As filed with the Securities and Exchange Commission on December 12, 2002
File No. 70-_____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Exelon Corporation
Exelon Ventures Company, LLC
Exelon Enterprises Company, LLC
Exelon Generation Company, LLC
Exelon New Trust Company
c/o Exelon Corporation
10 South Dearborn Street, 37th Floor
Chicago, IL 60603
(Name of company or companies filing this statement and
address of principal executive offices)
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Exelon Corporation
(Name of top registered holding company parent of each applicant or declarant)
---------------------------------
Randall E. Mehrberg
Executive Vice President and General Counsel
Exelon Corporation
10 South Dearborn Street, 37th Floor
Chicago, Illinois 60603
(Name and address of agent for service)
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The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
William J. Harmon Constance Reinhard
Michael G. Strohmeier Exelon Corporation
Jones, Day, Reavis & Pogue 10 South Dearborn Street, 37th Floor
77 West Wacker, Suite 3500 Chicago, Illinois 60603
Chicago, Illinois 60601 312-394-3604
312-782-3939
TABLE OF CONTENTS
Page
Item 1. Description of the Proposed Transaction ............................ 1
A. Introduction and General Request .............................. 1
1. Introduction ............................................. 1
2. Description of the Parties to the Transaction ............ 1
3. Summary of Approvals Sought .............................. 1
B. Detailed Description of Approval Sought ....................... 2
1. Background ............................................... 2
2. Proposed Restructuring ................................... 3
3. Summary of Benefits to Organization ...................... 3
4. Analysis ................................................. 4
Item 2. Fees, Commissions and Expenses ..................................... 5
Item 3. Applicable Statutory Provisions .................................... 6
A. Rule 54 Analysis .............................................. 6
Item 4. Regulatory Approvals ............................................... 7
Item 5. Procedure .......................................................... 7
Item 6. Exhibits and Financial Statements .................................. 8
A. Exhibits ...................................................... 8
B. Financial Statements .......................................... 8
Item 7. Information as to Environmental Effects ............................. 8
-i-
Item 1. Description of the Proposed Transaction
A. Introduction and General Request
1. Introduction
Exelon Corporation, a Pennsylvania corporation ("Exelon"), on behalf of
itself and certain Subsidiaries (as defined below) files this
Application/Declaration under sections 6(a), 7, and 11(b)(2) of the Public
Utility Holding Company Act of 1935 (the "Act") and Rules 45, 53 and 54
thereunder seeking authority to undertake activities related to Exelon's
corporate structure with respect to the Subsidiaries.
2. Description of the Parties to the Transaction
Exelon Generation Company, LLC ("Genco"), a Pennsylvania limited
liability company and a public utility company engaged in the generation
and sale of electricity in Pennsylvania, Illinois and elsewhere and also
engaged in electricity and energy commodities marketing and brokering
activities and development and ownership of exempt wholesale generators;
Exelon Ventures Company, LLC ("Ventures"), a non-utility company and
a first tier subsidiary of Exelon which has as wholly-owned subsidiaries,
Genco and Exelon Enterprises Company, LLC ("Enterprises" and, together with
Genco and Ventures, the "Subsidiaries");/1/
Enterprises, the principal subsidiary through which Exelon conducts
its non-utility businesses; and
Exelon New Trust Company ("MBT"), a to be formed Massachusetts
Business Trust, the entity that will be used to accomplish the transaction
described in this Form U-1./2/
3. Summary of Approvals Sought.
As indicated above, Ventures is a wholly-owned first tier subsidiary of
Exelon. Genco and Enterprises are wholly-owned subsidiaries of Ventures. Exelon
and the Subsidiaries seek authority to (i) form a new wholly-owned subsidiary of
Ventures, MBT and (ii) for Ventures to transfer its wholly-owned subsidiaries
Genco and Enterprises to MBT.
--------------------------------
/1/ As described in the Form U-1 Application-Declaration seeking approval
of the merger between Unicom Corporation ("Unicom") and PECO Energy Company
("PECO"), to form Exelon, formation of Ventures was necessary to achieve the
desired corporate reorganization of the Unicom non-utility subsidiaries and the
PECO non-utility subsidiaries without incurring substantial income tax
liability. See Exelon Corporation, Holding Co. Act Release No. 27256
(October 19, 2000) (the "Merger Order").
/2/ The name "Exelon New Trust Company" serves currently as a place holder
for the to be formed entity. Exelon will choose a final name upon the formation
of the entity and will amend the record in this proceeding to reflect such name.
1
B. Detailed Description of Approval Sought
1. Background
Genco is currently in the process of acquiring various generating and other
assets consisting primarily of power generation facilities operating (or under
construction) and located primarily in Massachusetts (the "Massachusetts Exempt
Businesses"). Acquisition of the Massachusetts Exempt Businesses will not
require any Commission approval because all entities acquired are either exempt
wholesale generators, energy related companies under Rule 58 or intermediate
subsidiaries of the type approved in Holding Co. Act Release No. 27545 (June 27,
2002). All of the Massachusetts Exempt Businesses are currently held in various
limited liability companies.
The acquisition of the Massachusetts Exempt Businesses by Genco is
anticipated to have certain adverse state tax impacts on the Exelon system,
unless the corporate restructuring for which authority is sought in this
Application can be implemented. State and local income and franchise taxes are
often directly impacted by a company's organizational structure, choice of legal
entity, state of incorporation, and other factors. The current legal entity
structure of the Exelon system is not the most efficient structure from a state
income and franchise tax standpoint when considering the changes in Genco's
business model resulting from the acquisition of the Massachusetts Exempt
Businesses. The Massachusetts Exempt Businesses are primarily located in
Massachusetts and other high tax states. Massachusetts has an unusual corporate
excise tax that includes both a tax on income and property and is very different
from the majority of states in which Genco currently operates. The overall tax
burden imposed by Massachusetts on corporate entities is generally greater than
that imposed by other states in which Genco does business.
The acquisition of the Massachusetts Exempt Businesses by Genco under the
current legal entity structure will cause Genco's existing nexus (i.e., physical
presence) in Massachusetts to increase. This will cause Genco to be taxable in
Massachusetts on its existing income and capital (i.e., pre-Massachusetts Exempt
Businesses attributes) as well as its income and capital resulting from the
Massachusetts Exempt Businesses./3/ This will have the effect of increasing the
overall tax burden of the Exelon system. This is true even though the
Massachusetts Exempt Businesses being acquired will not immediately generate
taxable income. Additionally, the existing legal entity structure creates the
potential for multiple taxation of the same income. The state income tax
treatment of certain entities (e.g., limited liability companies) and dividends
varies in different states. Under the existing structure, risk exists that
dividends to Ventures from the entities owning and operating the Massachusetts
Exempt Businesses and Ventures' other subsidiaries could be subject to multiple
layers of state income tax without meaningful relief in other states. This risk
of multiple taxation could be significant to the Exelon system due to the
profitability of the generation segment and the magnitude of potential
distributions paid from these entities.
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/3/ A multi-state entity apportions (i.e., divides) its income between
various states based on its amount of property, payroll and sales in each state.
The acquisition of the Massachusetts Exempt Businesses would cause Genco's
taxability in Massachusetts to increase regardless of the income or loss
actually produced from the Massachusetts Exempt Businesses.
2
2. Proposed Restructuring
Because of the issues discussed above, the Subsidiaries propose to
implement a restructuring that would create a more tax-efficient legal entity
structure, thereby reducing the Exelon system's overall tax burden, and reducing
the risk of multiple taxation of the dividends from the Massachusetts Exempt
Businesses and Ventures' other subsidiaries. Such restructuring has become
necessary due to the changes in Genco's business operations, including the
acquisition of the Massachusetts Exempt Businesses. The rules relating to the
taxation of certain legal entities for state income and franchise tax purposes
should allow the Exelon system to reduce its overall tax burden and reduce the
risk of double taxation without changing the underlying business operations of
Ventures, Genco and Genco's subsidiaries. The benefits of the proposed
restructuring to the Exelon organization are discussed in more detail below.
In order to mitigate the adverse state tax impact to the Exelon
organization from the acquisition of the Massachusetts Exempt Businesses, Exelon
and the Subsidiaries propose to create a new subsidiary, MBT, under Ventures to
hold Ventures' membership interests in Genco and Enterprises. The proposed new
legal entity would be formed as a business trust under Massachusetts law. MBT
would be wholly owned by Ventures. Upon formation, MBT will elect to be taxed as
a corporation for federal tax purposes./4/ Subsequently, Ventures will
contribute its membership interests in Genco and Enterprises to MBT. As a
result, Exelon will remain the sole owner of Ventures, Ventures will be the sole
owner of MBT and MBT will be the sole owner of Genco and Enterprises. For a
further illustration of the current corporate structure of the Exelon system
with respect to Ventures and its subsidiaries as well as the anticipated
restructuring, see the diagrams filed as Exhibit H to this
Application/Declaration.
Upon completion of the restructuring, MBT will become a registered holding
company under the Act.
3. Summary of Benefits to Organization
This proposed restructuring is expected to increase the overall efficiency
of Exelon's legal entity structure and should provide substantial state tax
efficiencies for the Exelon organization. These state tax efficiencies are
projected to create benefits to the Exelon organization of between $3 and $4
million on an annual basis./5/
In addition, the proposed restructuring should reduce the risk of multiple
layers of taxation associated with dividends from Ventures' various subsidiaries
to Ventures. The benefit to the Exelon system of reducing this risk of multiple
taxation is significant.
Due to the nature of these state tax efficiencies and the operation of the
applicable state tax provisions, the benefits to the Exelon organization cannot
be realized until the above restructuring is completed. Immediately upon the
completion of the restructuring, the benefits will begin to accrue to the
organization. Accordingly, for every month of delay in implementing
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/4/ Treas. Regs.ss.301.7701-1, et. seq.
/5/ Benefits calculated net of federal tax effect.
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the restructuring, the Exelon organization will forgo approximately $250,000 to
$330,000 of potential benefits./6/
4. Analysis
The Commission has previously addressed applications requesting changes to
the corporate structure of a registered holding company system, that were a
change in form but not a change in business substance as related to the Act./7/
The Commission recently authorized Exelon to conduct internal corporate
reorganizations and to form new intermediate subsidiaries for internal corporate
structuring of the form generally sought herein./8/ However, the authority
granted is limited to Exelon's non-utility subsidiaries and therefore does not
encompass the right to conduct the anticipated reorganization with respect to
Genco, one of Exelon's public utilities, albeit not a state-regulated utility.
However, in a series of recent orders approving the acquisition of electric
or gas utility companies and the associated formation of registered holding
companies, the Commission has approved the implementation of multiple
intermediate holding companies between the registered holding company and its
public utility subsidiaries to preserve structural and financial benefits./9/
For example, in Energy East Corp.,/10/ the Commission authorized the
interposition of CMP Group, Inc. between Energy East and Central Main Power,
although it would result in Energy East being a holding company with respect to
a subsidiary which "itself has a subsidiary company which is a holding company."
The Commission stated that "[t]he corporate structure that section 11(b)(2) was
intended to eliminate was the pyramiding of holding company groups. The practice
of pyramiding typically involved the interposition of one or more holding
companies between the ultimate parent holding company and the operating
companies and the issuance, at each level of the structure, of different classes
of debt or stock with unequal voting rights. Various abuses that Congress sought
to remedy by the Act were traceable in large measure to the use of the
pyramiding device." In light of those abuses Congress sought to remedy, the
Commission concluded that the intermediate holding company would not serve as a
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/6/ Based upon Genco's estimates of taxable income.
/7/ E.g., Allegheny Energy, Inc., Holding Co, Act Release No. (27486)
(December 31, 2001) (authorizing Genco to incorporate in a new state, transfer
several other entities from Allegheny to Genco, and merge an energy trading
subsidiary into Genco); General Public Utilities Corporation, Holding Co. Act
Release No. 25108 (June 26, 1990) (authorizing Energy Initiatives, Incorporated
to change its state of incorporation to Delaware by a statutory merger with a
newly formed Delaware corporation); Louisiana Power & Light Company, Holding Co.
Act Release No. 18791 (January 28, 1975) (changing state of incorporation from
Florida to Louisiana); General Public Utilities Corporation, Holding Co. Act
Release No. 16298 (February 26, 1969) (authorizing the registered holding
company to change its state of incorporation from New York to Pennsylvania).
/8/ See Exelon, Holding Co. Act Release No. 27545 (June 27, 2002); See
also, Emera Incorporated, Holding Co. Act Release No. 27445 (October 1, 2001);
Progress Energy, Holding Co. Act Release No. 27297 (December 12, 2000);
NiSource, Inc., Holding Co. Act Release No. 27265 (November 1, 2000).
/9/ See National Grid Group plc, Holding Co. Act Release No. 27154 (March
15, 2000); Energy East Corp., Holding Co. Act Release No. 27224 (August 31,
2000); PowerGen plc Holding Co. Act Release No. 27291 (December 6, 2000).
/10/ Holding Co. Act Release No. 27224 (August 31, 2000).
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means by which Energy East would diffuse control, rather, the intermediate
holding companies "will be maintained for the purpose of helping Applicants
capture economic efficiencies that might otherwise be lost."/11/
In addition thereto, in the Merger Order approving the formation of
Exelon, the Commission approved the corporate structure of Ventures and its
chain of utility companies. The Commission found that the structure will
centralize the organization and control of all generating entities in the Exelon
system and will enhance operational efficiency and coordination. The Commission
recognized that the structure is necessary for tax reasons related to the
realignment of PECO's non-utility subsidiaries. Finally, the Commission held
that "[a]ll of the utility companies in the Ventures chain can be viewed, for
purposes of section 11(b)(2), as essentially a single company."/12/ The
interposition of MBT will further the tax efficient structure of Ventures Exelon
was already seeking to achieve during the Merger reorganization. Granting the
authority sought in this Application/Declaration is therefore consistent with
the Merger Order.
As a registered holding company, MBT will be required to seek Commission
approval for any issuance of securities and for other actions under the Act. MBT
does not seek any authorization to issue securities except in connection with
the reorganization described in this Form U-1. Accordingly, MBT will have no
security holders other than Ventures
As discussed above, Exelon and the Subsidiaries are intending to interpose
an additional holding company subsidiary between Ventures and its subsidiaries
Genco and Enterprises to create a more efficient legal entity structure, reduce
the risk of multiple taxation, and realize substantial tax savings. MBT will
not serve as a means to diffuse control and hence will not contravene the
requirements of section 11(b)(2). The interposition of MBT does not cause
concern with respect to the various abuses Congress sought to remedy. Therefore
Exelon and the Subsidiaries respectfully request authority to implement the
corporate reorganization proposed in this Application/Declaration.
Item 2. Fees, Commissions and Expenses
Estimated Legal Fees and Expenses $40,000
Estimated Miscellaneous Expenses 5,000
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Total $45,000
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/11/ See also, National Grid Group plc, Holding Co. Act Release No. 27154
(March 15, 2000) (Holding that the intermediate holding companies will not serve
as a means by which National Grid seeks to diffuse control of the NEES Group.
Rather, these companies will be created as special-purpose entities for the sole
purpose of helping the parties to capture economic efficiencies that might
otherwise be lost in a cross-border transaction.); PowerGen plc Holding Co. Act
Release No. 27291 (December 6, 2000) (Authorizing the intermediate holding
companies as they will exist primarily to create an economically efficient
structure for the merger and the ongoing operations of PowerGen and the LG&E
Energy Subsidiaries).
/12/ Id.
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Item 3. Applicable Statutory Provisions
Sections 6, 7, and 11 of the Act and Rule 45, 53 and 54 thereunder are
considered applicable to the proposed transactions as described herein.
To the extent that the proposed transactions are considered by the
Commission to required authorization, exemption or approval under any section
of the Act or the rules and regulations other than those set forth above,
request for such authorization, exemption or approval is hereby made.
A. Rule 54 Analysis
The proposed transactions are subject to the requirements of Rule 54.
Rule 54 provides that in determining whether to approve the issue or sale of a
security by a registered holding company for purposes other than the acquisition
of an exempt wholesale generator ("EWG") or foreign utility company ("FUCO"), or
other transactions by such registered holding company or its subsidiaries other
than with respect to EWGs or FUCOs, the Commission shall not consider the effect
of the capitalization or earnings of any subsidiary which is an EWG or a FUCO
upon the registered holding company if paragraphs (a), (b) and (c) of Rule 53
are satisfied.
Exelon currently does not meet all of the conditions of Rule 53(a). As
of September 30, 2002, Exelon's "aggregate investment," as defined in Rule
53(a)(1), in EWGs and FUCOs was approximately $2,076 million which is in excess
of the 50% of Exelon's average consolidated retained earnings of $1,381 million
at September 30, 2002 which is the "safe harbor" limitation contained in Rule
53(a). However, under the Financing Order/13/ the Commission has authorized
Exelon to increase its "aggregate investment" in EWGs and FUCOs to an amount of
up to $4 billion. Therefore, although Exelon's "aggregate investment" in EWGs
and FUCOs currently exceeds the 50% "safe harbor" limitation, this investment
level is permitted under the Financing Order.
In any event, even taking into account the capitalization of and earnings
from EWGs and FUCOs in which Exelon has an interest, there would be no basis for
withholding approval of the proposed transaction. With regard to capitalization,
since the issuance of the Financing Order, there has been no material adverse
impact on Exelon's consolidated capitalization resulting from Exelon's
investments in EWGs and FUCOs. At September 30, 2002, Exelon's consolidated
capitalization consists of 37% equity, 3% preferred securities, 58% long-term
debt (including current maturities of long-term debt), and 2% short-term debt.
These ratios are within acceptable industry ranges. The proposed transactions
will not have any material impact on capitalization. Further, since the date of
the Financing Order, there has been no material change in Exelon's level of
earnings from EWGs and FUCOs.
Exelon satisfies all of the other conditions of paragraphs (a) and (b) of
Rule 53. With reference to Rule 53(a)(2), Exelon maintains books and records in
conformity with, and
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/13/ The Commission entered its order on November 2, 2000 (HCAR No.
35-27266; 70-9693) as supplemented on December 8, 2000 (HCAR No. 35-27296) (the
"Financing Order") approving certain financing transactions for Exelon and its
Subsidiaries.
6
otherwise adheres to, the requirements thereof. With reference to Rule 53(a)(3),
no more than 2% of the employees of Exelon's domestic public utility companies
render services, at any one time, directly or indirectly, to EWGs or FUCOs
in which Exelon directly or indirectly holds an interest. With reference to
Rule 53(a)(4), Exelon will continue to provide a copy of each application and
certificate relating to EWGs and FUCOs and relevant portions of its Form U5S
to each regulator referred to therein, and will otherwise comply with the
requirements thereof concerning the furnishing of information. With reference
to Rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2)
and (3) thereunder have occurred./14/ Finally, Rule 53(c) by its terms is
inapplicable since the proposed transaction does not involve the issue or sale
of a security to finance the acquisition of an EWG or FUCO.
Exelon's authority to use the proceeds of financings for investments in
EWGs and FUCOs is contained in the Financing Order. Exelon represents that it
will remain in compliance with the requirements of rule 53(a), other than rule
53(a)(1), at all times through March 31, 2004. As required by the Financing
Order, Exelon will file a post-effective amendment in File No. 70-9693 in the
event that one of the circumstances described in rule 53(b) should occur during
the period through March 31, 2004. If a rule 53(b) event should occur, the
Financing Order would cease to be effective to the extent that it authorizes
Exelon to use the proceeds of financings approved therein to make any further
investments in EWGs and FUCOs in amounts in excess of 50% of consolidated
retained earnings without obtaining a supplemental order.
Item 4. Regulatory Approvals
Under Section 184 of the Atomic Energy Act of 1954, as amended, U.S.
Nuclear Regulatory Commission ("NRC") approval is necessary to complete the
reorganization. Under Section 203 of the Federal Power Act, Federal Energy
Regulatory Commission ("FERC") approval is necessary to complete the
reorganization. No other state or federal regulatory agency other than the
Commission under the Act has jurisdiction over the proposed transactions.
Item 5. Procedure
Exelon and the Subsidiaries hereby request that there be no hearing on
this Application/Declaration and that the Commission issue its order as soon as
practicable after the filing hereof. The Commission is requested to issue and
publish the requisite notice under Rule 23 with respect to this
Application-Declaration as soon as possible; such notice specifying the minimum
period allowed under the Commission's rules during which comments may be entered
and the date on which an order of the Commission granting and permitting the
Application/Declaration to become effective may be entered by the Commission.
Exelon and the Subsidiaries hereby (i) waive a recommended decision by a hearing
officer, (ii) waive a recommended decision by any other responsible officer or
the Commission, (iii) consent that the Division of Investment Management may
assist in the preparation of the Commission's decision and (iv) waive a 30-day
-------------------
/14/ ETT Nevada Inc., Inc. an indirect subsidiary of Exelon, filed for
protection under Chapter 11 of the Bankruptcy Code on April 4, 2002. This
filing was necessary to protect ETT Nevada's $9.3 million equity investment
in Northwind Aladdin, LLC from the risk of loss due to a possible lender
foreclosure and to avoid disruption to Northwind Aladdin's business and
operations. This filing does not violate Rule 53(b)(1) because the bookvalue
of ETT Nevada, Inc. $(171,734) is less than 10% of Exelon's consolidated
retained earnings of $1,381 million at September 30, 2002.
7
waiting period between the issuance of the Commission's order and the date on
which it is to become effective.
Item 6. Exhibits and Financial Statements
A. Exhibits
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Exhibit No. Description of Document Method of Filing
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A Exelon New Trust Company Instrument To be filed by amendment
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B Inapplicable NA
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C Inapplicable NA
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D Inapplicable NA
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E Inapplicable NA
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F-1 Preliminary opinion of counsel to Exelon To be filed by amendment
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F-2 Past-tense opinion of counsel to Exelon To be filed by amendment
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G Form of Notice of filing Filed herewith
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H Corporate Structure of Exelon Ventures Filed herewith
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B. Financial Statements
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Statement
No. Description Method of Filing
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FS-1 Consolidated Financial Statements of Incorporated by reference to
Exelon Corporation as of Annual Report on Form 10-K for
December 31, 2001 the year ended December 31, 2001
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FS-2 Consolidated Financial Statements of Incorporated by reference to
Exelon Corporation as of March 31, Forms 10-Q for the fiscal
June 30, and September 30, 2002 quarters ended March 31, June 30,
and September 30, 2002
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Item 7. Information as to Environmental Effects
The proposed transaction involves neither a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
8
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the Applicants have duly caused this Application/ Declaration to be signed
on their behalf by the undersigned thereunto duly authorized.
Date: December 12, 2002
Exelon Corporation
By: /s/ Randall E. Mehrberg
-----------------------
Randall E. Mehrberg
Executive Vice President
and General Counsel
Exelon Ventures Company, LLC
Exelon Enterprises Company, LLC
Exelon Generation Company, LLC
Exelon New Trust Company
c/o Exelon Corporation
10 South Dearborn Street
37th Floor
Chicago, Illinois 60603
By: Exelon Corporation
By: /s/ Randall E. Mehrberg
------------------------
Randall E. Mehrberg
Executive Vice President
and General Counsel
9