UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Name of Registrant; State of Incorporation; Address of IRS Employer
Number Principal Executive Offices; and Telephone Number Identification Number
- --------------------- ---------------------------------------------------------- -------------------------
1-16169 EXELON CORPORATION 23-2990190
(a Pennsylvania corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-4321
1-1839 COMMONWEALTH EDISON COMPANY 36-0938600
(an Illinois corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-4321
1-1401 PECO ENERGY COMPANY 23-0970240
(a Pennsylvania corporation)
P.O. Box 8699
2301 Market Street
Philadelphia, Pennsylvania 19101-8699
(215) 841-4000
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.
Exelon Corporation Yes [X] No [_];
Commonwealth Edison Company Yes [_] No [X];
PECO Energy Company Yes [_] No [X].
The number of shares outstanding of each registrant's common stock as of
August 3, 2001 was as follows:
Exelon Corporation Common Stock, without par value 320,709,471
Commonwealth Edison Company Common Stock,
$12.50 par value 128,031,624
PECO Energy Company Common Stock, without par value 170,478,507
TABLE OF CONTENTS
Page No.
--------
Filing Format 3
Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Exelon Corporation
Condensed Consolidated Statements of Income and Comprehensive Income 5
Condensed Consolidated Balance Sheets 6
Condensed Consolidated Statements of Cash Flows 8
Commonwealth Edison Company
Condensed Consolidated Statements of Income and Comprehensive Income 9
Condensed Consolidated Balance Sheets 10
Condensed Consolidated Statements of Cash Flows 12
PECO Energy Company
Condensed Consolidated Statements of Income and Comprehensive Income 13
Condensed Consolidated Balance Sheets 14
Condensed Consolidated Statements of Cash Flows 16
Notes to Condensed Consolidated Financial Statements 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 34
Exelon Corporation 34
Commonwealth Edison Company 46
PECO Energy Company 54
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 62
PART II. OTHER INFORMATION 64
ITEM 1. LEGAL PROCEEDINGS 64
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 66
ITEM 5. OTHER INFORMATION 66
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 67
SIGNATURES 68
2
Filing Format
This combined Form 10-Q is separately being filed by Exelon
Corporation, Commonwealth Edison Company and PECO Energy Company. Information
contained herein relating to any individual registrant has been filed by such
registrant on its own behalf. Each registrant makes no representation as to
information relating to the other registrants.
Forward-Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements that are subject
to risks and uncertainties. The factors that could cause actual results to
differ materially include those discussed herein as well as those listed in Note
7 of Notes to Condensed Consolidated Financial Statements, those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Outlook" in Exelon Corporation's 2000 Annual Report, and other
factors discussed in filings with the Securities and Exchange Commission by
Exelon Corporation, Commonwealth Edison Company and PECO Energy Company. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which apply only as of the date of this Report. Exelon Corporation, Commonwealth
Edison Company and PECO Energy Company undertake no obligation to publicly
release any revision to these forward-looking statements to reflect events or
circumstances after the date of this Report.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
EXELON CORPORATION
- ------------------
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
OPERATING REVENUES $ 3,651 $ 1,385 $ 7,474 $ 2,738
OPERATING EXPENSES
Fuel and Purchased Power 1,210 476 2,540 939
Operating and Maintenance 1,134 456 2,192 847
Depreciation and Amortization 362 81 740 161
Taxes Other Than Income 153 63 321 130
------- ------- ------- -------
Total Operating Expenses 2,859 1,076 5,793 2,077
------- ------- ------- -------
OPERATING INCOME 792 309 1,681 661
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (287) (116) (581) (220)
Distributions on Preferred Securities of Subsidiaries (16) (5) (25) (10)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net 7 (1) 25 3
Other, net 46 7 101 29
------- ------- ------- -------
Total Other Income and Deductions (250) (115) (480) (198)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 542 194 1,201 463
INCOME TAXES 227 75 499 176
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 315 119 702 287
EXTRAORDINARY ITEM (net of income taxes of $2) -- (3) -- (3)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (net of income taxes of $8 and $16 for
the six months ended June 30, 2001 and 2000, respectively) -- -- 12 24
------- ------- ------- -------
NET INCOME 315 116 714 308
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
SFAS 133 Transition Adjustment -- -- 44 --
Cash Flow Hedge Fair Value Adjustment (48) -- (49) --
Unrealized Gain (Loss) on Marketable Securities 31 (3) (105) (4)
------- ------- ------- -------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (17) (3) (110) (4)
------- ------- ------- -------
TOTAL COMPREHENSIVE INCOME $ 298 $ 113 $ 604 $ 304
======= ======= ======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Basic 321 174 320 178
======= ======= ======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Diluted 324 175 323 179
======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle $ 0.98 $ 0.69 $ 2.19 $ 1.62
Extraordinary Item -- (0.02) -- (0.02)
Cumulative Effect of a Change in Accounting Principle -- -- 0.04 0.13
------- ------- ------- -------
Net Income $ 0.98 $ 0.67 $ 2.23 $ 1.73
======= ======= ======= =======
DILUTED:
Income Before Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle $ 0.97 $ 0.68 $ 2.17 $ 1.61
Extraordinary Item -- (0.02) -- (0.02)
Cumulative Effect of a Change in Accounting Principle -- -- 0.04 0.13
------- ------- ------- -------
Net Income $ 0.97 $ 0.66 $ 2.21 $ 1.72
======= ======= ======= =======
DIVIDENDS PER AVERAGE COMMON SHARE $ 0.42 $ 0.25 $ 0.98 $ 0.50
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
5
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 1,160 $ 526
Restricted Cash 330 314
Accounts Receivable, net 2,441 2,552
Inventories, at average cost 466 454
Other 639 338
------- -------
Total Current Assets 5,036 4,184
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 13,103 12,936
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 6,588 7,135
Nuclear Decommissioning Trust Funds 3,020 3,109
Investments 1,616 1,583
Goodwill, net 5,531 5,186
Other 465 464
------- -------
Total Deferred Debits and Other Assets 17,220 17,477
------- -------
TOTAL ASSETS $35,359 $34,597
======= =======
See Notes to Condensed Consolidated Financial Statements
6
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
2001 2000
-------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 424 $ 1,373
Long-Term Debt Due within One Year 921 908
Accounts Payable 1,178 1,193
Accrued Expenses 1,335 720
Other 366 457
-------- --------
Total Current Liabilities 4,224 4,651
-------- --------
LONG-TERM DEBT 13,850 12,958
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 4,381 4,409
Unamortized Investment Tax Credits 321 330
Nuclear Decommissioning Liability for Retired Plants 1,314 1,301
Pension Obligation 553 567
Non-Pension Postretirement Benefits Obligation 866 819
Spent Nuclear Fuel Obligation 830 810
Other 856 907
-------- --------
Total Deferred Credits and Other Liabilities 9,121 9,143
-------- --------
PREFERRED SECURITIES OF SUBSIDIARIES 630 630
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 6,937 6,883
Retained Earnings 755 332
Accumulated Other Comprehensive Income (Loss) (158) --
-------- --------
Total Shareholders' Equity 7,534 7,215
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 35,359 $ 34,597
======== ========
See Notes to Condensed Consolidated Financial Statements
7
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Six Months Ended June 30,
-------------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 714 $ 308
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 939 228
Cumulative Effect of a Change in Accounting Principle (net of income taxes) (12) (24)
Extraordinary Item (net of income taxes) -- 3
Provision for Uncollectible Accounts 60 25
Deferred Income Taxes 7 10
Deferred Energy Costs 7 15
Equity in (Earnings) Losses of Unconsolidated Affiliates, net (25) (3)
Other Operating Activities (92) (36)
Changes in Working Capital:
Accounts Receivable 68 (38)
Inventories (12) (2)
Accounts Payable, Accrued Expenses and Other Current Liabilities 256 (89)
Other Current Assets (21) (63)
------- -------
Net Cash Flows provided by Operating Activities 1,889 334
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (902) (287)
Acquisitions - Enterprises, net of cash acquired (39) (91)
Other Investing Activities 7 (71)
------- -------
Net Cash Flows used in Investing Activities (934) (449)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (949) 189
Issuance of Long-Term Debt 2,058 1,015
Retirement of Long-Term Debt (1,153) (460)
Common Stock Repurchase -- (496)
Change in Restricted Cash (16) 4
Proceeds from Stock Option Exercises 51 --
Dividends on Common Stock (312) (88)
Other Financing Activities -- (10)
------- -------
Net Cash Flows provided by (used in) Financing Activities (321) 154
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 634 39
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 526 55
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,160 $ 94
======= =======
See Notes to Condensed Consolidated Financial Statements
8
COMMONWEALTH EDISON COMPANY
- ---------------------------
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
------- ------- ------- -------
OPERATING REVENUES $ 1,530 | $ 1,711 $ 2,976 | $ 3,274
| |
OPERATING EXPENSES | |
Fuel and Purchased Power 586 | 470 1,195 | 796
Operating and Maintenance 248 | 526 466 | 986
Depreciation and Amortization 168 | 224 334 | 596
Taxes Other Than Income 69 | 125 141 | 262
------- | ------- ------- | -------
| |
Total Operating Expenses 1,071 | 1,345 2,136 | 2,640
------- | ------- ------- | -------
| |
OPERATING INCOME 459 | 366 840 | 634
------- | ------- ------- | -------
| |
OTHER INCOME AND DEDUCTIONS | |
Interest Expense (143) | (139) (284) | (282)
Provision for Dividends on Company-Obligated | |
Mandatorily Redeemable Preferred Securities of | |
Subsidiary Trusts Holding Solely the Company's | |
Subordinated Debt Securities (7) | (7) (15) | (14)
Other, net 22 | 47 59 | 183
------- | ------- ------- | -------
| |
Total Other Income and Deductions (128) | (99) (240) | (113)
------- | ------- ------- | -------
| |
INCOME BEFORE INCOME TAXES AND | |
EXTRAORDINARY ITEMS 331 | 267 600 | 521
INCOME TAXES 149 | 89 271 | 134
------- | ------- ------- | -------
INCOME BEFORE EXTRAORDINARY ITEMS 182 | 178 329 | 387
EXTRAORDINARY ITEMS (net of income taxes of | |
$1 and $2 for the three and six | |
months ended June 30, 2000, respectively) -- | (1) -- | (4)
------- | ------- ------- | -------
| |
NET INCOME 182 | 177 329 | 383
Preferred and Preference Stock Dividends -- | (1) -- | (2)
------- | ------- ------- | -------
NET INCOME ON COMMON STOCK $ 182 | $ 176 $ 329 | $ 381
======= | ======= ======= | =======
| |
COMPREHENSIVE INCOME | |
Net Income $ 182 | $ 177 $ 329 | $ 383
Other Comprehensive Income (net of income taxes): | |
Unrealized Gain (Loss) on Marketable Securities -- | -- (4) | 1
------- | ------- ------- | -------
TOTAL COMPREHENSIVE INCOME $ 182 | $ 177 $ 325 | $ 384
======= | ======= ======= | =======
See Notes to Condensed Consolidated Financial Statements
9
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
2001 2000
------- -------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 466 $ 141
Restricted Cash 60 60
Accounts Receivable, net 985 1,204
Receivables from Affiliates 306 468
Inventories, at average cost 56 186
Deferred Income Taxes 54 89
Other 271 285
------- -------
Total Current Assets 2,198 2,433
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 7,149 7,657
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 681 1,110
Nuclear Decommissioning Trust Funds -- 2,669
Investments 60 152
Goodwill, net 5,094 4,766
Receivable from Affiliate 1,316 1,316
Other 130 178
------- -------
Total Deferred Debits and Other Assets 7,281 10,191
------- -------
TOTAL ASSETS $16,628 $20,281
======= =======
See Notes to Condensed Consolidated Financial Statements
10
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
2001 2000
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-Term Debt Due within One Year $ 346 $ 348
Accounts Payable 285 597
Accrued Expenses 556 532
Payables to Affiliates 428 --
Other 125 329
-------- --------
Total Current Liabilities 1,740 1,806
-------- --------
LONG-TERM DEBT 6,724 6,882
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 1,773 1,837
Unamortized Investment Tax Credits 57 59
Nuclear Decommissioning Liability for Retired Plants -- 1,301
Pension Obligation 138 285
Non-Pension Postretirement Benefits Obligation 154 315
Payables to Affiliates 371 --
Spent Nuclear Fuel Obligation -- 810
Other 283 475
-------- --------
Total Deferred Credits and Other Liabilities 2,776 5,082
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING THE COMPANY'S
SUBORDINATED DEBT SECURITIES 328 328
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 2,047 2,678
Preference Stock of Subsidiary 7 7
Other Paid-in Capital 5,065 5,388
Receivable from Parent (1,062) --
Retained Earnings 314 133
Treasury Stock, at cost (1,307) (2,023)
Accumulated Other Comprehensive Income (Loss) (4) --
-------- --------
Total Shareholders' Equity 5,060 6,183
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,628 $ 20,281
======== ========
See Notes to Condensed Consolidated Financial Statements
11
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Six Months Ended June 30,
-------------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 329 | $ 383
Adjustments to Reconcile Net Income to Net Cash Flows |
provided by Operating Activities: |
Depreciation and Amortization 334 | 661
Extraordinary Items (net of income taxes) -- | 4
Gain on Forward Share Arrangement -- | (113)
Provision for Uncollectible Accounts 18 | 21
Reversal of Provision for Revenue Refund (15) | --
Deferred Income Taxes 38 | (102)
Midwest Independent System Operator Exit Fees (36) | --
Early Retirement and Separation Program -- | (9)
Other Operating Activities 20 | 133
Changes in Working Capital: |
Accounts Receivable (45) | 81
Inventories 16 | (19)
Accounts Payable, Accrued Expenses, and Other Current Liabilities 332 | (908)
Other Current Assets 7 | 45
------- | -------
Net Cash Flows provided by Operating Activities 998 | 177
------- | -------
|
CASH FLOWS FROM INVESTING ACTIVITIES |
Investment in Plant (451) | (676)
Plant Removals, net (8) | (18)
Contributions to Nuclear Decommissioning Trust Funds -- | (39)
Payables to Affiliates 122 | --
Other Investments 5 | 50
Other Investing Activities (4) | 5
------- | -------
Net Cash Flows used in Investing Activities (336) | (678)
------- | -------
|
CASH FLOWS FROM FINANCING ACTIVITIES |
Common Stock Repurchases -- | (153)
Retirement of Long-Term Debt (174) | (553)
Retirement of Mandatorily Redeemable Preferred Stock -- | (70)
Change in Restricted Cash -- | 220
Change in Short-Term Debt -- | 349
Dividends on Common and Preferred Stock (163) | (176)
Nuclear Fuel Principal Payments -- | (35)
Common Stock Repurchase Arrangement -- | (67)
------- | -------
|
Net Cash Flows used in Financing Activities (337) | (485)
------- | -------
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 325 | (986)
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 141 | 1,255
------- | -------
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 466 | $ 269
======= | =======
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
Noncash Investing and Financing Activities: |
Net Assets Transferred as a Result of Restructuring, net of Note Payable $ 1,307 | --
Contribution of Receivable from Parent $ 1,062 | --
Regulatory Asset Fair Value Adjustment $ 347 | --
Retirement of Treasury Shares $ 2,022 | --
Deferred Tax on Fossil Plant Sale -- | $ 481
Settlement of Common Share Repurchase Arrangement -- | $ 993
See Notes to Condensed Consolidated Financial Statements
12
PECO ENERGY COMPANY
- -------------------
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
------- ------- ------- -------
OPERATING REVENUES $ 906 $ 1,385 $ 1,957 $ 2,738
OPERATING EXPENSES
Fuel and Purchased Power 394 476 882 939
Operating and Maintenance 126 456 258 847
Depreciation and Amortization 99 81 200 161
Taxes Other Than Income 41 63 84 130
------- ------- ------- -------
Total Operating Expenses 660 1,076 1,424 2,077
------- ------- ------- -------
OPERATING INCOME 246 309 533 661
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (117) (116) (227) (220)
Company-Obligated Mandatorily Redeemable Preferred
Securities of a Partnership, which holds Solely
Subordinated Debentures of the Company (2) (2) (5) (5)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net -- (1) -- 3
Other, net 2 7 18 29
------- ------- ------- -------
Total Other Income and Deductions (117) (112) (214) (193)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 129 197 319 468
INCOME TAXES 44 75 112 176
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 85 122 207 292
EXTRAORDINARY ITEM (net of income taxes of $2) -- (3) -- (3)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (net of income taxes of $16) -- -- -- 24
------- ------- ------- -------
NET INCOME 85 119 207 313
Preferred Stock Dividends (3) (3) (5) (5)
------- ------- ------- -------
NET INCOME ON COMMON STOCK $ 82 $ 116 $ 202 $ 308
======= ======= ======= =======
COMPREHENSIVE INCOME
Net Income $ 85 $ 119 $ 207 $ 313
Other Comprehensive Income (net of income tax):
SFAS 133 Transition Adjustment -- -- 40 --
Cash Flow Hedge Fair Value Adjustment (8) -- (10) --
Unrealized Gain (Loss) on Marketable Securities -- (1) -- (1)
------- ------- ------- -------
Total Other Comprehensive Income (Loss) (8) (1) 30 (1)
------- ------- ------- -------
TOTAL COMPREHENSIVE INCOME $ 77 $ 118 $ 237 $ 312
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
13
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
2001 2000
------- -------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 26 $ 49
Restricted Cash 270 254
Accounts Receivable, net 325 1,024
Inventories, at average cost 64 257
Other 151 195
------- -------
Total Current Assets 836 1,779
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 3,976 5,158
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 5,908 6,026
Nuclear Decommissioning Trust Funds -- 440
Investments 26 847
Goodwill, net -- 326
Other 95 200
------- -------
Total Deferred Debits and Other Assets 6,029 7,839
------- -------
TOTAL ASSETS $10,841 $14,776
======= =======
See Notes to Condensed Consolidated Financial Statements
14
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
June 30, December 31,
2001 2000
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 41 $ 163
Payables to Affiliates 119 1,096
Long-Term Debt Due within One Year 567 553
Accounts Payable 61 403
Accrued Expenses 355 481
Deferred Income Taxes 27 27
Other 19 95
-------- --------
Total Current Liabilities 1,189 2,818
-------- --------
LONG-TERM DEBT 5,606 6,002
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 3,009 2,532
Unamortized Investment Tax Credits 28 271
Pension Obligation 129 281
Non-Pension Postretirement Benefits Obligation 238 505
Other 97 427
-------- --------
Total Deferred Credits and Other Liabilities 3,501 4,016
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP,
WHICH HOLDS SOLELY SUBORDINATED
DEBENTURES OF THE COMPANY 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 37 37
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 1,905 1,449
Receivable from Parent (1,983) --
Preferred Stock 137 137
Deferred Compensation (7) (7)
Retained Earnings 299 197
Accumulated Other Comprehensive Income (Loss) 29 (1)
-------- --------
Total Shareholders' Equity 380 1,775
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,841 $ 14,776
======== ========
See Notes to Condensed Consolidated Financial Statements
15
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Six Months Ended June 30,
-------------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 207 $ 313
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 200 228
Cumulative Effect of a Change in Accounting Principle (net of income taxes) -- (24)
Extraordinary Item (net of income taxes) -- 3
Provision for Uncollectible Accounts 29 25
Deferred Income Taxes 13 10
Deferred Energy Costs 7 15
Equity in (Earnings) Losses of Unconsolidated Affiliates, net -- (3)
Other Operating Activities (19) (36)
Changes in Working Capital:
Accounts Receivable (19) (38)
Inventories 6 (2)
Accounts Payable, Accrued Expenses and Other Current Liabilities 1 (89)
Other Current Assets (104) (63)
------- -------
Net Cash Flows provided by Operating Activities 321 339
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (122) (287)
Exelon Infrastructure Services Acquisitions , net of cash acquired -- (91)
Other Investing Activities 35 (71)
------- -------
Net Cash Flows used in Investing Activities (87) (449)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (122) 189
Change in Payable to Affiliate 75 --
Issuance of Long-Term Debt 805 1,015
Retirement of Long-Term Debt (978) (460)
Common Stock Repurchase -- (496)
Contribution from Parent 53 --
Change in Restricted Cash (16) 4
Dividends on Preferred and Common Stock (105) (93)
Proceeds on Settlement of Interest Rate Swap Agreements 31 --
Other Financing Activities -- (10)
------- -------
Net Cash Flows provided by (used in) Financing Activities (257) 149
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23) 39
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 49 55
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26 $ 94
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash Investing and Financing Activities:
Net Assets Transferred as a Result of Restructuring, net of Receivable from Affiliates $ 1,624 --
Contribution of Receivable from Parent $ 1,983 --
See Notes to Condensed Consolidated Financial Statements
16
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
1. BASIS OF PRESENTATION (Exelon, ComEd and PECO)
The accompanying condensed consolidated financial statements as of June 30, 2001
and for the three and six months then ended are unaudited, but include all
adjustments that Exelon Corporation (Exelon), Commonwealth Edison Company
(ComEd) and PECO Energy Company (PECO) consider necessary for a fair
presentation of such financial statements. All adjustments are of a normal,
recurring nature, except as otherwise disclosed. The year-end condensed
consolidated balance sheet data were derived from audited financial statements
but do not include all disclosures required by generally accepted accounting
principles. Certain prior-year amounts have been reclassified for comparative
purposes. Dividends on preferred stock of PECO for the three and six months
ended June 30, 2000 have been reclassified on Exelon's Condensed Consolidated
Statements of Income and Comprehensive Income to distributions on preferred
securities of subsidiaries, resulting in a deduction before, rather than after,
net income. This reclassification reflects the current organizational structure
in which PECO is a subsidiary of Exelon. These notes should be read in
conjunction with the Notes to Consolidated Financial Statements of Exelon, ComEd
and PECO included in or incorporated by reference in Item 8 of their Annual
Report on Form 10-K for the year ended December 31, 2000.
ComEd
ComEd was the principal subsidiary of Unicom Corporation (Unicom) prior
to the merger with Exelon. See Note 2 - Merger. The merger was accounted for
using the purchase method of accounting. The effects of the purchase method are
reflected on the financial statements of ComEd as of the merger date.
Accordingly, the financial statements presented for the period after the merger
reflect a new basis of accounting. ComEd's Condensed Consolidated Statements of
Income and Comprehensive Income and Condensed Consolidated Statements of Cash
Flows are separated by a bold black line to indicate the different basis of
accounting existing in each of the periods presented.
2. MERGER (Exelon)
On October 20, 2000, Exelon became the parent corporation of ComEd and PECO as a
result of the completion of the transactions contemplated by an Agreement and
Plan of Exchange and Merger, as amended, among PECO, Unicom and Exelon. Pursuant
to the merger, Exelon became the owner of all of the common stock of PECO and
Unicom ceased to exist and its subsidiaries, including ComEd, became
subsidiaries of Exelon. The merger was accounted for using the purchase method
of accounting. Exelon's results of operations include Unicom's results of
operations since October 20, 2000.
17
Selected unaudited pro forma combined results of operations of Exelon
for the three and six months ended June 30, 2000, assuming the merger occurred
on January 1, 2000, are as follows:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Operating revenue $3,188 $6,188
Net income $268 $623
Net income per common share (basic) $0.83 $1.95
Net income per common share (diluted) $0.83 $1.93
Pro forma net income for the three months ended June 30, 2000 excludes
extraordinary items of $7 million ($4 million, net of income taxes) and
merger-related costs of $29 million ($17 million, net of income taxes). These
non-recurring items total $21 million, net of income taxes, or $0.07 per share
on a basic and diluted basis.
Pro forma net income for the six months ended June 30, 2000 excludes
the benefit from the cumulative effect of a change in accounting principle of
$40 million ($24 million, net of income taxes), extraordinary items of $11
million ($7 million, net of income taxes) and merger-related costs of $45
million ($27 million, net of income taxes). These non-recurring items total $10
million, net of income taxes, or $0.03 per share on a basic and diluted basis.
The pro forma financial information presented above is not necessarily
indicative of the operating results of Exelon that would have occurred had the
merger been consummated as of the date indicated, nor is it necessarily
indicative of future operating results.
Merger-Related Costs (Exelon, ComEd and PECO)
Exelon recorded certain costs in 2000 associated with the merger. The
costs associated with PECO were charged to expense. The costs associated with
Unicom were recorded as part of the application of purchase accounting and did
not affect results of operations. Exelon anticipates that $282 million of
employee costs will be funded from its pension and postretirement benefit plans
and $149 million for employee severance cost associated with Unicom will be
funded from general corporate funds. The following table provides a
reconciliation of the reserve for employee severance associated with the merger:
Employee Severance Reserve as of October 20, 2000 $149
Deductions for Employee Terminations:
Fourth Quarter 2000 (5)
First Quarter 2001 (25)
Second Quarter 2001 (10)
-----
Employee Severance Reserve as of June 30, 2001 $109
=====
18
Approximately 2,900 Unicom and PECO positions were identified to be
eliminated as a result of the merger, of which 619 and 191 were eliminated in
the first and second quarters of 2001, respectively. The remaining approximate
2,090 positions are expected to be eliminated by the end of 2002.
3. CORPORATE RESTRUCTURING (Exelon, ComEd and PECO)
During January 2001, Exelon undertook a corporate restructuring to separate its
generation and other competitive businesses from its regulated energy delivery
businesses at ComEd and PECO. As part of the restructuring, the
generation-related operations and assets and liabilities of ComEd were
transferred to Exelon Generation, LLC (Generation). Also as part of the
restructuring, the non-regulated operations and related assets and liabilities
of PECO, representing PECO's Generation and Enterprises business segments, were
transferred to Generation and Exelon Enterprises Company, LLC (Enterprises),
respectively. Additionally, certain operations and assets and liabilities of
ComEd and PECO were transferred to Exelon Business Services Company (BSC). As a
result, effective January 1, 2001, the operations of ComEd consist of its retail
electricity distribution and transmission business in northern Illinois and the
operations of PECO consist of its retail electricity distribution and
transmission business in southeastern Pennsylvania, and its natural gas
distribution business located in the Pennsylvania counties surrounding the City
of Philadelphia.
The corporate restructuring had the following effect on the Condensed
Consolidated Balance Sheets of ComEd and PECO:
ComEd PECO
----- ----
Decrease in Assets:
-------------------
Current Assets ($825) ($1,085)
Property, Plant and Equipment, net (782) (1,212)
Investments (104) (1,262)
Other Noncurrent Assets (3,064) (431)
(Increase) Decrease in Liabilities:
-----------------------------------
Current Liabilities 834 1,601
Long-Term Debt -- 205
Deferred Income Taxes 84 (479)
Other Noncurrent Liabilities 3,000 964
------- -------
Net Assets Transferred ($857) ($1,699)
======= =======
Consideration, based on the net book value of the net assets
transferred, was as follows:
ComEd PECO
----- ----
Treasury Stock Received $1,307 $ --
Return of Capital -- 1,624
Note (Payable)/Receivable - Affiliates (450) 75
------- -------
$857 $1,699
======= =======
19
Selected unaudited pro forma results of operations of ComEd and PECO
for the three and six months ended June 30, 2000, assuming the merger and
corporate restructuring occurred as of January 1, 2000, are presented as
follows:
Three months ended Six months ended
June 30, 2000 June 30, 2000
------------- -------------
ComEd PECO ComEd PECO
----- ---- ----- ----
Operating revenues $1,500 $771 $2,924 $1,620
Operating income $394 $258 $606 $602
Net income $179 $94 $336 $248
The three months ended June 30, 2000 pro forma financial information
presented above for ComEd excludes merger-related costs of $13 million ($8
million, net of income taxes) and an extraordinary item of $2 million ($1
million, net of income taxes). PECO pro forma financial information for the same
period excludes merger-related costs of $4 million ($2 million, net of income
taxes) and an extraordinary charge of $5 million ($3 million, net of income
taxes.
The six months ended June 30, 2000 pro forma financial information
presented above for ComEd excludes merger-related costs of $17 million ($10
million, net of income taxes) and extraordinary items of $6 million ($4 million,
net of income taxes). PECO pro forma financial information for the same period
excludes the benefit from the cumulative effect of a change in accounting
principle of $40 million ($24 million, net of income taxes), merger-related
costs of $10 million ($6 million, net of income taxes) and an extraordinary
charge of $5 million ($3 million, net of income taxes).
In connection with the restructuring, ComEd and PECO assigned their
respective rights and obligations under various power purchase and fuel supply
agreements to Generation. Additionally, ComEd and PECO entered into power
purchase agreements (PPAs) with Generation.
Under the PPA between ComEd and Generation, Generation has agreed to
supply all of ComEd's load requirements through 2004. Prices for this energy
vary depending upon the time of day and month of delivery. During 2005 and 2006,
ComEd's PPA is a partial requirements agreement under which ComEd will purchase
all of its required energy and capacity from Generation, up to the available
capacity of the nuclear generating plants formerly owned by ComEd and
transferred to Generation. Under the terms of ComEd's PPA, Generation is
responsible for obtaining any required transmission service. The PPA also
specifies that prior to 2005, ComEd and Generation will jointly determine and
agree on a market-based price for energy delivered under the PPA for 2005 and
2006. In the event that the parties cannot agree to market-based prices for 2005
and 2006 prior to July 1, 2004, ComEd has the option of terminating the PPA
effective December 31, 2004. ComEd will need to obtain any additional supply
required from market sources in 2005 and 2006, and subsequent to 2006, will need
to obtain all of its supply from market sources, which could include Generation.
20
Under the PPA between PECO and Generation, Generation has agreed to
supply all of PECO's load requirements through 2010. Prices for this energy will
be a function of the amount PECO is able to charge its Provider of Last Resort
customers. Under the terms of PECO's PPA, PECO is responsible for obtaining any
required transmission service. Subsequent to 2010, PECO will obtain all of its
supply from market sources, which could include Generation.
4. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLES (Exelon and PECO)
On January 1, 2001, Exelon recognized a non-cash gain of $12 million, net of
income taxes, in earnings and deferred a non-cash gain of $44 million, net of
income taxes, in Accumulated Other Comprehensive Income, a component of
shareholders' equity, to reflect the initial adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended. SFAS No. 133 must be applied to all
derivative instruments and requires that such instruments be recorded in the
balance sheet either as an asset or a liability measured at their fair value
through earnings, with special accounting permitted for certain qualifying
hedges.
During the three and six months ended June 30, 2001, Exelon recognized
net gains of $5 million ($3 million, net of income taxes) and $22 million ($13
million, net of income taxes), respectively, relating to mark-to-market (MTM)
adjustments of certain power purchase and sale contracts pursuant to SFAS No.
133. MTM adjustments on power purchase contracts are reported in fuel and
purchased power and MTM adjustments on power sale contracts are reported as
operating revenues in the Condensed Consolidated Statements of Income and
Comprehensive Income. During the three and six months ended June 30, 2001,
Exelon recognized net losses aggregating $6 million ($4 million net of income
taxes) on derivative instruments entered into for trading purposes. Exelon
commenced financial trading in the second quarter of 2001. These losses are
reported as other income and deductions in the Condensed Consolidated Statements
of Income and Comprehensive Income. During the three and six months ended June
30, 2001, no amounts were reclassified from accumulated other comprehensive
income into earnings as a result of forecasted energy commodity transactions no
longer being probable. For the six months ended June 30, 2001, $6 million ($4
million after taxes) was reclassified from accumulated other comprehensive
income into earnings as a result of forecasted financing transactions no longer
being probable.
As of June 30, 2001, $38 million of deferred net losses on derivative
instruments accumulated in other comprehensive income are expected to be
reclassified to earnings during the next twelve months. Amounts in accumulated
other comprehensive income related to interest rate cash flows are reclassified
into earnings when the forecasted interest payment occurs. Amounts in
accumulated other comprehensive income related to energy commodity cash flows
are reclassified into earnings when the forecasted purchase or sale of the
energy commodity occurs.
21
5. EARNINGS PER SHARE (Exelon)
Diluted earnings per share are calculated by dividing net income by the weighted
average shares of common stock outstanding, including shares issuable upon
exercise of stock options outstanding under Exelon's stock option plans
considered to be common stock equivalents. The following table shows the effect
of these stock options on the weighted average number of shares outstanding used
in calculating diluted earnings per share (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
--- --- --- ---
Average common shares outstanding 321 174 320 178
Assumed exercise of stock options 3 1 3 1
--- --- --- ---
Average diluted common shares outstanding 324 175 323 179
=== === === ===
22
6. SEGMENT INFORMATION (Exelon)
Exelon operates in three business segments: Energy Delivery, Generation and
Enterprises. Energy Delivery consists of the operations of ComEd and PECO.
Exelon's segment information as of June 30, 2001 and December 31, 2000 and for
the three and six months ended June 30, 2001 as compared to the same periods in
2000 is as follows:
Three Months Ended June 30, 2001 as compared to Three Months Ended June 30, 2000
--------------------------------------------------------------------------------
Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
-------- ---------- ----------- ------------ ------------
Revenues:
2001 $2,436 $1,618 $ 546 $ (949) $3,651
2000 $ 771 $ 633 $ 271 $ (290) $1,385
EBIT (a):
2001 $ 706 $ 126 $ (5) $ (6) $ 821
2000 $ 257 $ 78 $ (32) $ 1 $ 304
Six Months Ended June 30, 2001 as compared to Six Months Ended June 30, 2000
----------------------------------------------------------------------------
Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
-------- ---------- ----------- ------------ ------------
Revenues:
2001 $ 4,933 $ 3,246 $ 1,213 $(1,918) $ 7,474
2000 $ 1,620 $ 1,131 $ 517 $ (530) $ 2,738
EBIT (a):
2001 $ 1,387 $ 419 $ (36) $ (12) $ 1,758
2000 $ 594 $ 117 $ (44) $ (1) $ 666
Total Assets:
June 30, 2001 $27,469 $ 7,035 $ 1,703 $ (848) $35,359
December 31, 2000 $27,424 $ 5,734 $ 2,277 $ (838) $34,597
(a) EBIT - consists of operating income, equity in earnings (losses) of
unconsolidated affiliates, and other income and expenses recorded in other,
net, with the exception of interest income. Interest income for the three
months ended June 30, 2001 was $24 million as compared to $11 million in
the same 2000 period. Interest income for the six months ended June 30,
2001 was $49 million as compared to $27 million in the same 2000 period.
The operations of Exelon Energy, Exelon's competitive retail generation
supplier, for 2000 have been reclassified from Generation to Enterprises to
reflect the corporate restructuring. See Note 3 - Corporate Restructuring.
23
7. COMMITMENTS AND CONTINGENCIES (Exelon, ComEd and PECO)
For information regarding capital commitments, nuclear insurance, nuclear
decommissioning and spent fuel storage, energy commitments and environmental
issues, see the Commitments and Contingencies Notes to the Consolidated
Financial Statements of Exelon, ComEd and PECO for the year ended December 31,
2000.
Environmental Liabilities
Exelon has identified 74 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
June 30, 2001, Exelon had accrued $168 million for environmental investigation
and remediation costs, including $137 million for MGP investigation and
remediation, that currently can be reasonably estimated. Exelon, ComEd and PECO
cannot predict whether they will incur other significant liabilities for
additional investigation and remediation costs at these or additional sites
identified by environmental agencies or others, or whether such costs may be
recoverable from third parties.
ComEd
As of June 30, 2001, ComEd had accrued $114 million (discounted) for
environmental investigation and remediation costs. This reserve included $108
million for MGP investigation and remediation, which currently can be reasonably
estimated.
PECO
As of June 30, 2001, PECO had accrued $39 million (undiscounted) for
environmental investigation and remediation costs, including $29 million for MGP
investigation and remediation, which currently can be reasonably estimated.
Energy Commitments
As of June 30, 2001, Exelon had long-term commitments relating to the
net purchase and sale of energy, capacity and transmission rights from
unaffiliated utilities and others as expressed in the following tables:
Net Net Transmission
Power Purchased Rights
Sales Capacity Purchases
----- -------- ---------
2001 $ 398 $ 550 $ 89
2002 409 943 50
2003 345 848 32
2004 215 840 25
2005 139 477 25
Thereafter (76) 5,445 80
------- ------- -------
Total $ 1,430 $ 9,103 $ 301
======= ======= =======
See Note 3 - Corporate Restructuring, for information about ComEd's and
PECO's PPAs with Generation.
24
Litigation
FERC Municipal Request for Refund. Three of ComEd's wholesale municipal
customers filed a complaint and request for refund with FERC alleging that ComEd
failed to properly adjust their rates as provided for under the terms of their
electric service contracts, and to track certain refunds made to ComEd's retail
customers in the years 1992 through 1994. In 1998, FERC granted the complaint
and directed that refunds be made, with interest. During the second quarter of
2001, FERC issued an order pursuant to ComEd's request for a rehearing, in which
it determined that its 1998 order had been erroneous and that no refunds were
due from ComEd to the municipal customers. In response to the favorable FERC
order, ComEd reversed the reserve of $15 million it had previously established
in connection with this case. The FERC order is subject to appeal to the Federal
circuit court.
Cotter Corporation Litigation. During 1989 and 1991, actions were
brought in federal and state courts in Colorado against ComEd and its
subsidiary, Cotter Corporation (Cotter), seeking unspecified damages and
injunctive relief based on allegations that Cotter permitted radioactive and
other hazardous material to be released from its mill into areas owned or
occupied by the plaintiffs, resulting in property damage and potential adverse
health effects. In 1994, a federal jury returned nominal dollar verdicts against
Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld
on appeal. The remaining claims in the 1989 actions were settled or dismissed.
In 1998, a jury verdict was rendered against Cotter in favor of 14 of the
plaintiffs in the 1991 cases, totaling approximately $6 million in compensatory
and punitive damages, interest and medical monitoring. On appeal, the Tenth
Circuit Court of Appeals reversed the jury verdict, and remanded the case for
new trial. These plaintiffs' cases were consolidated with the remaining 26
plaintiffs' cases, which had not been tried. The consolidated trial was
completed on June 28, 2001. The jury returned a verdict against Cotter and
awarded $16 million in various damages. Cotter will appeal the verdict.
In November 2000, another trial involving a separate sub-group of 13
plaintiffs, seeking $19 million in damages plus interest was completed in
federal district court in Denver. The jury awarded nominal damages of $42,500 to
11 of 13 plaintiffs, but awarded no damages for any personal injury or health
claims, other than requiring Cotter to perform periodic medical monitoring at
minimal cost. The plaintiffs appealed the verdict to the Tenth Circuit Court of
Appeals.
On February 18, 2000, ComEd sold Cotter to an unaffiliated third party.
As part of the sale, ComEd agreed to indemnify Cotter for any liability incurred
by Cotter as a result of these actions, as well as any liability arising in
connection with the West Lake Landfill discussed in the next paragraph. In
connection with the corporate restructuring, the responsibility to indemnify
Cotter for any liability related to these matters was transferred to Generation.
Exelon's management believes adequate reserves have been established in
connection with these proceedings.
The United States Environmental Protection Agency (EPA) has advised
Cotter that it is potentially liable in connection with radiological
contamination at a site known as the West Lake Landfill in Missouri. Cotter is
alleged to have disposed of approximately 39,000 tons of soils
25
mixed with 8,700 tons of leached barium sulfate at the site. Cotter, along with
three other companies identified by the EPA as potentially responsible parties
(PRPs), is reviewing a draft feasibility study that recommends capping the site.
The PRPs are also engaged in discussions with the State of Missouri and the EPA.
The estimated costs of remediation for the site are $10-15 million. Once a final
feasibility study is complete and a remedy selected, it is expected that the
PRPs will agree on an allocation of responsibility for the costs. Until an
agreement is reached, Exelon cannot predict its share of the costs.
Godley Park District Litigation. On April 18, 2001, the Godley Park
District filed suit in Will County Circuit Court against ComEd and Exelon
alleging that oil spills at Braidwood Station have contaminated the Park
District's water supply. The complaint seeks actual damages, punitive damages of
$100 million and statutory penalties. The complaint was not served on
ComEd/Exelon until July 12, 2001. Although ComEd and Exelon have not yet filed a
response to the complaint, the companies will contest liability and the damages
sought by the plaintiff.
Cajun Electric Power Cooperative, Inc. On May 27, 1998, the United
States Department of Justice, on behalf of the Rural Utilities Service and the
Chapter 11 Trustee for the Cajun Electric Power Cooperative, Inc. (Cajun), filed
an action claiming breach of contract against PECO in the United States District
Court for the Middle District of Louisiana arising out of PECO's termination of
the contract to purchase Cajun's interest in the River Bend nuclear power plant.
This action seeks the full purchase price of the 30% interest in the River Bend
nuclear plant, $50 million, plus interest and consequential damages. While PECO
cannot predict the outcome of this matter, PECO believes that it validly
exercised its right of termination and did not breach the agreement. In
connection with the corporate restructuring, the responsibility for any
liability related to this matter was transferred to Generation.
Service Interruptions. In August 1999, three class action lawsuits were
filed, and subsequently consolidated, in the Circuit Court of Cook County,
Illinois seeking damages for personal injuries, property damage and economic
losses from ComEd related to a series of service interruptions that occurred in
the summer 1999. The combined effect of these interruptions resulted in over
168,000 customers losing service for more than 4 hours. Conditional class
certification has been approved by the Court for the sole purpose of exploring
settlement talks. ComEd filed a motion to dismiss the complaints. On April 24,
2001, the court dismissed four of the five counts of the consolidated complaint
without prejudice and the sole remaining count was dismissed in part. On June 1,
2001, plaintiffs filed a second amended consolidated complaint. A portion of any
settlement or verdict may be covered by insurance and discussions with the
carrier are ongoing. Exelon's management believes adequate reserves have been
established in connection with these cases.
Reliability Investigation. In 1999, the ICC opened an investigation
regarding the design and reliability of ComEd's transmission and distribution
system. The investigation was expanded during 2000 to include a circuit breaker
fire that occurred in October 2000 at a ComEd substation. The ICC has issued
several reports in the investigation covering the summer of 1999 outages as well
as the transmission and distribution system. These reports include
recommendations and an implementation timetable. The recommendations are not
legally binding on ComEd, however; the ICC may enforce them through litigation.
Since the summer of 1999, ComEd has devoted significant resources to improving
the reliability of its transmission and distribution system. Exelon's management
believes that the likelihood of a successful material claim resulting from the
investigation is remote.
Retail Rate Law. In 1996, several developers of non-utility generating
facilities filed litigation against various Illinois officials claiming that the
enforcement against those facilities of an amendment to Illinois law removing
the entitlement of those facilities to state-subsidized
26
payments for electricity sold to ComEd after March 15, 1996 violated their
rights under the federal and state constitutions, and against ComEd for a
declaratory order that their rights under their contracts with ComEd were not
affected by the amendment. On August 4, 1999, the Illinois Appellate Court held
that the developers' claims against the state were premature, and the Illinois
Supreme Court denied leave to appeal that ruling. Developers of both facilities
have since filed amended complaints repeating their allegations that ComEd
breached the contracts in question, and requesting damages for such breach, in
the amount of the difference between the state-subsidized rate and the amount
ComEd was willing to pay for the electricity. ComEd intends to vigorously
contest this matter.
Pennsylvania Real Estate Tax Appeals. Exelon is involved in tax appeals
regarding two of its nuclear facilities, Limerick Generating Station (Montgomery
County) and Peach Bottom (York County). Exelon is also involved in the tax
appeal for Unit No. 1 at Three Mile Island Nuclear Station (Dauphin County)
through AmerGen Energy Company, LLC. Exelon does not believe the outcome of
these matters will have a material adverse effect on Exelon's results of
operations or financial condition.
Other Tax Issues. The Illinois Department of Revenue has issued a
notice of tax liability to ComEd alleging deficiencies in Illinois invested
capital tax payments for the years 1988 through 1997. The alleged deficiencies,
including interest and penalties, totaled approximately $54 million as of June
30, 2001. ComEd has protested the notices, and the matter is currently pending.
Chicago Franchise. In March 1999, ComEd reached a settlement agreement
with the City of Chicago to end the arbitration proceeding between ComEd and
Chicago regarding the January 1, 1992 franchise agreement. As part of the
settlement agreement, ComEd and Chicago agreed to a revised combination of
ongoing work under the franchise agreement and new initiatives that will result
in defined transmission and distribution expenditures by ComEd to improve
electric services in Chicago. The settlement agreement provides that ComEd would
be subject to liquidated damages if the projects are not completed by various
dates, unless it was prevented from doing so by events beyond its reasonable
control. In addition, ComEd and Chicago established an Energy Reliability and
Capacity Account, into which ComEd deposited $25 million during each of 1999 and
2000 and has conditionally agreed to deposit $25 million at the end of the years
2001 and 2002, to help ensure an adequate and reliable electric supply for
Chicago.
General. Exelon, ComEd and PECO are involved in various other
litigation matters. The ultimate outcome of such matters, while uncertain, is
not expected to have a material adverse effect on their respective financial
condition or results of operations.
8. PENSION AND POSTRETIREMENT BENEFIT OBLIGATIONS (ComEd and PECO)
ComEd
As part of Exelon's corporate restructuring, approximately 5,500 ComEd
employees were transferred to Generation, BSC and Enterprises. As a result of
the transfer, ComEd's pension
27
and non-pension postretirement benefits obligations were reduced by $143 million
and $172 million, respectively, as of January 1, 2001.
PECO
As part of Exelon's corporate restructuring, approximately 3,200 PECO
employees were transferred to Generation, BSC and Enterprises. As a result of
the transfer, PECO's pension and non-pension postretirement benefits obligations
were reduced by $70 million and $271 million, respectively, as of January 1,
2001.
ComEd's and PECO's plan assets and funded status of the plans as of December 31,
2000, after reflecting the effect of these transfers, are as follows:
ComEd PECO
------------------------ ------------------------
Other Other
Pension Postretirement Pension Postretirement
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Net Benefit Obligation at December 31, 2000 $ 2,220 $ 539 $ 1,024 $ 423
======= ======= ======= =======
Fair Value of Plan Assets at December 31, 2000 $ 1,987 $ 352 $ 1,380 $ 121
======= ======= ======= =======
Funded Status at December 31, 2000 $ (233) $ (187) $ 356 $ (302)
Unrecognized net actuarial (gain) loss 91 42 (441) 16
Unrecognized prior service cost -- -- 35 --
Unrecognized net transition obligation (asset) -- -- (9) 56
Miscellaneous adjustments -- 2 -- --
------- ------- ------- -------
Net amount recognized at December 31, 2000 $ (142) $ (143) $ (59) $ (230)
======= ======= ======= =======
Amounts recognized in the consolidated balance
sheets consist of:
Prepaid benefit cost $ 70 $ 2
Accrued benefit cost (129) (232)
-------
Net amount recognized at December 31, 2000 $ (59) $ (230)
=======
9. DECOMMISSIONING AND SPENT FUEL STORAGE (Exelon, ComEd and PECO)
The obligation for decommissioning Exelon's nuclear facilities and the related
trust fund assets were transferred from ComEd and PECO to Generation concurrent
with the transfer of the generating plants and the related Nuclear Regulatory
Commission (NRC) operating licenses as of January 1, 2001. Additionally,
obligations for spent nuclear fuel disposal, and provisions for nuclear
insurance were assumed by Generation under terms and conditions commensurate
with those previously borne by ComEd and PECO.
28
ComEd
ComEd has historically accounted for the current period's cost of
decommissioning by recording a charge to depreciation expense and a
corresponding liability in accumulated depreciation for its operating units, and
a reduction to regulatory assets for retired units (in current year dollars) on
a straight-line basis over the NRC operating license life of the plants. As of
December 31, 2000, ComEd's cumulative liability of $2.1 billion was recorded as
a component of accumulated depreciation. Additionally, a $1.3 billion liability
representing the present value of the estimated cost of decommissioning nuclear
units previously retired was recorded as a long-term liability. These
liabilities, as well as investments in trust fund assets of $2.6 billion to fund
the costs of decommissioning, were transferred to Generation.
In December 2000, the Illinois Commerce Commission (ICC) issued an
order, effective upon the transfer of the nuclear plants to Generation,
authorizing ComEd to recover $73 million annually from customers during the
first four years of the six-year term of the PPA between ComEd and Generation.
See Note 3 - Corporate Restructuring. Up to $73 million annually can also be
collected in 2005 and 2006, depending on the portion of the output of the former
ComEd nuclear stations that ComEd purchases from Generation. Under the ICC
order, subsequent to 2006, there would be no further collection for
decommissioning costs from customers. All amounts collected from customers must
be remitted to Generation for deposit into the related trust funds. The ICC
order also provides that any surplus trust funds after ComEd's former nuclear
stations are decommissioned must be refunded to ComEd's customers. The ICC order
has been appealed to the Illinois Appellate Court.
The $73 million annual recovery of decommissioning costs authorized by
the ICC order represents a reduction from the $84 million annual recovery in
2000. Accordingly, in the first quarter of 2001, ComEd reduced its nuclear
decommissioning regulatory asset to $372 million, reflecting the expected
probable future recoveries from customers. The reduction in the regulatory asset
in the amount of $347 million was recorded as an adjustment to the merger
purchase price allocation and resulted in a corresponding increase in goodwill.
Effective January 1, 2001, ComEd recorded an obligation to Generation of
approximately $440 million representing ComEd's legal requirement to remit funds
to Generation for the remaining regulatory asset amount of $372 million upon
collection from customers, and for collections from customers prior to the
establishment of external decommissioning trust funds in 1989 to be remitted to
Generation for deposit into the decommissioning trusts through 2006. Unrealized
gains and losses on decommissioning trust funds (based on the market value of
the assets on the merger date, in accordance with purchase accounting) had
previously been recorded in accumulated depreciation or regulatory assets. As a
result of the transfer of the nuclear plants to Generation and the ICC order
limiting the regulated recoveries of decommissioning costs, net unrealized
losses of $47 million (net of income taxes) were reclassified to accumulated
other comprehensive income. Realized gains and losses on decommissioning trust
funds' assets are based on the adjusted cost basis of the trust fund assets and
are reflected in other income and deductions in Exelon's Condensed Consolidated
Statements of Income and Comprehensive Income.
29
Additionally, as part of the corporate restructuring, ComEd's liability
to the U.S. Department of Energy (DOE) for payment of its one-time fee for spent
nuclear fuel disposal has been transferred to Generation. As of December 31,
2000, this liability, including accrued interest, was $810 million.
PECO
As of December 31, 2000, PECO's Condensed Consolidated Balance Sheet
included an estimated liability for decommissioning its nuclear plants of $412
million that was recorded as a component of accumulated depreciation.
Investments in nuclear decommissioning trust fund assets were $440 million. Both
the liability and the trust fund investments were transferred to Generation as
of January 1, 2001. Annual decommissioning cost recovery of $29 million,
collected through regulated rates, will continue, and all amounts collected will
be remitted to Generation to be deposited into the decommissioning trust funds.
10. LONG-TERM DEBT (Exelon and PECO)
On March 1, 2001, PECO Energy Transition Trust (PETT), a Delaware business trust
and a wholly owned subsidiary of PECO, refinanced $805 million of floating rate
Series 1999-A Transition Bonds through the issuance by PETT of fixed-rate
transition bonds (Series 2001-A Transition Bonds). Approximately 72% of the
Class A-3 and 70% of the Class A-5 Series 1999-A Transition Bonds were redeemed.
The Series 2001-A Transition Bonds are non-callable, fixed-rate securities with
an interest rate of 6.52%. The Series 2001-A Transition Bonds have an expected
final payment date of September 1, 2010 and a termination date of December 31,
2010. The transition bonds are solely obligations of PETT, secured by intangible
transition property sold by PECO to PETT concurrently with the issuance of
transition bonds and certain other related collateral.
In 1999, PECO entered into interest rate swaps relating to the Class
A-3 and Class A-5 Series 1999-A Transition Bonds in the aggregate notional
amount of $1.1 billion with an average interest rate of 6.65%. PECO also entered
into forward starting interest rate swaps relating to these two classes of
floating rate transition bonds in the aggregate notional amount of $1.1 billion
with an average interest rate of 6.01%. In connection with the refinancing of a
portion of the two floating rate series of transition bonds in the first quarter
of 2001, PECO settled $318 million of a forward starting interest rate swap
resulting in a $6 million gain which is reflected in other income and
deductions. See Note 4 - Cumulative Effect of a Change in Accounting Principle.
Also, in connection with the refinancing, PECO settled a portion of the interest
rate swaps and the remaining portion of the forward starting interest rate swaps
resulting in gains of $25 million, which were deferred and are being amortized
over the expected remaining lives of the related debt.
On May 8, 2001, Exelon issued $500 million of senior unsecured notes
with a maturity date of May 1, 2011 and an interest rate of 6.75%. On June 11,
2001, Generation issued $700 million of senior unsecured notes with a maturity
date of June 15, 2011 and an interest rate of 6.95%. The proceeds from these
financings were used to repay a $1.2 billion term loan.
30
11. SALE OF ACCOUNTS RECEIVABLE (Exelon and PECO)
PECO is party to an agreement with a financial institution under which it can
sell or finance with limited recourse an undivided interest, adjusted daily, in
up to $225 million of designated accounts receivable until November 2005. As of
June 30, 2001, PECO had sold a $225 million interest in accounts receivable,
consisting of a $176 million interest in accounts receivable which PECO
accounted for as a sale under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement
of FASB Statement No. 125" and a $49 million interest in special-agreement
accounts receivable which were accounted for as a long-term note payable. PECO
retains the servicing responsibility for these receivables. The agreement
requires PECO to maintain the $225 million interest, which, if not met, requires
PECO to deposit cash in order to satisfy such requirements. At June 30, 2001,
PECO met this requirement and was not required to make any cash deposits.
12. RELATED-PARTY TRANSACTIONS (ComEd and PECO)
ComEd
At December 31, 2000, ComEd had a $400 million receivable from PECO,
which was repaid in the second quarter of 2001. The average interest rate on
this receivable for the period outstanding was 6.5%. Interest income on the
receivable from PECO was $2 million and $8 million for the three and six months
ended June 30, 2001, respectively.
ComEd had a note receivable from an affiliate of $1.3 billion at June
30, 2001 and December 31, 2000, relating to the December 1999 fossil plant sale,
which is included in deferred debits and other assets in ComEd's Condensed
Consolidated Balance Sheets. Interest income earned on this note receivable was
$15 million and $46 million for the three months ended June 30, 2001 and 2000,
respectively. Interest income earned on this note receivable was $37 million and
$89 million for the six months ended June 30, 2001 and 2000, respectively.
Effective January 1, 2001, Exelon contributed to ComEd a $1.0 billion
non-interest bearing receivable related to Exelon's agreement to fund future
income tax payments resulting from the collection by ComEd of instrument funding
charges. This receivable is reflected as a reduction of shareholders' equity in
ComEd's Condensed Consolidated Balance Sheets. This receivable is expected to be
settled over the years 2001 through 2008.
At June 30, 2001, ComEd had a short-term payable of $391 million and a
long-term payable of $364 million to Generation resulting from the
restructuring, which were included in current liabilities and deferred credits
and other liabilities, respectively, on ComEd's Condensed Consolidated Balance
Sheets.
In connection with the transfer of the generation assets in the
corporate restructuring, ComEd entered into a PPA with Generation. See Note 3 -
Corporate Restructuring. Intercompany power purchases pursuant to the PPA for
the three and six months ended June 30, 2001 were $585 million and $1,193
million, respectively.
31
Effective January 1, 2001, upon the corporate restructuring, ComEd
receives a variety of corporate support services from BSC including legal, human
resources, financial and information technology services. Such services are
provided at cost including applicable overhead.
PECO
At December 31, 2000, PECO had a $400 million payable to ComEd, which
was repaid in the second quarter of 2001. The average annual interest rate on
this payable for the period outstanding was 6.5%. Interest expense related to
this payable for the three and six months ended June 30, 2001 was $2 million and
$8 million, respectively.
Effective January 1, 2001, Exelon contributed to PECO a $2.0 billion
non-interest bearing receivable related to Exelon's agreement to fund future
income tax payments resulting from the collection of competitive transition
charges. This receivable is reflected as a reduction of shareholders' equity in
PECO's Condensed Consolidated Balance Sheets. This receivable is expected to be
settled over the years 2001 through 2010.
In connection with the transfer of the generation assets in the
corporate restructuring, PECO entered into a PPA with Generation. See Note 3 -
Corporate Restructuring. Intercompany power purchases pursuant to the PPA for
the three and six months ended June 30, 2001 were $263 million and $508 million,
respectively.
Effective January 1, 2001, upon the corporate restructuring, PECO
receives a variety of corporate support services from BSC including legal, human
resources, financial and information technology services. Such services are
provided at cost including applicable overhead.
13. NEW ACCOUNTING PRONOUNCEMENTS (Exelon, ComEd and PECO)
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations" (SFAS No. 141),
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) and No. 143,
"Asset Retirement Obligations" (SFAS No. 143).
SFAS No. 141 requires that all business combinations be accounted for
under the purchase method of accounting and establishes criteria for the
separate recognition of intangible assets acquired in business combinations.
SFAS No. 141 is effective for business combinations initiated after June 30,
2001.
SFAS No. 142 establishes new accounting and reporting standards for
goodwill and intangible assets. Exelon expects to adopt SFAS No. 142 as of
January 1, 2002. Under SFAS No. 142, effective January 1, 2002, goodwill
recorded by Exelon will no longer be subject to amortization. After January 1,
2002, goodwill will be subject to an assessment for impairment using a fair
value based test at least annually, or more frequently if events or
circumstances indicate that goodwill might be impaired. An impairment loss would
be reported as a reduction to goodwill and a charge to operating expense, except
at the transition date, when the loss would be reflected as a cumulative effect
of a change in accounting principle. As of June 30, 2001, Exelon's Condensed
Consolidated Balance Sheet reflected approximately $5.5 billion in goodwill net
of accumulated amortization, including $5.1 billion of net goodwill related to
the merger of Unicom and PECO recorded on ComEd's Condensed Consolidated Balance
Sheets, with the remainder relating to Enterprises. Annualized amortization of
goodwill related to the merger and to Enterprises of $128 million and $24
million, respectively, is expected to be discontinued upon
32
adoption of SFAS No. 142. Exelon is in the process of evaluating the overall
impact of SFAS No. 142 on its financial statements and is currently unable to
determine the overall impact, but the effect could be material.
SFAS No. 143 provides accounting requirements for retirement
obligations associated with tangible long-lived assets. Exelon expects to adopt
SFAS No. 143 on January 1, 2003. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
there is a legal obligation to settle under existing or enacted law, statute,
written or oral contract or by legal construction under the doctrine of
promissory estoppel. Upon adoption of SFAS No. 143, Exelon will use a
cumulative-effect approach to recognize transition amounts for any existing
liabilities, asset retirement costs and accumulated depreciation. Exelon is in
the process of evaluating the impact of SFAS No. 143 on its financial
statements.
14. CHANGE IN ACCOUNTING ESTIMATE (Exelon)
Effective April 1, 2001, Exelon changed its accounting estimates
related to the depreciation and decommissioning of certain generating stations.
The estimated service lives were extended by 20 years for three nuclear
stations, by periods up to 20 years for certain fossil stations and by 50 years
for a pumped storage station. These changes were based on engineering and
economic feasibility studies performed by Exelon considering, among other
things, future capital and maintenance expenditures at these plants. As a result
of the change, net income for the three and six months ended June 30, 2001
increased $21 million ($12 million, net of income taxes).
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXELON CORPORATION
- ------------------
GENERAL
On October 20, 2000, Exelon Corporation (Exelon) became the parent corporation
of Commonwealth Edison Company (ComEd) and PECO Energy Company (PECO) as a
result of the completion of the merger. The merger was accounted for using the
purchase method of accounting.
During January 2001, Exelon undertook a corporate restructuring to
separate its generation and other competitive businesses from its regulated
energy delivery businesses at ComEd and PECO. As part of the restructuring, the
generation-related operations and assets and liabilities of ComEd were
transferred to Exelon Generation Company, LLC (Generation). Also, as part of the
restructuring, the non-regulated operations and related assets and liabilities
of PECO, representing PECO's Generation and Enterprises business segments, were
transferred to Generation and Exelon Enterprises Company, LLC (Enterprises),
respectively. Additionally, certain operations and assets and liabilities of
ComEd and PECO were transferred to Exelon Business Services Company (BSC).
Exelon, through subsidiaries, including PECO and ComEd, operates in
three business segments:
o Energy Delivery, consisting of the retail electricity distribution and
transmission businesses of ComEd in northern Illinois and PECO in
southeastern Pennsylvania, and the natural gas distribution business
of PECO in the Pennsylvania counties surrounding the City of
Philadelphia.
o Generation, consisting of electric generating facilities, power
marketing operations and equity interests in Sithe Energies, Inc.
(Sithe) and AmerGen Energy Company, LLC (AmerGen).
o Enterprises, consisting of competitive retail energy sales, energy and
infrastructure services, communications and related investments. The
operations of Exelon Energy for 2000 have been reclassified from
Generation to Enterprises to reflect the effects of the corporate
restructuring.
34
RESULTS OF OPERATIONS
Significant Operating Trends
Expense Items as a Percentage of
Total Operating Revenues
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
Fuel and Purchased Power 33% 34% 34% 34%
Operating and Maintenance 31% 33% 29% 31%
Depreciation and Amortization 10% 6% 10% 6%
Taxes Other Than Income 4% 5% 4% 5%
---- ---- ---- ----
Total Operating Expenses 78% 78% 77% 76%
---- ---- ---- ----
Operating Income 22% 22% 23% 24%
==== ==== ==== ====
Three Months Ended June 30, 2001 Compared To Three Months Ended June 30, 2000
Net Income and Earnings Per Share
Exelon's net income increased $196 million, or 165%, for the three months ended
June 30, 2001, excluding the effect of an extraordinary item. Diluted earnings
per share on the same basis increased $0.29 per share, or 43%. Net income
inclusive of the extraordinary item increased $199 million, or 172%, for the
three months ended June 30, 2001. Diluted earnings per share on the same basis
increased $0.31 per share, or 47%. Earnings per share increased less than net
income because of an increase in the weighted average shares of common stock
outstanding as a result of the issuance of common stock in connection with the
merger, partially offset by the repurchase of common stock with the proceeds
from PECO's May 2000 stranded cost recovery securitization.
Earnings Before Interest and Income Taxes
Exelon evaluates the performance of its business segments based on earnings
before interest and income taxes (EBIT). In addition to components of operating
income as shown on the consolidated statements of income, EBIT includes equity
in earnings (losses) of unconsolidated affiliates, and other income and expense
recorded in other, net, with the exception of interest income. Operating
revenues, operating expenses, depreciation and amortization and other income and
expenses for each business segment in the following analyses include
intercompany transactions, which are eliminated in the consolidated Exelon
financial statements. Exelon's EBIT was $821 million and $304 million for the
three months ended June 30, 2001 and 2000, respectively. EBIT for the three
months ended June 30, 2000 represents the results of PECO only and does not
include the effects of the October 20, 2000 merger of Unicom and
35
PECO. To provide a more meaningful analysis of results of operations, the EBIT
analyses by business segment below identify the portion of the EBIT variance
that is attributable to the addition of Unicom results of operations and the
portion of the variance that results from changes in components of the
underlying operations. The merger variance represents Unicom results for the
three and six months ended June 30, 2000 on a pro forma basis as if the merger
and corporate restructuring occurred on January 1, 2000.
EBIT Contribution by Business Segment
Three Months Components of Variance
Ended June 30, ----------------------
-------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Energy Delivery $ 706 $ 257 $ 449 $ 386 $ 63
Generation 126 78 48 (2) 50
Enterprises (5) (32) 27 (10) 37
Corporate (6) 1 (7) 7 (14)
----- ----- ----- ----- -----
Total $ 821 $ 304 $ 517 $ 381 $ 136
===== ===== ===== ===== =====
Energy Delivery
Three Months Components of Variance
Ended June 30, ----------------------
-------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $2,436 $ 771 $1,665 $1,500 $ 165
Operating Expense and Other 1,464 474 990 937 53
Depreciation & Amortization 266 40 226 177 49
------ ------ ------ ------ ------
EBIT $ 706 $ 257 $ 449 $ 386 $ 63
====== ====== ====== ====== ======
Energy Delivery's EBIT increased $449 million for the three months
ended June 30, 2001, as compared to the same period in 2000. The merger
accounted for $386 million of the variance and normal operations added $63
million. The increase in EBIT from normal operations was primarily attributable
to higher customer retention and rate adjustments at PECO aggregating $55
million, lower operating and maintenance expenses at ComEd of $29 million,
principally reflecting customer credit and billing process improvements and a
decrease in storm restoration and service reliability costs, and the reversal of
a $15 million reserve for revenue refunds related to ComEd municipal customers
as a result of a favorable FERC ruling. These increases were partially offset by
an increase in regulatory asset amortization expense of $51 million related to
Competitive Transition Charges (CTC) at PECO.
36
The $165 million growth in operating revenues was primarily
attributable to increased electric revenues of $137 million and additional gas
revenues of $28 million.
ComEd's operating revenues increased $30 million, or 2%, compared to
the same period in 2000, excluding the effects of restructuring. Revenues from
retail customers increased $14 million, before a $21 million reduction due to a
change in recording certain revenue taxes as operating revenue and tax expense
to collections recorded as liabilities resulting from Illinois legislation. This
revenue tax change had no effect on EBIT. Retail revenues also reflect the
negative effect of the migration of non-residential customers to alternative
electric suppliers or the power purchase option. Additionally, the increase in
operating revenues reflects a $22 million increase in transmission service
revenues and the reversal of a $15 million reserve for revenue refunds to
ComEd's municipal customers as the result of a favorable FERC ruling. Revenues
from retail customers reflect a consistent amount of total kilowatthour (kWh)
sales for the three months ended June 30, 2001 compared to the same 2000 period.
Residential sales and small commercial and industrial sales, which increased 3%
and 5% respectively, were offset by a 10% decrease in large commercial and
industrial sales primarily due to a slowing regional economy.
PECO's operating revenue increased by $135 million, or 18%, compared to
the same period in 2000, excluding the effects of restructuring. The increase in
operating revenues was attributable to higher electric revenues of $107 million
and additional gas revenues of $28 million. The increase in electric revenues
was primarily attributable to $112 million from customers in Pennsylvania
selecting or returning to PECO as their electric generation supplier and rate
adjustments, partially offset by a decrease of $5 million from unfavorable
weather conditions. Total kWh sales to retail customers decreased 2% compared to
the same 2000 period. Large commercial and industrial sales decreased 3% and
residential sales decreased 1%. These decreases were partially offset by an
increase in small commercial and industrial sales of 2%. The increase in
regulated gas revenues was primarily attributable to $28 million related to
higher natural gas prices, partially offset by a decrease of $2 million related
to the elimination of the gross receipts tax on gas sales effective July 1,
2000.
Generation
Three Months Components of Variance
Ended June 30, -------------------------
---------------------- Merger Normal
2001 2000 Variance Variance Operations
------ ------ -------- -------- ----------
(In millions)
Operating Revenue $1,618 $ 633 $ 985 $ 781 $ 204
Operating Expense and Other 1,416 523 893 757 136
Depreciation & Amortization 76 32 44 26 18
------ ------ ------ ------ ------
EBIT $ 126 $ 78 $ 48 $ (2) $ 50
====== ====== ====== ====== ======
Generation's EBIT increased $48 million for the three months ended June
30, 2001 compared to the same period in 2000. The increase was primarily
attributable to normal operations and resulted from higher margins on market and
affiliate wholesale energy sales,
37
coupled with a decrease in operating costs at the nuclear plants, partially
offset by an $18 million increase in depreciation and amortization expense.
During the three months ended June 30, 2001, Generation benefited from increased
power marketing activities relative to the comparable prior year period, which
contributed to higher margins on energy sales. Lower operating costs were
attributable to reductions in the number of employees and decreased utilization
of contractors, which offset the effect of an increase in legal reserves. The
increase in depreciation and amortization expense primarily reflects a net
increase in decommissioning expense of $27 million reflecting the discontinuance
of regulatory accounting practices and the extension of depreciable lives of
certain nuclear generating stations, partially offset by an $11 million
reduction in depreciation expense attributable to the extension of depreciable
lives of certain nuclear and fossil generating plants.
For the three months ended June 30, 2001, Generation's sales were
48,522 gigawatt-hours (GWhs), of which 26,998 GWhs were supplied by Generation's
nuclear units, 16,845 GWhs from purchases, 1,808 GWhs from fossil and hydro
units and 2,871 GWhs from Generation investments. Approximately 58% of
Generation's sales were to ComEd and PECO and the remaining 42% were in the
wholesale market.
Since June 30, 2000, Generation has added 3,034 megawatts (MWs) of new
capacity. Generation's nuclear units added 243 MWs through power uprates and 84
MWs through the acquisition of an additional 3.75% of Peach Bottom Atomic Power
Station. Exelon's fossil stations added 15 MWs through power uprates. Additional
capacity through PPAs added 2,692 MWs. Generation's nuclear fleet, including
AmerGen, performed at a capacity factor of 93.6% for the three months ended June
30, 2001 compared to 94.8% in the same 2000 period. Generation's nuclear units'
production costs for the three months ended June 30, 2001 were $13.02 per
megawatt-hour (MWh) compared to $13.28 per MWh for the same period in 2000.
Enterprises
Three Months Components of Variance
Ended June 30, --------------------------
---------------------- Merger Normal
2001 2000 Variance Variance Operations
------ ------ -------- -------- ----------
(In millions)
Operating Revenue $ 546 $ 271 $ 275 $ 130 $ 145
Operating Expense and Other 535 294 241 137 104
Depreciation & Amortization 16 9 7 3 4
----- ----- ----- ----- -----
EBIT $ (5) $ (32) $ 27 $ (10) $ 37
===== ===== ===== ===== =====
Enterprises' EBIT increased $27 million for the three months ended June
30, 2001 compared to the same period in 2000. Normal operations contributed $37
million of the variance, which was partially offset by a $10 million reduction
attributable to the merger. The increase in EBIT from normal operations
primarily reflects an $18 million gain on the sale of a communications
investment and a $9 million increase in margins at Exelon Energy primarily from
operations in Pennsylvania. Enterprises EBIT reflects lower margins in the
infrastructure
38
business associated with the significant downturn in the telecommunications
industry, partially offset by additional margins associated with infrastructure
services acquisitions.
Enterprises' revenues increased $275 million for the three months ended
June 30, 2001 compared to the same period in 2000. Normal operations contributed
$145 million and the merger added $130 million. Operating revenues attributable
to normal operations increased as a result of acquisitions by Exelon
Infrastructure Services and Exelon Services, which increased by $113 million and
$68 million, respectively. These increases were partially offset by a $31
million decrease in revenues at Exelon Infrastructure Services due to the
downturn in the telecommunications industry resulting in a decline in business
volumes and increased price pressure.
Enterprises' operating expenses increased $241 million for the three
months ended June 30, 2001 compared to the same period in 2000. Normal
operations accounted for $104 million and the merger added $137 million.
Operating expenses attributable to normal operations include incremental costs
associated with acquisitions made by Exelon Infrastructure Services and Exelon
Services of $91 million and $65 million, respectively. These increases were
partially offset by the gain on the sale of a communications investment and
lower operating expenses at Exelon Infrastructure Services and Exelon Energy.
Enterprises' depreciation and amortization expense increased primarily
as a result of goodwill amortization related to acquisitions by Exelon
Infrastructure Services, Exelon Services and Exelon Energy.
Other Components of Net Income
Interest Charges
Interest charges consist of interest expense and distributions on preferred
securities of subsidiaries. Interest charges increased $182 million, or 150%,
for the three months ended June 30, 2001. The increase was primarily
attributable to $162 million from the effects of the merger, $17 million related
to borrowings by Exelon and additional interest expense of $5 million as a
result of the issuance of transition bonds in May 2000 to securitize a portion
of PECO's stranded cost recovery, partially offset by $2 million of lower
interest charges as a result of the reduction of PECO's long-term debt with the
proceeds from the securitization.
Income Taxes
The effective income tax rate was 41.9% for the three months ended June 30, 2001
as compared to 38.7% in the same period in 2000. The increase in the effective
income tax rate was primarily attributable to goodwill amortization associated
with the merger, which is not deductible for tax purposes and a higher effective
state income tax rate due to operations in Illinois subsequent to the merger.
39
Six Months Ended June 30, 2001 Compared To Six Months Ended June 30, 2000
Net Income and Earnings Per Share
Exelon's net income increased $415 million, or 145%, for the six months ended
June 30, 2001, excluding the effect of an extraordinary item and the cumulative
effect of a change in accounting principle. Diluted earnings per share on the
same basis increased $0.56 per share, or 35%. Net income, inclusive of an
extraordinary item and the cumulative effect of a change in accounting
principle, increased $406 million, or 132%, for the six months ended June 30,
2001. Diluted earnings per share on the same basis increased $0.49 per share, or
28%. Earnings per share increased less than net income because of an increase in
the weighted average shares of common stock outstanding as a result of the
issuance of common stock in connection with the merger, partially offset by the
repurchase of common stock with the proceeds from PECO's May 2000 stranded cost
recovery securitization.
Earnings Before Interest and Income Taxes
EBIT Contribution by Business Segment
Six Months Components of Variance
Ended June 30, -------------------------
------------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Energy Delivery $ 1,387 $ 594 $ 793 $ 666 $ 127
Generation 419 117 302 69 233
Enterprises (36) (44) 8 (10) 18
Corporate (12) (1) (11) 16 (27)
------- ------- ------- ------- -------
Total $ 1,758 $ 666 $ 1,092 $ 741 $ 351
======= ======= ======= ======= =======
Energy Delivery
Six Months Components of Variance
Ended June 30, ------------------------
-------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $4,933 $1,620 $3,313 $2,924 $ 389
Operating Expense and Other 3,011 945 2,066 1,754 312
Depreciation & Amortization 535 81 454 504 (50)
------ ------ ------ ------ ------
EBIT $1,387 $ 594 $ 793 $ 666 $ 127
====== ====== ====== ====== ======
Energy Delivery's EBIT increased $793 million in the six months ended
June 30, 2001, as compared to the same period in 2000. The merger accounted for
$666 million of the variance and normal operations added $127 million. The
increase in EBIT from normal operations was primarily attributable to lower
regulatory asset amortization at ComEd of $182
40
million, higher customer retention and rate adjustments at PECO aggregating $70
million, lower operating and maintenance expenses at ComEd of $34 million,
principally associated with customer credit and billing process improvements,
and a decrease in storm restoration and service reliability costs, and the
reversal of a $15 million reserve for revenue refunds related to ComEd municipal
customers as a result of a favorable FERC ruling. These increases were partially
offset by an increase in regulatory asset amortization expense of $102 million
related to the CTC at PECO and higher fuel and purchased power costs at ComEd of
$69 million.
The $389 million growth in operating revenues was primarily
attributable to increased electric revenues of $267 million and additional gas
revenues of $122 million.
ComEd's operating revenues increased $52 million, or 2%, compared to
the same six-month period in 2000, excluding the effects of restructuring.
Revenues from retail customers increased $7 million, before a $44 million
reduction due to a change in recording certain revenue taxes as operating
revenue and tax expense to collections recorded as liabilities resulting from
Illinois legislation. This revenue tax change had no effect on EBIT. Retail
revenues also reflect the negative effect of the migration of non-residential
customers to alternative electric suppliers or the power purchase option.
Additionally, the increase in operating revenues reflects a $37 million increase
in transmission service revenues, the reversal of a $15 million reserve for
revenue refunds to ComEd's municipal customers as the result of a favorable FERC
ruling, and a $26 million increase in revenues from sales to alternative
electric suppliers. Revenues from retail customers reflect a consistent amount
of total kWh sales for the six months ended June 30, 2001 as compared to the
same 2000 period. Residential sales and small commercial and industrial sales,
which both increased 4%, were offset by a 9% decrease in large commercial and
industrial sales primarily due to a slowing regional economy.
PECO's operating revenues increased by $337 million, or 21%, compared
to the same six-month period in 2000. The increase in operating revenue was
attributable to higher electric revenue of $215 million and additional gas
revenue of $122 million. The increase in electric revenues was primarily
attributable to $205 million from customers in Pennsylvania selecting or
returning to PECO as their electric generation supplier and rate adjustments and
an $11 million settlement of competitive transition charges by a large customer.
Total kWh sales to retail customers remained consistent with the same 2000
period. Residential sales increased 2% and small commercial and industrial sales
increased 3%. These increases were offset by a decrease in large commercial and
industrial sales of 3%. The increase in regulated gas revenues was primarily
attributable to increases of $108 million related to higher natural gas prices
and $10 million as a result of favorable weather conditions, partially offset by
$7 million related to the elimination of the gross receipts tax on gas sales
effective July 1, 2000.
41
Generation
Six Months Components of Variance
Ended June 30, -------------------------
-------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $3,246 $1,131 $2,115 $1,475 $ 640
Operating Expense and Other 2,660 951 1,709 1,356 353
Depreciation & Amortization 167 63 104 50 54
------ ------ ------ ------ ------
EBIT $ 419 $ 117 $ 302 $ 69 $ 233
====== ====== ====== ====== ======
Generation's EBIT increased $302 million for the six months ended June
30, 2001 compared to the same period in 2000. The merger accounted for $69
million of the variance. The remaining $233 million increase primarily resulted
from higher margins on market and affiliate wholesale energy sales, coupled with
decreased operating costs at the nuclear plants, partially offset by additional
depreciation and amortization of $54 million. During the first five months of
2001, Generation benefited from increases in wholesale market prices,
particularly in the Pennsylvania-New Jersey-Maryland control area (PJM) and
Mid-America Interconnected Network (MAIN) regions. Generation also benefited
from higher nuclear plant output due to increased capacity factors during the
six months ended June 30, 2001. Lower operating costs are attributable to
reductions in the number of employees and decreased utilization of contractors
which offset the effect of an increase in legal reserves. The increase in
depreciation and amortization expense primarily reflects a net increase in
decommissioning expense of $63 million reflecting the discontinuance of
regulatory accounting practices and the extension of depreciable lives for
certain nuclear generating stations, partially offset by an $11 million
reduction in depreciation expense attributable to the extension of depreciable
lives of certain nuclear and fossil generating stations. The increase in
wholesale market prices was primarily driven by significant increases in fossil
fuel prices. The large concentration of nuclear generation in the Generation
portfolio allowed Exelon to capture the higher prices in the wholesale market
for sales to non-affiliates, with minimal increase in fuel prices.
For the six months ended June 30, 2001, Generation's sales were 96,776
GWhs, of which 54,950 GWhs were supplied by Generation's nuclear units, 32,408
GWhs from purchases, 3,294 GWhs by fossil and hydro units and 6,124 GWhs from
Generation investments. Approximately 59% of Generation's sales were to ComEd
and PECO and the remaining 41% were into the wholesale market.
Generation's nuclear fleet, including AmerGen, performed at a capacity
factor of 96.2% for the six months ended June 30, 2001 compared to 95.0% in the
same 2000 period. Generation's nuclear units' production costs for the six
months ended June 30, 2001 were $12.34 per MWh, compared to $13.78 per MWh for
the same period in 2000.
42
Enterprises
Six Months Components of Variance
Ended June 30, -------------------------
------------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $ 1,213 $ 517 $ 696 $ 239 $ 457
Operating Expense and Other 1,218 544 674 243 431
Depreciation & Amortization 31 17 14 6 8
------- ------- ------- ------- -------
EBIT $ (36) $ (44) $ 8 $ (10) $ 18
======= ======= ======= ======= =======
Enterprises' EBIT increased $8 million for the six months ended June
30, 2001 compared to the same period in 2000. Normal operations contributed $18
million of the variance, which was partially offset by a $10 million reduction
attributable to the merger. The increase in EBIT from normal operations is
primarily attributable to $28 million in gains on investments, partially offset
by increased wholesale natural gas prices and electric capacity costs at Exelon
Energy.
Enterprises' revenues increased $696 million for the six months ended
June 30, 2001 compared to the same period in 2000. Normal operations contributed
$457 million and the merger added $239 million. Operating revenues from normal
operations increased as a result of acquisitions by Exelon Infrastructure
Services and Exelon Services, which increased revenue by $167 million and $156
million, respectively. Exelon Energy's revenue increased $132 million primarily
from an acquisition of a retail natural gas marketing company and increases in
wholesale natural gas prices compared to the same period in 2000.
Enterprises' operating expense increased $674 million for the six
months ended June 30, 2001 compared to the same period in 2000. Unicom
contributed $243 million and normal operations added $431 million. Operating
expenses from normal operations included $145 million and $149 million as a
result of acquisitions made by Exelon Infrastructure Services and Exelon
Services, respectively. The remainder of the operating expense increase related
to Exelon Energy's retail natural gas marketing company acquisition and higher
first quarter 2001 expenses at Exelon Infrastructure Services. These increases
were partially offset by gains on investments.
Enterprises' depreciation and amortization expense increased primarily
as a result of goodwill amortization related to acquisitions by Exelon
Infrastructure Services, Exelon Services and Exelon Energy.
43
Other Components of Net Income
Interest Charges
Interest charges increased $376 million, or 163%, for the six months ended June
30, 2001. The increase was primarily attributable to $326 million from the
effects of the merger, $41 million related to borrowings by Exelon and
additional interest of $21 million as a result of the issuance of transition
bonds in May 2000 to securitize a portion of PECO's stranded cost recovery,
partially offset by $12 million of lower interest charges as a result of the
reduction of PECO's long-term debt with the proceeds from the securitization.
Income Taxes
The effective income tax rate was 41.5% for the six months ended June 30, 2001
as compared to 38.0% for the same period in 2000. The increase in the effective
income tax rate was primarily attributable to goodwill amortization associated
with the merger which is not deductible for tax purposes and a higher effective
state income tax rate due to operations in Illinois subsequent to the merger.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2001, Exelon adopted Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), as amended, resulting in a benefit of $20 million ($12 million, net of
income taxes). On January 1, 2000, Exelon recorded a benefit of $40 million ($24
million, net of income taxes) representing the cumulative effect of a change in
accounting method for nuclear outage costs by PECO in conjunction with the
synchronization of accounting policies in connection with the merger.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations for the six-month period ended June 30, 2001
were $1,889 million as compared to $334 million for the same 2000 period. The
increase was primarily attributable to depreciation and amortization of $711
million, changes in working capital of $483 million and net income of $406
million.
Cash flows used in investing activities for the six-month period ended
June 30, 2001 were $934 million as compared to $449 million for the same 2000
period. The increase was attributable to capital expenditures of $615 million
partially offset by lower Enterprises acquisitions and investments of $130
million.
Cash flows used in financing activities were $321 million for the
six-month period ended June 30, 2001 as compared to cash flows provided by
financing activities of $154 million for the same 2000 period. The decrease in
cash flows from financing activities was primarily attributable to additional
debt service of $234 million and additional payments of dividends on common
stock of $224 million. The common stock dividends of $312 million cover the
period from October 20, 2000, the date of the merger, through May 15, 2001.
44
At June 30, 2001, Exelon's capital structure consisted of 63% of
long-term debt of Exelon and subsidiaries, 32% common stock, 2% notes payable
and 3% preferred securities of subsidiaries. Long-term debt included $7.2
billion of securitization debt constituting obligations of certain consolidated
special purpose entities, representing 31% of capitalization.
At June 30, 2001, Exelon had outstanding $424 million of notes payable
consisting principally of commercial paper. For the six months ended June 30,
2001, the average interest rate on notes payable was approximately 5.4%. Certain
of the credit agreements to which Exelon, ComEd and PECO are a party require
each of them to maintain a debt to total capitalization ratio of 65% or less
(excluding securitization debt and for PECO, the receivable from parent recorded
in PECO's shareholders' equity). At June 30, 2001, the debt to total
capitalization ratios on that basis for Exelon, ComEd and PECO were 50%, 46%,
and 36%, respectively.
On May 8, 2001, Exelon issued $500 million of unsecured senior notes
with a maturity date of May 1, 2011 and an interest rate of 6.75%. On June 11,
2001, Generation issued $700 million of unsecured senior notes with a maturity
date of June 15, 2011 and an interest rate of 6.95%. The proceeds from these
financings were used to repay a $1.2 billion term loan.
45
COMMONWEALTH EDISON COMPANY
- ---------------------------
GENERAL
On October 20, 2000, ComEd became a 99.9% owned subsidiary of Exelon as a result
of the transactions relating to the merger of PECO and ComEd's former parent,
Unicom. Effective January 1, 2001, Exelon undertook a restructuring to separate
its generation and other competitive businesses from its regulated energy
delivery business. See ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Exelon Corporation - General for
information about Exelon's corporate restructuring. As a result of the merger,
ComEd's consolidated financial information for the period after the merger has a
different cost basis than in previous periods. Material variances caused by the
different cost basis and restructuring have been disclosed where applicable. The
restructuring has had a significant impact on all components of ComEd's results
of operations. The estimated impact of the restructuring set forth herein
reflects the effects of removing the operations related to ComEd's nuclear
generating stations and obtaining energy and capacity from Generation under the
terms of the PPA for the three and six months ended June 30, 2000.
46
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Significant Operating Trends
Three Months Ended Components of Variance
June 30, --------------------------------------------
---------------------- Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
(In millions)
Operating Revenues $ 1,530 $ 1,711 $ (211) $ 30 $ (181)
Fuel and Purchased Power 586 470 100 16 116
Operating and Maintenance 248 526 (249) (29) (278)
Depreciation and Amortization 168 224 (79) 23 (56)
Taxes Other Than Income 69 125 (34) (22) (56)
------- ------- ------- ------- -------
Total Operating Expenses 1,071 1,345 (262) (12) (274)
------- ------- ------- ------- -------
Operating Income 459 366 51 42 93
------- ------- ------- ------- -------
Interest Expense (143) (139) 10 (14) (4)
Provision for Dividends on Company-
Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trusts Holding Solely the Company's
Subordinated Debt Securities (7) (7) -- -- --
Other, Net 22 47 -- (25) (25)
------- ------- ------- ------- -------
Income Before Income Taxes and
Extraordinary Items 331 267 61 3 64
Income Taxes 149 89 29 31 60
------- ------- ------- ------- -------
Net Income Before Extraordinary Items 182 178 32 (28) 4
Extraordinary Items (net of income taxes) -- (1) -- 1 1
------- ------- ------- ------- -------
Net Income 182 177 32 (27) 5
Preferred and Preference Stock Dividends -- (1) -- 1 1
------- ------- ------- ------- -------
Net Income on Common Stock $ 182 $ 176 $ 32 $ (26) $ 6
======= ======= ======= ======= =======
47
Net Income
Net income decreased $36 million, or 17%, as compared to the same period in
2000, excluding the effects of restructuring, an extraordinary item and
non-recurring merger costs. Net income increased $5 million, or 3%, after
reflecting the effects of the $32 million restructuring impact, the $1 million
extraordinary item, and $13 million of non-recurring merger costs ($8 million,
net of tax) incurred for the three months ended June 30, 2000.
Operating Revenues
Operating revenues increased $30 million, or 2%, for the three months ended June
30, 2001, compared to the same 2000 period, excluding the effects of
restructuring. Revenues from retail customers increased $14 million, before a
$21 million reduction due to a change in recording certain revenue taxes as
operating revenue and tax expense to collections recorded as liabilities
resulting from Illinois legislation. Retail revenues also reflect the negative
effect of the migration of non-residential customers to alternative electric
suppliers or the power purchase option. Additionally, the increase in operating
revenues reflects a $22 million increase in transmission service revenues and
the reversal of a $15 million reserve for revenue refunds to ComEd's municipal
customers as the result of a favorable FERC ruling.
Revenues from retail customers reflect a consistent amount of total kWh
sales for the three months ended June 30, 2001 as compared to the same 2000
period. Residential sales and small commercial and industrial sales, which
increased 3% and 5% respectively, were offset by a 10% decrease in large
commercial and industrial sales primarily due to a slowing regional economy. As
of June 30, 2001, approximately 14,000 retail customers had elected to purchase
energy from alternative electric suppliers or the power purchase option,
compared to approximately 7,000 customers as of June 30, 2000. Delivered kWhs to
such customers increased from approximately 3.2 billion to 4.6 billion, or from
16% to 23% of total quarterly retail sales.
Fuel and Purchased Power Expense
Fuel and purchased power expense increased $16 million, or 3%, compared to the
same 2000 period, excluding the effects of restructuring. The increase in fuel
and purchased power expense was primarily attributable to a slight increase in
the weighted average on-peak/off-peak cost per MWh.
Operating and Maintenance Expense
Operating and maintenance (O&M) expense decreased $29 million or 10% compared to
the same 2000 period, excluding the effects of restructuring. The decrease in
O&M expense is primarily related to a $15 million decrease in customer credit
and billing costs due to process improvements and a $20 million decrease in
storm restoration and service reliability costs, partially offset by higher
administrative and general costs.
48
Depreciation and Amortization Expense
Depreciation and amortization expense increased $23 million, or 16%, compared to
the same 2000 period, excluding the effects of restructuring. The increase in
depreciation and amortization expense was primarily attributable to goodwill
amortization of $32 million and an $8 million increase in depreciation expense
from increased plant in service due to continued transmission and distribution
capital improvements, partially offset by a $17 million decrease in regulatory
asset amortization.
Taxes Other Than Income
Taxes other than income decreased $22 million, or 24%, compared to the same 2000
period, excluding the effects of restructuring. The decrease in taxes other than
income was primarily attributable to the effect of the change in municipal
utility taxes from operating revenue and tax expense to collections recorded as
liabilities resulting from Illinois legislation.
Interest Charges
Interest charges consist of interest expense and provisions for dividends on
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts. Interest charges increased $14 million, or 10%, compared to the same
2000 period, excluding the effects of restructuring. The increase was primarily
due to increased interest accrued on estimated tax liabilities.
Other Income and Deductions
Other income and deductions, excluding interest charges, decreased $25 million,
or 53%, compared to the same 2000 period. The decrease was primarily
attributable to less interest income in 2001 reflecting a $850 million reduction
in notes receivable from an affiliate, Unicom Investment, Inc., in the fourth
quarter of 2000.
Income Taxes
The effective income tax rate was 45% for the three months ended June 30, 2001,
compared to 33.3% for the same 2000 period. The increase in the effective tax
rate was primarily attributable to goodwill amortization in 2001, which is not
deductible for tax purposes, and lower investment tax credit amortization
resulting from the application of purchase accounting in connection with the
merger.
Extraordinary Items
Extraordinary charges aggregating $2 million ($1 million, net of income taxes)
were incurred for the three months ended June 30, 2000, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt.
49
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Significant Operating Trends
Six Months Ended Components of Variance
June 30, ---------------------------------------------
------------------------ Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
(In millions)
Operating Revenues $ 2,976 $ 3,274 $ (350) $ 52 $ (298)
Fuel and Purchased Power 1,195 796 330 69 399
Operating and Maintenance 466 986 (486) (34) (520)
Depreciation and Amortization 334 596 (158) (104) (262)
Taxes Other Than Income 141 262 (65) (56) (121)
------- ------- ------- ------- -------
Total Operating Expenses 2,136 2,640 (379) (125) (504)
------- ------- ------- ------- -------
Operating Income 840 634 29 177 206
------- ------- ------- ------- -------
Interest Expense (284) (282) 20 (22) (2)
Provision for Dividends on Company-
Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trusts Holding Solely the Company's
Subordinated Debt Securities (15) (14) -- (1) (1)
Other, Net 59 183 -- (124) (124)
------- ------- ------- ------- -------
Income Before Income Taxes and
Extraordinary Items 600 521 49 30 79
Income Taxes 271 134 28 109 137
------- ------- ------- ------- -------
Net Income Before Extraordinary Items 329 387 21 (79) (58)
Extraordinary Items (net of income taxes) -- (4) -- 4 4
------- ------- ------- ------- -------
Net Income 329 383 21 (75) (54)
Preferred and Preference Stock Dividends -- (2) -- 2 2
------- ------- ------- ------- -------
Net Income on Common Stock $ 329 $ 381 $ 21 $ (73) $ (52)
======= ======= ======= ======= =======
Net Income
Net income decreased $89 million, or 21%, as compared to the same period in
2000, excluding the effects of restructuring, an extraordinary item and
non-recurring merger costs. Net income decreased $54 million, or 14%, after
reflecting the effects of the $21 million restructuring impact, the $4 million
extraordinary item,
50
and $17 million of non-recurring merger costs ($10 million, net of tax) incurred
for the six months ended June 30, 2000.
Operating Revenues
Operating revenues for the six months ended June 30, 2001 increased $52 million,
or 2%, compared to the same period in 2000, excluding the effects of
restructuring. Revenues from retail customers increased $7 million, before a $44
million reduction due to a change in recording certain revenue taxes as
operating revenue and tax expense to collections recorded as liabilities
resulting from Illinois legislation. Retail revenues also reflect the negative
effect of the migration of non-residential customers to alternative electric
suppliers or the power purchase option. Additionally, the increase in operating
revenues reflects a $37 million increase in transmission service revenues, the
reversal of a $15 million reserve for revenue refunds to ComEd's municipal
customers as the result of a favorable FERC ruling, and a $26 million increase
in revenues from sales to alternative electric suppliers.
Revenues from retail customers reflect a consistent amount of total KWh
sales for the six months ended June 30, 2001, as compared to the same 2000
period. Residential sales and small commercial and industrial sales, which both
increased 4%, were offset by a 9% decrease in large commercial and industrial
sales primarily due to a slowing regional economy. As of June 30, 2001,
approximately 14,000 retail customers had elected to purchase energy from
alternative electric suppliers or the power purchase option, compared to
approximately 7,000 customers as of June 30, 2000. Delivered kWhs to such
customers increased from approximately 5.8 billion to 8.7 billion, or 14% to 21%
of total retail sales for the six-month period.
Fuel and Purchased Power Expense
Fuel and purchased power expense for the six months ended June 30, 2001
increased $69 million, or 6%, compared to the same period in 2000, excluding the
effects of restructuring. The increase in fuel and purchased power expense was
primarily attributable to increases in MWhs purchased and the weighted average
on-peak/off-peak cost per MWh.
Operating and Maintenance Expense
O&M expense for the six months ended June 30, 2001 decreased $34 million, or 7%,
compared to the same period in 2000, excluding the effects of restructuring. The
decrease in O&M expense is primarily related to a $30 million decrease in
customer credit and billing costs due to process improvements and a $26 million
decrease in storm restoration and service reliability costs, partially offset by
higher administrative and general costs.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $104 million, or 24%, compared
to the same period in 2000, excluding the effects of restructuring. Regulatory
asset amortization decreased $182 million primarily due to the settlement of the
common stock forward purchase arrangement in the first quarter of 2000,
partially offset by goodwill amortization of $65 million and an increase in
51
depreciation expense of $13 million from increased plant in service due to
continued transmission and distribution capital improvements.
Taxes Other Than Income
Taxes other than income decreased $56 million, or 28%, from the same period in
2000, excluding the effects of restructuring. The decrease in taxes other than
income was primarily attributable to the effect of the change in municipal
utility taxes from operating revenue and tax expense to collections recorded as
liabilities resulting from Illinois legislation.
Interest Charges
Interest charges increased $23 million, or 8%, compared to the same period in
2000, excluding the effects of restructuring. The increase was primarily due to
increased interest accrued on estimated tax liabilities.
Other Income and Deductions
Other income and deductions, excluding interest charges, decreased $124 million,
or 68%, compared to the same period in 2000. The decrease was primarily
attributable to the $113 million gain on the forward share repurchase
arrangement recognized during the first quarter of 2000 and a $49 million
reduction in interest income in 2001 reflecting a $850 million reduction in
notes receivable from an affiliate, Unicom Investment, Inc., in the fourth
quarter of 2000, partially offset by the $38 million loss on the sale of Cotter
Corporation, a ComEd subsidiary, recognized during the first quarter of 2000.
Income Taxes
The effective income tax rate was 45.2% for the six months ended June 30, 2001,
compared to 25.7% for the same period in 2000. The increase in the effective tax
rate was primarily attributable to the effects of the gain on the forward share
repurchase arrangement recorded in the first quarter of 2000, which was not
recognized for tax purposes, goodwill amortization in 2001, which is not
deductible for tax purposes, and lower investment tax credit amortization
resulting from the application of purchase accounting in connection with the
merger.
Extraordinary Items
Extraordinary charges aggregating $6 million ($4 million, net of income taxes)
were incurred for the six-month period ended June 30, 2000, and consisted of
prepayment premiums and the write-off of unamortized deferred financing costs
associated with the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $998 million for the six months ended
June 30, 2001 compared to $177 million for the same six months
52
in 2000. The increase in cash flows was primarily attributable to a $1,111
million increase in working capital due to a decrease in income tax payments
from the first quarter of 2000, which included tax payments related to the 1999
gain on the sale of fossil plants, partially offset by $290 million in lower
cash flows from other operating activities following the transfer of assets to
Generation.
Cash flows used in investing activities were $336 million for the six
months ended June 30, 2001 compared to $678 million for the same six months in
2000. The decrease in cash flows used in investing activities in 2001 was
primarily attributable to lower plant investment as a result of the transfer of
assets to Generation and a $122 million increase in payables to affiliates.
Cash flows used in financing activities were $337 million for the six
months ended June 30, 2001 compared to $485 million for the same six months in
2000. The decrease in cash flows used in financing activities in 2001 was
primarily attributable to $70 million of mandatorily redeemable preferred stock
retirements and $35 million in nuclear fuel principal payments in the first six
months of 2000.
Effective January 1, 2001, Exelon contributed to ComEd a $1.0 billion
non-interest bearing receivable for the purpose of funding future income tax
payments resulting from the collection of instrument funding charges. See ITEM
1. Financial Statements - Note 12 - Related-Party Transactions.
At June 30, 2001, ComEd's capital structure, excluding the deduction
from shareholders' equity of the $1.0 billion receivable from Exelon, consisted
of 53% long-term debt, 45% of common stock, and 2% of preferred securities of
subsidiaries. Long-term debt included $2.5 billion of transitional trust notes
constituting obligations of certain consolidated special purpose entities
representing 18% of capitalization.
ComEd meets its short-term liquidity requirements primarily through the
issuance of commercial paper and borrowings under bank credit facilities. ComEd,
along with Exelon and PECO, entered into a $2 billion unsecured revolving credit
facility with a group of banks. ComEd has a $200 million sublimit under this
364-day credit facility and expects to use the credit facility principally to
support its $200 million commercial paper program. The credit facility requires
ComEd to maintain a debt to total capitalization ratio of 65% or less (excluding
transitional trust notes). At June 30, 2001, ComEd's debt to total
capitalization ratio on that basis was 46%. At June 30, 2001, ComEd had no
short-term borrowings.
53
PECO ENERGY COMPANY
- -------------------
GENERAL
On October 20, 2000, PECO became a wholly owned subsidiary of Exelon as a result
of the transactions relating to the merger of PECO and Unicom. Effective January
1, 2001, Exelon undertook a restructuring to separate its generation and other
competitive businesses from its regulated energy delivery business. See ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Exelon Corporation - General for information about Exelon's
corporate restructuring. The restructuring has had a significant impact on all
components of PECO's results of operations. As part of the restructuring, the
non-regulated operations and related assets and liabilities previously included
in PECO's Generation and Enterprises business segments were transferred to
separate subsidiaries of Exelon. As a result, effective January 1, 2001, PECO
operates in a single business segment, Energy Delivery, and its operations
consist of its retail electricity distribution and transmission business in
southeastern Pennsylvania and its natural gas distribution business in the
Pennsylvania counties surrounding the City of Philadelphia.
54
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Significant Operating Trends
Three Months Ended Components of Variance
June 30, -------------------------------------------
------------------------ Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
(In millions)
Operating Revenues $ 906 $ 1,385 $ (614) $ 135 $ (479)
Fuel and Purchased Power 394 476 (176) 94 (82)
Operating and Maintenance 126 456 (325) (5) (330)
Depreciation and Amortization 99 81 (41) 59 18
Taxes Other Than Income 41 63 (17) (5) (22)
------- ------- ------- ------- -------
Total Operating Expenses 660 1,076 (559) 143 (416)
------- ------- ------- ------- -------
Operating Income 246 309 (55) (8) (63)
------- ------- ------- ------- -------
Interest Expense (117) (116) 13 (14) (1)
Company-Obligated Mandatorily Redeemable
Preferred Securities of a Partnership,
which holds Solely Subordinated
Debentures of the Company (2) (2) -- -- --
Equity in Earnings (Losses) of
Unconsolidated Affiliates, Net -- (1) 1 -- 1
Other, Net 2 7 (4) (1) (5)
------- ------- ------- ------- -------
Income Before Income Taxes and
Extraordinary Item 129 197 (45) (23) (68)
Income Taxes 44 75 (15) (16) (31)
------- ------- ------- ------- -------
Net Income Before Extraordinary Item 85 122 (30) (7) (37)
Extraordinary Item (net of income taxes) -- (3) 3 -- 3
------- ------- ------- ------- -------
Net Income 85 119 (27) (7) (34)
Preferred Stock Dividends (3) (3) -- -- --
------- ------- ------- ------- -------
Net Income on Common Stock $ 82 $ 116 $ (27) $ (7) $ (34)
======= ======= ======= ======= =======
55
Net Income
Net income decreased $7 million, or 8%, for the three months ended June 30,
2001, excluding the effects of the restructuring as compared to the same 2000
period.
Operating Revenue
Operating revenue for the three months ended June 30, 2001 increased $135
million, or 18%, as compared to the same 2000 period, excluding the effects of
the restructuring. The increase in operating revenue was attributable to higher
electric revenue of $107 million and additional gas revenue of $28 million. The
increase in electric revenue was primarily attributable to $112 million from
customers in Pennsylvania selecting or returning to PECO as their electric
generation supplier and rate adjustments, partially offset by a decrease of $5
million from unfavorable weather conditions. Total kWh sales to retail customers
decreased 2% compared to the same 2000 period. Large commercial and industrial
sales decreased 3% and residential sales decreased 1%. These decreases were
partially offset by an increase in small commercial and industrial sales of 2%.
The increase in regulated gas revenues was primarily attributable to $28 million
related to higher natural gas prices, partially offset by a decrease of $2
million related to the elimination of the gross receipts tax on gas sales
effective July 1, 2000.
Fuel and Purchased Power Expense
Fuel and purchased power expense for the three months ended June 30, 2001
increased $94 million, or 31%, as compared to the same 2000 period, excluding
the effects of the restructuring. The increase in fuel and purchased power
expense was primarily attributable to $57 million from customers in Pennsylvania
selecting or returning to PECO as their electric generation supplier, $29
million from increased prices related to gas and $12 million in additional PJM
ancillary charges.
Operating and Maintenance Expense
O&M expense for the three months ended June 30, 2001 decreased $5 million, or
4%, as compared to the same 2000 period, excluding the effects of the
restructuring. The decrease in O&M expense was primarily attributable to a $6
million reduction in employee fringe benefits expense.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2001
increased $59 million, or 148%, as compared to the same 2000 period, excluding
the effects of the restructuring. The increase was primarily attributable to $51
million of additional amortization of PECO's CTC and an $8 million increase in
depreciation expense associated with additional plant in service. The additional
amortization of the CTC is in accordance with PECO's original settlement under
the Pennsylvania Electricity Generation Customer Choice and Competition Act
(Pennsylvania Competition Act).
56
Taxes Other Than Income
Taxes other than income for the three months ended June 30, 2001 decreased $5
million, or 11%, as compared to the same 2000 period, excluding the effects of
the restructuring. The decrease was attributable to $3 million from the
reduction of the gross receipts tax rate on electric sales in 2001 and $2
million related to the elimination of gross receipts tax on gas sales effective
July 1, 2000.
Interest Charges
Interest charges consist of interest expense and distributions on
Company-Obligated Mandatorily Redeemable Preferred Securities of a Partnership
(COMRPS). Interest charges for the three months ended June 30, 2001 increased
$14 million, or 14%, as compared to the same 2000 period, excluding the effects
of the restructuring. The increase was primarily attributable to interest of $5
million on the additional transition bonds issued in May 2000 to securitize a
portion of PECO's stranded cost recovery and interest expense related to a loan
from an affiliate in 2001 of $2 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates
As part of the corporate restructuring, PECO's unconsolidated affiliates were
transferred to Generation and Enterprises.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in earnings
(losses) of unconsolidated affiliates for the three months ended June 30, 2001
decreased by $1 million, as compared to the same 2000 period, excluding the
effects of the restructuring.
Income Taxes
The effective tax rate was 34.1% for the three months ended June 30, 2001 as
compared to 38.1% for the same 2000 period. The decrease in the effective income
tax rate was primarily attributable to tax benefits associated with the
implementation of state tax planning strategies.
Preferred Stock Dividends
Preferred stock dividends for the three months ended June 30, 2001 were
consistent with the same 2000 period.
57
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Significant Operating Trends
Six Months Ended Components of Variance
June 30, -----------------------------------
---------------- Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
(In millions)
Operating Revenues $1,957 $2,738 $(1,118) $337 $(781)
Fuel and Purchased Power 882 939 (332) 275 (57)
Operating and Maintenance 258 847 (599) 10 (589)
Depreciation and Amortization 200 161 (80) 119 39
Taxes Other Than Income 84 130 (38) (8) (46)
------- ------- ------ ----- -------
Total Operating Expenses 1,424 2,077 (1,049) 396 (653)
------- ------- ------ ----- -------
Operating Income 533 661 (69) (59) (128)
------- ------- ------ ----- -------
Interest Expense (227) (220) 28 (35) (7)
Company-Obligated Mandatorily Redeemable
Preferred Securities of a Partnership,
which holds Solely Subordinated
Debentures of the Company (5) (5) -- -- --
Equity in Earnings (Losses) of
Unconsolidated Affiliates, Net -- 3 (3) -- (3)
Other, Net 18 29 (21) 10 (11)
------- ------- ------ ----- -------
Income Before Income Taxes, Extraordinary Item
and Cumulative Effect of a Change of
Accounting Principle 319 468 (65) (84) (149)
Income Taxes 112 176 (22) (42) (64)
------- ------- ------ ----- -------
Net Income Before Extraordinary Item and
Cumulative Effect of a Change of
Accounting Principle 207 292 (43) (42) (85)
Extraordinary Item (net of income taxes) -- (3) 3 -- 3
Cumulative Effect of a Change
of Accounting Principle -- 24 (24) -- (24)
------- ------- ------ ----- -------
Net Income 207 313 (64) (42) (106)
Preferred Stock Dividends (5) (5) -- -- --
------- ------- ------ ----- -------
Net Income on Common Stock $ 202 $ 308 $ (64) $ (42) $ (106)
======= ======= ====== ===== =======
Net Income
Net income decreased $42 million, or 17%, for the six months ended June 30,
2001, excluding the effects of the restructuring as compared to the same 2000
period.
58
Operating Revenue
Operating revenue for the six months ended June 30, 2001 increased $337 million,
or 21%, as compared to the same 2000 period, excluding the effects of the
restructuring. The increase in operating revenue was attributable to higher
electric revenue of $215 million and additional gas revenue of $122 million. The
increase in electric revenue was primarily attributable to $205 million from
customers in Pennsylvania selecting or returning to PECO as their electric
generation supplier and rate adjustments and an $11 million settlement of
competitive transition charges by a large customer. Total kWh sales to retail
customers remained consistent compared to the same 2000 period. Residential
sales increased 2% and small commercial and industrial sales increased 3%. These
increases were offset by a decrease in large commercial and industrial sales of
3%. The increase in regulated gas revenue was primarily attributable to
increases of $108 million related to higher natural gas prices and $10 million
as a result of favorable weather conditions, partially offset by $7 million
related to the elimination of the gross receipts tax on gas sales effective July
1, 2000.
Fuel and Purchased Power Expense
Fuel and purchased power expense for the six months ended June 30, 2001
increased $275 million, or 45%, as compared to the same 2000 period, excluding
the effects of the restructuring. The increase in fuel and purchased power
expense was primarily attributable to $135 million from customers in
Pennsylvania selecting or returning to PECO as their electric generation
supplier, $97 million from increased prices related to gas, $23 million in
additional PJM ancillary charges and $9 million as a result of favorable weather
conditions.
Operating and Maintenance Expense
O&M expense for the six months ended June 30, 2001 increased $10 million, or 4%,
as compared to the same 2000 period, excluding the effects of the restructuring.
The increase in O&M expense was primarily attributable to $6 million of
incremental costs related to a storm in the first quarter of 2001 and $4 million
associated with the write-off of excess and obsolete inventory.
Depreciation and Amortization Expense
Depreciation and amortization expense for the six months ended June 30, 2001
increased $119 million, or 147%, as compared to the same 2000 period, excluding
the effects of the restructuring. The increase was primarily attributable to
$102 million of additional amortization of PECO's CTC and a $17 million increase
in depreciation expense associated with additional plant in service. The
additional amortization of the CTC is in accordance with PECO's original
settlement under the Pennsylvania Competition Act.
59
Taxes Other Than Income
Taxes other than income for the six months ended June 30, 2001 decreased $8
million, or 9%, as compared to the same 2000 period, excluding the effects of
the restructuring. The decrease was primarily attributable to the elimination of
gross receipts tax on gas sales effective July 1, 2000.
Interest Charges
Interest charges for the six months ended June 30, 2001 increased $35 million,
or 18%, as compared to the same 2000 period, excluding the effects of the
restructuring. The increase was primarily attributable to interest of $21
million on the additional transition bonds issued in May 2000 to securitize a
portion of PECO's stranded cost recovery and interest expense related to a loan
from an affiliate in 2001 of $8 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates
As part of the corporate restructuring, PECO's unconsolidated affiliates were
transferred to Generation and Enterprises.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in earnings
(losses) of unconsolidated affiliates for the six months ended June 30, 2001
increased by $10 million as compared to the same 2000 period, excluding the
effects of the restructuring. The increase was primarily attributable to a gain
on the settlement of an interest rate swap of $6 million and the favorable
settlement of a customer contract of $3 million.
Income Taxes
The effective tax rate was 35.1% for the six months ended June 30, 2001 as
compared to 37.6% for the same 2000 period. The decrease in the effective tax
rate was primarily attributable to tax benefits associated with the
implementation of state tax planning strategies.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2000, PECO recorded a benefit of $40 million ($24 million, net of
tax) representing the cumulative effect of a change in accounting method for
nuclear outage costs in conjunction with the synchronization of accounting
policies in connection with the merger.
Preferred Stock Dividends
Preferred stock dividends for the six months ended June 30, 2001 were consistent
with the same 2000 period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $321 million for the six months ended
June 30, 2001 as compared to $339 million in the same 2000 period. The decrease
was attributable to less cash generated by operations of $94 million, partially
offset by an increase in working capital of $76 million.
60
Cash flows used in investing activities were $87 million for the six
months ended June 30, 2001 as compared to $449 million in the same 2000 period.
The decrease was attributable to lower capital expenditures of $165 million, a
decrease in other investing activities of $106 million and the acquisition of
four infrastructure services businesses in 2000 of $91 million.
Cash flows used in financing activities were $257 million for the six
months ended June 30, 2001 as compared to cash flows provided by financing
activities of $149 million for the same period in 2000. The decrease in cash
flows from financing activities was primarily attributable to short-term debt
repayments of $122 million as compared to borrowings of $189 million in the same
2000 period and debt service including refinancings of $120 million. Cash flows
from financing activities in 2000 includes net proceeds of $120 million from the
securitization of $1 billion of stranded cost recovery in May 2000 and the use
of related proceeds, partially offset by $61 million of debt service. These
decreases were partially offset by $75 million of borrowings from affiliates and
$31 million of proceeds from the settlement of interest rate swaps.
Effective January 1, 2001, Exelon contributed to PECO a $2.0 billion
non-interest bearing receivable for the purpose of funding future income tax
payments resulting from collection of intangible transition charges. See ITEM 1.
Financial Statements - Note 12 - Related-Party Transactions.
At June 30, 2001, PECO's capital structure, excluding the deduction
from shareholders' equity of the $2.0 billion receivable from Exelon, consisted
of 25% common equity, 1% notes payable, 3% preferred stock and COMRPS (which
comprised 1% of PECO's total capitalization structure), and 71% long-term debt
including transition bonds issued by PECO Energy Transition Trust (PETT).
Long-term debt included $4.7 billion of transition bonds representing 54% of
capitalization.
PECO meets its short-term liquidity requirements primarily through the
issuance of commercial paper and borrowings under bank credit facilities. PECO,
along with Exelon and ComEd, entered into a $2 billion unsecured revolving
credit facility with a group of banks. PECO has an $800 million sublimit under
this 364-day credit facility and expects to use the credit facility principally
to support its $800 million commercial paper program. This credit facility
requires PECO to maintain a debt to total capitalization ratio of 65% or less
(excluding transition bonds and the receivable from parent recorded in PECO's
shareholders' equity). As a result of the corporate restructuring, at June 30,
2001, PECO's debt to total capitalization ratio on that basis was 36%. At June
30, 2001, PECO had outstanding $41 million of notes payable consisting
principally of commercial paper.
61
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
EXELON
- ------
Exelon's activities expose it to a variety of market risks primarily related to
the effects of changes in commodity prices and interest rates. These financial
exposures are monitored and managed by Exelon as an integral part of its overall
risk-management program.
Exelon's commodity-price risk management strategy includes the use of
derivatives to minimize significant, unanticipated earnings and cash flow
fluctuations caused by commodity-price volatility. Exelon utilizes contracts for
the forward purchase and sale of energy and energy-related commodities to manage
its generation and physical delivery obligations to its retail and wholesale
customers. Energy option contracts and energy and energy-related swap agreements
are used to limit the price risk associated with these forward contracts.
Exelon's interest-rate risk management strategy includes the use of
derivative instruments to minimize significant, unanticipated earnings and cash
flow fluctuations caused by interest-rate volatility. Exelon uses a combination
of fixed-rate and variable-rate debt to reduce interest-rate exposure.
Interest-rate swaps may be used to adjust exposure when deemed appropriate,
based on market conditions. These strategies are employed to minimize the cost
of capital.
By using derivative financial instruments to hedge exposures to changes
in energy prices and interest rates, Exelon exposes itself to credit risk and
market risk. Credit risk is the risk of a counterparty failing to perform
according to contract terms. When the value of a contract is positive, the
counterparty owes Exelon, which creates repayment risk for Exelon. When the
value of a derivative contract is negative, Exelon owes the counterparty and,
therefore, the derivative contract does not create repayment risk. Exelon
minimizes the credit (or repayment) risk by (1) entering into transactions with
high-quality counterparties, (2) limiting the amount of exposure to each
counterparty, (3) monitoring the financial condition of its counterparties, and
(4) seeking credit enhancements to improve counterparty credit quality.
Market risk is the effect on the value of Exelon's commitments that
result from a change in interest rates or commodity prices. The market risk
associated with interest-rate, energy and energy-related contracts is managed by
the establishment and monitoring of parameters that limit the types and degree
of market risk that may be undertaken.
Exelon's derivatives activities are subject to the management,
direction, and control of the corporate Risk Management Committee (RMC). The RMC
is chaired by Exelon's chief risk officer and includes the chief financial
officer, general counsel, treasurer, vice president of corporate planning and
officers from each of the business units. The RMC reports to the board of
directors on the scope of Exelon's derivative activities. The RMC (1) sets forth
risk management philosophy and objectives through a corporate policy and (2)
establishes procedures for control and valuation, counterparty credit approval,
and the monitoring and reporting of derivative activity.
62
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS No. 133) to establish accounting and
reporting standards for derivatives. The new standard requires recognizing all
derivatives as either assets or liabilities on the balance sheet at their fair
value and specifies the accounting for changes in fair value depending upon the
intended use of the derivative. On January 1, 2001, Exelon recognized a non-cash
gain of $12 million, net of income taxes, in earnings and deferred a non-cash
gain of $44 million, net of income taxes, in accumulated other comprehensive
income, a component of shareholders' equity to reflect the initial adoption of
SFAS No. 133, as amended.
During the three and six months ended June 30, 2001, Exelon recognized
net gains of $5 million ($3 million, net of income taxes) and $22 million ($13
million, net of income taxes), respectively, relating to mark-to-market (MTM)
adjustments of certain power purchase and sale contracts pursuant to SFAS No.
133. MTM adjustments on power purchase contracts are reported in fuel and
purchased power and MTM adjustments on power sale contracts are reported as
operating revenues in the Condensed Consolidated Statements of Income and
Comprehensive Income. During the three and six months ended June 30, 2001,
Exelon recognized net losses aggregating $6 million ($4 million net of income
taxes) on derivative instruments entered into for trading purposes. Exelon
commenced financial trading in the second quarter of 2001. These losses are
reported as other income and deductions in the Condensed Consolidated Statements
of Income and Comprehensive Income. During the three and six months ended June
30, 2001, no amounts were reclassified from accumulated other comprehensive
income into earnings as a result of forecasted energy commodity transactions no
longer being probable. For the six months ended June 30, 2001, $6 million ($4
million after taxes) was reclassified from accumulated other comprehensive
income into earnings as a result of forecasted financing transactions no longer
being probable.
PECO
- ----
Interest Rate Risk
PECO has entered into interest rate swaps to manage interest rate
exposure associated with two classes of floating rate transition bonds issued to
securitize stranded cost recovery. At June 30, 2001, these interest rate swaps
had a fair market value exposure of $12 million based on the present value
difference between the contract and market rates at June 30, 2001.
The aggregate fair value exposure of the transition bond derivative
instruments that would have resulted from a hypothetical 50 basis point decrease
in the spot yield at June 30, 2001 is estimated to be $15 million. If the
derivative instruments had been terminated at June 30, 2001, this estimated fair
value represents the amount to be paid by PECO to the counterparties.
The aggregate fair value exposure of the transition bond derivative
instruments that would have resulted from a hypothetical 50 basis point increase
in the spot yield at June 30, 2001
63
is estimated to be $8 million. If the derivative instruments had been terminated
at June 30, 2001, this estimated fair value represents the amount to be paid by
PECO to the counterparties.
In connection with the refinancing of a portion of PETT's two variable
rate series of transition bonds in the first quarter of 2001, PECO settled $318
million of a forward starting interest rate swap resulting in a $6 million gain
which is reflected in other income. Also in connection with the refinancing,
PECO settled a portion of the interest rate swaps and the remaining portion of
the forward starting interest rate swaps resulting in net gains of $25 million
which were deferred and are being amortized over the expected remaining lives of
the related debt.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in Exelon's Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 2000 (2000 Form 10-K),
on May 27, 1998, the United States Department of Justice, on behalf of the Rural
Utilities Service and the Chapter 11 Trustee for the Cajun Electric Power
Cooperative, Inc. (Cajun), filed an action claiming breach of contract against
PECO in the United States District Court for the Middle District of Louisiana
arising out of PECO's termination of the contract to purchase Cajun's interest
in the River Bend nuclear power plant and seeking damages of $50 million, plus
interest and consequential damages. Trial is scheduled to commence on September
10, 2001. In connection with the corporate restructuring, the responsibility for
any liablility related to this matter was transferred to Generation.
As previously reported in Exelon's 2000 Form 10-K, Exelon is involved
in tax appeals challenging the assessed value of two of Generation's nuclear
facilities, Limerick Generating Station (Montgomery County, PA) and Peach Bottom
Atomic Power Station (Peach Bottom) (York County, PA). AmerGen is involved in a
tax appeal challenging the assessed value of Unit No. 1 at Three Mile Island
Nuclear Station (Dauphin County). As of January 11, 2001, Exelon and the
Montgomery County taxing authorities entered into a stipulation agreement
providing for partial payment of the taxes pending the interim determination of
the appeal. As of March 29, 2001, AmerGen and the York County taxing authorities
entered into a stipulation agreement providing for partial payment of the taxes
pending the interim determination of the appeal.
During 1989 and 1991, actions were brought in federal and state courts
in Colorado against ComEd and its subsidiary, Cotter Corporation (Cotter),
seeking unspecified damages and injunctive relief based on allegations that
Cotter permitted radioactive and other hazardous material to be released from
its mill into areas owned or occupied by the plaintiffs, resulting in property
damage and potential adverse health effects. In 1994, a federal jury returned
nominal dollar verdicts against Cotter on eight plaintiffs' claims in the 1989
cases, which verdicts were upheld on appeal. The remaining claims in the 1989
actions were settled or dismissed. In 1998, a jury verdict was rendered against
Cotter in favor of 14 of the plaintiffs in the 1991 cases, totaling
approximately $6 million in compensatory and punitive damages, interest and
medical
64
monitoring. On appeal, the Tenth Circuit Court of Appeals reversed the jury
verdict, and remanded the case for new trial. These plaintiffs' cases were
consolidated with the remaining 26 plaintiffs' cases, which had not been tried.
The consolidated trial was completed on June 28, 2001. The jury returned a
verdict against Cotter and awarded $16 million in various damages. Cotter will
appeal the verdict.
In November 2000, another trial involving a separate sub-group of 13
plaintiffs, seeking $19 million in damages plus interest was completed in
federal district court in Denver. The jury awarded nominal damages of $42,500 to
11 of 13 plaintiffs, but awarded no damages for any personal injury or health
claims, other than requiring Cotter to perform periodic medical monitoring at
minimal cost. The plaintiffs appealed the verdict to the Tenth Circuit Court of
Appeals.
On February 18, 2000, ComEd sold Cotter to an unaffiliated third party.
As part of the sale, ComEd agreed to indemnify Cotter for any liability incurred
by Cotter as a result of these actions, as well as any liability arising in
connection with the West Lake Landfill discussed in the next paragraph. In
connection with the corporate restructuring, the responsibility to indemnify
Cotter for any liability related to these matters was transferred to Generation.
The United States Environmental Protection Agency (EPA) has advised
Cotter that it is potentially liable in connection with radiological
contamination at a site known as the West Lake Landfill in Missouri. Cotter is
alleged to have disposed of approximately 39,000 tons of soils mixed with 8,700
tons of leached barium sulfate at the site. Cotter, along with three other
companies identified by the EPA as potentially responsible parties (PRPs), is
reviewing a draft feasibility study that recommends capping the site. The PRPs
are also engaged in discussions with the State of Missouri and the EPA. The
estimated costs of remediation for the site are $10-15 million. Once a final
feasibility study is complete and a remedy selected, it is expected that the
PRPs will agree on an allocation of responsibility for the costs. Until an
agreement is reached, Exelon cannot predict its share of the costs.
As previously reported in Exelon's 2000 Form 10-K, and Exelon's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (March 2001
Form 10-Q), three of ComEd's wholesale municipal customers filed a complaint and
request for refund with the United States Federal Energy Regulatory Commission
(FERC) alleging that ComEd failed to properly adjust its rates, as provided for
under the terms of the electric service contracts with the municipal customers
and to track certain refunds made to ComEd's retail customers in the years 1992
through 1994. In the third quarter of 1998, FERC granted the complaint and
directed that refunds be made, with interest. ComEd filed a request for
rehearing. On April 30, 2001, FERC issued an order granting rehearing in which
it determined that its 1998 order had been erroneous and that no refunds were
due from ComEd to the municipal customers. On June 29, 2001, FERC denied the
customers' requests for rehearing of the order granting rehearing. The April 30,
2001 FERC order is subject to appeal to the federal circuit court.
65
As previously reported in Exelon's 2000 Form 10-K and the March 2001
Form 10-Q, in August 1999, three class action lawsuits were filed and
subsequently consolidated in the Circuit Court of Cook County, Illinois seeking
damages for personal injuries, property damage and economic losses from ComEd
related to a series of service interruptions that occurred in the summer of
1999. ComEd filed a motion to dismiss the complaints. On April 24, 2001, the
court dismissed four of the five counts of the consolidated complaint without
prejudice and the sole remaining count was dismissed in part. On June 1, 2001,
plaintiffs filed a second amended consolidated complaint.
On April 18, 2001, the Godley Park District filed suit in Will County
Circuit Court against ComEd and Exelon alleging that oil spills at Braidwood
Station have contaminated the Park District's water supply. The complaint seeks
actual damages, punitive damages of $100 million and statutory penalties. The
complaint was not served on ComEd/Exelon until July 12, 2001. Although ComEd and
Exelon have not yet filed a response to the complaint, the companies will
contest liability and the damages sought by the plaintiff.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Exelon
- ------
Information regarding the submission of matters to a vote of security holders is
presented in the March 2001 Form 10-Q.
ComEd and PECO
- --------------
None.
ITEM 5. OTHER INFORMATION
As previously reported in Exelon's 2000 Form 10-K and the March 2001 Form 10-Q,
approximately 7,400 employees are covered by a collective bargaining agreement
with Local 15 of the International Brotherhood of Electrical Workers (Local 15),
which was scheduled to expire on March 31, 2001. On April 20, 2001, Exelon and
Local 15 officials signed an agreement for a new three-year collective
bargaining agreement, effective April 1, 2001 through March 31, 2004. Local 15
membership ratified the agreement as of June 8, 2001.
On June 1, 2001, ComEd filed with the ICC new proposed rates for
delivery services. The proposed rates include rates for residential customers,
who will be eligible to take delivery services for the first time in 2002, and
revised rates for nonresidential customers. Although the proposed rates for
nonresidential customers would result in an increase over the rates currently in
effect, the ICC has authority to investigate and modify the rates prior to
approving them. A final ICC order is expected by May 1, 2002.
As previously reported in Exelon's 2000 Form 10-K, Exelon entered into
an agreement with the United States Department of Energy (DOE) relating to Peach
Bottom to address the DOE's failure to begin removal of spent nuclear fuel in
January 1998, as required by contract. In November 2000, several utilities with
nuclear power plants filed a Joint Petition for Review against the DOE with the
United States Court of Appeals for the Eleventh Circuit seeking to invalidate
the portion of that agreement providing for credits against nuclear waste fund
payments. In April 2001, an individual plaintiff filed suit against officials of
the DOE in the United States District Court for the Middle District of
Pennsylvania, alleging that the agreement was entered by the DOE in violation of
procedural requirements of the Administrative Procedure Act and the National
Environmental Policy Act. Exelon has intervened as a defendant in both
proceedings.
66
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the three months ended June 30, 2001, Exelon filed the
following Current Reports on Form 8-K:
Date of earliest event reported:
April 4, 2001 reporting information under "ITEM 5. OTHER
EVENTS" regarding a presentation at Salomon Smith Barney's
Global Power & Merchant Energy Conference to explain Exelon's
integrated strategy involving its Energy Delivery, Generation
and Power Marketing, and Enterprises businesses.
Date of earliest event reported:
April 24, 2001 reporting information under "ITEM 5. OTHER
EVENTS" regarding Exelon's earnings release for the first
quarter of 2001.
Date of earliest event reported:
May 3, 2001 reporting information under "ITEM 5. OTHER EVENTS"
that Exelon announced that it agreed to sell $500 million
unsecured senior notes to partially refinance a term loan due
October 12, 2001. "ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS"
includes the Purchase Agreement, the Officer's Certificate
setting forth the terms of the senior notes, the form of
global certificate, and the Computation of Ratios of Earnings
to Fixed Charges for Exelon.
Date of earliest event reported:
June 13, 2001 reporting information under "ITEM 9. REGULATION
FD DISCLOSURE" regarding a presentation at the Deutsche Bank
Alex Brown Electric Power Conference in New York to explain
Exelon's earnings target and integrated strategy.
Date of earliest event reported:
June 14, 2001 reporting information under "ITEM 5. OTHER
EVENTS" that Exelon Generation Company, LLC, sold $700 million
of unsecured senior notes. The proceeds will be used to repay
an intercompany obligation to Exelon. "ITEM 9. REGULATION FD
DISCLOSURE" includes a discussion of Exelon Generation's
structure, strategy and historical data.
67
SIGNATURES
----------
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXELON CORPORATION
/s/ Jean H. Gibson
--------------------------------
JEAN H. GIBSON
Vice President and
Vice President and
Controller
(Chief Accounting Officer)
COMMONWEALTH EDISON COMPANY
/s/ Robert E. Berdelle
--------------------------------
ROBERT E. BERDELLE
Vice President and
Vice President and
Chief Financial Officer
(Chief Accounting Officer)
PECO ENERGY COMPANY
/s/ Thomas P. Hill, Jr.
--------------------------------
THOMAS P. HILL, JR.
Vice President and
Vice President and
Chief Financial Officer
(Chief Accounting Officer)
Date: August 14, 2001
68
