UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) PJM Settlement, Inc. ) Docket No. ES18- -000 ) APPLICATION OF PJM SETTLEMENT, INC. UNDER SECTION 204 OF THE FEDERAL POWER ACT FOR AN ORDER AUTHORIZING ISSUANCES OF SECURITIES AND APPROVING GUARANTY Pursuant to Section 204 of the Federal Power Act ( FPA ), 16 U.S.C. 824c, and Part 34 of the regulations of the Federal Energy Regulatory Commission ( Commission ), 18 C.F.R. Part 34 (2012), PJM Settlement, Inc. ( PJM Settlement ) files with the Federal Energy Regulatory Commission ( Commission ) this application ( Application ) for a Commission order authorizing PJM Settlement to: (1) guarantee obligations of PJM Interconnection, L.L.C. ( PJM ) (the PJM Settlement Guaranty ) in an amount not exceeding $177.4 million (PJM s total current available borrowing capacity authorized and/or pending Commission approval); and (2) provide a line of credit to PJM in an amount not exceeding the cash that PJM Settlement holds due to remittances from Market Participants 1 that PJM Settlement is not yet obligated to disburse, in an amount not to exceed $158.1 million (the PJM Settlement Line of Credit ). PJM Settlement requests all necessary waivers of the Commission s competitive bidding requirements set forth in section 34.2 of the Commission s regulations, 18 C.F.R. 34.2, as more fully described below. PJM Settlement respectfully requests that the Commission issue an order approving this Application by January 19, 2018, with an effective date of February 1, 2018. 1 Capitalized terms used and not otherwise defined herein have the meaning set forth in the PJM Open Access Transmission Tariff ( Tariff ) and the Amended and Restated Operating Agreement of PJM Interconnection, L.L.C. ( Operating Agreement ).
I. BACKGROUND PJM is a Commission-established Regional Transmission Organization and Independent System Operator 2 that administers the Tariff, operates the PJM Interchange Energy Market and related capacity and ancillary services markets, and coordinates the movement of wholesale electricity in the PJM Region. On May 5, 2010, on behalf of itself and a newly formed entity, PJM Settlement, PJM submitted certain revisions to the Tariff and Operating Agreement necessary to establish PJM Settlement as counterparty to transactions in PJM s markets. 3 Specifically, the revisions established PJM Settlement as the counterparty to Market Participants and customers for transmission and ancillary services transactions, purchases and sales of capacity in the Reliability Pricing Model Auctions, purchases and sales of Financial Transmission Rights ( FTRs ) in FTR Auctions, and the contractual rights and obligations of holders of FTRs and Auction Revenue Rights (collectively, Pool Transactions ). 4 The Commission approved the creation of PJM Settlement, and since January 1, 2011, PJM Settlement has functioned as the counterparty for the referenced transactions and has assumed certain billing and settlement functions previously performed by PJM. 5 In anticipation of this arrangement, on November 1, 2010, PJM and PJM Settlement jointly filed an application for a Commission order authorizing: (1) the PJM Settlement Guaranty; (2) a line of credit provided by PJM to PJM Settlement not to exceed PJM s available capacity on its bank working capital line of credit (the PJM Line of Credit ); 6 and (3) the PJM 2 See PJM Interconnection, L.L.C., 101 FERC 61,345 (2002). 3 See PJM Interconnection, L.L.C., Initial Filing, Docket No. ER10-1196-000 (May 5, 2010). 4 See id. at 1-2, 5. 5 See PJM Interconnection, L.L.C., 132 FERC 61,207, at P 1 (2010). 6 Contemporaneous with this Application, PJM is submitting a separate application requesting, inter alia, reauthorization of the PJM Line of Credit. 2
Settlement Line of Credit. 7 The Commission granted the authorizations requested by the applicants, and despite initially limiting the PJM Settlement Guaranty to $158.1 million, subsequently modified the limitation of the PJM Settlement Guaranty to $215 million, which represented the amount of PJM s total borrowing capacity authorized by the Commission at that time. 8 PJM Settlement requested reauthorization of the PJM Settlement Guaranty and PJM Settlement Line of Credit in 2012, and most recently on December 23, 2015, when the PJM Settlement requested that the Commission authorize the continued ability of PJM Settlement to (1) guarantee obligations of PJM in an amount not to exceed $202.4 million (the aforementioned PJM Settlement Guaranty); and (2) provide a line of credit to PJM in an amount not exceeding the cash that PJM Settlement holds due to remittances from Market Participants that PJM Settlement is not yet obligated to disburse up to $158.1 million (the aforementioned PJM Settlement Line of Credit). 9 Both of these requested authorizations were granted by the Commission on February 16, 2016 and expire on February 16, 2018. 10 The PJM Settlement is requesting that the Commission issue an order on the Application that will authorize PJM Settlement the continued ability to: (1) guarantee obligations of PJM in an amount not exceeding PJM s borrowing capacity authorized and/or pending approval by the Commission, which is currently $177.4 million 11 (the aforementioned PJM Settlement 7 See PJM Interconnection, L.L.C., Application of PJM Interconnection, L.L.C., and PJM Settlement, Inc. Under Section 204 of the Federal Power Act for an Order Authorizing Issuances of Securities and Approving Guaranty, Docket No. ES11-8-000 (November 1, 2010). 8 See e.g. PJM Interconnection, L.L.C., 134 FERC 61,153 at PP 10-12 (2011). 9 See PJM Interconnection, L.L.C., Application of PJM Settlement, Inc. under Section 204 of the Federal Power Act for an Order Authorizing Issuances of Securities and Approving Guaranty, Docket No. ES16-16-000 (December 23, 2015). 10 See PJM Settlement, Inc., 154 FERC 62,112 (2016). 11 PJM s Commission authorized borrowing capacity has decreased from $202.4 million to $177.4 million but the methodology used to calculate this amount has remained the same. 3
Guaranty); and (2) provide a line of credit to PJM in an amount not exceeding the cash that PJM Settlement holds due to remittances from Market Participants that PJM Settlement is not yet obligated to disburse in an amount not to exceed $158.1 million (the aforementioned PJM Settlement Line of Credit). II. SECTION 34.3 REQUIREMENTS Pursuant to section 34.3 of the Commission s regulations, 18 C.F.R. 34.3 (2017), PJM provides the following information: A. Official Name of Applicant and their Principal Business Address: PJM Settlement, Inc. 2750 Monroe Boulevard Audubon, PA 19403-2497 B. State of Incorporation, Date of Incorporation and States in which Applicant Operates: PJM Settlement is a nonprofit member organization formed on October 20, 2010 on a non-stock basis under the Pennsylvania Nonprofit Corporation Law of 1988. PJM is PJM Settlement s Executive Member with all voting rights. As described above, PJM Settlement was formed to clarify the counterparty to transactions in PJM s markets, and serves as a counterparty to buyers and sellers in Pool Transactions that occur throughout the PJM Region which includes all or parts of Pennsylvania, New Jersey, Maryland, Delaware, Illinois, Indiana, Kentucky, Michigan, Tennessee, North Carolina, Virginia, West Virginia, Ohio, and the District of Columbia. C. The Name, Address and Telephone Number of the Persons Authorized to Receive Notices and Communications Regarding this Application Jacqulynn Hugee Secretary PJM Settlement Inc. 2750 Monroe Boulevard Audubon, PA 19403-2497 4
also be sent to: (610) 666-8208 jacqulynn.hugee@pjm.com PJM Settlement also requests that notices and communications regarding this application Stephen D. Lawson Treasurer PJM Settlement, Inc. 2750 Monroe Boulevard Audubon, PA 19403-2497 (610) 666-4603 stephen.lawson@pjm.com Craig Glazer Board of Directors PJM Settlement, Inc. 1200 G Street, N.W. Suite 600 Washington, D.C. 20005 (202) 423-4743 craig.glazer@pjm.com D. Requested Action Date PJM Settlement respectfully requests that the Commission issue an order by no later than January 19, 2018, with an effective date of February 1, 2018. E. Description of the Securities to Proposed to be Issued 1. Type and Nature of Securities The PJM Settlement Guaranty is an unconditional guaranty by PJM Settlement of the financial obligations of PJM. The PJM Settlement Line of Credit is an unsecured, revolving line of credit arrangement extended by PJM Settlement to PJM. 2. Amount of Securities The PJM Settlement Line of Credit is limited to the cash that PJM Settlement holds due to remittances from Market Participants that PJM Settlement is not yet obligated to disburse, 12 which shall not exceed $158.1 million. The PJM Settlement Guaranty shall not exceed PJM s borrowing capacity authorized and/or pending approval by the Commission, which is currently $177.4 million. 12 For example, Market Participants periodically prepay their billing obligations. 5
3. Interest or Dividend Rate Outstanding borrowings on the PJM Settlement Line of Credit will accrue interest based on the interest charged to PJM Settlement, under its bank working capital line of credit. If PJM Settlement does not have a bank working capital line of credit, outstanding borrowings on the PJM Settlement Line of Credit will accrue interest at the interest rate charged to PJM, the borrower, under its bank working capital line of credit. 13 There is no interest or dividend rate applicable to the PJM Settlement Guaranty. 4. Dates of Issuance and Maturity The PJM Settlement Line of Credit was originally issued January 3, 2011 with an initial maturity date of December 31, 2015. Prior to maturity in 2015, the line of credit was renewed for an additional six years and will mature on December 31, 2021. The PJM Settlement Guaranty was originally issued on March 7, 2011 and shall continue in force until the entire indebtedness covered by this guaranty is repaid in full by PJM. PJM Settlement requires Commission approval to continue to utilize the PJM Settlement Guaranty since the Commission s current authorization expires on February 16, 2018. 14 5. Institutional Rating of Securities The PJM Settlement Guaranty is not institutionally rated. The PJM Settlement Line of Credit is also not institutionally rated. 13 At this time, PJM Settlement has not established a bank working capital line of credit and, consequently, all advances made pursuant to the PJM Settlement Line of Credit have accrued interest at the interest rate charged to PJM under its current bank working capital line of credit with PNC Bank, N.A. As set forth in the Order approving PJM s bank working capital line of credit with PNC Bank, N.A. (the aforementioned PNC Bank Line of Credit), loan advances shall bear interest at a rate per annum equal to the sum of: (a) the daily London Interbank Offered Rate (LIBOR) plus (b) up to one hundred (100) basis points based on Moody s Debt Rating. The current interest rate is LIBOR plus 62.5 basis points. Interest is calculated on an actual/360 day basis and is payable on the first day of each month. The Daily LIBOR rate shall mean the rate per annum determined by PNC Bank by dividing (x) the one (1) month LIBOR rate as published each business day in the Wall Street Journal Money Rate listing under London Interbank Offered Rates by (y) a number equal to 1.00. 14 See PJM Settlement, Inc., 154 FERC 62,112 (2016). 6
6. Stock Exchange on Which Security Will be Listed None. F. Purpose for Which the Securities are Issued The PJM Settlement Line of Credit, working together with the PJM Line of Credit, facilitates the functioning of PJM Settlement as a counterparty in the PJM markets, as authorized by the Commission, 15 without additional costs to PJM s customers. These instruments facilitate efficient cash flow management, permitting either entity to use cash that is available to the other entity, thereby avoiding any increases in costs to Market Participants that would arise from alternative third-party financing for short-term cash needs of the two companies. In other words, the lines of credit enable the status quo to be maintained with respect to the interest expense associated with short-term borrowings for the combined companies and the availability of cash for working capital needs. The PJM Settlement Guaranty (along with the PJM Guaranty, 16 which does not require Commission approval) facilitates maintaining an appropriate entity credit rating for both PJM and PJM Settlement. Fundamentally, the creditworthiness of PJM and PJM Settlement is based not on their assets and liabilities, but primarily on PJM Members agreement to mutualize any PJM and PJM Settlement losses among themselves when there are defaults. 17 This fundamental factor supporting PJM s and PJM Settlement s creditworthiness remains unchanged. Nonetheless, the mutual guaranties between PJM and PJM Settlement will further facilitate obtaining and maintaining credit ratings for both PJM and PJM Settlement. 15 See PJM Interconnection, L.L.C., 132 FERC 61,207. 16 The PJM Guaranty is the financial instrument by which PJM guarantees the financial obligations of PJM Settlement. 17 See Operating Agreement, section 15.2. 7
The ability of PJM to maintain an investment-grade credit rating will allow PJM ongoing access to cost-efficient third party financing arrangements. PJM Settlement s maintenance of an investment-grade entity rating assures Market Participants that the central counterparty to PJM Pool Transactions is creditworthy. G. State Applications No applications with respect to the issuance of any securities will be filed with any state regulatory authority. H. Facts Relied Upon to Show that the Issuance of the Securities is Lawful and Necessary PJM Settlement has the authority under its by-laws to issue the securities and guaranty described in this Application. Section 3.01 of the by-laws provides that [e]xcept as otherwise provided by law or in the Articles, the business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors and [t]he Board of Directors may exercise all such authority and powers of the Corporation and perform all such lawful acts as are authorized under the Act. The by-laws further provide in Article V that loans may be contracted on behalf of the Corporation and evidence of indebtedness may be issued when authorized by a resolution adopted by the Board of Directors, and such authority may be general or confined to specific instances. The issuance of the PJM Settlement Guaranty and the PJM Settlement Line of Credit are consistent with PJM s Settlement s purposes and responsibilities, and with the public interest. As explained in section (f) above, the purpose of these instruments is to facilitate PJM Settlement s ability to function as authorized by the Commission. The subject issuance is in the public interest because they avoid additional expenses and keep the combined costs of administrative services to the Members of PJM and PJM Settlement unchanged. The PJM 8
Settlement Line of Credit provides flexibility and facilitates efficient cash flow management. PJM s short-term cash obligations can be satisfied by permitting PJM to use cash available with PJM Settlement and avoiding the need to use external financing. The PJM Settlement Guaranty will also facilitate both PJM and PJM Settlement maintaining appropriate credit ratings. I. Statement of the Bond Indenture(s) or Other Limitations on the Issuance of Additional Debt or Equity Securities None. J. Summary of Any Rate Change The requested authorizations to issue the PJM Settlement Guaranty and the PJM Settlement Line of Credit will not affect PJM Settlement s stated rates. The combined stated rates of PJM and PJM Settlement to recover their administrative costs are the same as the previous stated rates recovered through Tariff, Schedule 9. There will be no change in the total costs to PJM customers. The combined PJM and PJM Settlement rates will not exceed the current PJM Settlement stated rates. III. SECTION 34.2 REQUIREMENTS Section 34.2 of the Commission s regulations requires that a utility obtain competitive bids from at least two prospective dealers, purchasers or underwriters, or negotiated offers from at least three prospective dealers, purchasers or underwriters, and that it accept the bid or offer that provides the utility with the lowest cost of money for the securities. 18 C.F.R. 34.2(a)(1), (a)(2), (a)(3)(i). In the alternative, a utility may obtain authorization from the Commission to accept bids or offers other than the types described above. 18 C.F.R. 34.2(a)(3)(iii). PJM Settlement requests a waiver of the Commission s competitive bidding or negotiated placement requirements set forth in section 34.2(a) of the Commission s regulations. A waiver of these requirements is reasonable and necessary to allow for the issuance of the securities that 9
are the subject of this Application. The PJM Settlement Guaranty and the PJM Settlement Line of Credit are necessary to facilitate both PJM and PJM Settlement maintaining appropriate credit ratings, and permitting PJM Settlement to efficiently function as a counterparty, and they are in the public interest because they facilitate keeping the costs of administrative services unchanged. In addition, the PJM Settlement Line of Credit, in conjunction with the previously approved PJM Line of Credit, facilitates cash flow management that prevents PJM and PJM Settlement from incurring interest expenses for additional short-term borrowing. Granting a waiver of section 34.2 will allow PJM Settlement to have the necessary mechanisms in place without having to undergo the costs, burdens and delays of undertaking a competitive bidding or negotiated placement process. Further, the PJM Settlement Guaranty is an agreement between PJM and PJM Settlement not susceptible to competitive bidding or a negotiated placement process. In addition, any rate increase above the existing stated rates currently set forth in Tariff, Schedule 9-1 through Schedule 9-5 cannot be affected without a Federal Power Act, section 205 filing. This further protects ratepayers and justifies granting the requested waivers. IV. SECTION 34.4 EXHIBITS PJM Settlement submits the following exhibits pursuant to Section 34.4 of the Commission s regulations, 18 C.F.R. 34.4 (2017): A. Exhibit A: Statement of Corporate Purposes Attached as Exhibit A is PJM Settlement s Articles of Incorporation setting forth the purposes and powers of PJM Settlement. B. Exhibit B: Resolution of Applicant s Directors and Shareholders Attached as Exhibit B are two separate Certificates of the Secretary of PJM Settlement, dated November 9, 2017, authorizing 1) the undertaking of the PJM Settlement Guaranty; and 2) the PJM Settlement Line of Credit. 10
C. Exhibit C: Balance Sheet and Attached Notes 18 Attached as Exhibit C are the 2016 audited balance sheet, September 30, 2017 published balance sheet, and the 2017 pro forma balance sheet for PJM. The 2017 pro forma balance sheet demonstrates the impact of PJM borrowing $158.1 million under the PJM Settlement Line of Credit, as well as the impact of the $177.4 million PJM Settlement Guaranty. D. Exhibit D: Income Statement and Attached Notes 19 Attached as Exhibit D are the twelve months ended 2016 audited income statement, the twelve months ended September 30, 2017 income statement, and the twelve months ended December 31, 2017 pro forma income statement for PJM. The December 31, 2017 pro forma income statement demonstrates the impact of PJM borrowing $158.1 million under the PJM Settlement Line of Credit, as well as the impact of the $177.4 million PJM Settlement Guaranty. E. Exhibit E: Statement of Cash Flows and Computation of Interest Coverage 20 Attached as Exhibit E are the twelve months ended 2016 audited cash flow statement, the twelve months ended September 30, 2017 cash flow statement, and the twelve months ended December 31, 2017 pro forma cash flow statement for PJM. Also included are the 2016 computation of interest coverage and the 2017 pro forma computation of interest coverage. The December 31, 2017 pro forma cash flow statement and the 2017 pro forma computation of 18 The Applicant is not including balance sheets related to PJM Settlement because the PJM Settlement Guaranty and PJM Settlement Line of Credit do not impact PJM Settlement s finances. In the application being submitted contemporaneous with this Application, PJM is submitting balance sheets related to PJM Settlement. 19 The Applicant is not including income statements related to PJM Settlement because the PJM Settlement Guaranty and PJM Settlement Line of Credit do not impact PJM Settlement s finances. In the application being submitted contemporaneous with this Application, PJM is submitting income statements related to PJM Settlement. 20 The Applicant is not including statements of cash flow related to PJM Settlement because the PJM Settlement Guaranty and PJM Settlement Line of Credit do not impact PJM Settlement s finances. In the application being submitted contemporaneous with this Application, PJM is submitting statements of cash flow related to PJM Settlement. 11
interest coverage demonstrate the impact of PJM borrowing $158.1 million under the PJM Settlement Line of Credit, as well as the impact of the $177.4 million PJM Settlement Guaranty. F. Exhibit F: Registration Statement and Exhibits Filed with the Securities and Exchange Commission for the Proposed Securities Issuances None. V. CONCLUSION For the foregoing reasons, the PJM Settlement requests that the Commission authorize, for the period of time from February 1, 2018 to January 31, 2020, to issue the PJM Settlement Guaranty and the PJM Settlement Line of Credit. PJM Settlement also requests that the Commission act on this application and issue an order by no later than January 19, 2018, with an effective date of February 1, 2018. Craig Glazer Board of Directors PJM Settlement, Inc. 1200 G Street, N.W. Suite 600 Washington, D.C. 20005 (202) 423-4743 craig.glazer@pjm.com Stanley Williams President, PJM Settlement, Inc. 2750 Monroe Boulevard Audubon, Pennsylvania 19403-2497 (610) 666-8839 stan.williams@pjm.com Respectfully submitted, Jacqulynn Hugee Jacqulynn Hugee Secretary, PJM Settlement, Inc. 2750 Monroe Boulevard Audubon, Pennsylvania 19403-2497 (610) 666-8208 jacqulynn.hugee@pjm.com Attorney for PJM Settlement, Inc. Stephen Lawson Treasurer, PJM Settlement, Inc. 2750 Monroe Boulevard Audubon, Pennsylvania 19403-2497 (610) 666-4603 stephen.lawson@pjm.com Dated: November 17, 2017 12
Exhibit A Articles of Incorporation of PJM Settlement, Inc.
Exhibit B Certificate of Secretary Setting Forth PJM Settlement, Inc. Board of Director Resolutions
Exhibit C PJM Interconnection, L.L.C. Balance Sheet and Attached Notes
Exhibit D PJM Interconnection, L.L.C. Income Statement and Attached Notes
Exhibit E PJM Interconnection, L.L.C. Statement of Cash Flows and Computation of Interest Coverage