securities of the CEH 
Companies; (ii) will have maturities ranging from one to fifty years; 
(iii) may be subject to optional and/or mandatory redemption, in whole 
or in part, at par, or at various premiums above the principal amount 
thereof; (iv) may be entitled to mandatory or optional sinking-fund 
provisions; (v) may provide for reset of the coupon pursuant to a 
remarketing arrangement; (vi) may be subject to tender to the issuer 
for repurchase or be subject to the obligation of the issuer to 
repurchase at the election of the holder or upon the occurrence of a 
specified event and (vii) may be called from existing investors by a 
third party.
    Specific terms of any borrowings such as maturity dates, interest 
rates, redemption and sinking fund provisions, tender, or repurchase 
and conversion features, if any, with respect to the long-term 
securities of a particular series, will be determined by the issuer at 
the time of issuance and will comply in all regards with the parameters 
for financing authorization set forth above. Associated placement, 
underwriting, or selling agent fees, commissions and discounts, if any, 
will be established by negotiation or competitive bidding.
3. Short-Term Debt
    Applicants request authority for the CEH Companies to issue the 
same types of short-term debt securities under the same terms as 
requested above for PHI. CEH Companies may, without counting against 
the limits set forth above, maintain back-up lines of credit. 
Outstanding external short-term debt issued by CEH Companies will be 
included in the calculation of the PHI Short-Term Debt Limit.
4. Guarantees
    Applicants request authority for CEH to enter into guarantees of 
the obligations of its subsidiaries under the same terms as the PHI 
Guarantees and for subsidiaries of CEH or financing entities 
established by CEH to issue guarantees to external lenders in support 
of their financing activities (collectively, ``CEH Guarantees''). The 
CEH Guarantees will count towards the

[[Page 18959]]

PHI Guarantee Limit, exclusive of any guarantees and other forms of 
credit support that are exempt under rule 45(b) and rule 52(b). In no 
event will any CEH Guarantees involve the pledging of any utility 
property.
    A portion of the CEH Guarantees may be issued in connection with 
the business of CESI, a wholly owned direct subsidiary of CEH. CESI 
conducts power marketing and trading operations. CEH may wish to 
provide credit support in connection with the trading positions of CESI 
entered into in the ordinary course of CESI's energy marketing and 
trading businesses. The portion of the PHI Guarantee Limit represented 
by CEH Guarantees allows only for a modest increase in the energy 
trading activities of CESI.
    CEH Guarantees may be in support of obligations that are not 
capable of exact quantification. In these cases, CEH will determine the 
exposure under a guarantee for purposes of measuring compliance with 
the PHI Guarantee Limit by appropriate means, including estimation of 
exposure based on loss experience or potential payment amounts. CEH may 
charge each of its subsidiaries a fee for any guarantee provided on its 
behalf. The fee will not be greater than the cost, if any, of obtaining 
the liquidity necessary to perform the guarantee for the period of time 
the guarantee remains outstanding.
5. Financing Risk Management Devices
    CEH or a financing subsidiary established by CEH, request authority 
to enter into, perform, purchase and sell interest rate management 
devices and Anticipatory Hedges subject to the limitations and 
requirements applicable to PHI described above in section III.A.7.
6. Utility Property Financing
    Conectiv, CAG, CDG and any new utility company established by 
Conectiv (``New Utility Subsidiary''), are currently authorized to 
acquire up to $1 billion of utility property.\2\ Authorization was 
granted for (i) Conectiv to fund CEH, (ii) CEH in turn to fund CDG, ACE 
REIT and any established New Utility Subsidiary and (iii) ACE REIT to 
fund CAG through the issuance of debt or equity securities to, and the 
acquisition of those securities by, their respective parent companies 
in an aggregate amount not to exceed $1 billion. Further, authorization 
was granted for CAG, CDG and the New Utility Subsidiaries to borrow up 
to $1 billion (less any debt or equity securities issued to their 
respective parent companies) from the Conectiv money pool to fund 
acquisitions of utility property. As of December 31, 2001, no utility 
property has been acquired under this authorization.
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    \2\ Conectiv and its subsidiaries currently have various 
authorizations under orders dated February 26, 1998 (HCAR No. 
26833), August 21, 1998 (HCAR No. 26907), September 28, 1998 (HCAR 
No. 26921), October 21, 1998 (HCAR No. 26930), November 13, 1998 
(HCAR No. 26941), December 14, 1999 (HCAR No. 27111), August 17, 
2000 (HCAR No. 27213), June 7, 2001 (HCAR No. 27415) and March 22, 
2002 (HCAR No. 25707) collectively, ``Conective Financing Orders''). 
Since it was formed under the authority granted in the Conectiv 
Financing Orders, CPGI is also a New Utility Subsidiary.
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    PHI requests that the authorizations previously granted in the 
Conectiv Financing Orders for CAG, CDG and the New Utility Subsidiaries 
to acquire and fund up to $1 billion of utility property be 
consolidated in this file. For purposes of this request, the 
acquisition of utility property by CAG, CDG, CPGI and the New Utility 
Subsidiaries (but not Pepco, Delmarva or ACE) would include any newly 
constructed facilities, any property acquired from unaffiliated third 
parties and any property acquired from associated companies that are 
public utility companies or EWGs. Any acquisition of utility property 
made under the Conectiv Financing Orders will count against the 
authorization for the acquisition of utility property sought in this 
Application.

D. Conectiv Financing

1. Existing Financing Arrangements
    Applicants request that Conectiv maintain certain financing 
arrangements in place following the merger. These financing 
arrangements are more fully described in exhibit K-2 to this 
Application.
2. Guarantees
    Applicants request authority for Conectiv to enter into guarantees 
of the obligations of its subsidiaries (``Conectiv Guarantees'') under 
the same terms and conditions as requested for PHI above in section 
III.A.6. The Conectiv Guarantees will count towards the PHI Guarantee 
Limit, exclusive of any guarantees and other forms of credit support 
that are exempt pursuant to rule 45(b) and rule 52(b).
    A portion of the Conectiv Guarantees may be in connection with the 
business of CESI, a wholly owned, indirect subsidiary of Conectiv. CESI 
conducts power marketing and trading operations. Conectiv may wish to 
provide credit support in connection with the trading positions of CESI 
entered into in the ordinary course of CESI's energy marketing and 
trading businesses. The portion of the PHI Guarantee Limit represented 
by Conectiv Guarantees allows only for a modest increase in the energy 
trading activities of CESI.
    Certain of the Conectiv Guarantees may be in support of obligations 
that are not capable of exact quantification. In these cases, Conectiv 
will determine the exposure under a guarantee for purposes of measuring 
compliance with the PHI Guarantee Limit by appropriate means, including 
estimation of exposure based on loss experience or potential payment 
amounts.
    Applicants propose that Conectiv charge each subsidiary a fee for 
any guarantee provided on its behalf that is not greater than the cost, 
if any, of obtaining the liquidity necessary to perform the guarantee 
for the period of time the guarantee remains outstanding.

E. Nonutility Subsidiary Financings

    Applicants request that certain Nonutility Subsidiaries maintain 
financing arrangements currently in place following consummation of the 
Merger. These financings are more fully described in exhibit K-2 to the 
Application.
    In order to be exempt under rule 52(b), any loans by PHI, CEH or 
Conectiv to a Nonutility Subsidiary, or by one Nonutility Subsidiary to 
another, must have interest rates and maturities that are designed to 
parallel the lending company's effective cost of capital. However, in 
the limited circumstances where the Nonutility Subsidiary making the 
borrowing is not wholly owned, directly or indirectly, by PHI, 
authority is requested for PHI, CEH, Conectiv or a Nonutility 
Subsidiary, as the case may be, to make loans to those Nonutility 
Subsidiaries at interest rates and maturities designed to provide a 
return to the lending company of not less than its effective cost of 
capital. The Nonutility Subsidiary receiving the loan in this situation 
will not sell any services to any associate Nonutility Subsidiary 
unless the transaction is exempt from the ``at cost'' standard by rule 
or Commission order.

F. Guarantees by Nonutility Subsidiaries

    Applicants request authority for the Nonutility Subsidiaries to 
provide guarantees and other forms of credit support to other 
Nonutility Subsidiaries (``Nonutility Subsidiary Guarantees''). The 
Nonutility Subsidiary Guarantees will count against the $3.5 billion 
PHI Guarantee Limit, along with the PHI Guarantees, Pepco Guarantees, 
CEH Guarantees and Conectiv Guarantees. Applicants request 
authorization for a Nonutility Subsidiary providing credit

[[Page 18960]]

support to charge an associate company a fee for each guarantee 
provided on its behalf, determined in the same manner as specified 
above for guarantees issued by PHI.

G. PHI System Money Pool

    Applicants request authorization to establish a system Money Pool. 
Applicants further request authorization for the Subsidiaries to make 
unsecured short-term borrowings from the Money Pool, to contribute 
surplus funds to the Money Pool and to lend and extend credit to one 
another through the Money Pool. Applicants request authority for PHI, 
Conectiv, CEH and ACE REIT to contribute surplus funds and to lend and 
extend credit to the Money Pool. Applicants state that no loans through 
the Money Pool would be made to, and no borrowings through the Money 
Pool would be made by PHI and Conectiv.\3\
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    \3\ Applicants state that CEH and ACE REIT are temporarily 
registered as holding companies under the Act due to lack of 
authorization to designate their subsidiaries' generation assets as 
EWGs. CEH and ACE REIT currently are authorized to borrow from 
Conectiv's money pool by order dated June 7, 2001 (HCAR No. 27415) 
and seek authority to borrow from the Money Pool until the later of 
a period of one year from the date of the Merger or the receipt of 
EWG authorization requested in this Application. Applicants further 
state that CEH and ACE REIT will be deregistered after their 
respective public utility subsidiaries are certified as EWGs.
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    Under the proposed terms of the Money Pool, short-term funds would 
be available from the following sources for short-term loans to the 
Subsidiaries from time to time: (i) surplus funds in the treasuries of 
lenders to the Money Pool (``Internal Funds'') and (ii) proceeds from 
the issuance of short-term debt securities by lenders to the Money Pool 
which are loaned to the Money Pool (``External Funds''). Funds would be 
made available from such sources in such order as the administrator of 
the Money Pool may determine would result in a lower cost of borrowing, 
consistent with the individual borrowing needs and financial standing 
of the companies providing funds to the pool. The determination of 
whether a Money Pool participant shall lend funds to the Money Pool 
would be made by the participant's chief financial officer or 
treasurer, or by a designee thereof, on the basis of cash flow 
projections and other relevant factors, in the participant's sole 
discretion. No party would be required to effect a borrowing through 
the Money Pool if it is determined that it could, and had authority to, 
effect a borrowing at lower cost directly from other lenders.
    The cost of compensating balances, if any, and fees paid to banks 
to maintain credit lines and accounts by Money Pool participants 
lending External Funds to the Money Pool would initially be paid by the 
participant maintaining the line. A portion of the costs, or all of the 
costs in the event a Money Pool participant establishes a line of 
credit solely for purposes of lending any External Funds obtained into 
the Money Pool, would be retroactively allocated every month to the 
companies borrowing the External Funds through the Money Pool in 
proportion to their respective daily outstanding borrowings of External 
Funds.
    If only Internal Funds make up the funds available in the Money 
Pool, the interest rate applicable and payable to or by Subsidiaries 
for all loans of the Internal Funds will be the rates for high-grade, 
unsecured thirty day commercial paper sold through dealers by major 
corporations as quoted in The Wall Street Journal.
    If only External Funds comprise the funds available in the Money 
Pool, the interest rate applicable to loans of the External Funds would 
be equal to the lending company's weighted average of the cost for the 
External Funds. If more than one Money Pool participant had made 
available External Funds on a certain day, the applicable interest rate 
would be a composite rate equal to the weighted average of the cost 
incurred by the respective Money Pool participants for the External 
Funds.
    In cases where both Internal Funds and External Funds are 
concurrently borrowed through the Money Pool, the rate applicable to 
all loans comprised of these ``blended'' funds would be a composite 
rate equal to the weighted average of the cost of all the External 
Funds.
    Funds not required by the Money Pool to make loans (with the 
exception of funds required to satisfy the Money Pool's liquidity 
requirements) would ordinarily be invested in one or more short-term 
investments, including: (i) Interest-bearing accounts with banks; (ii) 
obligations issued or guaranteed by the U.S. government and/or its 
agencies and instrumentalities, including obligations under repurchase 
agreements; (iii) obligations issued or guaranteed by any state or 
political subdivision thereof, provided that these obligations are 
rated not less than ``A'' by a nationally recognized rating agency; 
(iv) commercial paper rated not less than ``A-1'' or ``P-1'' or their 
equivalent by a nationally recognized rating agency; (v) money market 
mutual funds; (vi) bank certificates of deposit; (vii) Eurodollar funds 
and (viii) other investments as are permitted by section 9(c) of the 
Act and rule 40 under the Act.
    The interest income earned on investments in the Money Pool would 
be allocated among the participants in the Money Pool in accordance 
with the weighted average proportion each participant's contribution of 
funds bears to the total amount of funds in the Money Pool.
    Each Subsidiary receiving a loan through the Money Pool would be 
required to repay the principal amount of the loan, together with all 
interest accrued, on demand and in any event not later than one year 
after the date of the loan. All loans made through the Money Pool may 
be prepaid by the borrower without premium or penalty.
    Applicants request authority for Pepco and Delmarva to borrow up to 
$300 million and $275 million, respectively, at any one time 
outstanding, from the Money Pool. Any short-term debt borrowed from the 
Money Pool by Pepco and Delmarva will count against each company's 
short-term debt authority requested in section III.B.1, above.

H. Intrasystem Financing

    Applicants expect that PHI, CEH, Conectiv and the Nonutility 
Subsidiaries will lend funds, extend credit, make capital contributions 
and open account advances without interest to Nonutility Subsidiaries. 
Applicants state that these transactions will typically be exempt under 
rules 52(b) and 45(b). However, if intrasystem transactions are not 
exempt under rules 52(b) and 45(b), Applicants request that the company 
making a loan or extending credit may charge interest at the same 
effective rate of interest as the daily weighted average effective rate 
of commercial paper, revolving credit and/or other short-term 
borrowings currently held by the borrowing company, including an 
allocated share of commitment fees and related expenses. If the 
borrowing company has no outstanding borrowings, then the interest rate 
shall be predicated on the Federal Funds effective rate of interest as 
quoted daily by the Federal Reserve Bank of New York.
    In the limited circumstances where the Nonutility Subsidiary 
effecting the borrowing is not wholly owned by PHI, CEH, Conectiv, or a 
Nonutility Subsidiary, directly or indirectly, Applicants request 
authority for PHI, CEH, Conectiv, or a Nonutility Subsidiary to make 
loans to these subsidiaries at interest rates and maturities designed 
to provide a return to the lending company of not less than its 
effective cost of capital. If such loans

[[Page 18961]]

are made to a Nonutility Subsidiary, such Nonutility Subsidiary will 
not provide any services to any associate Nonutility Subsidiary unless 
such transaction is exempt from the ``at cost'' standard by rule or 
Commission order.
    If these loans are made to a Nonutility Subsidiary, such Nonutility 
Subsidiary will not provide any services to any associate Nonutility 
Subsidiary except to a wholly or partially owned subsidiary that meets 
one of the following conditions: (i) The Nonutility Subsidiary is a 
FUCO or an EWG that derives no part of its income, directly or 
indirectly, from the generation and sale of electric energy within the 
United States; (ii) the Nonutility Subsidiary is an EWG that sells 
electricity at market-based rates that have been approved by the 
Federal Energy Regulatory Commission (``FERC'') or the relevant state 
public utility commission, provided that the purchaser is not one of 
Pepco Holdings' regulated public utility subsidiaries; (iii) the 
Nonutility Subsidiary is a ``qualifying facility'' (``QF'') under the 
Public Utility Regulatory Policies Act of 1978, as amended (``PURPA''), 
that sells electricity exclusively at rates negotiated at arm's length 
to one or more industrial or commercial customers purchasing the 
electricity for their own use and not for resale, or to an electric 
utility company (other than one of Pepco Holdings' regulated public 
utility subsidiaries) at the purchaser's ``avoided costs'' as 
determined under the regulations under PURPA; (iv) the Nonutility 
Subsidiary is an EWG or QF that sells electricity at rates based upon 
its cost of service, as approved by the FERC or any state public 
utility commission having jurisdiction, provided that the purchaser of 
the electricity is not one of Pepco Holdings' regulated public utility 
subsidiaries or (v) the Nonutility Subsidiary is engaged solely in the 
business of developing, owning, operating and/or providing services to 
a company described in clauses (i)-(iv) above. In the event these loans 
are made, PHI will include in the next certificate filed under rule 24 
substantially the same information as required on form U-6B-2 with 
respect to the transaction.

I. Financing Subsidiaries

    Applicants request authority for PHI and the Subsidiaries to 
acquire, directly or indirectly, the equity securities of one or more 
corporations, trusts, partnerships, or other entities (``Financing 
Subsidiaries'') created specifically for the purpose of facilitating 
the financing of the authorized and exempt activities (including exempt 
and authorized acquisitions) of PHI and the Subsidiaries. Applicants 
request authority for the Financing Subsidiaries to issue short-term 
debt, long-term debt, preferred securities or equity securities to 
third parties and transfer the proceeds of these financings to PHI or 
their respective parent Subsidiaries. If required, Applicants propose 
that PHI or a Subsidiary, guarantee or enter into support or expense 
agreements with respect to the obligations of the Financing 
Subsidiaries. Applicants request authority for each of the Subsidiaries 
to enter into an expense agreement with its respective Financing 
Subsidiary, under which it would agree to pay all expenses of the 
Financing Subsidiary. Any amounts issued by the Financing Subsidiaries 
to third parties under this authorization will be included in the 
overall external financing limitation authorized for the immediate 
parent of the Financing Subsidiary, however, the underlying intrasystem 
mirror debt and parent guarantee shall not be included.

J. Changes in Capital Stock of Wholly Owned Subsidiaries

    The portion of an individual Subsidiary's aggregate financing to be 
effected through the sale of stock to PHI or another immediate parent 
company during the Authorization Period cannot be ascertained at this 
time. It may happen that the proposed sale of capital securities may in 
some cases exceed the then-authorized capital stock of the Subsidiary. 
In addition, the Subsidiary may choose to use capital stock with no par 
value.
    Applicants request authority to change the terms of any wholly 
owned Subsidiary's authorized capital stock capitalization or other 
equity interests by an amount deemed appropriate by PHI or other 
intermediate parent company, as needed to accommodate these proposed 
transactions and to provide for future issues. A Subsidiary would be 
able to change the par value, or change between par value and no-par 
stock, without obtaining additional Commission approval. Any action by 
a Utility Subsidiary (other than CAG, CDG and the New Utility 
Subsidiaries) would be subject to and would only be taken upon the 
receipt of any necessary approvals by the state commission in the state 
or states where the Utility Subsidiary is incorporated and doing 
business.

K. Investments in EWGs and FUCOs

    Conectiv has authorization to invest proceeds of securities 
issuances in EWGs in amounts not to exceed $350 million (``Conectiv EWG 
Project Limit'').\4\ As of June 30, 2001, Conectiv had investments in 
EWGs of $156.3 million. Conectiv has no investments in FUCOs. As of 
June 30, 2001, Conectiv states that it was in compliance with the 
requirements of the Conectiv Financing Orders as they relate to 
investments in EWGs.
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    \41\ See HCAR No. 27213 (August 17, 2000).
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    As of June 30, 2001, Pepco had investments in EWGs of $31.2 
million, which consisted of investments in the Benning Road and Buzzard 
Point power generation plants. As of December 21, 2001, Pepco had 
investments in FUCOs of $643.1 million in FUCOs. These investments 
consist of interests in projects located in the Netherlands, Australia 
and Austria and were made under long-term leveraged leases.
    Applicants request that the authorizations previously granted by 
the Commission for Conectiv to invest in EWGs continue in effect upon 
consummation of the Merger pending authorization of the request for 
further investment in EWGs and FUCOs described in the Application. 
Applicants further request that Pepco maintain its current investments 
in FUCOs.
    After the Merger, Applicants seek authority to finance additional 
EWG and FUCO investments in an aggregate amount of up to 100 percent of 
PHI's consolidated retained earnings plus $3.5 billion (``PHI Exempt 
Project Limit'') during the Authorization Period. These financings may 
include the issuance or sale of securities for the purpose of financing 
the acquisition or operations of an EWG or FUCO or the guarantee of a 
security of an EWG or FUCO.

L. Payment of Dividends out of Capital or Unearned Surplus

1. PHI and Conectiv
    Applicants propose that PHI and Conectiv be permitted to pay 
dividends, from time to time through the Authorization Period, out of 
capital and unearned surplus, to the extent permitted under applicable 
corporate law. Applicants request that the Commission reserve 
jurisdiction over this proposal pending completion of the record.
2. Utility Subsidiaries
    Applicants propose that the Utility Subsidiaries be permitted to 
pay dividends, from time to time through the Authorization Period, out 
of capital and unearned surplus, to the extent permitted under 
applicable corporate law. Applicants request that the

[[Page 18962]]

Commission reserve jurisdiction over this proposal pending completion 
of the record.
3. Nonutility Subsidiaries
    Applicants propose that the Nonutility Subsidiaries (including CEH, 
ACE REIT, CAG, CDG, CPGI and the New Utility Subsidiaries upon the 
receipt of EWG status) be permitted to pay dividends, from time to time 
through the Authorization Period, out of capital and unearned surplus, 
to the extent permitted under applicable corporate law.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9313 Filed 4-16-02; 8:45 am]
BILLING CODE 8010-01-P