e10vq
 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended September 30, 2004
 
or
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                 
Name of Registrant; State of Incorporation; IRS Employer
Commission Address of Principal Executive Offices; and Identification
File Number Telephone Number Number



  1-16169     EXELON CORPORATION
(a Pennsylvania corporation)
10 South Dearborn Street – 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-7398
    23-2990190  
  1-1839     COMMONWEALTH EDISON COMPANY
(an Illinois corporation)
10 South Dearborn Street – 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-4321
    36-0938600  
  1-1401     PECO ENERGY COMPANY
(a Pennsylvania corporation)
P.O. Box 8699
2301 Market Street
Philadelphia, Pennsylvania 19101-8699
(215) 841-4000
    23-0970240  
  333-85496     EXELON GENERATION COMPANY, LLC
(a Pennsylvania limited liability company)
300 Exelon Way
Kennett Square, Pennsylvania 19348
(610) 765-6900
    23-3064219  

      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 þ          No o.

      The number of shares outstanding of each registrant’s common stock as of September 30, 2004 was:

     
Exelon Corporation Common Stock, without par value
  662,549,435
Commonwealth Edison Company Common Stock, $12.50 par value
  127,016,488
PECO Energy Company Common Stock, without par value
  170,478,507
Exelon Generation Company, LLC
  not applicable

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Exelon Corporation     Yes þ          No o     Commonwealth Edison Company, PECO Energy Company and Exelon Generation Company, LLC     Yes o          No þ.




 

PAGE INTENTIONALLY LEFT BLANK

 


 

TABLE OF CONTENTS

             
Page No.

 FILING FORMAT     3  
 FORWARD-LOOKING STATEMENTS     3  
 WHERE TO FIND MORE INFORMATION     3  
 
   FINANCIAL INFORMATION     5  
   Financial Statements     5  
    Exelon Corporation        
       Consolidated Statements of Income and Comprehensive Income     6  
       Consolidated Statements of Cash Flows     7  
       Consolidated Balance Sheets     8  
    Commonwealth Edison Company        
       Consolidated Statements of Income and Comprehensive Income     10  
       Consolidated Statements of Cash Flows     11  
       Consolidated Balance Sheets     12  
    PECO Energy Company        
       Consolidated Statements of Income and Comprehensive Income     14  
       Consolidated Statements of Cash Flows     15  
       Consolidated Balance Sheets     16  
    Exelon Generation Company, LLC        
       Consolidated Statements of Income and Comprehensive Income     18  
       Consolidated Statements of Cash Flows     19  
       Consolidated Balance Sheets     20  
     Combined Notes to Consolidated Financial Statements     22  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     77  
     Exelon Corporation     78  
     Commonwealth Edison Company     117  
     PECO Energy Company     134  
     Exelon Generation Company, LLC     148  
   Quantitative and Qualitative Disclosure About Market Risk     163  
   Controls and Procedures     171  
 
   OTHER INFORMATION     172  
   Legal Proceedings     172  
   Unregistered Sales of Equity Securities and Use of Proceeds     172  
     Exelon Corporation     172  
   Other Information     173  
     Commonwealth Edison Company     173  
     PECO Energy Company     173  
     Generation Company, LLC     173  
   Exhibits     174  

1


 

             
Page No.

 SIGNATURES     178  
     Exelon Corporation     178  
     Commonwealth Edison Company     178  
     PECO Energy Company     179  
     Exelon Generation Company, LLC     179  
 CERTIFICATION EXHIBITS     180  

2


 

FILING FORMAT

      This combined Form 10-Q is being filed separately by Exelon Corporation (Exelon), Commonwealth Edison Company (ComEd), PECO Energy Company (PECO) and Exelon Generation Company, LLC (Generation) (collectively, the Registrants). Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant.

FORWARD-LOOKING STATEMENTS

      Certain of the matters discussed in this Report are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, 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 factors discussed herein, as well as the items discussed in (a) the Registrants’ 2004 Annual Report on Form 10-K — ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Outlook and the Challenges in Managing Our Business for each of Exelon, ComEd, PECO and Generation, (b) the Registrants’ 2004 Annual Report on Form 10-K — ITEM 8. Financial Statements and Supplementary Data: Exelon — Note 19, ComEd — Note 15, PECO — Note 14 and Generation — Note 13 and (c) other factors discussed in filings with the United States Securities and Exchange Commission (SEC) 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 undertakes any obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this Report.

WHERE TO FIND MORE INFORMATION

      The public may read and copy any reports or other information that the Registrants file with the SEC at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services, the web site maintained by the SEC at www.sec.gov and Exelon’s website at www.exeloncorp.com.

3


 

PAGE INTENTIONALLY LEFT BLANK

4


 

PART I. FINANCIAL INFORMATION

Item 1.     Financial Statements

5


 

EXELON CORPORATION

EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                                     
Three Months Nine Months
Ended Ended
September 30, September 30,


(In millions, except per share data) 2004 2003 2004 2003





Operating revenues
  $ 3,865     $ 4,441     $ 11,137     $ 12,236  
Operating expenses
                               
 
Purchased power
    873       1,179       2,107       2,765  
 
Purchased power from AmerGen Energy Company, LLC
          133             310  
 
Fuel
    407       551       1,781       1,908  
 
Impairment of Boston Generating, LLC long-lived assets
          945             945  
 
Operating and maintenance
    815       1,203       2,921       3,362  
 
Depreciation and amortization
    364       293       980       842  
 
Taxes other than income
    178       131       556       489  
     
     
     
     
 
   
Total operating expenses
    2,637       4,435       8,345       10,621  
     
     
     
     
 
Operating income
    1,228       6       2,792       1,615  
     
     
     
     
 
Other income and deductions
                               
 
Interest expense
    (132 )     (213 )     (418 )     (652 )
 
Interest expense to affiliates
    (88 )     (4 )     (271 )     (9 )
 
Distributions on preferred securities of subsidiaries
    (1 )     (8 )     (3 )     (30 )
 
Equity in earnings (losses) of unconsolidated affiliates
    (42 )     49       (97 )     82  
 
Other, net
    (107 )     (44 )     121       (226 )
     
     
     
     
 
   
Total other income and deductions
    (370 )     (220 )     (668 )     (835 )
     
     
     
     
 
Income (loss) before income taxes, minority interest and cumulative effect of changes in accounting principles
    858       (214 )     2,124       780  
Income taxes
    280       (112 )     656       258  
     
     
     
     
 
Income (loss) before minority interest and cumulative effect of changes in accounting principles
    578       (102 )     1,468       522  
Minority interest
    (1 )           10       (3 )
     
     
     
     
 
Income (loss) before cumulative effect of changes in accounting principles
    577       (102 )     1,478       519  
     
     
     
     
 
Cumulative effect of changes in accounting principles (net of income taxes of $(5) for the three months ended September 30, 2004 and $17 and $69 for the nine months ended September 30, 2004 and 2003, respectively)
    (9 )           23       112  
     
     
     
     
 
Net income (loss)
    568       (102 )     1,501       631  
     
     
     
     
 
Other comprehensive income (loss), net of income taxes
                               
 
Minimum pension liability
          9             9  
 
Change in net unrealized gain (loss) on cash-flow hedges
    77       142       (68 )     58  
 
Foreign currency translation adjustment
                (4 )     2  
 
Unrealized gain on marketable securities
    7       5       18       3  
 
SFAS No. 143 transition adjustment
                      168  
 
Interest in other comprehensive income of unconsolidated affiliates
          1       2       9  
     
     
     
     
 
   
Total other comprehensive income (loss)
    84       157       (52 )     249  
     
     
     
     
 
Total comprehensive income
  $ 652     $ 55     $ 1,449     $ 880  
     
     
     
     
 
Average shares of common stock outstanding — Basic
    661       652       660       650  
     
     
     
     
 
Average shares of common stock outstanding — Diluted
    669       652       668       655  
     
     
     
     
 
Earnings (loss) per average common share — Basic:
                               
 
Income (loss) before cumulative effect of changes in accounting principles
  $ 0.87     $ (0.16 )   $ 2.23     $ 0.80  
 
Cumulative effect of changes in accounting principles
    (0.01 )           0.04       .17  
     
     
     
     
 
 
Net income (loss)
  $ 0.86     $ (0.16 )   $ 2.27     $ 0.97  
     
     
     
     
 
Earnings (loss) per average common share — Diluted:
                               
   
Income (loss) before cumulative effect of changes in accounting principles
  $ 0.86     $ (0.16 )   $ 2.21     $ 0.79  
 
Cumulative effect of changes in accounting principles
    (0.01 )           0.04       0.17  
     
     
     
     
 
 
Net income (loss)
  $ 0.85     $ (0.16 )   $ 2.25     $ 0.96  
     
     
     
     
 
Dividends per common share
  $ 0.31     $ 0.25     $ 0.86     $ 0.71  
     
     
     
     
 

See Combined Notes to Consolidated Financial Statements

6


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                       
Nine Months
Ended
September 30,

2004 2003
(In millions)

Cash flows from operating activities
               
 
Net income
  $ 1,501     $ 631  
 
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
   
Depreciation, amortization and accretion, including nuclear fuel
    1,507       1,290  
   
Cumulative effect of changes in accounting principles (net of income taxes)
    (23 )     (112 )
   
Impairment of investments
    10       295  
   
Impairment of goodwill and other long-lived assets
    1       950  
   
Deferred income taxes and amortization of investment tax credits
    314       (363 )
   
Provision for uncollectible accounts
    59       72  
   
Equity in losses (earnings) of unconsolidated affiliates
    97       (82 )
   
Gains on sales of investments and wholly owned subsidiaries
    (154 )      
   
Net realized gains on nuclear decommissioning trust funds
    (2 )     (9 )
   
Other operating activities
    (35 )     62  
   
Changes in assets and liabilities:
               
     
Receivables
    245       24  
     
Inventories
    (20 )     (55 )
     
Other current assets
    82       (93 )
     
Accounts payable, accrued expenses and other current liabilities
    (165 )     113  
     
Changes in receivables and payables to unconsolidated affiliates
    (6 )     18  
     
Net realized and unrealized mark-to-market and hedging transactions
    (5 )     2  
     
Pension and non-pension postretirement benefits obligations
    (259 )     (161 )
     
Other noncurrent assets and liabilities
    7       (29 )
     
     
 
Net cash flows provided by operating activities
    3,154       2,553  
     
     
 
Cash flows from investing activities
               
 
Capital expenditures
    (1,295 )     (1,501 )
 
Proceeds from liquidated damages
          92  
 
Proceeds from nuclear decommissioning trust fund sales
    1,422       1,880  
 
Investment in nuclear decommissioning trust funds
    (1,624 )     (2,043 )
 
Note receivable from unconsolidated affiliate
          35  
 
Collection of other notes receivable
    58        
 
Proceeds from sales of investments and wholly owned subsidiaries
    238       186  
 
Proceeds from sales of long-lived assets
    50       5  
 
Investment in synthetic fuel-producing facilities
    (48 )      
 
Change in restricted cash
    11       78  
 
Net cash increase from consolidation of Sithe Energies, Inc.
    19        
 
Other investing activities
    (9 )     45  
     
     
 
Net cash flows used in investing activities
    (1,178 )     (1,223 )
     
     
 
Cash flows from financing activities
               
 
Issuance of long-term debt
    75       2,105  
 
Retirement of long-term debt
    (973 )     (2,075 )
 
Issuance of long-term debt to financing affiliate
          103  
 
Retirement of long-term debt to financing affiliates
    (547 )      
 
Change in short-term debt
    (1 )     (599 )
 
Issuance of mandatorily redeemable preferred securities
          200  
 
Retirement of mandatorily redeemable preferred securities
          (250 )
 
Retirement of preferred stock of subsidiaries
          (50 )
 
Payment on acquisition note payable to Sithe Energies, Inc. 
    (27 )     (210 )
 
Dividends paid on common stock
    (565 )     (461 )
 
Proceeds from employee stock plans
    192       139  
 
Purchase of treasury stock
    (75 )      
 
Other financing activities
    36       (85 )
     
     
 
Net cash flows used in financing activities
    (1,885 )     (1,183 )
     
     
 
Increase in cash and cash equivalents
    91       147  
Cash and cash equivalents at beginning of period
    493       469  
     
     
 
Cash and cash equivalents, including cash classified as held for sale
    584       616  
Cash classified as held for sale on the consolidated balance sheet
          (12 )
     
     
 
Cash and cash equivalents at end of period
  $ 584     $ 604  
     
     
 
Supplemental cash flow information
               
Noncash investing and financing activities:
               
 
Consolidation of Sithe Energies, Inc. pursuant to FASB Interpretation No. 46-R, “Consolidation of Variable Interest Entities”
  $ 85     $  
 
Adoption of SFAS No. 143 — Adjustment to other paid in capital
          210  
 
Note payable issued for investment in synthetic fuel-producing facilities
    22        

See Combined Notes to Consolidated Financial Statements

7


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

ASSETS
Current assets
               
 
Cash and cash equivalents
  $ 584     $ 493  
 
Restricted cash and investments
    166       97  
 
Accounts receivable, net
               
   
Customer
    1,613       1,567  
   
Other
    414       676  
 
Mark-to-market derivative assets
    403       337  
 
Inventories, at average cost
               
   
Fossil fuel
    191       212  
   
Materials and supplies
    326       310  
 
Notes receivable from affiliate
          92  
 
Deferred income taxes
    49       122  
 
Assets held for sale
          242  
 
Other
    308       413  
     
     
 
   
Total current assets
    4,054       4,561  
     
     
 
Property, plant and equipment, net
    20,724       20,630  
Deferred debits and other assets
               
 
Regulatory assets
    4,931       5,226  
 
Nuclear decommissioning trust funds
    4,943       4,721  
 
Investments
    895       955  
 
Goodwill
    4,707       4,719  
 
Mark-to-market derivative assets
    432       133  
 
Other
    1,373       991  
     
     
 
   
Total deferred debits and other assets
    17,281       16,745  
     
     
 
Total assets
  $ 42,059     $ 41,936  
     
     
 

See Combined Notes to Consolidated Financial Statements

8


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
 
Commercial paper
  $ 325     $ 326  
 
Note payable to Sithe Energies, Inc. 
          90  
 
Long-term debt due within one year
    410       1,385  
 
Long-term debt to ComEd Transitional Funding Trust and PECO Energy Transition Trust due within one year
    581       470  
 
Accounts payable
    1,136       1,238  
 
Mark-to-market derivative liabilities
    655       584  
 
Accrued expenses
    1,097       1,260  
 
Liabilities held for sale
          61  
 
Other
    301       306  
     
     
 
   
Total current liabilities
    4,505       5,720  
     
     
 
Long-term debt
    7,814       7,889  
Long-term debt to ComEd Transitional Funding Trust and PECO Energy Transition Trust
    4,397       5,055  
Long-term debt to other financing trusts
    545       545  
Deferred credits and other liabilities
               
 
Deferred income taxes
    4,735       4,320  
 
Unamortized investment tax credits
    278       288  
 
Asset retirement obligation
    3,473       2,997  
 
Pension obligations
    1,344       1,668  
 
Non-pension postretirement benefits obligations
    1,119       1,053  
 
Spent nuclear fuel obligation
    875       867  
 
Regulatory liabilities
    2,009       1,891  
 
Mark-to-market derivative liabilities
    391       141  
 
Other
    888       912  
     
     
 
   
Total deferred credits and other liabilities
    15,112       14,137  
     
     
 
   
Total liabilities
    32,373       33,346  
     
     
 
Commitments and contingencies
               
Minority interest of consolidated subsidiaries
    53        
Preferred securities of subsidiaries
    87       87  
Shareholders’ equity
               
 
Common stock
    7,532       7,292  
 
Treasury stock, at cost
    (75 )      
 
Retained earnings
    3,256       2,320  
 
Accumulated other comprehensive loss
    (1,167 )     (1,109 )
     
     
 
   
Total shareholders’ equity
    9,546       8,503  
     
     
 
Total liabilities and shareholders’ equity
  $ 42,059     $ 41,936  
     
     
 

See Combined Notes to Consolidated Financial Statements

9


 

COMMONWEALTH EDISON COMPANY

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                                     
Three Months Nine Months
Ended Ended
September 30, September 30,


2004 2003 2004 2003
(In millions)



Operating revenues
                               
 
Operating revenues
  $ 1,720     $ 1,717     $ 4,441     $ 4,473  
 
Operating revenues from affiliates
          20       17       49  
     
     
     
     
 
   
Total operating revenues
    1,720       1,737       4,458       4,522  
     
     
     
     
 
Operating expenses
                               
 
Purchased power
    80       6       144       17  
 
Purchased power from affiliate
    827       885       1,870       1,984  
 
Operating and maintenance
    185       261       533       691  
 
Operating and maintenance from affiliates
    46       38       136       90  
 
Depreciation and amortization
    104       97       309       287  
 
Taxes other than income
    68       87       219       235  
     
     
     
     
 
   
Total operating expenses
    1,310       1,374       3,211       3,304  
     
     
     
     
 
Operating income
    410       363       1,247       1,218  
     
     
     
     
 
Other income and deductions
                               
 
Interest expense
    (59 )     (107 )     (203 )     (322 )
 
Interest expense to affiliates
    (27 )           (85 )      
 
Distributions on mandatorily redeemable preferred securities
          (6 )           (20 )
 
Equity in (losses) of unconsolidated affiliates
    (4 )           (13 )      
 
Interest income from affiliates
    6       6       16       20  
 
Net loss on extinguishment of long-term debt
    (106 )           (106 )      
 
Other, net
    (1 )     9       6       28  
     
     
     
     
 
   
Total other income and deductions
    (191 )     (98 )     (385 )     (294 )
     
     
     
     
 
Income before income taxes and cumulative effect of a change in accounting principle
    219       265       862       924  
Income taxes
    95       102       351       365  
     
     
     
     
 
Income before cumulative effect of a change in accounting principle
    124       163       511       559  
Cumulative effect of a change in accounting principle (net of income taxes of $0)
                      5  
     
     
     
     
 
Net income
    124       163       511       564  
     
     
     
     
 
Other comprehensive income (loss), net of income taxes
                               
 
Change in net unrealized gain (loss) on cash-flow hedges
          3             31  
 
Unrealized gain on marketable securities
          2             3  
 
Foreign currency translation adjustment
    (1 )           (1 )     2  
     
     
     
     
 
   
Total other comprehensive income (loss)
    (1 )     5       (1 )     36  
     
     
     
     
 
Total comprehensive income
  $ 123     $ 168     $ 510     $ 600  
     
     
     
     
 

See Combined Notes to Consolidated Financial Statements

10


 

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                       
Nine Months Ended
September 30,

2004 2003
(In millions)

Cash flows from operating activities
               
 
Net income
  $ 511     $ 564  
 
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
   
Depreciation and amortization
    309       287  
   
Cumulative effect of a change in accounting principle (net of income taxes)
          (5 )
   
Deferred income taxes and amortization of investment tax credits
    157       92  
   
Provision for uncollectible accounts
    25       31  
   
Equity in losses of unconsolidated affiliates
    13        
   
Other operating activities
    80       46  
   
Changes in assets and liabilities:
               
     
Receivables
    (101 )     (55 )
     
Inventories
    (5 )     7  
     
Accounts payable, accrued expenses and other current liabilities
    10       (44 )
     
Receivables and payables to affiliates
    24       (151 )
     
Other current assets
    5       (12 )
     
Pension and non-pension postretirement benefits obligations
    (141 )     (110 )
     
Other noncurrent assets and liabilities
    (20 )     (14 )
     
     
 
Net cash flows provided by operating activities
    867       636  
     
     
 
Cash flows from investing activities
               
 
Capital expenditures
    (518 )     (537 )
 
Changes in Exelon intercompany money pool investment
    405       (147 )
 
Change in restricted cash
    20       (17 )
 
Notes receivable from affiliates
    436       213  
 
Other investing activities
    12       21  
     
     
 
Net cash flows provided by (used in) investing activities
    355       (467 )
     
     
 
Cash flows from financing activities
               
 
Issuance of long-term debt
          1,427  
 
Retirement of long-term debt
    (798 )     (1,139 )
 
Retirement of long-term debt to ComEd Transitional Funding Trust
    (261 )      
 
Issuance of mandatorily redeemable preferred securities
          200  
 
Retirement of mandatorily redeemable preferred securities
          (200 )
 
Changes in Exelon intercompany money pool borrowings
    17        
 
Change in short-term debt
          (71 )
 
Dividends paid on common stock
    (320 )     (305 )
 
Contributions from parent
    94       106  
 
Settlement of cash-flow and fair-value hedges
    26       (45 )
 
Other financing activities
    2       (36 )
     
     
 
Net cash flows used in financing activities
    (1,240 )     (63 )
     
     
 
(Decrease) increase in cash and cash equivalents
    (18 )     106  
Cash and cash equivalents at beginning of period
    34       16  
     
     
 
Cash and cash equivalents at end of period
  $ 16     $ 122  
     
     
 
Supplemental cash flow information
               
Noncash investing and financing activities:
               
 
Adoption of SFAS No. 143 — adjustment to other paid in capital and goodwill
  $     $ 210  

See Combined Notes to Consolidated Financial Statements

11


 

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

ASSETS
Current assets
               
 
Cash and cash equivalents
  $ 16     $ 34  
 
Restricted cash
          20  
 
Accounts receivable, net
               
   
Customer
    784       683  
   
Other
    43       68  
 
Inventories, at average cost
    49       43  
 
Deferred income taxes
          6  
 
Receivables from affiliates
    19       23  
 
Investment in Exelon intercompany money pool
          405  
 
Other
    26       31  
     
     
 
   
Total current assets
    937       1,313  
     
     
 
Property, plant and equipment, net
    9,349       9,096  
Deferred debits and other assets
               
 
Investments
    36       36  
 
Investment in affiliates
    59       73  
 
Goodwill
    4,707       4,719  
 
Receivables from affiliates
    1,906       2,271  
 
Pension asset
    172       4  
 
Other
    383       453  
     
     
 
   
Total deferred debits and other assets
    7,263       7,556  
     
     
 
Total assets
  $ 17,549     $ 17,965  
     
     
 

See Combined Notes to Consolidated Financial Statements

12


 

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
 
Long-term debt due within one year
  $ 284     $ 236  
 
Long-term debt to ComEd Transitional Funding Trust due within one year
    309       317  
 
Accounts payable
    157       170  
 
Accrued expenses
    529       540  
 
Payables to affiliates
    222       207  
 
Payable to Exelon intercompany money pool
    17        
 
Customer deposits
    86       78  
 
Deferred income taxes
    27        
 
Other
    18       9  
     
     
 
   
Total current liabilities
    1,649       1,557  
     
     
 
Long-term debt
    3,327       4,167  
Long-term debt to ComEd Transitional Funding Trust
    1,106       1,359  
Long-term debt to other affiliates
    361       361  
Deferred credits and other liabilities
               
 
Deferred income taxes
    1,882       1,686  
 
Unamortized investment tax credits
    46       48  
 
Non-pension postretirement benefits obligation
    217       190  
 
Payables to affiliates
    28       28  
 
Regulatory liabilities
    2,009       1,891  
 
Other
    297       336  
     
     
 
   
Total deferred credits and other liabilities
    4,479       4,179  
     
     
 
   
Total liabilities
    10,922       11,623  
     
     
 
Commitments and contingencies
               
Shareholders’ equity
               
 
Common stock
    1,588       1,588  
 
Preference stock
    7       7  
 
Other paid in capital
    4,115       4,115  
 
Receivable from parent
    (156 )     (250 )
 
Retained earnings
    1,075       883  
 
Accumulated other comprehensive income (loss)
    (2 )     (1 )
     
     
 
   
Total shareholders’ equity
    6,627       6,342  
     
     
 
Total liabilities and shareholders’ equity
  $ 17,549     $ 17,965  
     
     
 

See Combined Notes to Consolidated Financial Statements

13


 

PECO ENERGY COMPANY

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                                       
Three Months Nine Months
Ended Ended
September 30, September 30,


2004 2003 2004 2003
(In millions)



Operating revenues
                               
 
Operating revenues
  $ 1,119     $ 1,146     $ 3,381     $ 3,319  
 
Operating revenues from affiliates
    5       3       14       9  
     
     
     
     
 
     
Total operating revenues
    1,124       1,149       3,395       3,328  
     
     
     
     
 
Operating expenses
                               
 
Purchased power
    49       61       149       189  
 
Purchased power from affiliate
    409       421       1,108       1,101  
 
Fuel
    28       28       354       285  
 
Fuel from affiliate
    7             14        
 
Operating and maintenance
    96       178       310       414  
 
Operating and maintenance from affiliates
    26       14       77       39  
 
Depreciation and amortization
    144       134       395       370  
 
Taxes other than income
    64       12       181       123  
     
     
     
     
 
     
Total operating expenses
    823       848       2,588       2,521  
     
     
     
     
 
Operating income
    301       301       807       807  
     
     
     
     
 
Other income and deductions
                               
 
Interest expense
    (15 )     (73 )     (42 )     (241 )
 
Interest expense to affiliates
    (61 )     (2 )     (187 )     (2 )
 
Distributions on mandatorily redeemable preferred securities
          (1 )           (6 )
 
Equity in losses of unconsolidated affiliates
    (6 )           (19 )      
 
Other, net
    3       (10 )     8        
     
     
     
     
 
     
Total other income and deductions
    (79 )     (86 )     (240 )     (249 )
     
     
     
     
 
Income before income taxes
    222       215       567       558  
Income taxes
    83       74       195       193  
     
     
     
     
 
Net income
    139       141       372       365  
Preferred stock dividends
    (1 )     (1 )     (3 )     (4 )
     
     
     
     
 
Net income on common stock
  $ 138     $ 140     $ 369     $ 361  
     
     
     
     
 
Other comprehensive income, net of income taxes
                               
 
Net income
  $ 139     $ 141     $ 372     $ 365  
 
Other comprehensive income (net of income taxes):
                               
   
Change in net unrealized gain on cash-flow hedges
          2       2       2  
   
Unrealized gain on marketable securities
          1       2       1  
     
     
     
     
 
     
Total other comprehensive income
          3       4       3  
     
     
     
     
 
Total comprehensive income
  $ 139     $ 144     $ 376     $ 368  
     
     
     
     
 

See Combined Notes to Consolidated Financial Statements

14


 

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                       
Nine Months
Ended
September 30,

2004 2003
(In millions)

Cash flows from operating activities
               
 
Net income
  $ 372     $ 365  
 
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
   
Depreciation and amortization
    395       370  
   
Deferred income taxes and amortization of investment tax credits
    (72 )     (76 )
   
Provision for uncollectible accounts
    30       38  
   
Equity in losses of unconsolidated affiliates
    19        
   
Other operating activities
    4       (2 )
   
Changes in assets and liabilities:
               
     
Receivables
    4       25  
     
Inventories
    (15 )     (44 )
     
Deferred energy costs
    52       (33 )
     
Prepaid taxes
    (49 )     (46 )
     
Other current assets
    (2 )     (4 )
     
Accounts payable, accrued expenses and other current liabilities
    35       52  
     
Receivables and payables to affiliates
    9       68  
     
Pension and non-pension postretirement benefits obligations
    20       45  
     
Other noncurrent assets and liabilities
    (12 )     (1 )
     
     
 
Net cash flows provided by operating activities
    790       757  
     
     
 
Cash flows from investing activities
               
 
Capital expenditures
    (162 )     (191 )
 
Changes in Exelon intercompany money pool investment
    (26 )      
 
Change in restricted cash
          132  
 
Other investing activities
    2       (2 )
     
     
 
Net cash flows used in investing activities
    (186 )     (61 )
     
     
 
Cash flows from financing activities
               
 
Issuance of long-term debt
    75       450  
 
Retirement of long-term debt
    (75 )     (709 )
 
Issuance of long-term debt to affiliate
          103  
 
Retirement of long-term debt to PECO Energy Transition Trust
    (286 )      
 
Change in short-term debt
    (46 )     (188 )
 
Retirement of mandatorily redeemable preferred securities
          (50 )
 
Retirement of preferred stock
          (50 )
 
Dividends paid on preferred and common stock
    (279 )     (248 )
 
Contribution from parent
    106       17  
 
Other financing activities
    2       (2 )
     
     
 
Net cash flows used in financing activities
    (503 )     (677 )
     
     
 
Increase in cash and cash equivalents
    101       19  
Cash and cash equivalents at beginning of period
    44       63  
     
     
 
Cash and cash equivalents at end of period
  $ 145     $ 82  
     
     
 

See Combined Notes to Consolidated Financial Statements

15


 

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
(In millions) 2004 2003



ASSETS
Current assets
               
 
Cash and cash equivalents
  $ 145     $ 44  
 
Accounts receivable, net
               
   
Customer
    325       363  
   
Other
    35       27  
 
Inventories, at average cost
               
   
Gas
    112       99  
   
Materials and supplies
    9       7  
 
Investment in Exelon intercompany money pool
    26        
 
Deferred income taxes
    32       64  
 
Deferred energy costs
    29       81  
 
Prepaid taxes
    50       1  
 
Other
    12       10  
     
     
 
   
Total current assets
    775       696  
     
     
 
Property, plant and equipment, net
    4,305       4,256  
Deferred debits and other assets
               
 
Regulatory assets
    4,931       5,226  
 
Investments
    19       20  
 
Investment in affiliates
    108       123  
 
Receivables from affiliates
    15       13  
 
Pension asset
    78       68  
 
Other
    14       8  
     
     
 
   
Total deferred debits and other assets
    5,165       5,458  
     
     
 
Total assets
  $ 10,245     $ 10,410  
     
     
 

See Combined Notes to Consolidated Financial Statements

16


 

PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
               
 
Commercial paper
  $     $ 46  
 
Payables to affiliates
    161       150  
 
Long-term debt to PECO Energy Transition Trust due within one year
    272       153  
 
Accounts payable
    64       92  
 
Accrued expenses
    293       237  
 
Other
    42       35  
     
     
 
   
Total current liabilities
    832       713  
     
     
 
Long-term debt
    1,356       1,359  
Long-term debt to PECO Energy Transition Trust
    3,291       3,696  
Long-term debt to other affiliates
    184       184  
Deferred credits and other liabilities
               
 
Deferred income taxes
    2,886       2,986  
 
Unamortized investment tax credits
    20       22  
 
Non-pension postretirement benefits obligation
    317       287  
 
Other
    140       147  
     
     
 
   
Total deferred credits and other liabilities
    3,363       3,442  
     
     
 
   
Total liabilities
    9,026       9,394  
     
     
 
Commitments and contingencies
               
Shareholders’ equity
               
 
Common stock
    2,000       1,999  
 
Receivable from parent
    (1,518 )     (1,623 )
 
Preferred stock
    87       87  
 
Retained earnings
    639       546  
 
Accumulated other comprehensive income
    11       7  
     
     
 
   
Total shareholders’ equity
    1,219       1,016  
     
     
 
Total liabilities and shareholders’ equity
  $ 10,245     $ 10,410  
     
     
 

See Combined Notes to Consolidated Financial Statements

17


 

EXELON GENERATION COMPANY, LLC

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
                                       
Three Months Nine Months
Ended Ended
September 30, September 30,


2004 2003 2004 2003
(In millions)



Operating revenues
                               
 
Operating revenues
  $ 1,009     $ 1,180     $ 3,159     $ 3,055  
 
Operating revenues from affiliates
    1,244       1,357       2,994       3,246  
     
     
     
     
 
   
Total operating revenues
    2,253       2,537       6,153       6,301  
     
     
     
     
 
Operating expenses
                               
 
Purchased power
    743       1,096       1,814       2,531  
 
Purchased power from affiliates
          144       11       350  
 
Fuel
    379       449       1,427       1,156  
 
Impairment of Boston Generating, LLC long-lived assets
          945             945  
 
Operating and maintenance
    366       453       1,445       1,261  
 
Operating and maintenance from affiliates
    66       54       200       136  
 
Depreciation and amortization
    95       51       218       142  
 
Taxes other than income
    42       28       137       115  
     
     
     
     
 
   
Total operating expenses
    1,691       3,220       5,252       6,636  
     
     
     
     
 
Operating income (loss)
    562       (683 )     901       (335 )
     
     
     
     
 
Other income and deductions
                               
 
Interest expense
    (44 )     (22 )     (120 )     (52 )
 
Interest expense to affiliates
    (1 )     (3 )     (3 )     (11 )
 
Equity in earnings (losses) of unconsolidated affiliates
    (5 )     53       (7 )     90  
 
Other, net
    5       (53 )     129       (238 )
     
     
     
     
 
   
Total other income and deductions
    (45 )     (25 )     (1 )     (211 )
     
     
     
     
 
Income (loss) before income taxes, minority interest and cumulative effect of changes in accounting principles
    517       (708 )     900       (546 )
Income taxes
    198       (280 )     343       (209 )
     
     
     
     
 
Income (loss) before minority interest and cumulative effect of changes in accounting principles
    319       (428 )     557       (337 )
Minority interest
                10       (2 )
     
     
     
     
 
Income (loss) before cumulative effect of changes in accounting principles
    319       (428 )     567       (339 )
Cumulative effect of changes in accounting principles (net of income taxes of $22 and $70 for the nine months ended September 30, 2004 and 2003, respectively)
                32       108  
     
     
     
     
 
Net income (loss)
    319       (428 )     599       (231 )
     
     
     
     
 
 
Other comprehensive income (loss), net of income taxes
                               
   
Change in net unrealized gain (loss) on cash-flow hedges
    77       147       (70 )     30  
   
Unrealized gain (loss) on marketable securities
    7       1       15       (1 )
   
Foreign currency translation adjustment
    1             (3 )      
   
SFAS No. 143 transition adjustment
                      168  
   
Interest in other comprehensive income of unconsolidated affiliates
          1       2       9  
     
     
     
     
 
     
Total other comprehensive income (loss)
    85       149       (56 )     206  
     
     
     
     
 
Total comprehensive income (loss)
  $ 404     $ (279 )   $ 543     $ (25 )
     
     
     
     
 

     See Combined Notes to Consolidated Financial Statements

18


 

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                       
Nine Months
Ended
September 30,

2004 2003
(In millions)

Cash flows from operating activities
               
 
Net income (loss)
  $ 599     $ (231 )
 
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
               
   
Depreciation, amortization and accretion, including nuclear fuel
    745       594  
   
Cumulative effect of changes in accounting principles (net of income taxes)
    (32 )     (108 )
   
Gain on sale of investments
    (91 )     (2 )
   
Impairment of investment
          255  
   
Impairment of long-lived assets
          950  
   
Deferred income taxes and amortization of investment tax credits
    159       (393 )
   
Provision for uncollectible accounts
    3       1  
   
Equity in (earnings) losses of unconsolidated affiliates
    7       (90 )
   
Net realized gains on nuclear decommissioning trust funds
    (2 )     (9 )
   
Other operating activities
    (69 )     8  
   
Changes in assets and liabilities:
               
     
Receivables
    298       (81 )
     
Receivables and payables to affiliates, net
    (5 )     254  
     
Inventories
          (10 )
     
Accounts payable, accrued expenses and other current liabilities
    (46 )     69  
     
Other current assets
    66       (16 )
     
Net realized and unrealized mark-to-market and hedging transactions
    (18 )     1  
     
Pension and non-pension postretirement benefits obligations
    (89 )     (65 )
     
Other noncurrent assets and liabilities
    (17 )     14  
     
     
 
Net cash flows provided by operating activities
    1,508       1,141  
     
     
 
Cash flows from investing activities
               
 
Capital expenditures
    (608 )     (733 )
 
Proceeds from liquidated damages
          92  
 
Proceeds from nuclear decommissioning trust fund sales
    1,485       1,880  
 
Investment in nuclear decommissioning trust funds
    (1,687 )     (2,043 )
 
Investment in Exelon intercompany money pool
    (17 )      
 
Note receivable from affiliate
          20  
 
Net cash increase from consolidation of Sithe Energies, Inc. and Exelon Energy Company
    24        
 
Change in restricted cash
    (8 )     (25 )
 
Proceeds from sale of long-lived assets
    42        
 
Proceeds from sale of subsidiaries
    24        
 
Other investing activities
    13       12  
     
     
 
Net cash flows used in investing activities
    (732 )     (797 )
     
     
 
Cash flows from financing activities
               
 
Issuance of long-term debt
          211  
 
Retirement of long-term debt
    (29 )     (4 )
 
Payment on acquisition note payable to Sithe Energies, Inc.
    (27 )     (210 )
 
Changes in Exelon intercompany money pool borrowings
    (445 )     (178 )
 
Distribution to member
    (170 )     (116 )
 
Other financing activities
    7       (2 )
     
     
 
Net cash flows used in financing activities
    (664 )     (299 )
     
     
 
Increase in cash and cash equivalents
    112       45  
Cash and cash equivalents at beginning of period
    158       58  
     
     
 
Cash and cash equivalents at end of period
  $ 270     $ 103  
     
     
 
Supplemental cash flow information
               
 
Noncash investing and financing activities:
               
   
Consolidation of Sithe Energies, Inc. pursuant to FASB Interpretation No. 46-R, “Consolidation of Variable Interest Entities”
  $ 85     $  
   
Contribution of Exelon Energy Company from Exelon Corporation
    (9 )      
   
Distribution to member
          17  

See Combined Notes to Consolidated Financial Statements

19


 

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

ASSETS
Current assets
               
 
Cash and cash equivalents
  $ 270     $ 158  
 
Restricted cash and investments
    163       75  
 
Accounts receivable, net
               
   
Customer
    477       389  
   
Other
    119       402  
 
Mark-to-market derivative assets
    403       322  
 
Receivables from affiliates
    333       421  
 
Inventories, at average cost
               
   
Fossil fuel
    79       98  
   
Materials and supplies
    268       259  
 
Notes receivable
    23       5  
 
Deferred income taxes
    34       40  
 
Assets held for sale
          36  
 
Other
    141       233  
     
     
 
   
Total current assets
    2,310       2,438  
     
     
 
Property, plant and equipment, net
    6,914       7,106  
Deferred debits and other assets
               
 
Nuclear decommissioning trust funds
    4,943       4,721  
 
Investments
    103       65  
 
Receivable from affiliate
    22       22  
 
Pension asset
    216       79  
 
Mark-to-market derivative assets
    422       100  
 
Other
    554       118  
     
     
 
   
Total deferred debits and other assets
    6,260       5,105  
     
     
 
Total assets
  $ 15,484     $ 14,649  
     
     
 

See Combined Notes to Consolidated Financial Statements

20


 

EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)
                     
September 30, December 31,
2004 2003
(In millions)

Liabilities and member’s equity
               
Current liabilities
               
 
Long-term debt due within one year
  $ 61     $ 1,068  
 
Accounts payable
    853       848  
 
Mark-to-market derivative liabilities
    655       581  
 
Payables to affiliates
    31       1  
 
Notes payable to affiliates
          506  
 
Accrued expenses
    375       423  
 
Other
    100       126  
     
     
 
   
Total current liabilities
    2,075       3,553  
     
     
 
Long-term debt
    2,444       1,649  
Deferred credits and other liabilities
               
 
Deferred income taxes
    429       195  
 
Unamortized investment tax credits
    212       218  
 
Asset retirement obligation
    3,472       2,996  
 
Pension obligation
    21       21  
 
Non-pension postretirement benefits obligation
    604       555  
 
Spent nuclear fuel obligation
    875       867  
 
Payable to affiliates
    1,274       1,195  
 
Mark-to-market derivative liabilities
    391       133  
 
Other
    302       308  
     
     
 
   
Total deferred credits and other liabilities
    7,580       6,488  
     
     
 
   
Total liabilities
    12,099       11,690  
     
     
 
Commitments and contingencies
               
Minority interest of consolidated subsidiary
    55       3  
Member’s equity
               
 
Membership interest
    2,495       2,490  
 
Undistributed earnings
    1,031       602  
 
Accumulated other comprehensive loss
    (196 )     (136 )
     
     
 
   
Total member’s equity
    3,330       2,956  
     
     
 
Total liabilities and member’s equity
  $ 15,484     $ 14,649  
     
     
 

See Combined Notes to Consolidated Financial Statements

21


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES

COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
 
1. Basis of Presentation (Exelon, ComEd, PECO, and Generation)

      Exelon Corporation (Exelon) is a utility services holding company engaged, through its subsidiaries, in the energy delivery, wholesale generation and other businesses discussed below (see Note 17 — Segment Information). The energy delivery businesses (Energy Delivery) include the purchase and sale of electricity and distribution and transmission services by Commonwealth Edison Company (ComEd) in northern Illinois and PECO Energy Company (PECO) in southeastern Pennsylvania and the purchase and sale of natural gas and related distribution services by PECO in the Pennsylvania counties surrounding the City of Philadelphia. The generation business consists of the electric generating facilities and energy marketing operations of Exelon Generation Company, LLC (Generation), the competitive retail sales business of Exelon Energy Company, equity interests in Sithe Energies Inc. (Sithe) and certain generation projects. The enterprises business segment consists of the remaining infrastructure and electrical contracting services of Exelon Enterprises Company, LLC (Enterprises) and other investments weighted towards the communications and energy services industries. Effective January 1, 2004, Enterprises’ competitive retail sales business, Exelon Energy Company, became part of Generation. See Note 3 — Acquisitions and Dispositions for information regarding the disposition of businesses within the enterprises segment.

      The consolidated financial statements of Exelon, ComEd, PECO and Generation each include the accounts of entities in which it has a controlling financial interest, other than certain financing trusts of ComEd and PECO described below, after the elimination of intercompany transactions. A controlling financial interest is evidenced by either a voting interest greater than 50% or a risk and rewards model that identifies the registrant as the primary beneficiary of the variable interest entity. Investments and joint ventures in which Exelon, ComEd, PECO and Generation do not have a controlling financial interest and certain financing trusts of ComEd and PECO are accounted for under the equity or cost methods of accounting.

      In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN No. 46-R), Sithe, a 50% owned subsidiary of Generation, was consolidated in the financial statements of Exelon and Generation as of March 31, 2004. Certain trusts and limited partnerships that are financing subsidiaries of ComEd and PECO have issued debt or mandatorily redeemable preferred securities. Due to the adoption of FIN No. 46-R, these trusts and limited partnerships are no longer consolidated within the financial statements of Exelon, ComEd or PECO as of December 31, 2003, or as of July 1, 2003 for PECO Energy Capital Trust IV (PECO Trust IV). See Note 2 — New Accounting Principles for further discussion of the adoption of FIN 46-R and the resulting consolidation of Sithe and the deconsolidation of these financing entities.

      The accompanying consolidated financial statements as of September 30, 2004 and for the three and nine months then ended are unaudited but, in the opinion of the management of each of Exelon, ComEd, PECO and Generation, include all adjustments that are considered necessary for a fair presentation of its respective financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). All adjustments are of a normal, recurring nature, except as otherwise disclosed. The share and per-share amounts included in Exelon’s consolidated financial statements and combined notes to consolidated financial statements have been adjusted for all periods presented to reflect a 2-for-1 stock split of Exelon’s common stock. See Note 14 — Earnings Per Share and Shareholders’ Equity for additional information regarding the stock split. The December 31, 2003 Consolidated Balance Sheets were derived from audited financial statements. These combined notes to consolidated financial statements do not include all disclosures required by GAAP. Certain prior-year amounts have been reclassified for comparative purposes.

22


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

These reclassifications had no effect on net income or shareholders’ or member’s equity. These notes should be read in conjunction with the Notes to Consolidated Financial Statements of Exelon, ComEd, PECO and Generation included in or incorporated by reference in ITEM 8 of their Annual Reports on Form 10-K for the year ended December 31, 2003.

 
2. New Accounting Principles (Exelon, ComEd, PECO and Generation)
 
New Accounting Principles with a Cumulative Effect upon Adoption
 
FIN No. 46 and FIN No. 46-R

      The FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN No. 46), in January 2003 and subsequently issued its revision in FIN No. 46-R in December 2003, which addressed the requirements for consolidating certain variable interest entities. FIN No. 46 was effective for Exelon’s variable interest entities created after January 31, 2003 and FIN No. 46-R was effective December 31, 2003 for Exelon’s other variable interest entities that were considered to be special-purpose entities. FIN No. 46-R applied to all other variable interest entities as of March 31, 2004.

      Exelon and Generation consolidated Sithe as of March 31, 2004 pursuant to the provisions of FIN No. 46-R and recorded income of $32 million (net of income taxes) as a result of the elimination of a guarantee of Sithe’s commitments previously recorded by Generation. This income was reported as a cumulative effect of a change in accounting principle in the first quarter of 2004. Generation is a 50% owner of Sithe, and Exelon and Generation had accounted for Sithe as an unconsolidated equity method investment prior to March 31, 2004. Sithe owns and operates power-generating facilities. See Note 4 — Sithe for additional information on the consolidation of Sithe.

      PECO Trust IV, a financing subsidiary of PECO created in May 2003, was deconsolidated from the financial statements of Exelon and PECO pursuant to the provisions of FIN No. 46 as of July 1, 2003. Pursuant to the provisions of FIN No. 46-R, as of December 31, 2003, the financing trusts of ComEd, namely ComEd Financing II, ComEd Financing III, ComEd Funding LLC and ComEd Transitional Funding Trust, were deconsolidated from the financial statements of Exelon and ComEd, and the other financing trusts of PECO, namely PECO Energy Capital Trust III (PECO Trust III) and PECO Energy Transition Trust (PETT), were deconsolidated from the financial statements of Exelon and PECO. Amounts owed to these financing trusts were recorded as debt to financing trusts or affiliates within the Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 as follows:

                 
September 30, 2004 December 31, 2003


Exelon
  $ 5,523     $ 6,070  
ComEd
    1,776       2,037  
PECO
    3,747       4,033  

      This change in presentation had no effect on the net income of Exelon, ComEd or PECO. In accordance with FIN No. 46-R, prior periods were not reclassified.

 
SFAS No. 143

      FASB Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), provides accounting requirements for retirement obligations (whether statutory, contractual or as a result of principles of promissory estoppel) associated with tangible long-lived assets. Exelon, ComEd, PECO and Generation were required to adopt SFAS No. 143 as of January 1, 2003.

23


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A significant retirement obligation is Generation’s obligation to decommission its nuclear plants at the end of their license lives. See Note 13 — Asset Retirement Obligations and Nuclear Decommissioning Trust Fund Investments for additional information.

      Exelon recorded income of $112 million (net of income taxes) as a cumulative effect of a change in accounting principle in connection with its adoption of SFAS No. 143 in the first quarter of 2003. The components of the cumulative effect of a change in accounting principle, net of income taxes, were as follows:

         
Generation (net of income taxes of $52)
  $ 80  
Generation’s investments in AmerGen Energy Company, LLC and Sithe (net of income taxes of $18)
    28  
ComEd (net of income taxes of $0)
    5  
Enterprises (net of income taxes of $(1))
    (1 )
     
 
Total
  $ 112  
     
 

      The cumulative effect of the change in accounting principle in adopting SFAS No. 143 had no effect on PECO’s income statement.

 
Other New Accounting Principles
 
EITF 03-11

      In July 2003, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, ‘Accounting for Derivative Instruments and Hedging Activities,’ and Not ‘Held for Trading Purposes’ as Defined in EITF Issue No. 02-3, ‘Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities’ ” (EITF 03-11), which was ratified by the FASB in August 2003. The EITF concluded that determining whether realized gains and losses on physically settled derivative contracts not “held for trading purposes” should be reported in the income statement on a gross or net basis is a matter of judgment that depends on the relevant facts and circumstances. Exelon and Generation adopted EITF 03-11 as of January 1, 2004 and presented $272 million of revenue, $271 million of purchased power and $1 million of fuel expense net within revenues during the three months ended September 30, 2004 and $724 million of revenue, $715 million of purchased power and $9 million of fuel expense net within revenues during the nine months ended September 30, 2004. Prior periods were not reclassified. The adoption of EITF 03-11 had no effect on the net income of Exelon or Generation. Had EITF 03-11 been retroactively applied to 2003, operating revenues, purchased power and fuel expense would have been affected as follows:

 
Exelon
                         
EITF 03-11
For the Three Months Ended September 30, 2003 As Reported Impact Pro Forma




Operating revenues
    $4,441     $ (344 )     $4,097  
Purchased power
    1,312       (330 )     982  
Fuel expense
    551       (14 )     537  

24


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                         
EITF 03-11
For the Nine Months Ended September 30, 2003 As Reported Impact Pro Forma




Operating revenues
  $ 12,236     $ (829 )   $ 11,407  
Purchased power
    3,075       (778 )     2,297  
Fuel expense
    1,908       (51 )     1,857  
 
Generation
                         
EITF 03-11
For the Three Months Ended September 30, 2003 As Reported Impact Pro Forma




Operating revenues
    $2,537     $ (344 )     $2,193  
Purchased power
    1,240       (330 )     910  
Fuel expense
    449       (14 )     435  
                         
EITF 03-11
For the Nine Months Ended September 30, 2003 As Reported Impact Pro Forma




Operating revenues
    $6,301     $ (829 )     $5,472  
Purchased power
    2,881       (778 )     2,103  
Fuel expense
    1,156       (51 )     1,105  
 
FSP FAS 106-2

      Through its postretirement benefit plans, Exelon provides retirees with prescription drug coverage. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Prescription Drug Act) was enacted on December 8, 2003. The Prescription Drug Act introduced a prescription drug benefit under Medicare as well as a Federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare prescription drug benefit. Actuarial equivalence has not yet been formally defined by the U.S. Department of Health and Human Services and thus is a matter of judgment by the plan sponsor and its actuaries. Management believes the prescription drug benefit provided under Exelon’s postretirement benefit plans is at least actuarially equivalent to the Medicare prescription drug benefit. In response to the enactment of the Prescription Drug Act, in May 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP FAS 106-2), which provides transition guidance for accounting for the effects of the Prescription Drug Act and supersedes FSP FAS 106-1, which had been issued in January 2004. FSP FAS 106-1 permitted a plan sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer the accounting for the effects of the Prescription Drug Act. Exelon made the one-time election allowed by FSP FAS 106-1 during the first quarter of 2004.

      During the second quarter of 2004, Exelon early adopted the provisions of FSP FAS 106-2, resulting in a re-measurement of its postretirement benefit plans’ assets and accumulated postretirement benefit obligations (APBO) as of December 31, 2003. Upon adoption, the effect of the subsidy on benefits attributable to past service was accounted for as an actuarial experience gain, resulting in a decrease of the APBO of approximately $177 million. The annualized reduction in the net periodic postretirement benefit cost is estimated to be approximately $32 million compared to the annual cost calculated without considering the effects of the Prescription Drug Act. The effect of the subsidy on the components of net periodic

25


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

postretirement benefit cost for the three and nine months ended September 30, 2004 included in the consolidated financial statements and Note 11 — Retirement Benefits was as follows:

                 
Three Months Nine Months
Ended Ended
September 30, 2004 September 30, 2004


Amortization of the actuarial experience gain
  $ 3     $ 11  
Reduction in current period service cost
    2       4  
Reduction in interest cost on the APBO
    3       9  

      The following table presents Exelon’s net income and earnings per share for the three months ended March 31, 2004 as if FSP FAS 106-2 had been adopted as of January 1, 2004. Previously reported historical financial information for the three months ended March 31, 2004 has been adjusted in the table below and will be adjusted when presented for comparative purposes in future periods to reflect a reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.

           
Three Months
Ended
March 31, 2004

Net income — as reported
  $ 406  
Reduction in net periodic postretirement benefit expense(a)
    6  
     
 
Adjusted net income
  $ 412  
     
 
Earnings per share:
       
 
Basic — as reported
  $ 0.62  
 
Basic — as adjusted
  $ 0.63  
 
Diluted — as reported
  $ 0.61  
 
Diluted — as adjusted
  $ 0.62  


(a)  A portion of the net periodic postretirement benefit cost is capitalized within Exelon’s Consolidated Balance Sheets. The reduction in net periodic postretirement benefit expense due to the Prescription Drug Act is not taxable to Exelon.

     The following table presents net income of ComEd and Generation and net income on common stock of PECO for the three months ended March 31, 2004 as if FSP FAS 106-2 was adopted as of January 1, 2004. Historical financial information for the three months ended March 31, 2004 has been adjusted in the table below and will be adjusted when presented for comparative purposes in future periods to reflect a reduction in net periodic postretirement benefit cost due to the adoption of FSP FAS 106-2.

                         
Three Months Ended March 31, 2004 ComEd PECO Generation




Net income — as reported
  $ 182     $ 130 (a)   $ 99  
Reduction in net periodic postretirement benefit expense(b)
    2       1       3  
     
     
     
 
Adjusted net income
  $ 184     $ 131     $ 102  
     
     
     
 


(a)  Represents PECO’s net income on common stock.

(b)  A portion of the net periodic postretirement benefit cost is capitalized within the Consolidated Balance Sheets.

26


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
EITF 03-1

      In March 2004, the EITF reached a consensus on and the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired. Exelon adopted the disclosure requirements of EITF 03-1 for investments accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” within its financial statements for the year ended December 31, 2003. On September 30, 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,’ ” which delayed the effective date of the application guidance on impairment of securities included within EITF 03-1. Exelon, ComEd, PECO and Generation are still evaluating the potential impact of the adoption of EITF 03-1.

 
EITF 03-16

      In March 2004, the EITF reached a consensus on and the FASB ratified EITF Issue No. 03-16, “Accounting for Investments in Limited Liability Companies” (EITF 03-16). The EITF concluded that if investors in a limited liability company have specific ownership accounts, they should follow the guidance prescribed in Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” and EITF Topic No. D-46, “Accounting for Limited Partnership Investments.” Otherwise, investors should follow the significant influence model prescribed in Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” EITF 03-16 was effective for Exelon, ComEd, PECO and Generation during the third quarter of 2004. Exelon recorded a charge of $9 million (net of an income tax benefit of $5 million) as a cumulative effect of a change in accounting principle in connection with its adoption of this standard as of July 1, 2004. This charge related to certain investments in limited liability partnerships held by Enterprises. The adoption of this standard had no effect on the financial statements of ComEd, PECO or Generation.

 
3. Acquisitions and Dispositions (Exelon and Generation)
 
Sale of Ownership Interest in Boston Generating, LLC (Exelon and Generation)

      On May 25, 2004, Exelon and Generation completed the sale, transfer and assignment of ownership of their indirect wholly owned subsidiary, Boston Generating, LLC (Boston Generating), which owns the companies that own the Mystic 4-7, Mystic 8 and 9 and Fore River generating facilities, to a special purpose entity owned by the lenders under Boston Generating’s $1.25 billion credit facility (Boston Generating Credit Facility).

      The sale was pursuant to a settlement agreement reached with Boston Generating’s lenders on February 23, 2004. The Federal Energy Regulatory Commission (FERC) approved the sale of Boston Generating in May 2004. Responsibility for plant operations and power marketing activities were transferred to the lenders’ special purpose entity and its contractors in a separate transaction on September 1, 2004.

      In connection with the settlement reached on February 23, 2004, Exelon, Generation, the lenders and Raytheon Company (Raytheon), the guarantor of the obligations of the turnkey contractor under the projects’ engineering, procurement and construction agreements, entered into a global settlement of all disputes relating to the construction of the Mystic 8 and 9 and Fore River generating facilities. See Note 15 — Commitments and Contingencies for information regarding the settlement of litigation associated with the projects.

27


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In connection with the decision to transition out of Boston Generating and the generating units, Generation recorded during the third quarter of 2003 an impairment charge of its long-lived assets pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), of $945 million ($573 million net of income taxes) in operating expenses within its Consolidated Statements of Income and Comprehensive Income. As a result of Boston Generating’s liabilities being greater than its assets at the time of the sale, transfer and assignment of ownership, Exelon and Generation recorded a gain of $85 million ($52 million net of income taxes) in other income and deductions within the Consolidated Statements of Income and Comprehensive Income in the second quarter of 2004. In connection with the sale, Exelon and Generation recorded a liability associated with an existing guarantee by their subsidiary Exelon New England Holdings, LLC (Exelon New England) of fuel purchase obligations of Boston Generating. Due to Generation’s ongoing involvement through the continued existence of this guarantee and in accordance with SFAS No. 144, the results of Boston Generating have not been classified as a discontinued operation within the Consolidated Statements of Income and Comprehensive Income of Exelon and Generation. See Note 15 — Commitments and Contingencies for further information regarding the guarantee.

      Boston Generating was reported in the Generation segment of Exelon’s consolidated financial statements prior to its sale. At the date of the sale, Boston Generating had approximately $1.2 billion in assets, primarily consisting of property, plant and equipment, and approximately $1.3 billion of liabilities of which approximately $1.0 billion was debt outstanding under the Boston Generating Credit Facility. As of the date of transfer, these amounts were eliminated from the Consolidated Balance Sheets of both Exelon and Generation. Exelon’s and Generation’s Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2004 and 2003 include the following financial results related to Boston Generating:

                                 
Three Months Nine Months
Ended Ended
September 30, September 30,


2004 2003 2004 2003




Operating revenues
  $     $ 224     $ 248     $ 407  
Operating loss
          (962 )     (47 )     (944 )
Net income (loss)(a)
          (581 )     24       (572 )


(a)  Net income for the nine months ended September 30, 2004 included an after-tax gain of $52 million related to the sale of Boston Generating in the second quarter of 2004.
 
Disposition of Enterprises Entities (Exelon)

      Exelon Thermal Holdings, Inc. On June 30, 2004, Enterprises sold its Chicago business of Exelon Thermal Holdings, Inc. (Thermal) for net cash proceeds of $134 million, resulting in a pre-tax gain of $45 million. Enterprises repaid $37 million of debt outstanding of the Chicago thermal operations prior to closing, resulting in prepayment penalties of $9 million. On September 29, 2004, Enterprises sold ETT Nevada, Inc., the holding company for its investment in Northwind Aladdin, LLC, for a net cash outflow of $1 million, resulting in a pre-tax loss of $3 million.

      Exelon Services, Inc. During the nine months ended September 30, 2004, Enterprises disposed of substantially all of the operating components of Exelon Services, Inc. (Services), including Exelon Solutions, most mechanical services businesses and the Integrated Technology Group. Total expected proceeds (subject to post-closing adjustments) and the net gain on sale (before income taxes) recorded during 2004 related to the disposition of these businesses of Services were $35 million and $9 million, respectively. As of

28


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

September 30, 2004, Services had remaining assets and liabilities of $66 million and $14 million, respectively, which primarily represented the corporate center operations.

      PECO TelCove. On June 30, 2004, Enterprises sold its investment in PECO TelCove, a communications joint venture, along with certain telecommunications assets, for proceeds of $49 million. A pre-tax gain of $9 million was recorded in other income and deductions on Exelon’s Consolidated Statements of Income and Comprehensive Income. An impairment charge of $5 million (before income taxes) related to the telecommunications assets had been recorded in the fourth quarter of 2003.

      InfraSource, Inc. On September 24, 2003, Enterprises sold the electric construction and services, underground and telecom businesses of InfraSource, Inc. (InfraSource). See the Notes to Consolidated Financial Statements in Exelon’s 2003 Form 10-K for further information regarding this sale. A $30 million subordinated note receivable that was received as part of the sale proceeds at closing was collected in full prior to its maturity during the second quarter of 2004, resulting in income of $18 million. Enterprises’ results of operations for the three and nine months ended September 30, 2004 compared to the same periods in 2003 were significantly affected by the sale of InfraSource. In connection with the transaction, Enterprises entered into an agreement that may result in certain payments to InfraSource if the amount of services Exelon purchases from InfraSource during the period from closing through 2006 is below specified thresholds. Due to Exelon’s ongoing involvement with InfraSource through the continued existence of this agreement and in accordance with SFAS No. 144, the results of InfraSource have not been classified as a discontinued operation within Exelon’s Consolidated Statements of Income and Comprehensive Income.

      The results of Thermal and Services have been included in income from continuing operations within Exelon’s Consolidated Statements of Income and Comprehensive Income (as opposed to discontinued operations) as the impact of these entities on Exelon’s consolidated financial statements was not significant.

 
Exelon Energy Company (Generation)

      Effective January 1, 2004, Exelon contributed its interest in Exelon Energy Company to Generation. The transaction had no effect on the assets and liabilities of Exelon Energy Company, which were previously reported as a part of the Enterprises segment. Beginning in 2004, Exelon Energy Company’s assets and liabilities and results of operations are included in Generation’s financial statements. Generation and Enterprises’ 2003 segment information has been adjusted to reflect this transfer in Note 17 — Segment Information.

      The following summary represents the assets, liabilities, and equity of Exelon Energy Company, before intercompany eliminations, that were transferred to Generation as of January 1, 2004:

         
Current assets (including $5 million of cash)
  $ 119  
Property, plant and equipment
    2  
Deferred debits and other assets
    13  
     
 
Total assets
  $ 134  
     
 
Current liabilities
  $ 126  
Deferred credits and other liabilities
    10  
Member’s equity
    (2 )
     
 
Total liabilities and member’s equity
  $ 134  
     
 

29


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      See Note 5 — Selected Pro Forma and Consolidating Financial Information for the effect of the transfer of Exelon Energy Company to Generation as if the transaction had occurred on January 1, 2003 and was included in Generation’s results from that date.

 
AmerGen Energy Company, LLC (Exelon and Generation)

      On December 22, 2003, Generation purchased British Energy plc’s (British Energy) 50% interest in AmerGen Energy Company, LLC (AmerGen) for $277 million. The allocation of fair value of long-lived assets will be affected by the finalization of the purchase price based on the completion of the review of the closing balances of AmerGen and the British Energy holding companies that were acquired in this transaction. Generation and British Energy are currently negotiating the finalization of the purchase price adjustments and anticipate completion of these negotiations by the end of the fourth quarter of 2004.

      Prior to the purchase, Generation was a 50% owner of AmerGen and had accounted for the investment as an unconsolidated equity method investment. For the three and nine months ended September 30, 2003, Generation recorded equity in earnings of unconsolidated affiliates related to its investment in AmerGen of $47 million and $131 million, respectively, including income of $47 million ($28 million, net of tax) for the cumulative effect of the adoption of SFAS 143 on January 1, 2003. Generation recorded $133 million and $310 million, respectively, of purchased power from AmerGen for the three and nine months ended September 30, 2003, respectively. The book value of Generation’s investment in AmerGen prior to the purchase was $311 million. For the three and nine months ended September 30, 2004, AmerGen’s assets and liabilities and results of operations are included in Generation’s financial statements.

      See Note 5 — Selected Pro Forma and Consolidating Financial Information for the effect of the acquisition of the remaining 50% interest in AmerGen by Generation as if the transaction had occurred on January 1, 2003 and was included in Exelon and Generation’s results from that date.

 
Synthetic Fuel-Producing Facilities (Exelon)

      Synthetic fuel-producing facilities chemically change coal, including waste and marginal coal, into a fuel used at power plants. In November 2003, Exelon purchased interests in two synthetic fuel-producing facilities. The purchase price for these facilities included a combination of cash, notes payable and contingent consideration dependent upon the production level of the facilities. The notes payable recorded for the purchase of the facilities were $238 million. Exelon’s right to acquire its share of tax credits generated by the facilities was recorded as an intangible asset which is amortized as the tax credits are earned. In April 2004, the Internal Revenue Service (IRS) issued two private letter rulings that affirmed that the process used by the facilities will produce a solid synthetic fuel that qualifies for tax credits under Section 29 of the Internal Revenue Code.

      In July 2004, Exelon purchased an interest in a limited partnership that indirectly owns four synthetic fuel-producing facilities. Exelon’s purchase price for these facilities included a combination of cash, a note payable and contingent consideration dependent upon the production levels of the facilities. The note payable recorded for the purchase of the facilities was $22 million. Exelon’s right to acquire its share of tax credits generated by the facilities was recorded as an intangible asset which is amortized as the tax credits are earned. Private letter rulings have been received by the partnership that affirm that the process used by the facilities will produce a solid synthetic fuel that qualifies for tax credits under Section 29 of the Internal Revenue Code.

      Tax credits generated by the production of synthetic fuel are subject to a phase-out provision that gradually reduces tax credits as the annual average wellhead price per barrel of domestic crude oil increases

30


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

into an inflation-adjusted phase-out range. For 2003, the tax credit would have begun to phase-out when the annual average wellhead price per barrel of domestic crude oil exceeded $50.14 per barrel and would have been completely phased out when the annual average wellhead price per barrel of domestic crude oil reached $62.94 per barrel. The 2004 and 2005 phase-out range will be calculated using inflation rates published in 2005 and 2006, respectively, by the Internal Revenue Service.

      Due to the low price of domestic crude oil during the first part of 2004, the phase-out is not expected to affect Exelon’s tax credits or net income from the facilities for 2004. If domestic crude oil prices remain high in 2005, the tax credits and net income generated by the investments may be reduced substantially. In addition, Exelon has recorded an intangible asset related to its investments in these facilities that could become impaired if domestic crude oil prices continue to increase in the future. See Note 8 — Intangible Assets for additional information regarding this intangible asset.

      Exelon’s investments in synthetic fuel-producing facilities are not consolidated within Exelon’s financial statements as Exelon does not have a controlling financial interest in these facilities. See Note 12 — Income Taxes for information regarding the effect of these investments in synthetic fuel-producing facilities on Exelon’s effective income tax rate.

 
Assets and Liabilities Held for Sale (Exelon, Generation and Enterprises)

      During the third quarter of 2004, the remainder of Sithe assets and liabilities classified as held for sale at June 30, 2004 were sold. During the second quarter of 2004, Sithe completed the sale of certain of its gas, hydroelectric, and the Australian businesses, which represented an aggregate of $160 million and $143 million of assets and liabilities held for sale, respectively, at March 31, 2004, recognizing a gain on the sale of these businesses of $6 million during the period.

      During 2004, Enterprises sold the assets and liabilities of Thermal and Services that were classified as held for sale at December 31, 2003. See “Disposition of Enterprises Entities” above for additional information regarding these dispositions.

 
4. Sithe (Exelon and Generation)

      Sithe is primarily engaged in the ownership and operation of electric wholesale generating facilities in North America. At September 30, 2004, Sithe operated nine power units with total average net capacity of 1,323 megawatts (MW). Sithe also has a 49.5% interest in TEG, consisting of two 230-MW projects in Mexico, which commenced commercial operations during the second quarter of 2004. See Note 19 — Subsequent Events for information on the transfer of Sithe’s interests in the two generating facilities in Mexico to Generation.

      On November 25, 2003, Generation, Reservoir Capital Group (Reservoir) and Sithe completed a series of transactions resulting in Generation and Reservoir each indirectly owning a 50% interest in Sithe (Generation owned 49.9% prior to November 25, 2003). See the 2003 Form 10-K for further details regarding these transactions. Both Generation and Reservoir’s 50% interests in Sithe were subject to put and call options that could result in either party owning 100% of Sithe.

      On September 29, 2004, Generation exercised its call option to acquire Reservoir’s 50% interest in Sithe for $97 million. The closing of the call is subject to the receipt of state and Federal regulatory approvals.

31


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Generation’s intent is to fully divest its interest in Sithe, and it is actively pursuing opportunities to dispose of Sithe. Generation believes that exercising its call option will provide it with greater certainty of a timely exit from Sithe on favorable terms and conditions.

      Exelon and Generation had accounted for the investment in Sithe as an unconsolidated equity method investment prior to its consolidation on March 31, 2004 pursuant to FIN No. 46-R. See Note 2 — New Accounting Principles for further discussion.

      As a result of the series of transactions in November 2003 referred to above, the consolidation of Sithe at March 31, 2004 was accounted for as a step acquisition pursuant to purchase accounting policies. Under the provisions of FIN No. 46-R, the operating results of Sithe were included in Exelon and Generation’s results of operations beginning April 1, 2004.

      Sithe has entered into tolling arrangements (Tolling Agreement) with Dynegy Power Marketing and its affiliates with respect to Sithe’s Independence Station. The Tolling Agreement commenced on July 1, 2001 and runs through 2014. Additionally, Sithe has entered into an energy purchase agreement (Energy Purchase Agreement) with Consolidated Edison Company relating to the Independence Station, which continues through 2014. As a result of the acquisition accounting described above, values were assigned to the Tolling Agreement and the Energy Purchase Agreement on March 31, 2004 of approximately $91 million and $282 million, respectively, which have been recorded as intangible assets on Exelon’s and Generation’s Consolidated Balance Sheets in deferred debits and other assets. These amounts were determined based on fair value techniques utilizing the contract terms and various other estimates including forward power prices, discount rates and option pricing models.

      The intangible assets representing the Tolling Agreement and the Energy Purchase Agreement are being amortized on a straight-line basis over the lives of the associated agreements. The allocation of fair value related to the valuation of long-lived assets is preliminary and is anticipated to be finalized in the fourth quarter of 2004. Sithe’s intangible assets are included in other non-current assets on Generation’s Consolidated Balance Sheet. See Note 8 — Intangible Assets for further information regarding Sithe’s intangible assets as of September 30, 2004.

      In connection with the consolidation of Sithe, certain indemnification guarantees previously recorded in accordance with the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No. 45), were reversed in accordance with FIN No. 45, as Generation can no longer record liabilities associated with guarantees for the performance of a consolidated entity. The reversal of the guarantees resulted in Exelon and Generation recording income of $32 million (net of $22 million of income taxes) as a cumulative effect of a change in accounting principle. The condensed consolidating financial information included in Note 5 — Selected Pro Forma and Consolidating Financial Information presents the financial position of Exelon, Generation and Sithe, as well as consolidating entries related primarily to acquisition notes payable and receivables between Generation and Sithe.

      The book value of Generation’s investment in Sithe immediately prior to its consolidation on March 31, 2004 was $49 million. For the three months ended September 30, 2004, Generation recorded no equity method income or loss as Sithe is consolidated in Generation’s results. Generation recorded $2 million of equity method losses in the first quarter of 2004 prior to the consolidation of Sithe’s results of operations. Generation recorded equity method income related to Sithe of $6 million for the three and nine months ended September 30, 2003, respectively.

32


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Substantially all of Sithe’s property, plant and equipment and project agreements secure Sithe’s outstanding long-term debt, which consists primarily of project debt. During 2003, Sithe entered into an agreement with Exelon and Generation under which Exelon would obtain letters of credit to support contractual obligations of Sithe and its subsidiaries. As of September 30, 2004, Exelon has obtained $59 million of letters of credit in support of Sithe’s obligations not including the $50 million letter of credit that is not guaranteed by Exelon. With the exception of the issuance of letters of credit to support contractual obligations, the creditors of Sithe have no recourse against the general credit of Exelon or Generation.

      The following table details the Sithe balance sheet classification of mark-to-market energy contract net assets recorded as of September 30, 2004:

           
Current assets
  $ 25  
Non-current assets
    238  
     
 
 
Total mark-to-market energy contract assets
    263  
     
 
Current liabilities
    (13 )
Non-current liabilities
    (141 )
     
 
 
Total mark-to-market energy contract liabilities
    (154 )
     
 
Total mark-to-market energy contract net assets
  $ 109  
     
 

      The financial statements of Sithe’s foreign subsidiaries were prepared in their respective local currencies and translated into U.S. dollars based on the current exchange rates at the end of the periods for the Consolidated Balance Sheets and on weighted-average rates for the periods for the Consolidated Statements of Income and Comprehensive Income. Foreign currency translation adjustments, net of deferred income tax benefits, are reflected as a component of other comprehensive income on the Consolidated Statements of Income and Comprehensive Income and accordingly have no effect on net income.

 
5. Selected Pro Forma and Consolidating Financial Information
 
Exelon

      The following unaudited pro forma financial information gives effect to the acquisition of the remaining 50% interest in AmerGen by Generation and the sale of Boston Generating by Generation, in each case, as if the transaction had occurred on January 1, 2003 and was included in or excluded from Exelon’s results from that date.

                                         
Acquisition Sale of Pro Forma
Exelon of 50% of Boston Eliminating Exelon
Three Months Ended September 30, 2003 As Reported AmerGen Generating Entries(a) Consolidated






Total operating revenues
    $4,441     $ 222     $ 224     $ (133 )     $4,306  
Operating income (loss)
    6       87       (962 )           1,055  
Income (loss) before cumulative effect of changes in accounting principles
    (102 )     96       (581 )     (47 )     528  


(a)  Represents the elimination of intercompany revenues at AmerGen and equity in earnings from AmerGen in 2003.

33


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                         
Acquisition Sale of Pro Forma
Exelon of 50% of Boston Eliminating Exelon
Nine Months Ended September 30, 2003 As Reported AmerGen Generating Entries(a) Consolidated






Total operating revenues
  $ 12,236     $ 529     $ 407     $ (310 )   $ 12,048  
Operating income (loss)
    1,615       146       (944 )           2,705  
Income before cumulative effect of changes in accounting principles
    519       168       (572 )     (84 )     1,175  


(a)  Represents the elimination of intercompany revenues at AmerGen and equity in earnings from AmerGen in 2003.

     The above unaudited pro-forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if the transactions had actually occurred on January 1, 2003, nor of the results that might be obtained in the future.

 
Exelon Condensed Consolidating Balance Sheet at September 30, 2004

      The following condensed consolidating financial information presents the financial position of Exelon and Sithe, as well as eliminating entries, related primarily to acquisition notes payable and receivables between Generation and Sithe.

                                 
Exelon
Eliminating Consolidated
September 30, 2004 Exelon Sithe Entries (As Reported)





Assets
                               
Current assets
  $ 3,933     $ 282     $ (161 )   $ 4,054  
Property, plant and equipment, net
    20,452       272             20,724  
Other non-current assets
    16,553       770       (42 )     17,281  
     
     
     
     
 
Total assets
  $ 40,938     $ 1,324     $ (203 )   $ 42,059  
     
     
     
     
 
 
Liabilities and shareholders’ equity
                               
Current liabilities
  $ 4,418     $ 248     $ (161 )   $ 4,505  
Long-term debt
    11,953       803             12,756  
Other long-term liabilities(a)
    14,934       179       52       15,165  
Shareholders’ equity(b)
    9,633       94       (94 )     9,633  
     
     
     
     
 
Total liabilities and shareholders’ equity
  $ 40,938     $ 1,324     $ (203 )   $ 42,059  
     
     
     
     
 


(a)  Includes minority interest in consolidated subsidiaries.

(b)  Includes preferred securities of subsidiaries.

34


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Generation

      The following unaudited pro forma financial information gives effect to the acquisition of the remaining 50% interest in AmerGen, the transfer of Exelon Energy Company to Generation and the sale of Boston Generating, in each case, as if the transaction had occurred on January 1, 2003 and was included in or excluded from Generation’s results from that date.

                                         
Pro Forma
Generation Businesses Businesses Eliminating Generation
Three Months Ended September 30, 2003 As Reported Acquired(a) Disposed(b) Entries(c) Consolidated






Total operating revenue
  $ 2,537     $ 368     $ 224     $ (186 )   $ 2,495  
Operating income (loss)
    (683 )     82       (962 )           361  
Income (loss) before cumulative effect of changes in accounting principles
    (428 )     93       (581 )     (47 )     199  


(a)  Consists of the acquisition of the remaining 50% interest in AmerGen and the transfer of Exelon Energy Company to Generation.

(b)  Consists of the sale of Boston Generating.

(c)  Represents the elimination of intercompany revenues at AmerGen and Exelon Energy and equity in earnings from AmerGen in 2003.
                                         
Pro Forma
Generation Businesses Businesses Eliminating Generation
Nine Months Ended September 30, 2003 As Reported Acquired(a) Disposed(b) Entries(c) Consolidated






Total operating revenue
  $ 6,301     $ 1,180     $ 407     $ (472 )   $ 6,602  
Operating income (loss)
    (335 )     128       (944 )           737  
Income (loss) before cumulative effect of changes in accounting principles
    (339 )     156       (572 )     (84 )     305  


(a)  Consists of the acquisition of the remaining 50% interest in AmerGen and the transfer of Exelon Energy Company to Generation.

(b)  Consists of the sale of Boston Generating.

(c)  Represents the elimination of intercompany revenues at AmerGen and Exelon Energy and equity in earnings from AmerGen in 2003.

     The above unaudited, pro forma financial information should not be relied upon as being indicative of the historical results that would have been obtained if these transactions had actually occurred on January 1, 2003, nor of the results that might be obtained in the future.

35


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Generation Condensed Consolidating Balance Sheet at September 30, 2004

      The following condensed consolidating financial information presents the financial position of Generation, Sithe and Exelon Energy, as well as eliminating entries related primarily to acquisition notes payable and receivables between Generation and Sithe.

                                         
Generation
Exelon Eliminating Consolidated
September 30, 2004 Generation Sithe Energy Entries (As Reported)






Assets
                                       
Current assets
  $ 2,129     $ 282     $ 75     $ (176 )   $ 2,310  
Property, plant and equipment, net
    6,641       272       1             6,914  
Other non-current assets
    5,521       770       11       (42 )     6,260  
     
     
     
     
     
 
Total assets
  $ 14,291     $ 1,324     $ 87     $ (218 )   $ 15,484  
     
     
     
     
     
 
 
Liabilities and members’ equity
                                       
Current liabilities
  $ 1,934     $ 248     $ 69     $ (176 )   $ 2,075  
Long-term debt
    1,641       803                   2,444  
Other long-term liabilities(a)
    7,399       179       5       52       7,635  
Members’ equity
    3,317       94       13       (94 )     3,330  
     
     
     
     
     
 
Total liabilities and members’ equity
  $ 14,291     $ 1,324     $ 87     $ (218 )   $ 15,484  
     
     
     
     
     
 


(a)  Includes minority interest in consolidated subsidiaries.

36


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
6. Stock-Based Compensation (Exelon, ComEd, PECO, and Generation)

      Exelon accounts for its stock-based compensation plans under the intrinsic method prescribed by Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” and related interpretations and follows the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” Accordingly, no compensation expense for stock options has been recognized within the Consolidated Statements of Income and Comprehensive Income. The tables below show the effect on net income and earnings per share for Exelon had Exelon elected to account for its stock-based compensation plans using the fair-value method under SFAS No. 123 for the three and nine months ended September 30, 2004 and 2003:

 
Exelon
                   
Three Months
Ended
September 30,

2004 2003


Net income (loss) — as reported
  $ 568     $ (102 )
Deduct: Total stock-based compensation expense determined under fair-value method for all awards, net of income taxes
    (5 )     (5 )
     
     
 
Pro forma net income (loss)
  $ 563     $ (107 )
     
     
 
Earnings per share:
               
 
Basic earnings (loss) — as reported
  $ 0.86     $ (0.16 )
 
Basic earnings (loss) — pro forma
  $ 0.85     $ (0.16 )
 
Diluted earnings (loss) — as reported
  $ 0.85     $ (0.16 )
 
Diluted earnings (loss) — pro forma
  $ 0.84     $ (0.16 )
                   
Nine Months
Ended
September 30,

2004 2003


Net income — as reported
  $ 1,501     $ 631  
Deduct: Total stock-based compensation expense determined under fair-value method for all awards, net of income taxes
    (15 )     (16 )
     
     
 
Pro forma net income
  $ 1,486     $ 615  
     
     
 
Earnings per share:
               
 
Basic — as reported
  $ 2.27     $ 0.97  
 
Basic — pro forma
  $ 2.25     $ 0.95  
 
Diluted — as reported
  $ 2.25     $ 0.96  
 
Diluted — pro forma
  $ 2.23     $ 0.94  

      The net income (loss) of ComEd, PECO and Generation for the three and nine months ended September 30, 2004 and 2003 would not have been significantly affected had Exelon elected to account for its stock-based compensation plans using the fair-value method under SFAS No. 123.

37


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
7. Regulatory Issues (Exelon, ComEd and Generation)
 
Exelon and ComEd

      PJM Integration. On June 2, 2003, ComEd began receiving electric transmission reservation services from PJM and transferred control of ComEd’s Open Access Same Time Information System to PJM. On April 27, 2004, the FERC issued its order approving ComEd’s application to complete its integration into PJM, subject to certain stipulations, including a provision to hold certain utilities in Michigan and Wisconsin harmless from the impacts of ComEd joining PJM. ComEd agreed to these stipulations and fully integrated into PJM on May 1, 2004. In October 2004, ComEd entered into settlement agreements with nearly all the Michigan parties calling for a payment of approximately $2 million by ComEd. The agreements have been filed with the FERC and are awaiting approval. Settlement talks continue between ComEd and the remaining Wisconsin parties.

      Open Access Transmission Tariff. On November 10, 2003, the FERC issued an order allowing ComEd to put into effect, subject to refund and hearing, new transmission rates designed to reflect nearly $500 million of infrastructure investments made since 1998. During the third quarter of 2004, a settlement agreement was reached and approved by the FERC, on an interim basis, which established new wholesale rates that became effective May 1, 2004. The FERC has allowed the proposed rates in the settlement agreement pending its final approval. However, because of the Illinois retail rate freeze and the method for calculating competitive transition charges, the increase is not expected to have a significant effect on operating revenues until after December 31, 2006.

      Competitive Service Declaration. On November 14, 2002, the Illinois Commerce Commission (ICC) allowed ComEd, by operation of law, to revise its provider of last resort obligation to be the back-up energy supplier at market-based rates for customers with energy demands of at least three megawatts. About 370 of ComEd’s largest energy customers are affected, representing an aggregate supply obligation or load of approximately 2,500 megawatts. These customers accounted for 10% of ComEd’s 2003 MWh deliveries. These customers will not have a right to take bundled service after June 2006 or to come back to bundled rates if they choose an alternative supplier prior to June 2006. The parties to the March 2003 Agreement have committed, if specified market conditions exist, not to oppose a process for achieving a similar competitive declaration for customers having energy demands of one to three megawatts. To date, ComEd has not requested the competitive declaration for this second set of customers but continues to evaluate its options.

      On March 28, 2003, the ICC approved changes to ComEd’s real-time pricing tariff, to be available to customers who choose not to go to the competitive market to procure their electric power and energy. An appeal to each of the ICC’s orders was filed. On March 24, 2004, the Illinois Appellate Court issued its opinion affirming the ICC’s orders in both cases. The Court found that the ICC properly allowed ComEd’s competitive declaration for customers with loads of more than three megawatts to go into effect and that the ICC’s order approving the hourly rate was lawful.

 
Exelon and Generation

      Service Life Extension. Upon the acquisition of AmerGen, Generation changed the accounting estimates related to the depreciation of certain AmerGen generating facilities to conform with Generation’s depreciation policies. The estimated service lives were extended by 20 years for the three AmerGen stations. These changes were based on engineering and economic feasibility analyses performed by Generation. The service life extensions are subject to approval by the Nuclear Regulatory Commission (NRC) of extensions of the existing NRC operating licenses. Generation has not applied for license extensions at the AmerGen

38


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

facilities, but has announced its plan to file an extension request for the Oyster Creek Nuclear Generating Station (Oyster Creek), and is planning on filing for license extensions at Unit 1 at the Three Mile Island Nuclear Station (TMI) and the Clinton Nuclear Power Station (Clinton) on a timeline consistent and integrated with the other planned extension filings for the Generation nuclear fleet.

 
8. Intangible Assets (Exelon, ComEd and Generation)
 
Exelon

      Goodwill. As of September 30, 2004 and December 31, 2003, Exelon had recorded goodwill of approximately $4.7 billion. Under the provisions of SFAS No. 142, goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. Exelon will perform its annual goodwill impairment assessment in the fourth quarter of 2004. The changes in the carrying amount of goodwill by reportable segment (see Note 17 — Segment Information for further information regarding Exelon’s segments) for the periods ended September 30, 2004 and December 31, 2003 were as follows:

                           
Energy
Delivery Enterprises Total



Balances as of January 1, 2003
  $ 4,916     $ 76     $ 4,992  
Impairment losses
          (72 )     (72 )
Adoption of SFAS No. 143:(a)
                       
 
Reduction of asset retirement obligation
    (210 )           (210 )
 
Cumulative effect of change in accounting principle
    5             5  
Resolution of certain tax matters
    8             8  
Other
          (4 )     (4 )
     
     
     
 
Balances as of December 31, 2003
    4,719             4,719  
Resolution of certain tax matters
    (9 )           (9 )
Other
    (3 )           (3 )
     
     
     
 
Balances as of September 30, 2004
  $ 4,707     $     $ 4,707  
     
     
     
 


 
(a) See Notes to Consolidated Financial Statements of Exelon in the 2003 Form 10-K for information regarding the adoption of SFAS No. 143.

39


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Other Intangible Assets. Exelon’s other intangible assets, included in deferred debits and other assets, other, consisted of the following:

                                                   
September 30, 2004 December 31, 2003


Accumulated Accumulated
Gross Amortization Net Gross Amortization Net






Amortized intangible assets:
                                               
 
Energy purchase agreement(a)
  $ 384     $ (18 )   $ 366     $     $     $  
 
Tolling agreement(a)
    73       (3 )     70                    
 
Synthetic fuel investments(b)
    264       (40 )     224       241       (4 )     237  
 
Other
    6       (5 )     1       6             6  
     
     
     
     
     
     
 
Total amortized intangible assets
    727       (66 )     661       247       (4 )     243  
     
     
     
     
     
     
 
Other intangible assets:
                                               
 
Intangible pension asset
    186             186       186             186  
     
     
     
     
     
     
 
Total
  $ 913     $ (66 )   $ 847     $ 433     $ (4 )   $ 429  
     
     
     
     
     
     
 


 
(a) See Note 4 — Sithe for a description of Sithe’s intangible assets.
 
(b) See Note 3 — Acquisitions and Dispositions for a description of Exelon’s right to acquire tax credits through investments in synthetic fuel-producing facilities.

     Amortization expense related to these intangible assets was $21 million and $62 million for the three and nine months ended September 30, 2004, respectively, of which $8 million and $26 million for the three and nine months ended September 30, 2004, respectively, have been reflected as a reduction in revenues related to the energy purchase agreement and the tolling agreement. Amortization expense was not significant in 2003. Amortization expense related to these intangible assets is expected to be in the range of $100 million to $120 million annually from 2005 through 2007 and approximately $50 million in 2008.

 
ComEd

      Goodwill. As of September 30, 2004 and December 31, 2003, ComEd had recorded goodwill of approximately $4.7 billion. Under the provisions of SFAS No. 142, goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. ComEd will perform its annual goodwill impairment assessment in the fourth quarter of 2004. The changes in the carrying amount of goodwill for the periods ended September 30, 2004 and December 31, 2003 were as follows:

           
Balance as of January 1, 2003
  $ 4,916  
Adoption of SFAS No. 143:(a)
       
 
Reduction of asset retirement obligation
    (210 )
 
Cumulative effect of change in accounting principle
    5  
Resolution of certain tax matters
    8  
     
 
Balance as of December 31, 2003
    4,719  
Resolution of certain tax matters
    (9 )
Other
    (3 )
     
 
Balance as of September 30, 2004
  $ 4,707  
     
 

40


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
(a) See Notes to Consolidated Financial Statements of ComEd in the 2003 Form 10-K for information regarding the adoption of SFAS No. 143.
 
Generation

      Other Intangible Assets. Generation’s other intangible assets consisted of the following:

                                                   
September 30, 2004 December 31, 2003


Accumulated Accumulated
Gross Amortization Net Gross Amortization Net






Amortized intangible assets:
                                               
 
Energy purchase agreement(a)
  $ 384     $ (18 )   $ 366     $     $     $  
 
Tolling agreement(a)
    73       (3 )     70                    
 
Other
    6       (5 )     1       6             6  
     
     
     
     
     
     
 
Total amortized intangible assets
  $ 463     $ (26 )   $ 437     $ 6     $     $ 6  
     
     
     
     
     
     
 


 
(a) See Note 4 — Sithe for a description of Sithe’s intangible assets.

     Amortization expense related to Generation’s intangible assets was $8 million and $26 million for the three and nine months ended September 30, 2004, which has been reflected as a reduction in revenue. Amortization expense was not significant in 2003. Amortization expense related to these intangible assets is expected to be $43 million annually from 2005 through 2009.

 
9. Long-Term Debt (Exelon, ComEd, PECO and Generation)
 
Credit Facility (Exelon, ComEd, PECO and Generation)

      At December 31, 2003, Exelon Corporate, along with ComEd, PECO and Generation, participated in a $750 million 364-day unsecured revolving credit agreement and a $750 million three-year unsecured revolving credit agreement with a group of banks. On July 16, 2004, the $750 million 364-day facility was replaced with a $1 billion five-year facility and the $750 million three-year facility was reduced to $500 million. The terms of the new facilities are consistent with the previous facilities. Both revolving credit agreements are used principally to support the commercial paper programs at Exelon Corporate, ComEd, PECO and Generation and to issue letters of credit.

 
Boston Generating Credit Facility

      Approximately $1.0 billion of debt was outstanding under the non-recourse Boston Generating Credit Facility at December 31, 2003, all of which was reflected in the Consolidated Balance Sheets of Exelon and Generation as a current liability due to certain events of default under the Boston Generating Credit Facility.

      The outstanding debt under the Boston Generating Credit Facility was eliminated from the financial statements of Exelon and Generation upon the sale of Generation’s ownership interest in Boston Generating in May 2004. See Note 3 — Acquisitions and Dispositions for additional information regarding the sale.

41


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Long-Term Debt

      Issuance of Long-Term Debt. During the nine months ended September 30, 2004, the following long-term debt was issued:

                               
Interest
Company Type Rate Maturity Amount





PECO
  First Mortgage Bonds     5.90%       May 1, 2034     $ 75  
Exelon
  Note     6.00%       January 15, 2008       22  
                         
 
 
Total issuances
      $ 97  
         
 

      Debt Retirements. During the nine months ended September 30, 2004, the following debt was retired, either through redemption or payment at maturity:

                                 
Company Type Interest Rate Maturity Amount





ComEd
    Note       7.375 %     January 15, 2004     $ 150  
ComEd
    Note       7.625 %     January 15, 2007       5  
ComEd
    Note       6.95 %     July 15, 2018       85  
ComEd
    Pollution Control Revenue Bonds       5.30 %     January 15, 2004       26  
ComEd
    Pollution Control Revenue Bonds       5.70 %     January 15, 2009       4  
ComEd
    Pollution Control Revenue Bonds       5.85 %     January 15, 2014       3  
ComEd
    Sinking Fund Debentures       3.125 %     April 1, 2004       1  
ComEd
    Sinking Fund Debentures       3.875 %     July 1, 2004       1  
ComEd
    Sinking Fund Debentures       4.625 %     July 1, 2004       1  
ComEd
    Sinking Fund Debentures       4.75 %     June 1, 2004       1  
ComEd
    First Mortgage Bonds       5.875 %     February 1, 2033       96  
ComEd
    First Mortgage Bonds       8.00 %     May 15, 2008       20  
ComEd
    First Mortgage Bonds       6.15 %     March 15, 2012       150  
ComEd
    First Mortgage Bonds       4.70 %     April 15, 2015       135  
ComEd
    First Mortgage Bonds       7.625 %     April 15, 2013       65  
ComEd
    First Mortgage Bonds       7.50 %     July 1, 2013       20  
ComEd
    First Mortgage Bonds       4.74 %     August 15, 2010       35  
PECO
    First and Refunding Mortgage Bonds       6.375 %     August 15, 2005       75  
Enterprises
    Note       7.68 %     June 30, 2023       11  
Enterprises
    Note       9.09 %     January 31, 2020       26  
AmerGen
    Note       6.33 %     August 8, 2009       10  
Sithe
    Note       8.50 %     June 30, 2007       15  
Exelon
    Note       8.00 %     January 20, 2008       26  
Other     12  
     
 
Total retirements   $ 973  
     
 

      During the three and nine months ended September 30, 2004, ComEd made scheduled payments of $82 million and $261 million, respectively, related to its obligation to the ComEd Transitional Funding Trust,

42


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and PECO made scheduled payments of $120 million and $286 million, respectively, related to its obligation to the PETT.

      During the nine months ending September 30, 2004, ComEd retired $768 million of long-term debt pursuant to Exelon’s accelerated liability management plan. ComEd funded the retirements through cash from operations, a return of investments in the intercompany money pool and collections on an intercompany note receivable from Unicom Investments, Inc. Exelon and ComEd recorded a charge of $106 million associated with the retirement of debt under the plan for the three and nine months ended September 30, 2004. This charge is included within other, net within Exelon’s Consolidated Statements of Income and Comprehensive Income. The components of this charge included the following: $63 million related to prepayment premiums; $11 million related to net unamortized premiums, discounts and debt issuance costs; $23 million of losses on reacquired debt previously deferred as regulatory assets; and $9 million related to settled cash-flow interest-rate swaps previously deferred as regulatory assets.

      Sithe Long-Term Debt. At September 30, 2004, the following long-term debt of Sithe was consolidated in Exelon’s and Generation’s Consolidated Balance Sheets as a result of the adoption of FIN No. 46-R. See Note 2 — New Accounting Principles and Note 4 — Sithe for further information regarding the consolidation of Sithe.

                             
Stated Interest Face Amount
Rate Maturity of Debt



Non-recourse project debt:
                       
 
Independence notes and bonds:
                       
   
Secured bonds payable in semiannual installments commencing June 2003
    8.50 %(a)     2007     $ 107  
   
Secured bonds payable in semiannual installments commencing December 2007
    9.00 %(a)     2013       409  
 
Term loan repayable primarily in quarterly installments:
                       
   
Batavia
    18.00 %     2007       1  
Subordinated debt:
                       
   
Tracking account loan payable in semiannual installments commencing June 2015
    7.00 %(a)     2035       419  
                     
 
Total face amount of debt
                  $ 936  
 
Unamortized debt discount and premium, net
                    (100 )
 
Long-term debt due within one year
                    (33 )
                     
 
Total long-term debt
                  $ 803  
                     
 


 
(a) In addition to the stated interest rate, an additional 1.97% and 0.99% of interest on the carrying amount of the secured bonds payable is being credited due to debt premiums and 1.63% of interest on the carrying amount of the subordinated debt is being incurred due to the debt discount recorded at the time of the purchase.

43


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Aggregate maturities of Sithe’s debt are as follows:

         
2004
  $ 16  
2005
    34  
2006
    37  
2007
    40  
2008
    44  
2009 and thereafter
    765  
     
 
Total minimum payments
    936  
Net debt discount to be amortized to interest expense
    (100 )
     
 
Present value of minimum payments
  $ 836  
     
 

      Interest-Rate Swaps. In September 2004, Exelon entered into forward-starting interest-rate swaps in the aggregate amount of $160 million to lock in interest rate levels in anticipation of a future financing. The debt issuance that these swaps are hedging was considered probable as of September 30, 2004; therefore, Exelon accounted for these interest-rate swaps as cash-flow hedges. At September 30, 2004, these interest-rate swaps, designated as cash-flow hedges, had an aggregate fair market value of less than $1 million based on the present value difference between the contract and market rates at September 30, 2004. If these derivative instruments had been terminated at September 30, 2004, this estimated fair value represents the amount that would be paid by the counterparties to Exelon.

      In 2004, ComEd entered into fixed-to-floating interest-rate swaps in order to maintain its targeted percentage of variable-rate debt associated with fixed-rate debt issuances in the aggregate amount of $240 million. At September 30, 2004, these interest-rate swaps, designated as fair-value hedges, had an aggregate fair market value of $9 million based on the present value difference between the contract and market rates at September 30, 2004. If these derivative instruments had been terminated at September 30, 2004, this estimated fair value represents the amount that would be paid by the counterparties to ComEd.

 
10. Severance Benefits (Exelon, ComEd, PECO and Generation)

      Exelon, ComEd, PECO and Generation provide severance and health and welfare benefits to terminated employees pursuant to pre-existing severance plans primarily based upon each employee’s years of service with Exelon and compensation level. The registrants account for their ongoing severance plans in accordance with SFAS No. 112, “Employer’s Accounting for Postemployment Benefits, an amendment of FASB Statements No. 5 and 43,” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and accrue amounts associated with severance benefits that are considered probable and that can be reasonably estimated.

      In conjunction with The Exelon Way, a company-wide effort to define how Exelon will conduct business in years to come, Exelon, ComEd, PECO and Generation have collectively identified 1,850 positions for elimination as of September 30, 2004. Exelon, ComEd, PECO and Generation based their estimates of the number of positions to be eliminated on management’s current plans and ability to determine the appropriate staffing levels to effectively operate the businesses. Exelon, ComEd, PECO and Generation may incur further severance costs associated with The Exelon Way if additional positions are identified for elimination. These costs will be recorded in the period in which the costs can be first reasonably estimated.

44


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following tables present, by segment, Exelon’s total salary continuance severance costs for the three and nine months ended September 30, 2004 and 2003. These tables include charges for new positions identified in addition to revised estimates to reflect specific individuals instead of positions previously identified under The Exelon Way.

                                         
Energy Exelon
Salary Continuance Severance Delivery Generation Enterprises Corporate Consolidated






Expense recorded for three months ended September 30, 2004
  $ 10     $ 6     $     $ 3     $ 19  
Expense recorded for nine months ended September 30, 2004
    14       1             8       23  
                                         
Energy Exelon
Salary Continuance Severance Delivery Generation Enterprises Corporate Consolidated






Expense recorded for three months ended September 30, 2003
  $ 50     $ 20     $ 7     $ 10     $ 87  
Expense recorded for nine months ended September 30, 2003
    53       24       7       11       95  

      The following tables provide total salary continuance severance costs for ComEd, PECO and Generation for the three and nine months ended September 30, 2004 and 2003.

                         
Salary Continuance Severance ComEd PECO Generation




Expense (income) recorded for three months ended September 30, 2004
  $ 11     $ (1 )   $ 6  
Expense recorded for nine months ended September 30, 2004
    11       3       1  
                         
Salary Continuance Severance ComEd PECO Generation




Expense recorded for three months ended September 30, 2003
  $ 37     $ 13     $ 20  
Expense recorded for nine months ended September 30, 2003
    37       16       24  

      The following tables provide a roll forward of the salary continuance severance obligations from January 1, 2003 through September 30, 2004 for Exelon, ComEd, PECO and Generation:

                                 
Exelon
Salary Continuance Obligations Consolidated ComEd PECO Generation





Balance at January 1, 2003
  $ 39     $ 15     $     $ 11  
Additions
    135       61       16       38  
Payments
    (39 )     (21 )     (2 )     (9 )
Other adjustments
    4                   3  
     
     
     
     
 
Balance at January 1, 2004
    139       55       14       43  
Additions
    23       11       3       1  
Payments
    (64 )     (21 )     (8 )     (23 )
Other adjustments(a)
    (6 )     (3 )            
     
     
     
     
 
Balance at September 30, 2004
  $ 92     $ 42     $ 9     $ 21  
     
     
     
     
 

45


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
(a) In 2004, Generation increased the reserve for liabilities acquired upon the transfer of the operations of Exelon Energy Company to Generation on January 1, 2004, and reduced the reserve for liabilities associated with Boston Generating, which was sold in May 2004.
 
11. Retirement Benefits (Exelon, ComEd, PECO and Generation)

      Exelon sponsors defined benefit pension plans and postretirement welfare benefit plans applicable to essentially all ComEd, PECO, Generation and Exelon Business Services Company (BSC) employees and certain employees of Enterprises. Substantially all non-union employees and electing union employees hired on or after January 1, 2001 participate in Exelon-sponsored cash balance pension plans. Substantially all non-union employees hired prior to January 1, 2001 were offered a choice to remain in Exelon’s traditional pension plan or transfer to a cash balance pension plan for management employees. Employees of AmerGen participate in separate defined benefit pension plans and postretirement welfare benefit plans sponsored by AmerGen.

      The defined benefit pension plans and postretirement welfare benefit plans are accounted for in accordance with SFAS No. 87, “Employer’s Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” and are disclosed in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an Amendment of FASB Statements No. 87, 88, and 106” (revised 2003). The costs of providing benefits under these plans are dependent on historical information, such as employee age, length of service and level of compensation, and the actual rate of return on plan assets, in addition to assumptions about the future, including the expected rate of return on plan assets, the discount rate applied to benefit obligations, rate of compensation increase and the anticipated rate of increase in health care costs. The effects of changes in these factors on pension and other postretirement welfare benefit obligations are generally recognized over the expected remaining service life of the employees rather than immediately recognized in the income statement. Exelon uses a December 31 measurement date for the majority of its plans.

      Exelon’s traditional and cash balance pension plans are intended to be tax-qualified defined benefit plans, and Exelon has submitted applications to the IRS for rulings on the tax-qualification of the form of each plan. By letters dated April 21, 2004, the IRS notified Exelon that the rulings on its applications for the traditional and management cash balance plans were delayed pending advice from the IRS’s National Office, pursuant to a previously announced moratorium on rulings with respect to plans involved in so called cash balance “conversions.” On June 1, 2004, the IRS issued a favorable ruling on the union cash balance plan.

      On June 15, 2004, the U.S. Treasury Department announced the withdrawal of its proposed regulations covering cash balance plans in order to provide Congress an opportunity to consider proposed legislation. In addition, various methods used by other employers to accrue and calculate benefits under cash balance plans have been challenged in recent lawsuits. The design of Exelon’s cash balance plans differs in certain material respects from the cash balance plans involved in the cases decided to date, and the courts have not reached uniform decisions on certain issues. As a result, considerable uncertainty remains regarding the application of the Employee Retirement Income Security Act of 1974, the Internal Revenue Code and Federal employment laws to cash balance plans. Exelon does not know how the current uncertainty will be resolved and cannot determine at this time what impact, if any, future developments in this area will have on its pension plans or the funding of its pension obligations.

46


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      During the second quarter of 2004, Exelon early adopted FSP FAS 106-2. See Note 2 — New Accounting Principles for information regarding the adoption of FSP FAS 106-2 and the effect on the net periodic benefit cost of the other postretirement benefits plans included in the tables below.

      During the third quarter of 2004, Exelon announced changes to the benefit provisions of its postretirement welfare benefit plans. The changes will be effective January 1, 2005 and triggered a remeasurement of the plan assets and obligations as of August 1, 2004. The plan change resulted in a reduction in the accumulated postretirement benefit obligation of $106 million and a reduction of projected other postretirement benefit costs in 2004 of $6 million that will be recognized in the third and fourth quarters of 2004.

      The following tables present the components of Exelon’s net periodic benefit costs recognized for the three and nine months ended September 30, 2004 and 2003, including the net periodic benefit costs of AmerGen’s pension and postretirement plans for 2004. These tables reflect an annualized reduction in net periodic postretirement benefit cost of $32 million related to a Federal subsidy provided under the Prescription Drug Act. This subsidy has been accounted for under FSP FAS 106-2, as described in Footnote 2 — New Accounting Principles. The expected long-term rate of return on plan assets used to estimate 2004 pension benefit costs was 9.00%. Prior to the August 1, 2004 remeasurement, the expected long-term rate of return on plan assets used to estimate 2004 other postretirement benefit costs was 8.33%. The expected long-term rate of return on plan assets used for the August 1, 2004 remeasurement of the other postretirement benefit obligation was 8.35%. A portion of the net periodic benefit cost is capitalized within the Consolidated Balance Sheets.

                                   
Other
Postretirement
Pension Benefits Benefits


Three Months Three Months
Ended Ended
September 30, September 30,


2004 2003 2004 2003




Service cost
  $ 31     $ 27     $ 19     $ 18  
Interest cost
    139       130       38       45  
Expected return on assets
    (152 )     (143 )     (22 )     (18 )
Amortization of:
                               
 
Transition obligation (asset)
    (1 )     (7 )     3       3  
 
Prior service cost
    3       9       (22 )     (8 )
 
Actuarial loss
    22             7       12  
Curtailment charge
          11             15  
Special termination benefits charge
                8       54  
     
     
     
     
 
Net periodic benefit cost
  $ 42     $ 27     $ 31     $ 121  
     
     
     
     
 

47


 

EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                   
Other
Postretirement
Pension Benefits Benefits


Nine Months Nine Months
Ended Ended
September 30, September 30,


2004 2003 2004 2003




Service cost
  $ 97     $ 81     $ 59     $ 52  
Interest cost
    407       390       127       128  
Expected return on assets
    (459 )     (435 )     (68 )     (56 )
Amortization of:
                               
 
Transition obligation (asset)
    (3 )     (9 )     7       8  
 
Prior service cost
    11       17       (60 )     (35 )
 
Actuarial loss
    52       11       37       36  
Curtailment charge
    5       11       3       15  
Special termination benefits charge
                16       54  
     
     
     
     
 
Net periodic benefit cost
  $ 110     $ 66     $ 121     $ 202  
     
     
     
     
 

      The following table presents the allocation by registrant of Exelon’s pension and post-retirement benefit costs, excluding curtailment and special termination benefits costs, during the three and nine months ended September 30, 2004 and 2003. These amounts include a reduction in net periodic postretirement benefit cost resulting from the adoption of FSP FAS 106-2.

                                 
Three Months Nine Months
Ended Ended
September 30, September 30,


Pension and Postretirement Benefit Costs 2004 2003 2004 2003





ComEd
  $