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 21 of
the Notes to Consolidated Financial Statements and other factors discussed in
Exelon's filings with the SEC. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
Report. Exelon undertakes no obligation to publicly release any revision to
these forward-looking statements to reflect events or circumstances after the
date of this Report.
Exhibit 99-2
Exelon Corporation and Subsidiary Companies Financial Statements and
Supplementary Data
Report of Independent Accountants
To the Shareholders and Board of Directors of
Exelon Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and changes in shareholders'
equity and comprehensive income present fairly, in all material respects,
the financial position of Exelon Corporation and Subsidiary Companies (Exelon)
at December 31, 2001 and December 31, 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
Exelon's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, Exelon acquired
Unicom Corporation on October 20, 2000 in a business combination accounted for
under the purchase method of accounting. The results of Unicom Corporation are
included in the consolidated financial statements since the acquisition date.
As discussed in Note 6 to the consolidated financial statements, Exelon changed
its method of accounting for nuclear outage costs in 2000.
As discussed in Note 1 to the consolidated financial statements, Exelon changed
its method of accounting for derivative instruments and hedging activities
effective January 1, 2001.
As discussed in Note 2 to the consolidated financial statements, Exelon restated
its financial statements to correct deferred income taxes associated with
unrealized losses on nuclear decommissioning trust fund securities and to
reflect Exelon's share of other comprehensive income in certain equity
investees.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
January 29, 2002, except for Note 26 for which the date is March 1, 2002 and
except for Note 2 for which the date is October 18, 2002.
Consolidated Statements of Income
Exelon Corporation and Subsidiary Companies
For the Years Ended December 31,
-------------------------------------------
in millions, except per share data 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Operating Revenues $ 15,140 $ 7,499 $ 5,478
Operating Expenses
Fuel and Purchased Power 5,313 2,606 2,152
Operating and Maintenance 4,393 2,310 1,454
Merger-Related Costs -- 276 --
Depreciation and Amortization 1,449 458 237
Taxes Other Than Income 623 322 262
- ----------------------------------------------------------------------------------------------------------
Total Operating Expenses 11,778 5,972 4,105
- ----------------------------------------------------------------------------------------------------------
Operating Income 3,362 1,527 1,373
- ----------------------------------------------------------------------------------------------------------
Other Income and Deductions
Interest Expense, net of amounts capitalized (1,107) (608) (396)
Distributions on Preferred Securities of Subsidiaries (49) (24) (33)
Equity in Earnings (Losses) of Unconsolidated Affiliates 62 (41) (38)
Other, Net 79 53 59
- ----------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (1,015) (620) (408)
- ----------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Changes in Accounting
Principles 2,347 907 965
Income Taxes 931 341 358
- ----------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items and Cumulative Effects
of Changes in Accounting Principles 1,416 566 607
Extraordinary Items (net of income taxes of $2, and
$25 for 2000, and 1999, respectively) -- (4) (37)
Cumulative Effect of Changes in Accounting
Principles (net of income taxes of $8 and $16 in
2001 and 2000, respectively) 12 24 --
- ----------------------------------------------------------------------------------------------------------
Net Income $ 1,428 $ 586 $ 570
==========================================================================================================
Average Shares of Common Stock Outstanding 320 202 196
==========================================================================================================
Earnings Per Common Share:
Basic:
Income Before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles $ 4.42 $ 2.81 $ 3.10
Extraordinary Items -- (0.02) (0.19)
Cumulative Effect of Changes in Accounting Principles 0.04 0.12 --
- ----------------------------------------------------------------------------------------------------------
Net Income $ 4.46 $ 2.91 $ 2.91
==========================================================================================================
Diluted:
Income Before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles $ 4.39 $ 2.77 $ 3.08
Extraordinary Items -- (0.02) (0.19)
Cumulative Effect of Changes in
Accounting Principles 0.04 0.12 --
- ----------------------------------------------------------------------------------------------------------
Net Income $ 4.43 $ 2.87 $ 2.89
==========================================================================================================
Dividends Per Common Share $ 1.82 $ 0.91 $ 1.00
==========================================================================================================
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Exelon Corporation and Subsidiary Companies
For the Years Ended December 31,
------------------------------------------
in millions 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 1,428 $ 586 $ 570
Adjustments to reconcile Net Income to Net
Cash Flows provided by Operating Activities:
Depreciation and Amortization 1,834 607 358
Extraordinary Items (net of income taxes) -- 4 37
Cumulative Effects of Changes in Accounting
Principles (net of income taxes) (12) (24) --
Provision for Uncollectible Accounts 145 89 59
Deferred Income Taxes (68) 193 7
Merger-Related Costs -- 276 --
Employee Severance Costs 46 -- --
Deferred Energy Costs 29 (79) 23
Equity in (Earnings) Losses of Unconsolidated Affiliates (62) 41 38
Net Realized Losses on Nuclear
Decommissioning Trust Funds 127 -- --
Other Operating Activities 20 (169) 6
Changes in Working Capital:
Accounts Receivable 257 (445) (159)
Repurchase of Accounts Receivable -- (50) (150)
Inventories (33) 49 (43)
Accounts Payable, Accrued Expenses & Other Current Liabilities (129) (2) 149
Other Current Assets 33 20 (12)
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 3,615 1,096 883
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in Plant (2,041) (752) (491)
Unicom Merger Consideration -- (507) --
Proceeds from Direct Financing Leases -- 1,228 --
Investment in Sithe Energies, Inc. -- (704) --
InfraSource Acquisitions (30) (245) (222)
Investments in and Advances to Joint Ventures -- -- (118)
Proceeds from Nuclear Decommissioning Trust Funds 1,624 265 69
Investment in Nuclear Decommissioning Trust Funds (1,863) (380) (95)
Other Investing Activities (82) (108) (29)
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (2,392) (1,203) (886)
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of Long-Term Debt, net of issuance costs 2,270 1,021 4,170
Common Stock Repurchases -- (501) (1,693)
Retirement of Long-Term Debt (1,860) (665) (1,343)
Change in Short-Term Debt (1,013) 10 (388)
Redemption of Preferred Securities of Subsidiaries (17) (19) (258)
Dividends on Common Stock (583) (157) (196)
Change in Restricted Cash (58) (140) (174)
Proceeds from Employee Stock Plans 39 67 19
Capital Lease Payments -- -- (139)
Other Financing Activities (42) (11) 11
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Financing Activities (1,264) (395) 9
- ----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (41) (502) 6
Cash and Cash Equivalents at beginning of period 526 54 48
Cash Acquired in Unicom Merger -- 974 --
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at end of period $ 485 $ 526 $ 54
==========================================================================================================
See Notes to Consolidated Financial Statements
Exelon Corporation and Subsidiary Companies
Consolidated Balance Sheets
at December 31,
----------------------------------------
in millions 2001 2000
(Restated)
(See Note 2.)
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and Cash Equivalents $ 485 $ 526
Restricted Cash 372 314
Accounts Receivable, net
Customer 1,687 2,137
Other 472 371
Inventories, at average cost
Fossil Fuel 222 157
Materials and Supplies 249 297
Deferred Income Taxes 23 62
Other 272 287
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,782 4,151
- -------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net 13,742 12,936
Deferred Debits and Other Assets
Regulatory Assets 6,423 7,135
Nuclear Decommissioning Trust Funds 3,165 3,109
Investments 1,623 1,546
Goodwill, net 5,335 5,186
Other 708 723
- -------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 17,254 17,699
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 34,778 $ 34,786
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Notes Payable $ 360 $ 1,373
Long-Term Debt Due Within One Year 1,406 908
Accounts Payable 964 1,193
Accrued Expenses 1,182 989
Other 505 530
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 4,417 4,993
- -------------------------------------------------------------------------------------------------------------------
Long-Term Debt 12,876 12,958
Deferred Credits and Other Liabilities
Deferred Income Taxes 4,388 4,409
Unamortized Investment Tax Credits 316 330
Nuclear Decommissioning Liability for Retired Plants 1,314 1,301
Pension Obligations 334 416
Non-Pension Postretirement Benefits Obligation 847 817
Spent Nuclear Fuel Obligation 843 810
Other 728 907
- -------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 8,770 8,990
- -------------------------------------------------------------------------------------------------------------------
Preferred Securities of Subsidiaries 613 630
Commitments and Contingencies
Shareholders' Equity
Common Stock 6,930 6,890
Deferred Compensation (2) (7)
Retained Earnings 1,200 332
Accumulated Other Comprehensive Income (26) --
- -------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 8,102 7,215
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 34,778 $ 34,786
- -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Consolidated Statements of Changes in Shareholders' Equity Exelon Corporation
and Subsidiary Companies (Restated. See Note 2.)
Accumulated
Other Total
Common Deferred Retained Treasury Comprehensive Shareholders'
Dollars in millions, shares in thousands Shares Stock Compensation Earnings Shares Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 224,684 $ 3,558 $ -- $ (501) $ -- $ -- $ 3,057
Net Income -- -- 570 -- -- 570
Long-Term Incentive Plan Issuances 670 19 (5) 15 -- -- 29
Amortization of Deferred Compensation -- 2 -- -- -- 2
Common Stock Dividends -- -- (196) -- -- (196)
Common Stock Repurchases -- -- 12 (1,705) -- (1,693)
Other Comprehensive Income,
net of income taxes of $3 -- -- -- -- 4 4
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 225,354 $ 3,577 $ (3) $ (100) $ (1,705) $ 4 $ 1,773
Net Income -- -- 586 -- -- 586
Long-Term Incentive Plan Issuances 563 67 (9) 8 7 -- 73
Shares Issued to Acquire Unicom 147,963 5,310 -- -- -- -- 5,310
Merger Consideration-Stock Options 111 -- -- -- -- 111
Amortization of Deferred Compensation -- 5 -- -- -- 5
Common Stock Dividends -- -- (157) -- -- (157)
Common Stock Repurchases -- -- (5) (496) -- (501)
Stock Option Exercises -- -- -- 19 -- 19
Cancellation of Treasury Shares (54,875) (2,175) -- -- 2,175 -- --
Other Comprehensive Income,
net of income taxes of $(3) -- -- -- -- (4) (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 319,005 $ 6,890 $ (7) $ 332 $ -- $ -- $ 7,215
Net Income -- -- 1,428 -- -- 1,428
Long-Term Incentive Plan Issuances 1,864 32 -- 23 -- -- 55
Employee Stock Purchase Plan Issuances 138 6 -- -- -- -- 6
Merger Consideration-Stock Options 2 -- -- -- -- 2
Amortization of Deferred Compensation -- 5 -- -- -- 5
Common Stock Dividends -- -- (583) -- -- (583)
Reclassified Net Unrealized Losses on
Marketable Securities, net of income
taxes of $22 -- -- -- -- (23) (23)
Other Comprehensive Income, net of income
tax benefit of $112 -- -- -- -- (3) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 321,007 $ 6,930 $ (2) $ 1,200 $ -- $ (26) $ 8,102
====================================================================================================================================
Consolidated Statements of Comprehensive Income Exelon Corporation and Subsidiary Companies
For the Years Ended December 31,
----------------------------------
in millions 2001 2000 1999
(Restated)
(See Note 2.)
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 1,428 $ 586 $ 570
Other Comprehensive Income
SFAS 133 Transition Adjustment, net
of income taxes of $18 $ 44 $ -- $ --
Cash Flow Hedge Fair Value Adjustment, net of income taxes of $20 22 -- --
Foreign Currency Translation Adjustment,
net of income taxes of $0 (1) -- --
Unrealized Gain (Loss) on Marketable
Securities, net of income taxes of $44, $1 and $(1), respectively (41) (4) 4
Equity in Other Comprehensive Income of Unconsolidated Affiliates,
net of income taxes of $16 (27) -- --
- -----------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (3) (4) 4
- -----------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 1,425 $ 582 $ 574
=================================================================================================================
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exelon Corporation and Subsidiary Companies
(Dollars in millions, except per share data unless otherwise noted)
1. Significant Accounting Policies
Description of Business
Exelon Corporation (Exelon) is a utility services holding company formed as a
result of the merger of Unicom Corporation (Unicom) and PECO Energy Company
(PECO) (Merger). See Note 3 - Merger. Exelon is engaged, through subsidiaries,
in the energy delivery, wholesale generation and the energy-related enterprises
businesses. See Note 22 - Segment Information. The energy delivery business
consists of the retail electricity distribution and transmission businesses of
Commonwealth Edison Company (ComEd) in northern Illinois and PECO in
southeastern Pennsylvania and the natural gas distribution business of PECO
located in the Pennsylvania counties surrounding the City of Philadelphia. The
wholesale generation business consists of the electric generating facilities and
energy marketing operations of Exelon Generation LLC (Generation) and
Generation's interests in Sithe Energies, Inc. (Sithe) and AmerGen Energy
Company LLC (AmerGen). Exelon Enterprises Company, LLC (Enterprises) includes
energy and infrastructure services, competitive retail energy sales,
communications joint ventures and other investments weighted towards the
communications, energy services and retail services industries.
Basis of Presentation
The consolidated financial statements of Exelon include the accounts of its
majority-owned subsidiaries after the elimination of intercompany transactions.
Exelon generally accounts for its 20% to 50% owned investments and joint
ventures, in which it exerts significant influence, under the equity method of
accounting. Exelon consolidates its proportionate interest in its jointly owned
electric utility plants. Exelon accounts for its less than 20% owned investments
under the cost method of accounting. Accounting policies for regulated
operations are in accordance with those prescribed by the regulatory authorities
having jurisdiction, principally the Illinois Commerce Commission (ICC), the
Pennsylvania Public Utility Commission (PUC), the Federal Energy Regulatory
Commission (FERC) and the Securities and Exchange Commission (SEC) under the
Public Utility Holding Company Act of 1935 (PUHCA).
On October 20, 2000, Exelon became the parent of PECO through a share exchange
and Unicom, the parent of ComEd, was merged into Exelon. As a result of these
transactions, Unicom ceased to exist and Exelon became the parent of ComEd and
PECO. See Note 3 - Merger. In addition, for accounting purposes, PECO was deemed
the acquiror in the Merger. Accordingly, the financial statements of Exelon for
the periods presented prior to October 20, 2000 represent the historical
financial statements of PECO and for the periods from October 20, 2000 include
the operations acquired from Unicom.
Accounting for the Effects of Regulation Exelon accounts for all of its
regulated electric and gas operations in accordance with the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation,"
(SFAS No. 71) requiring Exelon to record in its financial statements the effects
of the rate regulation. Use of SFAS No. 71 is applicable to the utility
operations of Exelon that meet the following criteria:
(1) third-party regulation of rates; (2) cost-based rates; and (3) a reasonable
assumption that all costs will be recoverable from customers through rates.
Exelon believes that it is probable that currently recorded regulatory assets
will be recovered. If a separable portion of Exelon's business no longer meets
the provisions of SFAS No. 71, Exelon is required to eliminate the financial
statement effects of regulation for that portion.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates have been made in the accounting for derivatives, nuclear
decommissioning liabilities, environmental costs and pension costs.
Revenues
Operating revenues are generally recorded as service is rendered or energy is
delivered to customers. At the end of each month, Exelon accrues an estimate for
the unbilled amount of energy delivered or services provided to its electric and
gas customers. Exelon recognizes contract revenues and profits on certain
long-term fixed-price contracts from its services businesses under the
percentage-of-completion method of accounting based on costs incurred as a
percentage of estimated total costs of individual contracts.
Purchased Gas Adjustment Clause
PECO's natural gas rates are subject to a fuel adjustment clause designed to
recover or refund the difference between the actual cost of purchased gas and
the amount included in base rates. Differences between the amounts billed to
customers and the actual costs recoverable are deferred and recovered or
refunded in future periods by means of prospective quarterly adjustments to
rates.
Nuclear Fuel
The cost of nuclear fuel is capitalized and charged to fuel expense using the
unit of production method. Estimated costs of nuclear fuel storage and disposal
at operating plants are charged to fuel expense as the related fuel is consumed.
Depreciation, Amortization and Decommissioning Depreciation is provided over the
estimated service lives of property, plant and equipment on a straight line
basis. Annual depreciation provisions for financial reporting purposes,
expressed as a percentage of average service life for each asset category are
presented in the table below. See Note 24 for information on service life
extensions for certain nuclear generating stations.
Asset Category 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Electric-Transmission and Distribution 3.97% 4.16% 1.83%
Electric-Generation 3.11% 5.02% 5.12%
Gas 2.34% 2.39% 2.36%
Common - Gas and Electric 6.26% 5.09% 4.45%
Other Property and Equipment 9.53% 8.11% 8.61%
=========================================================================================================
Amortization of regulatory assets is provided over the recovery period as
specified in the related regulatory agreement. Goodwill associated with the
Merger was amortized on a straight line basis over 40 years in 2000 and 2001.
Goodwill associated with other acquisitions was amortized over periods from 10
to 20 years in 2000 and 2001. Accumulated amortization of goodwill was $185
million, $35 million and $1 million at December 31, 2001, 2000 and 1999,
respectively. Effective January 1, 2002 under SFAS No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142), goodwill recorded by Exelon will no longer be
subject to amortization. Exelon currently recovers costs for decommissioning its
nuclear generating stations through regulated rates. The amounts recovered from
customers are deposited in trust accounts and invested for funding of future
costs for operating and retired plants. Exelon accounts for the current period's
cost of decommissioning related to generating plants previously owned by PECO
following common regulatory accounting practices by recording a charge to
depreciation expense and a corresponding liability in accumulated depreciation
concurrently with decommissioning collections. Regulatory accounting practices
for the generating stations previously owned by ComEd were discontinued as a
result of an ICC order capping ComEd's ultimate recovery of decommissioning
costs. See Note 5 - Corporate Restructuring and Note 13 - Nuclear
Decommissioning and Spent Fuel Storage, regarding regulatory accounting
practices for nuclear generating stations transferred by ComEd to Generation.
The difference between the current cost decommissioning estimate and the
decommissioning liability recorded in accumulated depreciation for the former
ComEd operating stations is amortized to depreciation expense on a straight-line
basis over the remaining lives. The current cost decommissioning estimate
(adjusted annually to reflect inflation) for the former ComEd retired units
recorded in deferred credits and other liabilities is accreted to depreciation
expense. Exelon believes that the amounts being recovered from customers through
electric rates along with the earnings on the trust funds will be sufficient to
fully fund its decommissioning obligations.
Capitalized Interest
Exelon uses SFAS No. 34, "Capitalizing Interest Costs," to calculate the costs
during construction of debt funds used to finance its non-regulated construction
projects. Exelon recorded capitalized interest of $17 million, $2 million and $6
million in 2001, 2000 and 1999, respectively.
Allowance for Funds Used During Construction (AFUDC) is the cost, during the
period of construction, of debt and equity funds used to finance construction
projects for regulated operations. AFUDC is recorded as a charge to Construction
Work in Progress and as a non-cash credit to AFUDC which is included in Other
Income and Deductions. The rates used for capitalizing AFUDC are computed under
a method prescribed by regulatory authorities.
Income Taxes
Deferred Federal and state income taxes are provided on all significant
temporary differences between book bases and tax bases of assets and
liabilities. Investment tax credits previously utilized for income tax purposes
have been deferred on the Consolidated Balance Sheets and are recognized in book
income over the life of the related property. Exelon and its subsidiaries file a
consolidated Federal income tax return. Income taxes are allocated to each of
Exelon's subsidiaries within the consolidated group based on the separate return
method.
Gains and Losses on Reacquired Debt
Recoverable gains and losses on reacquired debt related to regulated operations
are deferred and amortized to interest expense over the period consistent with
rate recovery for ratemaking purposes. Gains and losses on other debt are
recognized in Exelon's Consolidated Statements of Income as incurred.
Comprehensive Income
Comprehensive income includes all changes in equity during a period except those
resulting from investments by and distributions to
shareholders. Comprehensive income is reflected in the Consolidated Statements
of Changes in Shareholders' Equity and the Consolidated Statements of
Comprehensive Income.
Cash and Cash Equivalents
Exelon considers all temporary cash investments purchased with an original
maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash reflects unused cash proceeds from the issuance of the
transition bonds and transitional trust notes, and escrowed cash to be applied
to the principal and interest payment on the transition bonds and transitional
trust notes.
Marketable Securities
Marketable securities are classified as available-for-sale securities and are
reported at fair value, with the unrealized gains and losses, net of tax,
reported in other comprehensive income. Under regulatory accounting practices,
unrealized gains and losses on marketable securities held in the nuclear
decommissioning trust funds are reported in accumulated depreciation for
operating units and as a reduction of regulatory assets for retired units. When
regulatory accounting practices are discontinued, unrealized gains and losses on
marketable securities held in the nuclear decommissioning trust funds are
reported in accumulated other comprehensive income. At December 31, 2001 and
2000, Exelon had no held-to-maturity or trading securities.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Exelon evaluates the carrying
value of property, plant and equipment and other long-term assets based upon
current and anticipated undiscounted cash flows, and recognizes an impairment
when it is probable that such estimated cash flows will be less than the
carrying value of the asset. Measurement of the amount of impairment, if any, is
based upon the difference between carrying value and fair value. The cost of
maintenance, repairs and minor replacements of property are charged to
maintenance expense as incurred.
Upon retirement, the cost of regulated property plus removal costs less salvage
value, are charged to accumulated depreciation by the regulated subsidiaries in
accordance with regulatory practices. For unregulated property, the cost and
accumulated depreciation of property, plant and equipment retired or otherwise
disposed of are removed from the related accounts and included in the
determination of the gain or loss on disposition.
Capitalized Software Costs
Costs incurred during the application development stage of software projects for
software which is developed or obtained for internal use are capitalized. At
December 31, 2001 and 2000, capitalized software costs totaled $240 million and
$285 million, respectively, net of $85 million and $53 million accumulated
amortization, respectively. Such capitalized amounts are amortized ratably over
the expected lives of the projects when they become operational, not to exceed
ten years. Certain capitalized software is being amortized over fifteen years
pursuant to regulatory approval.
Derivative Financial Instruments
Exelon accounts for derivative financial instruments under SFAS No. 133
"Accounting for Derivatives and Hedging Activities" (SFAS No. 133). Under the
provisions of SFAS No. 133, all derivatives are recognized on the balance sheet
at their fair value unless they qualify for a normal purchases and normal sales
exception. Changes in the fair value of the derivative financial instruments are
recognized in earnings unless specific hedge accounting criteria are met. A
derivative financial instrument can be designated as a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment (fair
value hedge), or a hedge of a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability (cash
flow hedge). Changes in the fair value of a derivative that is highly effective
as, and is designated and qualifies as, a fair value hedge, along with the gain
or loss on the hedged asset or liability that is attributable to the hedged
risk, are recorded in earnings. Changes in the fair value of a derivative that
is highly effective as, and is designated as and qualifies as a cash flow hedge
are recorded in other comprehensive income, until earnings are affected by the
variability of cash flows being hedged.
In connection with Exelon's Risk Management Policy (RMP), Exelon enters into
derivatives to manage its exposure to fluctuation in interest rates related to
its variable rate debt instruments, changes in interest rates related to planned
future debt issuances prior to their actual issuance and changes in the fair
value of outstanding debt which is planned for early retirement. As it relates
to energy transactions, Exelon utilizes derivatives to manage the utilization of
its available generating capability and provisions of wholesale energy to its
affiliates. Exelon also utilizes energy option contracts and energy financial
swap arrangements to limit the market price risk associated with forward energy
commodity contracts. Additionally, Exelon enters into certain energy related
derivatives for trading or speculative purposes.
As part of Exelon's energy marketing business, Exelon enters into contracts to
buy and sell energy to meet the requirements of its customers. These contracts
include short-term and long-term commitments to purchase and sell energy and
energy related products in the retail and wholesale markets with the intent and
ability to deliver or take delivery. While these contracts are considered
derivative financial instruments under SFAS No. 133, the majority of these
transactions have been designated as "normal purchases" and "normal sales" and
are not subject to the provisions of SFAS No. 133. Normal purchases and normal
sales are contracts where physical delivery is probable, quantities are expected
to be used or sold in the normal course of business over a reasonable period of
time, and price is not tied to an unrelated underlying derivative. Under these
contracts Exelon recognizes gains or losses when the underlying physical
transaction affects earnings. Revenues and expenses associated with market price
risk management contracts are amortized
over the terms of such contracts. Commitments under these contracts are
discussed in Note 21 - Commitments and Contingencies. The remainder of these
contracts are generally considered cash flow hedges under SFAS No. 133. To the
extent that the hedges are effective, changes in the fair value of these
contracts are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows being hedged.
Additionally, during 2001, as part of the creation of Exelon's energy trading
operation, Exelon began to enter into contracts to buy and sell energy for
trading purposes subject to limits. These contracts are recognized on the
balance sheet at fair value and changes in the fair value of these derivative
financial instruments are recognized in earnings.
Prior to the adoption of SFAS No. 133, Exelon applied hedge accounting only if
the derivative reduced the risk of the underlying hedged item and was designated
at the inception of the hedge, with respect to the hedged item. Exelon
recognized any gains or losses on these derivatives when the underlying physical
transaction affected earnings.
Contracts entered into by Exelon to limit market risk associated with forward
energy commodity contracts are reflected in the financial statements at the
lower or cost or market using the accrual method of accounting. Under these
contracts Exelon recognizes any gains or losses when the underlying physical
transaction affects earnings. Revenues and expenses associated with market price
risk management contracts were amortized over the terms of such contracts.
New Accounting Pronouncements
In 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No. 141),
SFAS No. 142, No. 143, "Asset Retirement Obligations" (SFAS No. 143), and SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No.144).
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 adopted SFAS No. 142 as of January 1, 2002. Under SFAS
No. 142, effective January 1, 2002, goodwill recorded by Exelon is no longer
subject to amortization. After January 1, 2002, goodwill will be subject to an
assessment for impairment using a two-step fair value based test, the first step
of which must be performed at least annually, or more frequently if events or
circumstances indicate that goodwill might be impaired. The first step compares
the fair value of a reporting unit to its carrying amount, including goodwill.
If the carrying amount of the reporting unit exceeds its fair value, the second
step is performed. The second step compares the carrying amount of the goodwill
to the fair value of the goodwill. If the fair value of goodwill is less than
the carrying amount, an impairment loss 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 December 31, 2001, Exelon's Consolidated Balance Sheets
reflected approximately $5.3 billion in goodwill net of accumulated
amortization, including $4.9 billion of net goodwill related to the merger of
Unicom and PECO recorded on ComEd's Consolidated Balance Sheets, with the
remainder related to Enterprises. Annual amortization of goodwill related to the
Merger and to Enterprises of $126 million and $24 million, respectively, was
discontinued upon adoption of SFAS No. 142. Exelon has completed the first step
of the transitional impairment analysis which indicated that the ComEd goodwill
is not impaired but that an impairment exists with respect to the Enterprises
goodwill. The second step of the analysis, which will compare the fair value of
the Enterprises goodwill to the $433 million carrying value at December 31, 2001
has not yet been completed. The second step analysis is expected to be completed
and the transitional impairment loss recognized, in the first quarter of 2002 as
a Cumulative Effect of a Change in Accounting Principle.
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets. Exelon expects to adopt SFAS No. 143
on January 1, 2003. Retirement obligations associated with long-lived assets
included within the scope of SFAS No. 143 are those for which there is a legal
obligation to settle under existing or enacted law, statute, written or oral
contract or by legal construction under the doctrine of promissory estoppel.
Adoption of SFAS No. 143 will change the accounting for the decommissioning of
Exelon's nuclear generating plants. Currently, Exelon records the obligation for
decommissioning ratably over the lives of the plants. The January 1, 2003
adoption of SFAS No. 143 will require a cumulative effect adjustment effective
the date of adoption to adjust plant assets and decommissioning liabilities to
the values they would have been had this standard been employed from the
in-service dates of the plants.
The effect of this cumulative adjustment will be to increase the decommissioning
liability to reflect a full decommissioning obligation in current year dollars.
Additionally, the standard will require the accrual of an asset related to the
full amount of the decommissioning obligation, which will be amortized over the
remaining lives of the plants. The net difference between the asset recognized
and the liability recorded upon adoption of the standard will be charged to
earnings and recognized as a cumulative effect, net of expected regulatory
recovery. The decommissioning liability to be recorded represents an obligation
for the future decommissioning of the plants, and as a result interest expense
will be accrued on this liability until such time as the obligation is
satisfied.
Exelon is in the process of evaluating the impact of SFAS No. 143 on its
financial statements, and cannot determine the ultimate impact of adoption at
this time, however the cumulative effect could be material to Exelon's earnings.
Additionally, although over the life of the plant the charges to earnings for
the depreciation of the asset and the interest on the liability will be equal to
the amounts currently recognized as decommissioning expense, the timing of those
charges will change and in the near-term period subsequent to adoption, the
depreciation of the asset and the interest on the liability could result in an
increase in expense.
SFAS No. 144 establishes accounting and reporting standards for both the
impairment and disposal of long-lived assets. This statement is effective for
fiscal years beginning after December 15, 2001 and provisions of this statement
are generally applied prospectively. Exelon is in the process of evaluating the
impact of SFAS No. 144 on its financial statements, and does not expect the
impact to be material.
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes. The
reclassifications did not affect net income.
2. Restatement
In October 2002, Exelon determined that its December 31, 2001 financial
statements required a restatement as a result of a double posting of deferred
income taxes recorded associated with unrealized losses on Generation's nuclear
decommissioning trust fund securities. Additionally, Exelon and Generation
determined that Other Comprehensive Income should be revised to reflect
Generation's ownership interest in the Other Comprehensive Income of its equity
investments in AmerGen Energy Company, LLC and Sithe Energies Inc. Such
adjustments had no effect on either Exelon's or Generation's net income,
earnings per share or cash flows.
The following tables show the items that have been restated on the Consolidated
Balance Sheets as of December 31, 2001, the Consolidated Statements of Changes
in Shareholders' Equity, the Consolidated Statements of Comprehensive Income,
the Supplemental Financial Information Note, the Income Tax Note, and the
Segment Note:
Consolidated Balance Sheets at December 31, 2001
As Previously As
Reported Restatement Restated
-------------------------------------------------
Investments $ 1,666 $ (43) $ 1,623
Total Deferred Debits and Other Assets $ 17,297 $ (43) $ 17,254
Total Assets $ 34,821 $ (43) $ 34,778
Deferred Income Taxes $ 4,303 $ 85 $ 4,388
Total Deferred Credits and Other Liabilities $ 8,685 $ 85 $ 8,770
Accumulated Other Comprehensive Income $ 102 $ (128) $ (26)
Total Shareholders' Equity $ 8,230 $ (128) $ 8,102
Total Liabilities and Shareholders' Equity $ 34,821 $ (43) $ 34,778
Consolidated Statements of Changes in Shareholders' Equity
Twelve Months Ended December 31, 2001
As Previously As
Reported Restatement Restated
-------------------------------------------------
Accumulated Other Comprehensive Income
Other Comprehensive Income (2001 activity) $ 125 $ (128) $ (3)
Balance, December 31, 2001 $ 102 $ (128) $ (26)
Total Shareholders' Equity
Other Comprehensive Income (2001 activity) $ 125 $ (128) $ (3)
Balance, December 31, 2001 $ 8,230 $ (128) $ 8,102
Consolidated Statements of Comprehensive Income
for the Year Ended December 31, 2001
As Previously As
Reported Restatement Restated
-------------------------------------------------
Unrealized Gain (Loss) on Marketable Securities, $ 60 $ (101) $ (41)
Equity in Other Comprehensive Income of
Unconsolidated Affiliates $ - $ (27) $ (27)
Total Other Comprehensive Income $ 125 $ (128) $ (3)
Total Comprehensive Income $ 1,553 $ (128) $ 1,425
Note 8 Supplemental Financial Information
at December 31, 2001
As Previously As
Reported Restatement Restated
-------------------------------------------------
Investment in Sithe $ 725 $ (25) $ 700
Investment in Amergen $ 113 $ (18) $ 95
Total Investments $ 1,666 $ (43) $ 1,623
Note 16 Income Taxes
at December 31, 2001
As Previously As
Reported Restatement Restated
-------------------------------------------------
Deferred tax assets:
Decommissioning and decontamination obligations $ (898) $ 85 $ (813)
Total deferred tax assets $(1,302) $ 85 $ (1,217)
Deferred income taxes (net) on the balance sheet $ 4,596 $ 85 $ 4,681
Note 22 Segment Note
at December 31, 2001
As Previously As
Reported Restatement Restated
-------------------------------------------------
Total Assets - Consolidated $34,821 $ (43) $ 34,778
Total Assets - Generation $ 7,588 $ (43) $ 7,545
3. Merger
On October 20, 2000, Exelon became the parent corporation of PECO and ComEd as a
result of the completion of the transactions contemplated by an Agreement and
Plan of Exchange and Merger, as amended (Merger Agreement), among PECO, Unicom
Corporation (Unicom) and Exelon. Pursuant to the Merger Agreement, Unicom merged
with and into Exelon (Merger). In the Merger, each share of the outstanding
common stock of Unicom was converted into 0.875 shares of common stock of Exelon
plus $3.00 in cash. As a result of the Share Exchange, Exelon became the owner
of all of the common stock of PECO. As a result of the Merger, Unicom ceased to
exist and its subsidiaries, including ComEd, became subsidiaries of Exelon.
The Merger was accounted for using the purchase method of accounting. The total
purchase price was $5,975 million. In connection with the Merger, Exelon issued
148 million shares of common stock in the amount of $5,310 million and paid $507
million in cash to Unicom shareholders pursuant to the terms of the Merger
Agreement. The source of the cash consideration was borrowings under an Exelon
term loan. In addition, the Merger consideration included $113 million of fair
value of stock options and awards for certain Unicom employees and $45 million
of direct acquisition costs. The cost in excess of net assets acquired was
$5,136 million as adjusted to reflect final purchase price allocations. Exelon's
results of operations include Unicom's results of operations since October 20,
2000. The fair value of the assets acquired, including the cost in excess of net
assets acquired, and liabilities assumed in the Merger are as follows:
- -----------------------------------------------------------------------------------------------------------
Current Assets (including cash of $974) $ 2,744
Property, Plant and Equipment 7,641
Deferred Debits and Other Assets 5,535
Cost in excess of net assets acquired 5,136
Current Liabilities (2,413)
Long-Term Debt (7,419)
Deferred Credits and Other Liabilities (4,921)
Preferred Securities of Subsidiaries (328)
- -----------------------------------------------------------------------------------------------------------
Total Purchase Price $ 5,975
===========================================================================================================
Goodwill associated with the merger increased by $262 million in 2001 as a
result of the finalization of the purchase price allocation. The adjustment
resulted primarily from the after-tax effects of the reduction of the regulatory
asset for decommissioning retired nuclear plants, as discussed in Note 13 -
Nuclear Decommissioning and Spent Fuel Storage, additional employee separation
costs and the finalization of other purchase price allocations.
Selected unaudited pro forma combined results of operations for the years ended
December 31, 2000 and 1999, assuming the Merger Transaction occurred on January
1, 2000 and 1999, respectively, are presented as follows:
(unaudited) 2000 1999
- -----------------------------------------------------------------------------------------------------------
Total revenues $ 13,531 $ 12,225
Pro forma net income $ 1,007 $ 1,184
Merger-related costs (net of income taxes of $147 million) 220 --
Extraordinary items (net of income taxes of $2 million and
$25 million for 2000 and 1999, respectively) (4) (37)
Cumulative effect of a change in accounting principle (net of
income taxes of $16 million) 24 --
- -----------------------------------------------------------------------------------------------------------
Pro forma net income before Merger-related costs, extraordinary
items and cumulative effect of a change in accounting principle $ 1,247 $ 1,147
===========================================================================================================
Proforma net income before Merger-related costs, extraordinary items and
cumulative effect of a change in accounting principle
per common share (diluted) $ 3.86 $ 3.55
===========================================================================================================
Pro forma information assumes the effects of Unicom's 1999 fossil plant sale and
the issuance of transition bonds and notes occurred at the beginning of 1999.
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Merger been consummated as of
the dates indicated, nor are they necessarily indicative of future operating
results.
Merger-Related Costs
In association with the Merger, Exelon recorded certain reserves for
restructuring costs. The reserves associated with PECO were charged to expense,
while the reserves associated with Unicom were recorded as part of the
application of purchase accounting and did not affect results of operations.
Merger-related costs charged to expense in 2000 were $276 million, consisting of
$124 million for PECO employee costs and $152 million of direct incremental
costs. Direct incremental costs represent expenses directly associated with
completing the Merger, including professional fees, regulatory approval and
settlement costs, and settlement of compensation arrangements. Employee costs
represent estimated severance costs and pension and postretirement benefits
provided under Exelon's merger separation plans for eligible employees who are
expected to be involuntarily terminated before December 2002 due to integration
activities of the merged companies.
The purchase price allocation as of December 31, 2000 included a liability of
$307 million for Unicom employee costs and liabilities of approximately $39
million for estimated costs of exiting various business activities of former
Unicom activities that were not compatible with the strategic business direction
of Exelon.
During 2001, Exelon finalized its plans for consolidation of functions,
including negotiation of an agreement with the union regarding severance
benefits to union employees and recorded adjustments to the purchase price
allocation as follows:
Original 2001 Adjusted
Estimate Adjustments Liabilities
- ------------------------------------------------------------------------------------------------------------
Employee severance payments $ 128 $ 33 $ 161 (a)
Actuarially determined pension and postretirement costs 158 (11) 147 (b)
Relocation and other severance 21 9 30 (a)
- ------------------------------------------------------------------------------------------------------------
Total Unicom - Employee Cost $ 307 $ 31 $ 338
============================================================================================================
(a) The increase is a result of the identification in 2001 of additional
positions to be eliminated.
(b) The reduction results from lower estimated pension and post retirement
welfare benefits reflecting revised actuarial estimates.
Additional employee severance costs of $48 million primarily related to PECO
employees were charged to expense in 2001. Exelon anticipates that a total of
$289 million of employee costs will be funded from pension and postretirement
benefit plans and $191 million of Unicom employee severance costs will be funded
from general corporate funds.
The following table provides a reconciliation of the reserve for employee
severance and relocation costs associated with the merger:
- -----------------------------------------------------------------------------------------------------------
Employee severance and relocation reserve as of October 20, 2000 $ 149
Additional reserve 42
- -----------------------------------------------------------------------------------------------------------
Adjusted employee severance and relocation reserve 191
Payments to employees (October 2000-December 2001) (77)
- -----------------------------------------------------------------------------------------------------------
Employee severance and relocation reserve as of December 31, 2001 $ 114
============================================================================================================
Approximately 3,400 Unicom and PECO positions have been identified to be
eliminated as a result of the merger. Exelon has terminated 1,461 employees as
of December 31, 2001. The remaining positions are expected to be eliminated by
the end of 2002.
4. Acquisitions
Sithe Energies, Inc. Acquisition Generation owns 49.9% of the outstanding common
stock of Sithe and has an option, beginning on December 18, 2002, to purchase
the remaining common stock outstanding (Remaining Interest) in Sithe. The
purchase option expires on December 18, 2005. In addition, the Sithe
stockholders who own in the aggregate the Remaining Interest have the right to
require Generation to purchase the Remaining Interest (Put Rights) during the
same period in which Generation can exercise its purchase option. At the end of
this exercise period, if Generation has not exercised its purchase option and
the other Sithe stockholders have not exercised their Put Rights, Generation
will have an additional one-time option to purchase shares from the other
stockholders in Sithe to bring Generation's ownership in Sithe from the current
49.9% to 50.1% of Sithe's total outstanding common stock.
If Generation exercises its option to acquire the Remaining Interest, or if all
the other Sithe stockholders exercise their Put Rights, the purchase price for
70% of the Remaining Interest will be set at fair market value subject to a
floor of $430 million and a ceiling of $650 million. The balance of the
Remaining Interest will be valued at fair market value without being subject to
floor or ceiling prices. In either instance, interest shall accrue from the
beginning of the exercise period.
If Generation increases its ownership in Sithe to 50.1% or more, Sithe will
become a consolidated subsidiary and Exelon's financial results will include
Sithe's financial results from the date of purchase. At December 31, 2001, Sithe
had total assets of $4.2 billion and long-term debt of $2.3 billion, including
$2.1 billion of non-recourse project debt, and excluding any non-recourse
project debt associated with Sithe's equity investments. For the year ended
December 31, 2001 Sithe had revenues of $1 billion. As of December 31, 2001
Exelon had a $725 million equity investment in Sithe.
Sithe, headquartered in New York, is a leading independent power producer, with
ownership interests in 27 facilities in North America. Sithe has net generation
capacity of 3,371 MW, primarily in New York and Massachusetts, 2,651 MW under
construction and 2,400 MW in advanced development.
InfraSource, Inc. Acquisitions
In 2001 InfraSource, Inc. (InfraSource), formerly Exelon Infrastructure
Services, Inc., acquired the assets of a utility service contracting company for
an aggregate purchase price of approximately $30 million. In 2000, InfraSource
acquired the stock or assets of seven utility services contracting companies for
an aggregate purchase price of approximately $245 million. The acquisitions were
accounted for using the purchase method of accounting. The initial estimates of
the excess of purchase price over the fair value of net assets acquired in the
2001 acquisition and in the 2000 acquisitions were approximately $19 million and
$216 million, respectively. The allocation of purchase price to the fair value
of assets acquired and liabilities assumed in these acquisitions is as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------
Current Assets (net of cash acquired) $ 10 $ 63
Property, Plant and Equipment 11 17
Cost in excess of net assets acquired 19 216
Current Liabilities (10) (51)
- -----------------------------------------------------------------------------------------------------------
Total $ 30 $ 245
===========================================================================================================
At December 31, 2001 and 2000, Current Assets includes $77 million and $70
million, respectively, of Costs and Earnings in Excess of Billings on
uncompleted contracts and Current Liabilities includes $56 million and $23
million, respectively, of Billings and Earnings in Excess of Costs on
uncompleted contracts.
AmerGen Energy Company, LLC
In August 2000, AmerGen Energy Company, LLC (AmerGen), a joint venture with
British Energy, Inc., a wholly owned subsidiary of
British Energy plc, (British Energy), completed the purchase of Oyster Creek
Nuclear Generating Facility (Oyster Creek) from GPU, Inc. (GPU) for $10 million.
Under the terms of the purchase agreement, GPU agreed to fund outage costs of
$89 million, including the cost of fuel, for a refueling outage that occurred in
2000. AmerGen is repaying these costs to GPU in equal annual installments
through 2009. In addition, AmerGen assumed full responsibility for the ultimate
decommissioning of Oyster Creek. At the closing of the sale, GPU provided
funding for the decommissioning trust of $440 million. In conjunction with this
acquisition, AmerGen has received a fully funded decommissioning trust fund
which has been computed assuming the anticipated costs to appropriately
decommission Oyster Creek discounted to net present value using the NRC's
mandated rate of 2%. AmerGen believes that the amount of the trust fund and
investment earnings thereon will be sufficient to meet its decommissioning
obligation. GPU is purchasing the electricity generated by Oyster Creek pursuant
to a three-year power purchase agreement.
5. Corporate Restructuring
During January 2001, Exelon undertook a restructuring to separate its generation
and other competitive businesses from its regulated energy delivery business at
ComEd and PECO. As part of the restructuring, the generation-related operations
and assets and liabilities of ComEd were transferred to 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 Enterprises, respectively.
Additionally, certain operations and assets and liabilities of ComEd and PECO
were transferred to Exelon Business Services Company (BSC).
6. Accounting Changes
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 adoption of SFAS No. 133, as amended.
During the fourth quarter of 2000, as a result of the synchronization of
accounting policies with Unicom in connection with the Merger, PECO changed its
method of accounting for nuclear outage costs to record such costs as incurred.
Previously, PECO accrued these costs over the operating unit cycle. As a result
of the change in accounting method for nuclear outage costs, PECO recorded
income of $24 million, net of income taxes of $16 million. The change is
reported as a cumulative effect of a change in accounting principle on the
Consolidated Statements of Income as of December 31, 2000, representing the
balance of the nuclear outage cost reserve at January 1, 2000.
7. Regulatory Issues
ComEd
In 2001, the phased process to implement competition in the electric industry
continued as mandated by the requirements of the Illinois restructuring
legislation.
Customer Choice As of December 31, 2000, all non-residential customers were
eligible to choose a new electric supplier or elect the power purchase option
which allows the purchase of electric energy from ComEd at market-based prices.
ComEd's residential customers become eligible to choose a new electric supplier
in May 2002. As of December 31, 2001, approximately 18,700 non-residential
customers, representing approximately 22% of ComEd's annual retail kilowatt-hour
sales, had elected to purchase their electric energy from an alternate electric
supplier or had chosen the power purchase option. Customers who receive energy
from an alternative supplier continue to pay a delivery charge. ComEd is unable
to predict the long term impact of customer choice on results of operations.
Rate Reductions and Return on Common Equity Threshold The Illinois restructuring
legislation provided a 15% residential base rate reduction effective August 1,
1998 with an additional 5% residential base rate reduction effective October 1,
2001. ComEd's operating revenues were reduced by approximately $24 million in
2001 due to the 5% residential rate reduction. Notwithstanding the rate
reductions and subject to certain earnings tests, a rate freeze is generally in
effect until at least January 1, 2005. A utility may request a rate increase
during the rate freeze period only when necessary to ensure the utility's
financial viability. Under the Illinois legislation, if the earned return on
common equity of a utility during this period exceeds an established threshold,
one-half of the excess earnings must be refunded to customers. The threshold
rate of return on common equity is based on the 30-Year Treasury Bond rate plus
8.5% in the years 2000 through 2004. Earnings for purposes of ComEd's threshold
include ComEd's net income calculated in accordance with GAAP and reflect the
amortization of regulatory assets and goodwill. As a result of the Illinois
legislation, at December 31, 2001, ComEd had a regulatory asset with an
unamortized balance of $277 million that it expects to fully recover and
amortize by the end of 2004. Consistent with the provisions of the Illinois
legislation, regulatory assets may be recovered at amounts that provide ComEd an
earned return on common equity within the Illinois legislation earnings
threshold. The earned return on common equity and the threshold return on common
equity for ComEd are each calculated on a two-year average basis. ComEd did not
trigger the earnings sharing provision in 2000 or 2001 and does not currently
expect to trigger the earnings sharing provisions in the years 2002 through
2004.
PECO
In 2001, the phased process to implement competition in the electric industry
continued as mandated by the requirements of the PUC's Final Restructuring
Order.
Customer Choice The PUC's Final Restructuring Order provided for the phase-in of
customer choice of electric generation supplier (EGS) for all customers and as
of January 1, 2000 all customers were eligible for customer choice. The Final
Restructuring Order also established market share thresholds to ensure that a
minimum number of residential and commercial customers choose an EGS or a PECO
affiliate. If less than 35% and 50% of residential and commercial customers have
chosen an EGS, including residential customers assigned to an EGS as a provider
of last resort default supplier, by January 1, 2001 and January 1, 2003,
respectively, the number of customers sufficient to meet the necessary threshold
levels shall be randomly selected and assigned to an EGS through a
PUC-determined process. On January 1, 2001, the 35% threshold was met for all
three customer classes as a result of agreements assigning customers to New
Power Company and Green Mountain as providers of last resort default service.
During 2001, PECO experienced an increase in the number of customers selecting
or returning to PECO as their EGS and at December 31, 2001, approximately 28% of
PECO's residential load, 6% of its small commercial and industrial load and 5%
of its large commercial and industrial load were purchasing generation from an
alternative generation supplier. Customers who purchase energy from an EGS
continue to pay a delivery charge.
Rate Reductions and Caps Under the Final Restructuring Order, retail electric
rates were capped at year-end 1996 levels (system-wide average of 9.96
cents/kilowatt hour (kWh)) through June 2005. The Final Restructuring Order
required PECO to reduce its retail electric rates by 8% from the 1996
system-wide average rate on January 1, 1999. This rate reduction decreased to 6%
on January 1, 2000 until January 1, 2001. The transmission and distribution rate
component was capped at a system-wide average rate of 2.98 cents/kWh through
June 30, 2005. Additionally, generation rate caps, defined as the sum of the
applicable transition charge and energy and capacity charge, will remain in
effect through 2010.
On March 16, 2000, the PUC issued an order authorizing PECO to securitize up to
an additional $1 billion of its authorized stranded costs recovery. In
accordance with the terms of that order, PECO provided its retail customers with
rate reductions of $60 million for calendar year 2001 only.
Under a comprehensive settlement agreement in connection with achieving
regulatory approval of the Merger, PECO agreed to $200 million in aggregate rate
reductions for all customers in Pennsylvania over the period January 1, 2002
through 2005 and extended the rate caps on PECO's retail electric distribution
charges through December 31, 2006.
8. Supplemental Financial Information
Supplemental Income Statement Information
For the Years Ended December 31,
-------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Taxes Other Than Income
Utility $ 342 $ 196 $ 155
Real estate 140 68 72
Payroll 81 41 28
Other 60 17 7
- -----------------------------------------------------------------------------------------------------------
Total $ 623 $ 322 $ 262
===========================================================================================================
Other, Net
Investment income $ 47 $ 64 $ 52
Gain (loss) on disposition of assets, net 4 (19) (1)
Settlement of power purchase agreement -- 6 --
AFUDC, equity and borrowed 18 3 4
Other 10 (1) 4
- -----------------------------------------------------------------------------------------------------------
Total $ 79 $ 53 $ 59
===========================================================================================================
Supplemental Cash Flow Information
For the Years Ended December 31,
-------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Cash paid during the year:
Interest (net of amount capitalized) $ 963 $ 519 $ 350
Income taxes (net of refunds) $ 749 $ 272 $ 304
Non-cash investing and financing:
Regulatory Asset Fair Value Adjustment $ 347 -- --
Purchase Accounting Estimate Adjustments $ (85) -- --
Issuance of Exelon Shares for Unicom -- $ 5,310 --
Issuance of InfraSource stock $ 35 $ 14 $ 11
Depreciation and amortization:
Property, plant and equipment $ 702 $ 325 $ 207
Nuclear fuel 393 149 104
Regulatory assets 445 53 --
Decommissioning 144 46 29
Goodwill 150 34 1
Leased property -- -- 17
- -----------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 1,834 $ 607 $ 358
===========================================================================================================
Supplemental Balance Sheet Information
Investments
December 31,
--------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Investment in Sithe (Restated, see Note 2) $ 700 $ 704
Direct financing leases 427 409
Energy services and other ventures 161 170
Communication ventures 116 97
Investment in AmerGen (Restated, see Note 2) 95 44
Affordable housing projects 98 88
Investment in subsidiaries and joint ventures 26 34
- -----------------------------------------------------------------------------------------------------------
Total $ 1,623 $ 1,546
===========================================================================================================
Prior to the Merger, Unicom entered into a like-kind exchange transaction
pursuant to which approximately $1.6 billion was invested in passive generating
station leases with two separate entities unrelated to Exelon. The generating
stations were leased back to such entities as part of the transaction. For
financial accounting purposes, the investments are accounted for as direct
financing lease investments. Under the terms of the lease agreements, Exelon
received a prepayment of $1.2 billion in the fourth quarter of 2000, which
reduced the investment in the lease. The remaining payments are payable at the
end of the thirty year lease and there are no minimum scheduled lease payments
to be received over the next five years. The components of the net investment in
the direct financing leases are as follows:
December 31,
---------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Total minimum lease payments $ 1,492 $ 1,492
Less: Unearned income 1,065 1,083
- -----------------------------------------------------------------------------------------------------------
Net investment in direct financing leases $ 427 $ 409
===========================================================================================================
Regulatory Assets
December 31,
---------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Competitive transition charge $ 4,947 $ 5,218
Recoverable deferred income taxes (see Note 16) 701 632
Nuclear decommissioning costs for retired plants 310 719
Recoverable transition costs 277 385
Loss on reacquired debt 112 99
Compensated absences 5 4
Non-pension postretirement benefits 71 78
- -----------------------------------------------------------------------------------------------------------
Long-Term Regulatory Assets 6,423 7,135
Deferred energy costs (current asset) 56 86
- -----------------------------------------------------------------------------------------------------------
Total $ 6,479 $ 7,221
===========================================================================================================
At December 31, 2001 and 2000, the Competitive Transition Charge (CTC) includes
the unamortized balance of $4.5 billion and $4.8 billion, respectively, of
Intangible Transition Property (ITP) sold to PECO Energy Transition Trust
(PETT), a wholly owned subsidiary of PECO, in connection with the securitization
of PECO's stranded cost recovery. PETT financed its purchase of the ITP through
the issuance of transition bonds. See Note 15 - Long-Term Debt. ITP represents
the irrevocable right of PECO or its assignee to collect non-bypassable charges
from customers to recover stranded costs. The CTC represents PECO's stranded
costs that are recoverable through regulated rates. The CTC is recoverable over
a twelve year period ending December 31, 2010 with a return on the unamortized
balance of 10.75%.
9. Earnings Per Share
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):
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 320 202 196
Assumed Exercise of Stock Options 2 2 1
- -----------------------------------------------------------------------------------------------------------
Average Dilutive Common Shares Outstanding 322 204 197
===========================================================================================================
10. Accounts Receivable
Accounts receivable -- Customer at December 31, 2001 and 2000 included unbilled
operating revenues of $438 million and $498 million, respectively. The allowance
for uncollectible accounts at December 31, 2001 and 2000 was $213 million and
$200 million, respectively.
Accounts receivable -- Other at December 31, 2001 and 2000 included demand notes
receivable from a communications joint venture in the amount of $153 million.
The receivable has been adjusted for Exelon's share of this joint venture's
operating losses incurred in excess of its investment. The notes bear interest
at the Applicable Federal Rate, compounded semi-annually. The average interest
rate on the notes receivable was 4.18% and 6.22% at December 31, 2001 and 2000,
respectively. Interest income related to the notes receivable was $6 million and
$10 million in 2001 and 2000, respectively.
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. At
December 31, 2001, PECO had sold a $225 million interest in accounts receivable,
consisting of a $170 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 Extinguishment of Liabilities - a Replacement
of FASB Statement No. 125," and a $55 million interest in special-agreement
accounts receivable which was accounted for as a long-term note payable. See
Note 15 - Long-Term Debt. 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 December 31, 2001 and 2000, PECO met this requirement and was
not required to make any cash deposits.
11. Property, Plant and Equipment
A summary of property, plant and equipment by classification as of December 31,
2001 and 2000 is as follows:
Asset Category 2001 2000
- -----------------------------------------------------------------------------------------------------------
Electric-Transmission and Distribution $ 10,156 $ 9,447
Electric-Generation 4,344 4,044
Gas 1,281 1,181
Common 399 408
Nuclear Fuel 2,681 2,341
Construction Work in Progress 1,294 1,189
Leased Property - 2
Other Property, Plant and Equipment 1,371 1,274
- -----------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment 21,526 19,886
Less Accumulated Depreciation (including accumulated
amortization of nuclear fuel of $1,838 and $1,445 in 2001
and 2000, respectively) 7,784 6,950
- -----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net $13,742 $12,936
===========================================================================================================
12. Jointly Owned Electric Utility Plant
Exelon's undivided ownership interests in jointly owned electric plant at
December 31, 2001, were as follows:
Production Plant
----------------------------------------------------------------- Transmission
Peach Bottom Salem Keystone Conemaugh Quad Cities and Other Plant
PSE&G
Operator Generation Nuclear Reliant Reliant Generation Various Co.
- --------------------------------------------------------------------------------------------------------------
Participating Interest 50% 42.59% 20.99% 20.72% 75% 21 to 44%
Exelon's Share:
Plant $ 387 $ 12 $ 121 $ 193 $ 96 $ 66
Accumulated Depreciation $ 220 $ 4 $ 98 $ 124 $ 10 $ 25
Construction Work
in Progress $ 13 $ 53 $ 13 $ 12 $ 52 $ 1
- -------------------------------------------------------------------------------------------------------------
Exelon's undivided ownership interests are financed with Exelon funds and, when
placed in service, all operations are accounted for as if such participating
interests were wholly owned facilities.
13. Nuclear Decommissioning and Spent Fuel Storage
Exelon has an obligation to decommission its nuclear power plants. Exelon's
current estimate of its nuclear facilities' decommissioning cost for its owned
nuclear power plants is $7.2 billion in current year (2002) dollars. These
expenditures are expected to occur after the plants retirement, estimated to
begin in 2045. Decommissioning costs are currently recoverable through regulated
rates. Under rates in effect through December 31, 2001, Exelon collected
approximately $102 million in 2001 from customers. At December 31, 2001 the
decommissioning liability, recorded in Accumulated Depreciation and Deferred
Credits and Other Liabilities on Exelon's Consolidated Balance Sheets, was $2.7
billion and $1.3 billion, respectively. At December 31, 2000 the decommissioning
liability, recorded in Accumulated Depreciation and Deferred Credits and Other
Liabilities on Exelon's Consolidated Balance Sheets, was $2.6 billion and $1.3
billion, respectively. In order to fund future decommissioning costs, at
December 31, 2001 and 2000, Exelon held $3.2 billion and $3.1 billion,
respectively, in trust accounts which are included as Investments in Exelon's
Consolidated Balance Sheets at their fair market value. Exelon believes that the
amounts being recovered from customers through regulated rates and earnings on
nuclear decommissioning trust funds will be sufficient to fully fund its
decommissioning obligations.
In connection with the transfer of ComEd's nuclear generating stations to
Generation, ComEd asked the ICC to approve the continued recovery of
decommissioning costs after the transfer. On December 20, 2000, the ICC issued
an order finding that the ICC has the legal authority to permit ComEd to
continue to recover decommissioning costs from customers for the six-year term
of the power purchase agreements between ComEd and Generation. Under the ICC
order, ComEd is permitted to recover $73 million per year from customers for
decommissioning for the years 2001 through 2004. In 2005 and 2006, ComEd can
recover up to $73 million annually, depending upon the portion of the output of
the former ComEd nuclear stations that ComEd purchases from Generation. Under
the ICC order, subsequent to 2006, there will be no further recoveries of
decommissioning costs from customers. The ICC order also provides that any
surplus funds after the nuclear stations are decommissioned must be refunded to
customers. The amount of recovery in the ICC order is less than the $84 million
annual amount ComEd recovered in 2000. The ICC order is currently pending on
appeal in the Illinois Appellate Court.
To account for the effects of the ICC order, in the first quarter of 2001 ComEd
reduced its nuclear decommissioning regulatory asset to $372 million, reflecting
the reduction in expected probable future recoveries from customers through
2006. The reduction in the regulatory asset in the amount of $347 million was
recorded as an adjustment to the initial purchase price allocation relating to
the asset and resulted in a corresponding increase in goodwill. Also, 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 ComEd nuclear plants to Generation and the ICC order limiting
the regulated recoveries of decommissioning costs, net unrealized losses of $23
million (net of income taxes) at that date were reclassified to accumulated
other comprehensive income. All subsequent realized gains and losses on these
decommissioning trust funds' assets are based on the cost basis of the trust
fund assets established on the Merger date and are reflected in Other Income and
Deductions in Exelon's Consolidated Statements of Income.
Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy
(DOE) is responsible for the selection and development of repositories for, and
the disposal of, spent nuclear fuel (SNF) and high-level radioactive waste.
ComEd and PECO, as required by the NWPA, each signed a contract with the DOE
(Standard Contract) to provide for disposal of SNF from their respective nuclear
generating stations. In accordance with the NWPA and the Standard Contract,
ComEd and PECO pay the DOE one mill ($.001) per kilowatt-hour of net nuclear
generation for the cost of nuclear fuel long-term storage and disposal. This fee
may be adjusted prospectively in order to ensure full cost recovery. The NWPA
and the Standard Contract required the DOE to begin taking possession of SNF
generated by nuclear generating units by no later than January 1998. The DOE,
however, failed to meet that deadline and its performance is expected to be
delayed significantly. The DOE's current estimate for opening a SNF facility is
2010. This extended delay in SNF acceptance by the DOE has led to Exelon's
adoption of dry storage at its Dresden and Peach Bottom Units and its
consideration of dry storage at other units.
In July 1998, ComEd filed a complaint against the United States Government
(Government) in the United States Court of Federal Claims (Court) seeking to
recover damages caused by the DOE's failure to honor its contractual obligation
to begin disposing of SNF in January 1998. In August 2001, the Court granted
ComEd's motion for partial summary judgment for liability on ComEd's breach of
contract claim. In November 2001 the Government filed two partial summary
judgment motions relating to certain damage issues in the case as well as two
motions to dismiss claims other than ComEd's breach of contract claim. The Court
has deferred briefing on those motions pending completion of discovery on
certain damage issues.
In July 2000, PECO entered into an agreement with the DOE relating to PECO's
Peach Bottom nuclear generating unit to address the DOE's failure to begin
removal of SNF in January 1998 as required by the Standard Contract. Under that
agreement, the DOE agrees to provide PECO with credits against PECO's future
contributions to the Nuclear Waste Fund over the next ten years to compensate
PECO for SNF storage costs incurred as a result of the DOE's breach of the
contract. The agreement also provides that, upon PECO's request, the DOE will
take title to the SNF and the interim storage facility at Peach Bottom provided
certain conditions are met. In November 2000, eight 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 that portion of
the agreement providing for credits to PECO against nuclear waste fund payments
on the ground that such provision is a violation of the NWPA. PECO intervened as
a defendant in that case, which is ongoing. In April 2001, an individual filed
suit against the DOE with the United States District Court for the Middle
District of Pennsylvania seeking to invalidate the agreement on the grounds that
the DOE has violated the National Environmental
Policy Act and the Administrative Procedure Act. PECO intervened as a defendant
and moved to dismiss the complaint. The Court has not yet ruled on the motion to
dismiss.
The Standard Contract with the DOE also requires that PECO and ComEd pay the DOE
a one-time fee applicable to nuclear generation through April 6, 1983. PECO's
fee has been paid. Pursuant to the Standard Contract, ComEd elected to pay the
one-time fee of $277 million, with interest to the date of payment, just prior
to the first delivery of SNF to the DOE. As of December 31, 2001, the liability
for the one-time fee with interest was $843 million. The liabilities for spent
nuclear fuel disposal costs, including the one-time fee, were transferred to
Generation as part of the corporate restructuring.
14. Notes Payable
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
Average borrowings $193 $186 $242
Average interest rates, computed on daily basis 4.01% 6.62% 5.62%
Maximum borrowings outstanding $599 $500 $728
Average interest rates, at December 31 2.63% 7.18% 6.80%
============================================================================================================
Exelon, ComEd, PECO and Generation entered into a $1.5 billion 364 day unsecured
revolving credit facility on December 12, 2001 with a group of banks. This
credit facility is used principally to support the commercial paper programs of
Exelon, ComEd and PECO. At December 31, 2001 and 2000, the amount of commercial
paper outstanding was $360 million and $161 million, respectively. Interest
rates on the advances from the credit facility are based on the London Interbank
Offering Rate (LIBOR) as of the date of the advance.
In October 2000, Exelon obtained a $1.25 billion term loan due June 30, 2001 to
finance the cash consideration paid to former holders of Unicom common stock in
connection with the Merger and to finance the purchase of its 49.9% interest in
Sithe in December 2000. On December 31, 2000, Exelon had $1,210 million
outstanding on the term loan which is also reflected in Notes Payable on the
Consolidated Balance Sheets. This term loan was refinanced with long-term debt
in the second quarter of 2001. The average interest rate on this term loan for
the period it was outstanding in 2001 and 2000 was 6.4% and 7.6%, respectively.
15. Long-Term Debt
at December 31,
--------------------------------------------------
Maturity
Rates Date 2001 2000
- -----------------------------------------------------------------------------------------------------------
ComEd Transitional Trust Notes
Series 1998-A: 5.00%-6.00% 2002-2008 $ 2,380 $ 2,720
PETT Bonds Series 1999-A:
Fixed rates 5.63%-6.13% 2003-2008 (a) 2,561 2,706
Floating rates 5.081%-6.52% 2004-2007 (a) 327 1,132
PETT Bonds Series 2000-A: 7.3%-7.65% 2002-2009 (a) 890 1,000
PETT Bonds Series 2001: 6.52% 2010 (a) 805 --
First and Refunding Mortgage Bonds (b) (c):
Fixed rates 4.00%-10.00% 2002-2023 3,942 4,260
Floating rates 1.46%-1.62% 2012 154 154
Notes payable 6.75%-9.20% 2002-2020 2,647 1,459
Pollution control notes:
Fixed rates 5.875% 2007 44 46
Floating rates 1.59%-2.45% 2009-2034 583 461
Notes payable - accounts receivable agreement 5.625%-10.25% 2005 55 40
Sinking fund debentures 3.125%-4.75% 2004-2011 23 27
- -----------------------------------------------------------------------------------------------------------
Total Long-Term debt (d) 14,411 14,005
Unamortized debt discount and premium, net (129) (139)
Due within one year (1,406) (908)
- -----------------------------------------------------------------------------------------------------------
Long-Term debt $12,876 $ 12,958
===========================================================================================================
(a) The maturity date represents the expected final payment date which is the
date when all principal and interest of the related class of transition
bonds is expected to be paid in full in accordance with the expected
amortization schedule for the applicable class. The date when all principal
and interest must be paid in full for the PETT Bonds Series 1999-A, 2000-A
and 2001-A are 2003 through 2009, 2003 through 2010 and 2010, respectively.
The current portion of transition bonds is based upon the expected maturity
date.
(b) Utility plant of ComEd and PECO is subject to the liens of their respective
mortgage indentures.
(c) Includes first mortgage bonds issued under the ComEd and PECO mortgage
indentures securing pollution control notes.
(d) Long-term debt maturities in the period 2002 through 2006 and thereafter
are as follows:
2002 $ 1,406
2003 1,391
2004 896
2005 1,308
2006 1,268
Thereafter 8,142
----------------------
Total $14,411
======================
In 2001, ComEd entered into forward starting interest rate swaps with an
aggregate notional amount of $250 million to manage interest rate exposure
associated with the anticipated $400 million refinancing of ComEd First Mortgage
Bonds. ComEd also entered into an interest rate swap agreement with a notional
amount of $235 million to effectively convert fixed rate debt to floating rate
debt.
In 1999, PECO entered into treasury forwards associated with the anticipated
issuance of the Series 2000-A Transition Bonds. On May 2, 2000, these
instruments were settled with net proceeds to the counterparties of $13 million
which has been deferred and is being amortized over the life of the Series
2000-A Transition Bonds as an increase to interest expense.
In 1998, PECO entered into treasury forwards and forward starting interest rate
swaps to manage interest rate exposure associated with the anticipated issuance
of the Series 1999-A Transition Bonds. On March 18, 1999, these instruments were
settled with net proceeds of $80 million to PECO which were deferred and are
being amortized over the life of the Series 1999-A Transition Bonds as a
reduction of interest expense.
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 due to the transaction no longer being
probable. 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.
At December 31, 2001 and 2000, the aggregate unamortized net gain on the
settlement of PECO transactions was $55 million and $51 million, respectively.
Prepayment premiums of $39 million, offset by unamortized issuance premiums of
$17 million, associated with the early retirement of debt in 2001 have been
deferred in regulatory assets and will be amortized to interest expense over the
life of the related new debt issuance consistent with regulatory recovery. In
2000 and 1999, Exelon incurred extraordinary charges aggregating $6 million ($4
million, net of tax) and $62 million ($37 million, net of tax), respectively for
prepayment premiums and the write-offs of unamortized deferred financing costs
associated with the early retirement of debt.
16. Income Taxes
Income tax expense (benefit) is comprised of the following components:
For the Years Ended December 31,
------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Included in operations:
Federal
Current $ 880 $ 163 $ 293
Deferred (61) 163 6
Investment tax credit, net (14) (15) (14)
State
Current 119 -- 72
Deferred 7 30 1
- -----------------------------------------------------------------------------------------------------------
$ 931 $ 341 $ 358
===========================================================================================================
Included in extraordinary item:
Federal
Current $ -- $ (2) $ (19)
State
Current -- -- (6)
- -----------------------------------------------------------------------------------------------------------
$ -- $ (2) $ (25)
===========================================================================================================
Included in cumulative effects of changes
in accounting principles:
Federal
Deferred $ 6 $ 13 $ --
State
Deferred 2 3 --
- -----------------------------------------------------------------------------------------------------------
$ 8 $ 16 $ --
===========================================================================================================
The effective income tax rate varies from the U.S. Federal statutory rate for
the years ended December 31 principally due to the following:
For the Years Ended December 31,
------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) due to:
Property basis differences (0.2) 0.1 (0.8)
State income taxes, net of Federal income tax benefit 3.4 2.1 4.8
Amortization of investment tax credit (0.5) (1.6) (1.5)
Amortization of goodwill 1.9 0.9 --
Prior period income taxes (0.3) 0.4 (0.7)
Dividends on PECO Preferred Stock 0.2 0.4 0.4
Other, net 0.2 0.3 (0.1)
- -----------------------------------------------------------------------------------------------------------
Effective income tax rate 39.7% 37.6% 37.1%
===========================================================================================================
The tax effects of temporary differences giving rise to significant portions of
Exelon's deferred tax assets and liabilities as of December 31, 2001 and 2000
are presented below:
(Restated
see note 2)
2001 2000
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant basis difference $ 5,116 $ 4,535
Deferred gain on like-kind exchange 453 466
Deferred investment tax credit 222 330
Deferred debt refinancing costs 44 48
Other, net 63 5
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 5,898 5,384
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Decommissioning and decontamination obligations (813) --
Deferred pension and postretirement obligations (382) (437)
Other, net (22) (270)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets (1,217) (707)
- -----------------------------------------------------------------------------------------------------------
Deferred income taxes (net) on the balance sheet $ 4,681 $ 4,677
===========================================================================================================
Prior to 2001, the offsetting deferred tax assets and liabilities resulting from
decommissioning and decontamination assets and obligations, accounted for as
regulatory assets and liabilities, were recorded within the plant basis
difference caption above. As a result of the corporate restructuring, on January
1, 2001, the decommissioning and decontamination obligations were transferred to
Generation, an unregulated subsidiary; however the regulatory asset related to
decommissioning and decontamination remained with ComEd as a receivable from its
regulated customers. The deferred tax liability relating to the regulatory asset
is reflected in the plant basis difference caption, however, the deferred tax
asset related to the decommissioning and decontamination obligation is no longer
recorded in the plant basis difference caption with the regulatory assets and
liabilities.
In accordance with regulatory treatment of certain temporary differences, Exelon
has recorded a regulatory asset for recoverable deferred income taxes of $701
million and $632 million at December 31, 2001 and 2000, respectively. These
recoverable deferred income taxes include the deferred tax effects associated
principally with liberalized depreciation accounted for in accordance with the
ratemaking policies of the ICC and PUC, as well as the revenue impacts thereon,
and assume continued recovery of these costs in future rates.
The Internal Revenue Service and certain state tax authorities are currently
auditing certain tax returns of Exelon's predecessor entities, Unicom and PECO.
The current audits are not expected to have an adverse impact on financial
condition or results of operations of Exelon.
17. Retirement Benefits
Exelon sponsors defined benefit pension plans and postretirement welfare benefit
plans applicable to essentially all ComEd, PECO, Generation and BSC employees
and certain employees of Enterprises. In 2001, Exelon consolidated the former
Unicom and PECO plans into Exelon plans. Essentially all management employees,
and electing union employees, hired on or after January 1, 2001 participate in
newly established cash balance pension plans. Management employees who were
active participants in the former Unicom and PECO pension plans on December 31,
2000, and remain employed by Exelon on January 1, 2002, will have the
opportunity to continue to participate in the pension plan or to transfer to the
cash balance plan. Benefits under Exelon's pension plans generally reflect each
employee's compensation, years of service and age at retirement. Funding is
based upon actuarially determined contributions that take into account the
amount deductible for income tax purposes and the minimum contribution required
under the Employee Retirement Income Security Act of 1974, as amended. The
following tables provide a reconciliation of benefit obligations, plan assets
and funded status of the plans.
Pension Benefits Other Postretirement Benefits
--------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Net benefit obligation at beginning of year $ 6,695 $ 2,054 $ 2,275 $ 798
Service cost 94 39 42 24
Interest cost 498 219 161 83
Plan participants' contributions -- -- 4 1
Plan amendments 44 -- (191) --
Actuarial (gain)loss 254 228 173 144
Acquisitions -- 4,231 -- 1,228
Curtailments/Settlements (38) (74) -- 4
Special accounting costs 48 217 3 48
Gross benefits paid (494) (219) (136) (55)
- -----------------------------------------------------------------------------------------------------------
Net benefit obligation at end of year $ 7,101 $ 6,695 $ 2,331 $ 2,275
===========================================================================================================
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 7,000 $ 2,982 $ 1,188 $ 244
Actual return on plan assets (265) 173 (14) (7)
Employer contributions 38 2 90 84
Plan participants' contributions -- -- 4 1
Acquisitions -- 4,062 -- 921
Gross benefits paid (494) (219) (136) (55)
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 6,279 $ 7,000 $ 1,132 $ 1,188
===========================================================================================================
Funded status at end of year $ (822) $ 305 $ (1,199) $ (1,087)
Miscellaneous adjustment -- -- -- 5
Unrecognized net actuarial (gain)loss 397 (777) 440 143
Unrecognized prior service cost 108 77 (191) --
Unrecognized net transition obligation (asset) (17) (21) 103 122
- -----------------------------------------------------------------------------------------------------------
Net amount recognized at end of year $ (334) $ (416) $ (847) $ (817)
===========================================================================================================
Pension Benefits Other Postretirement Benefits
-------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions
as of December 31,
Discount rate 7.35% 7.60% 8.00% 7.35% 7.60% 8.00%
Expected return on plan assets 9.50% 9.50% 9.50% 9.50% 8.00% 8.00%
Rate of compensation increase 4.00% 4.30% 5.00% 4.00% 4.30% 5.00%
Health care cost trend on
covered charges N/A N/A N/A 10.00% 7.00% 8.00%
decreasing decreasing decreasing
to ultimate to ultimate to ultimate
trend of 4.5% trend of 5.0% trend of 5.0%
in 2008 in 2005 in 2006
Pension Benefits Other Postretirement Benefits
-------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost (benefit):
Service cost $ 94 $ 39 $ 29 $ 42 $ 24 $ 19
Interest cost 498 219 154 161 83 57
Expected return on assets (625) (316) (222) (99) (34) (16)
Amortization of:
Transition obligation (asset) (4) (4) (4) 10 12 12
Prior service cost 9 7 5 (9) -- --
Actuarial (gain) loss (25) (26) (8) 1 -- --
Curtailment charge (credit) (12) (12) -- 9 24 --
Settlement charge (credit) (9) (16) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (benefit) $ (74) $ (109) $ (46) $ 115 $ 109 $ 72
==========================================================================================================================
Special accounting costs $ 48 $ 217 $ -- $ 3 $ 48 $ --
==========================================================================================================================
Sensitivity of retiree welfare results
- -----------------------------------------------------------------------------------------------------------
Effect of a one percentage point increase in assumed health care cost trend
on total service and interest cost components $ 33
on postretirement benefit obligation $ 276
Effect of a one percentage point decrease in assumed health care cost trend
on total service and interest cost components $ (28)
on postretirement benefit obligation $ (239)
- -----------------------------------------------------------------------------------------------------------
Prior service cost is amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits under the
plans.
Special accounting costs of $48 million in 2001 represent accelerated separation
and enhancement benefits provided to PECO employees expected to be terminated as
a result of the Merger. Special accounting costs in 2000 of $217 million
represented PECO's accelerated separation and enhancement benefits of $96
million and ComEd's accelerated liability increase of $121 million inclusive of
$96 million for separation benefits and $25 million for plan enhancements.
Exelon provides certain health care and life insurance benefits for retired
employees. In 2001, Exelon adopted an amendment to the former Unicom
postretirement medical benefit plan that changed the eligibility requirement of
the plan to cover only employees who retire with 10 years of service after age
45 rather than with 10 years of service and having attained the age of 55.
Welfare benefits for active employees are provided by several insurance policies
or self-funded plans whose premiums or contributions are based upon the benefits
paid during the year.
Additionally, Exelon sponsors nonqualified supplemental retirement plans which
cover any excess pension benefits that would be payable to management employees
under the qualified plan but which are limited by the Internal Revenue Code. The
fair value of plan assets excludes $58 million held in trust as of December 31,
2001 for the payment of benefits under the supplemental plan and $8 million held
in trust as of December 31, 2001 for the payment of postretirement medical
benefits.
Exelon sponsors savings plans for the majority of its employees. The plans allow
employees to contribute a portion of their pretax income in accordance with
specified guidelines. Exelon matches a percentage of the employee contribution
up to certain limits. The cost of Exelon's matching contribution to the savings
plans totaled $57 million, $17 million and $7 million in 2001, 2000 and 1999,
respectively.
18. Preferred Securities of Subsidiaries
Preferred and Preference Stock
At December 31, 2001 and 2000, Series Preference Stock of PECO, no par value,
consisted of 100,000,000 shares authorized, of which no shares were outstanding.
At December 31, 2001 and 2000, cumulative Preferred Stock of PECO, no par value,
consisted of 15,000,000 shares authorized and the amounts set forth below:
at December 31,
---------------------------------------------------------------
Current 2001 2000 2001 2000
Redemption ---------------------------------------------------------------
Price(a) Shares Outstanding Dollar Amount
- -----------------------------------------------------------------------------------------------------------
Series (without mandatory
redemption)
$4.68 $ 104.00 150,000 150,000 $ 15 $ 15
$4.40 112.50 274,720 274,720 27 27
$4.30 102.00 150,000 150,000 15 15
$3.80 106.00 300,000 300,000 30 30
$7.48 (b) 500,000 500,000 50 50
- -----------------------------------------------------------------------------------------------------------
1,374,720 1,374,720 137 137
Series (with mandatory
redemption)
$6.12 (c) 185,400 370,800 19 37
- -----------------------------------------------------------------------------------------------------------
Total preferred stock 1,560,120 1,745,520 $ 156 $ 174
===========================================================================================================
(a) Redeemable, at the option of PECO, at the indicated dollar amounts per
share, plus accrued dividends.
(b) None of the shares of this series is subject to redemption prior to April
1, 2003.
(c) PECO made the annual sinking fund payments of $18.5 million on August 1,
2001 and August 2, 2000. The future sinking fund requirement in 2002 is
$18.5 million.
At December 31, 2001, ComEd Prior Preferred Stock and ComEd Preference Stock
consisted of 850,000 and 6,810,451 shares authorized, respectively, none of
which were outstanding.
Company Obligated Mandatorily Redeemable Preferred Securities At December 31,
2001 and 2000, subsidiary trusts of PECO and ComEd had outstanding the following
preferred securities:
at December 31,
-----------------------------------------------
Mandatory Distri- Liqui- 2001 2000 2001 2000
Redemption bution dation -----------------------------------------------
Date Rate Value Trust Securities Outstanding Dollar Amount
- -----------------------------------------------------------------------------------------------------------
PECO Energy
Capital Trust II 2037 8.00% $ 25 2,000,000 2,000,000 $ 50 $ 50
PECO Energy
Capital Trust III 2028 7.38% 1,000 78,105 78,105 78 78
- -----------------------------------------------------------------------------------------------------------
Total 2,078,105 2,078,105 $ 128 $ 128
===========================================================================================================
ComEd Financing I 2035 8.48% $ 25 8,000,000 8,000,000 $ 200 200
ComEd Financing II 2027 8.50% 1,000 150,000 150,000 150 150
Unamortized Discount (21) (22)
- -----------------------------------------------------------------------------------------------------------
Total 8,150,000 8,150,000 $ 329 $ 328
===========================================================================================================
The securities issued by the PECO trusts represent Company Obligated Mandatorily
Redeemable Preferred Securities of a Partnership (COMRPS) having a distribution
rate and liquidation value equivalent to the trust securities. The COMRPS are
the sole assets of these trusts and represent limited partnership interests of
PECO Energy Capital, L.P. (Partnership), a Delaware limited partnership. Each
holder of a trust's securities is entitled to withdraw the corresponding number
of COMRPS from the trust in exchange for the trust securities so held. Each
series of COMRPS is supported by PECO's deferrable interest subordinated
debentures, held by the Partnership, which bear interest at rates equal to the
distribution rates on the related series of COMRPS.
ComEd Financing I and ComEd Financing II are wholly owned subsidiary trusts of
ComEd. Each ComEd trust's sole assets are subordinated deferrable interest
securities issued by ComEd bearing interest rates equivalent to the distribution
rate of the related trust security.
The interest expense on the debentures and deferrable interest securities is
included in Distributions on Preferred Securities of Subsidiaries in the
Consolidated Statements of Income and is deductible for income tax purposes.
19. Common Stock
At December 31, 2001 and 2000, common stock without par value consisted of
600,000,000 and 600,000,000 shares authorized and 321,006,904 and 319,005,112
shares outstanding, respectively.
Stock Repurchase
In January 2000, in connection with the Merger Agreement, PECO entered into a
forward purchase agreement to purchase $500 million of its common stock from
time to time. Settlement of this forward purchase agreement was, at PECO's
election, on a physical, net share or net cash basis. In May 2000, PECO utilized
a portion of the proceeds from the securitization of its stranded cost recovery
to physically settle this agreement, resulting in the repurchase of 12 million
shares of common stock for $496 million. In connection with the settlement of
this agreement, PECO received $1 million in accumulated dividends on the
repurchased shares and paid $6 million of interest.
During 1997, PECO's Board of Directors authorized the repurchase of up to 25
million shares of its common stock from time to time through open-market,
privately negotiated and/or other types of transactions in conformity with the
rules of the SEC. Pursuant to these authorizations, PECO entered into forward
purchase agreements to be settled from time to time, at PECO's election, on a
physical, net share or net cash basis. PECO utilized the proceeds from the
securitization of a portion of its stranded cost recovery in the first quarter
of 1999, to physically settle these agreements, resulting in the purchase of 21
million shares of common stock for $696 million. In connection with the
settlement of these agreements, PECO received $18 million in accumulated
dividends on the repurchased shares and paid $6 million of interest.
Stock-Based Compensation Plans
Exelon maintains a Long-Term Incentive Plan (LTIP) for certain full-time
salaried employees and previously maintained a broad-based incentive program for
certain other employees. The types of long-term incentive awards that have been
granted under the LTIP are non-qualified options to purchase shares of Exelon's
common stock and common stock awards. At December 31, 2001, there were 9,000,000
options authorized for issuance under the LTIP and 2,000,000 options authorized
under the broad-based incentive program. Exelon uses the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123). If Exelon elected to account for its stock-based compensation plans based
on SFAS No. 123, it would have recognized compensation expense of $7 million,
$60 million and $10 million, for 2001, 2000 and 1999, respectively. In addition,
net income would have been $1,421 million, $526 million and $560 million for
2001, 2000 and 1999, respectively, and earnings per share would have been $4.41,
$2.58 and $2.84 for 2001, 2000 and 1999, respectively.
The exercise price of the stock options is equal to the fair market value of the
underlying stock on the date of option grant. Options
granted under the LTIP and the broad-based incentive program become exercisable
upon attainment of a target share value and/or time. All options expire 10 years
from the date of grant. Information with respect to the LTIP and the broad-based
incentive program at December 31, 2001 and changes for the three years then
ended, is as follows:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares (per share) Shares (per share) Shares (per share)
2001 2001 2000 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------
Balance at January 1 15,287,859 42.13 6,065,897 $ 31.91 4,663,008 $ 27.71
Options granted/assumed 629,200 66.42 11,089,051 (a) 46.09 2,049,789 39.32
Options exercised (1,695,474) 34.84 (1,725,058) 31.79 (568,000) 25.17
Options canceled (181,589) 52.64 (142,031) 39.95 (78,900) 38.14
- -----------------------------------------------------------------------------------------------------------
Balance at December 31 14,039,996 43.96 15,287,859 42.13 6,065,897 31.91
===========================================================================================================
Exercisable at
December 31 8,006,193 38.75 4,953,942 30.04 3,331,903 25.60
===========================================================================================================
Weighted average fair value
of options granted
during year $ 19.59 $ 16.62 $ 8.24
===========================================================================================================
(a) Includes 5.3 million options converted in the Merger.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001, 2000 and 1999, respectively:
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Dividend yield 3.2% 3.6% 5.7%
Expected volatility 36.8% 36.8% 30.5%
Risk-free interest rate 4.9% 5.9% 5.9%
Expected life (years) 5.0 5.0 9.5
- -----------------------------------------------------------------------------------------------------------
At December 31, 2001, the options outstanding, based on ranges of exercise
prices, were as follows:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
$10.01-$20.00 597,400 6.14 $19.68 597,400 $19.68
$20.01-$30.00 1,639,611 4.40 25.03 1,639,611 25.03
$30.01-$40.00 5,395,604 7.54 37.85 3,069,046 37.63
$40.01-$50.00 1,438,206 7.43 41.56 1,023,557 41.21
$50.01-$60.00 4,332,775 8.82 59.46 1,669,077 59.49
$60.01-$70.00 636,400 9.04 67.30 7,502 64.97
- ------------------------------------------------------------------------------------------------------------
Total 14,039,996 8,006,193
============================================================================================================
Under Exelon's LTIP 195,725 shares and 120,300 shares of common stock awards
were issued during 2000 and 1999, respectively. Vesting for the common stock
awards is over a period not to exceed 10 years from the grant date. Compensation
cost of $14 million
associated with these awards is amortized to expense over the vesting period.
The related accumulated amortization was approximately $12 million, $7 million
and $2 million at December 31, 2001, 2000 and 1999, respectively.
Additionally under Exelon's LTIP, 426,794 and 159,129 Exelon common share awards
were granted during 2001 and 2000, respectively. Compensation cost of $30
million is to be accrued to expense over the vesting period of up to 5 years
from the date of the grant. The related accumulated amortization was
approximately $17 million and $6 million at December 31, 2001 and 2000,
respectively.
In June 2001, the Board of Directors of Exelon approved the Employee Stock
Purchase Plan (ESPP). The purpose of the ESPP is to provide employees of Exelon,
and its subsidiary companies the right to purchase shares of Exelon's common
stock at below-market prices. A total of 5,000,000 shares of Exelon's common
stock have been reserved for issuance under the ESPP. Employees' purchases are
limited to no more than 125 shares per quarter and no more than $25,000 in fair
market value in any plan year. During 2001, employees purchased 137,648 shares
of Exelon common stock under the ESPP.
20. Fair Value of Financial Assets and Liabilities
The carrying amounts and fair values of Exelon's financial assets and
liabilities as of December 31, 2001 and 2000 were as follows:
2001 2000
-------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
Non-derivatives:
Liabilities
Long-term debt (including
amounts due within one year) $ 14,282 $ 14,912 $ 13,866 $ 14,336
Preferred Securities of Subsidiaries 613 572 630 601
Derivatives:
Interest rate swaps (20) (20) -- (19)
Forward interest rate swaps (1) (1) -- 40
Energy derivatives 92 92 (34) (34)
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, customer accounts receivable and trust accounts for
decommisioning nuclear plants are recorded at their fair value.
As of December 31, 2001 and 2000, Exelon's carrying amounts of cash and cash
equivalents and accounts receivable are representative of fair value because of
the short-term nature of these instruments. Fair values of the trust accounts
for decommissioning nuclear plants, long-term debt and preferred securities of
subsidiaries are estimated based on quoted market prices for the same or similar
issues. The fair value of Exelon's interest rate swaps and power purchase and
sale contracts is determined using quoted exchange prices, external dealer
prices, or internal valuation models which utilize assumptions of future energy
prices and available market pricing curves.
Financial instruments that potentially subject Exelon to concentrations of
credit risk consist principally of cash equivalents and customer accounts
receivable. Exelon places its cash equivalents with high-credit quality
financial institutions. Generally, such investments are in excess of the Federal
Deposit Insurance Corporation limits. Concentrations of credit risk with respect
to customer accounts receivable are limited due to Exelon's large number of
customers and their dispersion across many industries.
Exelon has entered into interest rate swaps and forward-starting interest rate
swaps to manage interest rate exposure in the aggregate notional amount of $576
million. These swaps have been designated as cash-flow hedges under SFAS No.
133, and as such, as long as the hedge remains effective and the underlying
transaction remains probable, changes in the fair value of these swaps will be
recorded in accumulated other comprehensive income (loss) until earnings are
affected by the variability of the cash flows being hedged. Exelon has also
entered into an interest rate swap to lock in the value of a $235 million
fixed-rate obligation of ComEd. This swap has been designated as a fair-value
hedge, as defined in SFAS No. 133 and as such, changes in the fair value of the
swap will be recorded in earnings. However, as long as the hedge remains
effective and the underlying transaction remains probable, changes in the fair
value of the swap will be offset by changes in the fair value of the hedged
liabilities. Any change in the fair value of the hedge as a result of
ineffectiveness would be recorded immediately in earnings.
The notional amount of derivatives do not represent amounts that are exchanged
by the parties and, thus, are not a measure of Exelon's exposure. The amounts
exchanged are calculated on the basis of the notional or contract amounts, as
well as on the other terms of the derivatives, which relate to interest rates
and the volatility of these rates.
Exelon utilizes derivatives to manage the utilization of its available
generating capacity and provision of wholesale energy to its affiliates. Exelon
also utilizes energy option contracts and energy financial swap arrangements to
limit the market price risk associated with forward energy commodity contracts.
Additionally, Exelon enters into certain energy-related derivatives for trading
or speculative purposes.
Exelon would be exposed to credit-related losses in the event of non-performance
by the counterparties that issued the derivative instruments. The credit
exposure of derivatives contracts is represented by the fair value of contracts
at the reporting date. Exelon's
interest rate swaps are documented under master agreements. Among other things,
these agreements provide for a maximum credit exposure for both parties.
Payments are required by the appropriate party when the maximum limit is
reached. The majority of power purchase and sale contracts are documented under
master netting agreements.
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. 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 2001, Exelon recognized net gains of $16 million ($10 million, net of
income taxes) relating to mark-to-market (MTM) adjustments of certain
non-trading 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 Consolidated Statements of Income. During 2001, Exelon recognized net
gains aggregating $14 million ($10 million, net of income taxes) on derivative
instruments entered into for trading purposes. Exelon commenced financial
trading in the second quarter of 2001. Gains and losses associated with
financial trading are reported as Other Income and Deductions in the
Consolidated Statements of Income. During 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 2001, a
$6 million gain ($4 million, net of income taxes) was reclassified from
accumulated other comprehensive income into earnings as a result of forecasted
financing transactions no longer being probable.
As of December 31, 2001, $65 million of deferred net gains 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. The majority of Exelon's cash flow hedges are expected
to settle within the next 3 years. Exelon classifies investments in the trust
accounts for decommissioning nuclear plants as available-for-sale. The following
tables show the fair values, gross unrealized gains and losses and amortized
costs bases for the securities held in these trust accounts.
December 31,2001
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
Equity securities $ 1,666 $ 130 $ (236) $ 1,560
Debt securities
Government obligations 882 28 (3) 907
Other debt securities 701 16 (19) 698
- -----------------------------------------------------------------------------------------------------------
Total debt securities 1,583 44 (22) 1,605
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 3,249 $ 174 $ (258) $ 3,165
===========================================================================================================
December 31,2000
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
Equity securities $ 1,702 $ 144 $ (180) $ 1,666
Debt securities
Government obligations 932 40 -- 972
Other debt securities 470 8 (7) 471
- -----------------------------------------------------------------------------------------------------------
Total debt securities 1,402 48 (7) 1,443
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 3,104 $ 192 $ (187) $ 3,109
===========================================================================================================
Net unrealized losses of $84 million and gains of $5 million were recognized in
Accumulated Depreciation, Regulatory Assets and Accumulated Other Comprehensive
Income in Exelon's Consolidated Balance Sheets at December 31, 2001 and 2000,
respectively.
For the Years December 31
---------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales $ 1,624 $ 265
Gross realized gains 76 9
Gross realized losses (189) (46)
- -----------------------------------------------------------------------------------------------------------
Net realized gains of $14 million and net realized losses of $37 million were
recognized in Accumulated Depreciation and Regulatory Assets in Exelon's
Consolidated Balance Sheets at December 31, 2001 and 2000, respectively and $127
million of net realized losses was recognized in Other Income and Deductions in
Exelon's Consolidated Income Statements for 2001.
The available-for-sale securities held at December 31, 2001 have an average
maturity of eight to ten years. The cost of these securities was determined on
the basis of specific identification. See Note 13 - Nuclear Decommissioning and
Spent Fuel Storage for further information regarding the nuclear decommissioning
trusts.
21. Commitments and Contingencies
Capital Commitments
In December 2001, Generation agreed to purchase two generation plants located in
the Dallas-Fort Worth metropolitan area from TXU Corp. (TXU) to expand its
presence in the Texas region. The $443 million purchase of the two natural-gas
and oil-fired plants, to be funded through available cash and commercial paper
proceeds, will add approximately 2,300 megawatts (MW) capacity. The transaction
includes a power purchase agreement for TXU to purchase power during the months
of May through September from 2002 through 2006. During the periods covered by
the power purchase agreement, TXU will make fixed capacity payments and will
provide fuel to Exelon in return for exclusive rights to the energy and capacity
of the generation plants. The closing of the acquisition is contingent upon
receipt of the necessary regulatory approvals and is anticipated to occur in the
first quarter of 2002. Also, Exelon has committed to provide AmerGen with
capital contributions equivalent to 50% of the purchase price of any
acquisitions AmerGen makes in 2002 and Exelon and British Energy have each
agreed to provide up to $100 million to AmerGen at any time for operating
expenses.
Nuclear Insurance
The Price-Anderson Act limits the liability of nuclear reactor owners for claims
that could arise from a single incident. The current limit is $9.5 billion and
is subject to change to account for the effects of inflation and changes in the
number of licensed reactors. Through its subsidiaries, Exelon carries the
maximum available commercial insurance of $200 million and the remaining $9.3
billion is provided through mandatory participation in a financial protection
pool. Under the Price-Anderson Act, all nuclear reactor licensees can be
assessed up to $89 million per reactor per incident, payable at no more than $10
million per reactor per incident per year. This assessment is subject to
inflation and state premium taxes. In addition, the U.S. Congress could impose
revenue-raising measures on the nuclear industry to pay claims. The
Price-Anderson Act is scheduled to expire in August 2002. Although replacement
legislation has been proposed from time to time, Exelon is unable to predict
whether replacement legislation will be enacted.
Exelon carries property damage, decontamination and premature decommissioning
insurance for each station loss resulting from damage to its nuclear plants. In
the event of an accident, insurance proceeds must first be used for reactor
stabilization and site decontamination. If the decision is made to decommission
the facility, a portion of the insurance proceeds will be allocated to a fund,
which Exelon is required by the Nuclear Regulatory Commission (NRC) to maintain,
to provide for decommissioning the facility. Exelon is unable to predict the
timing of the availability of insurance proceeds to Exelon and the amount of
such proceeds which would be available. Under the terms of the various insurance
agreements, Exelon could be assessed up to $121 million for losses incurred at
any plant insured by the insurance companies. In the event that one or more acts
of terrorism cause accidental property damage within a twelve month period from
the first accidental property damage under one or more policies for all
insureds, the maximum recovery for all losses by all insureds will be an
aggregate of $3.2 billion plus such additional amounts as the insurer may
recover for all such losses from reinsurance, indemnity, and any other source,
applicable to such losses.
Additionally, through its subsidiaries, Exelon is a member of an industry mutual
insurance company that provides replacement power cost insurance in the event of
a major accidental outage at a nuclear station. The premium for this coverage is
subject to assessment for adverse loss experience. Exelon's maximum share of any
assessment is $46 million per year. Recovery under this insurance for terrorist
acts is subject to the $3.2 billion aggregate limit and secondary to the
property insurance described above.
In addition, Exelon participates in the American Nuclear Insurers Master Worker
Program, which provides coverage for worker tort claims filed for bodily injury
caused by a nuclear energy accident. This program was modified, effective
January 1, 1998, to provide coverage to all workers whose "nuclear-related
employment" began on or after the commencement date of reactor operations.
Exelon will not be liable for a retrospective assessment under this new policy.
However, in the event losses incurred under the small number of policies in the
old program exceed accumulated reserves, a maximum retroactive assessment of up
to $50 million could apply. Exelon is self-insured to the extent that any losses
may exceed the amount of insurance maintained. Such losses could have a material
adverse effect on Exelon's financial condition and results of operations.
Energy Commitments
Exelon's wholesale operations include the physical delivery and marketing of
power obtained through its generation capacity, and long, intermediate and
short-term contracts. Exelon maintains a net positive supply of energy and
capacity, through ownership of generation assets and power purchase and lease
agreements, to protect it from the potential operational failure of one of its
owned or contracted power generating units. Exelon has also contracted for
access to additional generation through bilateral long-term power purchase
agreements. These agreements are firm commitments related to power generation of
specific generation plants and/or are dispatchable in nature - similar to asset
ownership. Exelon enters into power purchase agreements with the objective of
obtaining low-cost energy supply sources to meet its physical delivery
obligations to its customers. Exelon has also purchased firm transmission
rights to ensure that it has reliable transmission capacity to physically move
its power supplies to meet customer delivery needs. The primary intent and
business objective for the use of its capital assets and contracts is to provide
Exelon with physical power supply to enable it to deliver energy to meet
customer needs. Exelon primarily uses financial contracts in its wholesale
marketing activities for hedging purposes. Exelon also uses financial contracts
to manage the risk surrounding trading for profit activities.
Exelon has entered into bilateral long-term contractual obligations for sales of
energy to load-serving entities, including electric utilities, municipalities,
electric cooperatives, and retail load aggregators. Exelon also enters into
contractual obligations to deliver energy to wholesale market participants who
primarily focus on the resale of energy products for delivery. Exelon provides
delivery of its energy to these customers through access to its transmission
assets or rights for firm transmission.
Generation has power purchase arrangements (PPAs) with Midwest Generation, LLC
(Midwest Generation) for the purchase of capacity from its coal fired stations,
in declining amounts through 2004. Contracted capacity and capacity available
through the exercise of an annual option are as follows (in megawatts):
Contracted Available Option
Capacity Capacity
- ------------------------------------------------------------------------------------------------------------
2002 4,013 1,632
2003 1,696 3,949
2004 1,696 3,949
- ------------------------------------------------------------------------------------------------------------
The agreements also provide for the option to purchase 2,698 megawatts of oil
and gas-fired capacity, and 944 megawatts of peaking capacity, subject to
reduction.
Generation has entered into PPAs with AmerGen, under which it will purchase all
the energy from Unit No. 1 at Three Mile Island Nuclear Station (TMI) after
December 31, 2001 through December 31, 2014. Under a 1999 PPA, Generation will
purchase from AmerGen all of the residual energy from the Clinton Nuclear Power
Station (Clinton), through December 31, 2002. Currently, the residual output
approximates 25% of the total output of the Clinton.
At December 31, 2001, Exelon had long-term commitments, relating to the purchase
and sale of energy, capacity and transmission rights from unaffiliated utilities
and others, including the Midwest Generation and AmerGen contracts, as expressed
in the following tables:
Transmission
Capacity Rights Power Only Power Only
Purchases Purchases Purchases Sales
- -------------------------------------------------------------------------------------------------------------
2002 $ 1,005 $ 139 $ 551 $ 1,803
2003 1,214 31 345 666
2004 1,222 15 346 219
2005 406 15 264 139
2006 406 5 250 58
Thereafter 3,657 -- 2,321 22
- -------------------------------------------------------------------------------------------------------------
Total $ 7,910 $ 205 $ 4,077 $ 2,907
=============================================================================================================
Environmental Issues
Exelon's operations have in the past and may in the future require substantial
capital expenditures in order to comply with environmental laws. Additionally,
under Federal and state environmental laws, Exelon, through its subsidiaries, is
generally liable for the costs of remediating environmental contamination of
property now or formerly owned by Exelon and of property contaminated by
hazardous substances generated by Exelon. Exelon owns or leases a number of real
estate parcels, including parcels on which its operations or the operations of
others may have resulted in contamination by substances which are considered
hazardous under environmental laws. Exelon has identified 72 sites where former
manufactured gas plant (MGP) activities have or may have resulted in actual site
contamination. Exelon is currently involved in a number of proceedings relating
to sites where hazardous substances have been deposited and may be subject to
additional proceedings in the future.
As of December 31, 2001 and 2000, Exelon had accrued $156 million and $172
million, respectively, for environmental investigation and remediation costs,
including $127 million and $140 million, respectively, for MGP investigation and
remediation, that currently can be reasonably estimated. Included in the
environmental investigation and remediation cost obligation as of December 31,
2001 and 2000 is $100 million and $110 million, respectively, that has been
recorded on a discount basis, (reflecting discount rates of 5.5%). Such
estimates, reflecting the effects of a 3% inflation rate before the effects of
discounting were $154 million and $170 million at December 31, 2001 and 2000,
respectively. Exelon anticipates that payments related to the discounted
environmental
investigation and remediation costs, recorded on an undiscounted basis, of $68
million will be incurred for the five-year period through 2006. Exelon cannot
reasonably estimate whether it will incur other significant liabilities for
additional investigation and remediation costs at these or additional sites
identified by Exelon, environmental agencies or others, or whether such costs
will be recoverable from third parties.
Leases
Minimum future operating lease payments, including lease payments for real
estate, computers, rail cars and office equipment, as of December 31, 2001 were:
- -----------------------------------------------------------------------------------------------------------
2002 $ 82
2003 84
2004 68
2005 67
2006 61
Remaining years 628
- -----------------------------------------------------------------------------------------------------------
Total minimum future lease payments $ 990
===========================================================================================================
Rental expense under operating leases totaled $75 million, $41 million, and $54
million in 2001, 2000 and 1999, respectively.
Litigation
Chicago Franchise. In March 1999, ComEd reached a settlement agreement with the
City of Chicago (Chicago)to end the arbitration proceeding between ComEd and
Chicago regarding 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 the
years 1999 through 2001 and has conditionally agreed to deposit $25 million at
the end of 2002, to help ensure an adequate and reliable electric supply for
Chicago.
Cotter Corporation Litigation. During 1989 and 1991, actions were brought in
Federal and state courts in Colorado against ComEd and its subsidiary, Cotter
Corporation (Cotter), seeking unspecified damages and injunctive relief based on
allegations that Cotter permitted radioactive and other hazardous material to be
released from its mill into areas owned or occupied by the plaintiffs, resulting
in property damage and potential adverse health effects. In 1994, a Federal jury
returned nominal dollar verdicts against Cotter on eight plaintiffs' claims in
the 1989 cases, which verdicts were upheld on appeal. The remaining claims in
the 1989 actions were settled or dismissed. In 1998, a jury verdict was rendered
against Cotter in favor of 14 of the plaintiffs in the 1991 cases, totaling
approximately $6 million in compensatory and punitive damages, interest and
medical monitoring. On appeal, the Tenth Circuit Court of Appeals reversed the
jury verdict, and remanded the case for new trial. These plaintiffs' cases were
consolidated with the remaining 26 plaintiffs' cases, which had not been tried.
The consolidated trial was completed on June 28, 2001. The jury returned a
verdict against Cotter and awarded $16.3 million in various damages. On November
20, 2001, the District Court entered an amended final judgment which included an
award of both pre-judgment and post-judgment interests, costs, and medical
monitoring expenses which total $43.3 million. This matter is being appealed by
Cotter in the Tenth Circuit Court of Appeals. Cotter will vigorously contest the
award.
In November 2000, another trial involving a separate sub-group of 13 plaintiffs,
seeking $19 million in damages plus interest was completed in federal district
court in Denver. The jury awarded nominal damages of $42,500 to 11 of 13
plaintiffs, but awarded no damages for any personal injury or health claims,
other than requiring Cotter to perform periodic medical monitoring at minimal
cost. 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 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 to $15 million. Once a final feasibility study is complete and
a remedy selected, it is expected that the PRPs will agree on an allocation of
responsibility for the costs. Until an agreement is reached, Exelon cannot
predict its share of the costs.
FERC Municipal Request for Refund. Three of ComEd's wholesale municipal
customers filed a complaint and request for refund with the 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. In August 2001, each of the three
wholesale municipal customers appealed the April 30, 2001 FERC order to the
Federal circuit court, which consolidated the appeals for the purposes of
briefing and decision. In November 2001, the court suspended briefing pending
court-initiated settlement discussions.
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 sought actual damages, punitive damages of $100 million
and statutory penalties. The court dismissed all counts seeking punitive damages
and statutory penalties, and the plaintiff has filed an amended complaint before
the court. Exelon is contesting the liability and damages sought by the
plaintiff.
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 Atomic Power Station (York County), and one of its
fossil facilities, Eddystone (Delaware County). Exelon is also involved in the
tax appeal for TMI (Dauphin County) through AmerGen. Exelon does not believe the
outcome of these matters will have a material adverse effect on Exelon's results
of operations or financial condition.
Retail Rate Law. In 1996, several developers of non-utility generating
facilities filed litigation against various Illinois officials claiming that the
enforcement against those facilities of an amendment to Illinois law removing
the entitlement of those facilities to state-subsidized payments for electricity
sold to ComEd after March 15, 1996 violated their rights under the Federal and
state constitutions. The developers also filed suit against ComEd for a
declaratory judgement 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 is contesting this matter.
Service Interruptions. In August 1999, three class action lawsuits were filed
against ComEd, and subsequently consolidated, in the Circuit Court of Cook
County, Illinois seeking damages for personal injuries, property damage and
economic losses related to a series of service interruptions that occurred in
the summer of 1999. The combined effect of these interruptions resulted in over
168,000 customers losing service for more than four hours. Conditional class
certification was approved by the court for the sole purpose of exploring
settlement 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, the plaintiffs filed a second amended consolidated complaint and ComEd has
filed an answer. A portion of any settlement or verdict may be covered by
insurance; discussions with the carrier are ongoing. Exelon's management
believes adequate reserves have been established in connection with these cases.
Enron. Exelon is an unsecured creditor in Enron Corp.'s (Enron) bankruptcy
proceeding. Exelon's claim for power and other products sold to Enron in
November and early December 2001 is $8.5 million. Enron may assert that Exelon
should not have closed out and terminated all of its forward contracts with
Enron. If Enron is successful in this argument, Exelon's exposure could be
greater than $8.5 million. Exelon may also be subject to exposure due to the
credit policies of ISO-operated spot markets that allocate defaults of market
participants to non-defaulting participants. Exelon has established reserves for
these matters.
As a result of Enron's bankruptcy, ComEd has potential monetary exposure for
customers served by Enron Energy Services (EES), either as a billing agent or a
third party supplier. EES is the billing agent for 366 of ComEd's customer
accounts. On January 7, 2002, EES was authorized by the bankruptcy court to
reject its contracts for 129 of these accounts. EES advised Exelon on January
10, 2002, that it will move to reject its contracts with the remaining 237
accounts during the week of January 14, 2002. Exelon is working to ensure that
customers know what amounts are owed to ComEd, and is obtaining updated billing
addresses for these accounts. As of January 8, 2002, approximately $3.5 million
in payments to Exelon were overdue and an additional $1.8 million in charges is
currently payable but not overdue. Therefore, Exelon's total amount outstanding
with respect to the EES accounts is approximately $5.3 million. Because that
amount is owed to Exelon by individual customers, it is not part of the bankrupt
Enron's estate. General. Exelon is involved in various other litigation matters.
The ultimate outcome of such matters, as well as the matters discussed above,
while uncertain, are not expected to have a material adverse effect on its
respective financial condition or results of operations.
22. Segment Information
Exelon evaluates the performance of its business segments based on Earnings
Before Interest Expense and Income Taxes (EBIT).
Energy Delivery consists 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 located in the Pennsylvania
counties surrounding the City of Philadelphia. Generation consists of electric
generating facilities, energy marketing operations and Exelon's interests in
Sithe and AmerGen. Enterprises consists of competitive retail energy sales,
energy and infrastructure services, communications and other investments
weighted towards the communications, energy services and retail services
industries. An analysis and reconciliation of Exelon's business segment
information to the respective information in the consolidated financial
statements are as follows:
Energy Intersegment
Delivery Generation Enterprises Corporate Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Total Revenues:
2001 $ 10,171 $ 7,048 $ 2,292 $ 341 $ (4,712) $ 15,140
2000 4,511 3,316 1,395 -- (1,723) 7,499
1999 3,265 2,411 644 -- (842) 5,478
Intersegment Revenues:
2001 $ 94 $ 4,102 $ 179 $ 337 $ (4,712) $ --
2000 24 1,227 472 -- (1,723) --
1999 -- 842 -- -- (842) --
EBIT (a):
2001 $ 2,623 $ 962 $ (107) $ (22) $ -- $ 3,456
2000 (b) 1,503 440 (140) (328) -- 1,475
1999 1,372 379 (212) (194) -- 1,345
Depreciation and
Amortization:
2001 $ 1,081 $ 282 $ 69 $ 17 $ -- $ 1,449
2000 297 126 35 -- -- 458
1999 108 125 4 -- -- 237
Capital Expenditures:
2001 $ 1,133 $ 803 $ 70 $ 35 $ -- $ 2,041
2000 367 288 70 27 -- 752
1999 205 245 1 40 -- 491
Total Assets:
2001 (Restated, see note 2)$ 26,448 $ 7,545 $ 1,699 $ (914) $ -- $ 34,778
2000 27,613 5,734 2,277 (838) -- 34,786
1999 10,306 1,734 640 407 -- 13,087
- ---------------------------------------------------------------------------------------------------------------------
(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 investment income. Investment income for 2001,
2000 and 1999 was $47 million, $64 million and $52 million, respectively.
(b) Includes non-recurring items of $276 million for Merger-related expenses in
2000.
Equity in losses of communications joint ventures and other investments of $19
million, $45 million and $38 million for 2001, 2000 and 1999, respectively, are
included in the Enterprises business unit's EBIT and equity losses of affordable
housing investments of $9 million for 2001 are included in Corporate's EBIT.
Equity in earnings of AmerGen and Sithe of $90 million and $4 million for 2001
and 2000, respectively, are included in the Generation business unit's EBIT.
23. Related Party Transactions
In August 2001, Exelon loaned Sithe, an equity method investment of Generation,
$150 million. The note, which bore interest at the eurodollar rate, plus 2.25%,
was repaid in December 2001 with the proceeds of bank borrowings. In connection
with the bank borrowing, Exelon provided the lenders with a support letter
confirming its investment in Sithe and Exelon's agreement to maintain a positive
net worth of Sithe. Exelon recorded $2 million of interest income on the note in
2001.
Generation has entered into PPAs dated December 18, 2001 and November 22, 1999
with AmerGen. Under the 2001 PPA, Exelon has agreed to purchase from AmerGen all
the energy from TMI after December 31, 2001 through December 31, 2014. Under the
1999 PPA, Generation has agreed to purchase from AmerGen all of the residual
energy from Clinton, through December 31, 2002. Currently, the residual output
approximates 25% of the total output of Clinton. For the years ended December
31, 2001, 2000 and 1999 the amount of purchased power recorded in Fuel and
Purchased Power in the Consolidated Statements of Income is $57 million, $52
million and $0 million respectively. As of December 31, 2001 and 2000 Generation
had a payable of $3 million resulting from this PPA .
In addition, under a service agreement dated March 1, 1999, Generation provides
AmerGen with certain operation and support services to the nuclear facilities
owned by AmerGen. This service agreement has an indefinite term and may be
terminated by Generation or by AmerGen on 90 days' notice. Generation is
compensated for these services in an amount agreed to in the work order but not
less than the higher of Exelon's fully allocated costs for performing the
services or the market price. For the years ended December 31, 2001, 2000 and
1999 the amount charged to AmerGen for these services was $80 million, $32
million and $1 million respectively. As of December 31, 2001 and 2000,
Generation had a receivable of $47 million and $20 million respectively,
resulting from these services.
24. Change in Accounting Estimate
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
of up to 20 years for certain fossil stations and by 50 years for a pumped
storage station. Effective July 1, 2001, the estimated service lives were
extended by 20 years for the remainder of Exelon's operating nuclear stations.
These changes were based on engineering and economic feasibility studies
performed by Exelon considering, among other things, future capital and
maintenance expenditures at these plants. As a result of the change, net income
for 2001 increased $90 million ($54 million, net of income taxes). At the end of
the year, annualized savings resulting from the change would be $132 million
($79 million, net of income taxes).
25. Quarterly Data (Unaudited)
The data shown below include all adjustments which Exelon considers necessary
for a fair presentation of such amounts:
Income (Loss) Before
Extraordinary Items
and Cumulative
Effect of a Change in
Operating Revenues Operating Income Accounting Principle Net Income (Loss)
--------------------------------------------------------------------------------------
2001 2000 2001 2000 (a) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
Quarter ended:
March 31 $3,823 $1,353 $889 $352 $387 $167 $399 $191
June 30 3,651 1,385 792 309 315 119 315 116
September 30
As initially reported 4,285 1,629 912 446 403 233 403 232
As amended (b) 4,285 1,629 912 446 376 233 376 232
December 31(c) 3,381 3,132 769 420 338 47 338 47
Earnings per Share Before
Extraordinary Items
Average Shares and Cumulative Effect
Outstanding of a Change in Earnings per Share
(in millions) Accounting Principle Net Income
------------------------------------------------------------------------------------
2001 2000 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Quarter ended:
March 31 320 181 $1.21 $0.92 $1.25 $1.05
June 30 321 174 0.98 0.69 0.98 0.67
September 30
As initially reported 321 170 1.26 1.37 1.26 1.37
As amended (b) 321 170 1.17 1.37 1.17 1.37
December 31 (c) 320 283 1.06 0.17 1.06 0.17
(a) Reflects a $276 million charge ($177 million, net of income taxes) for
merger-related costs consisting of $152 million of direct incremental costs
and $124 million for employee costs. Incremental merger expenses of $11
million, $9 million, $13 million and $13 million for each of the four
quarters in 2000, respectively, were reflected in Operating and Maintenance
Expense.
(b) Reflects the effects of the quarter ended September 30, 2001 restatement.
In January 2002, Exelon discovered that its September 30, 2001 financial
statements required a restatement for additional net realized and
unrealized losses on investments of Generation's nuclear decommissioning
trust funds that were incurred prior to September 30, 2001 but not
recorded.
(c) Reflects the effects of the Unicom merger (October 20, 2000).
26. Subsequent Events
On February 1, 2002, ComEd called $200 million of its First Mortgage Bonds at
the redemption price of 103.84% of the principal amount, plus accrued interest
to the March 21, 2002 redemption date. The bonds, which carried an interest rate
of 8.625% and had a maturity date of February 1, 2022, are expected to be
refinanced with long-term debt.
On March 1, 2002, Enterprises announced an agreement to sell its 49% interest in
AT&T Wireless PCS of Philadelphia, LLC for $285 million in cash. The transaction
is expected to close in the first half of 2002. Enterprises expects to record a
pre-tax gain of approximately $200 million on the sale ($120 million after
income taxes) resulting in an increase in diluted earnings per share in 2002 of
$0.37. Proceeds from the transaction will be used for Exelon's general corporate
purposes.
