UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
================================================================================
Exhibit 4.1
PECO ENERGY COMPANY
TO
WACHOVIA BANK, NATIONAL ASSOCIATION, TRUSTEE
(formerly, First Union National Bank)
______________________
NINETY-NINTH SUPPLEMENTAL
INDENTURE DATED AS OF SEPTEMBER 15, 2002
TO
FIRST AND REFUNDING MORTGAGE
OF
THE COUNTIES GAS AND ELECTRIC
COMPANY
TO
FIDELITY TRUST COMPANY, TRUSTEE
DATED MAY 1, 1923
__________________
4.75% SERIES DUE 2012
(New Series)
================================================================================
THIS SUPPLEMENTAL INDENTURE dated as of September 15, 2002, by and
between PECO ENERGY COMPANY, a corporation organized and existing under the laws
of the Commonwealth of Pennsylvania (hereinafter called the Company), party of
the first part, and WACHOVIA BANK, NATIONAL ASSOCIATION (formerly First Union
National Bank), a national banking association organized and existing under the
laws of the United States of America (hereinafter called the Trustee), as
Trustee under the Mortgage hereinafter mentioned, party of the second part,
Witnesseth that
WHEREAS, The Counties Gas and Electric Company (hereinafter called
Counties Company), a Pennsylvania corporation and a predecessor to the Company,
duly executed and delivered to Fidelity Trust Company, a Pennsylvania
corporation to which the Trustee is successor, as Trustee, a certain indenture
of mortgage and deed of trust dated May 1, 1923 (hereinafter called the
Mortgage), to provide for the issue of, and to secure, its First and Refunding
Mortgage Bonds, issuable in series and without limit as to principal amount
except as provided in the Mortgage, the initial series of Bonds being designated
the 6% Series of 1923, and the terms and provisions of other series of bonds
secured by the Mortgage to be determined as provided in the Mortgage; and
WHEREAS, thereafter Counties Company, Philadelphia Suburban-Counties
Gas and Electric Company (hereinafter called Suburban Company), and the Company,
respectively, have from time to time executed and delivered indentures
supplemental to the Mortgage, providing for the creation of additional series of
bonds secured by the Mortgage and for amendment of certain of the terms and
provisions of the Mortgage and of indentures supplemental thereto, or evidencing
the succession of Suburban Company to Counties Company and of the Company to
Suburban Company, such indentures supplemental to the Mortgage, the respective
dates, parties thereto, and purposes thereof, being as follows:
1
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
First Counties Company to Bonds of 5% Series of
September 1, 1926 Fidelity-Philadelphia 1926
Trust Company
(Successor to Fidelity
Trust Company)
Second Suburban Company to Evidencing succession of
May 1, 1927 Fidelity-Philadelphia Suburban Company to
Trust Company Counties Company
Third Suburban Company to Bonds of 4-1/2% Series
May 1, 1927 Fidelity-Philadelphia due 1957; amendment of
Trust Company certain provisions of
Mortgage
Fourth Suburban Company to Additional Bonds of
November 1, 1927 Fidelity-Philadelphia 4-1/2% Series due 1957
Trust Company
Fifth Company to Evidencing succession of
January 31, 1931 Fidelity-Philadelphia Company to
Trust Company Suburban Company
Sixth Company to Bonds of 4% Series
February 1, 1931 Fidelity-Philadelphia due 1971
Trust Company
Seventh Company to Bonds of 3-1/2% Series
March 1, 1937 Fidelity-Philadelphia due 1967; amendment of
Trust Company certain provisions of
Mortgage
Eighth Company to Bonds of 2-3/4% Series
December 1, 1941 Fidelity-Philadelphia due 1971; amendment of
Trust Company certain provisions of
Mortgage
Ninth Company to Bonds of 2-3/4% Series
November 1, 1944 Fidelity-Philadelphia due 1967 and 2-3/4% Series
Trust Company due 1974; amendment of
certain provisions of
Mortgage
Tenth Company to Bonds of 2-3/4% Series
December 1, 1946 Fidelity-Philadelphia due 1981; amendment of
Trust Company certain provisions of
Mortgage*
2
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Eleventh Company to Bonds of 2-7/8% Series
February 1, 1948 Fidelity-Philadelphia due 1978*
Trust Company
Twelfth Company to Bonds of 3-1/4% Series
January 1, 1952 Fidelity-Philadelphia due 1982*
Trust Company
Thirteenth Company to Bonds of 3-7/8% Series
May 1, 1953 Fidelity-Philadelphia due 1983*
Trust Company
Fourteenth Company to Bonds of 3-1/8% Series
December 1, 1953 Fidelity-Philadelphia due 1983*
Trust Company
Fifteenth Company to Bonds of 3-1/8% Series
April 1, 1955 Fidelity-Philadelphia due 1985*
Trust Company
Sixteenth Company to Bonds of 4-5/8% Series
September 1, 1957 Fidelity-Philadelphia due 1987; amendment of certain
Trust Company provisions of Mortgage*
Seventeenth Company to Bonds of 3-3/4% Series
May 1, 1958 Fidelity-Philadelphia due 1988; amendment of certain
Trust Company provisions of Mortgage*
Eighteenth Company to Bonds of 4-3/8% Series
December 1, 1958 Fidelity-Philadelphia due 1986*
Trust Company
Nineteenth Company to Bonds of 5% Series
October 1, 1959 Fidelity-Philadelphia due 1989*
Trust Company
Twentieth Company to Bonds of 4-1/2% Series
May 1, 1964 Fidelity-Philadelphia due 1994*
Trust Company
Twenty-first Company to Bonds of 6% Series due
October 15, 1966 Fidelity-Philadelphia 1968-1973*
Trust Company
Twenty-second Company to The Fidelity Bank Bonds of 5-1/4 % Series due
June 1, 1967 (formerly 1968-1973 and 5-3/4 %
Fidelity-Philadelphia Series due 1977*
Trust Company)
Twenty-third Company to The Fidelity Bonds of 6-1/8 % Series
October 1, 1957 Bank due 1997*
3
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Twenty-fourth Company to The Fidelity Bonds of 6-1/2% Series
March 1, 1968 Bank due 1993; amendment of
Article XIV of
Mortgage*
Twenty-fifth Company to The Fidelity Bonds of 1968 Series due
September 10, 1968 Bank 1969-1976*
Twenty-sixth Company to The Fidelity Bonds of 8% Series due
August 15, 1969 Bank 1975*
Twenty-seventh Company to The Fidelity Bonds of 9% Series due
February 1, 1970 Bank 1995*
Twenty-eighth Company to The Fidelity Bonds of 8-1/2% Series
May 1, 1970 Bank due 1976*
Twenty-ninth Company to The Fidelity Bonds of 7-3/4% Series
December 15, 1970 Bank due 2000*
Thirtieth Company to The Fidelity Bonds of 8-1/4% Series
August 1, 1971 Bank due 1996*
Thirty-first Company to The Fidelity Bonds of 7-3/8% Series
December 15, 1971 Bank due 2001; amendment of
Article XI of Mortgage*
Thirty-second Company to The Fidelity Bonds of 7-1/2% Series
June 15, 1972 Bank due 1998*
Thirty-third Company to The Fidelity Bonds of 7-1/2% Series
January 15, 1973 Bank due 1999*
Thirty-fourth Company to The Fidelity Bonds of 8-1/2% Series
January 15, 1974 Bank due 2004
Thirty-fifth Company to The Fidelity Bonds of 11% Series
October 15, 1974 Bank due 1980*
Thirty-sixth Company to The Fidelity Bonds of 11-5/8% Series
April 15, 1975 Bank due 2000*
Thirty-seventh Company to The Fidelity Bonds of 11% Series due
August 1, 1975 Bank 2000*
Thirty-eighth Company to The Fidelity Bonds of 9-1/8% Series
March 1, 1976 Bank due 2006*
Thirty-ninth Company to The Fidelity Bonds of 9-5/8% Series
August 1, 1976 Bank due 2002*
4
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Fortieth Company to The Fidelity Bonds of Pollution
February 1, 1977 Bank Control Series A
and Pollution
Control Series B*
Forty-first Company to The Fidelity Bonds of 8-5/8% Series
March 15, 1977 Bank due 2007*
Forty-second Company to The Fidelity Bonds of 8-5/8% Series
July 15, 1977 Bank due 2003*
Forty-third Company to The Fidelity Bonds of 9-1/8% Series
March 15, 1978 Bank due 2008*
Forty-fourth Company to The Fidelity Bonds of 12-1/2% Series
October 15, 1979 Bank due 2005*
Forty-fifth Company to The Fidelity Bonds of 13-3/4% Series
October 15, 1980 Bank due 1992*
Forty-sixth Company to The Fidelity Bonds of 15-1/4% Series
March 1, 1981 Bank due 1996; amendment of
Article VIII of
Mortgage*
Forty-seventh Company to The Fidelity Bonds of 15% Series due
March 1, 1981 Bank 1996; amendment of
Article VIII of
Mortgage*
Forty-eighth Company to The Fidelity Bonds of 17-5/8% Series
July 1, 1981 Bank due 2011*
Forty-ninth Company to The Fidelity Bonds of 18-3/4% Series
September 15, 1981 Bank due 2009*
Fiftieth Company to The Fidelity Bonds of 18% Series due
April 1, 1982 Bank 2012*
Fifty-first Company to The Fidelity Bonds of 15-3/8% Series
October 1, 1982 Bank due 2010*
Fifty-second Company to The Fidelity Bonds of 13-3/8% Series
June 15, 1983 Bank due 2013*
Fifty-third Company to Fidelity Bank, Bonds of 13.05% Series
November 15, 1984 National Association due 1994; amendment
(formerly The Fidelity Bank) of Article VIII of
Mortgage*
5
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Fifty-fourth Company to Fidelity Bank, Bonds of 14% Series due
December 1, 1984 National Association 1988-1994; amendment
of Article VIII of
Mortgage*
Fifty-fifth Company to Fidelity Bank, Bonds of Pollution
May 15, 1985 National Association Control Series C*
Fifty-sixth Company to Fidelity Bank, Bonds of Pollution
October 1, 1985 National Association Control Series D*
Fifty-seventh Company to Fidelity Bank, Bonds of 10-7/8% Series
November 15, 1985 National Association due 1995*
Fifty-eight Company to Fidelity Bank, Bonds of 11-3/4% Series
November 15, 1985 National Association due 2014*
Fifty-ninth Company to Fidelity Bank, Bonds of Pollution
June 1, 1986 National Association Control Series E*
Sixtieth Company to Fidelity Bank, Bonds of 10-1/4% Series
November 1, 1986 National Association due 2016*
Sixty-first Company to Fidelity Bank, Bonds of 8-3/4% Series
November 1, 1986 National Association due 1994*
Sixty-second Company to Fidelity Bank, Bonds of 9-3/8% Series
April 1, 1987 National Association due 2017*
Sixty-third Company to Fidelity Bank, Bonds of 11% Series due
July 15, 1987 National Association 2016*
Sixty-fourth Company to Fidelity Bank, Bonds of 10% Series due
July 15, 1987 National Association 1997*
Sixty-fifth Company to Fidelity Bank, Bonds of 10-1/4% Series
August 1, 1987 National Association due 2007*
Sixty-sixth Company to Fidelity Bank, Bonds of 11% Series due
October 15, 1987 National Association 1997*
Sixty-seventh Company to Fidelity Bank, Bonds of 12-1/8% Series
October 15, 1987 National Association due 2016*
Sixty-eighth Company to Fidelity Bank, Bonds of 10% Series due
April 15, 1988 National Association 1998*
Sixty-ninth Company to Fidelity Bank, Bonds of 11% Series due
April 15, 1988 National Association 2018*
6
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Seventieth Company to Fidelity Bank, Bonds of 10% Series due
June 15, 1989 National Association 2019*
Seventy-first Company to Fidelity Bank, Bonds of 9-7/8% Series
October 1, 1989 National Association due 2019*
Seventy-second Company to Fidelity Bank, Bonds of 9-1/4% Series
October 1, 1989 National Association due 1999*
Seventy-third Company to Fidelity Bank, Medium-Term Note
October 1, 1989 National Association Series A*
Seventy-fourth Company to Fidelity Bank, Bonds of 10-1/2% Series
October 15, 1990 National Association due 2020*
Seventy-fifth Company to Fidelity Bank, Bonds of 10% Series due
October 15, 1990 National Association 2000*
Seventy-sixth Company to Fidelity Bank, Bonds of Pollution
April 1, 1991 National Association Control Series F
and Pollution
Control Series G*
Seventy-seventh Company to Fidelity Bank, Bonds of Pollution
December 1, 1991 National Association Control Series H*
Seventy-eighth Company to Fidelity Bank, Bonds of 7-1/2% 1992
January 15, 1992 National Association Series due 1999*
Seventy-ninth Company to Fidelity Bank, Bonds of 8% Series due
April 1, 1992 National Association 2002*
Eightieth Company to Fidelity Bank, Bonds of 8-3/4% Series
April 1, 1992 National Association due 2022*
Eighty-first Company to Fidelity Bank, Bonds of Pollution
June 1, 1992 National Association Control Series I*
Eighty-second Company to Fidelity Bank, Bonds of 8-5/8% Series
June 1, 1992 National Association due 2022*
Eighty-third Company to Fidelity Bank, Bonds of 7-1/2% Series
July 15, 1992 National Association due 2002*
Eighty-fourth Company to Fidelity Bank, Bonds of 8-1/4% Series
September 1, 1992 National Association due 2022*
Eighty-fifth Company to Fidelity Bank, Bonds of 7-1/8% Series
September 1, 1992 National Association due 2002*
7
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Eighty-sixth Company to Fidelity Bank, Bonds of 6-5/8% Series
March 1, 1993 National Association due 2003*
Eighty-Seventh Company to Fidelity Bank, Bonds of 7-3/4% Series
March 1, 1993 National Association due 2023*
Eighty-eighth Company to Fidelity Bank, Bonds of Pollution
March 1, 1993 National Association Control Series J,
Pollution Control
Series K, Pollution
Control Series L
and Pollution Control
Series M*
Eighty-ninth Company to Fidelity Bank, Bonds of 6-1/2% Series
May 1, 1993 National Association due 2003*
Ninetieth Company to Fidelity Bank, Bonds of 7-3/4% Series
May 1, 1993 National Association 2 due 2023*
Ninety-first Company to First Fidelity Bank, Bonds of 7-1/8% Series
August 15, 1993 N.A., Pennsylvania due 2023*
Ninety-second Company to First Fidelity Bank, Bonds of 6-3/8% Series
August 15, 1993 N.A., Pennsylvania due 2005*
Ninety-third Company to First Fidelity Bank, Bonds of 5-3/8% Series
August 15, 1993 N.A., Pennsylvania due 1998*
Ninety-fourth Company to First Fidelity Bank, Bonds of 7-1/4% Series
November 1, 1993 N.A., Pennsylvania due 2024*
Ninety-fifth Company to First Fidelity Bank, Bonds of 5-5/8% Series
November 1, 1993 N.A., Pennsylvania due 2001*
Ninety-sixth Company to First Fidelity Bank, Medium Term Note Series B*
May 1, 1995 N.A., Pennsylvania
Ninety-seventh Company to First Union National Bank Bonds of 5.95% Series
October 15, 2001 (formerly First Fidelity Bank, N.A., due 2011*
Pennsylvania)
*And amendment of certain provisions of the Ninth Supplemental Indenture.
8
WHEREAS, the respective principal amounts of the bonds of each series
presently outstanding under the Mortgage and the several supplemental indentures
above referred to, are as follows:
PRINCIPAL
Series AMOUNT
------ ------
6-5/8% Series due 2003...................................250,000,000
6-1/2% Series due 2003...................................200,000,000
6-3/8% Series due 2005....................................75,000,000
Pollution Control Series J due 2012........................50,000,000
Pollution Control Series K due 2012........................50,000,000
Pollution Control Series L due 2012........................50,000,000
Pollution Control Series M due 2012.........................4,200,000
5.95% Series due 2011...................................250,000,000
Total $ $929,200,000
============
WHEREAS, the Company deems it advisable and has determined, pursuant to
Article XI of the Mortgage,
(a) to amend Article II of the Ninth Supplemental Indenture to the
Mortgage as heretofore amended;
(b) to convey, pledge, transfer and assign to the Trustee and to
subject specifically to the lien of the Mortgage additional property not therein
or in any supplemental indenture specifically described but now owned by the
Company and acquired by it by purchase or otherwise; and
(c) to create a new series of bonds to be issued from time to time
under, and secured by, the Mortgage, to be designated PECO Energy Company First
and Refunding Mortgage Bonds, 4.75% Series Due 2012, (hereinafter sometimes
called the "bonds of the New Series" or the "bonds of the 4.75% Series due
2012"); and for the above-mentioned purposes to execute, deliver and record this
Supplemental Indenture;
WHEREAS, the Company has determined by proper corporate action that the
terms, provisions and form of the bonds of the New Series shall be substantially
as follows:
9
(Form of Face of Bond)
PECO ENERGY COMPANY
REGISTERED REGISTERED
NUMBER
FIRST AND REFUNDING MORTGAGE BOND,
4.75 % SERIES DUE 2012,
DUE OCTOBER 1, 2012
PECO Energy Company, a Pennsylvania corporation (hereinafter called the
Company), for value received, hereby promises to pay to _____________________ or
registered assigns, __________________________ Dollars on October 1, 2012, at
the office or agency of the Company, in the City of Philadelphia, Pennsylvania,
or, at the option of the holder, at the office or agency of the Company, in the
Borough of Manhattan, The City of New York, in such coin or currency of the
United States of America as at the time of payment shall constitute legal tender
for the payment of public and private debts, and to pay interest (computed on
the basis of a 360-day year of twelve 30-day months) thereon from the date
hereof at the rate of 4.75 percent per annum in like coin or currency, payable
at either of the offices aforesaid on April 1 and October 1, commencing on April
1, 2003, in each year until the Company's obligation with respect to the payment
of such principal shall have been discharged.
The Company may fix a date, not more than fourteen calendar days prior
to any interest payment date, as a record date for determining the registered
holder of this bond entitled to such interest payment, in which case only the
registered holder on such record date shall be entitled to receive such payment,
notwithstanding any transfer of this bond upon the registration books subsequent
to such record date.
This bond shall not be valid or become obligatory for any purpose
unless it shall have been authenticated by the certificate of the Trustee under
said Mortgage endorsed hereon.
The provisions of this bond are continued on the reverse hereof and
such continued provisions shall for all purposes have the same effect as though
fully set forth at this place.
10
IN WITNESS WHEREOF, PECO Energy Company has caused this instrument to
be signed in its corporate name with the manual or facsimile signature of its
President or a Vice President and its corporate seal to be impressed or a
facsimile imprinted hereon, duly attested by the manual or facsimile signature
of its Secretary or an Assistant Secretary.
Dated:
PECO ENERGY COMPANY
By
------------------------------
President
(SEAL)
Attest:
-------------------------
Secretary
11
(Form of Reverse of Bond)
PECO ENERGY COMPANY
First and Refunding Mortgage Bond,
4.75% Series Due 2012, Due October 1, 2012
(CONTINUED)
This bond is one of a duly authorized issue of bonds of the Company,
unlimited as to amount except as provided in the Mortgage hereinafter mentioned
or in any indenture supplemental thereto, and is one of a series of said bonds
known as First and Refunding Mortgage Bonds, 4.75% Series due 2012. This bond
and all other bonds of said issue are issued and to be issued under and pursuant
to and are all secured equally and ratably by an indenture of mortgage and deed
of trust dated May 1, 1923, duly executed and delivered by The Counties Gas and
Electric Company (to which the Company is successor) to Fidelity Trust Company,
as Trustee (to which Wachovia Bank, National Association, a national banking
association organized and existing under the laws of the United States of
America, is successor Trustee), as amended, modified or supplemented by
ninety-seven certain supplemental indentures from the Company or its
predecessors to said successor Trustee or its predecessors, said mortgage, as so
amended, modified or supplemented being herein called the Mortgage. Reference is
hereby made to the Mortgage for a statement of the property mortgaged and
pledged, the nature and extent of the security, the rights of the holders of
said bonds and of the Trustee in respect of such security, the rights, duties
and immunities of the Trustee, and the terms and conditions upon which said
bonds are and are to be secured, and the circumstances under which additional
bonds may be issued.
As provided in the Mortgage, the bonds secured thereby may be for
various principal sums and are issuable in series, which series may mature at
different times, may bear interest at different rates, and may otherwise vary.
The bonds of this series mature on October 1, 2012, and are issuable only in
registered form without coupons in any denomination authorized by the Company.
Any bond or bonds of this series may be exchanged for another bond or
bonds of this series in a like aggregate principal amount in authorized
denominations, upon presentation at the office of the Trustee in the City of
Philadelphia, Pennsylvania, or, at the option of the holder, at the office or
agency of the Company in the Borough of Manhattan, The City of New York, all
subject to the terms of the Mortgage but without any charge other than a sum
sufficient to reimburse the Company for any stamp tax or other governmental
charge incident to the exchange.
The bonds of this series are redeemable at the option of the Company,
as a whole or in part, at any time upon notice sent by the Company through the
mail, postage prepaid, at least thirty (30) days and not more than forty-five
(45) days prior to the date fixed for redemption, to the registered holder of
each bond to be redeemed, addressed to such holder at his address appearing upon
the registration books, at a redemption price equal to the greater of (1) 100%
of the principal amount of the bonds to be redeemed, plus accrued interest to
the redemption date, or (2) as determined by the Quotation Agent, the sum of the
present values of the remaining
12
scheduled payments of principal and interest on the bonds to be redeemed (not
including any portion of payments of interest accrued as of the redemption date)
discounted to the redemption date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Adjusted Treasury Rate plus 25
basis points, plus accrued interest to the redemption date. Unless the Company
defaults in payment of the redemption price, on and after the redemption date,
interest will cease to accrue on the bonds of this series or portions of the
bonds of this series called for redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the rate per year equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for the redemption date.
"Business Day" means any day that is not a day on which banking
institutions in New York City are authorized or required by law or regulation to
close.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the bonds of this series that would be used, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
bonds of this series.
"Comparable Treasury Price" means, with respect to any redemption date:
o the average of the Reference Treasury Dealer Quotations for
that redemption date, after excluding the highest and lowest
of the Reference Treasury Dealer Quotations; or
o if the Trustee obtains fewer than three Reference Treasury
Dealer Quotations, the average of all Reference Treasury
Dealer Quotations so received.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
Company.
"Reference Treasury Dealer" means (1) each of Banc One Capital Markets,
Inc. and Salomon Smith Barney Inc. and their respective successors, unless any
of them ceases to be a primary U.S. Government securities dealer in New York
City (a "Primary Treasury Dealer"), in which case the Company shall substitute
another Primary Treasury Dealer; and (2) any other Primary Treasury Dealer
selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by that Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding that redemption date.
The principal of this bond may be declared or may become due on the
conditions, in the manner and with the effect provided in the Mortgage upon the
happening of an event of default as in the Mortgage provided.
13
This bond is transferable by the registered holder hereof in person or
by attorney, duly authorized in writing, at the office of the Trustee in the
City of Philadelphia, Pennsylvania, or, at the option of the holder, at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, in books of the Company to be kept for that purpose, upon surrender and
cancellation hereof, and upon any such transfer, a new registered bond or bonds,
without coupons, of this series and for the same aggregate principal amount,
will be issued to the transferee in exchange herefor, all subject to the terms
of the Mortgage but without payment of any charge other than a sum sufficient to
reimburse the Company for any stamp tax or other governmental charge incident to
the transfer. The Company, the Trustee, and any paying agent may deem and treat
the person in whose name this bond is registered as the absolute owner hereof
for the purpose of receiving payment of or on account of the principal and
interest due hereon and for all other purposes, and neither the Company nor the
Trustee nor any paying agent shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or
interest on this bond to any incorporator or any past, present or future
stockholder, officer or director of the Company or of any predecessor or
successor corporation, either directly or indirectly, by virtue of any statute
or by enforcement of any assessment or otherwise, and any and all liability of
the said incorporators, stockholders, officers or directors of the Company or of
any predecessor or successor corporation in respect to this bond is hereby
expressly waived and released by every holder hereof, except to the extent that
such liability may not be waived or released under the provisions of the
Securities Act of 1933 or of the rules and regulations of the Securities and
Exchange Commission thereunder.
(End of Form of Reverse of Bond)
14
and
WHEREAS, on the face of each of the bonds of the New Series, there is
to be endorsed a certificate of the Trustee in substantially the following form,
to wit:
(Form of Trustee's Certificate)
This bond is one of the bonds, of the series designated therein,
provided for in the within-mentioned Mortgage and in the Ninety-Ninth
Supplemental Indenture dated as of September 15, 2002.
WACHOVIA BANK, NATIONAL ASSOCIATION
By
--------------------------------
Authorized Officer
and
WHEREAS, all acts and things necessary to make the bonds of the New
Series, when duly executed by the Company and authenticated by the Trustee as
provided in the Mortgage and indentures supplemental thereto, and issued by the
Company, the valid, binding and legal obligations of the Company, and this
Supplemental Indenture a valid and enforceable supplement to the Mortgage, have
been done, performed and fulfilled and the execution and delivery hereof have
been in all respects duly and lawfully authorized.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
That in order to secure the payment of the principal of and interest on
all bonds issued and to be issued under the Mortgage and/or under any indenture
supplemental thereto, according to their tenor and effect, and according to the
terms of the Mortgage and of any indenture supplemental thereto, and to secure
the performance of the covenants and obligations in the bonds and in the
Mortgage and any indenture supplemental thereto respectively contained, and for
the proper assuring, conveying, and confirming unto the Trustee, its successors
in trust and its and their assigns forever, upon the trusts and for the purposes
expressed in the Mortgage and in any indentures supplemental thereto, all and
singular the estates, property and franchises of the Company thereby mortgaged
or intended so to be, the Company, for and in consideration of the premises and
of the sum of One Dollar ($1.00) in hand paid by the Trustee to the Company upon
the execution and delivery of this Supplemental Indenture, receipt whereof is
hereby acknowledged, and of other good and valuable consideration, has granted,
bargained, sold, conveyed, released, confirmed, pledged, assigned, transferred
and set over and by these presents does grant, bargain, sell, convey, release,
confirm, pledge, assign, transfer, and set over to Wachovia Bank, National
Association, as Trustee, and to its successors in trust and its and their
15
assigns forever, all the following described property, real, personal and mixed
of the Company, viz.:
The real property set forth in Schedule A, attached hereto and hereby
made a part hereof, with any improvements thereon erected now owned by the
Company but not specifically described in the Mortgage or in any indenture
supplemental thereto heretofore executed, in the places set forth in Schedule A.
Together with all gas works, electric works, plants, buildings,
structures, improvements and machinery located upon such real estate or any
portion thereof, and all rights, privileges and easements of every kind and
nature appurtenant thereto, and all and singular the tenements, hereditaments
and appurtenances belonging to the real estate or any part thereof hereinbefore
described or referred to or intended so to be, or in any way appertaining
thereto, and the reversions, remainders, rents, issues and profits thereof; also
all the estate, right, title, interest, property, possession, claim and demand
whatsoever, as well in law as in equity, of the Company, of, in and to the same
and any and every part thereof, with the appurtenances.
Also all the Company's electric transmission and distribution lines and
systems, substations, transforming stations, structures, machinery, apparatus,
appliances, devices and appurtenances.
Also all the Company's gas transmission and distribution mains, pipes,
pipe lines and systems, storage facilities, structures, machinery, apparatus,
appliances, devices and appurtenances.
Also all plants, systems, works, improvements, buildings, structures,
fixtures, appliances, engines, furnaces, boilers, machinery, retorts, tanks,
condensers, pumps, gas tanks, holders, reservoirs, expansion tanks, gas mains
and pipes, tunnels, service pipe, pipe lines, fittings, gates, valves,
connections, gas and electric meters, generators, dynamos, fans, supplies, tools
and implements, tracks, sidings, motor and other vehicles, all electric light
lines, electric power lines, transmission lines, distribution lines, conduits,
cables, stations, substations, and distributing systems, motors, conductors,
converters, switchboards, shafting, belting, wires, mains, feeders, poles,
towers, mast arms, brackets, pipes, lamps, insulators, house wiring connections
and all instruments, appliances, apparatus, fixtures, fittings and equipment and
all stores, repair parts, materials and supplies of every nature and kind
whatsoever now or hereafter owned by the Company in connection with or
appurtenant to its plants and systems for production, purchase, storage,
transmission, distribution, utilization and sale of gas and its by-products and
residual products, and/or for the generation, production, purchase, storage,
transmission, distribution, utilization and sale of electricity, or in
connection with such business.
Also all the goodwill of the business of the Company, and all rights,
claims, contracts, leases, patents, patent rights, and agreements, all accounts
receivable, accounts, claims, demands, choses in action, books of account, cash
assets, franchises, ordinances, rights, powers, easements, water rights,
riparian rights, licenses, privileges, immunities, concessions and consents now
or hereafter owned by the Company in connection with or appurtenant to its said
business.
16
Also all the right, title and interest of the Company in and to all
contracts for the purchase, sale or supply of gas, and its by-products and
residual products of electricity and electrical energy, now or hereafter entered
into by the Company with the right on the part of the Trustee, upon the
happening of an event of default as defined in the Mortgage as supplemented by
any supplemental indenture, to require a specific assignment of any and all such
contracts, whenever it shall request the Company to make the same.
Also all rents, tolls, earnings, profits, revenues, dividends and
income arising or to arise from any property now owned, leased, operated or
controlled or hereafter acquired, leased, operated or controlled by the Company
and subject to the lien of the Mortgage and indentures supplemental thereto.
Also all the estate, right, title and interest of the Company, as
lessee, in and to any and all demised premises under any and all agreements of
lease now or at any time hereafter in force, insofar as the same may now or
hereafter be assignable by the Company.
Also all other property, real, personal and mixed not hereinbefore
specified or referred to, of every kind and nature whatsoever, now owned, or
which may hereafter be owned by the Company (except shares of stock, bonds or
other securities not now or hereafter specifically pledged under the Mortgage
and indentures supplemental thereto or required to be pledged thereunder by the
provisions of the Mortgage or any indenture supplemental thereto), together with
all and singular the tenements, hereditaments and appurtenances thereunto
belonging or in any way appertaining and the reversions, remainder or
remainders, rents, issues and profits thereof; and also all the estate, right,
title, interest, property, claim and demand whatsoever as well in law as in
equity of the Company of, in and to the same and every part and parcel thereof.
It is the intention and it is hereby agreed that all property and the
earnings and income thereof acquired by the Company after the date hereof shall
be as fully embraced within the provisions hereof and subject to the lien hereby
created for securing the payment of all bonds, together with the interest
thereon, as if the property were now owned by the Company and were specifically
described herein and conveyed hereby, provided nevertheless, that no shares of
stock, bonds or other securities now or hereafter owned by the Company, shall be
subject to the lien of the Mortgage and indentures supplemental thereto unless
now or hereafter specifically pledged or required to be pledged thereunder by
the provisions of the Mortgage or any indenture supplemental thereto.
TO HAVE AND TO HOLD, all and singular the property, rights, privileges
and franchises hereby conveyed, transferred or pledged or intended so to be,
including after-acquired property, together with all and singular the
reversions, remainders, rents, revenues, income, issues and profits, privileges
and appurtenances, now or hereafter belonging or in any way appertaining
thereto, unto the Trustee and its successors in the trust hereby created, and
its and their assigns forever;
IN TRUST NEVERTHELESS, for the equal and pro rata benefit and security
of each and every person or corporation who may be or become the holders of
bonds secured by the Mortgage and indentures supplemental thereto, without
preference, priority or distinction (except as provided in Section 1 of Article
VIII of the Mortgage) as to lien or otherwise of any bond of
17
any series over or from any other bond, so that (except as aforesaid) each and
every of the bonds issued or to be issued, of whatsoever series, shall have the
same right, lien, privilege under the Mortgage and indentures supplemental
thereto and shall be equally secured thereby and hereby, with the same effect as
if the bonds had all been made, issued and negotiated simultaneously on the date
of the Mortgage.
AND THIS SUPPLEMENTAL INDENTURE FURTHER WITNESSETH:
It is hereby covenanted that all bonds secured by the Mortgage and
indentures supplemental thereto with the coupons appertaining thereto, are
issued to and accepted by each and every holder thereof, and that the property
aforesaid and all other property subject to the lien of the Mortgage and
indentures supplemental thereto is held by or hereby conveyed to the Trustee,
under and subject to the trusts, conditions and limitations set forth in the
Mortgage and indentures supplemental thereto and upon and subject to the further
trusts, conditions and limitations hereinafter set forth, as follows, to wit:
ARTICLE I
AMENDMENTS OF MORTGAGE
Article II of the Ninth Supplemental Indenture to the Mortgage, as
heretofore amended, is hereby further amended as follows:
By adding to paragraph (d) of Section 5 and to the first clause of
Section 9, the following:
"4.75% Series due 2012"
ARTICLE II .
BONDS OF THE NEW SERIES
Section 1. The bonds of the New Series shall be designated as
hereinabove specified for such designation in the recital immediately preceding
the form of bonds of the New Series, subject however, to the provisions of
Section 2 of Article I of the Mortgage, as amended, and are issuable only as
registered bonds without coupons, substantially in the form hereinbefore
recited; and the issue thereof shall be limited to $225,000,000 principal
amount.
The bonds of the New Series shall bear interest from the date thereof
and shall be dated as of the interest payment date to which interest was paid
next preceding the date of issue unless (a) such date of issue is an interest
payment date to which interest was paid, in which event such bonds shall be
dated as of such interest payment date, or (b) issued prior to the occurrence of
the first interest payment date on which interest is to be paid, in which event
such bonds shall be dated September 23, 2002. The bonds of the New Series shall
mature on October 1, 2012.
The bonds of the New Series shall bear interest (computed on the basis
of a 360-day year of twelve 30-day months) at the rate provided in the form of
bond hereinbefore recited, payable on April 1 and October 1 in each year
commencing on April 1, 2003 until the Company's
18
obligation with respect to the payment of principal thereof shall have been
discharged. Both principal and interest on bonds of the New Series shall be
payable at the office or agency of the Company in the City of Philadelphia,
Pennsylvania, or, at the option of the holder, at the office or agency of the
Company in the Borough of Manhattan, The City of New York, and shall be payable
in such coin or currency of the United States of America as at the time of
payment shall constitute legal tender for the payment of public and private
debts.
The bonds of the New Series shall be in any denomination authorized by
the Company.
Any bond or bonds of the New Series shall be exchangeable for another
bond or bonds of the New Series in a like aggregate principal amount. Any such
exchange may be made upon presentation at the office of the Trustee in the City
of Philadelphia, Pennsylvania, or, at the option of the holder, at the office or
agency of the Company in the Borough of Manhattan, The City of New York, without
any charge other than a sum sufficient to reimburse the Company for any stamp
tax or other governmental charge incident to the exchange.
Section 2. (a) Initially, the bonds of the New Series shall be issued
pursuant to a book-entry system administered by The Depository Trust Company (or
its successor, referred to herein as the "Depository") as a global security with
no physical distribution of bond certificates to be made except as provided in
this Section 2. Any provisions of the Mortgage or the bonds of the New Series
requiring physical delivery of bonds shall, with respect to any bonds of the New
Series held under the book-entry system, be deemed to be satisfied by a notation
on the bond registration books maintained by the Trustee that such bonds are
subject to the book-entry system.
(b) So long as the book-entry system is being used, one bond of the New
Series in the aggregate principal amount of the bonds of the New Series and
registered in the name of the Depository's nominee (the "Nominee") will be
issued and required to be deposited with the Depository and held in its custody.
The book-entry system will be maintained by the Depository and its participants
and indirect participants and will evidence beneficial ownership of the bonds of
the New Series, with transfers of ownership effected on the records of the
Depository, the participants and the indirect participants pursuant to rules and
procedures established by the Depository, the participants and the indirect
participants. The principal of and any premium on each bond of the New Series
shall be payable to the Nominee or any other person appearing on the
registration books as the registered holder of such bond or its registered
assigns or legal representative at the office of the office or agency of the
Company in the City of Philadelphia, Pennsylvania or the Borough of Manhattan,
The City of New York. So long as the book-entry system is in effect, the
Depository will be recognized as the holder of the bonds of the New Series for
all purposes. Transfers of principal, interest and any premium payments or
notices to participants and indirect participants will be the responsibility of
the Depository, and transfers of principal, interest and any premium payments or
notices to beneficial owners will be the responsibility of participants and
indirect participants. No other party will be responsible or liable for such
transfers of payments or notices or for maintaining, supervising or reviewing
such records maintained by the Depository, the participants or the indirect
participants. While the Nominee or the Depository, as the case may be, is the
registered owner of the bonds of the New Series, notwithstanding any other
provisions set forth herein, payments of principal of, redemption premium, if
any, and interest on the bonds of the New Series shall be made to the
19
Nominee or the Depository, as the case may be, by wire transfer in immediately
available funds to the account of such holder. Without notice to or consent of
the beneficial owners, the Trustee with the consent of the Company and the
Depository may agree in writing to make payments of principal, redemption price
and interest in a manner different from that set forth herein. In such event,
the Trustee shall make payment with respect to the bonds of the New Series in
such manner as if set forth herein.
(c) The Company may at any time elect (i) to provide for the
replacement of any Depository as the depository for the bonds of the New Series
with another qualified depository, or (ii) to discontinue the maintenance of the
bonds of the New Series under book-entry system. In such event, the Trustee
shall give 30 days prior notice of such election to the Depository (or such
fewer number of days acceptable to such Depository).
(d) Upon the discontinuance of the maintenance of the bonds of the New
Series under a book-entry system, the Company will cause the bonds to be issued
directly to the beneficial owners of the bonds of the New Series, or their
designees, as further described below. In such event, the Trustee shall make
provisions to notify participants and beneficial owners of the bonds of the New
Series, by mailing an appropriate notice to the Depository, that bonds of the
New Series will be directly issued to beneficial owners of the bonds as of a
date set forth in such notice (or such fewer number of days acceptable to such
Depository).
(e) In the event that bonds of the New Series are to be issued to
beneficial owners of the bonds, or their designees, the Company shall promptly
have bonds of the New Series prepared in certificated form registered in the
names of the beneficial owners of such bonds shown on the records of the
participants provided to the Trustee, as of the date set forth in the notice
above. Bonds issued to beneficial owners, or their designees shall be
substantially in the form set forth in this Supplemental Indenture, but will not
include the provision related to global securities.
(f) If the Depository is replaced as the depository for the bonds of
the New Series with another qualified depository, the Company will issue a
replacement global security substantially in the form set forth in this
Supplemental Indenture.
(g) The Company and the Trustee shall have no liability for the failure
of any Depository to perform its obligations to any participant, any indirect
participant or any beneficial owner of any bonds of the New Series, and the
Company and the Trustee shall not be liable for the failure of any participant,
indirect participant or other nominee of any beneficial owner or any bonds of
the New Series to perform any obligation that such participant, indirect
participant or other nominee may incur to any beneficial owner of the bonds of
the New Series.
(h) Notwithstanding any other provision of the Mortgage, on or prior to
the date of issuance of the bonds of the New Series the Trustee shall have
executed and delivered to the initial Depository a Letter of Representations
governing various matters relating to the Depository and its activities
pertaining to the bonds of the New Series. The terms and provisions of such
Letter of Representations are incorporated herein by reference and, in the event
there shall exist any inconsistency between the substantive provisions of the
said Letter of Representations and any provisions of the Mortgage, then, for as
long as the initial Depository
20
shall serve as depository with respect to the bonds of the New Series, the terms
of the Letter of Representations shall govern.
(i) The Company and the Trustee may rely conclusively upon (i) a
certificate of the Depository as to the identity of a participant in the
book-entry system; (ii) a certificate of any participant as to the identity of
any indirect participant and (iii) a certificate of any participant or any
indirect participant as to the identity of, and the respective principal amount
of bonds of the New Series owned by, beneficial owners.
Section 3. So long as the bonds of the New Series are held by The
Depository Trust Company, such bonds of the New Series shall bear the following
legend:
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
Section 4. So long as any of the bonds of the New Series remain
outstanding, the Company shall keep at its office or agency in the Borough of
Manhattan, The City of New York, as well as at the office of the Trustee in the
City of Philadelphia, Pennsylvania, books for the registry and transfer of
outstanding bonds of the New Series, in accordance with the terms and provisions
of the bonds of the New Series and the provisions of Section 8 of Article I of
said Mortgage.
Section 5. So long as any bonds of the New Series remain outstanding,
the Company shall maintain an office or agency in the City of Philadelphia,
Pennsylvania, and an office or agency in the Borough of Manhattan, The City of
New York, for the payment upon proper demand of the principal of, the interest
on, or the redemption price of the outstanding bonds of the New Series, and will
from time to time give notice to the Trustee of the location of such office or
agency. In case the Company shall fail to maintain for such purpose an office or
agency in the City of Philadelphia or shall fail to give such notice of the
location thereof, then notices, presentations and demands in respect of the
bonds of the New Series may be given or made to or upon the Trustee at its
office in the City of Philadelphia and the principal of, the interest on, and
the redemption price of said bonds in such event be payable at said office of
the Trustee. All bonds of the New Series when paid shall forthwith be cancelled.
Section 6. The Company may fix a date, not more than fourteen calendar
days prior to any interest payment date, as a record date for determining the
registered holder of each bond of the New Series entitled to such interest
payment, in which case only the registered holder of such bond on such record
date shall be entitled to receive such payment, notwithstanding any transfer of
such bond upon the registration books subsequent to such record date.
21
Section 7. The bonds of the New Series shall be issued under and
subject to all of the terms and provisions of the Mortgage, of the indentures
supplemental thereto referred to in the recitals hereof and of this Supplemental
Indenture which may be applicable to such bonds or applicable to all bonds
issued under the Mortgage and indentures supplemental thereto.
ARTICLE III .
ISSUE AND AUTHENTICATION OF
BONDS OF THE NEW SERIES
In addition to any bonds of any series which may from time to time be
executed by the Company and authenticated and delivered by the Trustee upon
compliance with the provisions of the Mortgage and/or of any indenture
supplemental thereto, bonds of the New Series of an aggregate principal amount
not exceeding $225,000,000 shall forthwith be executed by the Company and
delivered to the Trustee, and the Trustee shall thereupon, whether or not this
Supplemental Indenture shall have been recorded, authenticate and deliver said
bonds to or upon the written order of the President, a Vice President, or the
Treasurer of the Company, under the terms and provisions of paragraph (c) of
Section 3 of Article II of the Mortgage, as amended.
ARTICLE IV .
REDEMPTION OF BONDS OF THE
NEW SERIES
Section 1. The bonds of the New Series shall be redeemable, at the
option of the Company, as a whole or in part, at any time upon notice sent by
the Company through the mail, postage prepaid, at least thirty (30) days and not
more than forty-five (45) days prior to the date fixed for redemption, to the
registered holder of each bond to be redeemed in whole or in part, addressed to
such holder at his address appearing upon the registration books, at a
redemption price equal to the greater of (1) 100% of the principal amount of the
bonds to be redeemed, plus accrued interest to the redemption date, or (2) as
determined by the Quotation Agent, the sum of the present values of the
remaining scheduled payments of principal and interest on the bonds to be
redeemed (not including any portion of payments of interest accrued as of the
redemption date) discounted to the redemption date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Adjusted
Treasury Rate plus 25 basis points, plus accrued interest to the redemption
date. Unless the Company defaults in payment of the redemption price, on and
after the redemption date, interest will cease to accrue on the bonds of this
series or portions of the bonds of this series called for redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the rate per year equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for the redemption date.
"Business Day" means any day that is not a day on which banking
institutions in New York City are authorized or required by law or regulation to
close.
22
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the bonds of this series that would be used, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
bonds of the New Series.
"Comparable Treasury Price" means, with respect to any redemption date:
o the average of the Reference Treasury Dealer Quotations for
that redemption date, after excluding the highest and lowest
of the Reference Treasury Dealer Quotations; or
o if the Trustee obtains fewer than three Reference Treasury
Dealer Quotations, the average of all Reference Treasury
Dealer Quotations so received.
"Reference Treasury Dealer" means (1) each of Banc One Capital Markets,
Inc. and Salomon Smith Barney Inc. and their respective successors, unless any
of them ceases to be a primary U.S. Government securities dealer in New York
City (a "Primary Treasury Dealer"), in which case the Company shall substitute
another Primary Treasury Dealer; and (2) any other Primary Treasury Dealer
selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by that Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding that redemption date.
Section 2. In case the Company shall desire to exercise such right to
redeem and pay off all or any part of such bonds of the New Series as
hereinbefore provided it shall comply with all the terms and provisions of
Article III of the Mortgage, as amended, applicable thereto, and such redemption
shall be made under and subject to the terms and provisions of Article III and
in the manner and with the effect therein provided, but at the time or times and
upon mailing of notice, all as hereinbefore set forth in Section 1 of this
Article. No publication of notice of any redemption of any bonds of the New
Series shall be required.
ARTICLE V.
CERTAIN EVENTS OF DEFAULT; REMEDIES
Section 1. So long as any bonds of the New Series remain outstanding,
in case one or more of the following events shall happen, such events shall, in
addition to the events of default heretofore enumerated in paragraphs (a)
throughout (d) of Section 2 of Article VIII of the Mortgage, constitute an
"event of default" under the Mortgage, as fully as if such events were
enumerated therein:
(e) default shall be made in the due and punctual payment of
the principal (including the full amount of any applicable optional
redemption price) of any bond or
23
bonds of the New Series whether at the maturity of said bonds, or at a
date fixed for redemption of said bonds, or any of them, or by
declaration as authorized by the Mortgage;
Section 2. So long as any bonds of the New Series remain outstanding,
Section 10 of Article VIII of the Mortgage, as heretofore amended, is hereby
further amended by inserting in the first paragraph of such Section 10,
immediately after the words "as herein provided," at the end of clause (2)
thereof, the following:
"or (3) in case default shall be made in any payment of any interest on
any bond or bonds secured by this indenture or in the payment of the principal
(including any applicable optional redemption price) of any bond or bonds
secured by this indenture, where such default is not of the character referred
to in clause (1) or (2) of this Section 10 but constitutes an event of default
within the meaning of Section 2 of this Article VIII."
ARTICLE VI.
CONCERNING THE TRUSTEE
The Trustee hereby accepts the trust herein declared and provided and
agrees to perform the same upon the terms and conditions set forth in the
Mortgage, as amended and supplemented, and upon the following terms and
conditions:
The Trustee shall not be responsible in any manner whatsoever for or in
respect of the validity of this Supplemental Indenture or the due execution
hereof by the Company or for or in respect of the recitals contained herein, all
of which recitals are made by the Company solely.
ARTICLE VII.
MISCELLANEOUS
Section 3. Unless otherwise clearly required by the context, the term
"Trustee," or any other equivalent term used in this Supplemental Indenture,
shall be held and construed to mean the trustee under the Mortgage for the time
being whether the original or a successor trustee.
Section 4. The headings of the Articles of this Supplemental Indenture
are inserted for convenience of reference only and are not to be taken to be any
part of this Supplemental Indenture or to control or affect the meaning of the
same.
Section 5. Nothing expressed or mentioned in or to be implied from this
Supplemental Indenture or in or from the bonds of the New Series is intended, or
shall be construed, to give any person or corporation, other than the parties
hereto and their respective successors, and the holders of bonds secured by the
Mortgage and the indentures supplemental thereto, any legal or equitable right,
remedy or claim under or in respect of such bonds or the Mortgage or any
indenture supplemental thereto, or any covenant, condition or provision therein
or in this Supplemental Indenture contained. All the covenants, conditions and
provisions thereof and
24
hereof are for the sole and exclusive benefit of the parties hereto and their
successors and of the holders of bonds secured by the Mortgage and indentures
supplemental thereto.
Section 6. This Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all collectively but one
instrument.
Section 7. This Supplemental Indenture is dated and shall be effective
as of September 15, 2002, but was actually executed and delivered on September
17, 2002.
[Remainder of this page intentionally left blank]
25
IN WITNESS WHEREOF, the parties of the first and second parts hereto
have caused their corporate seals to be hereunto affixed and the President or a
Vice President of the party of the first part and the President or a Vice
President of the party of the second part, under and by the authority vested in
them, have hereto affixed their signatures and their Secretaries or Assistant
Secretaries have duly attested the execution hereof the 17th day of September,
2002.
PECO ENERGY COMPANY
By
----------------------------------------
F. F. Frankowski
Vice President
[SEAL]
Attest
-------------------------------------
T. D. Cutler
Assistant Secretary
WACHOVIA BANK, NATIONAL ASSOCIATION
By
----------------------------------------
G. J. Rayzis
Vice President
[SEAL]
Attest
-------------------------------------
J. M. Matthews
Assistant Secretary
26
COMMONWEALTH OF PENNSYLVANIA
ss.
COUNTY OF PHILADELPHIA
BE IT REMEMBERED, that on the 17th day of September, 2002, before me, a
Notary Public in and for said County and Commonwealth, residing in Philadelphia,
personally came T. D. Cutler, who being duly sworn according to law deposes and
says that he was personally present and did see the common or corporate seal of
the above named PECO Energy Company affixed to the foregoing Supplemental
Indenture, that the seal so affixed is the common or corporate seal of the said
PECO Energy Company, and was so affixed by the authority of the said corporation
as the act and deed thereof; that the above named F. F. Frankowski is a Vice
President of the said corporation, and did sign the said Supplemental Indenture
as such in the presence of this deponent that this deponent is Assistant
Secretary of the said corporation; and the name of the deponent, above signed in
attestation of the due execution of the said Supplemental Indenture, is in this
deponent's own proper handwriting.
Sworn to and subscribed before me the day and year aforesaid.
___________________________________________
Notarial Seal
_______________
Notary Public, City of Philadelphia,
Philadelphia County
My Commission Expires ______, ____
[SEAL]
27
COMMONWEALTH OF PENNSYLVANIA
ss.
COUNTY OF PHILADELPHIA
BE IT REMEMBERED, that on the 17th day of September, 2002, before me,
the subscriber, a Notary Public in and for said County and Commonwealth,
residing in Philadelphia, personally came J. M. Matthews, who being duly sworn
according to law deposes and says that he was personally present and did see the
common or corporate seal of the above named Wachovia Bank, National Association,
affixed to the foregoing Supplemental Indenture, that the seal so affixed is the
common or corporate seal of the said Wachovia Bank, National Association, and
was so affixed by the authority of the said corporation as the act and deed
thereof, that the above named G. J. Rayzis is a Vice President of the said
corporation, and did sign the said Supplemental Indenture as such in the
presence of this deponent; that this deponent is an Assistant Secretary of the
said corporation; and that the name of this deponent, above signed in
attestation of the due execution of the said Supplemental Indenture, is in this
deponent's own proper handwriting.
Sworn to and subscribed before me the day and year aforesaid.
I hereby certify that I am not an officer of director of said Wachovia
Bank, National Association.
___________________________________________
Notarial Seal
_____________, Notary Public
City of Philadelphia, Philadelphia County
My Commission Expires ______, ____
[SEAL]
28
CERTIFICATE OF RESIDENCE
Wachovia Bank, National Association, Mortgagee and Trustee within
named, hereby certifies that its precise residence in the City of Philadelphia
is N.E. Cor. Broad and Walnut Streets in the City of Philadelphia, Pennsylvania.
WACHOVIA BANK, NATIONAL ASSOCIATION
By
----------------------------------------
G. J. Rayzis
Vice President
29
SCHEDULE A
COMMONWEALTH OF PENNSYLVANIA
PHILADELPHIA COUNTY
EIGHTEENTH WARD: (PE 10,560)
(1) ALL THAT CERTAIN lot or piece of ground with the buildings and
improvements thereon erected, Situate in the 18th ward of the City of
Philadelphia, Commonwealth of Pennsylvania, BEGINNING at a point formed by the
intersection of the Southeasterly side of Delaware Avenue (variable width) and
the Northeasterly side of Palmer Street (50 feet wide), CONTAINING 105,681
square feet or 2.4261 acres.
BEING the same premises which Jerome Foods, Inc. by Deed dated
1/27/1998 and recorded 2/2/1998 in Philadelphia County in Deed Book JTD 577 Page
46 conveyed unto PIDC Financing Corporation, a Pennsylvania Non-Profit Corp., in
fee. UNDER AND SUBJECT to certain rights as of record.
30
================================================================================
Exhibit 4.2
PECO ENERGY COMPANY
TO
WACHOVIA BANK, NATIONAL ASSOCIATION TRUSTEE
(formerly, First Union National Bank)
______________________
NINETY-EIGHTH SUPPLEMENTAL
INDENTURE DATED AS OF
OCTOBER 1, 2002
TO
FIRST AND REFUNDING MORTGAGE
OF
THE COUNTIES GAS AND ELECTRIC
COMPANY
TO
FIDELITY TRUST COMPANY, TRUSTEE
DATED MAY 1, 1923
__________________
5.95% SERIES DUE 2011
(Exchange Series)
================================================================================
THIS SUPPLEMENTAL INDENTURE dated as of October 1, 2002, by and between
PECO ENERGY COMPANY, a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania (hereinafter called the Company), party of the
first part, and WACHOVIA BANK, NATIONAL ASSOCIATION (formerly, First Union
National Bank), a national banking association organized and existing under the
laws of the United States of America (hereinafter called the Trustee), as
Trustee under the Mortgage hereinafter mentioned, party of the second part,
Witnesseth that
WHEREAS, The Counties Gas and Electric Company (hereinafter called
Counties Company), a Pennsylvania corporation and a predecessor to the Company,
duly executed and delivered to Fidelity Trust Company, a Pennsylvania
corporation to which the Trustee is successor, as Trustee, a certain indenture
of mortgage and deed of trust dated May 1, 1923 (hereinafter called the
Mortgage), to provide for the issue of, and to secure, its First and Refunding
Mortgage Bonds, issuable in series and without limit as to principal amount
except as provided in the Mortgage, the initial series of Bonds being designated
the 6% Series of 1923, and the terms and provisions of other series of bonds
secured by the Mortgage to be determined as provided in the Mortgage; and
WHEREAS, thereafter Counties Company, Philadelphia Suburban-Counties
Gas and Electric Company (hereinafter called Suburban Company), and the Company,
respectively, have from time to time executed and delivered indentures
supplemental to the Mortgage, providing for the creation of additional series of
bonds secured by the Mortgage and for amendment of certain of the terms and
provisions of the Mortgage and of indentures supplemental thereto, or evidencing
the succession of Suburban Company to Counties Company and of the Company to
Suburban Company, such indentures supplemental to the Mortgage, the respective
dates, parties thereto, and purposes thereof, being as follows:
2
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
First Counties Company to Bonds of 5% Series of
September 1, 1926 Fidelity-Philadelphia 1926
Trust Company
(Successor to Fidelity
Trust Company)
Second Suburban Company to Evidencing succession of
May 1, 1927 Fidelity-Philadelphia Suburban Company to
Trust Company Counties Company
Third Suburban Company to Bonds of 4-1/2% Series
May 1, 1927 Fidelity-Philadelphia due 1957; amendment of
Trust Company certain provisions of
Mortgage
Fourth Suburban Company to Additional Bonds of
November 1, 1927 Fidelity-Philadelphia 4-1/2% Series due 1957
Trust Company
Fifth Company to Evidencing succession of
January 31, 1931 Fidelity-Philadelphia Company to
Trust Company Suburban Company
Sixth Company to Bonds of 4% Series
February 1, 1931 Fidelity-Philadelphia due 1971
Trust Company
Seventh Company to Bonds of 3-1/2% Series
March 1, 1937 Fidelity-Philadelphia due 1967; amendment of
Trust Company certain provisions of
Mortgage
Eighth Company to Bonds of 2-3/4% Series
December 1, 1941 Fidelity-Philadelphia due 1971; amendment of
Trust Company certain provisions of
Mortgage
Ninth Company to Bonds of 2-3/4% Series
November 1, 1944 Fidelity-Philadelphia due 1967 and 2-3/4% Series
Trust Company due 1974; amendment of
certain provisions of
Mortgage
Tenth Company to Bonds of 2-3/4% Series
December 1, 1946 Fidelity-Philadelphia due 1981; amendment of
Trust Company certain provisions of
Mortgage*
3
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Eleventh Company to Bonds of 2-7/8% Series
February 1, 1948 Fidelity-Philadelphia due 1978*
Trust Company
Twelfth Company to Bonds of 3-1/4% Series
January 1, 1952 Fidelity-Philadelphia due 1982*
Trust Company
Thirteenth Company to Bonds of 3-7/8% Series
May 1, 1953 Fidelity-Philadelphia due 1983*
Trust Company
Fourteenth Company to Bonds of 3-1/8% Series
December 1, 1953 Fidelity-Philadelphia due 1983*
Trust Company
Fifteenth Company to Bonds of 3-1/8% Series
April 1, 1955 Fidelity-Philadelphia due 1985*
Trust Company
Sixteenth Company to Bonds of 4-5/8% Series
September 1, 1957 Fidelity-Philadelphia due 1987; amendment of certain
Trust Company provisions of Mortgage*
Seventeenth Company to Bonds of 3-3/4% Series
May 1, 1958 Fidelity-Philadelphia due 1988; amendment of certain
Trust Company provisions of Mortgage*
Eighteenth Company to Bonds of 4-3/8% Series
December 1, 1958 Fidelity-Philadelphia due 1986*
Trust Company
Nineteenth Company to Bonds of 5% Series
October 1, 1959 Fidelity-Philadelphia due 1989*
Trust Company
Twentieth Company to Bonds of 4-1/2% Series
May 1, 1964 Fidelity-Philadelphia due 1994*
Trust Company
Twenty-first Company to Bonds of 6% Series due
October 15, 1966 Fidelity-Philadelphia 1968-1973*
Trust Company
Twenty-second Company to The Fidelity Bank Bonds of 5-1/4 % Series due
June 1, 1967 (formerly 1968-1973 and 5-3/4 %
Fidelity-Philadelphia Series due 1977*
Trust Company)
Twenty-third Company to The Fidelity Bonds of 6-1/8 % Series
October 1, 1957 Bank due 1997*
4
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Twenty-fourth Company to The Fidelity Bonds of 6-1/2% Series
March 1, 1968 Bank due 1993; amendment of
Article XIV of
Mortgage*
Twenty-fifth Company to The Fidelity Bonds of 1968 Series due
September 10, 1968 Bank 1969-1976*
Twenty-sixth Company to The Fidelity Bonds of 8% Series due
August 15, 1969 Bank 1975*
Twenty-seventh Company to The Fidelity Bonds of 9% Series due
February 1, 1970 Bank 1995*
Twenty-eighth Company to The Fidelity Bonds of 8-1/2% Series
May 1, 1970 Bank due 1976*
Twenty-ninth Company to The Fidelity Bonds of 7-3/4% Series
December 15, 1970 Bank due 2000*
Thirtieth Company to The Fidelity Bonds of 8-1/4% Series
August 1, 1971 Bank due 1996*
Thirty-first Company to The Fidelity Bonds of 7-3/8% Series
December 15, 1971 Bank due 2001; amendment of
Article XI of Mortgage*
Thirty-second Company to The Fidelity Bonds of 7-1/2% Series
June 15, 1972 Bank due 1998*
Thirty-third Company to The Fidelity Bonds of 7-1/2% Series
January 15, 1973 Bank due 1999*
Thirty-fourth Company to The Fidelity Bonds of 8-1/2% Series
January 15, 1974 Bank due 2004
Thirty-fifth Company to The Fidelity Bonds of 11% Series
October 15, 1974 Bank due 1980*
Thirty-sixth Company to The Fidelity Bonds of 11-5/8% Series
April 15, 1975 Bank due 2000*
Thirty-seventh Company to The Fidelity Bonds of 11% Series due
August 1, 1975 Bank 2000*
Thirty-eighth Company to The Fidelity Bonds of 9-1/8% Series
March 1, 1976 Bank due 2006*
Thirty-ninth Company to The Fidelity Bonds of 9-5/8% Series
August 1, 1976 Bank due 2002*
5
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Fortieth Company to The Fidelity Bonds of Pollution
February 1, 1977 Bank Control Series A
and Pollution
Control Series B*
Forty-first Company to The Fidelity Bonds of 8-5/8% Series
March 15, 1977 Bank due 2007*
Forty-second Company to The Fidelity Bonds of 8-5/8% Series
July 15, 1977 Bank due 2003*
Forty-third Company to The Fidelity Bonds of 9-1/8% Series
March 15, 1978 Bank due 2008*
Forty-fourth Company to The Fidelity Bonds of 12-1/2% Series
October 15, 1979 Bank due 2005*
Forty-fifth Company to The Fidelity Bonds of 13-3/4% Series
October 15, 1980 Bank due 1992*
Forty-sixth Company to The Fidelity Bonds of 15-1/4% Series
March 1, 1981 Bank due 1996; amendment of
Article VIII of
Mortgage*
Forty-seventh Company to The Fidelity Bonds of 15% Series due
March 1, 1981 Bank 1996; amendment of
Article VIII of
Mortgage*
Forty-eighth Company to The Fidelity Bonds of 17-5/8% Series
July 1, 1981 Bank due 2011*
Forty-ninth Company to The Fidelity Bonds of 18-3/4% Series
September 15, 1981 Bank due 2009*
Fiftieth Company to The Fidelity Bonds of 18% Series due
April 1, 1982 Bank 2012*
Fifty-first Company to The Fidelity Bonds of 15-3/8% Series
October 1, 1982 Bank due 2010*
Fifty-second Company to The Fidelity Bonds of 13-3/8% Series
June 15, 1983 Bank due 2013*
Fifty-third Company to Fidelity Bank, Bonds of 13.05% Series
November 15, 1984 National Association due 1994; amendment
(formerly The Fidelity Bank) of Article VIII of
Mortgage*
6
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Fifty-fourth Company to Fidelity Bank, Bonds of 14% Series due
December 1, 1984 National Association 1988-1994; amendment
of Article VIII of
Mortgage*
Fifty-fifth Company to Fidelity Bank, Bonds of Pollution
May 15, 1985 National Association Control Series C*
Fifty-sixth Company to Fidelity Bank, Bonds of Pollution
October 1, 1985 National Association Control Series D*
Fifty-seventh Company to Fidelity Bank, Bonds of 10-7/8% Series
November 15, 1985 National Association due 1995*
Fifty-eight Company to Fidelity Bank, Bonds of 11-3/4% Series
November 15, 1985 National Association due 2014*
Fifty-ninth Company to Fidelity Bank, Bonds of Pollution
June 1, 1986 National Association Control Series E*
Sixtieth Company to Fidelity Bank, Bonds of 10-1/4% Series
November 1, 1986 National Association due 2016*
Sixty-first Company to Fidelity Bank, Bonds of 8-3/4% Series
November 1, 1986 National Association due 1994*
Sixty-second Company to Fidelity Bank, Bonds of 9-3/8% Series
April 1, 1987 National Association due 2017*
Sixty-third Company to Fidelity Bank, Bonds of 11% Series due
July 15, 1987 National Association 2016*
Sixty-fourth Company to Fidelity Bank, Bonds of 10% Series due
July 15, 1987 National Association 1997*
Sixty-fifth Company to Fidelity Bank, Bonds of 10-1/4% Series
August 1, 1987 National Association due 2007*
Sixty-sixth Company to Fidelity Bank, Bonds of 11% Series due
October 15, 1987 National Association 1997*
Sixty-seventh Company to Fidelity Bank, Bonds of 12-1/8% Series
October 15, 1987 National Association due 2016*
Sixty-eighth Company to Fidelity Bank, Bonds of 10% Series due
April 15, 1988 National Association 1998*
Sixty-ninth Company to Fidelity Bank, Bonds of 11% Series due
April 15, 1988 National Association 2018*
7
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Seventieth Company to Fidelity Bank, Bonds of 10% Series due
June 15, 1989 National Association 2019*
Seventy-first Company to Fidelity Bank, Bonds of 9-7/8% Series
October 1, 1989 National Association due 2019*
Seventy-second Company to Fidelity Bank, Bonds of 9-1/4% Series
October 1, 1989 National Association due 1999*
Seventy-third Company to Fidelity Bank, Medium-Term Note
October 1, 1989 National Association Series A*
Seventy-fourth Company to Fidelity Bank, Bonds of 10-1/2% Series
October 15, 1990 National Association due 2020*
Seventy-fifth Company to Fidelity Bank, Bonds of 10% Series due
October 15, 1990 National Association 2000*
Seventy-sixth Company to Fidelity Bank, Bonds of Pollution
April 1, 1991 National Association Control Series F
and Pollution
Control Series G*
Seventy-seventh Company to Fidelity Bank, Bonds of Pollution
December 1, 1991 National Association Control Series H*
Seventy-eighth Company to Fidelity Bank, Bonds of 7-1/2% 1992
January 15, 1992 National Association Series due 1999*
Seventy-ninth Company to Fidelity Bank, Bonds of 8% Series due
April 1, 1992 National Association 2002*
Eightieth Company to Fidelity Bank, Bonds of 8-3/4% Series
April 1, 1992 National Association due 2022*
Eighty-first Company to Fidelity Bank, Bonds of Pollution
June 1, 1992 National Association Control Series I*
Eighty-second Company to Fidelity Bank, Bonds of 8-5/8% Series
June 1, 1992 National Association due 2022*
Eighty-third Company to Fidelity Bank, Bonds of 7-1/2% Series
July 15, 1992 National Association due 2002*
Eighty-fourth Company to Fidelity Bank, Bonds of 8-1/4% Series
September 1, 1992 National Association due 2022*
Eighty-fifth Company to Fidelity Bank, Bonds of 7-1/8% Series
September 1, 1992 National Association due 2002*
8
Supplemental Indenture
and Date Parties Providing for:
-------- ------- --------------
Eighty-sixth Company to Fidelity Bank, Bonds of 6-5/8% Series
March 1, 1993 National Association due 2003*
Eighty-Seventh Company to Fidelity Bank, Bonds of 7-3/4% Series
March 1, 1993 National Association due 2023*
Eighty-eighth Company to Fidelity Bank, Bonds of Pollution
March 1, 1993 National Association Control Series J,
Pollution Control
Series K, Pollution
Control Series L
and Pollution Control
Series M*
Eighty-ninth Company to Fidelity Bank, Bonds of 6-1/2% Series
May 1, 1993 National Association due 2003*
Ninetieth Company to Fidelity Bank, Bonds of 7-3/4% Series
May 1, 1993 National Association 2 due 2023*
Ninety-first Company to First Fidelity Bank, Bonds of 7-1/8% Series
August 15, 1993 N.A., Pennsylvania due 2023*
Ninety-second Company to First Fidelity Bank, Bonds of 6-3/8% Series
August 15, 1993 N.A., Pennsylvania due 2005*
Ninety-third Company to First Fidelity Bank, Bonds of 5-3/8% Series
August 15, 1993 N.A., Pennsylvania due 1998*
Ninety-fourth Company to First Fidelity Bank, Bonds of 7-1/4% Series
November 1, 1993 N.A., Pennsylvania due 2024*
Ninety-fifth Company to First Fidelity Bank, Bonds of 5-5/8% Series
November 1, 1993 N.A., Pennsylvania due 2001*
Ninety-sixth Company to First Fidelity Bank, Medium Term Note Series B*
May 1, 1995 N.A., Pennsylvania
Ninety-seventh Company to First Union National Bank Bonds of 5.95% Series
October 15, 2001 (formerly First Fidelity Bank, N.A., due 2011*
Pennsylvania)
Ninety-ninth Company to Wachovia Bank, National Bonds of 4.75% Series
September 15, 2002 Association (formerly First Union due 2012*
National Bank)
*And amendment of certain provisions of the Ninth Supplemental Indenture.
9
WHEREAS, the respective principal amounts of the bonds of each series
presently outstanding under the Mortgage and the several supplemental indentures
above referred to, are as follows:
PRINCIPAL
Series AMOUNT
------ ------
5-5/8% Series due 2001....................................$250,000,000
6-5/8% Series due 2003.....................................250,000,000
6-1/2% Series due 2003.....................................200,000,000
6-3/8% Series due 2005......................................75,000,000
Pollution Control Series J due 2012...........................50,000,000
Pollution Control Series K due 2012...........................50,000,000
Pollution Control Series L due 2012...........................50,000,000
Pollution Control Series M due 2012............................4,200,000
6-5/8% Pollution Control Series I due 2022....................29,530,000
4.75% Series due 2012........................................250,000,000
Total $1,208,730,000
==============
WHEREAS, on October 15, 2001, pursuant to the Ninety-seventh
Supplemental Indenture, the Company issued $250,000,000 aggregate principal
amount 5.95% First and Refunding Mortgage Bonds due 2011 (hereinafter called the
"Original Series");
WHEREAS, in connection with such issuance, the Company entered into a
Registration Rights Agreement, dated October 30, 2001, by and between the
Company and the representatives of the initial purchasers of the Original
Series, pursuant to which the Company agreed to register $250,000,000 aggregate
principal amount 5.95% First and Refunding Mortgage Bonds due 2011 (hereinafter
called "Exchange Series") and exchange the Original Series for the Exchange
Series in an exchange offer (the "Exchange Offer").
WHEREAS, the exchange offer for the Original Series, having been
completed, the Company wishes to issue $250,000,000 aggregate principal amount
of its 5.95% Exchange Series due 2011,
and
WHEREAS, the Company deems it advisable and has determined, pursuant to
Article XI of the Mortgage,
(a) to convey, pledge, transfer and assign to the Trustee and to
subject specifically to the lien of the Mortgage additional property not therein
or in any supplemental indenture specifically described but now owned by the
Company and acquired by it by purchase or otherwise; and
10
(b) to create an Exchange Series of bonds to be issued under, and
secured by, the Mortgage, and for the above-mentioned purposes to execute,
deliver and record this Supplemental Indenture; and
WHEREAS, the Company has determined by proper corporate action that the
terms, provisions and form of the bonds of the Exchange Series shall be
substantially as follows:
11
(Form of Face of Exchange Series of Bond)
PECO ENERGY COMPANY
REGISTERED REGISTERED
NUMBER
FIRST AND REFUNDING MORTGAGE BOND,
5.95% SERIES DUE 2011,
DUE NOVEMBER 1, 2011
PECO Energy Company, a Pennsylvania corporation (hereinafter called the
Company), for value received, hereby promises to pay to ________________________
or registered assigns, ________________________ Dollars on November 1, 2011, at
the office or agency of the Company, in the City of Philadelphia, Pennsylvania,
or, at the option of the holder, at the office or agency of the Company, in the
Borough of Manhattan, The City of New York, in such coin or currency of the
United States of America as at the time of payment shall constitute legal tender
for the payment of public and private debts, and to pay interest (computed on
the basis of a 360-day year of twelve 30-day months) thereon from the date
hereof at the rate of 5.95 percent per annum in like coin or currency, payable
at either of the offices aforesaid on May 1 and November 1 in each year until
the Company's obligation with respect to the payment of such principal shall
have been discharged. Any accrued and unpaid interest on any bond of the
Original Series upon the issuance of an Exchange Security (as defined in the
Registration Rights Agreement) shall cease to be payable to the holder thereof
but such accrued and unpaid interest shall be payable on the next interest
payment date for such Exchange Security to the holder thereof on the related
record date. Both such principal and interest are payable less deduction for any
taxes, assessments or governmental charges assessed against this bond or the
interest hereon or any owner or holder hereof which the Company, the Trustee
under the Mortgage referred to on the reverse hereof or any paying agent is or
may be required to collect or withhold under any present or future law of the
United States of America, or any state and/or of any county, municipality,
taxing authority or political subdivision thereof.
"Registration Rights Agreement" means an agreement by and among the
Company and the initial purchasers of the bonds of this series regarding the
Company's obligation to (1) complete the Exchange Offer and (2) register the
resale of the bonds of this series with the Securities and Exchange Commission.
The Company may fix a date, not more than fourteen calendar days prior
to any interest payment date, as a record date for determining the registered
holder of this bond entitled to such interest payment, in which case only the
registered holder on such record date shall be entitled to receive such payment,
notwithstanding any transfer of this bond upon the registration books subsequent
to such record date.
This bond shall not be valid or become obligatory for any purpose
unless it shall have been authenticated by the certificate of the Trustee under
said Mortgage endorsed hereon.
12
The provisions of this bond are continued on the reverse hereof and
such continued provisions shall for all purposes have the same effect as though
fully set forth at this place.
IN WITNESS WHEREOF, PECO Energy Company has caused this instrument to
be signed in its corporate name with the manual or facsimile signature of its
President or a Vice President and its corporate seal to be impressed or a
facsimile imprinted hereon, duly attested by the manual or facsimile signature
of its Secretary or an Assistant Secretary.
Dated:
PECO ENERGY COMPANY
By
--------------------------------------
President
(SEAL)
Attest:
----------------------------------
Secretary
13
(Form of Reverse of Exchange Series of Bond)
PECO ENERGY COMPANY
First and Refunding Mortgage Bond,
5.95% Series Due 2011
Due November 1, 2011
(CONTINUED)
This bond is one of a duly authorized issue of bonds of the Company,
unlimited as to amount except as provided in the Mortgage hereinafter mentioned
or in any indenture supplemental thereto, and is one of a series of said bonds
known as First and Refunding Mortgage Bonds, 5.95% Series due 2011. This bond
and all other bonds of said issue are issued and to be issued under and pursuant
to and are all secured equally and ratably by an indenture of mortgage and deed
of trust dated May 1, 1923, duly executed and delivered by The Counties Gas and
Electric Company (to which the Company is successor) to Fidelity Trust Company,
as Trustee (to which Wachovia Bank, National Association, a national banking
association organized and existing under the laws of the United States of
America, is successor Trustee), as amended, modified or supplemented by certain
supplemental indentures from the Company or its predecessors to said successor
Trustee or its predecessors, said mortgage, as so amended, modified or
supplemented being herein called the Mortgage. Reference is hereby made to the
Mortgage for a statement of the property mortgaged and pledged, the nature and
extent of the security, the rights of the holders of said bonds and of the
Trustee in respect of such security, the rights, duties and immunities of the
Trustee, and the terms and conditions upon which said bonds are and are to be
secured, and the circumstances under which additional bonds may be issued.
As provided in the Mortgage, the bonds secured thereby may be for
various principal sums and are issuable in series, which series may mature at
different times, may bear interest at different rates, and may otherwise vary.
The bonds of this series mature on November 1, 2011, and are issuable only in
registered form without coupons in any denomination authorized by the Company.
Any bond or bonds of this series may be exchanged for another bond or
bonds of this series in a like aggregate principal amount in authorized
denominations, upon presentation at the office of the Trustee in the City of
Philadelphia, Pennsylvania, or, at the option of the holder, at the office or
agency of the Company in the Borough of Manhattan, The City of New York, all
subject to the terms of the Mortgage but without any charge other than a sum
sufficient to reimburse the Company for any stamp tax or other governmental
charge incident to the exchange.
The bonds of this series are redeemable at the option of the Company,
as a whole or in part, at any time upon notice sent by the Company through the
mail, postage prepaid, at least thirty (30) days and not more than forty-five
(45) days prior to the date fixed for redemption, to the registered holder of
each bond to be redeemed, addressed to such holder at his address appearing upon
the registration books, at a redemption price equal to the greater of (1) 100%
of the principal amount of the bonds to be redeemed, plus accrued interest to
the redemption date, or (2) as determined by the Quotation Agent, the sum of the
present values of the remaining
14
scheduled payments of principal and interest on the bonds to be redeemed (not
including any portion of payments of interest accrued as of the redemption date)
discounted to the redemption date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Adjusted Treasury Rate plus 30
basis points, plus accrued interest to the redemption date. Unless the Company
defaults in payment of the redemption price, on and after the redemption date,
interest will cease to accrue on the bonds of this series or portions of the
bonds of this series called for redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the rate per year equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for the redemption date.
"Business Day" means any day that is not a day on which banking
institutions in New York City are authorized or required by law or regulation to
close.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the bonds of this series that would be used, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
bonds of this series.
"Comparable Treasury Price" means, with respect to any redemption date:
o the average of the Reference Treasury Dealer Quotations for
that redemption date, after excluding the highest and lowest
of the Reference Treasury Dealer Quotations; or
o if the Trustee obtains fewer than three Reference Treasury
Dealer Quotations, the average of all Reference Treasury
Dealer Quotations so received.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
Company.
"Reference Treasury Dealer" means (1) each of Merrill Lynch, Pierce,
Fenner & Smith Incorporated and First Union Securities, Inc. and their
respective successors, unless any of them ceases to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), in which case
the Company shall substitute another Primary Treasury Dealer; and (2) any other
Primary Treasury Dealer selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by that Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding that redemption date.
The principal of this bond may be declared or may become due on the
conditions, in the manner and with the effect provided in the Mortgage upon the
happening of an event of default as in the Mortgage provided.
15
This bond is transferable by the registered holder hereof in person or
by attorney, duly authorized in writing, at the office of the Trustee in the
City of Philadelphia, Pennsylvania, or, at the option of the holder, at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, in books of the Company to be kept for that purpose, upon surrender and
cancellation hereof, and upon any such transfer, a new registered bond or bonds,
without coupons, of this series and for the same aggregate principal amount,
will be issued to the transferee in exchange herefor, all subject to the terms
of the Mortgage but without payment of any charge other than a sum sufficient to
reimburse the Company for any stamp tax or other governmental charge incident to
the transfer. The Company, the Trustee, and any paying agent may deem and treat
the person in whose name this bond is registered as the absolute owner hereof
for the purpose of receiving payment of or on account of the principal and
interest due hereon and for all other purposes, and neither the Company nor the
Trustee nor any paying agent shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or
interest on this bond to any incorporator or any past, present or future
stockholder, officer or director of the Company or of any predecessor or
successor corporation, either directly or indirectly, by virtue of any statute
or by enforcement of any assessment or otherwise, and any and all liability of
the said incorporators, stockholders, officers or directors of the Company or of
any predecessor or successor corporation in respect to this bond is hereby
expressly waived and released by every holder hereof, except to the extent that
such liability may not be waived or released under the provisions of the
Securities Act of 1933 or of the rules and regulations of the Securities and
Exchange Commission thereunder.
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
(End of Form of Reverse of Bond)
16
and
WHEREAS, on the face of each of the bonds of the Exchange Series, there
is to be endorsed a certificate of the Trustee in substantially the following
form, to wit:
(Form of Trustee's Certificate)
This bond is one of the bonds, of the series designated therein,
provided for in the within-mentioned Mortgage and in the Ninety-Eighth
Supplemental Indenture dated as of October 1, 2002.
WACHOVIA BANK, NATIONAL ASSOCIATION
By
---------------------------------------
Authorized Officer
17
and
WHEREAS, all acts and things necessary to make the bonds of the
Exchange Series, when duly executed by the Company and authenticated by the
Trustee as provided in the Mortgage and indentures supplemental thereto, and
issued by the Company, the valid, binding and legal obligations of the Company,
and this Supplemental Indenture a valid and enforceable supplement to the
Mortgage, have been done, performed and fulfilled and the execution and delivery
hereof have been in all respects duly and lawfully authorized.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
That in order to secure the payment of the principal of and interest on
all bonds issued and to be issued under the Mortgage and/or under any indenture
supplemental thereto, according to their tenor and effect, and according to the
terms of the Mortgage and of any indenture supplemental thereto, and to secure
the performance of the covenants and obligations in the bonds and in the
Mortgage and any indenture supplemental thereto respectively contained, and for
the proper assuring, conveying, and confirming unto the Trustee, its successors
in trust and its and their assigns forever, upon the trusts and for the purposes
expressed in the Mortgage and in any indentures supplemental thereto, all and
singular the estates, property and franchises of the Company thereby mortgaged
or intended so to be, the Company, for and in consideration of the premises and
of the sum of One Dollar ($1.00) in hand paid by the Trustee to the Company upon
the execution and delivery of this Supplemental Indenture, receipt whereof is
hereby acknowledged, and of other good and valuable consideration, has granted,
bargained, sold, conveyed, released, confirmed, pledged, assigned, transferred
and set over and by these presents does grant, bargain, sell, convey, release,
confirm, pledge, assign, transfer, and set over to Wachovia Bank, National
Association, as Trustee, and to its successors in trust and its and their
assigns forever, all the following described property, real, personal and mixed
of the Company, viz.:
All of the real property with any improvements thereon erected as may
be owned by the Company and described in the Mortgage or in any indenture
supplemental thereto as may heretofore have been executed, delivered and
recorded, but excluding therefrom all real property heretofore released from the
lien of the Mortgage. It is hereby stated that the Company has not acquired
title to nor become the owner of any new or additional real property since the
execution, delivery and recording of the Ninety-ninth Supplemental Indenture
dated as of September 15, 2002. The purpose of restating such prior conveyances
as security is to confirm that the obligations of the Company as provided in
this Supplemental Indenture are included within the lien and security of the
Mortgage, and that public record be made of such purpose and fact by the
recording of this Supplemental Indenture.
Together with all gas works, electric works, plants, buildings,
structures, improvements and machinery located upon such real estate or any
portion thereof, and all rights, privileges and easements of every kind and
nature appurtenant thereto, and all and singular the tenements, hereditaments
and appurtenances belonging to the real estate or any part thereof hereinbefore
described or referred to or intended so to be, or in any way appertaining
thereto, and the
18
reversions, remainders, rents, issues and profits thereof; also all the estate,
right, title, interest, property, possession, claim and demand whatsoever, as
well in law as in equity, of the Company, of, in and to the same and any and
every part thereof, with the appurtenances.
Also all the Company's electric transmission and distribution lines and
systems, substations, transforming stations, structures, machinery, apparatus,
appliances, devices and appurtenances.
Also all the Company's gas transmission and distribution mains, pipes,
pipe lines and systems, storage facilities, structures, machinery, apparatus,
appliances, devices and appurtenances.
Also all plants, systems, works, improvements, buildings, structures,
fixtures, appliances, engines, furnaces, boilers, machinery, retorts, tanks,
condensers, pumps, gas tanks, holders, reservoirs, expansion tanks, gas mains
and pipes, tunnels, service pipe, pipe lines, fittings, gates, valves,
connections, gas and electric meters, generators, dynamos, fans, supplies, tools
and implements, tracks, sidings, motor and other vehicles, all electric light
lines, electric power lines, transmission lines, distribution lines, conduits,
cables, stations, substations, and distributing systems, motors, conductors,
converters, switchboards, shafting, belting, wires, mains, feeders, poles,
towers, mast arms, brackets, pipes, lamps, insulators, house wiring connections
and all instruments, appliances, apparatus, fixtures, fittings and equipment and
all stores, repair parts, materials and supplies of every nature and kind
whatsoever now or hereafter owned by the Company in connection with or
appurtenant to its plants and systems for production, purchase, storage,
transmission, distribution, utilization and sale of gas and its by-products and
residual products, and/or for the generation, production, purchase, storage,
transmission, distribution, utilization and sale of electricity, or in
connection with such business.
Also all the goodwill of the business of the Company, and all rights,
claims, contracts, leases, patents, patent rights, and agreements, all accounts
receivable, accounts, claims, demands, choses in action, books of account, cash
assets, franchises, ordinances, rights, powers, easements, water rights,
riparian rights, licenses, privileges, immunities, concessions and consents now
or hereafter owned by the Company in connection with or appurtenant to its said
business.
Also all the right, title and interest of the Company in and to all
contracts for the purchase, sale or supply of gas, and its by-products and
residual products of electricity and electrical energy, now or hereafter entered
into by the Company with the right on the part of the Trustee, upon the
happening of an event of default as defined in the Mortgage as supplemented by
any supplemental indenture, to require a specific assignment of any and all such
contracts, whenever it shall request the Company to make the same.
Also all rents, tolls, earnings, profits, revenues, dividends and
income arising or to arise from any property now owned, leased, operated or
controlled or hereafter acquired, leased, operated or controlled by the Company
and subject to the lien of the Mortgage and indentures supplemental thereto.
19
Also all the estate, right, title and interest of the Company, as
lessee, in and to any and all demised premises under any and all agreements of
lease now or at any time hereafter in force, insofar as the same may now or
hereafter be assignable by the Company.
Also all other property, real, personal and mixed not hereinbefore
specified or referred to, of every kind and nature whatsoever, now owned, or
which may hereafter be owned by the Company (except shares of stock, bonds or
other securities not now or hereafter specifically pledged under the Mortgage
and indentures supplemental thereto or required to be pledged thereunder by the
provisions of the Mortgage or any indenture supplemental thereto), together with
all and singular the tenements, hereditaments and appurtenances thereunto
belonging or in any way appertaining and the reversions, remainder or
remainders, rents, issues and profits thereof; and also all the estate, right,
title, interest, property, claim and demand whatsoever as well in law as in
equity of the Company of, in and to the same and every part and parcel thereof.
It is the intention and it is hereby agreed that all property and the
earnings and income thereof acquired by the Company after the date hereof shall
be as fully embraced within the provisions hereof and subject to the lien hereby
created for securing the payment of all bonds, together with the interest
thereon, as if the property were now owned by the Company and were specifically
described herein and conveyed hereby, provided nevertheless, that no shares of
stock, bonds or other securities now or hereafter owned by the Company, shall be
subject to the lien of the Mortgage and indentures supplemental thereto unless
now or hereafter specifically pledged or required to be pledged thereunder by
the provisions of the Mortgage or any indenture supplemental thereto.
TO HAVE AND TO HOLD, all and singular the property, rights, privileges
and franchises hereby conveyed, transferred or pledged or intended so to be,
including after-acquired property, together with all and singular the
reversions, remainders, rents, revenues, income, issues and profits, privileges
and appurtenances, now or hereafter belonging or in any way appertaining
thereto, unto the Trustee and its successors in the trust hereby created, and
its and their assigns forever;
IN TRUST NEVERTHELESS, for the equal and pro rata benefit and security
of each and every person or corporation who may be or become the holders of
bonds secured by the Mortgage and indentures supplemental thereto, without
preference, priority or distinction (except as provided in Section 1 of Article
VIII of the Mortgage) as to lien or otherwise of any bond of any series over or
from any other bond, so that (except as aforesaid) each and every of the bonds
issued or to be issued, of whatsoever series, shall have the same right, lien,
privilege under the Mortgage and indentures supplemental thereto and shall be
equally secured thereby and hereby, with the same effect as if the bonds had all
been made, issued and negotiated simultaneously on the date of the Mortgage.
AND THIS SUPPLEMENTAL INDENTURE FURTHER WITNESSETH:
It is hereby covenanted that all bonds secured by the Mortgage and
indentures supplemental thereto with the coupons appertaining thereto, are
issued to and accepted by each and every holder thereof, and that the property
aforesaid and all other property subject to the lien of the Mortgage and
indentures supplemental thereto is held by or hereby conveyed to the
20
Trustee, under and subject to the trusts, conditions and limitations set forth
in the Mortgage and indentures supplemental thereto and upon and subject to the
further trusts, conditions and limitations hereinafter set forth, as follows, to
wit:
ARTICLE I .
AMENDMENTS OF MORTGAGE
Article II of the Ninth Supplemental Indenture to the Mortgage, as
heretofore amended, is hereby further amended as follows:
By deleting from paragraph (d) of Section 5 and from the first clause
of Section 9, the following:
"4.75% Series due 2012"
and by inserting in lieu thereof, in both instances, the following:
", 4.75% Series due 2012 or 5.95% Series due 2011 ("Exchange Series")"
ARTICLE II .
BONDS OF THE EXCHANGE SERIES
Section 1. The bonds of the Exchange Series are identical in all
material respects to the bonds of the Original Series (except that the interest
rate step-up provisions and the transfer restrictions shall be modified or
eliminated, as appropriate) and are to be issued under this Ninety-Eighth
Supplemental Indenture to the Mortgage.
The bonds of the Exchange Series shall be designated as hereinabove
specified for such designation in the recital immediately preceding the form of
bonds of the Exchange Series, subject however, to the provisions of Section 2 of
Article I of the Mortgage, as amended, and are issuable only as registered bonds
without coupons, substantially in the form hereinbefore recited; and the issue
thereof shall be limited to $250,000,000 principal amount.
The bonds of the Exchange Series shall be dated the date of issuance
and shall bear interest from the interest payment date to which interest was
paid next preceding the date of issue. The bonds of the Exchange Series shall
mature on November 1, 2011.
Interest on the bonds of the Exchange Series shall be computed on the
basis of a 360-day year of twelve 30-day months and such bonds shall bear
interest at the rate provided in the form of bond hereinbefore recited, payable
on May 1 and November 1 in each year commencing on November 1, 2002 until the
Company's obligation with respect to the payment of principal thereof shall have
been discharged. Both principal and interest on bonds of the Exchange Series
shall be payable at the office or agency of the Company in the City of
Philadelphia, Pennsylvania, or, at the option of the holder, at the office or
agency of the Company in the
21
Borough of Manhattan, The City of New York, and shall be payable in such coin or
currency of the United States of America as at the time of payment shall
constitute legal tender for the payment of public and private debts.
The bonds of the Exchange Series shall be in any denomination
authorized by the Company.
Any bond or bonds of the Exchange Series shall be exchangeable for
another bond or bonds of the Exchange Series in a like aggregate principal
amount. Any such exchange may be made upon presentation at the office of the
Trustee in the City of Philadelphia, Pennsylvania, or, at the option of the
holder, at the office or agency of the Company in the Borough of Manhattan, The
City of New York, without any charge other than a sum sufficient to reimburse
the Company for any stamp tax or other governmental charge incident to the
exchange.
Section 2. (a) Initially, the bonds of the Exchange Series shall be
issued pursuant to a book-entry system administered by the Depository Trust
Company (or its successor, referred to herein as the "Depository") as a global
security with no physical distribution of bond certificates to be made except as
provided in this Section 2. Any provisions of the Mortgage or the bonds of the
Exchange Series requiring physical delivery of bonds shall, with respect to any
bonds of the Exchange Series held under the book-entry system, be deemed to be
satisfied by a notation on the bond registration books maintained by the Trustee
that such bonds are subject to the book-entry system.
(b) So long as the book-entry system is being used, one bond of the
Exchange Series in the aggregate principal amount of the bonds of the Exchange
Series and registered in the name of the Depository's nominee (the "Nominee")
will be issued and required to be deposited with the Depository and held in its
custody. The book-entry system will be maintained by the Depository and its
participants and indirect participants and will evidence beneficial ownership of
the bonds of the Exchange Series, with transfers of ownership affected on the
records of the Depository, the participants and the indirect participants
pursuant to rules and procedures established by the Depository, the participants
and the indirect participants. The principal of and any premium on each bond of
the Exchange Series shall be payable to the Nominee or any other person
appearing on the registration books as the registered holder of such bond or its
registered assigns or legal representative at the office of the office or agency
of the Company in the City of Philadelphia, Pennsylvania or the Borough of
Manhattan, The City of New York. So long as the book-entry system is in effect,
the Depository will be recognized as the holder of the bonds of the Exchange
Series for all purposes. Transfers of principal, interest and any premium
payments or notices to participants and indirect participants will be the
responsibility of the Depository, and transfers of principal, interest and any
premium payments or notices to beneficial owners will be the responsibility of
participants and indirect participants. No other party will be responsible or
liable for such transfers of payments or notices or for maintaining, supervising
or reviewing such records maintained by the Depository, the participants or the
indirect participants. While the Nominee or the Depository, as the case may be,
is the registered owner of the bonds of the Exchange Series, notwithstanding any
other provisions set forth herein, payments of principal of, redemption premium,
if any, and interest on the bonds of the Exchange Series shall be made to the
Nominee or the Depository, as the case may be, by wire transfer in immediately
available funds to the account of such holder. Without
22
notice to or consent of the beneficial owners, the Trustee with the consent of
the Company and the Depository may agree in writing to make payments of
principal, redemption price and interest in a manner different from that set
forth herein. In such event, the Trustee shall make payment with respect to the
bonds of the Exchange Series in such manner as if set forth herein.
(c) The Company may at any time elect (i) to provide for the
replacement of any Depository as the depository for the bonds of the Exchange
Series with another qualified depository, or (ii) to discontinue the maintenance
of the bonds of the Exchange Series under book-entry system. In such event, the
Trustee shall give 30 days prior notice of such election to the Depository (or
such fewer number of days acceptable to such Depository).
(d) Upon the discontinuance of the maintenance of the bonds of the
Exchange Series under a book-entry system, the Company will cause the bonds to
be issued directly to the beneficial owners of the bonds of the Exchange Series,
or their designees, as further described below. In such event, the Trustee shall
make provisions to notify participants and beneficial owners of the bonds of the
Exchange Series, by mailing an appropriate notice to the Depository, that bonds
of the Exchange Series will be directly issued to beneficial owners of the bonds
as of a date set forth in such notice (or such fewer number of days acceptable
to such Depository).
(e) In the event that bonds of the Exchange Series are to be issued to
beneficial owners of the bonds, or their designees, the Company shall promptly
have bonds of the Exchange Series prepared in certificated form registered in
the names of the beneficial owners of such bonds shown on the records of the
participants provided to the Trustee, as of the date set forth in the notice
above. Bonds issued to beneficial owners, or their designees shall be
substantially in the form set forth in this Supplemental Indenture, but will not
include the provision related to global securities.
(f) If the Depository is replaced as the depository for the bonds of
the Exchange Series with another qualified depository, the Company will issue a
replacement global security substantially in the form set forth in this
Supplemental Indenture.
(g) The Company and the Trustee shall have no liability for the failure
of any Depository to perform its obligations to any participant, any indirect
participant or any beneficial owner of any bonds of the Exchange Series, and the
Company and the Trustee shall not be liable for the failure of any participant,
indirect participant or other nominee of any beneficial owner or any bonds of
the Exchange Series to perform any obligation that such participant, indirect
participant or other nominee may incur to any beneficial owner of the bonds of
the Exchange Series.
(h) Notwithstanding any other provision of the Mortgage, on or prior to
the date of issuance of the bonds of the Exchange Series the Trustee shall have
executed and delivered to the initial Depository a Letter of Representations
governing various matters relating to the Depository and its activities
pertaining to the bonds of the Exchange Series. The terms and provisions of such
Letter of Representations are incorporated herein by reference and, in the event
there shall exist any inconsistency between the substantive provisions of the
said Letter of Representations and any provisions of the Mortgage, then, for as
long as the initial Depository
23
shall serve as depository with respect to the bonds of the Exchange Series, the
terms of the Letter of Representations shall govern.
(i) The Company and the Trustee may rely conclusively upon (i) a
certificate of the Depository as to the identity of a participant in the
book-entry system; (ii) a certificate of any participant as to the identity of
any indirect participant and (iii) a certificate of any participant or any
indirect participant as to the identity of, and the respective principal amount
of bonds of the Exchange Series owned by, beneficial owners.
Section 3. So long as the bonds of the Exchange Series or Original
Series are held by The Depository Trust Company, such bonds shall bear the
following legend:
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY BOND ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
Section 4. So long as any of the bonds of the Exchange Series remain
outstanding, the Company shall keep at its office or agency in the Borough of
Manhattan, The City of New York, as well as at the office of the Trustee in the
City of Philadelphia, Pennsylvania, books for the registry and transfer of
outstanding bonds of the Exchange Series, in accordance with the terms and
provisions of the bonds of the Exchange Series and the provisions of Section 8
of Article I of said Mortgage.
Section 5. So long as any bonds of the Exchange Series remain
outstanding, the Company shall maintain an office or agency in the City of
Philadelphia, Pennsylvania, and an office or agency in the Borough of Manhattan,
The City of New York, for the payment upon proper demand of the principal of,
the interest on, or the redemption price of the outstanding bonds of the
Exchange Series, and will from time to time give notice to the Trustee of the
location of such office or agency. In case the Company shall fail to maintain
for such purpose an office or agency in the City of Philadelphia or shall fail
to give such notice of the location thereof, then notices, presentations and
demands in respect of the bonds of the Exchange Series may be given or made to
or upon the Trustee at its office in the City of Philadelphia and the principal
of, the interest on, and the redemption price of said bonds in such event be
payable at said office of the Trustee. All bonds of the Exchange Series when
paid shall forthwith be cancelled.
Section 6. The Company may fix a date, not more than fourteen calendar
days prior to any interest payment date, as a record date for determining the
registered holder of each bond of the Exchange Series entitled to such interest
payment, in which case only the registered holder
24
of such bond on such record date shall be entitled to receive such payment,
notwithstanding any transfer of such bond upon the registration books subsequent
to such record date.
Section 7. The bonds of the Exchange Series shall be issued under and
subject to all of the terms and provisions of the Mortgage, of the indentures
supplemental thereto referred to in the recitals hereof and of this Supplemental
Indenture which may be applicable to such bonds or applicable to all bonds
issued under the Mortgage and indentures supplemental thereto.
ARTICLE III .
ISSUE AND AUTHENTICATION OF
BONDS OF THE EXCHANGE SERIES
In addition to any bonds of any series which may from time to time be
executed by the Company and authenticated and delivered by the Trustee upon
compliance with the provisions of the Mortgage and/or of any indenture
supplemental thereto, bonds of the Exchange Series of an aggregate principal
amount not exceeding the principal amount of the bonds of the Original Series
that were tendered in the Exchange Offer shall forthwith be executed by the
Company and delivered to the Trustee, and the Trustee shall thereupon, whether
or not this Supplemental Indenture shall have been recorded, authenticate and
deliver said bonds to or upon the written order of the President, a Vice
President, or the Treasurer of the Company, under the terms and provisions of
paragraph (d) of Section 3 of Article II of the Mortgage, as amended.
ARTICLE IV .
REDEMPTION OF BONDS OF THE
EXCHANGE SERIES
Section 1. The bonds of the Exchange Series shall be redeemable, at the
option of the Company, as a whole or in part, at any time upon notice sent by
the Company through the mail, postage prepaid, at least thirty (30) days and not
more than forty-five (45) days prior to the date fixed for redemption, to the
registered holder of each bond to be redeemed in whole or in part, addressed to
such holder at his address appearing upon the registration books, at a
redemption price equal to the greater of (1) 100% of the principal amount of the
bonds to be redeemed, plus accrued interest to the redemption date, or (2) as
determined by the Quotation Agent, the sum of the present values of the
remaining scheduled payments of principal and interest on the bonds to be
redeemed (not including any portion of payments of interest accrued as of the
redemption date) discounted to the redemption date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Adjusted
Treasury Rate plus 30 basis points, plus accrued interest to the redemption
date. Unless the Company defaults in payment of the redemption price, on and
after the redemption date, interest will cease to accrue on the bonds of this
series or portions of the bonds of this series called for redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date,
the rate per year equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for the redemption date.
25
"Business Day" means any day that is not a day on which banking
institutions in New York City are authorized or required by law or regulation to
close.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the bonds of this series that would be used, at the time of selection
and in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
bonds of the Exchange Series.
"Comparable Treasury Price" means, with respect to any redemption date:
o the average of the Reference Treasury Dealer Quotations for
that redemption date, after excluding the highest and lowest
of the Reference Treasury Dealer Quotations; or
o if the Trustee obtains fewer than three Reference Treasury
Dealer Quotations, the average of all Reference Treasury
Dealer Quotations so received.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
Company.
"Reference Treasury Dealer" means (1) each of Merrill Lynch, Pierce,
Fenner & Smith Incorporated and First Union Securities, Inc. and their
respective successors, unless any of them ceases to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), in which case
the Company shall substitute another Primary Treasury Dealer; and (2) any other
Primary Treasury Dealer selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by that Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding that redemption date.
Section 2. In case the Company shall desire to exercise such right to
redeem and pay off all or any part of such bonds of the Exchange Series as
hereinbefore provided it shall comply with all the terms and provisions of
Article III of the Mortgage, as amended, applicable thereto, and such redemption
shall be made under and subject to the terms and provisions of Article III and
in the manner and with the effect therein provided, but at the time or times and
upon mailing of notice, all as hereinbefore set forth in Section 1 of this
Article. No publication of notice of any redemption of any bonds of the Exchange
Series shall be required.
ARTICLE V .
CERTAIN EVENTS OF DEFAULT; REMEDIES
Section 1. So long as any bonds of the Exchange Series remain
outstanding, in case one or more of the following events shall happen, such
events shall, in addition to the events of default heretofore enumerated in
paragraphs (a) throughout (d) of Section 2 of Article VIII of the
26
Mortgage, constitute an "event of default" under the Mortgage, as fully as if
such events were enumerated therein:
(e) default shall be made in the due and punctual payment of
the principal (including the full amount of any applicable optional
redemption price) of any bond or bonds of the Exchange Series whether
at the maturity of said bonds, or at a date fixed for redemption of
said bonds, or any of them, or by declaration as authorized by the
Mortgage;
Section 2. So long as any bonds of the Exchange Series remain
outstanding, Section 10 of Article VIII of the Mortgage, as heretofore amended,
is hereby further amended by inserting in the first paragraph of such Section
10, immediately after the words "as herein provided," at the end of clause (2)
thereof, the following:
"or (3) in case default shall be made in any payment of any interest on
any bond or bonds secured by this indenture or in the payment of the principal
(including any applicable optional redemption price) of any bond or bonds
secured by this indenture, where such default is not of the character referred
to in clause (1) or (2) of this Section 10 but constitutes an event of default
within the meaning of Section 2 of this Article VIII."
ARTICLE VI .
CONCERNING THE TRUSTEE
The Trustee hereby accepts the trust herein declared and provided and
agrees to perform the same upon the terms and conditions set forth in the
Mortgage, as amended and supplemented, and upon the following terms and
conditions:
The Trustee shall not be responsible in any manner whatsoever for or in
respect of the validity of this Supplemental Indenture or the due execution
hereof by the Company or for or in respect of the recitals contained herein, all
of which recitals are made by the Company solely.
ARTICLE VII .
MISCELLANEOUS
Section 1. Unless otherwise clearly required by the context, the term
"Trustee," or any other equivalent term used in this Supplemental Indenture,
shall be held and construed to mean the trustee under the Mortgage for the time
being whether the original or a successor trustee.
Section 2. The headings of the Articles of this Supplemental Indenture
are inserted for convenience of reference only and are not to be taken to be any
part of this Supplemental Indenture or to control or affect the meaning of the
same.
27
Section 3. Nothing expressed or mentioned in or to be implied from this
Supplemental Indenture or in or from the bonds of the Exchange Series is
intended, or shall be construed, to give any person or corporation, other than
the parties hereto and their respective successors, and the holders of bonds
secured by the Mortgage and the indentures supplemental thereto, any legal or
equitable right, remedy or claim under or in respect of such bonds or the
Mortgage or any indenture supplemental thereto, or any covenant, condition or
provision therein or in this Supplemental Indenture contained. All the
covenants, conditions and provisions thereof and hereof are for the sole and
exclusive benefit of the parties hereto and their successors and of the holders
of bonds secured by the Mortgage and indentures supplemental thereto.
Section 4. This Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all collectively but one
instrument.
Section 5. This Supplemental Indenture is dated and shall be effective
as of October 1, 2002.
[Remainder of this page intentionally left blank]
28
IN WITNESS WHEREOF, the parties of the first and second parts hereto
have caused their corporate seals to be hereunto affixed and the President or a
Vice President of the party of the first part and the President or a Vice
President of the party of the second part, under and by the authority vested in
them, have hereto affixed their signatures and their Secretaries or Assistant
Secretaries have duly attested the execution hereof the 1st day of October,
2002.
PECO ENERGY COMPANY
By
--------------------------------
F. F. Frankowski
Vice President
[SEAL]
Attest
-----------------------------
T. D. Cutler
Assistant Secretary
WACHOVIA BANK, NATIONAL ASSOCIATION
By
--------------------------------
G. J. Rayzis
Vice President
[SEAL]
Attest
-----------------------------
J. M. Matthews
Assistant Secretary
29
COMMONWEALTH OF PENNSYLVANIA
ss.
COUNTY OF PHILADELPHIA
BE IT REMEMBERED, that on the 1st day of October, 2002, before me, a
Notary Public in and for said County and Commonwealth, residing in Philadelphia,
personally came T. D. Cutler, who being duly sworn according to law deposes and
says that he was personally present and did see the common or corporate seal of
the above named PECO Energy Company affixed to the foregoing Supplemental
Indenture, that the seal so affixed is the common or corporate seal of the said
Wachovia Bank, National Association, and was so affixed by the authority of the
said corporation as the act and deed thereof; that the above named F. F.
Frankowski is a Vice President of the said corporation, and did sign the said
Supplemental Indenture as such in the presence of this deponent that this
deponent is Assistant Secretary of the said corporation; and the name of the
deponent, above signed in attestation of the due execution of the said
Supplemental Indenture, is in this deponent's own proper handwriting.
Sworn to and subscribed before me the day and year aforesaid.
___________________________________________
Notarial Seal
_______________
Notary Public, City of Philadelphia,
Philadelphia County
My Commission Expires ______, ____
[SEAL]
30
COMMONWEALTH OF PENNSYLVANIA
ss.
COUNTY OF PHILADELPHIA
BE IT REMEMBERED, that on the 1st day of October, 2002, before me, the
subscriber, a Notary Public in and for said County and Commonwealth, residing in
Philadelphia, personally came J. M. Matthews, who being duly sworn according to
law deposes and says that he was personally present and did see the common or
corporate seal of the above named First Union National Bank affixed to the
foregoing Supplemental Indenture, that the seal so affixed is the common or
corporate seal of the said Wachovia Bank, National Association and was so
affixed by the authority of the said corporation as the act and deed thereof,
that the above named G. J. Rayzis is a Vice President of the said corporation,
and did sign the said Supplemental Indenture as such in the presence of this
deponent; that this deponent is an Assistant Secretary of the said corporation;
and that the name of this deponent, above signed in attestation of the due
execution of the said Supplemental Indenture, is in this deponent's own proper
handwriting.
Sworn to and subscribed before me the day and year aforesaid.
I hereby certify that I am not an officer of director of said Wachovia
Bank, National Association.
___________________________________________
Notarial Seal
_____________, Notary Public
City of Philadelphia, Philadelphia County
My Commission Expires ______, ____
[SEAL]
31
CERTIFICATE OF RESIDENCE
Wachovia Bank, National Association, Mortgagee and Trustee within
named, hereby certifies that its precise residence in the City of Philadelphia
is N.E. Cor. Broad and Walnut Streets in the City of Philadelphia, Pennsylvania.
WACHOVIA BANK, NATIONAL ASSOCIATION
By
--------------------------------------
G. J. Rayzis
Vice President
32
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
BY AND AMONG
EXELON CORPORATION, EXELON GENERATION COMPANY, LLC
AND
OLIVER D. KINGSLEY, JR.
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS..........................................................2
1.1 "Accrued Annual Incentive"............................................2
1.2 "Accrued Base Salary" ................................................2
1.3 "Accrued LTIP Award"..................................................2
1.4 "Accrued Obligations" ................................................2
1.5 "Affiliate"...........................................................2
1.6 "Agreement Date"......................................................3
1.7 "Annual Incentive"....................................................3
1.8 "Applicable Trigger Date" ............................................3
1.9 "Article".............................................................3
1.10 "Base Salary".......................................................3
1.11 "Beneficial Owner"..................................................3
1.12 "Beneficiary".......................................................3
1.13 "Board".............................................................3
1.14 "Cause".............................................................3
1.15 "Change Date".......................................................3
1.16 "Change in Control".................................................3
1.17 "Code"..............................................................5
1.18 "Company"...........................................................5
1.19 "Competitive Business"..............................................5
1.20 "Confidential Information"..........................................5
1.21 "Current Post-Merger Period"........................................6
1.22 "Disability"........................................................6
1.23 "Disaggregated Entity"..............................................6
1.24 "Disaggregation"....................................................6
1.25 "Employment Period" - see Section 3.1...............................7
1.26 "Enhanced SERP".....................................................7
1.27 "Exchange Act"......................................................7
1.28 "Good Reason".......................................................7
1.29 "Imminent Control Change"...........................................7
1.30 "Imminent Control Change Period"....................................7
1.31 "Incentive Plan"....................................................8
1.32 "including".........................................................8
1.33 "Incumbent Board"...................................................8
1.34 "IRS"...............................................................8
1.35 "Key Management Severance Plan".....................................8
1.36 "LTIP"..............................................................8
1.37 "LTIP Performance Period"...........................................8
1.38 "LTIP Target Level".................................................8
1.39 "Merger"............................................................9
1.40 "Notice of Termination".............................................9
1.41 "Performance Shares"................................................9
TABLE OF CONTENTS - Continued
Page
----
1.42 "Person"............................................................9
1.43 "Plan"..............................................................9
1.44 "Post-Change Period"................................................9
1.45 "Post-Disaggregation Period"........................................9
1.46 "Post-Significant Acquisition Period"...............................9
1.47 "Prior CIC Agreement"...............................................9
1.48 "Restrictive Covenants".............................................9
1.49 "Restricted Stock".................................................10
1.50 "SEC"..............................................................10
1.51 "SEC Person".......................................................10
1.52 "Section"..........................................................10
1.53 "SERP".............................................................10
1.54 "Severance Incentive"..............................................10
1.55 "Severance Period".................................................10
1.56 "Significant Acquisition"..........................................10
1.57 "Stock Options"....................................................11
1.58 "Subsidiary".......................................................11
1.59 "Target Incentive".................................................11
1.60 "Taxes"............................................................11
1.61 "Termination Date".................................................11
1.62 "Termination of Employment"........................................12
1.63 "20% Owner"........................................................12
1.64 "Voting Securities"................................................12
1.65 "Welfare Plans"....................................................12
ARTICLE II TERMS OF EMPLOYMENT................................................12
2.1 Duties...............................................................12
2.2 Other Activities.....................................................13
ARTICLE III EMPLOYMENT PERIOD.................................................13
3.1 Employment Period....................................................13
ARTICLE IV COMPENSATION.......................................................13
4.1 Base Salary..........................................................13
4.2 Annual Incentive.....................................................14
ARTICLE V SPECIAL INCENTIVE...................................................14
5.1 Restricted Stock Grant...............................................14
ARTICLE VI OTHER BENEFITS.....................................................14
6.1 Stock Option, Restricted Stock, Other Incentive Plans, Savings and
Retirement Plans.....................................................14
6.2 Enhanced Supplemental Executive Retirement Benefit...................14
6.3 Welfare Benefits.....................................................14
ii
TABLE OF CONTENTS - Continued
Page
----
6.4 Fringe Benefits......................................................15
6.5 Paid Time Off........................................................15
6.6 Expenses.............................................................15
6.7 Daughter's Medical Coverage..........................................15
6.8 Certain Special Circumstances........................................15
ARTICLE VII TERMINATION OF EMPLOYMENT.........................................18
7.1 Disability...........................................................18
7.2 Death. .............................................................18
7.3 Termination by the Company for Cause.................................18
7.4 Termination by Executive for Good Reason.............................22
ARTICLE VIII COMPANY'S OBLIGATIONS UPON CERTAIN TERMINATIONS OF EMPLOYMENT....25
8.1 Termination During the Employment Period Without Special
Circumstances........................................................25
8.2 Termination in Certain Special Circumstances.........................27
8.3 Termination During an Imminent Control Change Period.................30
8.4 Termination During a Post-Disaggregation Period......................30
8.5 Termination by the Company for Cause.................................31
8.6 Termination by Executive Other Than for Good Reason..................32
8.7 Termination by the Company for Disability............................33
8.8 Upon Death...........................................................34
8.9 Timing of Severance Payments.........................................35
8.10 Waiver and Release.................................................35
8.11 Sole and Exclusive Obligations.....................................36
ARTICLE IX CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.........................36
9.1 Gross-Up Payment.....................................................36
9.2 Limitation on Gross-Up Payments......................................37
9.3 Additional Gross-up Amounts..........................................37
9.4 Amount Increased or Contested........................................38
9.5 Refunds..............................................................40
ARTICLE X EXPENSES, INTEREST, DISPUTE RESOLUTION, INDEMNIFICATION AND
D&O LIABILITY INSURANCE....................................................40
10.1 Enforcement and Late Payments: Under Certain Special Circumstances.40
10.2 Negotiation of Agreement...........................................41
10.3 Interest: Under Certain Special Circumstances.....................41
10.4 Arbitration........................................................41
10.5 Indemnification....................................................42
10.6 Directors' and Officers' Liability Insurance.......................42
iii
TABLE OF CONTENTS - Continued
Page
----
ARTICLE XI NO SET-OFF OR MITIGATION...........................................42
11.1 No Set-off by Company..............................................42
11.2 No Mitigation......................................................42
ARTICLE XII RESTRICTIVE COVENANTS.............................................43
12.1 Confidential Information...........................................43
12.2 Non-Competition....................................................43
12.3 Non-Solicitation...................................................44
12.4 Intellectual Property..............................................45
12.5 Non-Disparagement..................................................46
12.6 Reasonableness of Restrictive Covenants............................46
12.7 Right to Injunction; Survival of Undertakings......................47
12.8 Breach of Covenants................................................47
ARTICLE XIII NON-EXCLUSIVITY OF RIGHTS........................................48
13.1 Other Rights.......................................................48
13.2 No Right to Continued Employment...................................48
ARTICLE XIV MISCELLANEOUS.....................................................49
14.1 No Assignability...................................................49
14.2 Successors.........................................................49
14.3 Affiliates.........................................................49
14.4 No Double Payment..................................................49
14.5 Payments to Beneficiary............................................49
14.6 Non-Alienation of Benefits.........................................49
14.7 Severability.......................................................49
14.8 Amendments.........................................................50
14.9 Notices............................................................50
14.10 Joint and Several Liability, Continuing Enhanced SERP Obligations
of ComEd...........................................................50
14.11 Counterparts.......................................................50
14.12 Governing Law......................................................50
14.13 Captions...........................................................51
14.14 Number and Gender..................................................51
14.15 Tax Withholding....................................................51
14.16 No Waiver..........................................................51
14.17 Entire Agreement...................................................51
14.18 Approvals..........................................................51
14.19 Survival of Executive's Rights.....................................51
iv
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of September 5,
2002 (the "Agreement Date") is made by and among Exelon Corporation,
incorporated under the laws of the Commonwealth of Pennsylvania (together with
successors thereto, the "Company"), Exelon Generation Company, LLC, a
Pennsylvania limited liability company (together with successors and assigns
thereto, "Genco"), and Oliver D. Kingsley, Jr. ("Executive"), a resident of
Illinois, amends and restates, to be effective immediately upon the Agreement
Date, that certain Employment Agreement dated as of November 1, 1997, as
amended, between ComEd and Executive.
RECITALS
WHEREAS, Executive is currently serving as Senior Executive Vice
President of the Company and President and Chief Executive
Officer of Genco;
WHEREAS, Commonwealth Edison Company ("ComEd") was a subsidiary of
Unicom Corporation;
WHEREAS, effective October 20, 2000 Unicom Corporation merged with and
into the Company, which has succeeded to the rights and obligations of ComEd
hereunder, except with respect to the Enhanced SERP (as defined below in Article
I) which obligations are joint and several between ComEd and the Company;
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
to assure that the Company will have the continued services of Executive,
despite the possibility or occurrence of a Change in Control of the Company and
the Board believes it is imperative to reduce the distraction of Executive that
would result from the personal uncertainties caused by a pending or threatened
Change in Control or a Significant Acquisition, to encourage Executive's full
attention and dedication to the Company, and to provide Executive with
compensation and benefits arrangements upon a Change in Control which are
competitive with those of similarly-situated corporations;
WHEREAS, the Board has determined that Change in Control protection for
Executive as incorporated into this Agreement should also include
non-competition, confidential information, non-solicitation, intellectual
property and non-disparagement restrictive covenants as provided in Article XII
below (the "Restrictive Covenants");
WHEREAS, the Board has determined that the Change in Control protection
for Executive should supersede the Change in Control Agreement by and among
Unicom Corporation, ComEd and Executive, dated March 8, 1999 (the "Prior CIC
Agreement");
WHEREAS, in order to induce Executive to enter into this Agreement,
including but not limited to the Restrictive Covenants and Change in Control
protection superseding the Prior CIC Agreement, and to induce Executive to
continue to serve as Senior Executive Vice President of the Company and
President and Chief Executive Officer of Genco, the Compensation Committee
of the Board of Directors of the Company has approved the terms of this
Agreement as amended and restated herein; and
WHEREAS, Executive is willing to accept such continued employment and
perform such services on the terms and conditions hereunder set forth;
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the terms specified below shall have the
following meanings:
1.1 "Accrued Annual Incentive" means the amount of any Annual Incentive
earned but not yet paid with respect to the Company's latest fiscal year ended
prior to the Termination Date.
1.2 "Accrued Base Salary" means the amount of Executive's Base Salary
that is accrued but not yet paid as of the Termination Date.
1.3 "Accrued LTIP Award" means the amount of any LTIP Award earned and
vested, but either deferred or not yet paid as of the Termination Date.
1.4 "Accrued Obligations" means, as of any date, the sum of the
following (subject to Section 8.11):
(a) Accrued Base Salary,
(b) Accrued Annual Incentive,
(c) Accrued LTIP Award,
(d) any accrued but unpaid paid time off, calculated in
accordance with Company policy in effect from time to time,
(e) reimbursement, in accordance with the applicable Plans of
the Company, of any unreimbursed business expenses incurred by
Executive prior to the Termination Date, to the extent such expenses
would be reimbursable if Executive remained employed by the Company,
and
(f) any other amounts and benefits in accordance with the
Plans of the Company in effect from time to time (including, each to
the extent applicable, retiree health care coverage and benefits due
under any tax-qualified retirement plans), calculated by taking into
account the years of service provided in accordance to the provisions
of Attachment B, which are then due to be paid or provided to Executive
by the Company, but have not yet been paid or provided (as applicable).
1.5 "Affiliate" means any Person that directly or indirectly controls,
is controlled by, or is under common control with, the Company. For purposes of
this definition the term "control"
2
with respect to any Person means the power to direct or cause the direction of
management or policies of such Person, directly or indirectly, whether through
the ownership of Voting Securities, by contract or otherwise. As of the
Agreement Date, Genco is an Affiliate.
1.6 "Agreement Date" -- see the introductory paragraph of this
Agreement.
1.7 "Annual Incentive" -- see Section 4.2.
1.8 "Applicable Trigger Date" means
(a) the Agreement Date with respect to the Current Post-Merger
Period;
(b) the Change Date with respect to the Post-Change Period;
(c) the date of an Imminent Control Change with respect to the
Imminent Control Change Period;
(d) the date of a Significant Acquisition with respect to a
Post-Significant Acquisition Period; and
(e) the date of a Disaggregation with respect to a
Post-Disaggregation Period.
1.9 "Article" means an article of this Agreement.
1.10 "Base Salary" -- see Section 4.1.
1.11 "Beneficial Owner" means such term as defined in Rule 13d-3 of the
SEC under the Exchange Act.
1.12 "Beneficiary" -- see Section 14.5.
1.13 "Board" means the Board of Directors of Company or, from and after
the effective date of a Corporate Transaction (as defined in the definition of
"Change in Control"), the Board of Directors of the corporation resulting from a
Corporate Transaction or, if securities representing at least 50% of the
aggregate voting power of such resulting corporation are directly or indirectly
owned by another corporation, such other corporation.
1.14 "Cause" -- see Section 7.3.
1.15 "Change Date" means the date on which a Change in Control first
occurs during the Employment Period.
1.16 "Change in Control" means, except as otherwise provided below, the
first to occur of any of the following during the Employment Period:
(a) any SEC Person becomes the Beneficial Owner of 20% or more
of the then outstanding common stock of the Company or of Voting
Securities representing 20% or more of the combined voting power of all
the then outstanding Voting Securities of Company (such an SEC Person,
a "20% Owner"); provided, however, that for purposes
3
of this subsection (a), the following acquisitions shall not constitute
a Change in Control: (1) any acquisition directly from the Company
(excluding any acquisition resulting from the exercise of an exercise,
conversion or exchange privilege unless the security being so
exercised, converted or exchanged was acquired directly from the
Company), (2) any acquisition by the Company, (3) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company (a "Company
Plan"), or (4) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
subsection (c) of this definition; provided further, that for purposes
of clause (2), if any 20% Owner of the Company other than the Company
or any Company Plan becomes a 20% Owner by reason of an acquisition by
the Company, and such 20% Owner of the Company shall, after such
acquisition by the Company, become the beneficial owner of any
additional outstanding common shares of the Company or any additional
outstanding Voting Securities of the Company (other than pursuant to
any dividend reinvestment plan or arrangement maintained by the
Company) and such beneficial ownership is publicly announced, such
additional beneficial ownership shall constitute a Change in Control;
or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Incumbent Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest (as such
terms are used in Rule 14a-11 promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation
("Merger"), or the sale or other disposition of more than 50% of the
operating assets of the Company (determined on a consolidated basis),
other than in connection with a sale-leaseback or other arrangement
resulting in the continued utilization of such assets (or the operating
products of such assets) by the Company (such reorganization, merger,
consolidation, sale or other disposition, a "Corporate Transaction");
excluding, however, a Corporate Transaction pursuant to which:
(i) all or substantially all of the individuals and
entities who are the Beneficial Owners, respectively, of the
outstanding common stock of Company and outstanding Voting
Securities of the Company immediately prior to such Corporate
Transaction beneficially own, directly or indirectly, more
than 60% of, respectively, the then-outstanding shares of
common stock and the combined voting power of the
then-outstanding voting securities entitled to vote generally
in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction
(including, without limitation, a corporation which, as a
result of such transaction, owns the Company or all or
substantially all of the assets of the Company either directly
or through one or more subsidiaries) in substantially the same
proportions as their ownership immediately prior to such
4
Corporate Transaction of the outstanding common stock of
Company and outstanding Voting Securities of the Company, as
the case may be;
(ii) no SEC Person (other than the corporation
resulting from such Corporate Transaction, and any Person
which beneficially owned, immediately prior to such corporate
Transaction, directly or indirectly, 20% or more of the
outstanding common stock of the Company or the outstanding
Voting Securities of the Company, as the case may be) becomes
a 20% Owner, directly or indirectly, of the then-outstanding
common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the outstanding
voting securities of such corporation; and
(iii) individuals who were members of the Incumbent
Board will constitute at least a majority of the members of
the board of directors of the corporation resulting from such
Corporate Transaction; or
(d) Approval by the Company's shareholders of a plan of
complete liquidation or dissolution of the Company, other than a plan
of liquidation or dissolution which results in the acquisition of all
or substantially all of the assets of the Company by an affiliated
company.
Notwithstanding the occurrence of any of the foregoing events, a Change in
Control shall not occur with respect to Executive if, in advance of such event,
Executive agrees in writing that such event shall not constitute a Change in
Control.
1.17 "Code" means the Internal Revenue Code of 1986, as amended.
1.18 "Company" - see the introductory paragraph to this Agreement.
1.19 "Competitive Business" means, as of any date, any utility business
and any individual or entity (and any branch, office, or operation thereof)
which engages in, or proposes to engage in (with Executive's assistance) (i) the
harnessing, production, transmission, distribution, marketing or sale of energy
or the transmission or distribution thereof through wire or cable or similar
medium, (ii) any other business engaged in by the Company prior to Executive's
Termination Date which represents for any calendar year or is projected by the
Company (as reflected in a business plan adopted by the Company before
Executive's Termination Date) to yield during any year during the first
three-fiscal year period commencing on or after Executive's Termination Date,
more than 5% of the gross revenue of Company, and, in either case, which is
located (x) anywhere in the United States, or (y) anywhere outside of the United
States where Company is then engaged in, or proposes as of the Termination Date
to engage in to the knowledge of Executive, any of such activities.
1.20 "Confidential Information" shall mean any information, ideas,
processes, methods, designs, devices, inventions, data, techniques, models and
other information developed or used by the Company or any Affiliate and not
generally known in the relevant trade or industry relating to the Company's or
its Affiliates' products, services, businesses, operations, employees, customers
or suppliers, whether in tangible or intangible form, which gives the Company
and its Affiliates a competitive advantage in the harnessing, production,
transmission,
5
distribution, marketing or sale of energy or the transmission or distribution
thereof through wire or cable or similar medium or in the energy services
industry and other businesses in which the Company or an Affiliate is engaged,
or of third parties which the Company or Affiliate is obligated to keep
confidential (provided Executive knows or should have known the Company or the
Affiliate, as the case may be, was obligated by the third party to keep such
information confidential), or which was learned, discovered, developed,
conceived, originated or prepared during or as a result of Executive's
performance of any services on behalf of the Company and which falls within any
of the following general categories:
(a) information relating to trade secrets of the Company or
Affiliate or any customer or supplier of the Company or Affiliate;
(b) information relating to existing or contemplated products,
services, technology, designs, processes, formulae, algorithms,
research or product developments of the Company or Affiliate or any
customer or supplier of the Company or Affiliate;
(c) information relating to business plans or strategies,
sales or marketing methods, methods of doing business, customer lists,
customer usages and/or requirements, supplier information of the
Company or Affiliate or any customer or supplier of the Company or
Affiliate;
(d) information subject to protection under the Uniform Trade
Secrets Act, as adopted by the State of Illinois, or to any comparable
protection afforded by applicable law; or
(e) any other confidential information which either the
Company or Affiliate or any customer or supplier of the Company or
Affiliate may reasonably have the right to protect by patent, copyright
or by keeping it secret and confidential.
1.21 "Current Post-Merger Period" means the period commencing on the
Agreement Date and ending on the earlier of the Termination Date or October 20,
2002. To the extent that, prior to October 21, 2002, the Current Post-Merger
Period includes any portion of an Imminent Control Change Period or a
Post-Significant Acquisition Period, the terms of this Agreement applicable to
the Current Post-Merger Period shall govern. To the extent that, prior to
October 21, 2002, the Current Post-Merger Period includes any portion of a
Post-Disaggregation Period, the terms of this Agreement applicable to the
Post-Disaggregation Period shall govern.
1.22 "Disability" - see Section 7.1(b).
1.23 "Disaggregated Entity" means the Disaggregated Unit or any other
Person (other than the Company or an Affiliate) that controls or is under common
control with the Disaggregated Unit.
1.24 "Disaggregation" means the consummation, in contemplation of a
Change in Control, of a sale, spin-off or other disaggregation by the Company or
the Affiliate or business unit of the Company ("Disaggregated Unit") which
employed Executive immediately prior to the sale, spin-off or other
disaggregation.
6
1.25 "Employment Period" - see Section 3.1.
1.26 "Enhanced SERP" means the contractual supplemental executive
retirement benefit described in Section 6.2.
1.27 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.28 "Good Reason" -- see Section 7.4.
1.29 "Imminent Control Change" means, as of any date on or after the
Agreement Date and prior to the Change Date, the occurrence of any one or more
of the following:
(a) the Company enters into an agreement the consummation of
which would constitute a Change in Control;
(b) Any SEC Person commences a "tender offer" (as such term is
used in Section 14(d) of the Exchange Act) or exchange offer, which, if
consummated, would result in a Change in Control; or
(c) Any SEC Person files with the SEC a preliminary or
definitive proxy solicitation or election contest to elect or remove
one or more members of the Board, which, if consummated or effected,
would result in a Change in Control;
provided, however, that an Imminent Control Change will lapse and cease to
qualify as an Imminent Control Change:
(i) With respect to an Imminent Control Change
described in clause (a) of this definition, the date such
agreement is terminated, cancelled or expires without a Change
Date occurring;
(ii) With respect to an Imminent Control Change
described in clause (b) of this definition, the date such
tender offer or exchange offer is withdrawn or terminates
without a Change Date occurring;
(iii) With respect to an Imminent Control Change
described in clause (c) of this definition, (1) the date the
validity of such proxy solicitation or election contest
expires under relevant state corporate law, or (2) the date
such proxy solicitation or election contest culminates in a
shareholder vote, in either case without a Change Date
occurring; or
(iv) The date a majority of the members of the
Incumbent Board make a good faith determination that any event
or condition described in clause (a), (b), or (c) of this
definition no longer constitutes an Imminent Control Change,
provided that such determination may not be made prior to the
twelve (12) month anniversary of the occurrence of such event.
1.30 "Imminent Control Change Period" means the period (excluding any
portion of such period in effect during the Current Post-Merger Period, but
including any portion of such
7
period after a Disaggregation occurring after October 20, 2002) commencing on
the date of an Imminent Control Change, and ending on the first to occur
thereafter of
(a) a Change Date, provided
(i) such date occurs after October 20, 2002 and no later than
the one-year anniversary of the Termination Date, and
(ii) either the Imminent Control Change has not lapsed, or the
Imminent Control Change in effect upon such Change Date is the last
Imminent Control Change in a series of Imminent Control Changes
unbroken by any period of time between the lapse of an Imminent Control
Change and the occurrence of a new Imminent Control Change;
(b) if Executive's business unit undergoes Disaggregation after October
20, 2002, and Executive retains substantially the same position with the
Disaggregated Entity as immediately prior to such Disaggregation (determined
without regard to reporting obligations) the earlier to occur after such
Disaggregation of a Change Date or the end of the 60th day following such
Disaggregation without the occurrence of a Change Date,
(c) the date an Imminent Control Changes lapses without the prior or
concurrent occurrence of a new Imminent Control Change; or
(d) the twelve-month anniversary of the Termination Date.
1.31 "Incentive Plan" means any annual incentive award arrangement of
the Company.
1.32 "including" means including without limitation.
1.33 "Incumbent Board" - see definition of "Change in Control".
1.34 "IRS" means the Internal Revenue Service of the United States of
America.
1.35 "Key Management Severance Plan" means the Second Amended and
Restated Exelon Corporation Key Management Severance Plan, as effective June 15,
1989, as amended and restated effective June 1, 2001, and as may be further
amended and restated from time to time.
1.36 "LTIP" means the Exelon Corporation Long-Term Incentive Plan, as
amended from time to time, or any successor thereto, and including any Stock
Options or Restricted Stock granted thereunder to replace stock options or
restricted stock initially granted under the Unicom Corporation Long-Term
Incentive Plan.
1.37 "LTIP Performance Period" means the performance period applicable
to an LTIP award, as designated in accordance with the LTIP.
1.38 "LTIP Target Level" means, in respect of any grant of Performance
Shares under the Exelon Performance Share Program under the LTIP, the number of
Performance Shares
8
which Executive would have been awarded (prior to the Termination Date) for the
LTIP Performance Period corresponding to such grant if the business and personal
performance goals related to such grant were achieved at the 100% (target) level
as of the end of the first year of the LTIP Performance Period.
1.39 "Merger" - see definition of "Change in Control".
1.40 "Notice of Termination" means a written notice given in accordance
with Section 14.9 which sets forth (i) the specific termination provision in
this Agreement relied upon by the party giving such notice, (ii) in reasonable
detail the specific facts and circumstances claimed to provide a basis for such
Termination of Employment, and (iii) if the Termination Date is other than the
date of receipt of such Notice of Termination, the Termination Date; provided
that in the case of Disability or Cause, the procedures referred to in Section
7.1 or Section 7.3, respectively, have been complied with.
1.41 "Performance Shares" - see Section 8.1(e). After a Disaggregation,
"Performance Shares" shall also refer to performance shares, performance units
or similar stock incentive awards granted by a Disaggregated Entity (or an
affiliate thereof) in replacement of performance shares, performance units or
similar stock incentive awards granted under the Exelon Performance Share
Program under the LTIP.
1.42 "Person" means any individual, sole proprietorship, partnership,
joint venture, limited liability company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, entity or
government instrumentality, division, agency, body or department.
1.43 "Plan" means a plan, practice, policy or program of the Company
(or, if applicable to Executive, the Disaggregated Entity or Affiliate).
1.44 "Post-Change Period" means the period commencing on the Change
Date and ending on the earlier of the Termination Date or the second anniversary
of the Change Date.
1.45 "Post-Disaggregation Period" means the period commencing on the
first date during the Employment Period on which a Change in Control occurs
following a Disaggregation, provided such Change Date occurs no more than 60
days following such Disaggregation, and ending on the earlier of the Termination
Date or the second anniversary of the Change Date. If no Change Date occurs
within 60 days after the Disaggregation, there shall be no Post-Disaggregation
Period.
1.46 "Post-Significant Acquisition Period" means the period (excluding
any portion thereof in effect during the Current Post-Merger Period) commencing
on the date of a Significant Acquisition that occurs during the Employment
Period prior to a Change Date, and ending on the first to occur of (a) the end
of the 18-month period commencing on the date of the Significant Acquisition,
(b) the Change Date, or (c) the Termination Date.
1.47 "Prior CIC Agreement" - see the Recitals to this Agreement.
1.48 "Restrictive Covenants" - see the Recitals to this Agreement.
9
1.49 "Restricted Stock" -- see Section 8.1(f). After a Disaggregation,
"Restricted Stock" shall also refer to deferred stock units, restricted stock or
restricted share units granted by a Disaggregated Entity (or an affiliate
thereof) in replacement of deferred stock units, restricted stock or restricted
share units granted by the Company other than under the Exelon Performance Share
Program under the LTIP.
1.50 "SEC" means the United States Securities and Exchange Commission.
1.51 "SEC Person" means any person (as such term is used in Rule 13d-5
of the SEC under the Exchange Act) or group (as such term is defined in Sections
3(a)(9) and 13(d)(3) of the Exchange Act), other than (a) the Company or an
Affiliate, or (b) any employee benefit plan (or any related trust) or Company or
any of its Affiliates.
1.52 "Section" means, unless the context otherwise requires, a section
of this Agreement.
1.53 "SERP" means the Exelon Corporation Supplemental Management
Retirement Plan, as in effect from time to time, or any successor thereto.
1.54 "Severance Incentive" means
(a) for purposes of Section 8.1, the average of the annual
incentive awards paid to Executive under the LTIP (or such other
Incentive Plan under which Executive is entitled to such awards), a
successor plan or otherwise with respect to each of the two calendar
years preceding the year in which the Termination Date occurs; and
(b) for all other purposes under the Agreement, the greater of
(i) the Target Incentive for the performance period in which the
Termination Date occurs, or (ii) the average (mean) of the actual
Annual Incentives paid (or payable, to the extent not previously paid)
to Executive under the Incentive Plan for each of the two calendar
years preceding the calendar year in which the Termination Date occurs.
1.55 "Severance Period" means the period beginning on Executive's
Termination Date, and ending on whichever of the following is applicable:
(a) if Executive's Termination of Employment entitles
Executive to benefits under Section 8.1, the second anniversary of such
Termination of Employment; or
(b) if Executive's Termination of Employment entitles
Executive to benefits under Section 8.2, 8.3 or 8.4, the third
anniversary of such Termination of Employment.
There shall be no Severance Period if Executive's Termination of Employment is
on account of death or Disability or if Executive's employment is terminated by
the Company for Cause or by Executive other than for Good Reason.
1.56 "Significant Acquisition" means a Corporate Transaction affecting
Genco that is consummated after the Agreement Date and prior to the Change Date,
which Corporate Transaction is not a Change in Control, provided that as a
result of such Corporate Transaction,
10
all or substantially all of the individuals and entities who are the Beneficial
Owners, respectively, of the outstanding common stock of Company and outstanding
Voting Securities of the Company immediately prior to such Corporate Transaction
beneficially own, directly or indirectly, more than 60% but not more than
66-2/3% of, respectively, the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Corporate Transaction (including, without limitation, a
corporation which, as a result of such transaction, owns the Company or all or
substantially all of the assets of the Company either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership
immediately prior to such Corporate Transaction of the outstanding common stock
of Company and outstanding Voting Securities of the Company, as the case may be.
1.57 "Stock Options" -- see Section 8.1(d). After a Disaggregation,
"Stock Options" shall also refer to stock options, stock appreciation rights, or
similar incentive awards granted by the Disaggregated Entity (or an affiliate
thereof) in replacement of stock options, stock appreciation rights, or similar
incentive awards granted under the LTIP.
1.58 "Subsidiary" - see the introductory paragraph to this Agreement.
1.59 "Target Incentive" as of a certain date means an amount equal to
the product of Base Salary determined as of such date multiplied by the
percentage of such Base Salary to which Executive would have been entitled
immediately prior to such date under the Incentive Plan for the applicable
performance period if the performance goals established pursuant to such
Incentive Plan were achieved at the 100% (target) level as of the end of the
applicable performance period (which shall be equal to at least 80% of Base
Salary as provided in Section 4.2); provided, however, that any reduction in
Executive's Base Salary or Annual Incentive that would qualify as Good Reason
shall be disregarded for purposes of this definition.
1.60 "Taxes" means the incremental federal, state, local and foreign
income, employment, excise and other taxes payable by Executive with respect to
any applicable item of income.
1.61 "Termination Date" means the effective date of Executive's
Termination of Employment, which shall be the date of the receipt of the Notice
of Termination, or any later date, not more than 30 days after the giving of
such notice, specified in such notice; provided, however, that:
(a) if, during a Current Post-Merger Period, Post-Change
Period, Post-Significant Acquisition Period, Post-Disaggregation
Period, or Imminent Control Change Period, the Company terminates
Executive's employment other than for Cause or Disability or if
Executive terminates Executive's employment for Good Reason, then the
Termination Date shall be the date of receipt of the Notice of
Termination by Executive (if such Notice is given by the Company, an
Affiliate or a Disaggregated Entity) or by the Company, an Affiliate or
a Disaggregated Entity (if such Notice is given by Executive), or such
later date, not more than 15 days after the giving of such Notice,
specified in such Notice as of which Executive's employment shall be
terminated; and
11
(b) if Executive's employment is terminated by reason of death
or Disability, the Termination Date shall be the date of Executive's
death or the Disability Effective Date (as described in Section
7.1(a));
(c) if, during the Employment Period other than during a
Current Post-Merger Period, Post-Change Period, Post-Significant
Acquisition Period, Post-Disaggregation Period, or Imminent Control
Change Period, Executive elects to retire or otherwise terminate
employment other than for Good Reason, Disability or death, the
Termination Date shall be at least 90 days after the Company's receipt
of a Notice of Termination; and
(d) if no Notice of Termination is given, the Termination Date
shall be the last day on which Executive is employed by the Company, an
Affiliate or a Disaggregated Entity.
1.62 "Termination of Employment" means any termination of Executive's
employment with the Company and its Affiliates, whether such termination is
initiated by the Company or by Executive; provided that if Executive's cessation
of employment with the Company and its Affiliates is effected through a
Disaggregation, and Executive is employed in substantially the same position
(without regard to reporting obligations) by the Disaggregated Entity
immediately following the Disaggregation, and a Change Date occurs no more than
60 days after such Disaggregation, then the Disaggregation shall not be deemed
to effect a "Termination of Employment" for purposes of this Agreement, and
after the Disaggregation, "Termination of Employment" means any termination of
Executive's employment with the Disaggregated Entity, whether such termination
is initiated by the Disaggregated Entity or by Executive.
1.63 "20% Owner" -- see paragraph (a) of the definition of "Change in
Control."
1.64 "Voting Securities" means with respect to a corporation,
securities of such corporation that are entitled to vote generally in the
election of directors of such corporation.
1.65 "Welfare Plans" - see Section 6.3.
ARTICLE II
TERMS OF EMPLOYMENT
2.1 Duties. During the Employment Period, Executive shall be a Senior
Executive Vice President of the Company and shall hold such other position as
the Board designates, provided such other position (including status, offices,
and rank) shall be at least commensurate in status, responsibility, and
authority with Executive's current position of President and Chief Executive
Officer of Genco. Executive shall report directly to the Chief Executive Officer
of the Company. Executive shall assume the authority, duties, and
responsibilities as are commensurate and consistent with Executive's experience
in the industry, his contributions to the Company and such positions and titles.
During the Employment Period, Executive shall perform the duties properly
assigned to him by the Chief Executive Officer to the reasonable satisfaction of
the Company; shall devote substantially all of his business time, attention and
effort during normal business hours, excluding any periods of disability,
vacation, or sick leave to which Executive is
12
entitled, to the affairs of the Company and Genco; and shall use his reasonable
best efforts to promote the interests of the Company and Genco.
2.2 Other Activities. Executive may (i) serve on corporate, civic or
charitable boards or committees, (ii) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (iii) manage personal
investments; provided that such activities are consistent with the Plans of the
Company (or in the case of a Disaggregation, the Disaggregated Entity) in effect
from time to time or have been consented to by the Company, and do not
significantly interfere with the performance of Executive's duties under this
Agreement.
ARTICLE III
EMPLOYMENT PERIOD
3.1 Employment Period. Subject to the termination provisions
hereinafter provided, the term of Executive's employment under this Agreement
(the "Employment Period") shall begin on the Agreement Date and shall end on the
first anniversary of the Agreement Date or such later date to which the
Employment Period is extended pursuant to the following sentence, unless earlier
terminated as provided herein. Commencing on the Agreement Date, the Employment
Period shall automatically be extended each day by one day to create a new
one-year term until, at any time after the Agreement Date, the Company delivers
written notice (an "Expiration Notice") to Executive that the Employment Period
shall expire on a date specified in the Expiration Notice (the "Expiration
Date") that is not less than 12 months after the date the Expiration Notice is
delivered to Executive; provided, however, that if a Change Date, Imminent
Control Change, Disaggregation or Significant Acquisition occurs before the
Expiration Date specified in the Expiration Notice, then such Expiration Notice
shall be void and of no further effect. If such Imminent Control Change or
Disaggregation does not culminate in a Change Date, then such Expiration Notice
shall be reinstated and the Employment Period shall expire on the date
originally specified as the Expiration Date, or if later, the date the Imminent
Control Change lapses or the end of the sixtieth day after the Disaggregation.
Notwithstanding anything herein to the contrary, the Employment Period shall not
end before the earliest of the following: (a) the second anniversary of the
Change Date, (b) eighteen (18) months after the Significant Acquisition,
provided there has been no Change Date, (c) the end of the sixtieth day after
the Disaggregation if there has been no Change Date after the Disaggregation,
and (d) the Termination Date.
ARTICLE IV
COMPENSATION
4.1 Base Salary. The Company shall pay or cause to be paid to Executive
in accordance with its normal payroll practices (as may be modified from time to
time) an annual salary at a rate of $750,000 per year ("Base Salary"). During
the Employment Period, the Base Salary shall be reviewed at least annually and
may be increased from time to time as shall be determined by the Company. After
any such increase, the term "Base Salary" shall thereafter refer to the
increased amount. Base Salary shall not be reduced at any time without the
express written consent of Executive. Any increase in Base Salary shall not
limit or reduce any other obligation of the Company to Executive under this
Agreement.
13
4.2 Annual Incentive. Executive shall have the opportunity to
participate in and receive payment ("Annual Incentive") pursuant to the
Company's annual cash incentive plan or program in such amount as determined by
the Company in its discretion in accordance with the terms hereof for each
fiscal year which begins during the Employment Period.
(a) If Executive achieves his target performance goals, as
determined by the Company on an annual basis, such Annual Incentive
shall be at least 80% of Executive's Base Salary. Actual payout of the
Annual Incentive may vary from 0% to 160% according to achievement of
performance goals.
(b) During the Current Post-Merger Period and the Post-Change
Period, the Annual Incentive will have an award opportunity no less,
including target performance goals not materially more difficult to
achieve, than that in effect immediately prior to the Applicable
Trigger Date for each applicable performance period which commences
prior to the Termination Date and ends during the Current Post-Merger
Period and the Post-Change Period.
ARTICLE V
SPECIAL INCENTIVE
5.1 Restricted Stock Grant. The Company has granted to Executive a
total of 35,000 restricted shares of common stock of the Company, the terms of
which shall be substantially as set forth in Attachment A.
ARTICLE VI
OTHER BENEFITS
6.1 Stock Option, Restricted Stock, Other Incentive Plans, Savings and
Retirement Plans. Executive shall be entitled to participate during the
Employment Period and thereafter in all stock option, restricted stock, other
equity incentive plans, other incentive plans, savings and retirement plans,
practices policies and programs of the Company that are from time to time
applicable to and on the same terms as apply to peer executives of the Company
generally, including the LTIP but excluding any supplemental executive
retirement plan (subject to Section 6.2).
6.2 Enhanced Supplemental Executive Retirement Benefit. Executive shall
be entitled to a contractual supplemental executive retirement benefit pursuant
to this Section 6.2 ("Enhanced SERP"), determined and paid in accordance with
the provisions of the SERP (including, without limitation, Section 5.6 thereof)
for "Key Management Employees" thereunder, provided, however, that (A) the
amount of, and entitlement to, the annual benefit otherwise determined in
accordance with the SERP, payable to Executive or his surviving spouse, shall be
determined based on service in accordance with the provisions of Attachment B
and the other applicable provisions of this Agreement. The Enhanced SERP shall
be reduced by the actuarial equivalent value of any amount payable to Executive
or his spouse under the SERP.
6.3 Welfare Benefits. During the Employment Period and thereafter,
Executive and his eligible dependents shall be eligible to participate in, and
shall receive all benefits under, welfare
14
benefit plans, practices, policies and programs provided by the Company
("Welfare Plans") (including medical, prescription, dental, vision/hearing,
disability, salary continuance, employee group life, dependent life, accidental
death and travel accident insurance plans and programs) applicable to and on the
same terms as apply to peer executives of the Company generally, in accordance
with their terms as in effect from time to time. For purposes of the Key
Management Severance Plan, this Agreement shall be considered to be an
individual Change in Control Agreement.
6.4 Fringe Benefits. During the Employment Period and thereafter,
Executive shall be entitled to fringe benefits applicable to and on the same
terms as apply to peer executives of the Company generally, in accordance with
their terms as in effect from time to time.
6.5 Paid Time Off. During the Employment Period, Executive shall be
entitled to 30 days of paid vacation per year in accordance with the Plans
applicable to and on the same terms as apply to peer executives of the Company
generally.
6.6 Expenses. During the Employment Period and thereafter, Executive
shall be entitled to receive prompt reimbursement for all reasonable business
expenses incurred by Executive in accordance with the Plans applicable to and on
the same terms as apply to peer executives of the Company generally.
6.7 Daughter's Medical Coverage.
(a) Company has arranged for a Blue Cross/Blue Shield
individual Preferred Provider Option medical coverage policy for
Executive's daughter Abby ("Policy"), which is guaranteed renewable to
age 65. Executive shall purchase the Policy from Blue Cross/Blue
Shield.
(b) Beginning on the Start Date (as defined below) and
terminating on the day that is the fifteenth (15th) anniversary of the
Start Date, Company shall reimburse Executive for expenses for her
medical care (as defined in Section 213(d) of the Internal Revenue
Code) incurred by Executive's daughter, Abby, to the extent such
expenses exceed the amount payable (after satisfaction of deductibles
and co-payments, which shall be the responsibility of Executive) under
the Policy and any other medical coverage applicable to Abby; provided
that such reimbursement shall not exceed $100,000 for medical care
expenses incurred in any 12-month period, beginning with the Start Date
and annual anniversaries of the Start Date. The "Start Date" shall be,
(as elected by Executive) (i) the Agreement Date, (ii) the first day
following the Termination Date, or (iii) on such day as the medical
coverage for Executive's daughter Abby in effect as of the Agreement
Date lapses.
6.8 Certain Special Circumstances.
(a) Additional Assurances during the Current Post-Merger
Period and Post-Change Period. During the Current Post-Merger Period
and the Post-Change Period, the compensation and benefits described in
Sections 6.1 through 6.5 shall in no event be materially less
favorable, in the aggregate, than the greater of (A) those provided by
the Company for Executive (including any such compensation and benefits
provided under
15
Plans) at any time during the 90-day period immediately preceding the
Applicable Trigger Date, or (B) those provided at any time after the
Applicable Trigger Date to peer executives of the Company generally. In
addition, Executive shall be entitled to the following during the
Current Post-Merger Period and the Post Change Period:
(i) Office and Support Staff. Executive shall be
entitled to an office or offices of a size and with
furnishings and other appointments, and to secretarial and
other assistance substantially equivalent to the office or
offices, furnishings, appointments and assistance as in effect
with respect to Executive on the Applicable Trigger Date.
(ii) LTIP Awards. Awards under the LTIP shall be
granted to Executive with aggregate target opportunities
(including target performance goals not materially more
difficult to achieve) no less than the average of Executive's
awards (expressed as a percentage of Executive's Base Salary
in effect at the beginning of the applicable performance
period) granted in the three-year period ending on the
Applicable Trigger Date.
(b) Treatment of Certain Equity During the Post-Disaggregation
Period.
(i) Stock Options.
Extinguished or Converted at Disaggregation. If so provided in the documents and
instruments ("Disaggregation Documents") pursuant to which the Disaggregation is
effected, then all of Executive's Stock Options shall (I) be extinguished
immediately prior to the Disaggregation for such consideration as is provided
for in the Disaggregation Documents (but not less than the product of the number
of Executive's vested Stock Options multiplied by the difference between the
fair market value of a share of common stock of the Company immediately prior to
the Disaggregation and the option exercise price), or (II) be converted into
options to acquire stock of the Disaggregated Entity or an affiliate thereof on
a basis determined by the Company in good faith to preserve economic value.
Extinguished or Converted at Merger. If the Change in Control following the
Disaggregation is a Merger, and if so provided in the agreement pursuant to
which the Merger is effected, then all of Executive's Company Stock Options that
were not extinguished or converted to options to acquire stock in the
Disaggregated Entity or an affiliate shall (I) be extinguished immediately prior
to the Change in Control for such consideration as is provided for Stock Options
of peer executives employed by the Company or an Affiliate, or (II) be converted
into options to acquire stock of the corporation resulting from the Merger
("Merger Survivor") or an affiliate thereof, on the same basis as Stock Options
of peer executives of the Company are converted.
Stock Options after the Disaggregation. Executive's unextinguished Stock
Options, whether or not they are converted to options for stock of the
Disaggregated Entity or Merger Survivor, shall continue to vest and, once
vested, shall remain exercisable in accordance with their terms, subject to
Section 8.4(b).
(ii) Performance Shares.
16
Extinguished or Converted at Disaggregation. If so provided in the
Disaggregation Documents, all of Executive's Performance Shares shall (I) be
extinguished immediately prior to the Disaggregation for such consideration as
is provided under the Disaggregation Documents (but no less than the fair market
value, immediately prior to the Disaggregation, of a number of shares of common
stock of the Company equal to the sum of Executive's earned and awarded
Performance Shares and the target number of Executive's Performance Shares that
have not yet been earned and awarded), or (II) shall be converted into
performance shares with respect to the Disaggregated Entity or an affiliate on a
basis determined by the Company in good faith to preserve economic value for
Executive.
Extinguished or Converted at Merger. If the Change in Control following the
Disaggregation is a Merger, and if so provided in the agreement pursuant to
which the Merger is effected, then all of Executive's Performance Shares that
were not extinguished or converted to performance shares of the Disaggregated
Entity or an affiliate shall (I) be extinguished immediately prior to the Change
in Control for such consideration as is provided for Performance Shares of peer
executives employed by the Company or an Affiliate, or (II) be converted into
performance shares of the Merger Survivor or an affiliate thereof, on the same
basis as Performance Shares of peer executives of the Company are converted.
Performance Shares after the Disaggregation. Executive's unextinguished
Performance Shares, whether or not they are converted into performance shares of
the Disaggregated Entity or Merger Survivor, will continue to vest during the
Post-Disaggregation Period, subject to Section 8.4(c).
(iii) Restricted Stock.
Extinguished or Converted at Disaggregation. If so provided in the
Disaggregation Documents, all of Executive's Restricted Stock shall (I) be
extinguished immediately prior to the Disaggregation and Executive shall be paid
an amount equal to the fair market value of an equal number of shares of common
stock of the Company, or (II) shall be converted into restricted stock of the
Disaggregated Entity or an affiliate (on a basis determined by the Company in
good faith to preserve economic value for Executive).
Extinguished or Converted at Merger. If the Change in Control following the
Disaggregation is a Merger, and if so provided in the agreement pursuant to
which the Merger is effected, then all of Executive's Restricted Stock that was
not extinguished or converted to restricted stock of the Disaggregated Entity or
an affiliate shall (I) be extinguished immediately prior to the Change in
Control for such consideration as is provided for Restricted Stock of peer
executives employed by the Company or an Affiliate, or (II) be converted into
restricted stock of the Merger Survivor or an affiliate thereof on a basis
determined by the Merger Survivor (or such affiliate) in good faith to preserve
economic value for Executive, and such converted restricted stock will continue
to vest during the Post-Disaggregation Period prior to the Termination Date.
Restricted Stock after the Disaggregation. Executive's unextinguished Restricted
Stock, whether or not converted to restricted stock of the Disaggregated Entity
or Merger Survivor, will continue to vest during the Post-Disaggregation Period,
subject to Section 8.4(d).
17
ARTICLE VII
TERMINATION OF EMPLOYMENT
7.1 Disability.
(a) During the Employment Period, the Company (or, if
applicable, the Disaggregated Entity) may terminate Executive's
employment at any time because of Executive's Disability by giving
Executive or his legal representative, as applicable, (i) written
notice in accordance with Section 14.9 of the Company's intention to
terminate Executive's employment pursuant to this Section and (ii) a
certification of Executive's Disability by a physician selected by the
Company or its insurers, subject to the reasonable consent of Executive
or Executive's legal representative, which consent shall not be
unreasonably withheld or delayed. Executive's employment shall
terminate effective on the 30th day after Executive's receipt of such
notice (which such 30th day shall be deemed to be the "Disability
Effective Date") unless, before such 30th day, Executive shall have
resumed the full-time performance of Executive's duties.
(b) "Disability" means any medically determinable physical or
mental impairment that has lasted for a continuous period of not less
than six months and can be expected to be permanent or of indefinite
duration, and that renders Executive unable to perform the duties
required under this Agreement.
7.2 Death. Executive's employment shall terminate automatically upon
Executive's death during the Employment Period.
7.3 Termination by the Company for Cause.
(a) Termination for Cause Without Special Circumstances.
During the Employment Period other than during the Current Post-Merger
Period, Post-Change Period, Post-Disaggregation Period, Imminent
Control Change Period or Post-Significant Acquisition Period, the
Company may terminate Executive's employment and the Employment Period
(or cause Executive's employment and the Employment Period to be
terminated) for Cause in accordance with this Section 7.3(a) and
Section 7.3(e). The Company shall provide Executive with a Notice of
Termination specifying that it is a Termination of Employment for Cause
and stating the basis for the Termination of Employment for Cause. Such
Notice of Termination shall be provided no more than a reasonable time
after the Board becomes aware of the circumstances constituting Cause.
Immediately upon Executive's receipt of the Notice of Termination for
Cause, Executive shall no longer participate in the management or other
operations of the Company. For purposes of this Section 7.3(a), "Cause"
means any one or more of the following:
(i) Executive's material breach of any of the
material terms of this Agreement or the Restrictive Covenants;
(ii) Executive's willful commission of an act(s) or
omission(s) which has, has had, or are likely to have a
material adverse effect on the business, operations, financial
condition or reputation of the Company and/or an Affiliate;
18
(iii) Executive's conviction (including a plea of
guilty or nolo contendere) of a felony or any crime of fraud,
theft, dishonesty or moral turpitude; or
(iv) Executive's material violation of any statutory
or common-law duty of loyalty to the Company or an Affiliate;
provided that, if (A) Executive's material breach of any of the
Restrictive Covenants is not willful or (B) Executive's material breach
of any of the Restrictive Covenants or Executive's material breach of
any of the material terms of this Agreement involved an act, or failure
to act, which was done, or omitted to be done, by Executive in good
faith and with a reasonable belief that Executive's act, or failure to
act, was in the best interest of the Company or was required by
applicable law or administrative regulation, and if such breach
described in (A) or (B) is curable, such breach shall not constitute
Cause if, within 10 days after Executive is given written notice of
such breach that specifically refers to this Section, Executive cures
such breach to the fullest extent that it is curable. During such
10-day cure period, at the discretion of the Company, Executive shall
no longer participate in the management or other operations of the
Company.
(b) Termination for Cause Under Certain Special Circumstances.
During the Current Post-Merger Period and the Post-Change Period, the
Company may terminate Executive's employment and the Employment Period
(or cause Executive's employment and the Employment Period to be
terminated) for Cause solely in accordance with all of the substantive
and procedural provisions of this Section 7.3(b) and Section 7.3(e).
(i) Definition of Cause. For purposes of this Section
7.3(b), "Cause" means any one or more of the following,
subject to Section 7.3(d):
(1) Executive's willful commission of acts or
omissions which have, have had, or are
likely to have a material adverse effect on
the business, operations, financial
condition or reputation of the Company or an
Affiliate;
(2) Executive's conviction (including a plea of
guilty or nolo contendere) of a felony or
any crime of fraud, theft, dishonesty or
moral turpitude;
(3) Executive's material violation of any
statutory or common-law duty of loyalty to
the Company or an Affiliate; or
(4) Executive's material breach of any of the
Restrictive Covenants;
provided that, if (A) Executive's material breach of any of the
Restrictive Covenants is not willful or (B) Executive's material breach
of any of the Restrictive Covenants involved an act, or failure to act,
which was done, or omitted to be done, by Executive in good faith and
with a reasonable belief that Executive's act, or failure to act, was
in the best interest of the Company or was required by applicable law
or administrative regulation, and if such breach described in (A) or
(B) is curable, such breach shall not
19
constitute Cause if, within 10 days after Executive is given written
notice of such breach that specifically refers to this Section,
Executive cures such breach to the fullest extent that it is curable.
During such 10-day cure period, at the discretion of the Company,
Executive shall no longer participate in the management or other
operations of the Company.
(ii) Post-Disaggregation Period. In the event
Executive's Termination of Employment for Cause is from a
Disaggregated Entity in a Post-Disaggregation Period, the
definition of Cause and the procedural requirements for
termination for Cause in this Section 7.3(b) and Section
7.3(e) shall be applied by substituting "Disaggregated Entity"
for "Company," "affiliate of the Disaggregated Entity" for
"Affiliate," and "Disaggregated Entity's Board" for "Board."
Further, the Company shall have no obligation to provide
payments or benefits under Section 8.4 if the Board determines
that the Company could have terminated Executive's employment
for Cause as defined above in Section 7.3(b)(i)(1), if
Executive had been employed by the Company. Rather, in such
case, the Company shall provide payments of benefits in
accordance with Section 8.5. Such determination by the Board
shall be made as provided in Section 7.3(e) but in applying
Section 7.3(d), "Disaggregated Entity" shall be substituted
for "Company" and "Disaggregated Entity's Board" shall be
substituted for "Board."
(c) Termination for Cause During the Imminent Control Change
Period or Post-Significant Acquisition Period. During the Imminent
Control Change Period and any Post-Significant Acquisition Period, the
Company may terminate Executive's employment (or cause Executive's
employment to be terminated) for Cause solely in accordance with all of
the substantive and procedural provisions of this Section 7.3(c) and
Section 7.3(e).
(i) Definition of Cause. For purposes of this Section
7.3(c), "Cause" means any one or more of the following:
(1) Executive's willful commission of acts or
omissions which have, have had, or are
likely to have a material adverse effect on
the business, operations, financial
condition or reputation of the Company or an
Affiliate;
(2) Executive's conviction (including a plea of
guilty or nolo contendere) of a felony or
any crime of fraud, theft, dishonesty or
moral turpitude;
(3) Executive's material violation of any
statutory or common law duty of loyalty to
the Company or an Affiliate; or
(4) Executive's failure to meet objective
performance criteria of the position,
provided that, in the case of a Termination
of Employment during an Imminent Control
Change Period (other than after a
Disaggregation) this Section 7.3(c)(i)(4)
shall be
20
inapplicable if the Imminent Change in
Control culminates in a Change Date; or
(5) Executive's material breach of any of the
Restrictive Covenants;
provided that, if (A) Executive's material breach of any of the
Restrictive Covenants is not willful or (B) Executive's material breach
of any of the Restrictive Covenants involved an act, or failure to act,
which was done, or omitted to be done, by Executive in good faith and
with a reasonable belief that Executive's act, or failure to act, was
in the best interest of the Company or was required by applicable law
or administrative regulation, and if such breach described in (A) or
(B) is curable, such breach shall not constitute Cause if, within 10
days after Executive is given written notice of such breach that
specifically refers to this Section, Executive cures such breach to the
fullest extent that it is curable. During such 10-day cure period, at
the discretion of the Company, Executive shall no longer participate in
the management or other operations of the Company.
(d) Meaning of "Willful". For purposes of Sections 7.3(b) and
7.3(c), no act, or failure to act, on the part of Executive shall be
considered "willful" unless it is done, or omitted to be done, by
Executive in bad faith or without reasonable belief that Executive's
action or omission was in the best interests of the Company, or unless
Executive fails to cure such breach to the fullest extent that it is
curable if a cure period is provided in this Section 7.3. Any act, or
failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or upon the instructions of the chief
executive officer or a senior officer of the Company other than
Executive or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by Executive
in good faith and in the best interests of the Company.
(e) Procedural Requirements for Termination for Cause.
Executive's Termination of Employment shall not be deemed to be for
Cause under this Section 7.3 unless and until there shall have been
delivered to Executive a copy of a resolution duly adopted by the
affirmative vote of not less than 60% of the entire membership of the
Board at a meeting of such Board called and held for such purpose
(after reasonable written notice of such meeting is provided to
Executive and Executive is given an opportunity, together with counsel,
to be heard before the Board), finding that, in the good faith opinion
of the Board, Executive's acts, or failure to act, constitutes Cause
and specifying the particulars thereof in detail.
7.4 Termination by Executive for Good Reason.
(a) Termination by Executive for Good Reason Without Special
Circumstances. During the Employment Period other than during the
Current Post-Merger Period, Post-Change Period, Post-Disaggregation
Period, Imminent Control Change Period or Post-Significant Acquisition
Period, Executive may terminate his employment for Good Reason.
Executive shall provide the Company with a Notice of Termination
specifying that it is a Termination of Employment for Good Reason and
stating the basis for the Termination of Employment for Good Reason.
Such Notice of Termination shall be
21
provided no more than a reasonable time after Executive becomes aware
of the circumstances constituting Good Reason. For purposes of this
Section 7.4(a), "Good Reason" means a material reduction of Executive's
Base Salary, incentive compensation (including Annual Incentive), or
other benefits, unless such reduction is part of a policy, program or
arrangement applicable to peer executives of the Company and of any
successor entity; or a material reduction or material adverse
alteration in the nature of Executive's position, duties, function,
responsibilities or authority, other than during the 10-day cure period
described in Section 7.3(a).
(b) Termination by Executive for Good Reason Under Certain
Special Circumstances. During the Current Post-Merger Period, the
Post-Change Period, an Imminent Control Change Period, a
Post-Significant Acquisition Period or Post-Disaggregation Period,
Executive may terminate his or her employment for Good Reason in
accordance with the substantive and procedural provisions of this
Section 7.4(b).
(i) Definition of Good Reason. For purposes of this
Section 7.4(b), and subject to the provisions of subsections
(ii) through (vi), "Good Reason" means the occurrence of any
one or more of the following actions or omissions prior to the
Termination Date during the Current Post-Merger Period, the
Post-Change Period, the Imminent Control Change Period, the
Post-Significant Acquisition Period or the Post-Disaggregation
Period:
(1) a material adverse reduction in the nature
or scope of Executive's office, position,
duties, functions, responsibilities or
authority (other than in a Post-Significant
Acquisition Period, and other than ceasing
to serve as an officer of the Company after
a Disaggregation in which Genco is the
Disaggregated Unit);
(2) a material reduction of Executive's salary,
incentive compensation or aggregate benefits
unless such reduction is part of a policy,
program or arrangement applicable to peer
executives of the Company and of any
successor entity;
(3) the failure of any successor to the Company
or Genco to assume this Agreement;
(4) a relocation (other than in a
Post-Significant Acquisition Period), of
more than 50 miles of (A) Executive's
workplace, or (B) the principal offices of
the Company or its successor (if such
offices are Executive's workplace), in each
case without the consent of Executive;
provided, however, in both cases of (A) and
(B) of this Section 7.4(b)(i)(4), such new
location is farther from Executive's
residence than the prior location;
(5) a requirement (other than in a
Post-Significant Acquisition Period) of the
greater of (A) more than 24 days of travel
per year, or (B) at
22
least 20% more business travel than was
required of Executive prior to the
Applicable Trigger Date;
(6) any failure by the Company to comply with
any of the provisions of Sections 4.1 and
4.2, and Article VI of this Agreement, other
than an isolated, insubstantial and
inadvertent failure not occurring in bad
faith and which is remedied by the Company
promptly after receipt of notice thereof
given by Executive; or
(7) a material breach of this Agreement by the
Company or its successor;
provided that the occurrence of a Disaggregation shall not be
Good Reason if Executive retains substantially the same
position (determined without regard to reporting requirements)
with the Disaggregated Entity, with substantially the same
compensation and benefits, in the aggregate, as immediately
prior to such Disaggregation, notwithstanding Sections
7.4(b)(i)(1), 7.4(b)(i)(2) and 7.4(b)(i)(6).
(ii) Additional Basis for Good Reason During the
Current Post-Merger Period. With respect to the Current
Post-Merger Period, "Good Reason" shall have the meaning set
forth in Section 7.4(b)(i) and shall also include any of the
following which occurred prior to the Agreement Date:
(1) a material adverse alteration in the nature
or scope of Executive's position, duties,
functions, responsibilities or authority;
(2) a determination by Executive, made in good
faith during the term of the Prior CIC
Agreement and prior to the Agreement Date,
that, as a result of the change in control
resulting in the merger of Unicom
Corporation and PECO Energy Corporation,
Executive is substantially unable to
perform, or that there has been a material
reduction in, any of Executive's duties,
functions, responsibilities or authority;
(3) a relocation of more than 50 miles of
Executive's workplace, without the consent
of Executive;
(4) a requirement of at least 20% more business
travel than was required of Executive prior
to the change in control resulting in the
merger of Unicom Corporation and PECO Energy
Corporation.
(iii) Application of "Good Reason" Definition During
the Imminent Control Change Period. During the Imminent
Control Change Period, "Good Reason" shall not include the
events or conditions described in Section 7.4(b)(i)(1),
7.4(b)(i)(4) or 7.4(b)(i)(5) unless the Imminent Control
Change Period culminates in a Change Date. Further, if
Executive's Termination of Employment occurs during an
Imminent Control Change Period that
23
culminates in a Change Date, then, except as provided in
Section 7.4(b)(iv), the definition of "Good Reason" shall be
applied as though Sections 4.1 and 4.2, and Article VI were
applicable during the Imminent Control Change Period prior to
Executive's Termination of Employment.
(iv) Special Conditions Relating to Good Reason
During the Post-Disaggregation Period. If Executive retains
substantially the same position with the Disaggregated Entity
as was held with respect to the Disaggregated Unit immediately
prior to the Disaggregation (determined without regard to
reporting requirements and determined without regard to
Executive's position with respect to the Company), then (1)
Section 7.4(b)(i)(1) shall apply only with respect to
Executive's office, duties, functions, responsibilities or
authority as in effect at the Disaggregated Entity on the day
following the Disaggregation, (2) subsections 7.4(b)(i)(4) and
7.4(b)(i)(5) shall apply only with respect to relocations or
travel required more than 60 days after the Disaggregation and
shall be applied by substituting "Disaggregated Entity" for
"any successor to the Company", and (3) all references in
Section 7.4(b) to the Company or its successor shall be to the
Disaggregated Entity or its successor.
(c) Limitations on Good Reason. Notwithstanding the foregoing
provisions of this Section 7.4(a) or (b), no act or omission shall
constitute a material breach of this Agreement by the Company, nor
grounds for Termination of Employment by Executive for "Good Reason":
(1) unless Executive gives the Company 30 days'
prior written notice of such act or omission
and the Company fails to cure such act or
omission within the 30-day period following
receipt of such notice;
(2) if Executive first acquired knowledge of
such act or omission more than 12 months
before Executive gives the Company such
notice; or
(3) if Executive has consented in writing to
such act or omission in a document that
makes specific reference to this Section.
(d) Notice by Executive. In the event of any Termination of
Employment by Executive for Good Reason, Executive shall as soon as
practicable after the expiration of the 30-day cure period referred to
in Section 7.4(c) above send a Notice of Termination to the Company
(and Disaggregated Entity, if applicable) detailing the events
constituting such Good Reason by a Notice of Termination. Subject to
the limitations in Section 7.4(c), a delay in the delivery of such
Notice of Termination shall not waive any right of Executive under this
Agreement.
24
ARTICLE VIII
COMPANY'S OBLIGATIONS UPON CERTAIN TERMINATIONS OF EMPLOYMENT
8.1 Termination During the Employment Period Without Special
Circumstances. If, during the Employment Period other than during the Current
Post-Merger Period, Post-Change Period, Imminent Control Change Period that
culminates in a Change Date, Post-Significant Acquisition Period or
Post-Disaggregation Period, the Company terminates Executive's employment other
than for Cause or Disability, or Executive terminates employment for Good
Reason, the Company's sole obligations to Executive under Articles II, IV, VI
and VIII shall be as set forth in this Section 8.1, subject to Sections 8.9,
8.10, 8.11 and 12.8.
(a) Termination Without Special Circumstances: Accrued
Obligations. The Company shall pay to Executive all Accrued
Obligations.
(b) Termination Without Special Circumstances: Prorated Annual
Incentive. The Company shall pay to Executive an amount equal to the
Target Incentive, determined as of the Termination Date, for the
performance period in which the Termination Date occurs, multiplied by
a fraction, the numerator of which is the number of days elapsed during
such calendar year as of and including the date of such Termination
Date and the denominator of which is 365.
(c) Termination Without Special Circumstances: Severance
Payments. The Company shall pay (according to the payment terms set
forth in Section 8.9 below) to Executive an amount equal to two (2.0)
times the sum of (i) Base Salary plus (ii) the Severance Incentive.
(d) Termination Without Special Circumstances: Stock Options.
Executive shall not be entitled to participate in any grants of stock
options, stock appreciation rights or similar incentive awards granted
under the LTIP ("Stock Options") made after the earlier of the date of
the Notice of Termination or the Termination Date. All Stock Options
shall (i) become fully vested (if they are not already vested as of the
Termination Date), and (ii) remain exercisable until (1) the option
expiration date for any such Stock Options granted prior to January 1,
2002, or (2) the fifth anniversary of the Termination Date, or, if
earlier, the option expiration date for any such Stock Options granted
on or after January 1, 2002.
(e) Termination Without Special Circumstances: LTIP Vesting.
On the Termination Date all of the performance shares, performance
units or similar stock incentive awards granted to Executive under the
Exelon Performance Share Program under the LTIP ("Performance Shares")
to the extent earned by and awarded to Executive (i.e. as to which the
first year of the performance cycle has elapsed) as of the Termination
Date, shall become fully vested at the actual level earned and awarded,
and, to the extent not yet earned by and awarded to Executive (i.e., as
to which the first year of the performance cycle has not elapsed) as of
the Termination Date, shall become fully vested at the LTIP Target
Level. Payment under this Section 8.1(e) shall be made according to the
terms of the LTIP, as in effect from time to time.
25
(f) Termination Without Special Circumstances: Restricted
Stock. All forfeiture conditions that as of the Termination Date are
applicable to any deferred stock unit, restricted stock or restricted
share units awarded to Executive by the Company, including the
restricted shares granted pursuant to Article V (other than under the
Exelon Performance Share Program under the LTIP) ("Restricted Stock")
shall lapse immediately and all such awards will become fully vested.
Within ten business days after the Termination Date, the Company shall
deliver to Executive all of such shares theretofore held by or on
behalf of the Company.
(g) Termination Without Special Circumstances: Health Care
Coverage. Until the last day of the Severance Period, Executive shall
continue to participate in the health care plans under which he was
covered immediately prior to his Termination Date. Executive's out of
pocket costs (including premiums, deductibles, and co-payments) for
such health care coverage shall be the same as that in effect from time
to time for peer executives who are actively employed by the Company
after the Termination Date. Coverage under this Section 8.1(g) shall be
provided for the duration of the Severance Period in lieu of
continuation coverage under Section 4980B of the Code and Section 601
to 609 of ERISA ("COBRA") for the Severance Period. At the end of such
period, Executive and his eligible dependents shall be entitled to
elect retiree health care coverage under the Company's health care
plans in effect from time to time on the same terms and subject to the
same conditions as peer employees and their eligible dependents who are
actively employed by the Company after the Termination Date who have
completed ten years of service after age 45 and are eligible to begin
receiving early retirement benefits under the Commonwealth Edison
Company Service Annuity System.
(h) Termination Without Special Circumstances: Retirement
Plans. Until the last day of the Severance Period, Executive shall
accrue credited service under the Enhanced SERP. The amount of any
payment made under Section 8.1(c) to Executive during, or in respect
of, such period shall be taken into account as compensation for
purposes of the Enhanced SERP. At the end of the Severance Period, the
Company shall pay to Executive the Enhanced SERP pursuant to the terms
of the SERP regarding form of payment, calculated according to this
Section 8.1(h) and the service credited to Executive pursuant to the
provisions of Attachment B. Executive shall not accrue service or
otherwise actively participate in any tax-qualified retirement or
savings plan sponsored by the company during or in respect of the
Severance Period, and shall not be entitled to commence to receive
benefits under any such plan until after the expiration of the
Severance Period.
(i) Termination Without Special Circumstances: Life Insurance
and Disability Coverage. The Company shall extend to Executive
continued coverage under the life insurance plan and long term
disability program of the Company through the last day of the Severance
Period on the same terms and subject to the same conditions as are
applicable to active peer executives.
(j) Termination Without Special Circumstances: Deferred
Compensation Plans. The elections, if any, that Executive made under
any non-qualified deferred compensation plan sponsored by the Company
shall remain in effect through the last day
26
of the Severance Period, but Executive shall not be entitled to make
any additional deferral elections with respect to such plans after
December 31 of the year in which the Termination Date occurs.
(k) Termination Without Special Circumstances: Executive
Perquisites. Executive's perquisites shall terminate effective as of
the Termination Date, and any Company-owned property shall be required
to be returned to the Company no later than such date; provided,
however, that if Executive is retiring at the end of the Severance
Period, he shall be entitled to financial counseling services for a
period of twenty-four (24) months following the Termination Date.
(l) Termination Without Special Circumstances: Outplacement
Services. Executive shall be entitled to outplacement services, to the
extent actually used, at the expense of the Company for such period
(which shall not be less than six months) and subject to such terms and
conditions as the Company, it its sole discretion, determines are
appropriate. No cash shall be paid in lieu of such fees and costs.
8.2 Termination in Certain Special Circumstances. If, during the
Current Post-Merger Period, Post-Change Period or Post-Significant Acquisition
Period (other than any portion of any of such periods that are also a
Post-Disaggregation Period), the Company terminates Executive's employment other
than for Cause or Disability, or Executive terminates employment for Good
Reason, the Company's sole obligations to Executive under Articles II, IV, VI
and VIII shall be as set forth in this Section 8.2, subject to Sections 8.9,
8.10, 8.11 and 12.8.
(a) Termination in Certain Special Circumstances: Severance
Payments. The Company shall pay or provide Executive, according to the
payment terms set forth in Section 8.9 below, the following:
(i) Accrued Obligations. All Accrued Obligations;
(ii) Annual Incentive for Year of Termination. An
amount equal to the Target Incentive applicable to Executive
under the Incentive Plan for the performance period in which
the Termination Date occurs.
(iii) Deferred Compensation and Non-Qualified Defined
Contribution Plans. All amounts previously deferred by, or
accrued to the benefit of, Executive under the Exelon
Corporation Deferred Compensation Plan, the Exelon Corporation
Stock Deferral Plan, or any successor of either of them, or
under any non-qualified defined contribution or deferred
compensation plan of the Company or an Affiliate (unless
Executive has made an irrevocable election in writing, filed
with the Company no more than 60 days after the Applicable
Trigger Date (or such earlier date as counsel to the Company
may deem to be required to avoid constructive receipt of such
amounts), and in any event at least 90 days prior to the
Termination Date to have such amounts paid under the terms of
the Exelon Corporation Deferred Compensation Plan or the
Exelon Corporation Stock Deferral Plan, as applicable, or any
successor of either (including any elections in effect
thereunder)) whether vested or unvested, together with any
accrued
27
earnings thereon, to the extent that such amounts and earnings
have not been previously paid and are not provided under the
terms of either such non-qualified plan;
(iv) Enhanced SERP. An amount equal to the lump sum
value of Executive's Enhanced SERP, calculated as if Executive
had
(1) attained as of the Termination Date and age
that is three years greater than Executive
actual age,
(2) accrued a number of years of service (for
purposes of determining the amount of such
benefits, entitlement to - but not
commencement of - early retirement benefits,
and all other purposes of such defined
benefit plans) that is three years greater
than the number of years of service credited
to Executive pursuant to the provisions of
Attachment B, and
(3) received the severance benefits specified in
Sections 8.2(a)(ii) and 8.2(a)(vi) as
covered compensation for the purpose of
computing Highest Average Annual Pay (as
defined in the SERP) in equal monthly
installments during the Severance Period.
(v) Unvested Benefits Under Defined Benefit Plan. To
the extent not paid pursuant to clause (iv) of this Section
8.2(a), an amount equal to the actuarial equivalent present
value of the unvested portion of Executive's accrued benefits
under any tax-qualified (under Section 401(a) of the Code)
defined benefit retirement plan maintained by the Company as
of the Termination Date and forfeited by Executive by reason
of the Termination of Employment; and
(vi) Multiple of Salary and Severance Incentive. An
amount equal to three (3.0) times the sum of (x) Base Salary
plus (y) the Severance Incentive.
(b) Termination in Certain Special Circumstances: Stock
Options. Each of Executive's Stock Options shall (i) become fully
vested, and (ii) remain exercisable until (1) the option expiration
date for any such Stock Options granted prior to January 1, 2002 or (2)
the fifth anniversary of the Termination Date or, if earlier, the
option expiration date for any such Stock Options granted on or after
January 1, 2002.
(c) Termination in Certain Special Circumstances: LTIP
Vesting. On the Termination Date all of the Performance Shares to the
extent earned by and awarded to Executive (i.e. as to which the first
year of the performance cycle has elapsed) as of the Termination Date,
shall become fully vested at the actual level earned and awarded, and,
to the extent not yet earned by and awarded to Executive (i.e., as to
which the first year of the performance cycle has not elapsed) as of
the Termination Date, shall become fully vested at the LTIP Target
Level. Payment under this Section 8.2(c) shall be made according to the
terms of the LTIP, as in effect from time to time.
28
(d) Termination in Certain Special Circumstances: Restricted
Stock. All forfeiture conditions that as of the Termination Date are
applicable to any Restricted Stock shall lapse immediately and all such
awards will become fully vested, and within ten business days after the
Termination Date, the Company shall deliver to Executive all of such
shares theretofore held by or on behalf of the Company.
(e) Termination in Certain Special Circumstances: Continuation
of Welfare Benefits. During the Severance Period (and continuing
through such later date as any Welfare Plan may specify), the Company
shall continue to provide (or shall cause the continued provision) to
Executive and Executive's family welfare benefits under the Welfare
Plans to the same extent as if Executive had remained employed during
the Severance Period. Such provision of welfare benefits shall be
subject to the following:
(i) In determining benefits applicable under such
Welfare Plans, Executive's annual compensation attributable to
base salary and incentives for any plan year or calendar year,
as applicable, shall be deemed to be not less than Executive's
Base Salary and Annual Incentive.
(ii) The cost of such welfare benefits to Executive
and family under this Section 4.1(e) shall not exceed the cost
of such benefits to peer executives who are actively employed
after the Termination Date.
(iii) Executive's rights under this Section 8.2(e)
shall be in addition to and not in lieu of any
post-termination continuation coverage or conversion rights
Executive may have pursuant to applicable law, including,
without limitation, continuation coverage required by COBRA.
(iv) Executive and his eligible dependents shall be
eligible for the retiree health care coverage benefits
provided under the Company's health care plans under the terms
of the Company's health care plans as in effect from time to
time, commencing after the end of the Severance Period.
Notwithstanding the foregoing, if Executive obtains a specific type of
coverage under welfare plan(s) sponsored by another employer of
Executive (e.g. medical, prescription, vision/hearing, dental,
disability, individual life insurance benefits, group life insurance
benefits, but excluding for the purposes of this sentence retiree
benefits if Executive is so eligible), then the Company shall not be
obligated to provide any such specific type of coverage.
(f) Termination in Certain Special Circumstances:
Outplacement. To the extent actually incurred by Executive, the Company
shall pay or cause to be paid on behalf of Executive, as incurred, all
reasonable fees and costs charged by a nationally recognized
outplacement firm selected by Executive for outplacement services
provided up to 12 months after the Termination Date. No cash shall be
paid in lieu of such fees and costs.
8.3 Termination During an Imminent Control Change Period. If Executive
has a Termination of Employment during an Imminent Control Change Period, the
Company's sole obligations to Executive under Articles II, IV, VI and VIII shall
be as set forth in this Section
29
8.3, subject to Sections 8.9, 8.10, 8.11 and 12.8. If, during an Imminent
Control Change Period, Executive has a Termination of Employment that would (but
for the fact that such Termination of Employment occurred during an Imminent
Control Change Period), entitle Executive to benefits under Section 8.1, then
the Company shall, prior to the occurrence of a Change Date, provide Executive
any payments and benefits to which Executive would be entitled under Section
8.1. If Executive's Termination of Employment is without Cause by the Company or
for Good Reason by Executive during any portion of an Imminent Control Change
Period which culminates in a Change in Control, then the Company shall, upon the
Change Date, provide Executive any payments and benefits to which Executive
would be entitled under Section 8.2; provided that to the extent the Company has
already paid or provided any amounts or benefits to Executive pursuant to
Section 8.1, such amounts and benefits shall reduce the amounts and benefits due
pursuant to Section 8.2.
8.4 Termination During a Post-Disaggregation Period. If, during a
Post-Disaggregation Period the Disaggregated Entity terminates Executive's
employment other than for Cause or Disability, or if Executive terminates
employment for Good Reason, the Company's sole obligations to Executive under
Articles II, IV, VI and VIII shall be as set forth in this Section 8.4, subject
to Section 7.3(b)(ii), but only to the extent not provided by the Disaggregated
Entity.
(a) Termination During a Post-Disaggregation Period: Cash
Severance Payments. The Company shall pay Executive the amounts
described in Section 8.2(a), as provided in Section 8.9.
(b) Termination During a Post-Disaggregation Period: Stock
Options. All of Executive's Stock Options granted prior to the
Disaggregation that have not expired, whether or not converted to
options or stock of the Disaggregated Entity or Merger Survivor, shall
be fully vested, and may be exercised in whole or in part by Executive
at any time until (1) the remaining option expiration date for such
Stock Options granted prior to January 1, 2002 and (2) the earlier of
the fifth anniversary of the Termination Date or the option expiration
date for such Stock Options granted on or after January 1, 2002.
(c) Termination During a Post-Disaggregation Period:
Performance Shares. Executive's Performance Shares granted prior to the
Disaggregation, whether or not earned by and awarded to Executive as of
the Disaggregation, and whether or not converted to performance shares
of the Disaggregated Entity or the Merger Survivor, shall become fully
vested (at the earned level for Performance Shares earned and awarded,
and at the target level for any converted performance shares not yet
earned and awarded) on the Termination Date. Payment under this Section
8.4(c) shall be made according to the terms of the LTIP, as in effect
from time to time.
(d) Termination During a Post-Disaggregation Period:
Restricted Stock. Executive's unvested Restricted Stock (including
restricted shares granted pursuant to Article V), whether or not
converted to restricted stock of the Disaggregated Entity or Merger
Survivor, shall become fully vested on the Termination Date.
30
(e) Termination During a Post-Disaggregation Period:
Continuation of Welfare Benefits. Until the end of the Severance
Period, the Company shall continue to provide to Executive and
Executive's family welfare benefits with the same rights in relation to
continuation coverage, status in relation to other employer benefits,
scope and cost as described in Section 8.2(e); provided that, to the
extent Executive is eligible for post-termination continuation coverage
under the plans of the Disaggregated Entity, whether pursuant to COBRA
or otherwise, the continued coverage required hereunder shall be
provided under the plans of the Disaggregated Entity (and the Company
shall reimburse any excess cost to Executive of such coverage).
(f) Termination During a Post-Disaggregation Period:
Outplacement. To the extent actually incurred by Executive, the Company
shall pay or cause to be paid on behalf of Executive, as incurred, all
reasonable fees and costs charged by a nationally recognized
outplacement firm selected by Executive for outplacement services
provided up to 12 months after the Termination Date. No cash shall be
paid in lieu of such fees and costs.
8.5 Termination by the Company for Cause.
(a) If the Company (or Affiliate or, if applicable, the
Disaggregated Entity) terminates Executive's employment for Cause
during the Employment Period, the Company's sole obligation to
Executive under Articles II, IV, VI and VIII shall be to pay Executive
(i) pursuant to the Company's then-effective Plans, a
lump-sum cash amount equal to all Accrued Obligations
(provided that any amounts due under any tax-qualified plans
(under Section 401(a) of the Code) shall be paid in accordance
with the provision of those plans) determined as of the
Termination Date, and
(ii) the Enhanced SERP pursuant to the terms of the
SERP regarding form of payment, as in effect from time to
time;
and Executive shall not be entitled to receive any severance payment
hereunder; provided, however, that if the Company terminates
Executive's employment for Cause based on Executive's material breach
of the Restrictive Covenants, and obtains a judicial determination or
final arbitration decree as provided in Section 12.8 (collectively, the
"Determination") at any time before or after Executive is terminated
for Cause, the Company's sole obligation to Executive under Articles
II, IV, VI and VIII shall be to pay Executive his Accrued Base Salary
and Accrued Annual Incentive.
(b) During the time ("Determination Period"), if any, between
such termination for Cause based on Executive's material breach of the
Restrictive Covenants and the date of the Determination (or, if
applicable, the date proceedings conclude without a Determination
having been made), but subject to the repayment provisions of Section
12.8(c),
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(i) Executive and his eligible dependents shall be
eligible for the retiree health care coverage benefits
provided under the Company's health care plans under the terms
of the Company's health care plans as in effect from time to
time, and
(ii) Enhanced SERP payments, regardless of the form
of payment elected, shall be no greater than the monthly
amount Executive (and in the event of Executive's death during
the Determination Period, his surviving spouse) would receive
if Executive elected a Marital Annuity (as defined in
Attachment B). Such amounts shall be payable monthly during
the Determination Period commencing with the date elected by
Executive for such commencement, and the Company shall deposit
any Enhanced SERP amounts that would otherwise be paid in
excess of such Marital Annuity monthly amounts in an escrow
account established by the Company for this purpose, to be
paid from the escrow to the Company upon the Determination, or
to Executive if the Determination Period ends without a
Determination.
(c) If Executive is terminated for Cause, The remaining
applicable provisions of this Agreement (including the Restrictive
Covenants) shall continue to apply.
8.6 Termination by Executive Other Than for Good Reason. If Executive
elects to retire or otherwise terminate employment with the Company or Affiliate
(or, if applicable, the Disaggregated Entity) during the Employment Period other
than for Good Reason, Disability or death, the Company's sole obligation to
Executive under Articles II, IV, VI and VIII shall be as set forth in this
Section 8.6 (and Executive shall not be entitled to receive any severance
payment hereunder). The remaining provisions of this Agreement (including the
Restrictive Covenants) shall continue to apply.
(a) Termination Other Than for Good Reason: Accrued
Obligations. The Company shall pay Executive all Accrued Obligations.
(b) Termination Other Than for Good Reason: Enhanced SERP. The
Company shall pay to Executive the Enhanced SERP pursuant to the terms
of the SERP regarding form of payment as in effect from time to time.
(c) Termination Other Than for Good Reason: Stock Options.
Executive shall not be entitled to participate in any grants of Stock
Options made after the Termination Date. All Stock Options shall (i)
become fully vested, and (ii) remain exercisable until (A) the option
expiration date for any such Stock Options granted prior to January 1,
2002, or (B) the fifth anniversary of the Termination Date, or if
earlier, the option expiration date for any such Stock Options granted
on or after January 1, 2002.
(d) Termination Other Than for Good Reason: LTIP Vesting. On
the Termination Date all Performance Shares to the extent earned by and
awarded to Executive (i.e. as to which the first year of the
performance cycle has elapsed) as of the Termination Date, shall become
fully vested at the actual level earned and awarded, and,
32
to the extent not yet earned by and awarded to Executive (i.e., as to
which the first year of the performance cycle has not elapsed) as of
the Termination Date, shall be forfeited. Payment under this Section
8.6(d) shall be made according to the terms of the LTIP, as in effect
from time to time.
(e) Termination Other Than for Good Reason: Restricted Stock.
All forfeiture conditions that as of the Termination Date are
applicable to any Restricted Stock (other than the restricted shares
granted under Article V) shall lapse immediately and all such awards
will become fully vested, and within ten business days after the
Termination Date, the Company shall deliver to Executive all of such
shares theretofore held by or on behalf of the Company.
(f) Termination Other Than for Good Reason: Health Care
Coverage. Executive and his eligible dependents shall be eligible for
the retiree health care coverage benefits provided under the Company's
health care plans under the terms of the Company's health care plans as
in effect from time to time.
(g) Termination Other Than for Good Reason: Other Benefits.
The Company shall provide Executive other retirement benefits (but not
perquisites) after the Termination Date to the extent available to
retired peer executives under Plans of the Company.
8.7 Termination by the Company for Disability. If the Company (or
Disaggregated Entity, if applicable) terminates Executive's employment by reason
of Executive's Disability, the Company's sole obligation to Executive under
Articles II, IV, VI and VIII shall be as set forth in this Section 8.7 reduced
by amounts paid or provided by the Disaggregated Entity (and Executive shall not
be entitled to receive any severance payment hereunder). The remaining
provisions of this Agreement (including the Restrictive Covenants) shall
continue to apply.
(a) Termination for Disability: Accrued Obligations and
Prorated Annual Incentive. The Company shall pay Executive a lump-sum
cash amount equal to the amount specified in Sections 8.1(a) and (b)
determined as of the Termination Date.
(b) Termination for Disability: Enhanced SERP. Executive may
elect payment or commencement of the Enhanced SERP, pursuant to the
terms of the SERP regarding form of payment as in effect from time to
time, and subject to the offset for disability benefits provided under
the SERP.
(c) Termination for Disability: Stock Options. Executive shall
not be entitled to participate in any grants of Stock Options made
after the Termination Date. All Stock Options shall (i) become fully
vested, and (ii) remain exercisable until (A) the option expiration
date for any such Stock Options granted prior to January 1, 2002, or
(B) the fifth anniversary of the Termination Date, or if earlier, the
option expiration date for any such Stock Options granted on or after
January 1, 2002.
(d) Termination for Disability: LTIP Vesting. On the
Termination Date all Performance Shares to the extent earned by and
awarded to Executive (i.e. as to which
33
the first year of the performance cycle has elapsed) as of the
Termination Date, shall become fully vested at the actual level earned
and awarded, and, to the extent not yet earned by and awarded to
Executive (i.e., as to which the first year of the performance cycle
has not elapsed) as of the Termination Date, shall become fully vested
at the LTIP Target Level. Payment under this Section 8.7(d) shall be
made according to the terms of the LTIP, as in effect from time to
time.
(e) Termination for Disability: Restricted Stock. All
forfeiture conditions that as of the Termination Date are applicable to
any Restricted Stock (including the restricted shares granted pursuant
to Article V) shall lapse immediately and all such awards will become
fully vested, and within ten business days after the Termination Date,
the Company shall deliver to Executive all of such shares theretofore
held by or on behalf of the Company.
(f) Termination for Disability: Health Care Coverage. While
Executive is receiving long term disability benefits, he shall continue
to participate in the health care plans under which Executive was
covered immediately prior to his Termination Date. Executive's out of
pocket costs (including premiums, deductibles, and co-payments) for
such health care coverage shall be the same as that in effect from time
to time for peer executives whose employment has been terminated on
account of disability. Coverage under this Section 8.7(f) shall be
provided in lieu of COBRA. Thereafter, Executive and his eligible
dependents shall be eligible for the retiree health care coverage
benefits provided under the Company's health care plans under the terms
of the Company's health care plans as in effect from time to time.
(g) Termination for Disability: Disability Benefits. The
Company shall provide Executive disability and other benefits after the
Termination Date pursuant to the Company's long term disability Plans
in which Executive participates, as in effect from time to time;
provided, however, that if the Termination Date occurs during the
Current Post-Merger Period, Post-Change Period, Imminent Control Change
Period that culminates in a Change Date, Post-Significant Acquisition
Period or Post-Disaggregation Period, the Company shall provide
Executive disability and other benefits after the Termination Date that
are not less than the most favorable of such benefits then provided
under Plans of the Company to disabled peer executives of the Company
in effect immediately before the Termination Date.
8.8 Upon Death. If Executive's employment with the Company or
Affiliate, (or, if applicable, the Disaggregated Entity) is terminated by reason
of Executive's death during the Employment Period, the Company's sole obligation
to Executive (and the Beneficiary) under Articles II, IV, VI and VIII shall be
as set forth in this Section 8.8 (and neither Executive nor the Beneficiary
shall be entitled to receive any severance payment hereunder). The remaining
provisions of this Agreement shall continue to apply.
(a) Termination By Death: Accrued Obligations and Prorated
Annual Incentive. The Company shall pay the Beneficiary, a lump-sum
cash amount equal to the amount specified in Sections 8.1(a) and (b)
determined as of the Termination Date.
34
(b) Termination By Death: Enhanced SERP. The Company shall pay
to the Beneficiary the Enhanced SERP pursuant to the terms of the SERP
regarding form of payment as in effect from time to time.
(c) Termination By Death: Stock Options. All Stock Options
shall (i) become fully vested, and (ii) remain exercisable until (A)
the option expiration date for any such Stock Options granted prior to
January 1, 2002, or (B) the third anniversary of the Termination Date,
or if earlier, the option expiration date for any such Stock Options
granted on or after January 1, 2002.
(d) Termination By Death: LTIP Vesting. On the Termination
Date all Performance Shares to the extent earned by and awarded to
Executive (i.e. as to which the first year of the performance cycle has
elapsed) as of the Termination Date, shall become fully vested at the
actual level earned and awarded, and, to the extent not yet earned by
and awarded to Executive (i.e., as to which the first year of the
performance cycle has not elapsed) as of the Termination Date, shall
become fully vested at the LTIP Target Level. Payment under this
Section 8.8(d) shall be made according to the terms of the LTIP, as in
effect from time to time.
(e) Termination By Death: Restricted Stock. All forfeiture
conditions that as of the Termination Date are applicable to any
Restricted Stock (including restricted shares granted under Article V)
shall lapse immediately and all such awards will become fully vested,
and within ten business days after the Termination Date, the Company
shall deliver to the Beneficiary all of such shares theretofore held by
or on behalf of the Company.
(f) Termination By Death: Health Care Coverage. Executive's
surviving spouse shall be eligible for the retiree health care coverage
benefits provided under the Company's health plans under the terms of
the Company's health care plans as in effect from time to time.
(g) Termination By Death: Survivor Benefits. The Company shall
provide the Beneficiary such survivor and other benefits (including the
proceeds of any life insurance policies on Executive's life maintained
by the Company on behalf of Executive under which the Beneficiary is
the beneficiary) available as of the Termination Date under the Plans
of the Company; provided, however, that if Executive's death occurs
during the Current Post-Merger Period, Post-Change Period, Imminent
Control Change Period that culminates in a Change Date,
Post-Significant Acquisition Period or Post-Disaggregation Period, the
Company shall provide the Beneficiary such survivor and other benefits
that are not less favorable than the most favorable of such benefits
then available under Plans of the Company to surviving families of peer
executives of the Company in effect immediately before Executive's
death.
8.9 Timing of Severance Payments. Unless otherwise specified herein or
in an applicable Plan, the amounts described in Sections 8.1(a) and (b),
Sections 8.2(a)(i), (ii), (iii), (iv) and (v), Sections 8.6(a) and Section
8.7(a) and Section 8.8(a) shall be paid in cash within 30 business days of the
Termination Date (provided that any amounts due under any tax-qualified plans
35
(under Section 401(a) of the Code) shall be paid pursuant to the terms of such
plans, including payment timing and form). The severance payments described in
Sections 8.1(c) and 8.2(a)(vi) shall be paid as follows:
(a) Beginning no later than the second paydate which occurs
after the Termination Date, the Company shall make periodic payments to
Executive according to the Company's normal payroll practices at a
monthly rate equal to 1/12 of the sum of (i) Executive's Base Salary
plus (ii) the Severance Incentive; and
(b) Within 30 business days of the second anniversary of the
Termination Date, the Company shall pay Executive a cash lump sum equal
to the difference (if any) between the total severance payment under
Sections 8.1(c) and 8.2(a)(vi), as applicable, less the total amount
paid pursuant to normal payroll practices under Section 8.9(a).
8.10 Waiver and Release. Notwithstanding anything herein to the
contrary, the Company shall have no obligation to Executive under Article VIII
or Article IX unless and until Executive executes a release and waiver of
Company and its Affiliates, in substantially the same form as attached hereto as
Attachment C, or as otherwise mutually acceptable, and any revocation period
with respect to such release and waiver has lapsed. Notwithstanding anything
herein (whether or not during the Employment Period) or in the Key Management
Severance Plan to the contrary, Executive hereby waives any right he may have at
any time during the Current Post-Merger Period to terminate his employment for
Good Reason, whether or not under the Key Management Severance Plan or this
Agreement, as a result of any event or condition ("Waived Events") made as part
of an internal structural reorganization or restructuring of Genco which results
in any change or reduction or transition in the nature or scope of Executive's
office, position, duties, functions, responsibilities or authority, that has
occurred, exists, or occurs, or of which Executive has been or is notified, at
any time during the Current Post-Merger Period, provided that any such change or
reduction after the Agreement Date shall not assign Executive to a position of
less status, responsibility, or authority than Executive's position on the
Agreement Date. Executive also hereby agrees and acknowledges that the
substitution of this Agreement for the Prior CIC Agreement (a) does not and will
not give rise to Good Reason under either such agreement and (b) renders the
Prior CIC Agreement null and void with no further rights or obligations
thereunder. Executive will, however, retain the right to terminate his
employment for Good Reason under this Agreement, as applicable, should other
future events or conditions other than the Waived Events independently trigger
such right (including other future events or conditions relating to a subsequent
Change in Control).
8.11 Sole and Exclusive Obligations. The obligations of the Company
under this Agreement with respect to the employment and any Termination of
Employment of Executive shall supersede any obligations of the Company in any
other plan of the Company (except to the extent the Company's obligations under
such agreement are included herein) or any other agreement between Executive and
the Company, including, without limitations, the Key Management Severance Plan,
the Prior CIC Agreement, any other Change in Control Agreement entered into by
and among Executive, Unicom Corporation, or ComEd, or any other plan or
agreement (including an offer of employment or employment contract) of the
Company or any Affiliates. Notwithstanding the preceding or anything in this
Article VIII to the contrary, all benefits or coverage provided or amounts paid
by the Company pursuant to this Article VIII
36
shall be reduced (but not below zero) by the same or similar benefits or
coverage provided or amounts paid or payable to Executive by the Company or an
affiliate on account of the Termination of Employment, pursuant to the Key
Management Severance Plan or otherwise. In the event of any inconsistency,
ambiguity or conflict between the terms of such other plan of the Company or
agreement between Executive and the Company and this Agreement with respect to
any severance obligations of the Company, this Agreement shall govern.
ARTICLE IX
CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY
9.1 Gross-Up Payment. If at any time or from time to time, it shall be
determined by the Company's independent auditors that any payment or other
benefit to Executive under this Agreement or otherwise ("Potential Parachute
Payment") is or will become subject to the excise tax imposed by Section 4999 of
the Code or any similar tax payable under any United States federal, state,
local, foreign or other law ("Excise Taxes"), then the Company shall, subject to
Section 9.2, pay or cause to be paid a tax gross-up payment ("Gross-Up Payment")
with respect to all such Excise Taxes and other Taxes on the Gross-Up Payment.
The Gross-Up Payment shall be an amount equal to the product of
(a) The amount of the Excise Taxes (calculated at the
effective marginal rates of all federal, state, local, foreign or other
law),
multiplied by
(b) A fraction (the "Gross-Up Multiple"), the numerator or
which is one (1.0), and the denominator of which is one (1.0) minus the
lesser of (i) the sum, expressed as a decimal fraction, of the
effective marginal rates of any Taxes and any Excise Taxes applicable
to the Gross-Up Payment or (ii) .80, it being intended that the
Gross-Up Multiple shall in no event exceed five (5.0). If different
rates of tax are applicable to various portions of a Gross-Up Payment,
the weighted average of such rates shall be used. For purposes of this
Section, Executive shall be deemed to be subject to the highest
effective marginal rate of Taxes.
The Gross-Up Payment is intended to compensate Executive for all such Excise
Taxes and any other Taxes payable by Executive with respect to the Gross-Up
Payment. The Company shall pay or cause to be paid the Gross-Up Payment to
Executive within thirty (30) days of the calculation of such amount, but in no
event after Executive makes payment to the IRS of such Excise Taxes.
9.2 Limitation on Gross-Up Payments.
(a) To the extent possible, any payments or other benefits to
Executive pursuant to Article IV, Article VI and Article VII of this
Agreement shall be allocated as consideration for Executive's entry
into the covenants of Article IX.
(b) Notwithstanding any other provision of this Article V, if
the aggregate amount of the Potential Parachute Payments that, but for
this Section 9.2, would be payable to
37
Executive, does not exceed 110% of Floor Amount (as defined below),
then no Gross-Up Payment shall be made to Executive and the aggregate
amount of Potential Parachute Payments payable to Executive shall be
reduced (but not below the Floor Amount) to the largest amount which
would both (i) not cause any Excise Tax to be payable by Executive and
(ii) not cause any Potential Parachute Payments to become nondeductible
by the Company by reason of Section 280G of the Code (or any successor
provision). For purposes of the preceding sentence, "Floor Amount"
means the greatest pre-tax amount of Potential Parachute Payments that
could be paid to Executive without causing Executive to become liable
for any Excise Taxes in connection therewith.
9.3 Additional Gross-up Amounts. If, for any reason (whether pursuant
to subsequently enacted provisions of the Code, final regulations or published
rulings of the IRS, or a final judgment of a court of competent jurisdiction)
the Company's independent auditors later determine that the amount of Excise
Taxes payable by Executive is greater than the amount initially determined
pursuant to Section 9.1, then the Company shall, subject to Sections 9.2 and
9.4, pay Executive, within thirty (30) days of such determination, or pay to the
IRS as required by applicable law, an amount (which shall also be deemed a
Gross-Up Payment) equal to the product of:
(a) the sum of (i) such additional Excise Taxes and (ii) any
interest, penalties, expenses or other costs incurred by Executive as a
result of having taken a position in accordance with a determination
made pursuant to Section 9.1 or 9.4,
multiplied by
(b) the Gross-Up Multiple.
9.4 Amount Increased or Contested.
(a) Executive shall notify the Company in writing (an
"Executive's Notice") of any claim by the IRS or other taxing authority
(an "IRS Claim") that, if successful, would require the payment by
Executive of Excise Taxes in respect of Potential Parachute Payments in
an amount in excess of the amount of such Excise Taxes determined in
accordance with Section 9.1. Executive's Notice shall include the
nature and amount of such IRS Claim, the date on which such IRS Claim
is due to be paid (the "IRS Claim Deadline"), and a copy of all notices
and other documents or correspondence received by Executive in respect
of such IRS Claim. Executive shall give Executive's Notice as soon as
practicable, but no later than the earlier of (i) 10 days after
Executive first obtains actual knowledge of such IRS Claim or (ii) five
days before the IRS Claim Deadline; provided, however, that any failure
to give such Executive's Notice shall affect the Company's obligations
under this Article only to the extent that the Company is actually
prejudiced by such failure. If at least one business day before the IRS
Claim Deadline the Company shall:
(i) deliver to Executive a written certificate from
the Company's independent auditors ("Company Certificate") to
the effect that, notwithstanding the IRS Claim, the amount of
Excise Taxes, interest or penalties payable by
38
Executive is either zero or an amount less than the amount
specified in the IRS Claim,
(ii) pay to Executive, or to the IRS as required by
applicable law, an amount (which shall also be deemed a
Gross-Up Payment) equal to difference between the product of
(A) amount of Excise Taxes, interest and penalties specified
in the Company Certificate, if any, multiplied by (B) the
Gross-Up Multiple, less the portion of such product, if any,
previously paid to Executive by the Company, and
(iii) direct Executive pursuant to Section 9.4(d) to
contest the balance of the IRS Claim,
then Executive shall pay only the amount, if any, of Excise Taxes,
interest and penalties specified in the Company Certificate. In no
event shall Executive pay an IRS Claim earlier than 30 business days
after having given an Executive's Notice to the Company (or, if sooner,
the IRS Claim Deadline).
(b) At any time after the payment by Executive of any amount
of Excise Taxes, other Taxes or related interest or penalties in
respect of Potential Parachute Payments (including any such amount
equal to or less than the amount of such Excise Taxes specified in any
Company Certificate, or IRS Claim), the Company may in its discretion
require Executive to pursue a claim for a refund (a "Refund Claim") of
all or any portion of such Excise Taxes, other Taxes, interest or
penalties as may be specified by the Company in a written notice to
Executive.
(c) If the Company notifies Executive in writing that the
Company desires Executive to contest an IRS Claim or to pursue a Refund
Claim, Executive shall:
(i) give the Company all information that it
reasonably requests in writing from time to time relating to
such IRS Claim or Refund Claim, as applicable,
(ii) take such action in connection with such IRS
Claim or Refund Claim (as applicable) as the Company
reasonably requests in writing from time to time, including
accepting legal representation with respect thereto by an
attorney selected by the Company, subject to the approval of
Executive (which approval shall not be unreasonably withheld
or delayed),
(iii) cooperate with the Company in good faith to
contest such IRS Claim or pursue such Refund Claim, as
applicable,
(iv) permit the Company to participate in any
proceedings relating to such IRS Claim or Refund Claim, as
applicable, and
(v) contest such IRS Claim or prosecute Refund Claim
(as applicable) to a determination before any administrative
tribunal, in a court of initial
39
jurisdiction and in one or more appellate courts, as the
Company may from time to time determine in its discretion.
The Company shall control all proceedings in connection with such IRS
Claim or Refund Claim (as applicable) and in its discretion may cause
Executive to pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the Internal Revenue Service
or other taxing authority in respect of such IRS Claim or Refund Claim
(as applicable); provided that (i) any extension of the statute of
limitations relating to payment of taxes for the taxable year of
Executive relating to the IRS Claim is limited solely to such IRS
Claim, (ii) the Company's control of the IRS Claim or Refund Claim (as
applicable) shall be limited to issues with respect to which a Gross-Up
Payment would be payable, and (iii) Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or other taxing authority.
(d) The Company may at any time in its discretion direct
Executive to (i) contest the IRS Claim in any lawful manner or (ii) pay
the amount specified in an IRS Claim and pursue a Refund Claim;
provided, however, that if the Company directs Executive to pay an IRS
Claim and pursue a Refund Claim, the Company shall advance the amount
of such payment to Executive on an interest-free basis and shall
indemnify Executive, on an after-tax basis, for any Excise Tax or
income tax, including related interest or penalties, imposed with
respect to such advance.
(e) The Company shall pay directly all legal, accounting and
other costs and expenses (including additional interest and penalties)
incurred by the Company or Executive in connection with any IRS Claim
or Refund Claim, as applicable, and shall indemnify Executive, on an
after-tax basis, for any Excise Tax or income tax, including related
interest and penalties, imposed as a result of such payment of costs
and expenses.
9.5 Refunds. If, after the receipt by Executive or the IRS of any
payment or advance of Excise Taxes or other Taxes by the Company pursuant to
this Article, Executive receives any refund with respect to such Excise Taxes,
Executive shall (subject to the Company's complying with any applicable
requirements of Section 9.4) promptly pay the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 9.4 or receipt by the IRS of an amount paid by the
Company on behalf of Executive pursuant to Section 9.4, a determination is made
that Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify Executive in writing of its intent to contest
such determination within 30 days after the Company receives written notice of
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid. Any contest of a
denial of refund shall be controlled by Section 9.4(d).
40
ARTICLE X
EXPENSES, INTEREST, DISPUTE RESOLUTION,
INDEMNIFICATION AND D&O LIABILITY INSURANCE
10.1 Enforcement and Late Payments: Under Certain Special
Circumstances. If, after the Agreement Date and during or on account of the
Current Post-Merger Period, Post-Change Period, Imminent Control Change Period
that culminates in a Change Date, Post-Significant Acquisition Period or
Post-Disaggregation Period, Executive incurs reasonable legal fees or other
expenses (including arbitration costs and expenses under Section 10.4) in an
effort to secure, preserve, or obtain benefits under this Agreement, the Company
shall, regardless of the outcome of such effort, reimburse Executive (in
accordance with Section 10.1(a)) for such fees and expenses, subject to the
following.
(a) Reimbursement of legal fees and expenses and Gross-Up
Payments shall be made on a current basis, promptly after Executive's
written submission of a request for reimbursement together with
evidence that such fees and expenses were incurred.
(b) If Executive does not prevail (after exhaustion of all
available judicial remedies) in respect of a claim by Executive or by
the Company hereunder, and the Company establishes before a court of
competent jurisdiction by clear and convincing evidence that Executive
had no reasonable basis for Executive's claim hereunder, or for
Executive's response to the Company's claim hereunder, or that
Executive acted in bad faith, no further reimbursement for legal fees
and expenses shall be due to Executive in respect of such claim and
Executive shall refund any amounts previously reimbursed hereunder with
respect to such claim.
10.2 Negotiation of Agreement. The Company shall reimburse Executive
for 50% of the reasonable attorney fees and expenses incurred by Executive in
negotiating and drafting this Agreement for up to the first $100,000 of such
reasonable attorney fees and expenses so incurred. The Company's obligation
under this Section 10.2 shall not exceed $50,000.
10.3 Interest: Under Certain Special Circumstances. If the Company does
not pay any cash amount due to Executive under Sections 8.2, 8.3, 8.4 or Article
IX this Agreement within three business days after such amount first became due
and owing, interest shall accrue on such amount from the date it became due and
owing until the date of payment at an annual rate equal to 200 basis points
above the base commercial lending rate published in The Wall Street Journal in
effect from time to time during the period of such nonpayment; provided that
Executive shall not be entitled to interest on any Gross Up Payment.
10.4 Arbitration. Any dispute, controversy or claim between the parties
hereto arising out of or in connection with or relating to this Agreement (other
than disputes related to Article IX or to an alleged breach of the Restrictive
Covenants in Article XII) or any breach or alleged breach thereof, or any
benefit or alleged benefit hereunder, shall be settled by arbitration in
Chicago, Illinois, before an impartial arbitrator pursuant to the rules and
regulations of the American Arbitration Association ("AAA") pertaining to the
arbitration of commercial disputes. Either party may invoke the right to
arbitration. The arbitrator shall be selected by means of the parties striking
alternatively from a panel of seven arbitrators supplied by the Chicago office
of
41
AAA. The arbitrator shall have the authority to interpret and apply the
provisions of this Agreement, consistent with Section 14.12 below. The decision
of the arbitrator shall be final and binding upon the parties and a judgment
thereon may be entered in the highest court of a forum, state or federal, having
jurisdiction. The expenses of the arbitration shall be borne according to
Section 10.1, if applicable and, if Section 10.1 is not applicable, each party
shall be responsible for its own costs including attorneys' fees. No arbitration
shall be commenced after the date when institution of legal or equitable
proceedings based upon such subject matter would be barred by the applicable
statutes of limitations. Notwithstanding anything to the contrary contained in
this Section 10.4 or elsewhere in this Agreement, either party may bring an
action in the District Court of Cook County, or the United States District Court
for the Northern District of Illinois, if jurisdiction there lies, in order to
maintain the status quo ante of the parties. The "status quo ante" is defined as
the last peaceable, uncontested status between the parties. However, neither the
party bringing the action nor the party defending the action thereby waives its
right to arbitration of any dispute, controversy or claim arising out of or in
connection or relating to this Agreement. Notwithstanding anything to the
contrary contained in this Section 10.4 or elsewhere in this Agreement, either
party may seek relief in the form of specific performance, injunctive or other
equitable relief in order to enforce the decision of the arbitrator. The parties
agree that in any arbitration commenced pursuant to this Agreement, the parties
shall be entitled to such discovery (including depositions, requests for the
production of documents and interrogatories) as would be available in a federal
district court pursuant to Rules 26 through 37 of the Federal Rules of Civil
Procedure. In the event that either party fails to comply with its discovery
obligations hereunder, the arbitrator shall have full power and authority to
compel disclosure or impose sanctions to the full extent of Rule 37 of the
Federal Rules of Civil Procedure.
10.5 Indemnification. Executive shall be indemnified and held harmless
by the Company on the same terms as other senior executives and to the greatest
extent permitted under applicable law as the same now exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification than was
permitted prior to such amendment) and the Company's by-laws as such exist on
the Agreement Date if Executive was, is, or is threatened to be, made a party to
any pending, completed or threatened action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding whether civil, criminal, administrative or investigative, and whether
formal or informal, by reason of the fact that Executive is or was, or had
agreed to become, a director, officer, employee, agent, or fiduciary of the
Company or any other entity which Executive is or was serving at the request of
the Company ("Proceeding"), against all expenses (including all reasonable
attorneys' fees) and all claims, damages, liabilities and losses incurred or
suffered by Executive or to which Executive may become subject for any reason. A
Proceeding shall not include any proceeding to the extent it concerns or relates
to a matter described in Section 10.1 (concerning reimbursement of certain costs
and expenses). Upon receipt from Executive of (i) a written request for an
advancement of expenses, which Executive reasonably believes will be subject to
indemnification hereunder and (ii) a written undertaking by Executive to repay
any such amounts if it shall ultimately be determined that Executive is not
entitled to indemnification under this Agreement or otherwise, the Company shall
advance such expenses to Executive or pay such expenses for Executive, all in
advance of the final disposition of any such matter.
42
10.6 Directors' and Officers' Liability Insurance. For a period of six
years after the Termination Date (or for any known longer applicable statute of
limitations period), the Company shall provide Executive with coverage under a
directors' and officers' liability insurance policy in an amount no less than,
and on the same terms as those provided to senior executive officers and
directors of the Company.
ARTICLE XI
NO SET-OFF OR MITIGATION
11.1 No Set-off by Company.
(a) Executive's right to receive when due the payments and
other benefits provided for under this Agreement is absolute,
unconditional and subject to no setoff, counterclaim or legal or
equitable defense. Time is of the essence in the performance by the
Company of its obligations under this Agreement.
(b) Any claim which the Company may have against Executive,
whether for a breach of this Agreement or otherwise, shall be brought
in a separate action or proceeding and not as part of any action or
proceeding brought by Executive to enforce any rights against the
Company under this Agreement.
11.2 No Mitigation.
(a) Executive shall not have any duty to mitigate the amounts
payable by the Company under this Agreement by seeking new employment
or self-employment following termination.
(b) Except as specifically otherwise provided in this
Agreement, all amounts payable pursuant to this Agreement shall be paid
without reduction regardless of any amounts of salary, compensation or
other amounts which may be paid or payable to Executive as the result
of Executive's employment by another employer or self-employment.
ARTICLE XII
RESTRICTIVE COVENANTS
12.1 Confidential Information. Executive acknowledges that in the
course of performing services for the Companies and Affiliates, he may create
(alone or with others), learn of, have access to and receive Confidential
Information. Confidential Information shall not include: (i) information that is
or becomes generally known to the public or within the relevant trade or
industry through no fault of Executive; (ii) information received from a third
party outside of the Company that was disclosed without a breach of any
confidentiality obligation that Executive knew, or should have known about at
the time of such disclosure; or (iii) information approved for release by
written authorization of the Company. Executive recognizes that all such
Confidential Information is the sole and exclusive property of the Company and
its Affiliates or of third parties which the Company or Affiliate is obligated
to keep confidential,
43
that it is the Company's policy to keep all such Confidential Information
confidential, and that disclosure of Confidential Information would cause damage
to the Company and its Affiliates. Executive agrees that, (a) except as required
by the duties of Executive's employment with the Company or any of its
Affiliates (including pursuant to this Agreement), (b) except in connection with
enforcing Executive's rights under this Agreement, and/or (c) except if
compelled by a court or governmental agency, provided in each case of (b) and
(c) above that prior written notice is given to Company, Executive will not,
without the written consent of Company, willfully disseminate or otherwise
disclose, directly or indirectly, any Confidential Information obtained during
his employment with the Company or its Affiliates, and will take all necessary
precautions to prevent disclosure, to any unauthorized individual or entity
inside or outside the Company, and will not use the Confidential Information or
permit its use for the benefit of Executive or any other person or entity other
than the Company or its Affiliates. These obligations shall continue during and
after the termination of Executive's employment (whether or not after a Change
in Control, Imminent Control Change, Significant Acquisition or Disaggregation).
Nothing in this Section 12.1 prohibits Executive from reporting any suspected
instance of a nuclear safety concern or any safety concern of any nature related
to the operation of a nuclear power station to the United States Nuclear
Regulatory Commission ("NRC"), the United States Department of Labor, or any
other state or federal government agency; nor does this Section 12.1 prohibit or
discourage Executive from providing information to the NRC, or to any state or
federal agency or from testifying in any civil or criminal proceeding.
12.2 Non-Competition. During the period beginning on the Agreement Date
and ending on the second anniversary of the Termination Date, whether or not
after a Change in Control, Imminent Control Change, Significant Acquisition or
Disaggregation, Executive hereby agrees that without the written consent of the
Company Executive shall not at any time, directly or indirectly, in any
capacity:
(a) engage or participate in, become employed by, serve as a
director of, or render advisory or consulting or other services in
connection with, any Competitive Business; provided, however, that
after the Termination Date this Section 12.2 shall not preclude
Executive from (i) being an employee of, or consultant to, any business
unit of a Competitive Business if (A) such business unit does not
qualify as a Competitive Business in its own right and (B) Executive
does not have any direct or indirect involvement in, or responsibility
for, any operations of such Competitive Business that cause it to
qualify as a Competitive Business, (ii) being a consultant to, an
advisor to, or an employee of a governmental regulatory agency,
(iii)serving on the boards of colleges, universities or professional
societies (e.g., the American Nuclear Society) (and related committees
or organizations thereof), (iv) serving on the following industry
boards (or related committees or organizations thereof): WANO (World
Association of Nuclear Operators), INPO (Institute of Nuclear
Professional Operators), NEI (Nuclear Energy Institute), EEI (Edison
Electric Institute) and EPRI (Electric Power Research Institute) or (v)
with the approval of the Chief Executive Officer of the Company,
serving as a non-employee director of a Competitive Business.
(b) make or retain any financial investment, whether in the
form of equity or debt, or own any interest, in any Competitive
Business. Nothing in this subsection shall, however, restrict Executive
from making an investment in any Competitive Business if
44
such investment does not (i) represent more than 1% of the aggregate
market value of the outstanding capital stock or debt (as applicable)
of such Competitive Business, (ii) give Executive any right or ability,
directly or indirectly, to control or influence the policy decisions or
management of such Competitive Business, and (iii) create a conflict of
interest between Executive's duties under this Agreement and his
interest in such investment.
12.3 Non-Solicitation. During the period beginning on the Agreement
Date and ending on the second anniversary of any Termination Date, whether or
not after a Change in Control, Imminent Control Change, Significant Acquisition
or Disaggregation, Executive shall not, directly or indirectly:
(a) other than in connection with the good-faith performance
of his duties as an officer of the Company, cause or attempt to cause
any employee or agent of the Company to terminate his or her
relationship with the Company;
(b) employ, engage as a consultant or adviser, or solicit the
employment or engagement as a consultant or adviser, of any employee or
agent of the Company (other than by the Company or its Affiliates), or
cause or attempt to cause any Person to do any of the foregoing;
(c) establish (or take preliminary steps to establish) a
business with, or cause or attempt to cause others to establish (or
take preliminary steps to establish) a business with, any employee or
agent of the Company, if such business is or will be a Competitive
Business; or
(d) interfere with the relationship of the Company with, or
endeavor to entice away from the Company, any Person who or which at
any time during the period commencing one year prior to the Termination
Date was or is, to Executive's knowledge, a material customer or
material supplier of, or maintained a material business relationship
with, the Company.
Notwithstanding anything herein to the contrary, Executive may respond
to an unsolicited request for an employment reference regarding any employee or
agent of the Company (or Affiliate) from a third party by providing a reference
setting forth Executive's personal views about such employee or agent.
12.4 Intellectual Property. During the period of Executive's employment
with the Company and any Affiliate, and thereafter upon the Company's request,
whether or not after a Change in Control, Imminent Control Change, Significant
Acquisition or Disaggregation, Executive shall disclose immediately to the
Company all ideas, inventions and business plans that he makes, conceives,
discovers or develops alone or with others during the course of his employment
with the Company or during the one year period following Executive's Termination
Date, including any inventions, modifications, discoveries, developments,
improvements, computer programs, processes, products or procedures (whether or
not protectable upon application by copyright, patent, trademark, trade secret
or other proprietary rights) ("Work Product") that: (i) relate to the business
of the Company or any customer or supplier to the
45
Company or any of the products or services being developed, manufactured, sold
or otherwise provided by the Company or that may be used in relation therewith;
or (ii) result from tasks assigned to Executive by the Company; or (iii) result
from the use of the premises or personal property (whether tangible or
intangible) owned, leased or contracted for by the Company. Executive agrees
that any Work Product shall be the property of the Company and, if subject to
copyright, shall be considered a "work made for hire" within the meaning of the
Copyright Act of 1976, as amended (the "Act"). If and to the extent that any
such Work Product is not a "work made for hire" within the meaning of the Act,
Executive hereby assigns to the Company all right, title and interest in and to
the Work Product, and all copies thereof, and the copyright, patent, trademark,
trade secret and all proprietary rights in the Work Product, without further
consideration, free from any claim, lien for balance due or rights of retention
thereto on the part of Executive.
(a) The Company hereby notifies Executive that the preceding
paragraph does not apply to any inventions for which no equipment,
supplies, facility, or trade secret information of the Company was used
and which was developed entirely on Executive's own time, unless: (i)
the invention relates (a) to the Company's business, or (b) to the
Company's actual or demonstrably anticipated research or development,
or (ii) the invention results from any work performed by Executive for
the Company.
(b) Executive agrees that upon disclosure of Work Product to
the Company, Executive will, during his employment and at any time
thereafter, at the request and cost of the Company, execute all such
documents and perform all such acts as the Company or its duly
authorized agents may reasonably require: (i) to apply for, obtain and
vest in the name of the Company alone (unless the Company otherwise
directs) letters patent, copyrights or other analogous protection in
any country throughout the world, and when so obtained or vested to
renew and restore the same; and (ii) to prosecute or defend any
opposition proceedings in respect of such applications and any
opposition proceedings or petitions or applications for revocation of
such letters patent, copyright or other analogous protection, or
otherwise in respect of the Work Product.
(c) In the event that the Company is unable, after reasonable
effort, to secure Executive's execution as provided in subsection (b)
above, whether because of Executive's physical or mental incapacity or
for any other reason whatsoever, Executive hereby irrevocably
designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and on his
behalf to execute and file any such application or applications and to
do all other lawfully permitted acts to further the prosecution,
issuance and protection of letters patent, copyright and other
intellectual property protection with the same legal force and effect
as if personally executed by Executive.
(d) If Executive is required to execute documents or perform
acts after the Termination Date pursuant to this Section 12.4,
Executive shall be entitled to receive prompt reimbursement for all
reasonable out-of-pocket costs and expenses necessitated by compliance
with this Section 12.4, including travel expenses but not attorneys'
fees.
46
12.5 Non-Disparagement. During the period beginning on the Termination
Date and ending on the second anniversary of the Termination Date, Executive
shall not (a) make any written or oral statement that brings the Company or any
of its Affiliates or the employees, officers or agents of the Company or any of
its Affiliates into disrepute, or tarnishes any of their images or reputations
or (b) publish, comment upon or disseminate any statements suggesting or
accusing the Company or any of its Affiliates or any agents, employees or
officers of the Company or any of its Affiliates of any misconduct or unlawful
behavior. This Section 12.5 shall not be deemed to be breached by testimony of
Executive given in any judicial or governmental proceeding which Executive
reasonably believes to be truthful at the time given or by any other action of
Executive which he reasonably believes is taken in accordance with the
requirements of applicable law or administrative regulation. Nothing in this
Section 12.5 prohibits Executive from reporting any suspected instance of a
nuclear safety concern or any safety concern of any nature related to the
operation of a nuclear power station to the United States Nuclear Regulatory
Commission ("NRC"), the United States Department of Labor, or any other state or
federal government agency; nor does this Section 12.5 prohibit or discourage
Executive from providing information to the NRC, or to any state or federal
agency or from testifying in any civil or criminal proceeding.
12.6 Reasonableness of Restrictive Covenants.
(a) Executive acknowledges that the covenants contained in
Sections 12.1, 12.2, 12.3, 12.4 and 12.5 are reasonable in the scope of
the activities restricted, the geographic area covered by the
restrictions, and the duration of the restrictions, and that such
covenants are reasonably necessary to protect the Company's legitimate
interests in its Confidential Information and in its relationships with
its employees, customers and suppliers. Executive further acknowledges
such covenants are essential elements of this Agreement and that, but
for such covenants, the Company would not have entered into this
Agreement.
(b) The Company and Executive have each consulted with their
respective legal counsel and have been advised concerning the
reasonableness and propriety of such covenants. Executive acknowledges
that his observance of the covenants contained in Sections 12.1, 12.2,
12.3, 12.4 and 12.5 will not deprive Executive of the ability to earn a
livelihood or to support his dependents.
12.7 Right to Injunction; Survival of Undertakings.
(a) In recognition of the confidential nature of the
Confidential Information, and in recognition of the necessity of the
limited restrictions imposed by Sections 12.1, 12.2, 12.3 and 12.4 the
parties agree that it would be impossible to measure solely in money
the damages which the Company would suffer if Executive were to breach
any of his obligations under such Sections. Executive acknowledges that
any breach of any provision of such Sections would irreparably injure
the Company. Accordingly, Executive agrees that if he breaches any of
the provisions of such Sections, the Company shall be entitled, in
addition to any other remedies to which the Company may be entitled
under this Agreement or otherwise, to an injunction to be issued by a
court of competent jurisdiction, to restrain any breach, or threatened
breach, of such provisions, and
47
Executive hereby waives any right to assert any claim or defense that
the Company has an adequate remedy at law for any such breach.
(b) If a court determines that any of the covenants included
in this Article XII is unenforceable in whole or in part because of
such covenant's duration or geographical or other scope, such court
shall have the power to modify the duration or scope of such provision,
as the case may be, so as to cause such covenant as so modified to be
enforceable.
(c) All of the provisions of this Article XII shall survive
any Termination of Employment without regard to (i) the reasons for
such termination or (ii) the expiration of the Employment Period.
12.8 Breach of Covenants.
(a) In the event Executive breaches a Restrictive Covenant,
the Company shall be entitled to require a Forfeiture (as defined
below) if and only if a Forfeiture Event (as defined below) has
occurred.
(b) A "Forfeiture Event" means that both of the following have
occurred:
(i) Executive shall have committed a willful and
material breach of any of the covenants contained in this
Article XII, or Executive shall have failed to cure (to the
fullest extent curable) a non-willful breach of any of such
covenants within 10 days after his receipt of a written notice
thereof from the Company; provided no act or failure to act
(including simple negligence or an error in judgment) shall be
deemed a willful breach of a Restrictive Covenant if such act
or failure to act was done in good faith, with a reasonable
belief that the act, or failure to act, was in the best
interest of the Company or was required by applicable law or
administrative regulations, and was not done primarily to
benefit Executive.
(ii) In an action brought at any time but no later
than three years after the Termination Date, the Company shall
have obtained a final judicial determination (or, if the
Company reasonably determines, based upon the advice of
counsel, that it is more likely than not that each of the
Circuit Court of Cook County, Illinois and the United States
District Court for the Northern District of Illinois will
decline to adjudicate the issue, a final decree in an
arbitration proceeding conducted in accordance with the rules
of the American Arbitration Association, with such arbitration
proceeding to be conducted in Chicago, Illinois before a panel
of three arbitrators) to the effect that a Forfeiture Event
has occurred and that the occurrence of a Forfeiture is
appropriate and consistent with the requirements and
procedures set forth in this Agreement.
(c) A Forfeiture means any or all of the following, in the
discretion of the Company:
48
(i) Discontinuance of any and all payments and
benefits provided to Executive pursuant to Articles VIII,
Article IX, and any other provision of this Agreement;
(ii) Termination of any Stock Options then held by
Executive, whether or not then exercisable;
(iii) Requiring Executive to:
(1) Repay to the Company all amounts (if
any) previously received by Executive pursuant to any
provision of Articles VIII and/or IX on or after the
first date on which the Executive breached any of the
covenants contained in this Article XII ("Breach
Date");
(2) Repay to the Company all amounts (if
any) previously received by Executive pursuant to the
Enhanced SERP at any time on or after the Termination
Date;
(3) Pay to the Company an amount equal to
the aggregate "spread" on all Stock Options exercised
on or after the Breach Date (for this purpose
"spread" in respect of any Stock Option shall mean
the product of the number of shares as to which such
Stock Option has been exercised on or after the
Breach Date multiplied by the difference between the
closing price of the common stock on the exercise
date (or if the common stock did not trade on the New
York Stock Exchange on the exercise date, the most
recent date on which the common stock did so trade)
and the exercise price of the Stock Option); and
(4) Repay to the Company any other amount
that it paid to Executive on or after the Breach Date
which Executive would not have been entitled to
receive if the Company had terminated the employment
of Executive for Cause as of the Breach Date.
ARTICLE XIII
NON-EXCLUSIVITY OF RIGHTS
13.1 Other Rights. Except as expressly provided in Section 8.11 or 12.8
or elsewhere in this Agreement, this Agreement shall not prevent or limit
Executive's continuing or future participation in any benefit, bonus, incentive
or other Plans provided by the Company and for which Executive may qualify, nor
shall this Agreement limit or otherwise affect such rights as Executive may have
under any other agreements with the Company. Amounts which are vested benefits
or which Executive is otherwise entitled to receive under any Plan and any other
payment or benefit required by law at or after the Termination Date shall be
payable in accordance with such Plan or applicable law except as expressly
modified by this Agreement.
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13.2 No Right to Continued Employment. Nothing in this Agreement shall
guarantee the right of Executive to continue in employment, and the Company
retains the right to terminate Executive's employment at any time for any reason
or for no reason.
ARTICLE XIV
MISCELLANEOUS
14.1 No Assignability. This Agreement is personal to Executive and
without the prior written consent of the Company shall not be assignable by
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's legal
representatives.
14.2 Successors. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. The Company will
require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business or
assets of the Company to assume expressly and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Any successor to the business
or assets of the Company which assumes or agrees to perform this Agreement by
operation of law, contract, or otherwise shall be jointly and severally liable
with the Company under this Agreement as if such successor were the Company.
14.3 Affiliates. To the extent that immediately prior to the Applicable
Trigger Date, Executive has been on the payroll of, and participated in the
incentive or employee benefit plans of, an Affiliate of the Company, the
references to the Company contained in Sections 6.8(a), (a)(i) and (a)(ii) and
the other Sections of this Agreement referring to benefits to which Executive
may be entitled shall be read to refer to such Affiliate.
14.4 No Double Payment. Notwithstanding any other provision of this
Agreement, Executive shall not be entitled to payment under both this Agreement
and the Key Management Severance Plan for the same type of benefit or payment.
Amounts paid hereunder shall be reduced by amounts paid under the Key Management
Severance Plan for the same type of benefit or payment.
14.5 Payments to Beneficiary. If Executive dies before receiving
amounts to which Executive is entitled under this Agreement, such amounts shall
be paid in a lump sum to one or more beneficiaries designated in writing by
Executive (each, a "Beneficiary"). Executive, without the consent of any prior
Beneficiary, may change his designation of Beneficiary or Beneficiaries at any
time or from time to time by submitting to the Company a new designation in
writing. If none is so designated, Executive's estate shall be his or her
Beneficiary.
14.6 Non-Alienation of Benefits. Benefits payable under this Agreement
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, before actually being received by
Executive, and any such attempt to dispose of any right to benefits payable
under this Agreement shall be void.
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14.7 Severability. If any one or more Articles, Sections or other
portions of this Agreement are declared by any court or governmental authority
to be unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any Article, Section or other portion not so declared to be unlawful
or invalid. Any Article, Section or other portion so declared to be unlawful or
invalid shall be construed so as to effectuate the terms of such Article,
Section or other portion to the fullest extent possible while remaining lawful
and valid.
14.8 Amendments. This Agreement shall not be amended or modified except
by written instrument executed by the Company and Executive.
14.9 Notices. All notices and other communications under this Agreement
shall be in writing and delivered by hand, by nationally-recognized delivery
service that promises overnight delivery, or by first-class registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to Executive, to Executive at his most recent home address
on file with the Company.
If to the Company:
Exelon Corporation
37th Floor
10 S. Dearborn Street
Chicago, Illinois 60690
Attention: S. Gary Snodgrass, Senior Vice President and
Chief Human Resources Officer
Facsimile No.: (312) 394-5440
With copy to:
Pamela Baker, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Facsimile No.: (312) 876-7934
or to such other address as either party shall have furnished to the other in
writing in accordance with the provisions of this Section 14.9. Notice and
communications shall be effective when actually received by the addressee.
14.10 Joint and Several Liability, Continuing Enhanced SERP Obligations
of ComEd. The Company and Genco shall be jointly and severally liable for the
obligations of the Company or Genco hereunder. ComEd has acknowledged its
continuing obligation to provide the Enhanced SERP benefits, to the extent not
paid by the Company or Genco.
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14.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together constitute one and the same instrument.
14.12 Governing Law. This Agreement shall be interpreted and construed
in accordance with the laws of the State of Illinois, without regard to its
choice of law principles.
14.13 Captions. The captions of this Agreement are not a part of the
provisions hereof and shall have no force or effect.
14.14 Number and Gender. Wherever appropriate, the singular shall
include the plural, the plural shall include the singular, and the masculine
shall include the feminine.
14.15 Tax Withholding. The Company may withhold from any amounts
payable under this Agreement or otherwise payable to Executive any Taxes the
Company determines to be appropriate under applicable law and may report all
such amounts payable to such authority as is required by any applicable law or
regulation.
14.16 No Waiver. Executive's failure to insist upon strict compliance
with any provision of this Agreement shall not be deemed a waiver of such
provision or any other provision of this Agreement. A waiver of any provision of
this Agreement shall not be deemed a waiver of any other provision, and any
waiver of any default in any such provision shall not be deemed a waiver of any
later default thereof or of any other provision.
14.17 Entire Agreement. This Agreement, together with its attachments,
contains the entire understanding of Company and Executive with respect to its
subject matter and shall supersede all prior agreements, promises and
representations regarding employment, compensation, severance or other payments
contingent upon termination of employment, whether in writing or otherwise;
provided, however that with respect to obligations relating to the SERP, ComEd
shall remain joint and severally liable with the Company. Notwithstanding
anything herein to the contrary, the agreement dated as of February 1, 2002
among Executive and the Acknowledging Companies (as defined therein) shall
survive and not be superceded by this Agreement to the extent such agreement
provides that the Acknowledging Companies remain obligated to provide the
Enhanced SERP.
14.18 Approvals. The Company represents and warrants to Executive it
has taken all corporate action necessary to authorize this Agreement. Executive
represents and warrants to the Company that there are no agreements or
arrangements, whether written or oral, in effect which would prevent him from
performing the services provided for in this Agreement, and that he has not made
and will not make any commitment, agreement or arrangement, or do any act in
conflict with this Agreement.
14.19 Survival of Executive's Rights. All of Executive's rights
hereunder, including his rights to compensation and benefits, and his
obligations under Article XII hereof, shall survive the termination of
Executive's employment or the termination of this Agreement.
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IN WITNESS WHEREOF, Executive, Exelon Corporation and Exelon Generation
Company, LLC have executed this Employment Agreement as of the Agreement Date.
OLIVER D. KINGSLEY, JR.
/s/ Oliver D. Kingsley, Jr.
--------------------------------------------
EXELON CORPORATION
By: /s/ John W. Rowe
---------------------------------------
Title: President and CEO
-----------------------------------
EXELON GENERATION COMPANY, LLC
By: /s/ Barry J. Mitchell
---------------------------------------
Title: Senior Vice President and Treasurer
-----------------------------------
53
Attachment A
EXELON CORPORATION
------------------
Special Restricted Stock Award Agreement
Exelon Corporation, a Pennsylvania corporation (the "Company"), hereby grants to
Oliver D. Kingsley, Jr.,(the "Holder") pursuant to the provisions of the Exelon
Corporation Long-Term Incentive Plan, as amended and restated effective October
20, 2000 (the "Plan"), a restricted stock award (the "Award") of thirty-five
thousand (35,000) restricted shares of the Company's Common Stock, without par
value ("Common Stock"), upon and subject to the terms and conditions set forth
below. Unless otherwise noted, capitalized terms not defined herein shall have
the meanings specified in the Plan.
1. Award Subject to Employment Agreement.
The Award shall be subject to all the terms of this Agreement, the
Plan, and that certain Employment Agreement dated as of September 5, 2002 among
the Company, Exelon Generation Company, LLC and the Holder (the "Employment
Agreement") to which this Award is attached as Attachment A.
2. Rights as a Stockholder.
The Holder shall have the right to vote the shares of Common Stock
subject to the Award and to receive dividends and other distributions thereon
unless and until, and only to the extent, such shares are forfeited pursuant to
Section 3.2 hereof; provided, however, that a dividend or distribution with
respect to shares (including, without limitation, a stock dividend or stock
split), other than a regular cash dividend, shall be delivered to the Company
(and the Holder shall, if requested by the Company, execute and return one or
more irrevocable stock powers related thereto) and shall be subject to the same
restrictions as the shares of Common Stock with respect to which such dividend
or other distribution was made.
3. Restriction Period -- Vesting Dates and Vesting.
3.1 Vesting Dates.
Subject to Section 3.2 hereof, twenty percent (20%) of the total shares
of Common Stock subject to the Award shall vest on January 1, 2003, and an
additional twenty percent (20%) shall vest on each of the next four
anniversaries of January 1, 2003, provided Executive is employed by the Company
or an Affiliate on such anniversary. Upon Holder's Termination of Employment (as
such term is defined in the Employment Agreement) by Holder for Good Reason (as
such term is defined in the Employment Agreement), death or Disability (as such
term is defined in the Employment Agreement) or by the Company other than for
Cause (as such term is defined in the Employment Agreement), any non-vested
shares then subject to the Award shall immediately become fully vested and
nonforfeitable.
3.2 Forfeiture of Non-Vested Shares.
If, prior to the date on which all of the shares of Common Stock
subject to the Award become vested, the Holder's employment is terminated by the
Company for Cause (as such term is defined in the Employment Agreement), the
non-vested shares shall be forfeited by the Holder if not vested by the Date of
Termination (as such term is defined in the Employment Agreement).
4. Termination of Award.
In the event that Holder shall forfeit any shares of Common Stock
subject to the Award pursuant to Section 3.2, this Award shall immediately
terminate. The Holder shall, upon the Company's request, promptly return this
Agreement to the Company for cancellation. Such cancellation shall, however, be
effective regardless of whether the Holder returns this Agreement. Cancellation
of this Agreement shall not effect the Holder's right hereunder with respect to
any vested shares.
5. Additional Terms and Conditions of Award.
5.1 Nontransferability of Award.
This Award may not be sold, transferred, assigned, pledged,
hypothecated, encumbered or otherwise disposed of (whether by operation of law
or otherwise) or be subject to execution, attachment or similar process. Upon
any attempt to sell, transfer, assign, pledge, hypothecate or encumber, or
otherwise dispose of this Award or any shares of Common Stock subject hereto
that haven not vested and been issued pursuant to Section 5.5, this Award and
any obligation of the Company with respect to the shares subject hereto shall
immediately become null and void.
5.2 Withholding Taxes.
(a) As a condition precedent to the delivery to the Holder of any
shares of Common Stock subject to the Award, the Holder shall, upon
request by the Company, pay to the Company (or shall cause a
broker-dealer on behalf of the Holder to pay to the Company) such
amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay
over as income or other withholding taxes (the "Required Tax Payments")
with respect to the Award. If the Holder shall fail to advance the
Required Tax Payments after request by the Company, the Company may, in
its discretion, deduct any Required Tax Payments from any amount then
or thereafter payable by the Company to the Holder.
(b) The Holder may elect to satisfy his obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment
to the Company pursuant to Section 5.2(a), (2) delivery to the Company
of previously owned whole shares of Common Stock (which the Holder has
held for at least six months prior to the delivery of such shares or
which the Holder purchased on the open market and for which the Holder
has good title, free and clear of all liens and encumbrances) having a
Fair Market Value, determined as of the date the obligation to withhold
or pay taxes first arises in connection with the Award (the "Tax
Date"), equal to the Required Tax Payments, (3) authorizing
2
the Company to withhold from the shares of Common Stock otherwise to be
delivered to the Holder pursuant to the Award a number of whole shares
of Common Stock having a Fair Market Value, determined as of the Tax
Date, equal to the Required Tax Payments, (4) a cash payment by a
broker-dealer acceptable to the Company through whom the Holder has
sold the shares with respect to which the Required Tax Payments have
arisen or (5) any combination of (1), (2) and (3). The Committee shall
have sole discretion to disapprove of an election pursuant to any of
clauses (2)-(5). Shares of Common Stock to be delivered or withheld may
not have a Fair Market Value in excess of the minimum amount of the
Required Tax Payments. Any fraction of a share of Common Stock which
would be required to satisfy such an obligation shall be disregarded
and the remaining amount due shall be paid in cash by the Holder. No
certificate representing a share of Common Stock shall be delivered
until the Required Tax Payments have been satisfied in full.
5.3 Adjustment.
In the event of any stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, combination, exchange of shares,
liquidation, spin-off or other similar change in capitalization or event, or any
distribution to holders of Common Stock other than a regular cash dividend, the
number and class of securities subject to the Award shall be adjusted as
determined by the Committee. If any adjustment would result in a fractional
security being subject to the Award, the Company shall pay the Holder, in
connection with the vesting, if any, of such fractional security, an amount in
cash determined by multiplying (i) such fraction (rounded to the nearest
hundredth) by (ii) the Fair Market Value on the relevant vesting date. The
decision of the Committee regarding any such adjustment shall be final, binding
and conclusive.
5.4 Compliance with Applicable Law.
The Award is subject to the condition that if the listing, registration
or qualification of the shares subject to the Award upon any securities exchange
or under any law, or the consent or approval of any governmental body, or the
taking of any other action is necessary or desirable as a condition of, or in
connection with, the vesting or delivery of shares hereunder, the shares of
Common Stock subject to the Award shall not vest or be delivered, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company. The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.
5.5 Custody and Delivery of Shares.
The Company shall hold the certificate or certificates representing the
shares of Common Stock subject to the Award until such Award shall have
vested pursuant to Section 3.1 hereof. Subject to Section 5.2, as soon
as practicable after the shares of Common Stock subject to the Award
become vested, the Company shall deliver or cause to be delivered one
or more certificates issued in the Holder's name representing the
number of vested shares and destroy the stock power or powers relating
to the vested shares. The Company shall pay all original issue or
transfer taxes and all fees and expenses incident to such delivery,
except as otherwise provided in Section 5.2.
3
5.6 Award Confers no Rights to Continued Employment.
In no event shall the granting of the Award or its acceptance by the
holder give or be deemed to give the Holder any right to continued employment by
the Company or any affiliate of the Company.
5.7 Decisions of Committee.
The Committee shall have the right to resolve all questions which may
arise in connection with the Award. Any interpretation, determination or other
action made or taken by the Committee regarding the Plan or this Agreement shall
be final, binding and conclusive.
5.8 Agreement Subject to the Plan.
This Agreement is subject to the provisions of the Plan and shall be
interpreted in accordance therewith.
5.9 Investment Representation.
The Holder hereby represents and covenants that (a) any share of Common
Stock acquired upon the vesting of the Award will b acquired for investment and
not with a view to the distribution thereof within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), unless such acquisition has been
registered under the Securities Act and any applicable state securities law; (b)
any subsequent sale of any such shares shall be made either pursuant to an
effective registration statement under the Securities Act and any applicable
state securities laws, or pursuant to an exception from registration under the
Securities Act and such state securities laws; and (c) if requested by the
Company, the Holder shall submit a written statement, in form satisfactory to
the Company, to the effect that such representation (x) is true and correct as
of the date of acquisition of any shares hereunder or (y) is true and correct as
of the date of any sale of any such shares, as applicable.
6. Miscellaneous Provisions.
6.1 Meaning of Certain Terms.
As used herein, the following terms shall have the respective meanings
set forth below:
"Fair Market Value" means the closing transaction price of a share of
Common Stock, as reported on the New York Stock Exchange Composite
Transactions on the date in question or, if there shall be no reported
transaction for such date, on the next preceding date for which a
transaction was reported.
As used herein, "employment by the Company" shall include employment by
a corporation which is a "subsidiary corporation" of the Company, as such term
is defined in Section 424 of the Code. References in this Agreement to sections
of the Code shall be deemed to refer to any successor section of the Code or any
successor internal revenue law.
4
6.2 Successors.
This Agreement shall be binding upon and inure to the benefit of any
successor or successors of the Company and any person or persons who
shall, upon the death of the Holder, acquire any rights hereunder in
accordance with this Agreement, the Employment Agreement or the Plan.
6.3 Notices.
All notices, requests or other communications provided for in this
Agreement shall be made, if to the Company, to Exelon Corporation, 10
South Dearborn Street -- 37th Floor, Chicago, Illinois 60603,
Attention: Corporate Secretary, and if to the Holder, at his then
current work location. All notices, requests or other communications
provided for in this Agreement shall be made in writing (a) by personal
delivery to the party entitled thereto, (b) by facsimile transmission
with confirmation of receipt, (c) by mailing in the United States mails
to the last known address of the party entitled thereto or (d) by
express courier service. The notice, request or other communication
shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile transmission, or upon receipt by
the party entitled thereto if by United States mail or express courier
service; provided, however, that if a notice, request or other
communication is not received during regular business hours, it shall
be deemed to be received on the next succeeding business day of the
Company.
6.4 Governing Law.
This Agreement, the Award and all determinations made and actions taken
pursuant hereto and thereto, to the extent not otherwise governed by the laws of
the United States, shall be governed by the laws of the Commonwealth of
Pennsylvania and construed in accordance therewith without giving effect to
conflicts of laws principles.
EXELON CORPORATION
By: /s/ Katherine Combs
---------------------------------------
Title: Secretary
----------------------------------
5
Attachment B
Exelon Corporation Supplemental Management Retirement Plan Credits:
Enhanced SERP Years of Credited Service
For purposes of determining the Executive's Credited Service Executive would
have under the Exelon Corporation Supplemental Management Retirement Plan (the
"Plan") for purposes of calculating the Enhanced SERP benefit under Section 6.2
of this Agreement, Executive shall be credited with years of service in
accordance with the following schedule:
- ----------------------------------------------------------------------------------------------------------------------
Years of Employment 1 Years of additional Credited Service Total Years of Credited Service
- ----------------------------------------------------------------------------------------------------------------------
Less than 2 0 Actual Service
- ----------------------------------------------------------------------------------------------------------------------
2 but less than 3 15 15
- ----------------------------------------------------------------------------------------------------------------------
3 but less than 4 20 20
- ----------------------------------------------------------------------------------------------------------------------
4 but less than 5 25 25
- ----------------------------------------------------------------------------------------------------------------------
5 25 30
- ----------------------------------------------------------------------------------------------------------------------
More than 5 25 30, plus actual service for any
service after 5 years
- ----------------------------------------------------------------------------------------------------------------------
Executive's Enhanced SERP is fully vested, subject to the provisions of Article
XII of the Agreement.
If, prior to the date Executive would be eligible to receive an annuity under
the Commonwealth Edison Service Annuity System (the "Service Annuity System")
Executive (a) becomes entitled to payment under the Enhanced SERP or (b) dies
while employed, then, as applicable, Executive shall be entitled to elect
payment in the form of a service annuity or a Marital Annuity2, or if Section
8.2 applies, a lump sum in accordance with Section 8.2, or his surviving spouse
shall be immediately entitled to a surviving spouse benefit. Any annuity payment
shall be determined as though he (or his surviving spouse) were entitled to such
annuity under the Service Annuity System, taking into account Executive's
service as credited above, and under Section 8.2(a)(iv), if applicable.
__________
1 A "Year of Employment" is a 12-month period beginning November 1 and ending
October 31 of the following year, throughout which Executive has been
continuously employed by the Company or an Affiliate.
2 The Marital Annuity, which is an automatic election under the SERP, provides a
pension benefit to Executive during his lifetime and if he dies after he retires
and his spouse to whom he was married when the pension benefits commenced
survives him, such surviving spouse will be paid a reduced benefit (generally
50% of the pension benefit payable while both Executive and his surviving spouse
were living) for the remainder of her lifetime. Generally, the Marital Annuity
will be equal to 50% of Executive's regular pension benefit. The actual amount
payable to Executive and Executive's spouse will be affected by his age, his
spouse's age and the amount of the Enhanced SERP. Unless Executive is entitled
to choose and does choose a lump sum Enhanced SERP payment under this Agreement
(in which case no spousal consent is required), if Executive does not choose the
Marital Annuity, he must obtain his spouse's written consent and complete the
appropriate documents during the 90 day period before his Enhanced SERP payments
begin.
Attachment C
Waiver and Release
WAIVER AND RELEASE
EMPLOYMENT AGREEMENT
This agreement, release and waiver (the "Agreement"), made as of the
___ day of ________________, _____ (the "Effective Date"), is made by and among
Exelon Corporation, a Delaware corporation (together with all successors
thereto, "Company"), Exelon Generation Company, LLC, and Oliver D. Kingsley,
Jr.("Executive").
WHEREAS, the Company and Executive have previously entered into the
Employment Agreement , dated as of _________________, 2002 ("Employment
Agreement");
NOW THEREFORE, in consideration for receiving benefits and severance
under the Change in Control Agreement and in consideration of the
representations, covenants and mutual promises set forth in this Agreement, the
parties agree as follows:
1. Release. Except with respect to the Company's obligations under the
Employment Agreement, Executive, and Executive's heirs, executors,
assigns, agents, legal representatives, and personal representatives,
hereby releases, acquits and forever discharges the Company, its
agents, subsidiaries, affiliates, and their respective officers,
directors, agents, servants, employees, attorneys, shareholders,
successors, assigns and affiliates, of and from any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys
fees, damages, indemnities and obligations of every kind and nature, in
law, equity, or otherwise, known and unknown, suspected and
unsuspected, disclosed and undisclosed, arising out of or in any way
related to agreements, events, acts or conduct at any time prior to the
day prior to execution of this Agreement, including but not limited to
any and all such claims and demands directly or indirectly arising out
of or in any way connected with Executive's employment with the
Company; Executive's termination of employment with the Company; claims
or demands related to salary, bonuses, commissions, stock, stock
options, or any other ownership interests in the Company, vacation pay,
fringe benefits, expense reimbursements, sabbatical benefits, severance
benefits, or any other form of compensation or equity; claims pursuant
to any federal, state, local law, statute, ordinance or cause of action
including, but not limited to, the federal Civil Rights Act of 1964, as
amended; the federal Age Discrimination in Employment Act of 1967, as
amended; the federal Americans with Disabilities Act of 1990; tort law;
contract law; wrongful discharge; discrimination; fraud; defamation;
harassment; emotional distress; or breach of the implied covenant of
good faith and fair dealing. This Release does not apply to the payment
of any benefits to which Executive may be entitled under a Company
sponsored tax qualified retirement or savings plan or any right
Executive may have to obtain contribution as permitted by law in the
event of entry of judgment against him as a result of any act or
failure to act for which Executive and the Company (including any
affiliate) are jointly liable.
2. Release by Company. Except with respect to Executive's obligations
under the Employment Agreement, including but not limited to the
covenants set forth in
Article XII of the Employment Agreement, the Company, and its agents,
subsidiaries, attorneys, representatives, successors, and assigns,
hereby release, acquit and forever discharge Executive, and Executive's
heirs, executors, assigns, representatives, agents, legal
representatives, and personal representatives, of and from any and all
claims, liabilities, demands, causes of action, costs, expenses,
attorneys fees, damages, indemnities and obligations of every kind and
nature, in law, equity, or otherwise, known and unknown, suspected and
unsuspected, disclosed and undisclosed, arising out of or in any way
related to agreements, events, acts or conduct at any time prior to the
day prior to execution of this Agreement including but not limited to
any and all claims and demands directly or indirectly arising out of or
in any way connected with Executive's employment with the Company. This
Release does not apply to or any right the Company (including any
affiliate) may have to obtain contribution as permitted by law in the
event of entry of judgment against it as a result of any act or failure
to act for which Executive and the Company (including any affiliate)
are jointly liable.
3. No Inducement. Executive agrees that no promise or inducement to enter
into this Agreement has been offered or made except as set forth in
this Agreement, that Executive is entering into this Agreement without
any threat or coercion and without reliance or any statement or
representation made on behalf of the Company or by any person employed
by or representing the Company, except for the written provisions and
promises contained in this Agreement.
4. Damages. The parties agree that damages incurred as a result of a
breach of this Agreement will be difficult to measure. It is,
therefore, further agreed that, in addition to any other remedies,
equitable relief will be available in the case of a breach of this
Agreement. It is also agreed that, in the event Executive files a claim
against the Company with respect to a claim released by Executive
herein (other than a proceeding before the EEOC), the Company may
withhold or retain all or any portion of the benefits and severance
payments under the Employment Agreement until such claim is withdrawn
by Executive.
5. Advice of Counsel; Time to Consider; Revocation. Executive acknowledges
the following:
(a) Executive has read this Agreement, and understands its legal
and binding effect. Executive is acting voluntarily and of
Executive's own free will in executing this Agreement.
(b) Executive has been advised to seek and has had the opportunity
to seek legal counsel in connection with this Agreement.
(c) Executive was given at least 21 days to consider the terms of
this Agreement before signing it.
Executive understands that, if Executive signs the Agreement, Executive
may revoke it within seven days after signing it. Executive understands
that this Agreement will not be effective until after the seven-day
period has expired.
2
6. Severability. If all or any part of this Agreement is declared by any
court or governmental authority to be unlawful or invalid, such
unlawfulness or invalidity shall not invalidate any other portion of
this Agreement. Any section or a part of a section declared to be
unlawful or invalid shall, if possible, be construed in a manner which
will give effect to the terms of the section to the fullest extent
possible while remaining lawful and valid.
7. Amendment. This Agreement shall not be altered, amended, or modified
except by written instrument executed by the Company and Executive. A
waiver of any portion of this Agreement shall not be deemed a waiver of
any other portion of this Agreement.
8. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
9. Headings. The headings of this Agreement are not part of the provisions
hereof and shall not have any force or effect.
10. Applicable Law. The provisions of this Agreement shall be interpreted
and construed in accordance with the laws of the State of Illinois
without regard to its choice of law principles.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
dates specified below.
OLIVER D. KINGSLEY, JR.
DATE:
---------------------------------------
EXELON CORPORATION
BY:
--------------------------------------
TITLE:
--------------------------------------
DATE:
--------------------------------------
3
Exhibit 99.1
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of Exelon Corporation for the quarterly period ended September 30,
2002, that (i) the report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in the report fairly presents, in all material respects, the financial
condition and results of operations of Exelon Corporation.
Date: October 31, 2002 /s/ John W. Rowe
------------------------------------
John W. Rowe
Chairman of the Board and
Chief Executive Officer
Exelon Corporation
Exhibit 99.2
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of Exelon Corporation for the quarterly period ended September 30,
2002, that (i) the report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in the report fairly presents, in all material respects, the financial
condition and results of operations of Exelon Corporation.
Date: October 31, 2002 /s/ Ruth Ann M. Gillis
------------------------------------
Ruth Ann M. Gillis
Senior Vice President and Chief
Financial Officer
Exelon Corporation
Exhibit 99.3
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of Exelon Corporation for the quarterly period ended September 30,
2002, that (i) the report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in the report fairly presents, in all material respects, the financial
condition and results of operations of Commonwealth Edison Company.
Date: October 31, 2002 /s/ Frank M. Clark
-------------------------------------
Frank M. Clark
President
Commonwealth Edison Company
Exhibit 99.4
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of Exelon Corporation for the quarterly period ended September 30,
2002, that (i) the report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in the report fairly presents, in all material respects, the financial
condition and results of operations of Commonwealth Edison Company.
Date: October 31, 2002 /s/ Robert E. Berdelle
-------------------------------------
Robert E. Berdelle
Vice President, Finance and Chief
Financial Officer
Commonwealth Edison Company
Exhibit 99.5
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of PECO Energy Company for the quarterly period ended September 30,
2002, that (i) the report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in the report fairly presents, in all material respects, the financial
condition and results of operations of PECO Energy Company.
Date: October 31, 2002 /s/ Kenneth G. Lawrence
-------------------------------------
Kenneth G. Lawrence
President
PECO Energy Company
Exhibit 99.6
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of PECO Energy Company for the quarterly period ended September 30,
2002, that (i) the report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in the report fairly presents, in all material respects, the financial
condition and results of operations of PECO Energy Company.
Date: October 31, 2002 /s/ Frank F. Frankowski
------------------------------------
Frank F. Frankowski
Vice President, Finance and
Chief Financial Officer
PECO Energy Company
Exhibit 99.7
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
-----------------------------------------------------
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of Exelon Generation Company, LLC for the quarterly period ended
September 30, 2002, that (i) the report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the
information contained in the report fairly presents, in all material respects,
the financial condition and results of operations of Exelon Generation Company,
LLC.
Date: October 31, 2002 /s/ Oliver D. Kingsley, Jr.
-------------------------------------
Oliver D. Kingsley, Jr.
Chief Executive Officer and President
Exelon Generation Company, LLC
Exhibit 99.8
Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code
The undersigned officer hereby certifies, as to the Quarterly Report on
Form 10-Q of Exelon Generation Company, LLC for the quarterly period ended
September 30, 2002, that (i) the report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the
information contained in the report fairly presents, in all material respects,
the financial condition and results of operations of Exelon Generation Company,
LLC.
Date: October 31, 2002 /s/ Ruth Ann M. Gillis
------------------------------------
Ruth Ann M. Gillis
Senior Vice President and
Chief Financial Officer
Exelon Corporation
Exhibit 99.9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Income. Our net income increased $264 million, or 102%, for 2001. Income before cumulative effect of changes in accounting principles increased $252 million, or 97%, for 2001.
Earnings Before Interest and Income Taxes. We and our parent Exelon evaluate our performance based on earnings before interest and income taxes (EBIT). In addition to components of operating income as shown on the consolidated statements of income, EBIT includes equity in earnings of unconsolidated affiliates, and other income and expense recorded in other, net, with the exception of investment income.
The October 20, 2000 merger of PECO and Unicom, and the January 1, 2001 corporate restructuring, significantly impacted our results of operations. To provide a more meaningful analysis of results of operations, the EBIT analyses below identifies the portion of the EBIT variance that is attributable to the former ComEd generation business unit results of operations and the portion of the variance that results from normal operations attributable to changes in components of our underlying operations. The merger variance represents the former ComEd generation business unit results for the year ended December 31, 2000 prior to the October 20, 2000 acquisition date as well as the effect of merger-related costs incurred in 2000. The 2000 effects of the merger and restructuring were developed using estimates of various items, including allocation of corporate overheads and intercompany transactions.
| |
|
|
|
Components of Variance |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
Variance |
Merger Variance |
Normal Operations |
|||||||||||
| |
(in millions) |
|||||||||||||||
| Operating Revenue | $ | 7,048 | $ | 3,274 | $ | 3,774 | $ | 2,772 | $ | 1,002 | ||||||
| Fuel & Purchased Power | 4,218 | 1,846 | 2,372 | 1,689 | 683 | |||||||||||
| Operating & Maintenance and Other | 1,586 | 858 | 728 | 978 | (250 | ) | ||||||||||
| Depreciation & Decommissioning | 282 | 123 | 159 | 83 | 76 | |||||||||||
| EBIT | $ | 962 | $ | 447 | $ | 515 | $ | 22 | $ | 493 | ||||||
Our EBIT increased $515 million for 2001 compared to 2000. This increase was primarily attributable to higher margins on increased market and affiliate wholesale energy sales, coupled with reduced operating expenses at the nuclear plants, partially offset by additional depreciation and decommissioning expense. During the first five months of 2001, we benefited from increases in wholesale market prices, particularly in the Pennsylvania-New Jersey-Maryland control area and Mid-America Interconnected Network regions. The increase in wholesale market prices was primarily driven by significant increases in fossil fuel prices. The large concentration of nuclear generation in our portfolio allowed us to capture the higher prices in the wholesale market for sales to non-affiliates with minimal increase in fuel prices. Our revenues for 2001 include charges to affiliates for line losses. Line loss charges were not included in 2000 revenue. We also benefited from higher nuclear plant output due to increased capacity factors during 2001. Energy marketing activities positively impacted 2001 results. Mark-to-market gains were $16 million and $14 million on non-trading and trading energy contracts, respectively, offset by realized trading losses of $6 million.
15
Our sales were 201,879 GWhs in 2001 compared to 200,072 GWhs in 2000, approximately 60% of which were to affiliates. Supply sources for 2001 and 2000 were as follows:
| |
2001 |
2000 |
|||
|---|---|---|---|---|---|
| Operated nuclear units | 54 | % | 54 | % | |
| Purchases | 37 | % | 37 | % | |
| Fossil and hydro units | 3 | % | 3 | % | |
| Generation investments | 6 | % | 6 | % | |
| Total | 100 | % | 100 | % |
Our nuclear fleet, including AmerGen, performed at a weighted average capacity factor of 94.4% for 2001 compared to 93.8% in 2000. Our nuclear fleet's production costs, including AmerGen, were $12.79 per MWh for 2001, compared to $14.65 per MWh for 2000. Our purchased power costs were $42.26 MWh for 2001, compared to $38.05 per MWh for 2000. The increase resulted in purchase power costs from the increase in fuel prices in the first quarter of 2001 as well as the increase in volumes sold during peak demand in 2001 compared to 2000.
Operating expenses were favorably affected by reductions in labor costs due to a decline in the number of employees and fewer nuclear outages in 2001 than in 2000, which offset the effect of increases in litigation-related expenses of $30 million. In addition, our EBIT benefited from an increase in equity in earnings of AmerGen and Sithe of $86 million in 2001 compared to the prior-year period reflecting a full year of operations for Sithe and AmerGen's Oyster Creek plant in 2001.
The increase in depreciation and decommissioning expense is primarily due to an increase in decommissioning expense of $140 million resulting from the discontinuance of regulatory accounting practices associated with decommissioning costs for the former ComEd nuclear generating stations that are in active generation, partially offset by a $90 million reduction in depreciation and decommissioning expense attributable to the extension of estimated service lives of our generating plants.
Other Components of Net Income
Interest Expense. Interest expense increased $74 million in 2001, from $41 million, in 2000. This increase was primarily attributable to increased interest charge on the note payable to Exelon of $23 million, interest charges of $26 million due to the issuance of $700 million of 6.95% senior unsecured notes in a 144A offering in June 2001, $23 million of additional interest due to a full year of interest charges on the spent fuel obligation compared to only two months in 2000 for the former ComEd generating stations and $15 million of interest charges from affiliates. These increases were partially offset by capitalized interest of approximately $17 million.
Investment Income. Investment income is recorded in Other, Net on the Consolidated Statements of Income, but is excluded from EBIT. Investment income decreased by $29 million due to net realized losses of $127 million offset by interest and dividend income of $67 million on the nuclear decommissioning trust funds reflecting the discontinuance of regulatory accounting practices associated with nuclear decommissioning costs for the nuclear stations formerly owned by ComEd, primarily offset by increased income of $31 million of money market interest and interest on the loan to Sithe recorded in 2001.
Income Taxes. The effective income tax rate was 39.0% for 2001 as compared to 38.1% for 2000. The increase in the effective income tax rate was primarily attributable to a higher effective state income rate due to operations in Illinois subsequent to the merger and a reduction in the investment tax credit. Income taxes increased by $167 million in 2001 as compared to 2000, $160 million of which is due to higher pretax income and $7 million due to a higher effective income tax rate.
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Cumulative Effect of Changes in Accounting Principles
On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, resulting in a benefit of $12 million, net of income taxes.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Income. Our net income increased $56 million, or 27%, in 2000.
Earnings Before Interest and Income Taxes. To provide a more meaningful analysis of our results of operations, the EBIT analysis below identifies the portion of the EBIT variance that is attributable to the former ComEd generation business unit results of operations and the portion of the variance that results from normal operations attributable to changes in components of our underlying operations. The merger variance represents the former ComEd generation business unit results for the period after October 20, 2000 as well as the effect of merger-related costs incurred in 2000. The 2000 and 1999 results also reflect the corporate restructuring as if it had occurred on January 1, 1999. The 2000 effects of the merger and restructuring were developed using estimates of various items, including allocation of corporate overheads and intercompany transactions.
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|
|
|
Components of Variance |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
Variance |
Merger Variance |
Normal Operations |
|||||||||||
| |
(in millions) |
|||||||||||||||
| Operating Revenue | $ | 3,274 | $ | 2,425 | $ | 849 | $ | 561 | $ | 288 | ||||||
| Fuel & Purchased Power | 1,846 | 1,205 | 641 | 279 | 362 | |||||||||||
| Operating Expense and Other | 858 | 765 | 93 | 180 | (87 | ) | ||||||||||
| Depreciation & Decommissioning | 123 | 125 | (2 | ) | 31 | (33 | ) | |||||||||
| EBIT | $ | 447 | $ | 330 | $ | 117 | $ | 71 | $ | 46 | ||||||
Our EBIT increased $117 million for 2000 compared to 1999. The merger accounted for $71 million of the variance. The remaining $46 million increase resulted primarily from higher margins on market and affiliate wholesale energy sales, a charge against earnings of $15 million related to the abandonment of two information systems implementations in 1999 and a $15 million write-off in 1999 of the investment in a cogeneration facility in connection with the settlement of litigation. Our EBIT benefited from an increase in equity in earnings of AmerGen of $4 million in 2000 compared to the prior-year period. Effective with the acquisition of Clinton Nuclear Power Station by AmerGen, our agreement to manage Clinton was terminated, resulting in lower revenues of $99 million and lower operating and maintenance expense of $70 million.
Our nuclear fleet, including AmerGen, performed at a weighted average capacity factor of 93.8% for 2000. Our nuclear fleet production costs for 2000, including AmerGen, were $14.65 per MWh. Our purchased power costs for 2000 were $38.05 per MWh.
Other Components of Net Income
Interest Expense. Interest expense increased $29 million, or 242%, to $41 million in 2000. The increase was primarily attributable to interest related to the spent fuel obligation of the former ComEd nuclear plants, which was assumed in connection with the merger, and interest expense related to the $696 million note payable to Exelon used to finance our investment in Sithe.
Income Taxes. The effective tax rate was 38.1% in 2000 as compared to 38.0% in 1999.
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Liquidity and Capital Resources
Our capital resources are primarily provided by internally generated cash flows from operations and, to the extent necessary, external financings and borrowings or capital contributions from Exelon. Our access to external financing at reasonable terms is dependent on our credit ratings and our general business condition, as well as the general business conditions of the industry. Our business is capital intensive. Capital resources are used primarily to fund our capital requirements, including construction, investments in new and existing ventures, and repayments of maturing debt. Any potential future acquisitions could require external financing or borrowings or capital contributions for Exelon.
Cash Flows from Operating Activities. Cash flows provided by operations for 2001 were $1.3 billion. Our cash flows from operating activities primarily result from the sale of electric energy to wholesale customers, including our affiliated companies. Our future cash flow from operating activities will depend upon future demand and market prices for energy and the ability to continue to produce and supply power at competitive costs.
Cash Flows from Investing Activities. Cash flows used in investing activities for 2001 were $1.1 billion, primarily for capital expenditures of $515 million, investment in nuclear fuel of $336 million and $239 million related to our investment in the nuclear decommissioning funds. We project capital expenditures of approximately $1.1 billion in 2002, approximately 75% of which are for additions to and upgrades of existing facilities, nuclear fuel and increases in capacity at existing plants. Capital expenditures are projected to increase in 2002 as compared to 2001 due to higher nuclear fuel expenditures, growth and an increase in the number of planned refueling outages, during which significant maintenance work is performed. Eleven nuclear refueling outages, including AmerGen, are planned for 2002, compared to six during 2001. Total capital expenditures during nuclear refueling outages are expected to increase in 2002 over 2001 by $24 million. We anticipate that our capital expenditures will be funded by internally generated funds, external borrowings, and borrowings or capital contributions from Exelon. Our proposed capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.
In addition to the 2002 capital expenditures of $1.1 billion, we expect to close the purchase of two natural-gas and oil-fired plants from TXU Corp. (TXU) in the second quarter of 2002. The $443 million purchase is expected to be funded with available cash and borrowings from Exelon.
During 2001, we loaned Sithe $150 million, which was repaid by Sithe in December of 2001. During 2001, Sithe paid us $2 million in interest on the loan.
Cash Flows from Financing Activities. Cash flows used in financing activities were $1 million in 2001 primarily attributable to the issuance of $700 million of senior unsecured notes with a maturity of June 2011 The majority of the proceeds of this issuance were used to repay Exelon for amounts borrowed to finance our investment in Sithe. We also issued $121 million of pollution control bonds to refinance an equivalent amount originally issued by PECO.
Credit Issues. We meet short-term liquidity requirements primarily through internally generated cash or borrowings from Exelon. We, along with ComEd, PECO and Exelon, entered into a $1.5 billion unsecured revolving credit facility with a group of banks. We currently cannot borrow under the credit agreement until we deliver audited financial statements to the banks, which is expected to occur in the second quarter of 2002. At December 31, 2001, we had outstanding $700 million of 6.95% senior unsecured debt, $317 million of variable rate pollution control notes and other long-term notes payable of $9 million. For 2001, the average interest rate on these pollution control notes was approximately 2.62% Certain of the credit agreements to which we are party require us to maintain a debt to total capitalization ratio of 65% or less. At December 31, 2001, our debt to total capitalization ratio on that basis was 35%.
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Our access to the capital markets and financing costs in those markets is dependent on our securities ratings. None of our borrowings are subject to default or prepayment as a result of a downgrading of securities ratings, although such a downgrading could increase interest charges under the bank credit facility. We enter agreements to purchase energy and capacity, including obligations that are treated as derivatives, which require us to maintain investment grade ratings. Failure to maintain investment grade ratings would allow a counterparty to terminate its contract and settle the transaction on a net present value basis. Exelon has provided guarantees to support certain of our lines of credit, surety bonds, nuclear insurance and energy marketing contracts.
Exelon has obtained an order from the SEC under PUHCA authorizing financing transactions, including the issuance of common stock, preferred securities, long-term debt and short-term debt in an aggregate amount not to exceed $4 billion. The order applies to our issuances as well. As of December 31, 2001, $3.0 billion of financing authority was available under the SEC order. Exelon requested, and the SEC reserved jurisdiction over, an additional $4 billion in financing authorization. Exelon agreed to limit its short-term debt outstanding to $3 billion of the $4 billion total financing authority. Exelon has asked the SEC to eliminate the short-term debt restriction. The SEC order also authorized Exelon to issue guarantees of up to $4.5 billion outstanding at any one time. At December 31, 2001, Exelon had provided $1.4 billion of guarantees. Under PUHCA and the Federal Power Act, we can pay dividends only from retained or current earnings. At December 31, 2001, we had retained earnings of $524 million. Exelon is also limited by order of the SEC under PUHCA to an aggregate investment of $4 billion in exempt wholesale generators (EWGs) and foreign utility companies (FUCOs). Exelon requested, and the SEC reserved jurisdiction over, an additional $1.5 billion investment in EWGs and FUCOs.
Contractual Obligations and Commercial Commitments. Our contractual obligations and commercial commitments as of December 31, 2001 are as follows:
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Payment Due Within |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Obligations/Commitments |
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Due After 5 Years |
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| Total |
1 Year |
2-3 Years |
4-5 Years |
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($ in millions) |
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| Long-Term Debt(a) | $ | 1,025 | $ | 4 | $ | 5 | $ | — | $ | 1,016 | |||||
| Operating Leases(b) | 682 | 28 | 63 | 64 | 527 | ||||||||||
| Purchase Power Obligations(c) | 12,192 | 1,695 | 3,173 | 1,346 | 5,978 | ||||||||||
| Acquisition of TXU Generating Stations(d) | 443 | 443 | — | — | — | ||||||||||
| Spent fuel obligation(e) | 843 | — | — | — | 843 | ||||||||||
- (a)
- Comprised
primarily of senior unsecured debt and pollution control notes. In connection with the variable rate debt, we maintain direct pay letters of credit in order to provide
liquidity in the event that it is not possible to remarket all of the debt as required following specific events, including changes in the basis of determining the interest rate of debt. Letters of
credit as of December 31, 2001 amounted to $317 million, of which $121 million expire in 2002 and the remaining $196 million expire in 2003 to 2004. Total includes the
current portion of long-term debt.
- (b)
- Company
leases equipment and certain office facilities.
- (c)
- Commitments
relating to the purchase of energy, capacity and transmission rights. Included in amounts are $3,485 million of power purchases from our affiliate AmerGen.
- (d)
- Commitment
to purchase generating stations in spring of 2002.
- (e)
- One-time fee of $277 million with interest to date payable to the DOE for Spent Nuclear Fuel.
We have an obligation to decommission our nuclear power plants. Our current estimate of decommissioning costs for our owned nuclear plants is $7.2 billion in current-year (2002) dollars.
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Nuclear decommissioning activity occurs primarily after a plant's retirement and is currently estimated to begin in 2029, except for the retired Zion station, which is currently estimated to begin decommissioning in 2013. Decommissioning costs are recoverable by ComEd and PECO through regulated rates and are remitted to us for deposit in the decommissioning trust funds. In 2001, ComEd and PECO collected from customers and remitted to us approximately $102 million in decommissioning costs. At December 31, 2001, the decommissioning liability, which is recorded over the life of the plant, recorded in Property, Plant and Equipment, Net as well as Deferred Credits and Other Liabilities on our balance sheet was $2.7 billion and $1.3 billion, respectively. In order to fund future decommissioning costs, we held $3.2 billion of investments in nuclear decommissioning trust funds, which are included as Deferred Debits and Other Assets on our balance sheet and which include net unrealized and realized gains. Due to the performance of the United States debt and equity markets in 2001, the value of assets held in trusts to satisfy the obligations of the nuclear generating stations eventual decommissioning has decreased. Contributions to the nuclear decommissioning trust funds of $112 million offset net losses of $109 million, resulting in a 2% increase in the decommissioning trust funds balance at December 31, 2001 compared to December 31, 2000. We believe that the amounts being remitted to us by ComEd and PECO and the earnings on nuclear decommissioning trust funds will be sufficient to fully fund our decommissioning obligations.
Off Balance Sheet Obligations. Beginning December 18, 2002, we will have the right to purchase all (but not less than all) of the remaining outstanding shares of the Sithe common stock. The option expires on December 18, 2005. In addition, each of Sithe's other stockholder groups will have the right to require us to purchase all (but not less than all) of its shares during the same period in which we can exercise our option. At the end of that period, if no stockholder has exercised its option, we will have a one-time option to purchase shares from the other stockholders to bring our holdings to 50.1% of the total outstanding shares. If we exercise our option or if all the stockholder groups exercise their put rights, the purchase price for 70% of the remaining 50.1% of the Sithe stock will be set at a fair market value plus a 10% premium in the case of a call or 10% discount in the case of a put, subject to a floor of $430 million and a ceiling of $650 million, and the remaining portion will be valued at fair market value subject to floor price of $141 million and a ceiling price of $330 million, plus, in each case, interest accrued from the beginning of the exercise period.
If we increase our ownership in Sithe to 50.1% or more, Sithe will become a consolidated subsidiary and our 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 $107 million of 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, we had a $725 million equity investment in Sithe.
Additionally, the debt on the books of our unconsolidated equity investments and joint ventures is not reflected on our Consolidated Balance Sheets. Total investee debt, including the debt of Sithe described in the preceding paragraph, is currently estimated to be $2.4 billion ($1.2 billion based on Exelon Generation's ownership interest of the investments).
We and British Energy, our joint venture partner in AmerGen, have each agreed to provide up to $100 million to AmerGen at any time for operating expenses. We have committed to provide AmerGen with capital contributions equivalent to 50% of the purchase price of any acquisitions AmerGen makes in 2002.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks associated with commodity price, credit, interest rates and equity prices. The inherent risk in market sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, counterparty credit, interest rates and equity security prices.
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Exelon's corporate Risk Management Committee (RMC) sets forth risk management philosophy and objectives through a corporate policy, and establishes procedures for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of derivative activity and risk exposures. The RMC is chaired by Exelon's chief risk officer and includes the chief financial officer, general counsel, treasurer, vice president of corporate planning and officers from each of the Exelon business units. The RMC reports to the Exelon Board of Directors on the scope of our derivative and risk management activities.
Commodity Price Risk. Commodity price risk is associated with market price movements resulting from excess or insufficient generation, changes in fuel costs, market liquidity and locational price commodity differences. Trading activities and non-trading marketing activities include the purchase and sale of electric capacity and energy and fossil fuels, including oil, gas and coal. The availability and prices of energy and energy-related commodities are subject to fluctuations due to factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies and other events.
Marketing (non-trading) activities. To the extent that our generation supply (either owned or contracted) is in excess of our obligations to customers, including ComEd's and PECO's retail load, the available electricity is sold in the wholesale markets. To reduce price risk caused by market fluctuations, we enter into derivative contracts, including forwards, futures, swaps, and options with approved counterparties, to hedge our anticipated exposures. Market price risk exposure is the risk of a change in the value of unhedged positions. We expect to maintain a minimum 80% hedge ratio in 2002 for our energy marketing portfolio. This hedge ratio represents the percentage of our forecasted aggregate annual generation supply that is committed to firm sales, including sales to our affiliated entities. The hedge ratio is not fixed and will vary from time to time depending upon market conditions, demand and volatility. Absent any opportunistic efforts to mitigate market price exposure, the estimated market price exposure for the non-trading portfolio associated with a 10% reduction in the average around-the-clock market price of electricity is an approximate $100 million decrease in net income. This sensitivity assumes an 80% hedge ratio and that price changes occur evenly throughout the year and across all markets. The sensitivity also assumes a static portfolio. We expect to actively manage our portfolio to mitigate the market price exposure. Actual results could differ depending on the specific timing of, and markets affected by, the price changes, as well as future changes in our portfolio.
Trading activities. We began to use financial contracts for trading purposes in the second quarter of 2001. The trading activities were entered into as a complement to our energy marketing portfolio and represent a very limited portion of our overall energy marketing activities. For example, the limit on open positions in electricity for any forward month represents less than 5% of the owned and contracted supply of electricity. The trading portfolio is planned to grow modestly in 2002, subject to stringent risk management limits and policies, including volume, stop-loss and value-at-risk limits to manage exposure to market risk. A value-at-risk (VAR) model is used to assess the market risk associated with financial derivative instruments entered into for trading purposes. VAR represents the potential gains or losses for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. The measured VAR as of December 31, 2001, using a Monte Carlo model with a 95% confidence level and assuming a one-day time horizon was approximately $800,000. The measured VAR represents an estimate of the potential change in value of our portfolio of trading related financial derivative instruments. These estimates, however, are not necessarily indicative of actual results, which may differ due to the fact that actual market rate fluctuations may differ from forecasted fluctuations and due to the fact that the portfolio may change over the holding period.
Our energy contracts are accounted for under SFAS No. 133. Most non-trading contracts qualify for a normal purchases and normal sales exception under that accounting pronouncement and therefore are not recorded on the balance sheet and marked to market. Contracts that do not qualify for the
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exception are recorded as assets or liabilities on the balance sheet at fair value. Changes in the fair value of qualifying hedge contracts are recorded in Other Comprehensive Income, and gains and losses are recognized in earnings when the underlying transaction occurs. Changes in the fair value of derivative contracts that do not meet hedge criteria under SFAS No. 133 or the ineffective portion of hedge contracts is recognized in earnings on a current basis. Outlined below is a summary of the changes in fair value for those contracts included as assets and liabilities in our balance sheet for the year ended December 31, 2001:
| |
Non-trading |
Trading |
||||
|---|---|---|---|---|---|---|
| |
(in millions) |
|||||
| Fair value of contracts outstanding as of January 1, 2001 (Reflects the adoption of SFAS No. 133) | $ | (7 | ) | $ | — | |
| Change in fair value during 2001: | ||||||
| Contracts settled during year | 87 | 7 | ||||
| Mark-to-market unrealized gain (loss) | (2 | ) | 7 | |||
| Total change in Fair Value | 85 | 14 | ||||
Fair value of contracts outstanding at December 31, 2001 |
$ |
78 |
$ |
14 |
||
The total change in fair value during 2001 is reflected in the 2001 consolidated financial statements as follows:
| |
Non-trading |
Trading |
||||
|---|---|---|---|---|---|---|
| Mark-to-market gain on non-qualifying hedge contracts or hedge ineffectiveness reflected in earnings | $ | 16 | $ | 14 | ||
| Mark-to market hedge contracts reflected in Other Comprehensive Income | 69 | — | ||||
| Total change in fair value | $ | 85 | $ | 14 | ||
The majority of our contracts are non-exchange traded contracts valued using prices provided by external sources, which primarily represent price quotations available through brokers or over-the-counter, on-line exchanges. Prices reflect the average of the bid-ask midpoint prices obtained from all sources that we believe provide the most liquid market for the commodity. The terms for which such price information is available varies by commodity, by region and by product. The remainder of the assets represents contracts for which external valuations are not available, primarily option contracts. These contracts are valued using the Black model, an industry standard option valuation model and other valuation techniques. The fair values in each category reflect the level of forward prices and volatility factors as of December 31, 2001 and may change as a result of future
22
changes in these factors. The maturities of the net energy trading and non-trading assets and sources of fair value as of December 31, 2001 are as follows:
| |
Less than One Year |
One - Three Years |
Three - Five Years |
Total Fair Value |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in millions) |
|||||||||||||
| Non-trading: | ||||||||||||||
| Actively quoted prices | $ | — | $ | — | $ | — | $ | — | ||||||
| Prices provided by other external sources | 36 | 50 | — | 86 | ||||||||||
| Prices based on model or other valuation methods | (4 | ) | 2 | (6 | ) | (8 | ) | |||||||
| Total | $ | 32 | $ | 52 | $ | (6 | ) | $ | 78 | |||||
| Trading: | ||||||||||||||
| Actively quoted prices | $ | — | $ | — | $ | — | $ | — | ||||||
| Prices provided by other external sources | 10 | 4 | — | 14 | ||||||||||
| Prices based on model or other valuation methods | — | — | — | — | ||||||||||
| Total | $ | 10 | $ | 4 | $ | — | $ | 14 | ||||||
Management uses its best estimates to determine the fair value of commodity and derivative contracts it holds and sells. These estimates consider various factors, including closing exchange and over-the-counter price quotations, time value, volatility factors, and credit exposure. However, it is possible that future market prices could vary from those used in recording assets and liabilities from energy marketing and trading activities, and such variations could be material.
Credit Risk. We have credit risk associated with counterparty performance, which includes, but is not limited to, the risk of financial default or slow payment. Counterparty credit risk is managed through established policies, including establishing counterparty credit limits, and in some cases requiring deposits or letters of credit to be posted by certain counterparties. Our counterparty credit limits are based on a scoring model that considers a variety of factors, including leverage, liquidity, profitability, credit ratings and risk management capabilities. We have entered into master netting agreements with the majority of our large counterparties, which reduce exposure to risk by providing for the offset of amounts payable to the counterparty against the counterparty receivables.
We participate in the five established, real-time energy markets, which are administered by independent system operators (ISOs): Pennsylvania, New Jersey, Maryland, LLC (PJM), which is in the Mid-Atlantic Area Council region; New England and New York, which are both in the Northeast Power Coordinating Council region; California, which is in the Western Systems Coordinating Council region; and Texas, which is administered by the Electric Reliability Council of Texas. In 2001, approximately one-half of our transactions, on a megawatthour basis, were made in these markets. In these areas, power is traded through bilateral agreements between buyers and sellers and on the spot markets which are operated by the ISOs For sales into the spot markets administered by an ISO, the ISO maintains financial assurance policies that are established and enforced by those administrators. The credit policies of the ISOs may under certain circumstances require that losses arising from the default of one member on spot market transactions be shared by the remaining participants. Non-performance or non-payment by a major counterparty, could result in a material adverse impact on our financial condition, results of operations or net cash flows.
In areas where there is no spot market, electricity is purchased and sold solely through bilateral agreements.
Interest Rate Risk. We use a combination of fixed-rate and variable-rate debt to reduce interest rate exposure. Interest rate swaps may be used to adjust exposure when deemed appropriate based
23
upon market conditions. We also use forward-starting interest rate swaps and treasury rate locks to lock in interest rate levels in anticipation of future financings. These strategies are employed to maintain the lowest cost of capital. As of December 31, 2001, a hypothetical 10% increase in the interest rates associated with pollution control bonds would result in an approximately $1 million decrease in pre-tax earnings for 2002.
Equity Price Risk. We maintain trust funds, as required by the NRC, to fund certain costs of decommissioning our nuclear plants. As of December 31, 2001, these funds are reflected at fair value on our balance sheet. The mix of securities is designed to provide returns to be used to fund decommissioning and to compensate, including inflationary increases in decommissioning costs. However, the equity securities in the trusts are exposed to price fluctuations in equity markets, and the value of fixed rate, fixed income securities are exposed to changes in interest rates. We actively monitor the investment performance and periodically review asset allocation in accordance with our nuclear decommissioning trust fund investment guidelines. A hypothetical 10% increase in interest rates and decrease in equity prices would result in a $204 million reduction in the fair value of the trust assets.
Critical Accounting Policies
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. The following areas represent those that management believes are particularly important to the financial statements and that require the use of estimates and assumptions to describe matters that are inherently uncertain.
Accounting for Derivative Instruments. We use derivative financial instruments primarily to manage our commodity price and interest rate risks. Derivative financial instruments are accounted for under SFAS No. 133. Accounting for derivatives continues to evolve through guidance issued by the Derivatives Implementation Group (DIG) of the Financial Accounting Standards Board. To the extent that changes by the DIG modify current guidance, including the normal purchases and normal sales determination, the accounting treatment for derivatives may change.
Energy Contracts. To manage our use of generation supply (including owned and contracted assets), we enter into contracts to purchase or sell electricity, fossil fuels, and ancillary products such as transmission rights and congestion credits, and emission allowances. These energy marketing contracts are considered derivatives under SFAS 133 unless a determination is made that they qualify for a SFAS No. 133 normal purchases and normal sales exclusion. If the exclusion applies, those contracts are not marked-to-market and are not reflected in the financial statements until delivery occurs.
The availability of the normal purchases and normal sales exclusion to specific contracts is based on a determination that excess generation is available for a forward sale and similarly a determination that at certain times generation supply will be insufficient to serve load. This determination is based on internal models that forecast customer demand and generation supply. The models include assumptions regarding customer load growth rates, which are influenced by the economy, weather and the impact of customer choice, and generating unit availability, particularly nuclear generating unit capability factors. The critical assumptions used in the determination of normal purchases and normal sales are consistent with assumptions used in the general corporate planning process.
Energy contracts that are considered derivatives may be eligible for designation as hedges. If a contract is designated as a hedge, the change in its market value is generally deferred as a component of other comprehensive income until the transaction it is hedging occurs. Conversely, the change in the market value of derivatives not designated as hedges is recorded in current period earnings. To qualify as a cash flow hedge, the fair value changes in the derivative must be expected to offset 80%-120% of
24
the change in fair value or cash flows of the hedged item. The effectiveness of an energy contract designated as a hedge is determined by internal models that measure the statistical correlation between the derivative and the associated hedged item.
When external quoted market prices are not available, we use the Black model, a standard industry valuation model to determine the fair value of energy derivative contracts. The valuation model uses volatility assumptions relating to future energy prices based on specific energy markets and utilizes externally available forward market price curves.
Interest Rate Derivatives. We use derivatives to manage our exposure to fluctuation in interest rates and planned future debt issuances. Hedge accounting has been used for all interest rate derivatives to date based on the probability of the transaction and the expected highly effective nature of the hedging relationship between the interest rate swap contract and the interest payment or changes in fair value of the hedged debt. Dealer quotes are available for all of our interest rate swap agreement derivatives.
Nuclear Decommissioning. Our current estimate of our nuclear facilities' decommissioning cost is $7.2 billion in current year dollars. Calculating this estimate involves significant assumptions with respect to the expected increases in decommissioning costs relative to general inflation rates, changes in the regulatory environment or regulatory requirements, and the timing of decommissioning. The estimated service life of a nuclear station is also a significant assumption because decommissioning costs are generally recognized over the life of the generating station. Cost estimates for decommissioning our nuclear facilities have been prepared by an independent engineering firm and reflect currently existing regulatory requirements and available technology. Nuclear station service lives, over which the decommissioning costs are recognized, were extended by 20 years in 2001. The life extension is subject to NRC approval of an extension of existing NRC operating licenses, which generally are 40 years. As discussed in New Accounting Pronouncements, this accounting will be affected by the adoption of SFAS No. 143, "Asset Retirement Obligations" (SFAS No. 143) effective January 1, 2003.
Estimated Service Lives of Property, Plant and Equipment. We depreciate our generation facilities and other property plant and equipment over estimated useful service lives. These estimated useful service lives are determined using three criteria: (1) economic feasibility, (2) physical feasibility and (3) functional feasibility. Economic feasibility is demonstrated through a cost/benefit analysis that an asset is economically viable and that the asset is providing an overall financial benefit. Physical feasibility represents the fact that the actual plant and equipment can operate during the defined period. Changes in physical feasibility may result from changes in the regulatory environment or environmental restrictions. Functional feasibility evaluates the impact of technology changes on the estimated service lives. In addition, nuclear power stations operate under licenses granted by the NRC. Operating licenses for our operating plants are for 40 years. We have or intend to request 20-year life extensions of these operating licenses. If not extended, nuclear plant service lives would be limited by the expiration of licenses. During 2001, we increased the estimated service lives for our operating nuclear stations, certain fossil stations and our pumped storage station. As a result of the change in service lives, depreciation and decommissioning expense decreased $90 million ($54 million, net of income taxes). Annualized savings resulting from the change will be $132 million ($79 million, net of income taxes).
Outlook
Changes in the Utility Industry. The electric utility industry in the United States remains in transition. It is moving from a fully regulated industry, consisting primarily of integrated companies combining generation, transmission and distribution, to competitive wholesale generation markets with continuing regulation of transmission and distribution. The transition has resulted in substantial
25
disposition of generating assets by formerly integrated companies, the creation of separate and, in some cases, stand-alone generating companies and consolidation. During 2001, however, the pace of transition slowed. This slowdown was due primarily to public and governmental reactions to issues associated with deregulation efforts in California and the collapse of the wholesale electricity market in California.
At the Federal level, FERC remains committed to the development of wholesale generation markets. Although its proposal for the development of large regional transmission organizations to facilitate markets has been delayed, it is planning an initiative to standardize wholesale markets in the United States. At the state level, concerns raised by the California experiences have stalled new retail competition initiatives and slowed the separation of generation from regulated transmission and distribution assets.
We believe that the transition in the electric utility industry will continue, albeit at a slower pace than previously, particularly at the state level. This slower transition may be reflected in reduced industry consolidation in the near term and reduced disaggregation of regulated to unregulated services. These uncertainties may limit opportunities for us to pursue our plans to expand our generation portfolio.
We also believe that competition for electric generation services has created new risks and uncertainties in the industry. Some of these risks were clearly illustrated in California—the risks of inadequate sources of generation, having load obligations without owning generation, and price volatility. The situation in California also illustrated the need for additional infrastructure to support competitive markets. The uncertainties include future prices of generation services in both the wholesale and retail markets, supply and demand volatility, and changes in customer profiles that may impact margins on various electric service offerings. These uncertainties create additional risk for participants in the industry, including us, and may result in increased volatility in operating results from year to year.
Competitive Position. We compete nationally in the wholesale electric generation markets on the basis of price and service offerings, using our generation portfolio to assure customers of energy deliverability. We have agreed to supply ComEd and PECO with their load requirements for customers through 2006 and 2010, respectively. We have contracted with Exelon Energy, the competitive retail energy services subsidiary of Exelon, to meet its load requirements pursuant to its competitive retail generation sales agreements and, in addition, we have contracts to sell energy and capacity to third parties. To the extent that our resources exceed our contractual commitments, we market these resources on a short-term basis or sell them in the spot market.
Our supply agreements with ComEd and PECO are expected to provide us with a stable source of revenue; they do not, however, provide us with any guaranteed level of revenue. As long as we have commitments to ComEd and PECO, our revenues will largely be a function of the cost of fulfilling these obligations and how much electricity is available to sell in wholesale markets after fulfilling those contracts. Generally, to the extent market prices decrease, customers may have an incentive to obtain electricity from alternative energy suppliers. To the extent that customers choose alternative energy suppliers, our revenues from contracts with ComEd and PECO will be reduced and our revenues will depend more on prices in the wholesale markets. If market prices increase substantially and our load requirements exceed our generation capacity, we may be required to purchase expensive power in the wholesale markets. Thus, any dramatic change in electricity prices combined with switching by ComEd's and PECO's customers could have an adverse effect on our results of operations or financial condition. Further, while our contracts with ComEd and PECO are currently a substantial portion of our business, we cannot predict whether they will be renewed at the end of their respective terms or, if renewed, what the terms of such renewal would be.
26
Our future results of operations also depend upon our ability to operate our generating facilities efficiently to meet our contractual commitments and to sell energy services in the wholesale markets. A substantial portion of our generating capacity, including all of the nuclear capacity, is base-load generation designed to operate for extended periods of time at low variable costs. Nuclear generation is currently the most cost-effective way for us to meet our commitments for sales to affiliated entities and other utilities. During 2001, our nuclear generating fleet, including AmerGen, operated at a 94.4% weighted average capacity factor. The number of refueling outages, including AmerGen, is expected to increase to eleven in 2002 from six in 2001 and, accordingly, our planned nuclear capacity factor for 2002 is 91%. Failure to achieve these capacity levels may require us to contract or purchase more expensive energy in the spot market to meet these commitments. Maintenance and capital expenditures during nuclear refueling outages are expected to increase by $80 million and $24 million, respectively, in 2002 compared to 2001 as a result of the additional nuclear refueling outages. Because of our reliance on nuclear facilities, any changes in regulations by the NRC requiring additional investments or resulting in increased operating or decommissioning costs of nuclear generating units could adversely affect our results of operations.
After we have met our contractual commitments, we sell energy in the wholesale markets. These sales expose us to the risks of rising and falling prices in those markets, and cash flows may vary accordingly. After our contracts with ComEd and PECO expire, our cash flows will largely be determined by our ability to successfully market energy, capacity and ancillary services and by wholesale prices of electricity.
We currently intend to grow our generation portfolio through investments, acquisitions and the development of new energy projects, the completion of any of which is subject to substantial risk. The competitive energy market is still evolving following deregulation and we may not be successful in anticipating appropriate market opportunities. It is possible that, due to a variety of factors, including purchase price, operating performance and future market conditions, we would be unable to achieve our goals.
Our wholesale marketing division, Power Team, uses our generation portfolio, transmission rights and expertise to ensure delivery of generation to wholesale customers under long-term and short-term contracts. Power Team is responsible for supplying the load requirements of ComEd and PECO and markets the remaining energy in the wholesale markets. Power Team also buys and sells power in the wholesale markets. Trading activities were initiated in 2001 and represent a small portion of Power Team's activity. As of December 31, 2001, trading activities accounted for less than 1% of our EBIT. Trading activities are expected to increase modestly in 2002; trading activity growth will be dependent on the continued development of the wholesale energy markets and Power Team's ability to manage trading and credit risks in those markets. The spot markets also involve the credit risks of market participants purchasing energy, which we may not be able to manage or hedge. We use financial trading primarily to complement the marketing of our generation portfolio. We intend to manage the risk of these activities through a mix of long-term and short-term supply obligations and through the use of established policies, procedures and trading limits. Financial trading, together with the effects of SFAS No. 133, may cause volatility in our future results of operations.
Other Factors
Environmental. Our 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, we are generally liable for the costs of remediating environmental contamination of property now owned by us or formerly owned by ComEd or PECO and of property contaminated by hazardous substances generated by us, ComEd or PECO.
27
As of December 31, 2001 and 2000, we had accrued $14 million and $16 million, respectively, for environmental investigation and remediation costs, other than decommissioning. We expect to spend $5 million for environmental remediation activities in 2002. We cannot predict whether we will incur other significant liabilities for any additional investigation and remediation costs at these or additional sites identified by us, environmental agencies or others, or whether such costs will be recoverable from third parties.
Security Issues and Other Impacts of Terrorist Actions. The events of September 11, 2001 have affected our operating procedures and costs and are expected to affect the cost and availability of the insurance coverages that we carry. The NRC has issued Safeguards and Threat Advisories to all nuclear power plant licensees, including us, requesting that they place their facilities on highest alert security status. In response to the NRC Advisories and on our own initiative, we also implemented enhanced security measures, such as increased guard forces, the erection of additional physical barriers, and heightened communication with authorities at all levels of government. In addition to the Advisories, the NRC began an initiative to perform a "top to bottom" review of its safeguards and security programs and requirements in light of the events of September 11.
On February 25, 2002, the NRC issued immediately effective orders modifying the operating licenses for all nuclear power plants to require all licensees, including us, to implement certain interim security enhancements. The security requirements imposed by the NRC's orders issued to us are currently estimated to increase capital expenditures by approximately $1 million per station for improvements, such as enhanced vehicle barriers, modifications to plant facilities and increased size of guard forces.
Insurance. We carry nuclear liability insurance. The Price-Anderson Act limits the liability of nuclear reactor owners for claims arising 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. We carry the maximum available commercial insurance of $200 million. The remaining $9.3 billion is provided through mandatory participation in a financial protection pool. Price-Anderson is scheduled to expire on August 1, 2002. While there are numerous bills proposing to review Price-Anderson, we cannot predict at this time whether Congress will renew it or the effects on operations resulting from the expiration of the Price-Anderson Act.
In addition to nuclear liability insurance, we carry property damage and liability insurance for our properties and operations. Our property insurance through Nuclear Electric Insurance Limited (NEIL) provides coverage for damages caused by acts of terrorism at any of our nuclear generating stations. The terrorism endorsement to the NEIL policy specifies that the coverage applies to acts of terrorism similar to the September 11, 2001 events. In the event that one or more acts of terrorism cause accidental property damage within a 12-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 $3.24 billion plus such additional amounts as the insurer may recover for all such losses from reinsurance, indemnity or any other source applicable to such losses. If total property losses exceed available funds under the policy, proportionate recovery is provided to cover a portion of an insured's property losses. The percentage recovery would be equal to the ratio of the insured's property losses and the total of all property losses.
NEIL also provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The policy provides for a waiting period before recovery of costs can commence. The premium for this coverage is subject to assessment for adverse loss experience, with a maximum assessment of $46 million per year. Recovery under this insurance for terrorist acts is subject to the $3.24 billion aggregate limit and is secondary to the property insurance described above.
We are self-insured to the extent that any losses may exceed the amount of insurance maintained. NEIL provides property and business interruption insurance for our nuclear operations. In recent years,
28
NEIL has made distributions to its members. Our distribution for 2001 was $69 million, which was recorded as a reduction to Operating and Maintenance Expense on our Statements of Income. Due in part to the September 11, 2001 events, we cannot predict the level of future distributions, although they are expected to be lower than historical levels.
In addition, we participate 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. We 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 retrospective assessment of up to $50 million could apply.
We do not carry any business interruption insurance other than NEIL coverage for nuclear operations. We cannot at this time predict the effect on our operations of any changes in any of these insurance policies because of terrorist acts or otherwise.
Benefit Plans. We maintain defined benefit pension plans and post-retirement welfare benefit plans. All of our employees are eligible to participate in these plans. Management employees and electing union employees, hired on or after January 1, 2001, are eligible to participate in newly established Exelon cash balance pension plans. Management employees who were active participants in the former ComEd and PECO pension plans on December 31, 2000 and remain employed by Exelon or a participating subsidiary on January 1, 2002, have the opportunity to continue to participate in the pension plan or to transfer to the cash balance plan. Participants in the cash balance plan, unlike participants in the other defined benefit plans, may request a lump-sum cash payment upon the termination of their employment, which may result in increased cash requirements from pension plan assets. We may be required to increase future funding to the pension plan as a result of these increased cash requirements.
Due to the performance of the United States debt and equity markets in 2001, the value of assets held in trusts to satisfy the obligations of pension and postretirement benefit plans has decreased. Also, as a result of the merger and corporate restructuring, there was a larger number of employees taking advantage of retirement benefits in 2001 than in other years. These factors may also result in additional future funding requirements of the pension and postretirement benefit plans.
New Accounting Pronouncements
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" (SFAS No. 141), SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142, 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. In addition, SFAS No. 141 requires that unamortized negative goodwill related to pre-July 1, 2001 purchase be recognized as change in accounting principle concurrent with the adoption of SFAS No. 142. Included on AmerGen's balance sheet is $43 million of negative goodwill, net of accumulated amortization. Upon AmerGen's adoption of SFAS No. 141 on January 1, 2002, we will recognize our appropriate share of approximately $22 million in additional income as a cumulative effect of a change in accounting principle.
SFAS No. 142 establishes new accounting and reporting standards for goodwill and intangible assets. We adopted SFAS No. 142 as of January 1, 2002. Under SFAS No. 142, effective January 1,
29
2002, goodwill 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, we did not have any goodwill recorded on our Consolidated Balance sheets. Accordingly, we do not expect the adoption of SFAS No. 142 to have a material impact on our financial statements.
SFAS No. 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets. We expect 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 our nuclear generating plants. Currently, we record the obligation for decommissioning ratably over the lives of the plants. The January 1, 2003 adoption of this standard 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 SFAS No. 143 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, SFAS No. 143 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 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.
We are in the process of evaluating the impact of SFAS No. 143 on our financial statements, and cannot determine the ultimate impact of adoption at this time; however, the cumulative effect could be material to our 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. We are in the process of evaluating the impact of SFAS No. 144 on our financial statements, and we do not expect the impact to be material.
30
| |
Page(s) |
||
|---|---|---|---|
| Report of Independent Accountants | F-2 | ||
| Consolidated Financial Statements: | |||
| Statements of Income | F-3 | ||
| Statements of Cash Flows | F-4 | ||
| Balance Sheets | F-5 | ||
| Statements of Changes in Divisional/Member's Equity | F-6 | ||
| Statements of Other Comprehensive Income | F-7 | ||
| Notes to Consolidated Financial Statements | F-8 - 39 | ||
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Member and Board of Directorse
of Exelon Generation Company LLC
In our opinion, the accompanying consolidated balance sheets and related consolidated statements of income, cash flows, changes in divisional/member's equity and comprehensive income present fairly, in all material respects, the financial position of Exelon Generation Company, LLC and Subsidiary Companies (Exelon Generation) 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 Generation's management; our responsibility is to express an opinion on these consolidated 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 Generation's parent company, Exelon Corporation, acquired Unicom Corporation on October 20, 2000 in a business combination accounted for under the purchase method of accounting. The results of the acquired generation-related business are included in the consolidated financial statements of Exelon Generation since the acquisition date.
As discussed in Note 1, Exelon Generation changed its method of accounting for derivative instruments and hedging activities effective January 1, 2001.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
March 1,
2002
Philadelphia, PA
F-2
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions)
| |
For the Years Ended December 31, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
1999 |
|||||||||
| Operating revenues: | ||||||||||||
| Operating revenues | $ | 2,946 | $ | 1,723 | $ | 1,584 | ||||||
| Operating revenues—affiliates | 4,102 | 1,551 | 841 | |||||||||
| Total operating revenues | 7,048 | 3,274 | 2,425 | |||||||||
| Operating expenses: | ||||||||||||
| Fuel and purchased power | 4,093 | 1,845 | 1,205 | |||||||||
| Purchased power—affiliates | 125 | 1 | — | |||||||||
| Operating and maintenance | 1,338 | 754 | 658 | |||||||||
| Operating and maintenance—affiliates | 189 | 46 | 100 | |||||||||
| Depreciation and decommissioning | 282 | 123 | 125 | |||||||||
| Taxes other than income | 149 | 64 | 37 | |||||||||
| Total operating expenses | 6,176 | 2,833 | 2,125 | |||||||||
| Operating income | 872 | 441 | 300 | |||||||||
| Other income and deductions: | ||||||||||||
| Interest expense | (115 | ) | (41 | ) | (12 | ) | ||||||
| Equity in earnings of unconsolidated affiliates | 90 | 4 | — | |||||||||
| Other, net | (8 | ) | 16 | 41 | ||||||||
| Total other income and deductions | (33 | ) | (21 | ) | 29 | |||||||
| Income before income taxes and cumulative effect of a change in accounting principle | 839 | 420 | 329 | |||||||||
| Income taxes | 327 | 160 | 125 | |||||||||
| Income before cumulative effect of a change in accounting principle | 512 | 260 | 204 | |||||||||
| Cumulative effect of a change in accounting principle (net of income taxes of $7) | 12 | — | — | |||||||||
| Net income | $ | 524 | $ | 260 | $ | 204 | ||||||
F-3
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
| |
For the Years Ended December 31, |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
1999 |
||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 524 | $ | 260 | $ | 204 | |||||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||||
| Depreciation and decommissioning (including amortization of nuclear fuel) | 674 | 289 | 270 | ||||||||||
| Provision for uncollectible accounts | 15 | 2 | — | ||||||||||
| Allowance for obsolete inventory | 11 | 1 | — | ||||||||||
| Cumulative effect of a change in accounting principle (net of income taxes) | (12 | ) | — | — | |||||||||
| Deferred income taxes | 33 | (47 | ) | 23 | |||||||||
| Amortization of investment tax credit | (8 | ) | (13 | ) | (12 | ) | |||||||
| Earnings from equity investments | (90 | ) | (4 | ) | — | ||||||||
| Net realized losses on decommissioning trust funds | 127 | — | — | ||||||||||
| Unrealized gains on derivative financial instruments | (30 | ) | — | — | |||||||||
| Interest expense on spent nuclear fuel obligation | 33 | 10 | — | ||||||||||
| Expense in contributions to long term incentive plan | — | 44 | — | ||||||||||
| Other operating activities | (6 | ) | (4 | ) | 22 | ||||||||
Changes in working capital: |
|||||||||||||
| Accounts receivable | 127 | (158 | ) | (54 | ) | ||||||||
| Accounts receivable from affiliates | 104 | (342 | ) | (66 | ) | ||||||||
| Accounts payable to affiliates | (99 | ) | 99 | — | |||||||||
| Inventories | (22 | ) | (58 | ) | (5 | ) | |||||||
| Accounts payable | (101 | ) | 91 | (70 | ) | ||||||||
| Accrued expenses | 61 | 286 | 114 | ||||||||||
| Other current assets | 2 | 37 | (7 | ) | |||||||||
| Other current liabilities | (12 | ) | (17 | ) | 10 | ||||||||
| Net cash provided by operating activities | 1,331 | 476 | 429 | ||||||||||
| Cash flows from investing activities: | |||||||||||||
| Investment in nuclear fuel | (336 | ) | (112 | ) | (95 | ) | |||||||
| Investment in plant | (515 | ) | (214 | ) | (253 | ) | |||||||
| Investment in AmerGen Energy, LLC | — | — | (39 | ) | |||||||||
| Investment in Sithe Energies, Inc. | — | (704 | ) | — | |||||||||
| Change in long-term receivable, affiliate | 72 | 1 | — | ||||||||||
| Proceeds from nuclear decommissioning trust funds | 1,624 | 265 | 69 | ||||||||||
| Investment in nuclear decommissioning trust funds | (1,863 | ) | (380 | ) | (95 | ) | |||||||
| Other investment activity | (92 | ) | (20 | ) | (18 | ) | |||||||
| Net cash used in investing activities | (1,110 | ) | (1,164 | ) | (431 | ) | |||||||
| Cash flows from financing activities: | |||||||||||||
| Change in note payable, member | (696 | ) | 696 | — | |||||||||
| Issuance of long-term debt, net of issuance costs | 820 | — | 6 | ||||||||||
| Retirement of long-term debt | (4 | ) | (4 | ) | (4 | ) | |||||||
| Distributions to member | (121 | ) | — | — | |||||||||
| Net cash (used in) provided by financing activities | (1 | ) | 692 | 2 | |||||||||
| Increase in cash and cash equivalents | 220 | 4 | — | ||||||||||
| Cash and cash equivalents at beginning of period | 4 | — | — | ||||||||||
| Cash and cash equivalents at end of period | $ | 224 | $ | 4 | $ | — | |||||||
F-4
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
| |
December 31, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
|||||||
| Assets | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 224 | $ | 4 | |||||
| Accounts receivable, net | |||||||||
| Customer | 316 | 316 | |||||||
| Other | 165 | 198 | |||||||
| Affiliates | 327 | 941 | |||||||
| Inventories, net, at average cost: | |||||||||
| Fossil fuel | 105 | 93 | |||||||
| Materials and supplies | 202 | 203 | |||||||
| Other | 65 | 38 | |||||||
| Total current assets | 1,404 | 1,793 | |||||||
Property, plant and equipment, net |
1,160 |
831 |
|||||||
| Nuclear fuel, net | 843 | 896 | |||||||
Deferred debits and other assets: |
|||||||||
| Deferred income taxes, net | 297 | 337 | |||||||
| Nuclear decommissioning trust funds | 3,165 | 3,127 | |||||||
| Investments | 859 | 762 | |||||||
| Receivables from affiliate | 291 | 363 | |||||||
| Other | 223 | 153 | |||||||
| Total deferred debits and other assets | 4,835 | 4,742 | |||||||
| Total assets | $ | 8,242 | $ | 8,262 | |||||
| Liabilities and Divisional/Member's Equity | |||||||||
| Current liabilities: | |||||||||
| Note payable to parent | $ | — | $ | 696 | |||||
| Payable to affiliate | — | 99 | |||||||
| Long-term debt due within one year | 4 | 4 | |||||||
| Accounts payable | 588 | 618 | |||||||
| Accrued expenses | 303 | 576 | |||||||
| Deferred income taxes | 7 | — | |||||||
| Other | 171 | 183 | |||||||
| Total current liabilities | 1,073 | 2,176 | |||||||
Long-term debt |
1,021 |
205 |
|||||||
Deferred credits and other liabilities: |
|||||||||
| Unamortized investment tax credits | 234 | 242 | |||||||
| Nuclear decommissioning liability for retired plants | 1,353 | 1,301 | |||||||
| Pension obligations | 118 | 172 | |||||||
| Non-pension postretirement benefits obligation | 384 | 377 | |||||||
| Spent nuclear fuel obligation | 843 | 810 | |||||||
| Other | 280 | 369 | |||||||
| Total deferred credits and other liabilities | 3,212 | 3,271 | |||||||
| Commitments and contingencies (See Note 11) | — | — | |||||||
Divisional equity |
— |
2,610 |
|||||||
| Member's equity: | |||||||||
| Membership interest | 2,315 | ||||||||
| Undistributed earnings | 524 | ||||||||
| Accumulated other comprehensive income | 97 | — | |||||||
| Total divisional/member's equity | 2,936 | 2,610 | |||||||
| Total liabilities and divisional/member's equity | $ | 8,242 | $ | 8,262 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN DIVISIONAL/MEMBER'S EQUITY
(Dollars in Millions)
| |
Divisional Equity |
Membership Interest |
Undistributed Earnings |
Accumulated Other Comprehensive Income |
Total Divisional/ Member's Equity |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 1999 | $ | 746 | $ | — | $ | — | $ | — | $ | 746 | |||||||
| Net income | 204 | 204 | |||||||||||||||
| Balance, December 31, 1999 | 950 | 950 | |||||||||||||||
| Net income | 260 | 260 | |||||||||||||||
| Contribution of net assets as a result of merger with Unicom | 1,400 | 1,400 | |||||||||||||||
| Balance, December 31, 2000 | 2,610 | 2,610 | |||||||||||||||
| Formation of LLC | (2,610 | ) | 2,610 | — | |||||||||||||
| Non-cash distribution to member | (174 | ) | (174 | ) | |||||||||||||
| Net income | 524 | 524 | |||||||||||||||
| Distribution to member | (121 | ) | (121 | ) | |||||||||||||
| Reclassified net unrealized losses on marketable securities, net of income taxes of $22 | (23 | ) | (23 | ) | |||||||||||||
| Comprehensive income, net of income tax benefit of $171 | 120 | 120 | |||||||||||||||
| Balance, December 31, 2001 | $ | — | $ | 2,315 | $ | 524 | $ | 97 | $ | 2,936 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Millions)
| |
For the Years Ended December 31 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
1999 |
|||||||
| Net income | $ | 524 | $ | 260 | $ | 204 | ||||
| Other comprehensive income: | ||||||||||
| SFAS 133 transitional adjustment, net of income taxes of $3 | 5 | |||||||||
| Net unrealized gains on nuclear decommissioning trust funds, net of income taxes of $138 | 69 | |||||||||
| Cash flow hedge fair value adjustment, net of income taxes of $29 | 48 | |||||||||
| Realized loss on forward starting interest rate swap net of income taxes of $1 | (2 | ) | ||||||||
| Total other comprehensive income | 120 | — | — | |||||||
| Total comprehensive income | $ | 644 | $ | 260 | $ | 204 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, unless
otherwise noted)
1. Summary of Significant Accounting Policies
Description of Business
Exelon Generation Company, LLC (Exelon Generation) is a limited liability company engaged principally in the production and wholesale marketing of electricity in various regions of the United States. In 2001, the Company also began trading activities. Exelon Generation is wholly owned by Exelon Corporation (Exelon). In connection with the restructuring by Exelon to separate the regulated energy delivery business of its subsidiaries Commonwealth Edison Company (ComEd) and PECO Energy Company (PECO) from its unregulated businesses, including its generation business, Exelon Generation began operations as a separate indirect subsidiary of Exelon effective January 1, 2001. Exelon Generation has numerous wholly owned subsidiaries. These subsidiaries were primarily established to hold certain hydro electric and peaking unit facilities as well as the 49.9% interest in Sithe Energies, Inc. (Sithe) and 20.99% investment in Keystone Fuels, LLC. In addition, Exelon Generation also has a finance company subsidiary, Exelon Generation Finance Company, LLC, which provides certain financing for Exelon Generation's other subsidiaries. Exelon Generation also owns a 50% investment in AmerGen Energy Company, LLC (AmerGen).
Basis of Presentation
The consolidated financial statements include the accounts of all majority-owned subsidiaries of Exelon Generation after the elimination of intercompany accounts and transactions. Exelon Generation consolidates its proportionate interest in jointly owned electric utility plants. Exelon Generation accounts for its investments in 20% to 50% owned entities under the equity method of accounting.
The consolidated financial statements of Exelon Generation as of December 31, 2000 and for the years ended December 31, 2000 and 1999 present the financial position, results of operations and net cash flows of the generation-related business of Exelon prior to its corporate restructuring on January 1, 2001. Exelon Generation operated as a separate business subsequent to electric-industry restructuring in Pennsylvania effective January 1, 1999. Prior to that date, Exelon (and its predecessor, PECO Energy Company) operated as a fully integrated electric and gas utility, and revenues and expenses were not separately identified in the accounting records. The consolidated financial statements are not necessarily indicative of the financial position, results of operations or net cash flows that would have resulted had the generation-related business been a separate entity during the periods presented. For periods prior to the restructuring, references to Exelon Generation mean the generation-related business of Exelon Corporation.
Certain information in these consolidated financial statements relating to the results of operations and financial condition of Exelon Generation for periods prior to Exelon's restructuring was derived from the historical financial statements of Exelon. Various allocation methodologies were employed to separate the results of operations and financial condition of the generation-related portion of Exelon's business from the historical financial statements for the periods presented prior to the restructuring. Revenues include the generation component of revenue from Exelon's operations and any generation-related revenues, such as ancillary services and wholesale energy activity. Expenses including fuel and other energy-related costs, including purchased power, operations and maintenance and depreciation and amortization, as well as assets, such as property, plant and equipment, materials and supplies and fuel, were specifically identified for Exelon Generation's operations. Various allocations were used to
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disaggregate other common expenses, assets and liabilities between Exelon Generation and Exelon's other businesses, primarily the regulated transmission and distribution operations.
Management believes that these allocation methodologies are reasonable; however, had Exelon Generation existed as a separate company prior to January 1, 2001, its results could have significantly differed from those presented herein. In addition, future results of operations, financial position and net cash flows could materially differ from the historical results presented.
Segment Information
Exelon Generation operates in one business comprising its generation and marketing of energy and energy-related products in the United States.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of 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 and estimated service lives for plant.
Revenue Recognition
Operating revenues are generally recorded as service is rendered or energy is delivered to customers. At the end of each month, Exelon Generation accrues an estimate for unbilled energy provided to its customers. Premiums received and paid on option contracts and swap arrangements are amortized to revenue and expense over the life of the contracts. Certain of these contracts are considered derivative instruments and are recorded at fair value with subsequent changes in fair value recognized as revenues and expenses unless hedge accounting is applied.
Commodity derivatives used for trading purposes are accounted for using the mark-to-market method. Under this methodology, these derivatives are adjusted to fair value, and the unrealized gains and losses are recognized in current period income.
Nuclear Fuel
The cost of nuclear fuel is capitalized and charged to fuel expense using the units of production method. Estimated costs of nuclear fuel storage and disposal at operating plants are charged to expense as the related fuel is consumed.
Emission Allowances
Emission allowances are included in deferred debits and other assets and are carried at acquisition cost and charged to fuel expense as they are used in operations. Allowances held can be used from years 2002 to 2028.
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Depreciation and Decommissioning
Depreciation is provided over the estimated useful service lives of the property, plant and equipment on a straight-line basis. Nuclear power stations operate under licenses granted by the Nuclear Regulatory Commission (NRC.) Operating licenses for Exelon Generation's operating plants are for 40 years. Exelon Generation has or intends to request 20 year extensions of these operating licenses. If not extended, nuclear plant service lives would be limited by the expiration of the licenses.
The average estimated useful service lives currently being applied to determine depreciation and decommissioning expense of property, plant and equipment by type of asset are as follows:
| Nuclear | 60 years | |
| Fossil | 40 years | |
| Hydro | 100 years | |
| Other | 5-50 years |
Exelon Generation's current estimate of the costs for decommissioning its ownership share of its nuclear generation stations is charged to operations over the expected service life of the plant. Exelon Generation's affiliates PECO and ComEd are currently recovering costs for the decommissioning of nuclear generating stations through regulated customer rates. Amounts collected for decommissioning by Exelon Generation's affiliates are remitted to Exelon Generation and are deposited in trust accounts and invested for the funding of future decommissioning costs. Exelon Generation accounts for the current period's cost of decommissioning related to generation plants previously owned by PECO by recording a charge to depreciation and decommissioning expense and a corresponding liability in accumulated depreciation concurrently with decommissioning collections.
For Exelon Generation's active nuclear generating stations previously owned by ComEd, annual decommissioning expense is based on an annual assessment of the difference between the current cost of decommissioning estimate and the decommissioning liability recorded in accumulated depreciation. The difference is amortized to depreciation and decommissioning expense on a straight-line basis over the remaining lives of the operating plants with the corresponding offset to accumulated depreciation. The current decommissioning cost estimate (adjusted annually to reflect inflation), for the former ComEd retired units recorded in deferred credits and other liabilities is accreted to depreciation and decommissioning expense. Exelon Generation believes that the amounts being recovered by ComEd and PECO from their customers through electric rates along with the earnings on the trust funds will be sufficient to fully fund its decommissioning obligations.
Research and Development
Research and development costs are charged to expense as incurred.
Capitalized Interest
Exelon Generation capitalizes the costs during construction of debt funds used to finance its construction projects. Exelon Generation recorded capitalized interest of $17 million, $2 million and $6 million in 2001, 2000 and 1999, respectively.
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Income Taxes
As part of Exelon's consolidated group, Exelon Generation files a consolidated Federal income tax return with Exelon. Income taxes are allocated to each of Exelon subsidiaries within the consolidated group, including Exelon Generation, based on the separate return method.
Deferred Federal and state income taxes are provided on all temporary differences between book bases and tax bases of assets and liabilities. Investment tax credits previously used for income tax purposes have been deferred on Exelon Generation's consolidated balance sheet and are recognized in income over the life of the related property.
Cash and Cash Equivalents
Exelon Generation considers all temporary cash investments purchased with an original maturity of three months or less to be cash equivalents.
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. The cost of these securities is determined on the basis of specific identification. At December 31, 2001 and 2000, Exelon Generation had no held-to-maturity or trading securities.
Unrealized gains and losses on marketable securities held in the nuclear decommissioning trust funds associated with the former PECO plants are reported in accumulated depreciation. Unrealized gains and losses on marketable securities held in the nuclear decommissioning trust funds associated with the former ComEd plants are reported in accumulated other comprehensive income.
Inventories
Inventories, which consist primarily of fuel and materials and supplies, are valued at the lower of cost or market and are stated on the average cost method.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Exelon Generation 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. 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.
Comprehensive Income
Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to the member. Comprehensive income primarily relates to unrealized
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gains or losses on securities held in nuclear decommissioning trust funds and unrealized gains and losses on cash flow hedge instruments.
Derivative Financial Instruments
Subsequent to January 1, 2001, Exelon Generation 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 or normal sales exception. Derivative financial instruments are recorded as other assets and liabilities in the consolidated balance sheet and classified as current or non-current based on the maturity date. 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.
Pursuant to Exelon's Risk Management Policy (RMP), Exelon Generation uses derivatives to manage the utilization of its available generating capability and provisions of wholesale energy to its affiliates. Exelon Generation also utilizes energy option contracts and energy financial swap arrangements to limit the market price risk associated with forward energy commodity contracts. Exelon Generation enters into certain energy related derivatives for trading or speculative purposes. Exelon Generation may also enter 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 part of Exelon Generation's energy marketing business, Exelon Generation 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 Generation recognizes gains or losses when the underlying physical transaction occurs. Revenues and expenses associated with market price risk management contracts are amortized over the terms of such contracts. The remainder of these contracts are generally considered cash flow hedges under SFAS No. 133.
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Additionally, during 2001, as part of the creation of Exelon Generation's energy trading operation, Exelon Generation 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 Generation 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 Generation recognized any gains or losses on these derivatives when the underlying physical transaction affected earnings.
Contracts entered into by Exelon Generation 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 Generation 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.
Recently Issued Accounting Standards
During 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No. 141), No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), No. 143, "Asset Retirement Obligations" (SFAS No. 143) and 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. In addition, SFAS No. 141 requires that unamortized negative goodwill related to pre-July 1, 2001 purchase be allocated as a pro-rata reduction of the amounts that otherwise would have been assigned to the acquired assets. If any excess remains, that remaining excess is to be recognized as an extraordinary gain concurrent with the adoption of SFAS No. 142. Included on AmerGen's balance sheet is $43 million of negative goodwill net of accumulated amortization. Upon AmerGen's adoption of SFAS No. 141 in the first quarter of 2002. Exelon Generation expects to recognize its appropriate share of approximately $22 million, pre-tax, as a cumulative effect of a change in accounting principle.
SFAS No. 142 establishes new accounting and reporting standards for goodwill and intangible assets. Exelon Generation adopted SFAS No. 142 as of January 1, 2002. Under SFAS No. 142, goodwill will no longer be subject to amortization. After January 1, 2002, goodwill will be subject to an assessment for impairment using a fair value based test at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. An impairment loss would be reported as a reduction to goodwill and a charge to operating expense, except at the transition date, when the loss would be reflected as a cumulative effect of a change in accounting principle. As of December 31, 2001, Exelon Generation has no goodwill recorded on its consolidated balance sheet.
SFAS No. 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets. Exelon Generation 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
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or by legal construction under the doctrine of promissory estoppel. Adoption of SFAS No. 143 will change the accounting for the decommissioning of Exelon Generation's nuclear generating plants. Currently, Exelon Generation 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 SFAS No. 143 standard will require the accrual of an asset, to the extent allowable under the standard, 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 Generation 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 a significant increase in expense.
SFAS No. 144 establishes accounting and reporting standards for both the impairment and disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and provisions of SFAS No. 144 are generally applied prospectively. Exelon Generation is in the process of evaluating the impact of SFAS No. 144 on its financial.
2. Merger
On October 20, 2000 Exelon became the parent corporation for PECO and ComEd as a result of the completion of the transactions contemplated by the Agreement and Plan of Exchange and Merger, as amended (Merger Agreement) among PECO, Unicom Corporation and Exelon. The Merger was accounted for using the purchase method of accounting, with PECO as acquirer.
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The fair value of the assets acquired and liabilities assumed in the merger associated with the generation-related business of ComEd are summarized below:
| Current assets | $ | 704 | |
| Property, plant and equipment | 64 | ||
| Nuclear fuel | 669 | ||
| Deferred debits and other assets | 3,683 | ||
| 5,120 | |||
Current liabilities |
634 |
||
| Deferred credits and other liabilities | 3,086 | ||
| 3,720 | |||
| Net generation-related assets | $ | 1,400 | |
Exelon Generation has included the generation-related assets and liabilities of ComEd and the related results of operations in its consolidated financial statements beginning October 20, 2000. Exelon Generation's Statement of Changes in Member's Equity reflects the generation-related impacts of the Merger as a capital contribution from Exelon.
3. Corporate Restructuring
During January 2001, Exelon undertook a corporate restructuring to separate its generation and other competitive businesses from its regulated energy delivery businesses conducted by ComEd and PECO. As part of the restructuring, the generation-related operations, employees, assets, liabilities, and certain commitments of Exelon Corporation were transferred to Exelon Generation.
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The assets and liabilities transferred to Exelon Generation as of January 1, 2001 were as follows:
| Assets | ||||
| Current assets | $ | 1,285 | ||
| Property, plant and equipment | 831 | |||
| Nuclear fuel | 896 | |||
| Nuclear decommissioning trust funds | 3,127 | |||
| Investments | 762 | |||
| Deferred income taxes | 337 | |||
| Note receivable from affiliate | 363 | |||
| Other noncurrent assets | 153 | |||
| Total assets transferred | 7,754 | |||
| Liabilities | ||||
| Note payable to member | 696 | |||
| Current liabilities | 1,146 | |||
| Long-term debt | 205 | |||
| Decommissioning obligation for retired plants | 1,301 | |||
| Other noncurrent liabilities | 1,970 | |||
| Total liabilities transferred | 5,318 | |||
| Net assets transferred | $ | 2,436 | ||
On January 1, 2001, a non-cash distribution of $174 million was made in connection with the elimination of certain intercompany transactions.
In connection with the restructuring, ComEd and PECO also assigned their respective rights and obligations under various power purchase and fuel supply agreements to Exelon Generation. Additionally, Exelon Generation entered into power purchase agreements (PPAs) to supply the capacity and energy requirements of ComEd and PECO.
4. Equity Investments
Sithe Energies, Inc.
On December 18, 2000, Exelon Generation acquired 49.9% of the outstanding common stock of Sithe for $696 million in cash and $8 million of acquisition costs. 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.
Beginning December 18, 2002, Exelon Generation will have the right to purchase all (but not less than all) of the remaining outstanding shares of the Sithe common stock. The option expires on December 18, 2005. In addition, each of Sithe's other stockholder groups will have the right to require us to purchase all (but not less than all) of its shares during the same period in which Exelon Generation can exercise its option. At the end of that period, if no stockholder has exercised its option,
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Exelon Generation will have a one-time option to purchase shares from the other stockholders to bring its holdings to 50.1% of the total outstanding shares. If Exelon Generation exercise its option or if all the stockholder groups exercise their put rights, the purchase price for 70% of the remaining 50.1% of the Sithe stock will be set at a fair market value plus a 10% premium in the case of a call or 10% discount in the case of a put, subject to a floor of $430 million and a ceiling of $650 million, and the remaining portion will be valued at fair market value, subject to a floor price of $141 million and a ceiling price of $330 million, plus, in each case, interest accrued from the beginning of the exercise period.
If Exelon Generation increases its ownership in Sithe to 50.1% or more, Sithe will become a consolidated subsidiary and Exelon Generation'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 approximately $1 billion. In December 2001, Sithe entered into a new 18-month corporate credit facility for $500 million expiring in June 2003. As of December 31, 2001 Sithe had drawn approximately $176 million under this facility and extended approximately $161 million in letters of credit.
Exelon Generation's investment in Sithe as of December 31, 2001 and 2000 was $725 million and $704 million, respectively.
AmerGen Energy Company, LLC
Exelon Generation and British Energy, Inc, a wholly owned subsidiary of British Energy, plc, each own a 50% equity interest in AmerGen Energy Company, LLC (AmerGen). Established in 1997, AmerGen was formed to pursue opportunities to acquire and operate nuclear generation facilities in the North America. Currently, AmerGen owns and operates three nuclear generation facilities: Clinton Power Station (Clinton) located in Illinois, Three Mile Island (TMI) Unit 1 located in Pennsylvania, and Oyster Creek, which was acquired in August 2000, located in New Jersey. Oyster Creek was acquired from GPU, Inc. (GPU) for $10 million. Under the terms of the purchase agreement, GPU agreed to fund outage cots 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%. As part of each acquisition, AmerGen entered into a power sales agreement with the seller. The agreement with the seller for Clinton calls for Exelon Generation to sell 75% of the output back to Illinois Power for a term expiring at the end of 2005. The agreements with the seller of TMI and Oyster Creek are for all of the output expiring in 2001 and 2003, respectively.
AmerGen maintains a nuclear decommissioning trust fund for each of its plants in accordance with NRC regulations and believes that amounts in these trust funds, together with the investment earnings
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thereon and additional contributions for Clinton from Illinois Power, will be sufficient to meet its decommissioning obligations.
Exelon Generation's investment in AmerGen as of December 31, 2001 and 2000 was $113 million and $44 million, respectively.
The table below presents summarized financial information for Sithe and AmerGen, Exelon Generation's unconsolidated equity affiliates:
| |
Year Ended December 31, |
||||||||
|---|---|---|---|---|---|---|---|---|---|
| Income Statement Information |
|||||||||
| 2001 |
2000 |
1999 |
|||||||
| Operating revenues | $ | 1,691 | $ | 1,675 | $ | 15 | |||
| Operating income | 297 | 546 | 4 | ||||||
| Income before extraordinary items and cumulative effect of change in accounting principle | (8 | ) | 254 | 4 | |||||
| Net income | $ | (8 | ) | $ | 254 | $ | 4 | ||
Year Ended December 31, |
|||||||
|---|---|---|---|---|---|---|---|
| Balance Sheet Information |
|||||||
| 2001 |
2000 |
||||||
| Current assets | $ | 745 | $ | 588 | |||
| Noncurrent assets | 5,126 | 3,930 | |||||
| Total assets | $ | 5,871 | $ | 4,518 | |||
| Current liabilities | 591 | 1,072 | |||||
| Noncurrent liabilities | 3,714 | 2,025 | |||||
| Members' capital | 80 | 80 | |||||
| Undistributed earnings (deficit) | 155 | (1 | ) | ||||
| Additional paid-in capital | 735 | 735 | |||||
| Retained earnings | 647 | 602 | |||||
| Accumulated other comprehensive income (loss) | (51 | ) | 5 | ||||
| Total capitalization and liabilities | $ | 5,871 | $ | 4,518 | |||
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5. Property, Plant and Equipment
A summary of property, plant and equipment by classification is as follows:
| |
December 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
|||||
| Generation plant | $ | 4,344 | $ | 4,142 | |||
| Construction work-in-progress | 610 | 380 | |||||
| Total property, plant and equipment | 4,954 | 4,522 | |||||
| Less: accumulated depreciation (including decommissioning costs for active nuclear stations) | 3,794 | 3,691 | |||||
| Property, plant and equipment, net | $ | 1,160 | $ | 831 | |||
6. Jointly Owned Facilities—Property, Plant and Equipment
Exelon Generation's ownership interest in jointly owned generation plant at December 31, 2001 and 2000 were as follows:
| |
2001 |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Plant |
||||||||||||||||
| Peach Bottom |
Salem |
Keystone |
Conemaugh |
Quad Cities |
||||||||||||
| Operator |
Exelon Generation |
PSEG Nuclear |
Sithe |
Sithe |
Exelon Generation |
|||||||||||
| Participating Interest | 50.00 | % | 42.59 | % | 20.99 | % | 20.72 | % | 75.00 | % | ||||||
| Generation plant | $ | 387 | $ | 12 | $ | 121 | $ | 193 | $ | 96 | ||||||
| Construction work-in-progress | 13 | 53 | 13 | 12 | 52 | |||||||||||
| Total property, plant and equipment | 400 | 65 | 134 | 205 | 148 | |||||||||||
| Accumulated depreciation | 220 | 4 | 98 | 124 | 10 | |||||||||||
| Property, plant and equipment, net | $ | 180 | $ | 61 | $ | 36 | $ | 81 | $ | 138 | ||||||
| |
2000 |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Plant |
||||||||||||||||
| Peach Bottom |
Salem |
Keystone |
Conemaugh |
Quad Cities |
||||||||||||
| Operator |
Exelon Generation |
PSEG Nuclear |
Sithe |
Sithe |
Exelon Generation |
|||||||||||
| Participating Interest | 46.25 | % | 42.59 | % | 20.99 | % | 20.72 | % | 75.00 | % | ||||||
| Generation plant | $ | 378 | $ | 3 | $ | 120 | $ | 190 | $ | 84 | ||||||
| Construction work-in-progress | 41 | 41 | 4 | 10 | 38 | |||||||||||
| Total property, plant and equipment | 419 | 44 | 124 | 200 | 122 | |||||||||||
| Accumulated depreciation | 214 | 3 | 94 | 118 | 2 | |||||||||||
| Property, plant and equipment, net | $ | 205 | $ | 41 | $ | 30 | $ | 82 | $ | 120 | ||||||
Exelon Generation's undivided ownership interests are financed with Exelon Generation funds and, when placed in service, all operations are accounted for as if such participating interests were wholly owned facilities.
On September 30, 1999, PECO reached an agreement to purchase an additional 7.51% ownership interest in Peach Bottom Atomic Power Station (Peach Bottom) from Atlantic City Electric Company
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(ACE) and Delmarva Power & Light Company (DPL) for $18 million. With the purchase of the additional ownership interest in Peach Bottom, Exelon Generation received a transfer of $47 million representing ACE and DPL's decommissioning trust funds and the related liability for the station. As a result of the restructuring, the purchase agreement has been assigned to Exelon Generation. DPL's 3.755% interest was purchased in December 2000 by PECO and transferred to Exelon Generation as part of the restructuring. The purchase of ACE's 3.755% ownership interest was completed in October 2001.
7. Nuclear Decommissioning and Spent Fuel Storage
Nuclear Decommissioning
Exelon Generation has an obligation to decommission its nuclear power plants. Exelon Generation's current estimate of its nuclear facilities' decommissioning cost for its owned nuclear plants is $7.2 billion in current year (2002) dollars. Nuclear decommissioning activity occurs primarily after the plants retirement and is currently estimated to begin in 2031. Exelon Generation's Zion Station permanently ceased power generation operations in 1998. The plant is currently being maintained in a secure and safe condition until final decommissioning, which is scheduled to begin in 2013. Decommissioning costs are currently recoverable through the regulated rates of ComEd and PECO. Exelon Generation collected $102 million in 2001 from ComEd and PECO. At December 31, 2001, the decommissioning liability recorded in accumulated depreciation and deferred credits and other liabilities 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 was $2.6 billion and $1.3 billion, respectively. In order to fund future decommissioning costs, at December 31, 2001 and 2000, Exelon Generation held $3.2 billion and $3.1 billion, respectively, in trust accounts which are included as investments in Exelon Generation's Consolidated Balance Sheets at their fair market value. These trust funds are either qualified or non-qualified. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a "qualified fund." Contributions made into a qualified fund are tax deductible. Exelon Generation 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 by ComEd of its nuclear generating stations to Exelon Generation, ComEd asked the Illinois Commerce Commission (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 Exelon 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 Exelon 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 ICC order is currently pending on appeal in the Illinois Appellate Court.
Exelon Generation recorded a receivable from ComEd of approximately $440 million representing ComEd's legal requirement to remit funds to Exelon Generation upon collection from customers, and
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for collections from customers prior to the establishment of external decommissioning trust funds in 1989 to be remitted to Exelon 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. As a result of the transfer of the ComEd nuclear plants to Exelon Generation and the ICC order limiting the regulated recoveries of decommissioning costs, net unrealized losses of $23 million (net of income taxes) at that date were reclassified to accumulated other comprehensive income. All subsequent realized gains and losses on these decommissioning trust funds' assets are based on the cost basis of the trust fund assets established on the Merger date and are reflected in Other Income and Deductions in Exelon Generation's Consolidated Statements of Income.
Nuclear decommissioning costs associated with the nuclear generating stations formerly owned by PECO continue to be recovered currently through rates charged by PECO to regulated customers these amounts are remitted to Exelon Generation as allowed by the Pennsylvania Public Utility Commission.
Spent Fuel Storage
Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste (SNF). ComEd and PECO, as required by the NWPA, each signed a contract with the DOE (Standard Contract) to provide for disposal of SNF from their respective nuclear generating stations. In accordance with the NWPA and the Standard Contract, ComEd and PECO pay the DOE one mill ($.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 an SNF facility is 2010. This extended delay in SNF acceptance by the DOE has led to Exelon Generation's use of dry storage at its Dresden and Peach Bottom Units and its consideration of dry storage at other units.
In July 2000, PECO entered into an agreement with the DOE relating to 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 agreed to provide credits against future contributions to the Nuclear Waste Fund over the next ten years to compensate for SNF storage costs incurred as a result of the DOE's breach of the contract. The agreement also provides that the DOE will take title to the SNF upon request 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 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
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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 defer payment of the one-time fee of $277 million, with interest accruing 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 Exelon Generation as part of the corporate restructuring.
8. Long-Term Debt
Long-term debt is comprised of the following:
| |
|
|
December 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
Maturity Date |
||||||||||
| |
Rates |
2001 |
2000 |
|||||||||
| Notes payable | 7.25 | % | 2003-2004 | $ | 9 | $ | 14 | |||||
| Senior unsecured notes | 6.95 | % | 2011 | 699 | — | |||||||
| Pollution control notes | 2.10%—2.70 | % | 2016-2034 | 317 | 195 | |||||||
| Total long-term debt | 1,025 | 209 | ||||||||||
| Due within one year | (4 | ) | (4 | ) | ||||||||
| Long-term debt | $ | 1,021 | $ | 205 | ||||||||
Long-term debt maturities in the period 2002 through 2006 and thereafter are as follows:
| 2002 | $ | 4 | |
| 2003 | 4 | ||
| 2004 | 1 | ||
| 2005 | — | ||
| 2006 | — | ||
| Thereafter | 1,016 | ||
| $ | 1,025 | ||
In May 2001, Exelon Generation entered into a forward-starting interest rate swap, with an aggregate notional amount of $700 million, to hedge the interest rate risk related to the anticipated issuance of debt. On June 11, 2001, Exelon Generation issued $700 million of senior unsecured notes with a maturity date of June 15, 2011 and an interest rate of 6.95% and closed the forward-starting interest rate swap. The aggregate loss on the settlement of the swap of $2 million, net of related income taxes, was classified in Accumulated Other Comprehensive Income and is being amortized to interest expense over the life of the debt.
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Also during 2001, Exelon Generation issued $121 million of Pollution Control Revenue Refunding Bonds at an average variable commercial paper interest rate of 2.685% with maturities of 20 to 33 years. The proceeds from these offerings were used to refund tax-exempt debt previously issued by PECO. The transaction was accounted for as a distribution to the member.
Exelon Generation, together with Exelon, ComEd and PECO, entered into a $1.5 billion 364 day unsecured revolving credit facility on December 12, 2001 with a group of banks. As of December 31, 2001, Exelon Generation did not meet the requirements to borrow under this facility.
9. 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 | $ | 253 | $ | 177 | $ | 92 | ||||||
| Deferred | 15 | (38 | ) | 18 | ||||||||
| Investment tax credit, net | (8 | ) | (13 | ) | (12 | ) | ||||||
| State: | ||||||||||||
| Current | 51 | 43 | 22 | |||||||||
| Deferred | 16 | (9 | ) | 5 | ||||||||
| $ | 327 | $ | 160 | $ | 125 | |||||||
| Included in cumulative effect of a change in accounting principle: | ||||||||||||
| Federal—deferred | $ | 6 | $ | — | $ | — | ||||||
| State—deferred | 1 | — | — | |||||||||
| $ | 7 | — | — | |||||||||
The effective income tax rate differed from the Federal statutory rate for the years ended December 31 principally due to the following:
| |
2001 |
2000 |
1999 |
|||||
|---|---|---|---|---|---|---|---|---|
| Income taxes on above at Federal statutory rate of 35% | 35.0 | % | 35.0 | % | 35.0 | % | ||
| Increase (decrease) due to: | ||||||||
| State income taxes, net of Federal income tax benefit | 5.2 | % | 5.0 | % | 5.2 | % | ||
| Nuclear decommissioning trust income | (0.6 | )% | 0.0 | % | — | |||
| Amortization of investment tax credit | (0.6 | )% | (1.9 | )% | (2.1 | )% | ||
| Other, net | — | — | (0.1 | )% | ||||
| Effective income tax rate | 39.0 | % | 38.1 | % | 38.0 | % | ||
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The tax effect of temporary differences giving rise to Exelon Generation's deferred tax assets and liabilities as of December 31, 2001 and 2000 are presented below:
| |
2001 |
2000 |
||||||
|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | ||||||||
| Decommissioning and decontamination obligations | $ | 856 | $ | 455 | ||||
| Deferred pension and postretirement obligations | 236 | 227 | ||||||
| Deferred investment tax credits | 93 | 96 | ||||||
| Other, net | 110 | |||||||
| Total deferred tax assets | 1,185 | 888 | ||||||
| Deferred tax liabilities: | ||||||||
| Plant basis difference | (709 | ) | (397 | ) | ||||
| Unrealized gains on derivative financial instruments | (30 | ) | — | |||||
| Decommissioning and decontamination obligations | (100 | ) | (118 | ) | ||||
| Emission allowances | (44 | ) | (36 | ) | ||||
| Other, net | (12 | ) | — | |||||
| Total deferred tax liabilities | (895 | ) | (551 | ) | ||||
| Deferred income taxes net on the balance sheet | $ | 290 | $ | 337 | ||||
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 Exelon Generation. 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.
Included in accrued expenses on Exelon Generation's consolidated balance sheets at December 31, 2001 and 2000 was approximately $245 and $334 million current taxes payable due to the member.
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 effect on financial condition or results of operations of Exelon Generation.
10. Employee Benefits
Exelon Generation has adopted defined benefit pension plans and postretirement welfare plans sponsored by Exelon. All Exelon Generation employees are eligible to participate in these plans. Essentially all Exelon Generation management employees, and electing union employees, hired on or after January 1, 2001 are eligible to participate in the newly established Exelon cash balance pension plan. Management employees who were active participants in the pension plans on December 31, 2000 and remain employed on January 1, 2002, will have the opportunity to continue to participate in the pension plans or to transfer to the cash balance plan. Benefits under these 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
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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 Exelon Generation's proportionate interest in the Exelon plans.
| |
Pension Benefits |
Other Postretirement Benefits |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
2001 |
2000 |
|||||||||
| Change in Benefit Obligation: | |||||||||||||
| Net benefit obligation at beginning of year | $ | 2,757 | $ | 893 | $ | 1,144 | $ | 351 | |||||
| Service cost | 37 | 17 | 17 | 11 | |||||||||
| Interest cost | 166 | 91 | 70 | 33 | |||||||||
| Plan participants' contributions | — | — | 2 | — | |||||||||
| Plan amendments | 19 | — | (105 | ) | — | ||||||||
| Actuarial (gain)loss | 102 | 102 | 72 | 77 | |||||||||
| Acquisitions | — | 1,689 | — | 670 | |||||||||
| Curtailments/Settlements | (16 | ) | (32 | ) | — | 2 | |||||||
| Special accounting costs | 13 | 90 | 2 | 25 | |||||||||
| Gross benefits paid | (202 | ) | (93 | ) | (70 | ) | (25 | ) | |||||
| Net benefit obligation at end of year | $ | 2,876 | $ | 2,757 | $ | 1,132 | $ | 1,144 | |||||
| Change in Plan Assets: | |||||||||||||
| Fair value of plan assets at beginning of year | $ | 2,908 | $ | 1,296 | $ | 635 | $ | 108 | |||||
| Actual return on plan assets | (111 | ) | 82 | (7 | ) | (6 | ) | ||||||
| Employer contributions | 14 | 1 | 40 | 40 | |||||||||
| Plan participants' contributions | — | — | 2 | 1 | |||||||||
| Acquisitions | — | 1,622 | — | 517 | |||||||||
| Gross benefits paid | (202 | ) | (93 | ) | (70 | ) | (25 | ) | |||||
| Fair value of plan assets at end of year | $ | 2,609 | $ | 2,908 | $ | 600 | $ | 635 | |||||
| Funded status at end of year | $ | (267 | ) | $ | 151 | $ | (532 | ) | $ | (509 | ) | ||
| Miscellaneous adjustment | — | — | — | 3 | |||||||||
| Unrecognized net actuarial (gain)loss | 110 | (347 | ) | 207 | 75 | ||||||||
| Unrecognized prior service cost | 46 | 33 | (105 | ) | — | ||||||||
| Unrecognized net transition obligation (asset) | (7 | ) | (9 | ) | 46 | 54 | |||||||
| Net amount recognized at end of year | $ | (118 | ) | $ | (172 | ) | $ | (384 | ) | $ | (377 | ) | |
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| |
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 to ultimate trend of 4.5% in 2008 | decreasing to ultimate trend of 5.0% in 2005 | decreasing to ultimate trend of 5.0% in 2006 | |||||||||||
| |
Pension Benefits |
Other Postretirement Benefits |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
1999 |
2001 |
2000 |
1999 |
|||||||||||||
| Components of net periodic | |||||||||||||||||||
| benefit cost (benefit): | |||||||||||||||||||
| Service cost | $ | 37 | $ | 17 | $ | 13 | $ | 17 | $ | 11 | $ | 8 | |||||||
| Interest cost | 166 | 91 | 65 | 70 | 33 | 20 | |||||||||||||
| Expected return on assets | (215 | ) | (131 | ) | (94 | ) | (46 | ) | (15 | ) | (6 | ) | |||||||
| Amortization of: | |||||||||||||||||||
| Transition obligation (asset) | (2 | ) | (2 | ) | (2 | ) | 4 | 4 | 4 | ||||||||||
| Prior service cost | 4 | 3 | 2 | (5 | ) | — | — | ||||||||||||
| Actuarial (gain) loss | (11 | ) | (11 | ) | (3 | ) | — | — | — | ||||||||||
| Curtailment charge (credit) | (6 | ) | (5 | ) | — | 4 | 10 | — | |||||||||||
| Settlement charge (credit) | (3 | ) | (7 | ) | — | — | — | — | |||||||||||
| Net periodic benefit cost (benefit) | $ | (30 | ) | $ | (45 | ) | $ | (19 | ) | 44 | $ | 43 | $ | 26 | |||||
| Special accounting costs | $ | 13 | $ | 90 | $ | — | $ | 2 | $ | 25 | $ | — | |||||||
| 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 | $ | 15 | ||
| on postretirement benefit obligation | $ | 135 | ||
| Effect of a one percentage point decrease in assumed health care cost trend on total service and interest cost components | $ | (12 | ) | |
| on postretirement benefit obligation | $ | (117 | ) |
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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 in 2000 of $90 million include $42 million for separation benefits and $48 million for plan enhancements. Exelon Generation provides certain health care and life insurance benefits for retired employees through plans sponsored by Exelon. In 2001, Exelon amended the postretirement medical benefit plan to change 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.
Exelon Generation has 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 Generation matches a percentage of the employee contribution up to certain limits. The cost of Exelon Generation's matching contribution to the savings plans totaled $15 million in 2001.
Exelon Generation participates in a 401(k) Savings Plan for Employees sponsored by Exelon. The plan allows employees to contribute a portion of their pretax income in accordance with specified guidelines. Exelon Generation matches a percentage of employee contributions to the plan up to certain limits. Exelon Generation expensed matching contributions to the plan totaling $23 million for 2001, $7 million for 2000 and $3 million for 1999.
11. Commitments and Contingent Liabilities
Capital Expenditures
Generation's estimated capital expenditures for 2002 are as follows:
| |
(in millions) |
|||
|---|---|---|---|---|
| Production Plant | $ | 392 | ||
| Nuclear Fuel | 432 | |||
| Investments | 254 | |||
| Total | $ | 1,078 | ||
Capital expenditures for production include expenditures to increase capacity of existing plants.
Capital Commitments
Exelon Generation has committed to provide AmerGen with capital contributions equivalent to 50% of the purchase price of any acquisitions AmerGen makes in 2002 and Exelon Generation and British Energy have each agreed to provide up to $100 million to AmerGen at any time for operating expenses.
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Pending Acquisition
In December 2001, Exelon 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 (not included in above table) 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 Generation 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 second quarter of 2002.
Nuclear Insurance Coverages and Assessments
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. Exelon Generation 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. Price-Anderson is scheduled to expire on August 1, 2002. Although replacement legislation has been proposed from time to time, Exelon Generation is unable to predict whether replacement legislation will be enacted.
Exelon Generation 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 Generation is required by the NRC to maintain, to provide for decommissioning the facility. Exelon Generation is unable to predict the timing of the availability of insurance proceeds to Exelon Generation and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, Exelon Generation 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, Exelon Generation 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 Generation's maximum share of any assessment is $46 million per year.
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In addition, Exelon Generation 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 Generation 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 Generation 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 Generation's financial condition and results of operations.
Energy Commitments
Exelon Generation's wholesale operations include the physical delivery and marketing of power obtained through its generation capacity, and long, intermediate and short-term contracts. Exelon Generation 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 generation units. Exelon Generation 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 Generation 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 Generation 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 intent and business objective for the use of its capital assets and contracts are to provide Exelon Generation 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 Generation has entered into bilateral long-term contractual obligations for sales of energy to ComEd, PECO and other load-serving entities, including electric utilities, municipalities, electric cooperatives, and retail load aggregators. Exelon Generation also enters into contractual obligations to deliver energy to wholesale market participants who primarily focus on the resale of energy products for delivery. Exelon Generation provides delivery of its energy to these customers through rights for firm transmission. In addition, Exelon Generation has entered into long-term power purchase agreements with independent power producers (IPP) under which Exelon Generation makes fixed capacity payments to the IPP in return for exclusive rights to the energy and capacity of the generation units for a fixed period.
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At December 31, 2001, Exelon Generation's long-term commitments, relating to the purchase and sale of energy, capacity and transmission rights from affiliated and unaffiliated entities are as expressed in the following tables:
| |
Unaffiliated |
Affiliated |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Power Purchases |
Power Sales |
Capacity Purchases |
Transmission Rights Purchases |
Power Sale/ Capacity |
Power Purchases |
|||||||||||||
| 2002 | $ | 295 | $ | 1,803 | $ | 1,005 | $ | 139 | $ | 4,047 | $ | 256 | |||||||
| 2003 | 84 | 666 | 1,214 | 31 | 4,220 | 261 | |||||||||||||
| 2004 | 31 | 219 | 1,222 | 15 | 4,094 | 315 | |||||||||||||
| 2005 | 23 | 139 | 406 | 15 | 4,018 | 241 | |||||||||||||
| 2006 | 9 | 58 | 406 | 5 | 3,974 | 241 | |||||||||||||
| Thereafter | 150 | 22 | 3,657 | — | 6,207 | 2,171 | |||||||||||||
| Total | $ | 592 | $ | 2,907 | $ | 7,910 | $ | 205 | $ | 26,560 | $ | 3,485 | |||||||
Included in Exelon Generation's long-term commitments are 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 Capacity |
Available Option Capacity |
||
|---|---|---|---|---|
| 2002 | 4,013 | 1,632 | ||
| 2003 | 1,696 | 3,949 | ||
| 2004 | 1,696 | 3,949 |
The agreements with Midwest Generationa 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.
Exelon Generation has entered into PPAs with AmerGen, under which it will purchase all the energy from Unit No. 1 at TMI after December 31, 2001 through December 31, 2014. Under a 1999 PPA, Generation will 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 the Clinton facility.
Environmental Issues
Exelon Generation'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 Generation is generally liable for the costs of remediating environmental contamination of property now owned and of property contaminated by hazardous substances generated by Exelon Generation.
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As of December 31, 2001, Exelon Generation had accrued $14 million for environmental investigation and remediation costs. Exelon Generation cannot reasonably estimate whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by Exelon Generation, 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, rail cars and office equipment, as of December 31, 2001 were:
| 2002 | $ | 28 | |
| 2003 | 37 | ||
| 2004 | 26 | ||
| 2005 | 32 | ||
| 2006 | 32 | ||
| Thereafter | 527 | ||
| Total minimum future lease payments | $ | 682 | |
Rental expense under operating leases totaled $29 million $19 million and $18 million for the year ended December 31, 2001, 2000 and 1999, respectively.
Litigation
Cajun Electric Power Cooperative, Inc. On May 27, 1998, the United States Department of Justice, on behalf of the Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric Power Cooperative, Inc. (Cajun), filed an action claiming breach of contract against PECO in the United States District Court for the Middle District of Louisiana arising out of PECO's termination of the contract to purchase Cajun's interest in the River Bend nuclear power plant. Effective with the corporate restructuring, Exelon Generation has agreed to assume any liability and obligation arising from this litigation. During 2001, the parties reached a settlement of the dispute, and Exelon Generation made a payment of $14 million to Cajun.
Cotter Corporation. 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
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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.
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 Generation cannot predict its share of the costs.
In connection with the corporate restructuring, the responsibility to indemnify Cotter for any liability related to these matters was transferred to Exelon Generation. Management believes it has established an adequate contingent liability in connection with these proceedings.
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 Generation is contesting the liability and damages sought by plaintiff.
Pennsylvania Real Estate Tax Appeals. Exelon Generation is involved in tax appeals regarding two of its nuclear facilities, Limerick (Montgomery County) and Peach Bottom (York County) and one of its fossil facilities, Eddystone (Delaware County), Exelon is also involved in the appeal for TMI (Dauphin County) through AmerGen. Exelon Generation does not believe the outcome of these matters will have a material adverse effect on Exelon Generation's results of operations or financial condition.
Enron. Exelon Generation is an unsecured creditor in Enron Corp.'s (Enron) bankruptcy proceeding. Exelon Generation'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 Generation should not have closed
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out and terminated all of its forward contracts with Enron. If Enron is successful in this argument, Exelon Generation's exposure could be greater than $8.5 million. Exelon Generation 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 Generation has established an allowance for uncollectibles in anticipation of resolution of these matters.
General. Exelon Generation is involved in various other litigation matters. The ultimate outcome of such matters, while uncertain, is not expected to have a material adverse effect on Exelon Generation's financial condition or results of operations.
12. Fair Value of Financial Assets and Liabilities
The carrying amounts and fair values of Exelon Generation's financial assets and liabilities as of December 31 were as follows:
| |
2001 |
2000 |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||
| Non-derivatives | ||||||||||||||
| Assets: | ||||||||||||||
| Cash and cash equivalents | $ | 224 | $ | 224 | $ | 4 | $ | 4 | ||||||
| Customer accounts receivable | 316 | 316 | 316 | 316 | ||||||||||
| Nuclear decommissioning trust funds | 3,165 | 3,165 | 3,127 | 3,127 | ||||||||||
| Liabilities: | ||||||||||||||
| Long-term debt (including amounts due within one year) | 1,025 | 1,040 | 209 | 209 | ||||||||||
| Derivatives | ||||||||||||||
| Energy Derivatives | 92 | 92 | (34 | ) | (34 | ) | ||||||||
As of December 31, 2001 and 2000, Exelon Generation'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 and long-term debt are estimated based on quoted market prices for the same or similar issues. The fair value of Exelon Generation's 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. The fair value of Exelon Generation's energy derivatives is reported in the balance sheet as current or non-current assets or liabilities depending on the time until settlement of the transaction. At December 31, 2001, the following amounts were reported in Exelon Generation's consolidated balance sheet for the fair value of energy derivatives: accounts receivable of $109 million; other non-current assets of $62; accounts payable of $71; and non-current liabilities of $8.
Financial instruments that potentially subject Exelon Generation to concentrations of credit risk consist principally of cash equivalents, customer accounts receivable and energy derivatives. Exelon Generation places its cash equivalents with high-credit quality financial institutions. Generally, such investments are in excess of the Federal Deposit Insurance Corporation limits.
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Exelon Generation utilizes derivatives to manage the utilization of its available generating capacity and provision of wholesale energy to its affiliates. Exelon Generation also utilizes energy option contracts and energy financial swap arrangements to limit the market price risk associated with forward energy commodity contracts. Additionally, Exelon Generation enters into certain energy-related derivatives for trading or speculative purposes. Exelon Generation 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. The majority of power purchase and sale contracts are documented under master netting agreements.
On January 1, 2001, Exelon Generation recognized a non-cash gain of $12 million, net of income taxes, in earnings and deferred a non-cash gain of $5 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 Generation 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 Generation recognized net gains aggregating $14 million ($10 million, net of income taxes) on derivative instruments entered into for trading purposes. Exelon Generation commenced financial trading in the second quarter of 2001. Gains and losses associated with financial trading are reported as either operating revenue or fuel and purchased power expense 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.
As of December 31, 2001, approximately $50 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 Generation's cash flow hedges are expected to settle within the next 3 years.
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Exelon Generation classifies investments in the trust accounts for decommissioning nuclear plants as available-for-sale. The following tables show the fair values, gross unrealized gains and losses and amortized costs bases for the securities held in these trust accounts.
| |
December 31, 2001 |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated 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 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||
| Equity securities | $ | 1,712 | $ | 144 | $ | (180 | ) | $ | 1,676 | |||
| Debt securities: | ||||||||||||
| Government obligations | 940 | 40 | — | 980 | ||||||||
| Other debt securities | 470 | 8 | (7 | ) | 471 | |||||||
| Total debt securities | 1,410 | 48 | (7 | ) | 1,451 | |||||||
| Total available-for-sale securities | $ | 3,122 | $ | 192 | $ | (187 | ) | $ | 3,127 | |||
Net unrealized losses of $84 million and net unrealized gains of $5 million, respectively, were recognized in Accumulated Depreciation and Other Comprehensive Income in Exelon Generation's Consolidated Balance Sheets at December 31, 2001 and 2000, respectively.
| |
For the years ended 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 in Exelon Generation'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 Generation'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.
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13. Selected Quarterly Data (Unaudited)
The information shown below, in the opinion of management, includes all adjustments, consisting only of normal or recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the generation business, quarterly amounts vary significantly during the year.
| |
Calendar Quarter Ended |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
March 31, |
June 30, |
September 30, |
December 31, |
|||||||||||||||||||||
| |
2001 |
2000 |
2001 |
2000 |
2001 |
2000 |
2001 |
2000 |
|||||||||||||||||
| Revenues | $ | 1,628 | $ | 510 | $ | 1,618 | $ | 645 | $ | 2,292 | $ | 941 | $ | 1,510 | $ | 1,178 | |||||||||
| Operating income | $ | 268 | $ | 70 | $ | 113 | $ | 140 | $ | 225 | $ | 228 | $ | 266 | $ | 3 | |||||||||
| Income before cumulative effect of change in accounting principle | $ | 158 | $ | 88 | $ | 71 | $ | 147 | $ | 167 | $ | 164 | $ | 116 | ($ | 139 | ) | ||||||||
| Cumulative effect of a change in accounting principle | $ | 12 | — | — | — | — | — | — | — | ||||||||||||||||
| Net income (loss) | $ | 170 | $ | 88 | $ | 71 | $ | 147 | $ | 167 | $ | 164 | $ | 116 | ($ | 139 | ) | ||||||||
14. Related Party Transactions
Exelon Corporation
At December 31, 2000, Exelon Generation had a $696 million demand note payable, that was due no later than December 16, 2001, with Exelon related to the acquisition of Sithe, which was reflected in current liabilities in Exelon Generation's Consolidated Balance Sheet. Interest expense on the note payable was $23 million and $2 million for the years ended December 31, 2001 and 2000. The loan was repaid in full in June 2001.
Exelon Corporate Restructuring
At December 31, 2001, Exelon Generation had a long-term receivable of $291 million from ComEd resulting from the restructuring which is included in deferred debits and other assets, on Exelon Generation's consolidated balance sheet. This receivable represents ComEd's legal requirement to remit the recovery of decommissioning costs upon collection from the customers.
Exelon Business Service Company
Effective January 1, 2001, upon the corporate restructuring, Exelon Generation receives a variety of corporate support services from the Business Services Company (BSC), a subsidiary of Exelon, including executive management, legal, human resources, financial and information technology services. Such services are provided at cost including applicable overheads. Costs charged to Exelon Generation by BSC for the year ended December 31, 2001 were $78 million.
Power Purchase Agreements with ComEd and PECO
In connection with the restructuring transaction, ComEd and PECO entered into PPAs with Exelon Generation. Under the PPA between Exelon Generation and ComEd, Exelon Generation supplies all of ComEd's load requirements through 2004. Prices for energy vary depending upon the time of day and month of delivery, as specified in the PPA. During 2005 and 2006, ComEd will purchase energy and capacity from Exelon Generation, up to the available capacity of the nuclear
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generation plants formerly owned by ComEd and transferred to Exelon Generation. Under the terms of the PPA with ComEd, Exelon Generation is responsible for obtaining the required transmission for its supply. The PPA with ComEd also specifies that prior to 2005, ComEd and Exelon Generation will jointly determine and agree on a market-based price for energy delivered under the PPA for 2005 and 2006. In the event that the parties cannot agree to market-based prices for 2005 and 2006 prior to July 1, 2004, ComEd has the option of terminating its PPA effective December 31, 2004.
Exelon Generation has also entered into a PPA with PECO whereby Exelon Generation will supply all of PECO's load requirements through 2010. Prices for energy are equivalent to the net proceeds from sales of unbundled generation to PECO's provider of last resort customers at rates PECO is allowed to charge customers who do not choose an alternate generation supplier. Under the terms of PPA, PECO is responsible for obtaining the required transmission for its supply.
Intercompany power purchases pursuant to the PPAs for the year ended December 31, 2001 for ComEd and PECO were $2.6 billion and $1.2 billion, respectively. Prior to the restructuring, Exelon Generation recorded revenues of $871 million and $798 million related to sales of energy to PECO for 2000 and 1999, respectively. During 2000, Exelon Generation recorded revenue of $403 million related to sales of energy to ComEd.
AmerGen
Exelon Generation has entered into a PPA dated November 22, 1999 with AmerGen. Under this PPA, Exelon Generation has agreed to purchase from AmerGen all of the residual energy from the Clinton Power Station through December 31, 2002. Currently, the residual output approximates 25% of the total output of the Clinton Power Station. For the years ended December 31, 2001 and 2000, the amount of purchased power recorded in Consolidated Statements of Income is $57 million and $52 million, respectively. As of December 31, 2001 and 2000, Exelon Generation had a payable of $3.1 million and $2.9 million, respectively, resulting from this PPA.
In addition, under a service agreement dated March 1, 1999, Exelon 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 Exelon Generation or by AmerGen on 90 days' notice. Exelon Generation is compensated for these services in an amount agreed to in the work order but not less than the higher of the 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, Exelon Generation had a receivable of $47 million and $20 million respectively resulting from these services.
In February 2002, Exelon Generation entered into an agreement to loan AmerGen up to $75 million at an interest rate of one-month LIBOR plus 2.25%. As of March 1, 2002, AmerGen had borrowed $30 million under this agreement. The loan is due November 1, 2002.
Sithe Energies, Inc.
In August 2001, Exelon Generation recorded a $150 million note receivable from Sithe. Sithe used the proceeds from the note to repay its subordinated debt. The note has a maturity date of August 20,
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2004 and an interest rate of the Eurodollar rate, plus 2.25%. Sithe repaid this note in December 2001. For the year ended December 31, 2001, Exelon recorded $2.7 million of interest income on the note.
Beginning December 18, 2002, we will have the right to purchase all (but not less than all) of the remaining outstanding shares of the Sithe common stock. The option expires on December 18, 2005. In addition, each of Sithe's other stockholder groups will have the right to require us to purchase all (but not less than all) of its shares during the same period in which we can exercise our option. At the end of that period, if no stockholder has exercised its option, we will have a one-time option to purchase shares from the other stockholders to bring our holdings to 50.1% of the total outstanding shares. If we exercise our option or if all the stockholder groups exercise their put rights, the purchase price for 70% of the remaining 50.1% of the Sithe stock will be set at a fair market value plus a 10% premium in the case of a call or 10% discount in the case of a put, subject to a floor of $430 million and a ceiling of $650 million, and the remaining portion will be valued at fair market value subject to floor price of $141 million and a ceiling price of $330 million, plus, in each case, interest accrued from the beginning of the exercise period.
15. Change in Accounting Estimate
Effective April 1, 2001, Exelon Generation changed its accounting estimates related to the depreciation and decommissioning of certain generating stations. The estimated service lives were extended by 20 years for three nuclear stations, by periods of up to 20 years for certain fossil stations and by 50 years for a pumped storage station. Effective July 1, 2001, the estimated service lives were extended by 20 years for the remainder of Exelon Generation's operating nuclear stations. These changes were based on engineering and economic feasibility studies performed by Exelon Generation considering, among other things, future capital and maintenance expenditures at these plants. The extension of the estimated service lives for the nuclear generating facilities is subject to approval by the NRC. As a result of the change, depreciation and decommissioning expense for 2001 decreased $90 million ($54 million, net of income taxes). At the end of the year, annualized savings resulting from the change would be a decrease of $132 million ($79 million, net of income taxes).
16. Supplemental Financial Information
Supplemental Balance Sheet Information
| |
December 31, |
|||||
|---|---|---|---|---|---|---|
| |
2001 |
2000 |
||||
| Valuation Allowances | ||||||
| Allowance for Doubtful Accounts | $ | 17 | $ | 2 | ||
| Reserve for inventory obsolescence | $ | 12 | $ | 79 | ||
| Accumulated Amortization | ||||||
| Nuclear Fuel | $ | 1,838 | $ | 1,445 | ||
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Supplemental Income Statement Information
| |
For the Years Ended December 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
1999 |
|||||||
| Taxes Other than Income | ||||||||||
| Real Estate | $ | 94 | $ | 32 | $ | 18 | ||||
| Payroll | 38 | 27 | 16 | |||||||
| Other | 17 | 5 | 3 | |||||||
| Total | $ | 149 | $ | 64 | $ | 37 | ||||
Other, Net |
||||||||||
| Investment Income | $ | (8 | ) | $ | 14 | — | ||||
| Other | 2 | 41 | ||||||||
| Total | $ | (8 | ) | $ | 16 | $ | 41 | |||
Supplemental Cash Flow Information
| |
For the Years Ended December 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2001 |
2000 |
1999 |
|||||||
| Cash paid during the year: | ||||||||||
| Interest (net of amount capitalized) | $ | 74 | $ | 35 | $ | 18 | ||||
| Income taxes (net of refunds) | $ | 335 | — | — | ||||||
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