SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27838; 70-10217)
Pepco Holdings, Inc., et al.
April 21, 2004
Pepco Holdings, Inc. ("Pepco"), a registered holding company, Washington, D.C.; Conectiv, a registered holding company subsidiary of Pepco; and Atlantic City Electric Company ("ACE"), a public utility subsidiary of Conectiv, both of Wilmington, Delaware (collectively "Applicants"), have filed a declaration ("Declaration") under section 12(d) of the Act and rules 44 and 54 under the Act. The Commission issued a notice of the Declaration on March 30, 2004 (Holding Company Act Release No. 27825).
Applicants seek authority for ACE to sell distribution facilities owned by ACE that operate at 14kV and lower voltages within the city limits of Vineland, New Jersey ("Vineland"). Vineland, through a municipally-owned utility known as the Vineland Municipal Electric Utility ("VMEU"), provides distribution services to approximately two-thirds of the residences and businesses operating within the city limits. ACE provides distribution services to the remaining customers, about 5,500 customers. If the sale is approved, substantially all customers within the city limits will be served by VMEU. ACE will retain its higher-voltage transmission facilities both within and outside the city limits, which are used to deliver bulk supplies of electricity throughout southern New Jersey, including to VMEU. In addition, ACE will retain some lower voltage facilities that will be located within and pass through Vineland but will not interconnect with the current or to-be-transferred VMEU facilities.
The specific utility distribution assets to be sold have a depreciated book value of approximately $9.1 million (as of year end 2001) and include approximately 4,300 poles, less than 800 miles of primary and secondary wires attached to those poles, approximately 2,400 pad-mounted and pole-mounted transformers, street lights, underground conduit, customer service lines, and customer meters. Applicants state that detailed field inventory work is being done to identify the exact figures of the various types of assets to be transferred. Also being sold or transferred incidental to the sales transaction are accounts receivable from the transferred customers, various pole attachment agreements with third parties who have equipment attached to the transferred poles, easements and rights of way, and approximately 11 acres of unimproved land.
The total consideration for the transaction is $23.9 million, of which $9.1 million was the approximate net book value as of year-end 2001 of the assets to be transferred. Applicants are in the process of determining additions, prior retirements and post 2001 depreciation. A significant, but not specifically quantified, portion of the consideration is for the loss of future income from the customers being transferred.
The transaction is proposed following a condemnation action initiated by Vineland in a New Jersey state court. Various pleadings were filed by the city and ACE in which expert testimony was offered by both parties on the value of what was sought to be condemned based on a variety of valuation methods, including depreciated book value of the assets, replacement costs of the assets, the present value analyses of the future stream of income from the transferred customers, and other considerations. A settlement of the condemnation action was negotiated and executed on March 13, 2002. The settlement provided for the sale of assets and transfer of the customers from ACE to VMEU, effective as of a condemnation date to be selected. Between March 13, 2002, and the present, ACE has been constructing the facilities necessary to reconfigure its system and doing other work necessary to permit a smooth transition of customer records, customer billing and similar matters.
Under the transition plan, customers are being transferred to VMEU in advance of the transfer of title to the utility assets. Under the settlement agreement and the transition plan, Vineland has made payments to ACE totaling $12.4 million and is expected to make an additional payment of $11 million sometime in April 2004. Title to the utility assets has not been transferred but is expected to be transferred in early June 2004. A final payment of approximately $500,000 will be made six months after the transfer date.
The proposed transaction is subject to rule 54. Pepco currently does not meet the conditions of rule 53(a). At December 31, 2003, Pepco's "aggregate investment" (as defined in rule 53(a)(1)) was approximately $2.9 billion. At December 31, 2003, Pepco's "consolidated retained earnings" (also as defined in rule 53(a)(1)) were approximately $781 million. Accordingly, at December 31, 2003, Pepco's aggregate investment exceeded 50% of its consolidated earnings, the "safe harbor" limitation contained in rule 53(a).
However, by order dated July 31, 2002 (Holding Company Act Release No. 27557) ("Financing Order"), the Commission authorized Pepco to increase its aggregate investment to an amount equal to the sum of 100% of consolidated retained earnings, plus $3.5 billion. At December 31, 2003, based on the Financing Order, Pepco could have had an aggregate investment of $4.281 billion. Therefore, although Pepco's aggregate investment at that date exceeded the 50% "safe harbor" limitation of rule 53, it is within the higher investment level granted by the order
With respect to capitalization, there has been no material adverse impact on Pepco's consolidated capitalization resulting from Pepco's investments in EWGs and FUCOs. At December 31, 2002, Pepco's consolidated capitalization consisted of 31.6% equity. At December 31, 2003, Pepco's consolidated capitalization consisted of 32.5% equity. Further, at December 31, 2003, Pepco's senior unsecured debt was rated "investment grade" by all the major rating agencies. Under the Financing Order, Pepco has committed to maintain a 30% consolidated common equity ratio, and the proposed transaction will have no adverse impact on Pepco's ability to meet that commitment. Pepco satisfies all of the other conditions of paragraphs (a) and (b) of rule 53.
No state or federal commission, other than this Commission, has jurisdiction with respect to the proposed transactions. The fees, commissions and expenses to be incurred in connection with this filing will be approximately $3,500.
Due notice of the filing of the 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. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules are satisfied and no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Declaration, as amended, is permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland