UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Name of Registrant; State of Incorporation; Address of IRS Employer
Number Principal Executive Offices; and Telephone Number Identification Number
--------------------- ---------------------------------------------------------- ------------------------
1-16169 EXELON CORPORATION 23-2990190
(a Pennsylvania corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-7398
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
The number of shares outstanding of each registrant's common stock as
of October 15, 2002 was as follows:
Exelon Corporation Common Stock, without par value 322,984,742
TABLE OF CONTENTS
Page No.
Explanatory Note 3
Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Exelon Corporation
Consolidated Statements of Income and Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Consolidated Balance Sheets 7
Notes to Consolidated Financial Statements 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 34
SIGNATURES 37
CERTIFICATIONS 38
2
Explanatory Note
Exelon Corporation is filing this amendment to correct two
typographical errors in its Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 included in Item 1 of Part I of its Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002. The amounts shown
for Cash and Cash Equivalents at Beginning of Period and End of Period in that
Statement were incorrect and should have been shown as $485 million and $461
million, respectively. The correct amounts for these items were shown in the
attachments to Exelon's earnings press release issued on October 30, 2002. No
attempt has been made in this Form 10-Q/A to modify or update other disclosures
as presented in the original Form 10-Q except as required to reflect the effects
of the restatement.
Forward-Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements that are subject
to risks and uncertainties. The factors that could cause actual results to
differ materially from the forward-looking statements made by a registrant
include those discussed herein as well as those listed in Note 8 of Notes to
Consolidated Financial Statements, those discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Outlook" in
Exelon Corporation's 2001 Annual Report, those discussed in "Risk Factors" in
PECO Energy Company's Registration Statement on Form S-3, Reg. No. 333-99361,
those discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Exelon Generation Company,
LLC's Registration Statement on Form S-4, Reg. No. 333-85496, those discussed in
"Risk Factors" in Commonwealth Edison Company's Registration Statement of Form
S-3, Reg. No. 333-99363 and other factors discussed in filings with the
Securities and Exchange Commission by the Registrants. Readers are cautioned not
to place undue reliance on these forward-looking statements, which apply only as
of the date of this Report. None of the Registrants undertake any obligation to
publicly release any revision to its forward-looking statements to reflect
events or circumstances after the date of this Report.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
EXELON CORPORATION
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions, except per share data) 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $4,370 $4,185 $ 11,245 $ 11,625
OPERATING EXPENSES
Purchased Power 1,233 1,249 2,543 2,634
Purchased Power from Unconsolidated Affiliate 104 26 220 48
Fuel 373 356 1,233 1,455
Operating and Maintenance 1,114 1,101 3,252 3,293
Depreciation and Amortization 345 369 1,012 1,109
Taxes Other Than Income 201 172 568 493
---------------------------------------------------------------------------------------------------------------------
Total Operating Expense 3,370 3,273 8,828 9,032
---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,000 912 2,417 2,593
---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (249) (283) (739) (864)
Distributions on Preferred Securities of Subsidiaries (11) (11) (34) (34)
Equity in Earnings of Unconsolidated Affiliates, net 92 52 114 77
Other, net 16 (51) 239 48
---------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (152) (293) (420) (773)
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 848 619 1,997 1,820
INCOME TAXES 297 243 724 742
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 551 376 1,273 1,078
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES (net of income taxes of ($90) and $8 for the nine
months ended September 30, 2002 and 2001, respectively) -- -- (230) 12
---------------------------------------------------------------------------------------------------------------------
NET INCOME 551 376 1,043 1,090
---------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
SFAS 133 Transition Adjustment -- -- -- 44
Cash Flow Hedge Fair Value Adjustment (28) 13 (109) (17)
Unrealized Gain (Loss) on Marketable Securities, net (73) (30) (158) (154)
Interest in Other Comprehensive Income of
Unconsolidated Affiliates (20) (3) (21) (1)
---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (121) (20) (288) (128)
---------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 430 $ 356 $ 755 $ 962
=====================================================================================================================
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Basic 323 321 322 320
=====================================================================================================================
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Diluted 324 323 324 323
=====================================================================================================================
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Cumulative Effect of Changes in Accounting
Principles $ 1.71 $ 1.17 $ 3.95 $ 3.36
Cumulative Effect of Changes in Accounting Principles -- -- (0.71) 0.04
---------------------------------------------------------------------------------------------------------------------
Net Income $ 1.71 $ 1.17 $ 3.24 $ 3.40
=====================================================================================================================
DILUTED:
Income Before Cumulative Effect of Changes in Accounting
Principles $ 1.70 $ 1.16 $ 3.93 $ 3.33
Cumulative Effect of Changes in Accounting Principles -- -- (0.71) 0.04
---------------------------------------------------------------------------------------------------------------------
Net Income $ 1.70 $ 1.16 $ 3.22 $ 3.37
=====================================================================================================================
DIVIDENDS PER COMMON SHARE $ 0.44 $ 0.42 $ 1.32 $ 1.40
=====================================================================================================================
See Notes to Consolidated Financial Statements
5
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(in millions) 2002 2001
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,043 $ 1,090
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization, including nuclear fuel 1,284 1,481
Cumulative Effect of a Change in Accounting Principle (net of income taxes) 230 (12)
Net Gain on Sale of Investments (net of income taxes) (199) --
Provision for Uncollectible Accounts 107 95
Deferred Income Taxes 293 (101)
Deferred Energy Costs 50 21
Equity in Earnings of Unconsolidated Affiliates, net (114) (77)
Net Realized Losses on Nuclear Decommissioning Trust Funds 32 90
Other Operating Activities 162 (76)
Changes in Working Capital:
Accounts Receivable (320) (163)
Inventories (31) 41
Accounts Payable, Accrued Expenses and Other Current Liabilities (6) 572
Changes in Receivables and Payables to Unconsolidated Affiliates, net 46 --
Other Current Assets 24 (4)
---------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 2,601 2,957
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (1,534) (1,352)
Acquisition of Generating Plants (443) --
Enterprises Acquisitions, net of cash acquired -- (39)
Proceeds from the Sale of Investments 287 --
Proceeds from Nuclear Decommissioning Trust Funds 1,184 1,077
Investment in Nuclear Decommissioning Trust Funds (1,330) (1,128)
Note Receivable from Unconsolidated Affiliate (42) --
Other Investing Activities 81 (143)
---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (1,797) (1,585)
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 956 2,126
Retirement of Long-Term Debt (1,946) (1,433)
Change in Short-Term Debt 428 (957)
Dividends on Common Stock (420) (448)
Change in Restricted Cash 81 125
Proceeds from Employee Stock Plans 64 52
Contribution from Minority Interest of Consolidated Subsidiary 43 --
Redemption of Preferred Securities of Subsidiaries (18) (18)
Other Financing Activities (16) 32
---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Financing Activities (828) (521)
---------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS (24) 851
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 485 526
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 461 $ 1,377
=====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash Investing and Financing Activities:
Contribution of Land from Minority Interest of Consolidated Subsidiary $ 12 --
Regulatory Asset Fair Value Adjustment -- $ 347
Purchase Accounting Estimate Adjustments -- $ 63
See Notes to Consolidated Financial Statements
6
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 461 $ 485
Restricted Cash 291 372
Accounts Receivable, net
Customer 2,007 1,687
Other 210 428
Receivable from Unconsolidated Affiliate 40 44
Inventories, at average cost
Fossil Fuel 189 222
Materials and Supplies 312 249
Deferred Income Taxes 101 23
Other 300 272
---------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,911 3,782
---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 14,926 13,781
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 6,111 6,423
Nuclear Decommissioning Trust Funds 2,997 3,165
Investments 1,665 1,623
Goodwill, net 4,964 5,335
Other 662 708
---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 16,399 17,254
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 35,236 $ 34,817
=====================================================================================================================
See Notes to Consolidated Financial Statements
7
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 788 $ 360
Long-Term Debt Due within One Year 1,501 1,406
Accounts Payable 1,304 964
Accrued Expenses 942 1,182
Other 495 505
---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 5,030 4,417
---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 11,904 12,879
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 4,506 4,388
Unamortized Investment Tax Credits 305 316
Nuclear Decommissioning Liability for Retired Plants 1,389 1,353
Pension Obligation 315 334
Non-Pension Postretirement Benefits Obligation 893 847
Spent Nuclear Fuel Obligation 854 843
Other 859 694
---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 9,121 8,775
---------------------------------------------------------------------------------------------------------------------
PREFERRED SECURITIES OF SUBSIDIARIES 595 613
MINORITY INTEREST OF CONSOLIDATED SUBSIDIARIES 75 31
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 6,995 6,930
Deferred Compensation (1) (2)
Retained Earnings 1,830 1,200
Accumulated Other Comprehensive Income (Loss) (313) (26)
---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 8,511 8,102
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 35,236 $ 34,817
=====================================================================================================================
See Notes to Consolidated Financial Statements
8
EXELON CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements as of September 30,
2002 and for the three and nine months then ended are unaudited, but include all
adjustments that Exelon Corporation (Exelon) considers necessary for a fair
presentation of its financial statements. All adjustments are of a normal,
recurring nature, except as otherwise disclosed. The December 31, 2001
consolidated balance sheets were derived from audited financial statements but
do not include all disclosures required by generally accepted accounting
principles (GAAP). Certain prior-year amounts have been reclassified for
comparative purposes. These reclassifications had no effect on net income or
shareholders' equity. These notes should be read in conjunction with the Notes
to Consolidated Financial Statements of Exelon in or incorporated by reference
in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2001
and the Notes to Consolidated Financial Statements in Generation's Form S-4
registration statement No. 333-85496 declared effective on April 24, 2002 by the
Securities and Exchange Commission (SEC), (Generation's Form S-4).
The consolidated financial statements contained herein include the
accounts of majority-owned subsidiaries after the elimination of intercompany
transactions. Investments and joint ventures in which a 20% to 50% interest is
owned and a significant influence is exerted are accounted for under the equity
method of accounting. The proportionate interests in jointly owned electric
utility plants are consolidated. Investments in which less than a 20% interest
is owned are accounted for under the cost method of accounting. Exelon owns 100%
of all significant consolidated subsidiaries, either directly or indirectly,
except for ComEd of which Exelon owns 99%, InfraSource of which Exelon owns 95%
and Southeast Chicago Energy Project, LLC of which Exelon owns 70% through
Generation. Exelon has reflected the third-party interests in the above majority
owned investments as minority interests in its Consolidated Statements of Cash
Flows, Consolidated Balance Sheets and in Other, Net on the Consolidated
Statements of Income and Comprehensive Income.
2. ADOPTION OF NEW ACCOUNTING PRINCIPLES
SFAS No. 141 and SFAS No. 142
In 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standard (SFAS) No. 141, "Business Combinations" (SFAS
No. 141), which requires that all business combinations be accounted for under
the purchase method of accounting and establishes criteria for the separate
recognition of intangible assets acquired in business combinations. SFAS No. 141
is effective for business combinations initiated after June 30, 2001. In
addition, SFAS No. 141 requires that unamortized negative goodwill related to
9
pre-July 1, 2001 purchases be recognized as a change in accounting principle
concurrent with the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142). At December 31, 2001, AmerGen Energy Company, LLC
(AmerGen), an equity-method investee of Generation, had $43 million of negative
goodwill, net of accumulated amortization, recorded on its balance sheet. Upon
AmerGen's adoption of SFAS No. 141 in January 2002, Generation recognized its
proportionate share of income of $22 million ($13 million, net of income taxes)
as a cumulative effect of a change in accounting principle.
Exelon, ComEd, PECO and Generation adopted SFAS No. 142 as of January
1, 2002. SFAS No. 142 establishes new accounting and reporting standards for
goodwill and intangible assets. Other than goodwill, Exelon does not have
significant other intangible assets recorded on its consolidated balance sheets.
Under SFAS No. 142, goodwill is no longer subject to amortization, however,
goodwill is subject to an assessment for impairment using a two-step fair value
based test, the first step of which must be performed at least annually, or more
frequently if events or circumstances indicate that goodwill might be impaired.
The first step compares the fair value of a reporting unit to its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step is performed. The second step compares the
carrying amount of the goodwill to the fair value of the goodwill. If the fair
value of goodwill is less than the carrying amount, an impairment loss is
reported as a reduction to goodwill and a charge to operating expense, except at
the transition date, when the loss is reflected as a cumulative effect of a
change in accounting principle.
As of December 31, 2001, Exelon's Consolidated Balance Sheets reflected
approximately $5.3 billion in goodwill net of accumulated amortization,
including $4.9 billion of net goodwill related to the October 20, 2000 merger of
Unicom Corporation (Unicom), the former parent company of ComEd, and PECO
(Merger) recorded on ComEd's Consolidated Balance Sheets, with the remainder
related to acquisitions by Exelon Enterprises Company, LLC (Enterprises). The
first step of the transitional impairment analysis indicated that ComEd's
goodwill was not impaired but that an impairment did exist with respect to
goodwill recorded in Enterprises' reporting units. Exelon's infrastructure
services business (InfraSource), the energy services business (Exelon Services)
and the competitive retail energy sales business (Exelon Energy) were determined
to be those reporting units of Enterprises that had goodwill allocated to them.
The second step of the analysis, which compared the fair value of each of
Enterprises' reporting units' goodwill to the carrying value at December 31,
2001, indicated a total goodwill impairment of $357 million ($243 million, net
of income taxes and minority interest). The fair value of the Enterprises'
reporting units was determined using discounted cash flow models reflecting the
expected range of future cash flow outcomes related to each of the Enterprises
reporting units over the life of the investment. These cash flows were
discounted to 2002 using a risk-adjusted discount rate. The impairment was
recorded as a cumulative effect of a change in accounting principle in the first
quarter of 2002.
10
The changes in the carrying amount of goodwill by reportable segment
(see Note 6 for further discussion of reportable segments) for the nine months
ended September 30, 2002 are as follows:
Energy
Delivery Enterprises Total
---------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 $ 4,902 $ 433 $ 5,335
Impairment losses -- (357) (357)
Settlement of pre-Merger income tax contingencies (7) -- (7)
Merger severance adjustment (7) -- (7)
---------------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2002 $ 4,888 $ 76 $ 4,964
=====================================================================================================================
The September 30, 2002, Energy Delivery goodwill relates to ComEd and
the remaining Enterprises goodwill relates to the InfraSource and Exelon
Services reporting units. Consistent with SFAS No. 142, the remaining goodwill
will be reviewed for impairment on an annual basis, or more frequently if
significant events occur that could indicate an impairment exists. ComEd and
Enterprises plan to perform an impairment review in the fourth quarter of 2002.
Such future review would be consistent with the review conducted related to the
implementation of SFAS No. 142 (implementation review), which required estimates
of numerous items with varying degrees of uncertainty, such as discount rates,
terminal value earnings multiples, future revenue levels and estimated future
expenditure levels for ComEd and Enterprises; load growth and the resolution of
future rate proceedings for ComEd; and customer base and construction back logs
for Enterprises. Significant changes from the assumptions used in the
implementation review could possibly result in a future impairment loss. The
Illinois legislation provides that reductions to ComEd's common equity resulting
from goodwill impairments will not impact ComEd's earnings through 2006 under
the earnings provisions of the legislation.
The components of the net transitional impairment loss recognized in
the first quarter of 2002 as a cumulative effect of a change in accounting
principle are as follows:
Exelon
---------------------------------------------------------------------------------------------------------------------
Enterprises goodwill impairment (net of income taxes of $103 million) $ (254)
Minority interest (net of income taxes of $4 million) 11
Elimination of AmerGen negative goodwill (net of income taxes of $9 million) 13
---------------------------------------------------------------------------------------------------------------------
Total cumulative effect of a change in accounting principle $ (230)
=====================================================================================================================
Generation
---------------------------------------------------------------------------------------------------------------------
Elimination of AmerGen negative goodwill (net of income taxes of $9 million)
recorded as cumulative effect of a change in accounting principle $ 13
---------------------------------------------------------------------------------------------------------------------
11
The following tables set forth Exelon's net income and earnings per
common share and ComEd's net income for the three and nine months ended
September 30, 2002 and 2001, respectively, adjusted to exclude 2001 amortization
expense related to goodwill that is no longer being amortized.
Exelon
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
Reported income before cumulative effect
of changes in accounting principles $ 551 $ 376 $ 1,273 $ 1,078
Cumulative effect of changes in
accounting principles -- -- (230) 12
---------------------------------------------------------------------------------------------------------------------
Reported net income 551 376 1,043 1,090
Goodwill amortization -- 37 -- 114
---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 551 $ 413 $ 1,043 $ 1,204
---------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Reported income before cumulative effect
of changes in accounting principles $ 1.71 $ 1.17 $ 3.95 $ 3.36
Cumulative effect of changes in
accounting principles -- -- (0.71) 0.04
---------------------------------------------------------------------------------------------------------------------
Reported net income 1.71 1.17 3.24 3.40
Goodwill amortization -- 0.12 -- 0.36
---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.71 $ 1.29 $ 3.24 $ 3.76
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Reported income before cumulative effect
of changes in accounting principles $ 1.70 $ 1.16 $ 3.93 $ 3.33
Cumulative effect of changes in
accounting principles -- -- (0.71) 0.04
---------------------------------------------------------------------------------------------------------------------
Reported net income 1.70 1.16 3.22 3.37
Goodwill amortization -- 0.11 -- 0.35
---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.70 $ 1.27 $ 3.22 $ 3.72
---------------------------------------------------------------------------------------------------------------------
ComEd
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
Reported net income $ 215 $ 178 $ 576 $ 507
Goodwill amortization -- 32 -- 97
---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 215 $ 210 $ 576 $ 604
---------------------------------------------------------------------------------------------------------------------
Generation
The cessation of the amortization of negative goodwill of AmerGen on
January 1, 2002 did not have a material impact on Generation's reported net
income for the three or nine months ended September 30, 2002.
12
EITF Issue 02-3
Exelon and Generation early adopted the provision of Emerging Issues
Task Force (EITF) Issue 02-3 "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" (EITF 02-3) issued by the FASB EITF in
June 2002 that requires revenues and energy costs related to energy trading
contracts to be presented on a net basis in the income statement. Prior to the
second quarter of 2002, revenues from trading activity were presented in Revenue
and the energy costs related to energy trading were presented as either
Purchased Power or Fuel expense on Exelon and Generation's Consolidated
Statements of Income. For comparative purposes, energy costs related to energy
trading have been reclassified in prior periods to revenue to conform to the net
basis of presentation required by EITF 02-3. For the three and nine months ended
September 30, 2001, $93 million and $123 million of purchased power expense,
respectively, and $7 million and $12 million of fuel expense, respectively, was
reclassified and reflected as a reduction to revenue. The three months ended
March 31, 2002 included $504 million of purchased power expense and $9 million
of fuel expense that has been reclassified and reflected as a reduction to
revenue in the nine months ended September 30, 2002.
SFAS No. 144
In September 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). Exelon, ComEd, PECO
and Generation adopted SFAS No. 144 on January 1, 2002. SFAS No. 144 establishes
accounting and reporting standards for both the impairment and disposal of
long-lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 and its provisions are generally applied prospectively. The
adoption of this statement had no effect on Exelon, ComEd, PECO or Generation's
reported financial positions, results of operations or cash flows.
SFAS No. 145
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). SFAS No. 145 eliminates SFAS No. 4 "Reporting Gains
and Losses from Extinguishment of Debt" (SFAS No. 4) and thus allows for only
those gains or losses on the extinguishment of debt that meet the criteria of
extraordinary items to be treated as such in the financial statements. SFAS No.
145 also amends Statement of Financial Accounting Standards No. 13, "Accounting
for Leases" (SFAS No. 13) to require sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The adoption of SFAS No. 145 had no effect on Exelon, ComEd, PECO
or Generation's reported financial positions, results of operations or cash
flows.
SFAS No. 133
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133) applies to all derivative instruments and requires
that such instruments be recorded on the balance sheet either as an asset or a
liability measured at their fair value through earnings, with special accounting
permitted for certain qualifying hedges. On January 1, 2001, Exelon, ComEd,
PECO, and Generation adopted SFAS No. 133. Generation recognized a non-cash gain
of $12 million, net of income taxes, in earnings and deferred a non-cash gain of
$4 million, net of income taxes, in accumulated other comprehensive income and
13
PECO deferred a non-cash gain of $40 million, net of income taxes, in
accumulated other comprehensive income.
3. ACQUISITIONS AND DISPOSITIONS
Acquisition of Generating Plants from TXU
On April 25, 2002, Generation acquired two natural-gas and oil-fired
plants from TXU Corp. (TXU) for an aggregate purchase price of $443 million. The
purchase included the 893-megawatt Mountain Creek Steam Electric Station in
Dallas and the 1,441-megawatt Handley Steam Electric Station in Fort Worth. The
transaction included a purchased power agreement for TXU to purchase power
during the months of May through September from 2002 through 2006. During the
periods covered by the purchased power agreement, TXU will make fixed capacity
payments, variable expense payments, and will provide fuel to Exelon in return
for exclusive rights to the energy and capacity of the generation plants.
Substantially all of the purchase price has been allocated to property, plant
and equipment.
Sale of AT&T Wireless
On April 1, 2002, Enterprises sold its 49% interest in AT&T Wireless
PCS of Philadelphia, LLC to a subsidiary of AT&T Wireless Services for $285
million in cash. Enterprises recorded an after-tax gain of $116 million in
other, net on the $84 million investment, which had been reflected in Deferred
Debits and Other Assets on Exelon's Consolidated Balance Sheets.
Sithe New England Holdings Acquisition
On June 26, 2002, Generation agreed to purchase Sithe New England
Holdings, LLC (Sithe New England), a subsidiary of Sithe Energies Inc. (Sithe),
and related power marketing operations in exchange for a $543 million note. In
addition, Generation will assume various Sithe guarantees related to an equity
contribution agreement between Sithe New England and Sithe Boston Generation
(Boston Generation), a project subsidiary of Sithe New England. The equity
contribution agreement requires, among other things, that Sithe New England,
upon the occurrence of certain events, contribute up to $38 million of equity
for the purpose of completing the construction of two generating facilities.
Boston Generation established a $1.2 billion credit facility in order to finance
the construction of these two generating facilities. The approximately $1.1
billion expected to be outstanding under the facility at the transaction closing
date, will be reflected on Exelon's Consolidated Balance Sheet. Sithe New
England has provided security interests in and has pledged the stock of its
other project subsidiaries to Boston Generation. If the closing conditions are
satisfied, the transaction could be completed in November 2002.
The purchase involves approximately 4,471 megawatts (MWs) of generation
capacity, consisting of 1,670 MWs in operation and 2,421 MWs under construction,
which would increase Generation's net assets by approximately $1.6 billion.
Sithe New England's generation facilities are located primarily in
Massachusetts.
Generation is a 49.9% owner of Sithe and accounts for the investment as
an unconsolidated equity investment. The Sithe New England purchase would not
affect the accounting for Sithe as an equity investment. Separate from the Sithe
New England transaction, Generation is subject to a Put and Call Agreement (PCA)
that gives Generation the right to purchase (Call) the remaining 50.1% of Sithe,
and gives the other Sithe shareholders the right to sell (Put) their interest to
14
Generation. If the Put option is exercised, Generation has the obligation to
complete the purchase. The PCA provides that the Put and Call options become
exercisable as of December 18, 2002 and expire in December 2005. The Sithe New
England purchase is a separate transaction from the PCA in that it is intended
to enable Generation to acquire only the Sithe assets that fit Generation's
strategy, accelerate the realization of synergies, and reduce the amount of debt
needed to finance the transaction.
See ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Exelon Corporation - for further discussion of the
PCA.
4. REGULATORY ISSUES
On June 1, 2001, ComEd filed with the Illinois Commerce Commission (ICC)
to establish delivery service charges for residential customers in preparation
for residential customer choice, which began in May 2002. The filing also
updated delivery service charges for non-residential customers.
On April 1, 2002, the ICC issued an interim order in ComEd's Delivery
Services Rate Case. The interim order is subject to an audit of test year (2000)
expenditures, including capital plant expenditures, with a final order to be
issued in 2003. The order sets delivery rates for residential customers choosing
a new retail electric supplier. The new rates became effective May 1, 2002 when
residential customers became eligible to choose their supplier of electricity.
Traditional bundled rates paid by customers that retain ComEd as their
electricity supplier are not affected by this order. Bundled rates will remain
frozen through 2006, as a result of the June 6, 2002 amendments to the Illinois
Restructuring Act that extended the freeze on bundled rates for an additional
two years. Delivery service rates for non-residential customers are not affected
by the order. The potential revenue impact of the interim order is not expected
to be material in 2002.
On October 10, 2002, ComEd received the audit report on the audit of
test year expenditures by the Liberty Consulting Group (Liberty), a consulting
firm engaged by the ICC in conjunction with the audit of test year expenditures.
Using the interim order as a starting point, Liberty recommends certain
additional disallowances to test year expenditures and rate base levels, which,
if ultimately approved by the ICC would result in lower residential delivery
service charges and higher non-residential delivery service charges. The ICC
will hold hearings on the Liberty audit report and responses from ComEd and
other parties. A final decision is expected in the middle of 2003.
ComEd intends to contest the Liberty audit findings in the reopened
hearings and cannot currently determine what portion, if any, of the Liberty
audit recommendations the ICC will accept. If the ICC ultimately determines that
all or some portion of ComEd's distribution plant is not recoverable through
rates, ComEd may be required to write-off some or all of the amount of its
investment that the ICC determines is not recoverable. The estimated potential
write-off, before income taxes, could be up to approximately $100 million if the
Liberty audit recommendations were to be accepted by the ICC in their entirety.
ComEd recorded a charge to earnings, before income taxes, of $12 million in the
third quarter of 2002, representing the estimated minimum probable write-off
exposure resulting from the audit findings.
15
As permitted by the Pennsylvania Electric Competition Act, the
Pennsylvania Department of Revenue calculated a 2002 Revenue Neutral
Reconciliation (RNR) adjustment to the gross receipts tax rate in order to
neutralize the impact of electric restructuring on its tax revenues. In January
2002, the Pennsylvania Public Utility Commission (PUC) approved the RNR
adjustment to the gross receipts tax rate collected from customers. Effective
January 1, 2002, PECO implemented the change in the gross receipts tax rate. The
RNR adjustment increases the gross receipts tax rate, which will increase PECO's
annual revenues and tax obligations by approximately $50 million in 2002. The
RNR adjustment was under appeal. The case was remanded to the PUC and in August
2002, the PUC ruled that PECO is properly authorized to recover these costs.
5. EARNINGS PER SHARE
Diluted earnings per share are calculated by dividing net income by the
weighted average number of shares of common stock outstanding, including shares
issuable upon exercise of stock options outstanding under Exelon's stock option
plans considered to be common stock equivalents. The following table shows the
effect of these stock options on the weighted average number of shares
outstanding used in calculating diluted earnings per share (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 323 321 322 320
Assumed exercise of stock options 1 2 2 3
---------------------------------------------------------------------------------------------------------------------
Average diluted common shares outstanding 324 323 324 323
=====================================================================================================================
Stock options not included in average common shares used in calculating
diluted earnings per share due to their antidilutive effect were five million
for the three and nine months ended September 30, 2002 and four million and one
million for the three and nine months ended September 30, 2001, respectively.
16
6. SEGMENT INFORMATION
Exelon operates in three business segments: energy delivery, generation
and enterprises. Beginning in 2002, Exelon evaluates the performance of its
business segments on the basis of net income. ComEd and PECO operate in one
business segment, Energy Delivery. Exelon's segment information for the three
months and nine months ended September 30, 2002 as compared to the same periods
in 2001 and at September 30, 2002 and December 31, 2001 are as follows:
Three Months Ended September 30, 2002 as compared to Three Months Ended
September 30, 2001
Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
Revenues(1):
2002 $ 3,162 $ 2,213 $ 509 $ (1,514) $ 4,370
2001 2,970 2,191 529 (1,505) 4,185
Intersegment Revenues:
2002 $ 29 $ 1,463 $ 22 $ (1,514) $ --
2001 17 1,404 84 (1,505) --
Operating Expenses(1):
2002 $ 2,350 $ 2,026 $ 494 $ (1,500) $ 3,370
2001 2,272 1,967 529 (1,495) 3,273
Net Income/(Loss)
2002 $ 370 $ 163 $ 15 $ 3 $ 551
2001 280 140 (33) (11) 376
-------------------------------------------------------------------------------------------------------------------
17
Nine Months Ended September 30, 2002 as compared to Nine Months Ended September 30, 2001
Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
Revenues(2):
2002 $ 7,973 $ 5,233 $ 1,475 $(3,436) $ 11,245
2001 7,903 5,403 1,742 (3,423) 11,625
Intersegment Revenues:
2002 $ 59 $ 3,309 $ 72 $(3,440) $ --
2001 78 3,223 124 (3,425) --
Operating Expenses(2):
2002 $ 5,865 $ 4,844 $ 1,510 $ (3,391) $ 8,828
2001 5,833 4,798 1,794 (3,393) 9,032
Net Income/(Loss):
2002 $ 908 $ 326 $(174) $ (17) $1,043
2001 810 381 (63) (38) 1,090
--------------------------------------------------------------------------------------------------------------------
Total Assets:
September 30, 2002 $ 26,584 $9,280 $1,310 $(1,938) $ 35,236
December 31, 2001 26,365 8,145 1,790 (1,483) 34,817
--------------------------------------------------------------------------------------------------------------------
(1) $59 million and $58 million in utility taxes are included in the Revenues
and Expenses for the three months ended September 30, 2002 and 2001,
respectively, for ComEd. $64 million and $50 million in utility taxes are
included in the Revenues and Expenses for the three months ended September
30, 2002 and 2001, respectively, for PECO.
(2) $157 million and $156 million in utility taxes are included in the Revenues
and Expenses for the nine months ended September 30, 2002 and 2001,
respectively, for ComEd. $157 million and $103 million in utility taxes are
included in the Revenues and Expenses for the nine months ended September
30, 2002 and 2001, respectively, for PECO.
7. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
During the three and nine months ended September 30, 2002 and 2001,
Exelon recorded pre-tax gains and losses in other comprehensive income relating
to mark-to-market (MTM) adjustments of contracts designated as cash flow hedges
as follows:
ComEd PECO Generation Enterprises Exelon
---------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2002 $ (36) $ -- $ (24) $ 4 $ (56)
Three months ended September 30, 2001 -- (12) 84 9 81
Nine months ended September 30, 2002 (42) (1) (132) 19 (156)
Nine months ended September 30, 2001 -- (4) (23) 11 (16)
---------------------------------------------------------------------------------------------------------------------
During the three months ended September 30, 2002 and 2001, and the nine
months ended September 30, 2002 and 2001, Generation recognized net MTM gains on
non-trading energy derivative contracts not designated as cash flow hedges, in
operating revenues as follows:
2002 2001
---------------------------------------------------------------------------------------------------------------------
Three months ended September 30, $ 1 $ 7
Nine months ended September 30, 11 29
---------------------------------------------------------------------------------------------------------------------
18
During the three months ended September 30, 2002 and 2001, and the nine
months ended September 30, 2002 and 2001, Generation recognized net MTM gains
and losses on energy trading contracts, in earnings as follows:
2002 2001
---------------------------------------------------------------------------------------------------------------------
Three months ended September 30, $ -- $ 4
Nine months ended September 30, (13) (2)
---------------------------------------------------------------------------------------------------------------------
During the three months ended September 30, 2002 and 2001 and the nine
months ended September 30, 2002 and 2001, PECO reclassified other income in the
Consolidated Statements of Income and Comprehensive Income, as a result of the
discontinuance of cash flow hedges related to certain forecasted financing
transactions that were no longer probable of occurring as follows:
2002 2001
---------------------------------------------------------------------------------------------------------------------
Three months ended September 30, $ -- $ --
Nine months ended September 30, -- 6
---------------------------------------------------------------------------------------------------------------------
As of September 30, 2002, deferred net gains/(losses) on derivative
instruments accumulated in other comprehensive income are expected to be
reclassified to earnings during the next twelve months are as follows:
ComEd PECO Generation Enterprises Exelon
---------------------------------------------------------------------------------------------------------------------
Net Gains (Losses) Expected to be Reclassified $ (1) $ 15 $ (48) $ 5 $ (29)
---------------------------------------------------------------------------------------------------------------------
Amounts in accumulated other comprehensive income related to interest
rate cash flow hedges are reclassified into earnings when the forecasted
interest payment occurs. Amounts in accumulated other comprehensive income
related to energy commodity cash flows are reclassified into earnings when the
forecasted purchase or sale of the energy commodity occurs.
During the three months ended September 30, 2002 and 2001 and the nine
months ended September 30, 2002 and 2001, Generation did not reclassify any
amounts from accumulated other comprehensive income into earnings as a result of
forecasted energy commodity transactions no longer being probable.
Generation classifies investments in the trust accounts for
decommissioning nuclear plants as available-for-sale. The following tables show
the fair values, gross unrealized gains and losses and amortized cost bases for
the securities held in these trust accounts.
19
September 30, 2002
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------------------------------------------------------------------------------------------------------------
Equity securities $ 1,754 $ 59 $ (557) $ 1,256
Debt securities
Government obligations 989 73 -- 1,062
Other debt securities 674 33 (28) 679
---------------------------------------------------------------------------------------------------------------------
Total debt securities 1,663 106 (28) 1,741
---------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 3,417 $ 165 $ (585) $ 2,997
=====================================================================================================================
Unrealized gains and losses are recognized in Accumulated Depreciation
and Accumulated Other Comprehensive Income in Generation's Consolidated Balance
Sheet.
For the three months ended September 30, 2002, proceeds from the sale
of decommissioning trust investments and gross realized gains and losses on
those sales were $295 million, $12 million and $21 million, respectively. For
the nine months ended September 30, 2002, proceeds from the sale of
decommissioning trust investments and gross realized gains and losses on those
sales were $1,184 million, $43 million and $77 million, respectively.
For the nine months ended September 30, 2002, net realized losses of $2
million were recognized in Accumulated Depreciation in Generation's Consolidated
Balance Sheets and $32 million of net realized losses were recognized in Other
Income and Deductions in Generation's Consolidated Statements of Income and
Comprehensive Income. The available-for-sale securities held at September 30,
2002 have an average maturity of eight to ten years. The cost of these
securities was determined on the basis of specific identification.
8. COMMITMENTS AND CONTINGENCIES
For information regarding capital commitments, nuclear decommissioning
and spent fuel storage, see the Commitments and Contingencies Note in the
Consolidated Financial Statements of Exelon, ComEd and PECO for the year ended
December 31, 2001 and Generation's S-4.
Environmental Liabilities
Exelon has identified 71 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
September 30, 2002, Exelon had accrued $150 million for environmental
investigation and remediation costs that currently can be reasonably estimated,
including $127 million for MGP investigation and remediation.
As of September 30, 2002, ComEd had accrued $107 million (discounted)
for environmental investigation and remediation costs that currently can be
reasonably estimated. This reserve included $103 million for MGP investigation
and remediation. The MGP reserve was increased by $17 million in the third
quarter of 2002 as the result of a delay in implementing the ongoing remediation
for a MGP site in Oak Park, Illinois.
As of September 30, 2002, PECO had accrued $34 million (undiscounted)
for environmental investigation and remediation costs that currently can be
reasonably estimated, including $24 million for MGP investigation and
remediation.
20
As of September 30, 2002, Generation had accrued $9 million
(undiscounted) for environmental investigation and remediation cost, none of
which relates to MGP investigation and remediation.
Exelon, ComEd, PECO and Generation cannot predict the extent to which
they will incur other significant liabilities for additional investigation and
remediation costs at these or additional sites identified by environmental
agencies or others, or whether such costs may be recoverable from third parties.
Energy Commitments
Exelon and Generation had long-term commitments relating to the net
purchase and sale of energy, capacity and transmission rights from unaffiliated
utilities, including Midwest Generation LLC (Midwest Generation), and others,
including AmerGen, as expressed in the following table:
Net Capacity Power Only Power Only Purchases from Transmission Rights
Purchases (1) Sales AmerGen Non-Affiliates Purchases (2)
---------------------------------------------------------------------------------------------------------------------
2002 $ 191 $ 850 $ 47 $ 796 $ 32
2003 597 1,954 261 1,467 75
2004 642 944 315 744 93
2005 357 231 489 212 84
2006 329 92 494 177 3
Thereafter 4,150 22 2,003 901 --
---------------------------------------------------------------------------------------------------------------------
Total $ 6,266 $ 4,093 $ 3,609 $ 4,297 $ 287
---------------------------------------------------------------------------------------------------------------------
(1) Net Capacity Purchases includes Midwest Generation commitments as of
October 2, 2002. On October 2, 2002, Generation notified Midwest Generation
of its exercise of termination options under the existing Collins
Generating Station (Collins) and Peaking Unit (Peaking) Purchase Power
Agreements. Generation exercised its termination options on 1,727 MWs in
2003 and 2004. In 2003, Generation will take 1,778 MWs of option capacity
under the Collins and Peaking Unit Agreements as well as 1,265 MWs of
option capacity under the Coal Generation Purchase Power Agreement. Net
capacity purchases in 2004 include 3,474 MWs of optional capacity from
Midwest Generation. Net Capacity Purchases also include capacity sales to
TXU under the purchase power agreement entered into in connection with the
purchase of two generating plants in April 2002, which states that TXU will
purchase the plant output from May through September from 2002 through
2006. The combined capacity of the two plants is 2,334 MWs.
(2) Transmission Rights Purchases include estimated commitments in 2004 and
2005 for additional transmission rights that will be required to fulfill
firm sales contracts.
Additionally, Generation has the following commitments.
In connection with the 2001 corporate restructuring, ComEd entered into
a purchase power agreement (PPA) with Generation under which Generation has
agreed to supply all of ComEd's load requirements through 2004. Prices for this
energy vary depending upon the time of day and month of delivery. During 2005
and 2006, ComEd's PPA is a partial requirements agreement under which ComEd will
purchase all of its required energy and capacity from Generation, up to the
available capacity of the nuclear generating plants formerly owned by ComEd and
transferred to Generation. Under the terms of the PPA, Generation is responsible
for obtaining any required transmission service. The PPA also specifies that
prior to 2005, ComEd and Generation will jointly determine and agree on a
market-based price for energy delivered under the PPA for 2005 and 2006. In the
event that the parties cannot agree to market-based prices for 2005 and 2006
prior to July 1, 2004, ComEd has the option of terminating the PPA effective
December 31, 2004. ComEd will obtain any additional supply required from market
21
sources in 2005 and 2006, and subsequent to 2006, will obtain all of its supply
from market sources, which could include Generation.
In connection with the 2001 corporate restructuring, PECO entered into
a PPA with Generation under which PECO obtains substantially all of its electric
supply from Generation through 2010. Also, under the restructuring, PECO
assigned its rights and obligations under various PPAs and fuel supply
agreements to Generation. Generation supplies power to PECO from the transferred
generation assets, assigned PPAs and other market sources.
Under terms of the 2001 corporate restructuring, ComEd remits to
Generation any amounts collected from customers for nuclear decommissioning.
Under an agreement effective September 2001, PECO remits to Generation any
amounts collected from customers for nuclear decommissioning.
Litigation
Exelon
Securities Litigation. Between May 8 and June 14, 2002, several class
action lawsuits were filed in the Federal District Court in Chicago asserting
nearly identical securities law claims on behalf of purchasers of Exelon
securities between April 24, 2001 and September 27, 2001 (Class Period). The
complaints allege that Exelon violated Federal securities laws by issuing a
series of materially false and misleading statements relating to its 2001
earnings expectations during the Class Period. The court consolidated the
pending cases into one lawsuit and has appointed two lead plaintiffs as well as
lead counsel.
On October 1, 2002, the plaintiffs filed a consolidated amended
complaint. In addition to the original claims, this complaint contains
allegations of new facts and contains several new theories of liability. Exelon
believes the lawsuit is without merit and is vigorously contesting this matter.
ComEd
Chicago Franchise. In March 1999, ComEd reached a settlement agreement
with the City of Chicago (Chicago) to end the arbitration proceeding between
ComEd and Chicago regarding their January 1, 1992 franchise agreement. As part
of the settlement agreement, ComEd and Chicago agreed to a revised combination
of ongoing work under the franchise agreement and new initiatives that will
result in defined transmission and distribution expenditures by ComEd to improve
electric services in Chicago. The settlement agreement provides that ComEd would
be subject to liquidated damages if the projects are not completed by various
dates, unless it was prevented from doing so by events beyond its reasonable
control. In addition, ComEd and Chicago established an Energy Reliability and
Capacity Account, into which ComEd paid $25 million during each of the years
1999 through 2001 and has conditionally agreed to pay $25 million at the end of
2002, to help ensure an adequate and reliable electric supply for Chicago.
FERC Municipal Request for Refund. Three of ComEd's wholesale municipal
customers filed a complaint and request for refund with FERC, alleging that
ComEd failed to properly adjust its rates, as provided for under the terms of
the electric service contracts with the municipal customers and to track certain
refunds made to ComEd's retail customers in the years 1992 through 1994. In the
22
third quarter of 1998, FERC granted the complaint and directed that refunds be
made, with interest. ComEd filed a request for rehearing. On April 30, 2001,
FERC issued an order granting rehearing in which it determined that its 1998
order had been erroneous and that no refunds were due from ComEd to the
municipal customers. On June 29, 2001, FERC denied the customers' requests for
rehearing of the order granting rehearing. In August 2001, each of the three
wholesale municipal customers appealed the April 30, 2001 FERC order to the
Federal circuit court, which consolidated the appeals for the purposes of
briefing and decision.
Retail Rate Law. In 1996, several developers of non-utility generating
facilities filed litigation against various Illinois officials claiming that the
enforcement against those facilities of an amendment to Illinois law removing
the entitlement of those facilities to state-subsidized payments for electricity
sold to ComEd after March 15, 1996 violated their rights under the Federal and
state constitutions. The developers also filed suit against ComEd for a
declaratory judgment that their rights under their contracts with ComEd were not
affected by the amendment. On August 4, 1999, the Illinois Appellate Court held
that the developers' claims against the state were premature, and the Illinois
Supreme Court denied leave to appeal that ruling. Developers of both facilities
have since filed amended complaints repeating their allegations that ComEd
breached the contracts in question and requesting damages for such breach
reflecting the state-subsidized rate to which the developers claim they were
entitled under their contracts. These matters are in the discovery phase. ComEd
is contesting each case.
Service Interruptions. In August 1999, three class action lawsuits were
filed against ComEd, and subsequently consolidated, in the Circuit Court of Cook
County, Illinois seeking damages for personal injuries, property damage and
economic losses related to a series of service interruptions that occurred in
the summer of 1999. The combined effect of these interruptions resulted in over
168,000 customers losing service for more than four hours. Conditional class
certification was approved by the court for the sole purpose of exploring
settlement. ComEd filed a motion to dismiss the complaints. On April 24, 2001,
the court dismissed four of the five counts of the consolidated complaint
without prejudice and the sole remaining count was dismissed in part. On June 1,
2001, the plaintiffs filed a second amended consolidated complaint and ComEd has
filed an answer. A portion of any settlement or verdict may be covered by
insurance.
Enron. As a result of Enron Corp.'s bankruptcy proceeding, ComEd has
potential monetary exposure for 366 of its customer accounts that were served by
Enron Energy Services (EES) as a billing agent. EES has rejected its contracts
with these accounts, with the exception of approximately 100 accounts for which
EES retains its billing agency. ComEd is working to ensure that customers know
what amounts are owed to ComEd on accounts for which EES has been removed as
billing agent, and has obtained updated billing addresses for these accounts.
With regard to the accounts for which EES retains its billing agency, ComEd's
total amount outstanding is not material. Because that amount is owed to ComEd
by individual customers, it is not part of the bankrupt Enron's estate. The ICC
has rescinded EES's authority to act as an alternative retail energy supplier in
Illinois. However, EES never served as a supplier, as opposed to a billing
agent, to any of ComEd's retail accounts.
23
Generation
Godley Park District Litigation. On April 18, 2001, the Godley Park
District filed suit in Will County Circuit Court against ComEd and Generation
alleging that oil spills at Braidwood Station have contaminated the Park
District's water supply. The complaint sought actual damages, punitive damages
of $100 million and statutory penalties. The court dismissed all counts seeking
punitive damages and statutory penalties, and the plaintiff has filed an amended
complaint before the court. The amended complaint added counts under the
Illinois Public Utility Act (PUA), which provides for statutory penalties and
allows recovery of attorney's fees. On April 20, 2002, the Court denied ComEd
and Generation's motion to dismiss the additional counts under the PUA. ComEd
and Generation are contesting the liability and damages sought by the plaintiff.
As a result of the 2001 corporate restructuring, Generation has responsibility
for this matter.
Cotter Corporation Litigation. During 1989 and 1991, actions were
brought in Federal and state courts in Colorado against ComEd and its
subsidiary, Cotter Corporation (Cotter), seeking unspecified damages and
injunctive relief based on allegations that Cotter permitted radioactive and
other hazardous material to be released from its mill into areas owned or
occupied by the plaintiffs, resulting in property damage and potential adverse
health effects. In 1994, a Federal jury returned nominal dollar verdicts against
Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld
on appeal. The remaining claims in the 1989 actions were settled or dismissed.
In 1998, a jury verdict was rendered against Cotter in favor of 14 of the
plaintiffs in the 1991 cases, totaling approximately $6 million in compensatory
and punitive damages, interest and medical monitoring. On appeal, the Tenth
Circuit Court of Appeals reversed the jury verdict, and remanded the case for
new trial. These plaintiffs' cases were consolidated with the remaining 26
plaintiffs' cases, which had not been tried. The consolidated trial was
completed on June 28, 2001. The jury returned a verdict against Cotter and
awarded $16.3 million in various damages. On November 20, 2001, the District
Court entered an amended final judgment that included an award of both
pre-judgment and post-judgment interests, costs, and medical monitoring expenses
that total $43.3 million. This matter is being appealed by Cotter in the Tenth
Circuit Court of Appeals. Cotter is vigorously contesting the award.
In November 2000, another trial involving a separate sub-group of 13
plaintiffs, seeking $19 million in damages plus interest was completed in
Federal District Court in Denver. The jury awarded nominal damages of $42,500 to
11 of 13 plaintiffs, but awarded no damages for any personal injury or health
claims, other than requiring Cotter to perform periodic medical monitoring at
minimal cost. Cotter and the plaintiffs both appealed the verdict to the Tenth
Circuit Court of Appeals.
On February 18, 2000, ComEd sold Cotter to an unaffiliated third party.
As part of the sale, ComEd agreed to indemnify Cotter for any liability incurred
by Cotter as a result of these actions, as well as any liability arising in
connection with the West Lake Landfill discussed in the next paragraph. In
connection with Exelon's 2001 corporate restructuring, the responsibility to
indemnify Cotter for any liability related to these matters was transferred by
ComEd to Generation.
24
The United States Environmental Protection Agency (EPA) has advised
Cotter that it is potentially liable in connection with radiological
contamination at a site known as the West Lake Landfill in Missouri. Cotter is
alleged to have disposed of approximately 39,000 tons of soils mixed with 8,700
tons of leached barium sulfate at the site. Cotter, along with three other
companies identified by the EPA as potentially responsible parties (PRPs), is
reviewing a draft feasibility study that recommends capping the site. The PRPs
are also engaged in discussions with the State of Missouri and the EPA. The
estimated costs of remediation for the site are $10 million to $15 million. Once
a final feasibility study is complete and a remedy selected, it is expected that
the PRPs will agree on an allocation of responsibility for the costs. Until an
agreement is reached, Generation cannot predict its share of the costs.
Real Estate Tax Appeals. Generation is involved in tax appeals
regarding a number of its nuclear facilities, Limerick Generating Station
(Montgomery County, PA), Peach Bottom Atomic Power Station (York County, PA),
Quad Cities Station (Rock Island County, IL), and one of its fossil facilities,
Eddystone (Delaware County, PA). Generation is also involved in the tax appeal
for Three Mile Island (Dauphin County, PA) through AmerGen. Generation does not
believe the outcome of these matters will have a material adverse effect on
Generation's results of operations or financial condition.
General
Exelon, ComEd, PECO and Generation are involved in various other
litigation matters. The ultimate outcome of such matters, as well as the matters
discussed above, while uncertain, are not expected to have a material adverse
effect on their respective financial condition or results of operations.
Credit Contingencies
Generation
Generation is a counterparty to Dynegy Inc. (Dynegy) in various energy
transactions. In early July 2002, the credit ratings of Dynegy were downgraded
by two credit rating agencies to below investment grade. As of September 30,
2002, Generation had a net receivable from Dynegy of approximately $7 million,
and consistent with the terms of the existing credit arrangement, has received
collateral in support of this receivable. Generation also has credit risk
associated with Dynegy through Generation's equity investment in Sithe. Sithe is
a 60% owner of the Independence generating station, a 1,040 MW gas-fired
qualified facility that has an energy only long-term tolling arrangement with
Dynegy, with a related financial swap arrangement. As of September 30, 2002,
Sithe had recognized an asset on its balance sheet related to the fair value of
the financial swap agreement with Dynegy that is marked-to-market under the
terms of SFAS No. 133. If Dynegy is unable to fulfill the terms of this
agreement, Sithe would be required to write-off the fair value asset, which
Generation estimates would result in an approximate $22 million reduction in its
equity earnings from Sithe, based on Generation's current 49.9% investment
ownership in Sithe. Additionally, the future economic value of Sithe's
investment in the Independence Station and AmerGen's purchased power arrangement
with Illinois Power, a subsidiary of Dynegy, could be impacted by events related
to Dynegy's financial condition.
25
9. MERGER-RELATED COSTS
In association with the Merger, Exelon recorded certain reserves for
restructuring costs. The reserves associated with PECO were charged to expense
pursuant to EITF Issue 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)"; while the reserves associated with Unicom
were recorded as part of the application of purchase accounting and did not
affect results of operations, consistent with EITF Issue 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination."
Exelon, PECO and Generation
Merger costs charged to expense. PECO's merger-related costs charged to
expense in 2000 were $248 million, consisting of $116 million for PECO employee
costs and $132 million of direct incremental costs incurred by PECO in
conjunction with the merger transaction. Direct incremental costs represent
expenses directly associated with completing the Merger, including professional
fees, regulatory approval and settlement costs, and settlement of compensation
arrangements. Employee costs represent estimated severance costs and pension and
postretirement benefits provided under Exelon's merger separation plans for
eligible employees who are expected to be involuntarily terminated before
December 2002 due to integration activities of the merged companies. Additional
employee severance costs of $48 million, primarily related to PECO employees,
were charged to operating and maintenance expense in 2001, and a $10 million
reduction in the estimated liability related to Generation employees was
recorded in operating and maintenance expense in the first quarter of 2002.
Employee costs are being paid from the Exelon's pension and post-retirement
benefit plans, except for certain benefits such as outplacement services,
continuation of health care coverage and educational benefits. As of September
30, 2002 a liability of $7 million is reflected on Exelon's balance sheet for
payment of these benefits, of which $2 million is reflected on PECO's balance
sheet and $3 million is reflected on Generation's balance sheet.
A total of 960 PECO positions are expected to be eliminated as a result
of the merger, 274 of which related to generation, 230 of which related to PECO
energy delivery and the remainder from the enterprises and corporate support
areas of the company. As of September 30, 2002, 788 of the positions had been
eliminated, of which 162 related to PECO energy delivery, and 181 related to
generation and the remainder to enterprises and corporate support. The remaining
positions are expected to be eliminated in the fourth quarter of 2002.
Additionally, in the third quarter of 2000, approximately $20 million
of closing costs and $8 million of stock compensation costs associated with
Unicom were charged to expense.
Exelon, ComEd and Generation
Merger Costs Included in Purchase Price Allocation. The purchase price
allocation as of December 31, 2000 included a liability of $307 million for
Unicom employee costs and liabilities of approximately $39 million for estimated
costs of exiting various business activities of former Unicom activities that
were not compatible with the strategic business direction of Exelon.
26
During 2001, Exelon, ComEd and Generation finalized plans for
consolidation of functions, including negotiation of an agreement with the
International Brotherhood of Electrical Workers Local 15 regarding severance
benefits to union employees. Also, in January of 2001, ComEd transferred a
portion of its employee related liabilities to Generation, Enterprises and
Business Services Company (BSC) as part of the corporate restructuring. In the
third quarter of 2002, Exelon reduced its reserve by $12 million due to the
elimination of identified positions through normal attrition, which did not
require payments under Exelon's merger separation plans, and a determination
that certain positions would not be eliminated by the end of 2002 as originally
planned due to a change in certain business plans. The reduction in the reserve
was recorded as a purchase price adjustment to goodwill. In 2001 and through
September 30, 2002, Exelon, ComEd and Generation recorded adjustments to the
purchase price allocation as follows:
Exelon
Original Adjustments Adjusted
Estimate 2001 2002 Liabilities
-----------------------------------------------------------------------------------------------------------------------
Employee severance payments $ 128 $ 33 $ (10) $ 151 (a)
Other benefits 21 9 (2) 28 (a)
-----------------------------------------------------------------------------------------------------------------------
Employee severance payments and other benefits 149 42 (12) 179
Actuarially determined pension and postretirement costs 158 (11) -- 147 (b)
-----------------------------------------------------------------------------------------------------------------------
Total Unicom employee cost $ 307 $ 31 $ (12) $ 326
=======================================================================================================================
(a) The increase is a result of the identification in 2001 of additional
positions to be eliminated, partially offset by the 2002 elimination of
identified positions through normal attrition and changes in certain
business plans.
(b) The reduction results from lower estimated pension and post retirement
welfare benefits reflecting revised actuarial estimates.
The following table provides a reconciliation of the reserve for
employee severance and other benefits associated with the Merger:
---------------------------------------------------------------------------------------------------------------------
Adjusted employee severance and other benefits reserve $ 179
Payments to employees (October 2000-June 2002) (125)
Payments to employees (July 2002-September 2002) (10)
---------------------------------------------------------------------------------------------------------------------
Employee severance and other benefits reserve as of September 30, 2002 $ 44
=====================================================================================================================
ComEd
Original Adjustments Adjusted
Estimate Transfer 2001 2002 Liabilities
------------------------------------------------------------------------------------------------------------------------
Employee severance payments $ 128 $ (68) $ 17 $ (7) $ 70 (a)
Other benefits 21 (14) 8 (2) 13 (a)
------------------------------------------------------------------------------------------------------------------------
Employee severance payments
and other benefits 149 (82) 25 (9) 83
Actuarially determined pension
and postretirement costs 158 (82) 10 -- 86 (b)
------------------------------------------------------------------------------------------------------------------------
Unicom employee cost - ComEd $ 307 $ (164) $ 35 $ (9) $ 169
========================================================================================================================
(a) The increase is a result of the identification in 2001 of additional
positions to be eliminated, partially offset by the 2002 elimination of
identified positions through normal attrition and changes in certain
business plans.
(b) The reduction results from lower estimated pension and post retirement
welfare benefits reflecting revised actuarial estimates.
27
The following table provides a reconciliation of ComEd's reserve for
employee severance and other benefits associated with the Merger:
---------------------------------------------------------------------------------------------------------------------
Adjusted employee severance and other benefits reserve $ 83
Payments to employees (October 2000-June 2002) (54)
Payments to employees (July 2002-September 2002) (5)
---------------------------------------------------------------------------------------------------------------------
Employee severance and other benefits reserve as of September 30, 2002 $ 24
=====================================================================================================================
Generation
Original Adjustments Adjusted
Estimate 2001 2002 Liabilities
------------------------------------------------------------------------------------------------------------------------
Employee severance payments $ 45 $ (12) $ (2) $ 31 (a)
Other benefits 5 2 -- 7 (a)
------------------------------------------------------------------------------------------------------------------------
Employee severance payments and other benefits 50 (10) (2) 38
Actuarially determined pension and postretirement costs 71 (25) -- 46 (b)
------------------------------------------------------------------------------------------------------------------------
Unicom employee cost - Generation $ 121 $ (35) $ (2) $ 84
========================================================================================================================
(a) The increase is a result of the identification in 2001 of additional
positions to be eliminated, partially offset by the 2002 elimination of
identified positions through normal attrition and changes in certain
business plans.
(b) The reduction results from lower estimated pension and post retirement
welfare benefits reflecting revised actuarial estimates.
The following table provides a reconciliation of the reserve for
employee severance and other benefits associated with the Merger:
---------------------------------------------------------------------------------------------------------------------
Adjusted employee severance and other benefits reserve $ 38
Payments to employees (October 2000-June 2002) (26)
Payments to employees (July 2002-September 2002) (3)
---------------------------------------------------------------------------------------------------------------------
Employee severance and other benefits reserve as of September 30, 2002 $ 9
=====================================================================================================================
Exelon, ComEd and Generation
The following table provides the status of the former Unicom positions
identified to be eliminated as a result of the Merger:
Corporate
& Other ComEd Generation Total
---------------------------------------------------------------------------------------------------------------------
Estimate at October 20, 2000 180 1,022 1,073 2,275
2001 adjustments (a) 109 206 (197) 118
Total estimated positions to be eliminated 289 1,228 876 2,393
Terminated employees (October 2000-June 2002) (241) (648) (699) (1,588)
Terminated employees (July 2002-September 2002) (9) (49) (13) (71)
Normal attrition (9) (148) (75) (232)
Business plan changes (b) (2) (99) (49) (150)
---------------------------------------------------------------------------------------------------------------------
Remaining positions to be eliminated by the end of 2002 28 284 40 352
=====================================================================================================================
(a) The increase is a result of the identification of additional positions to
be eliminated in 2001.
(b) The reduction is due to a determination in the third quarter of 2002, that
certain positions would not be eliminated by the end of 2002 as originally
planned due to a change in certain business plans.
28
10. LONG-TERM DEBT
ComEd
On September 30, 2002, ComEd paid on maturity $200 million of variable
rate senior notes due September 30, 2002.
On September 16, 2002, ComEd paid on maturity $200 million of 7.375%
First Mortgage Bonds, Series 85, due September 15, 2002. On September 16, 2002,
ComEd also redeemed $200 million of 8.375% First Mortgage Bonds, Series 86, at a
redemption price of 103.425% of the principal amount. These bonds had a maturity
date of September 15, 2022.
On June 13, 2002, ComEd issued $200 million of 6.15% First Mortgage
Bonds, Series 98, due March 15, 2012. The $200 million bond issuance was a
refinancing of the $200 million of 8.5% First Mortgage Bonds, Series 84 redeemed
on July 15, 2002 at a redemption price of 103.915% of the principal amount.
These redeemed bonds had a maturity date of July 15, 2022.
In connection with the issuance of the $200 million of First Mortgage
Bonds, ComEd settled a forward starting interest rate swap in the notional
amount of $75 million resulting in a $1 million pre-tax loss recorded in other
comprehensive income, which is being amortized over the expected remaining life
of the related debt.
On June 4, 2002, ComEd issued $100 million of Illinois Development
Finance Authority floating-rate Pollution Control Revenue Refunding Bonds,
Series 2002 due April 15, 2013. The $100 million bond issuance was used to
redeem $100 million of 7.25% Illinois Development Finance Authority Pollution
Control Revenue Refunding Bonds, Series 1991. These redeemed bonds had a
maturity date of June 1, 2011.
On March 21, 2002, ComEd redeemed $200 million of 8.625% First Mortgage
Bonds, Series 81, at a redemption price of 103.84% of the principal amount.
These bonds had a maturity date of February 1, 2022.
On March 13, 2002, ComEd issued $400 million of 6.15% First Mortgage
Bonds, Series 98, due March 15, 2012. This $400 million bond issuance refinanced
other First Mortgage Bonds. In connection with the bond issuance, ComEd settled
forward starting interest rate swaps in the aggregate notional amount of $375
million, resulting in a $9 million pre-tax loss recorded in other comprehensive
income, which is being amortized over the expected remaining life of the related
debt.
During the nine months ended September 30, 2002, ComEd recorded
prepayment premiums of $24 million and net unamortized premiums, discounts and
debt issuance expenses of $3 million, associated with the early retirement of
debt in 2002 that have been deferred by ComEd in regulatory assets and will be
amortized to interest expense over the life of the related new debt issuance
consistent with regulatory recovery.
PECO
On September 23, 2002, PECO issued $225 million of 4.75% First and
Refunding Mortgage Bonds, due October 1, 2012. This bond issuance repaid
commercial paper that was used to pay at maturity $222 million of First and
Refunding Mortgage Bonds with a weighted average interest rate of 7.30%. In
29
connection with the issuance of the First and Refunding Mortgage Bonds, PECO
settled forward starting interest rate swaps in the aggregate notional amount of
$200 million resulting in a $5 million pre-tax loss recorded in other
comprehensive income, which is being amortized over the expected remaining life
of the related debt.
11. SALE OF ACCOUNTS RECEIVABLE
PECO is party to an agreement, which expires in November 2005, with a
financial institution under which it can sell or finance with limited recourse
an undivided interest, adjusted daily, in up to $225 million of designated
accounts receivable. As of September 30, 2002, PECO had sold a $225 million
interest in accounts receivable, consisting of a $164 million interest in
accounts receivable that PECO accounted for as a sale under SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a Replacement of FASB Statement No. 125" and a $61 million
interest in special-agreement accounts receivable which were accounted for as a
long-term note payable. PECO retains the servicing responsibility for these
receivables. The agreement requires PECO to maintain the $225 million interest,
which, if not met, requires cash, which would otherwise be received by PECO
under this program, to be held in escrow until the requirement is met. At
September 30, 2002, PECO met this requirement.
12. RELATED-PARTY TRANSACTIONS
Exelon's financial statements reflect related-party transactions with
unconsolidated affiliates as reflected in the tables below.
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
Purchased Power from AmerGen (1) $ 104 $ 26 $ 220 $ 48
Interest Income from AmerGen (2) 1 -- 2 --
Services Provided to AmerGen (3) 16 18 46 50
Services Provided to Sithe (4) -- -- 1 --
Services Provided by Sithe (5) 3 -- 5 --
---------------------------------------------------------------------------------------------------------------------
30
September 30, 2002 December 31, 2001
---------------------------------------------------------------------------------------------------------------------
Net Receivable from AmerGen (1,2,3) $ 42 $ 44
Net Payable to Sithe (4,5) 3 --
---------------------------------------------------------------------------------------------------------------------
(1) Generation has entered into PPAs dated December 18, 2001 and November 22,
1999 with AmerGen. Under the 2001 PPA, Generation has agreed to purchase
from AmerGen all the energy from Unit No. 1 at Three Mile Island Nuclear
Station from January 1, 2002 through December 31, 2014. Under the 1999
PPA, Generation has agreed to purchase from AmerGen all of the residual
energy from Clinton Nuclear Power Station (Clinton), through December 31,
2002. Currently, the residual output approximates 29% of the total output
of Clinton. In accordance with the terms of the AmerGen partnership
agreement, the 1999 PPA will be extended through the end of the AmerGen
partnership agreement.
(2) In February 2002, Generation entered into an agreement to loan AmerGen up
to $75 million at an interest rate equal to the 1-month London Interbank
Offering Rate plus 2.25%. In July 2002, the limit of the loan agreement
was increased to $100 million and the maturity date was extended to July
1, 2003. As of September 30 2002, the outstanding principal balance of
the loan was $42 million.
(3) Under a service agreement dated March 1, 1999, Generation provides
AmerGen with certain operation and support services to the nuclear
facilities owned by AmerGen. This service agreement has an indefinite
term and may be terminated by Generation or AmerGen on 90 days notice.
Generation is compensated for these services in an amount agreed to in
the work order, which is not less than the higher of its fully allocated
cost for performing each service or the market price for such service.
(4) Under a service agreement dated December 18, 2000, Generation provides
certain engineering and environmental services for fossil fuels
facilities owned by Sithe and for certain developmental projects.
Generation is compensated for these services in the amount agreed to in
the work order, but not less than the higher of fully allocated costs for
performing such services or the market price.
(5) Under a service agreement dated December 18, 2000, Sithe provides
Generation certain fuel and project development services. Sithe is
compensated for these services in the amount agreed to in the work order,
but not less than the higher of fully allocated costs for performing such
services or the market price.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Asset Retirement
Obligations" (SFAS No. 143). In July 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No.
146).
SFAS No. 143 provides accounting requirements for retirement
obligations associated with tangible long-lived assets. Exelon expects to adopt
SFAS No. 143 on January 1, 2003. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
there is a legal obligation to settle under existing or enacted law, statute,
written or oral contract or by legal construction under the doctrine of
promissory estoppel. Adoption of SFAS No. 143 will change the accounting for the
decommissioning of Generation's nuclear generating plants as well as certain
other long-lived assets.
31
As it relates to nuclear decommissioning, the effect of this cumulative
adjustment will be to change the decommissioning liability to reflect the fair
value of the decommissioning obligation at the balance sheet date. Additionally,
the standard will require the accrual of an asset related to the decommissioning
obligation, which will be amortized over the remaining lives of the plants. The
net difference between the asset recognized and the liability recorded upon
adoption of SFAS No. 143 will be charged to earnings and recognized as a
cumulative effect of a change in accounting principle, net of expected
regulatory recovery. The decommissioning liability to be recorded represents an
obligation for the future decommissioning of the plants and, as a result,
accretion expense will be accrued on this liability until such time as the
obligation is satisfied.
Currently, Generation records the obligation for decommissioning
ratably over the lives of the plants. Exelon, ComEd, PECO and Generation are in
the process of evaluating the impact of adopting SFAS 143 on their financial
condition. Based on the current information and assumptions, Exelon estimates
that the non-cash impact on 2003 earnings per share (EPS) to be up to a negative
ten cents. However, if economic conditions change the assumptions, the EPS
impact could be more or less than ten cents per share. Additionally, the
adoption of the standard is expected to result in a large non-cash one-time
cumulative effect of a change in accounting principle gain of at least $1.5
billion, after tax. Like the EPS impact, the one-time impact could change with a
change in the assumptions or economic conditions. The final determination is in
part a function of the Treasury bond rate at the time of the adoption of the
standard. Additionally, although over the life of the plant the charges to
earnings for the depreciation of the asset and the interest on the liability
will be equal to the amounts that would have been recognized as decommissioning
expense under the current accounting, the timing of those charges will change
and in the near-term period subsequent to adoption, the depreciation of the
asset and the interest on the liability is expected to result in an increase in
expense.
SFAS No. 146 requires that the liability for costs associated with exit
or disposal activities be recognized when incurred, rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
14. CHANGE IN ACCOUNTING ESTIMATE
Generation
Effective April 1, 2001, Generation changed its accounting estimates
related to the depreciation and decommissioning of certain generating stations.
The estimated service lives were extended by 20 years for three nuclear
stations, by periods of up to 20 years for certain fossil stations and by 50
years for a pumped storage station. Effective July 1, 2001, the estimated
service lives were extended by 20 years for the remainder of Exelon's operating
nuclear stations. These changes were based on engineering and economic
feasibility studies performed by Generation considering, among other things,
future capital and maintenance expenditures at these plants. The service life
extension is subject to Nuclear Regulatory Commission (NRC) approval of an
extension of existing NRC operating licenses, which are generally 40 years. The
estimated annualized reduction in expense from the change is $132 million ($79
million, net of income taxes). As a result of the change, net income for the
three months and nine months ended September 30, 2002 increased approximately
32
$37 million ($22 million, net of income taxes) and approximately $96 million
($58 million, net of income taxes), respectively.
ComEd
Effective April 1, 2002, ComEd changed its accounting estimate related
to the allowance for uncollectible accounts. This change was based on an
independently prepared evaluation of the risk profile of ComEd's customer
accounts receivable. As a result of the new evaluation, the allowance for
uncollectible accounts reserve was reduced by $11 million in the second quarter
of 2002.
Effective July 1, 2002, ComEd has lowered its depreciation rates based
on a new depreciation study reflecting its significant construction program in
recent years, changes in and development of new technologies, and changes in
estimated plant service lives since the last depreciation study. The annualized
reduction in depreciation expense, based on December 31, 2001 plant balances, is
estimated to be approximately $100 million ($60 million, net of income taxes).
As a result of the change, net income for the three months and nine months ended
September 30, 2002 increased approximately $24 million ($14 million, net of
income taxes).
15. SUBSEQUENT EVENTS
ComEd
On October 15, 2002, ComEd paid at maturity $100 million of 9.17%
medium-term notes due October 15, 2002.
PECO
On October 9, 2002, PECO exchanged $250 million of 5.95% First and
Refunding Mortgage Bonds, due November 1, 2011, for $250 million of 5.95% First
and Refunding Mortgage Bonds, due November 1, 2011, which are registered under
the Securities Act. The exchange bonds are identical to the outstanding bonds
except for the elimination of certain transfer restrictions and registration
rights pertaining to the outstanding bonds. PECO did not receive any cash
proceeds from issuance of the exchange bonds.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 - Ninety-Ninth Supplemental Indenture dated as of September 15,
2002 to PECO Energy Company's First and Refunding Mortgage.
(File No. 1-1401, Form 10-Q, Exhibit 4.1)
4.2 - Ninety-Eighth Supplemental Indenture dated as of October 1,
2002 to PECO Energy Company's First and Refunding Mortgage.
(File No. 1-1401, Form 10-Q, Exhibit 4.2)
10.1 - Employment Agreement by and among Exelon Corporation, Exelon
Generation Company, LLC and Oliver D. Kingsley, Jr. dated as
of September 5, 2002. (File No. 1-16169, Form 10-Q, Exhibit
10.1)
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18
United States Code (Sarbanes - Oxley Act of 2002) as to the Amended
Quarterly Report on Form 10-Q/A for the quarterly period ended
September 30, 2002 filed by the following officers for the following
companies:
--------------------------------------------------------------------------------
99.1 - Filed by John W. Rowe for Exelon Corporation
99.2 - Filed by Ruth Ann M. Gillis for Exelon Corporation
34
(b) Reports on Form 8-K:
Exelon, filed Current Reports on Form 8-K during the three months ended
September 30, 2002 as follows:
Date of Earliest
Event Reported Description of Item Reported
---------------------------------------------------------------------------------------------------------------------------------
July 1, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon and Generation, regarding Generation's notification to
Midwest Generation, LLC of its exercise of Generation's call option.
July 16, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon, ComEd, PECO and Generation, reporting that Exelon's second
quarter 2002 earnings results were expected to be higher than estimates.
July 31, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon, ComEd, PECO and Generation, reporting Exelon's second
quarter 2002 earnings results and "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon, ComEd, PECO
and Generation, regarding highlights of the Exelon Second Quarter Earnings Conference Call.
August 6, 2002 "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon, regarding certifications of Exelon's principal
executive officer and principal financial officer, as required by SEC Order No. 4-460.
August 27, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon and ComEd, regarding a letter order from the Federal Energy
Regulatory Commission (FERC) related to the treatment of goodwill associated with the generating
assets and power marketing business that it transferred in January 2001 as part of Exelon's
corporate restructuring.
September 3, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon and ComEd, announcing that ComEd will seek a rehearing of
the order by FERC related to the treatment of goodwill as a part of Exelon's corporate
restructuring in January 2001.
September 3, 2002 "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon, ComEd and PECO, regarding Exelon's anticipated
savings from its Cost Management Initiative at Energy Delivery.
September 4, 2002 "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon, ComEd, PECO and Generation, Oliver D.
Kingsley, Jr., Senior Executive Vice President, made a presentation at the Lehman Brothers
Conference. The exhibits include the presentation slides and other materials made available at
the conference.
35
September 4, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon and Generation, regarding Exelon's announcement that it is
in the preliminary stages of exploring the possibility of selling its share of AmerGen Energy
Company, LLC and "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon and Generation, reporting that
Exelon does not intend, as part of its strategy, to own the international assets of Sithe.
September 18, 2002 "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon, ComEd, PECO and Generation, John W. Rowe,
Chairman and CEO, made a presentation at Merrill Lynch Global Power and Gas Leaders Conference. The
exhibits include the presentation slides and other materials made available at the conference.
September 18, 2002 "ITEM 9. REGULATION FD DISCLOSURE" filed by Exelon, ComEd, PECO and Generation, during the Power and
Gas Leaders Conference, John W. Rowe commented on the third quarter earnings outlook, the range of
guidance for 2003 earnings and the status of Exelon's discussion with FERC and the SEC regarding the
allocation of goodwill to ComEd's transmission and distribution business.
September 19, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon and ComEd, related to their understanding that the Office of
the Chief Accountant of the SEC will not object to the accounting treatment for goodwill.
September 26, 2002 "ITEM 5. OTHER EVENTS" filed by Exelon and ComEd, related the letter received from FERC which states
that FERC has no objection to ComEd's determination that none of the goodwill was related to assets
transferred to Generation.
------------------------------------------------------------------------------------------------------------------------------------
36
SIGNATURES
--------------------------------------------------------------------------------
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXELON CORPORATION
/s/ John W. Rowe /s/ Ruth Ann M. Gillis
----------------------------- ---------------------------
JOHN W. ROWE RUTH ANN M. GILLIS
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
/s/ Matthew F. Hilzinger
-----------------------------
MATTHEW F. HILZINGER
Vice President and Corporate Controller
(Principal Accounting Officer)
November 1, 2002
37
CERTIFICATIONS
--------------------------------------------------------------------------------
Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
and Exchange Act of 1934
I, John W. Rowe certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Exelon
Corporation;
2. Based on my knowledge, this amended quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
amended quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this amended
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this amended quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this amended
quarterly report (the "Evaluation Date"); and
c) presented in this amended quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
amended quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002
/s/ John W. Rowe
-------------------------------
John W. Rowe
Chairman of the Board and Chief Executive Officer
38
Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
and Exchange Act of 1934
--------------------------------------------------------------------------------
I, Ruth Ann M. Gillis certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Exelon
Corporation;
2. Based on my knowledge, this amended quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
amended quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this amended
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this amended quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this amended
quarterly report (the "Evaluation Date"); and
c) presented in this amended quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
amended quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002
/s/ Ruth Ann M. Gillis
-------------------------------
Ruth Ann M. Gillis
Senior Vice President and Chief Financial Officer
39