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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
December 19, 2002
(Date of earliest
event reported)
EXHIBIT 99
[Exelon Company Logo]
EXELON CORPORATION WWW.EXELONCORP.COM
P.O. BOX 805379
CHICAGO, IL 60680-5379
December 19, 2002
Note to Exelon's Financial Community:
Update on Sithe Energies Investment
Exelon Corporation's investment in Sithe Energies (Sithe) is fully incorporated
in the previous earnings guidance of $4.65 to $4.80 for 2002 and $4.70 to $5.00
for 2003. The updated information provided below is consistent with the previous
guidance. Exelon will report year-end 2002 earnings on January 29, 2003.
Latest Developments
In connection with Exelon's initial investment in Sithe, Exelon and Sithe's
other shareholders executed a Put and Call Agreement (PCA) that gave Exelon the
right to purchase (Call) the remaining 50.1% of Sithe, and gave the other Sithe
shareholders the right to sell (Put) to Exelon at market based prices subject to
floor and ceiling prices. The Put and Call provisions related to Exelon
Generation's (Exelon) investment in Sithe became exercisable yesterday, December
18. Exelon owns 49.9% of Sithe. The other ownership share of Sithe consisted of
Vivendi (34.2%), Marubeni (14.9%) and Sithe management (1%). Under the Put/Call
scenario, Exelon's planning assumption has been that Vivendi would exercise its
Put option as early as possible, December 18.
Late yesterday, Apollo Energy LLC (Apollo) completed the purchase of Vivendi's
34.2% ownership of Sithe as well as the 1% share owned by Sithe management.
Apollo now owns a 35.2% share of Sithe with Exelon retaining its 49.9% ownership
and Marubeni retaining its 14.9% share.
Earlier this year, Exelon began to explore potential options to restructure the
acquisition of the remaining 50.1% of Sithe. On November 1, Exelon Generation
completed the purchase of Sithe New England Holdings (SNEH), which consisted of
a portfolio of generating plants and Sithe's energy marketing entities. Exelon,
Vivendi, Marubeni, and Sithe management retained their ownership shares of the
remaining Sithe entity and maintained the terms of the Put and Call Agreement.
As part of Apollo's purchase, Apollo has agreed to delay the effective date of
its Put right until June 1, 2003 and, if certain conditions are met, until
September 1, 2003. Exelon has retained its Call right with respect to Apollo's
ownership. Apollo's Put price if executed, or Exelon's Call price if executed,
is equal to about $458 million growing at a rate of interest. There are no
changes to the Put and Call terms with respect to Marubeni's ownership.
The delay of Apollo's Put right while preserving Exelon's Call right provides
flexibility for Exelon and Sithe to resolve ownership restrictions related to
the qualifying facilities (QFs), divest non-strategic assets, and to pursue
restructuring the transaction for the remaining 50.1% of Sithe. Exelon is
continuing discussions with Marubeni regarding restructuring alternatives. The
generating assets remaining at Sithe after Exelon's recent purchase of SNEH
consists of 344 MWs of operating merchant plants located in New York and Canada,
977 MWs of QFs located throughout the US, 230 MWs of capacity under construction
in Mexico and 1,600 MWs of capacity under advanced development in Canada.
If Exelon is unable to restructure the Sithe transaction and purchases the
remaining 50.1% of Sithe under the Put and Call Agreement, Exelon would proceed
to implement measures to accommodate the QFs as well as divest non-strategic
assets. Under either a Put and Call or a restructured scenario, Exelon's
ultimate asset ownership would be largely the same.
What Does It Mean for Exelon?
The SNEH assets were acquired by Exelon on November 1, and are included in
Exelon Generation's and Exelon Corporation's 2003 budgets. Forecasting
assumptions related to those assets are given below. The SNEH assets were
purchased in exchange for a $543 million note at LIBOR plus 87.5 bps between
Exelon Generation and Sithe plus $1.15 billion of project debt. Exelon's
operating loss in 2003 related to those recently acquired assets is expected to
be approximately $27 million after-tax but before acquisition debt interest
expense. The one-time transition cost to integrate the assets into Exelon
Generation is estimated at about $19 million after-tax.
In 2003, the income related to the remaining investment in Sithe and the total
interest expense related to acquisition debt will be a function of the timing of
potential transactions under either the Put and Call or restructured scenario
and wholesale market power prices. Based on our current assumptions, we expect
the financial impact of the remaining investment in Sithe and the acquisition
debt interest expense to be an expense of between $27 million and $32 million
after-tax in 2003.
Exelon Corporation has previously provided guidance that the earnings impact of
the investment in Sithe Energies in 2003 is expected to be a loss of between
$0.20 and $0.25 per share. On a net income basis, the impact is expected to be
about $27 million (dilutive) from the operations of the plants acquired from
Sithe in November (SNEH), $19 million (dilutive) of related transition costs and
between $27 million and $32 million (dilutive) related to the acquisition debt
and the operation of the remaining Sithe assets. On an after-tax net income
basis, the loss is expected to be between $73 and $78 million in 2003, which
falls within the previous forecast of $0.20 to $0.25 EPS range.
What About the Balance Sheet and Cash Flow?
The initial investment for the 49.9% interest in Sithe was financed with about
$700 million of debt at 6.95%, which is currently on Exelon's balance sheet. The
$543 million
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note and $1.15 billion of project debt related to the purchase of the SNEH
assets will appear on Exelon's year-end 2002 balance sheet. By the end of 2003,
the balance sheet will reflect any additional acquisition and project related
debt net of cash at Sithe, transaction-related tax benefits and cash proceeds
from asset sales.
Under the Put and Call Agreement, Exelon would incur acquisition debt of
approximately $650 million to purchase the remaining 50.1% of Sithe. This
amount, however, is expected to be offset by unrestricted cash remaining in
Sithe, estimated at $200 million, which will be a result of Sithe's required
sale of its Asian and Australian assets and the receipt of a tax receivable
resulting from Sithe's loss on the sale of SNEH. To the extent that QFs and
non-strategic assets would be sold prior to closing, these cash proceeds would
also reduce the amount of net acquisition debt. Exelon expects Sithe to have
approximately $1.0 billion of project and subordinated debt, mostly associated
with the Independence project, at the time of closing.
Depending on the set of transactions and the success of certain tax planning
initiatives, it is possible that the final acquisition debt could be less than
the initial $700 million investment currently on Exelon Generation's balance
sheet. However, the $1.15 million of project debt related to the SNEH plants
will remain on the balance sheet along with any project debt associated with
additional asset purchases.
Sithe Relationship with Dynegy
Sithe's Independence plant, a QF, is under various long-term agreements with
Dynegy. Exelon's earnings guidance reflects Dynegy's continued performance under
these agreements. Under the Put and Call Agreement scenario, Independence would
be restructured and retained by Exelon.
Sithe is a 60% owner of the Independence station, a 1,040 MW gas-fired QF that
has an energy-only long-term tolling agreement with Dynegy, with a related
financial swap arrangement. As of September 30, 2002, Sithe had recognized an
asset on its balance sheet related to the fair market value of the financial
swap agreement with Dynegy that is marked-to-market under the terms of SFAS 133.
If Dynegy is unable to fulfill the terms of this agreement, Sithe would be
required to write off the fair value asset, which Exelon Generation estimates
would result in an approximate $22 million reduction in its equity earnings
from Sithe, based on Exelon Generation's 49.9% ownership in Sithe. Depending on
the ultimate structure of Exelon's ownership of the Independence station,
Exelon's financials could reflect the entire impact of the fair value of the
swap agreement as well as any lost value of the tolling agreement.
2003 Forecast Assumptions
The SNEH assets were acquired by Exelon on November 1, and are consolidated into
Exelon Generation's and Exelon Corporation's 2003 budgets. With the acquisition
of SNEH already completed, the final budget includes the assumption of the
acquisition of
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the rest of Sithe through a restructured scenario rather than a Put and Call
scenario. The forecast assumptions include the following:
o The 1,644 MWs of operating capacity (excluding New Boston 2) are valued at
approximately $180 million and will be depreciated over 20 years.
o The 2,421 MWs of capacity under construction (Mystic 8 and 9 and Fore
River) will begin operation on March 1, 2003. At that time, the $1.8
billion investment will be depreciated over 40 years.
o The SNEH plants are uncontracted merchant plants. LNG for Mystic 8 & 9 and
ForeRiver is supplied under a long-term contract with Distigas.
o The assumed average interest cost for the $1.15 billion of project debt is
6.1%.
o The capitalized interest expense on the three plants under construction
for two months prior to the assumed March 1 start-up will be $5.8 million
per month.
o The acquisition of the remaining Sithe ownership in mid-2003 will be
restructured. Various Sithe asset sales and/or purchases will take place
around that date.
- ---------------------------------------------------------------------------------------------------------------
Table 1 Sithe New England Plants
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Station Status Capacity Fuel Heat Rate 2003 Projected
(MWs) (Btu/kWh) Capacity Factor
===============================================================================================================
- ---------------------------------------------------------------------------------------------------------------
ForeRiver (Base-load) Construction 807 Gas/Oil 6,850 > 70%
- ---------------------------------------------------------------------------------------------------------------
Mystic 8 (Base-load) Construction 807 Gas 6,850 > 70%
- ---------------------------------------------------------------------------------------------------------------
Mystic 9 (Base-load) Construction 807 Gas 6,850 > 50%
- ---------------------------------------------------------------------------------------------------------------
Total Merchant Under Constr. 2,421
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Framingham 1 (Peaking) Operating 13 Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
Framingham 2 (Peaking) Operating 11 Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
Framingham 3 (Peaking) Operating 13 Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
Mystic 4 (Intermediate) Operating 135 Oil 9,900 < 5%
- ---------------------------------------------------------------------------------------------------------------
Mystic 5 (Intermediate) Operating 130 Oil 10,200 < 5%
- ---------------------------------------------------------------------------------------------------------------
Mystic 6 (Intermediate) Operating 138 Oil 10,300 < 5%
- ---------------------------------------------------------------------------------------------------------------
Mystic 7 (Intermediate) Operating 592 Gas/Oil 10,400 30-40%
- ---------------------------------------------------------------------------------------------------------------
Mystic CT (Peaking) Operating 11 Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
New Boston 1(Peaking) Operating 380 Gas/Oil N/A
- ---------------------------------------------------------------------------------------------------------------
New Boston 2 (Peaking) Idle 380 Gas/Oil N/A
- ---------------------------------------------------------------------------------------------------------------
New Boston 3 (Peaking) Operating 20 Oil N/A
- ---------------------------------------------------------------------------------------------------------------
West Medway 1 (Peaking) Operating 55 Gas/Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
West Medway 2 (Peaking) Operating 55 Gas/Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
West Medway 3(Peaking) Operating 55 Gas/Oil 13,500 < 5%
- ---------------------------------------------------------------------------------------------------------------
Wyman 4 (Peaking) Operating 36 Oil 10,400 < 5%
- ---------------------------------------------------------------------------------------------------------------
Total Merchant in Operation 2,024
- ---------------------------------------------------------------------------------------------------------------
Total MWs 4,445
- ---------------------------------------------------------------------------------------------------------------
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For additional information please contact Linda Byus at (312) 394-7696 or
Marybeth Flater at (312) 394-8354.
================================================================================
This press release contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Actual results may vary materially
from the expectations contained herein. The forward-looking statements herein
include statements about future financial and operating results of Exelon.
Economic, business, competitive and/or regulatory factors affecting Exelon's
businesses generally could cause actual results to differ materially from those
described herein. For a discussion of the factors that could cause actual
results to differ materially, please see Exelon's filings with the Securities
and Exchange Commission, particularly those factors discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook" in Exelon's 2001 Annual Report and "Risk Factors" in Exelon Generation
Company's Registration Statement on Form S-4, file number 333-85496. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this press release. Exelon does not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date of this press release.
###
Exelon Corporation is one of the nation's largest electric utilities with
approximately 5 million customers and more than $15 billion in annual
revenues. The company has one of the industry's largest portfolios of
electricity generation capacity, with a nationwide reach and strong positions
in the Midwest and Mid-Atlantic. Exelon distributes electricity to approximately
5 million customers in Illinois and Pennsylvania and gas to more than 440,000
customers in the Philadelphia area. Exelon is headquartered in Chicago and
trades on the NYSE under the ticker EXC.
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