PEPCO HOLDINGS, INC. AND
AFFILIATED U.S. CORPORATIONS
FORM OF
FEDERAL AND STATE INCOME TAX ALLOCATION AGREEMENT
This agreement (the "Agreement") made as of [Insert Date], by and among
Pepco Holdings, Inc. (formerly New RC, Inc.), a Delaware corporation ("Pepco
Holdings"); Potomac Electric Power Company, a corporation organized under the
laws of the District of Columbia and the Commonwealth of Virginia ("Pepco"); the
Pepco subsidiaries set forth on Exhibit A hereto (the "Pepco Subsidiaries");
Conectiv, a Delaware corporation ("Conectiv"); and the Conectiv subsidiaries set
forth on Exhibit B hereto (the "Conectiv Subsidiaries"), (each, a "Group
Member").
W I T N E S S E T H T H A T:
WHEREAS, the term "Affiliates" as used herein shall be deemed to refer to
Pepco, the Pepco Subsidiaries, and the Conectiv Subsidiaries. The Affiliates
together with Pepco Holdings and Conectiv as a collective taxpaying unit, are
sometimes referred to collectively as the "Group."
WHEREAS, Potomac Electric Power Company and Subsidiaries executed the
Election to Allocate Consolidated Tax Liability on July 25, 1985 (the
"Election"), and the Election was confirmed pursuant to that certain Tax Sharing
Agreement between Potomac Electric Power Company and Pepco Holdings Incorporated
and its Subsidiaries in November, 2000;
WHEREAS, Pepco, Pepco Holdings and Conectiv entered into an Agreement and
Plan of Merger dated as of February 9, 2001 among Potomac Electric Power
Company, New RC, Inc. and Conectiv;
WHEREAS, the Group Members desire to join annually in the filing of a
consolidated Federal income tax return, and it is now the intention of the
Group, to enter into an agreement for the allocation of current federal income
taxes; and
WHEREAS, Pepco Holdings owns directly or indirectly at least 80 percent of
the issued and outstanding shares of each class of voting common stock and at
least 80 percent of the total value of the stock of each of the Affiliates and
Conectiv; the Group is an affiliated group within the meaning of Section 1504 of
the Internal Revenue Code of 1986, as amended (the "Code"), of which Pepco
Holdings is the common parent; and the Group presently participates in the
filing of a consolidated federal income tax return.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, Pepco Holdings, Conectiv and the Affiliates agree to allocate
tax liability as follows:
I. Allocation Procedures for Federal Income Tax Liabilities
A. General Rule
Step 1 - The federal consolidated tax liability of the Group (not including
any liability for alternative minimum tax) shall be apportioned among the Group
Members in accordance with the ratio that each Group Member's separate taxable
liability bears to the sum of the separate taxable liabilities of all Group
Members having taxable income.
Step 2 - An additional liability amount will be allocated to Group Members
equal to 100% of the excess of the Group Member's separate tax liability over
the consolidated tax liability of the Group allocated to the Group Member under
Step 1 (an "Excess Separate Tax"); provided, however, the amount of any Excess
Separate Tax allocated to a Group Member under this Step 2 shall be reduced by
such Group Member's proportional share of the Excess Separate Tax attributable
to the losses, credits, and/or other tax benefits of Pepco Holdings and Conectiv
which are not attributable to acquisition related debt, based upon the ratio
that each Group Member's Excess Separate Tax bears to the aggregate Excess
Separate Tax allocation to all the Group Members (in each case, prior to
reduction by this proviso).
Step 3 - The total of the amounts allocated under Step 2 is credited
pursuant to a consistent method to those Group Members who had losses, credits
or other net tax benefits included in the consolidated return (referred to as
"corporate tax benefits"); provided, however, that for the purposes of this Step
3, Pepco Holdings and Conectiv shall be deemed to have corporate tax benefits
only with respect to that portion of their losses, credits or other tax benefits
that arise from taking into account items attributable to acquisition related
debt.
B. Alternative Minimum Tax
1. General
If the total consolidated tax liability results in an alternative minimum
tax ("AMT") liability, as imposed by Section 55(a) of the Code, then any
consolidated AMT will be allocated to the Group Members based upon their
proportionate amounts of AMT.
2. AMT Credits
If the total consolidated return liability results in consolidated minimum
tax credit utilization, the consolidated minimum tax credit shall be tentatively
allocated to each Group Member participating in the consolidated return in an
amount equal to the lesser of (1) each Group Member's separate Minimum Tax
Credit Carryforward or (2) the excess of such Group Member's allocated regular
tax over its separate AMT. Minimum Tax Credit Carryforward for this purpose is
the sum of the annual amounts of consolidated AMT allocated to a Group Member in
prior years less the sum of the consolidated minimum tax credits allocated to
that Group Member in prior years. If the total of such tentative allocations
exceeds the consolidated minimum tax credit utilized in the current taxable
year, then the difference between the total of the tentative allocations and the
consolidated minimum tax credit utilized for the taxable year shall be allocated
as a negative amount to each Group Member in proportion to that Group Member's
tentative allocation to the combined total of all such amounts. If the total of
the
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tentative allocations is less than the consolidated minimum tax credit utilized,
the difference between the consolidated minimum tax credit utilization and the
total of the tentative allocations shall be allocated to each Group Member in
proportion to that Group Member's remaining Minimum Tax Credit Carryforward to
the combined total of such carryforwards. The consolidated minimum tax credit
allocated to each Group Member for the taxable year will equal the sum of the
amounts allocated in the two step computation.
C. Separate Return Limitation
Under no circumstances shall the amount of tax or other liability allocated
to a Group Member under this Article I exceed such Group Member's separate tax
liability.
D. Unused Corporate Tax Benefits
A Group Member that is entitled to payment for a corporate tax benefit, but
does not receive such payment because of the rules of this Article I shall
retain such right for the future to the extent that such benefit can be applied
subsequently against the consolidated tax liability. Uncompensated corporate tax
benefits arising from negative taxable income shall have priority over the
benefits attributable to excess tax credits.
E. Tax Adjustments
In the event of any adjustments to the tax returns of any of the Group
Members (by reason of an amended return, a claim for refund or an audit by the
Internal Revenue Service), the tax liability, if any, of each of the Group
Members under Section A of this Article I shall be redetermined to give effect
to any such adjustment as if it had been made as part of the original
computation of tax liability, and payments by or to the appropriate Group
Members shall be made within 120 days after any such payments are made or
refunds are received, or, in the case of contested proceedings, within 120 days
after a final determination of the contest. Interest and penalties, if any,
attributable to such an adjustment shall be paid by or to (in the case of
interest accruing with respect to a refund) each Group Member, in proportion to
the increase or decrease in such Group Member's separate return tax liability
computed under Section A of this Article I. In any situation in which the
Group's tax liability is adjusted by a revenue agent's report or a court
settlement and an item-by-item modification is not made, the Group shall consult
its accountants for assistance in determining the appropriate Group Member
giving rise to such adjusted tax liability. If responsibility cannot be
determined, then the penalties and interest shall be allocated to all Group
Members employing the same method used to allocate liability for taxes under
this Article I.
F. Earnings and Profits
For purposes of determining the earnings and profits of each Group Member,
the tax liability of the Group shall be allocated among the Group Members in
accordance with Treasury Regulation Sections 1.1552-1(a)(2) and 1.1502-33(d)(3).
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II. Allocation Procedures for State Income Tax Liabilities
A. Allocation
To the extent any Group Members are required or permitted to file a
combined, consolidated, or unitary state income tax return, state and local
income tax liabilities will be allocated, where appropriate, among Group Members
in accordance with principles similar to those employed in the Agreement for the
allocation of consolidated federal income tax liability.
B. Tax Adjustments
In the event of any adjustments to the tax returns of any consolidated,
combined or unitary group covered by this Article II (by reason of an amended
return, a claim for refund or an audit by any state taxing authority), the
liability, if any, of each Group Member included in such consolidated, combined
or unitary return shall be redetermined to give effect to any such adjustment as
if it had been made as part of the original computation of tax liability, and
payments by or to the appropriate Group Members shall be made within 120 days
after any such payments are made or refunds are received, or, in the case of
contested proceedings, within 120 days after a final determination of the
contest. Interest and penalties, if any, attributable to such an adjustment
shall be paid by or to (in the case of interest accruing with respect to a
refund) each Group Member included in the consolidated, combined or unitary
return in proportion to the increase or decrease, as the case may be, in such
Group Member's share of the consolidated, combined or unitary business profits
tax liability as determined in accordance with this Article II. In any situation
in which the consolidated, combined or unitary tax liability is adjusted and an
item-by-item modification is not made, the Group Members of such consolidated,
combined or unitary group shall consult its accountants for assistance in
determining the appropriate Group Member giving rise to such adjusted tax
liability. If responsibility cannot be determined, then the penalties and
interest shall be allocated to all Group Members included in the consolidated,
combined or unitary return employing the same method used to allocate liability
for taxes under this Article II.
C. Limitation on Tax Liability Allocation of each Group Member
Under no circumstances shall the amount of tax or other liability allocated
to a Group Member under this Article II exceeds such Group Member's separate tax
liability.
D. Restriction Pertaining to Reimbursements of Certain Tax Benefits
Notwithstanding the requirements of this Article II, Pepco Holdings and
Conectiv are not entitled to be reimbursed for any corporate tax benefits or
losses other than those arising from acquisition related debt. Adjustments
similar to the adjustments provided under Step 2 and Step 3 in Section A of
Article I shall be made with respect to any payment made or required pursuant to
this Article II.
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III. Administration
A. Agency
Any actions to be taken by Pepco Holdings under this Agreement may be
delegated to, and performed by, such designee as deemed appropriate by Pepco
Holdings.
B. Group Member Tax Information
The Group Members shall submit the tax information requested by Pepco
Holdings, in the manner and by the date requested, in order to enable Pepco
Holdings to calculate the amounts payable by the Group Members pursuant to this
Agreement.
C. Settlement Authority
Pepco Holdings or, with respect to any combined consolidated or unitary tax
return, any person designated by Pepco Holdings pursuant to Section A of this
Article III, shall have sole authority, to the exclusion of all other Group
Members, to agree to any adjustment proposed by the Internal Revenue Service or
any other taxing authority with respect to items of income, deductions or
credits, as well as interest or penalties, attributable to any Group Member
notwithstanding that such adjustment may increase the amounts payable by Group
Members under this Agreement.
D. Elections
Pepco Holdings and the other Group Members shall execute and file such
consents, elections and other documents that may be required or appropriate for
the proper filing of a consolidated federal income tax return and any
consolidated, combined or unitary state tax return, in each case, as determined
by Pepco Holdings or, with respect to any combined consolidated or unitary tax
return, any person designated by Pepco Holdings pursuant to Section A of this
Article III, in such person's sole discretion.
E. Payments
Payments made to a Group Member pursuant to Step 3 in Section A of Article
I or any similar amounts paid pursuant to Article II shall be made at
approximately the same time the related tax payments are made to the appropriate
tax authorities. Journal entries recording payments made pursuant to this
Agreement will be made in the same month in which such payments are made.
F. Preparation of Returns
Pepco Holdings shall be responsible for the preparation of any income tax
returns and the calculations required by this Agreement (including any
calculation related to estimated taxes).
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IV. Subsidiaries of Group Members
If at any time, any of the Group Members acquires or creates one or more
subsidiary corporations that are includible corporations of the Group, they
shall be subject to this Agreement and all references to the Group Members
herein shall be interpreted to include such subsidiaries.
V. Successors
This Agreement shall be binding on and inure to the benefit of any
successor, by merger, acquisition of assets or otherwise, to any of the parties
hereto (including but not limited to any successor of any Group Member
succeeding to the tax attributes of such corporation under Section 381 of the
Code) to the same extent as if such successor had been an original party to this
Agreement.
VI. Effective Date
This Agreement shall apply with respect to any payments, adjustments and
any other matters addressed herein related to the taxable year ending [Insert
Date], and subsequent taxable years. The provisos in step 2 and step 3 in
Section A of Article I shall no longer be effective to the extent the Public
Utility Holding Company Act of 1935 (the "1935 Act") is repealed or Rule 45(c)
under the 1935 Act is repealed or amended to permit tax sharing payments with
respect to losses, credits or other tax benefits of a registered holding
company.
VII. Termination Clause
This Agreement shall apply to the taxable year ending [Insert Date], and
subsequent taxable years, unless all of the Group Members agree in writing to
terminate the Agreement prior to the end of the taxable year. Notwithstanding
any termination, this Agreement shall continue in effect with respect to any
payment or refunds due for all taxable periods prior to termination.
VIII. Notices
Any and all notices, requests or other communications hereunder shall be
given in writing (a) if to Pepco Holdings, to Attention: Manager of Taxes,
Facsimile Number: (xxx) xxx-xxxx and (b) if to any other person, at such other
address as shall be furnished by such person by like notice to the other
parties.
IX. Expenses
Each party hereto shall pay its own expenses incident to this Agreement and
the transactions contemplated hereby, including all legal and accounting fees
and disbursements.
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
set their hands this [Insert Date].
[signature blocks]
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EXHIBIT A
Pepco Subsidiaries
Name Jurisdiction
Aircraft International Management Company Delaware
American Energy Corporation Delaware
Edison Capital Reserves Corporation Delaware
Energy & Telecommunication Services, LLC Delaware
Engineered Services, Inc. Delaware
G&L Mechanical Services, Inc. Delaware
Longwood Realty Company Delaware
Met Electrical Testing Company, Inc. Delaware
PCI-BT Investing, LLC Delaware
PCI Energy Corporation Delaware
PCI Holdings, Inc. Delaware
PCI Netherlands Corporation Nevada
PCI Nevada Investments Delaware
PCI Queensland Corporation Nevada
Pepco Building Services, Inc. Delaware
Pepco Communications, Inc. Delaware
Pepco Energy Company Delaware
Pepco Energy Services, Inc. Delaware
Pepco Enterprises, Inc. Delaware
Pepco Holdings, Inc. Delaware
UniTemp, Inc. Delaware
Pepco Technologies, LLC Delaware
PepMarket LLC Delaware
PES Home Warranty Services of Virginia Virginia
Potomac Aircraft Leasing Corporation Nevada
Potomac Capital Investment Corporation ("PCI") Delaware
Potomac Capital Joint Leasing Corporation Delaware
Potomac Capital Markets Corporation Delaware
Potomac Delaware Leasing Corporation Delaware
Potomac Electric Power Company Trust I Delaware
Potomac Equipment Leasing Corporation Nevada
Potomac Harmans Corporation Maryland
Potomac Land Corporation ("PLC") Delaware
Potomac Nevada Corporation ("PNC") Nevada
Potomac Nevada Investment, Inc. Nevada
Potomac Nevada Leasing Corporation Nevada
Potomac Power Resources, Inc. Delaware
Seaboard Mechanical Contractors, Inc. Delaware
Severn Cable, LLC Delaware
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Severn Construction, LLC Delaware
Substation Test Company, Inc. Delaware
W.A. ▇▇▇▇▇▇▇ Corporation Delaware
W.A. ▇▇▇▇▇▇▇, LLC Delaware
Nextgate, Inc. Delaware
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EXHIBIT B
Conectiv Subsidiaries
Name Jurisdiction
ACE REIT, Inc. Delaware
ATE Investments, Inc. New Jersey
Atlantic City Electric Company New Jersey
Atlantic Generation, Inc. New Jersey
Atlantic Jersey Thermal Systems, Inc. Delaware
Atlantic Southern Properties, Inc. New Jersey
ATS Operating Services, Inc. Delaware
Binghamton General, Inc. Delaware
Binghamton Limited, Inc. Delaware
Conectiv Communications, Inc. Delaware
Conectiv Energy Supply, Inc. Delaware
Conectiv Operating Services Company Delaware
Conectiv Plumbing, LLC Delaware
Conectiv Resource Partners, Inc. Delaware
Conectiv Services, Inc. Delaware
Conectiv Solutions, LLC Delaware
Conectiv Thermal Systems, Inc. Delaware
DCI I, Inc. Delaware
DCTC ▇▇▇▇▇▇, Inc. Delaware
Conectiv Properties and Investments, Inc. Delaware
Delmarva Power & Light Company Delaware & Virginia
Conectiv Delmarva Generation, Inc. Delaware
▇▇▇▇▇▇▇ Gen, Inc. New Jersey
Vineland General, Inc Delaware
Vineland Limited, Inc. Delaware
Conectiv Energy Holding Company Delaware
Conectiv Mid-Merit, Inc. Delaware
Conectiv Bethlehem, Inc. Delaware
King Street Assurance, Ltd. Bermuda
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