ITEM 1. BUSINESS.
General
Exelon Corporation, a Pennsylvania corporation (Exelon), was incorporated in February 1999. On October 20, 2000, Exelon became the parent corporation for each of PECO Energy Company (PECO) and Commonwealth Edison Company (ComEd) as a result of the completion of the transactions contemplated by an Agreement and Plan of Exchange and Merger, as amended, among PECO, Unicom Corporation (Unicom) and Exelon. PECO and ComEd, which was a subsidiary of Unicom, became the principal utility subsidiaries of Exelon through a mandatory exchange of each share of outstanding common stock of PECO for one share of common stock of Exelon and a merger of Unicom into Exelon. In the merger, holders of Unicom common stock received 0.875 shares of Exelon common stock plus $3.00 in cash for each of their shares of Unicom common stock. The merger transaction was accounted for as a purchase of Unicom by PECO.
Exelon, through subsidiaries including PECO and ComEd, operates in three business segments:
o Energy Delivery, consisting of the retail electricity distribution and transmission businesses of ComEd in northern Illinois and PECO in southeastern Pennsylvania and the natural gas distribution business of PECO in the Pennsylvania counties surrounding the City of Philadelphia.
o Generation, consisting of electric generating facilities, power marketing operations and equity interests in Sithe Energies, Inc. (Sithe) and AmerGen Energy Company, LLC (AmerGen).
o Enterprises, consisting of competitive retail energy sales, energy and infrastructure services, communications and related investments.
During January 2001, Exelon undertook a restructuring to separate Exelon's generation and other competitive businesses from its regulated energy delivery business. As part of the restructuring, the non-regulated operations and related assets of ComEd and PECO were transferred to separate subsidiaries of Exelon. Restructuring will streamline the process for managing, operating and tracking the financial performance of each business segment.
Exelon's principal executive offices are located at 10 South Dearborn Street, Chicago, Illinois 60603, and its telephone number is 312-394-4321. ComEd was organized in the State of Illinois in 1913 as a result of the merger of Cosmopolitan Electric Company into the original corporation named Commonwealth Edison Company, which was incorporated in 1907. ComEd's principal executive offices are located at 10 South Dearborn Street, Chicago, Illinois 60603 and its telephone number is 312-394-4321. PECO was incorporated in Pennsylvania in 1929. PECO's principal executive offices are located at 2301 Market Street, Philadelphia, Pennsylvania 19101-8699 and its telephone number is 215-841-4000.
Exelon and various of its subsidiaries are subject to Federal and state regulation. Exelon is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). ComEd is a public utility under the Illinois Public Utilities Act subject to regulation by the Illinois
Commerce Commission (ICC). PECO is a public utility under the Pennsylvania Public Utility Code subject to regulation by the Pennsylvania Public Utility Commission (PUC). PECO, ComEd and Generation are electric utilities under the Federal Power Act subject to regulation by the Federal Energy Regulatory Commission (FERC). Specific operations of Exelon are also subject to the jurisdiction of various other Federal, state, regional and local agencies, including the United States Nuclear Regulatory Commission (NRC).
As a registered holding company, Exelon and its subsidiaries are subject to a number of restrictions under PUHCA. These restrictions generally involve financing, investments and affiliate transactions. Under PUHCA, Exelon and its subsidiaries cannot issue debt or equity securities or guaranties without approval of the Securities and Exchange Commission (SEC), or in some circumstances in the case of ComEd and PECO, the ICC or the PUC, respectively. Exelon currently has SEC approval to issue up to an aggregate of $4 billion in common stock, preferred securities, long-term debt and short-term debt, and to issue up to $4.5 billion in guaranties. PUHCA also limits the businesses in which Exelon may engage and the investments that Exelon may make. With limited exceptions, Exelon may only engage in traditional electric and gas utility businesses and other businesses that are reasonably incidental or economically necessary or appropriate to the operations of the utility business. The exceptions include Exelon's ability to invest in exempt telecommunications companies, in exempt wholesale generating businesses and foreign utility companies (these investments are capped at $4 billion in the aggregate), in energy-related companies (as defined in SEC rules, and subject to a cap on these investments of 15% of Exelon's consolidated capitalization), and in other businesses, subject to SEC approval. In addition, PUHCA requires that all of a registered holding company's utility subsidiaries constitute a single system that can be operated in an efficient, coordinated manner. For additional information about restrictions on the payment of dividends and other effects of PUHCA on Exelon and its subsidiaries, see ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Exelon.
Energy Delivery
Energy Delivery consists of Exelon's regulated energy delivery operations conducted by ComEd and PECO.
ComEd is engaged principally in the purchase, transmission, distribution and sale of electricity to a diverse base of residential, commercial, industrial and wholesale customers in northern Illinois. ComEd is a public utility under the Illinois Public Utilities Act. Consequently, ComEd is subject to regulation by the ICC as to rates and charges, issuance of most of its securities, service and facilities, classification of accounts, transactions with affiliated interests, as defined in the Illinois Public Utilities Act, and other matters. ComEd is also subject to regulation by FERC as to transmission rates and certain other aspects of its business, including interconnections and sales of transmission related assets.
ComEd's traditional service territory has an area of approximately 11,300 square miles and an estimated population of approximately 8 million as of December 31, 2000. The service territory includes the City of Chicago, an area of about 225 square miles with an estimated population of approximately 3 million. ComEd had approximately 3.5 million customers at December 31, 2000.
ComEd's franchises are sufficient to permit it to engage in the business it now conducts. ComEd's franchise rights are generally nonexclusive rights documented in agreements and, in some cases, certificates of public convenience issued by the ICC. With few exceptions, the franchise rights have stated expiration dates ranging from 2001 to 2040 and subsequent years.
PECO is engaged principally in the purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and in the purchase, distribution and sale of natural gas to residential, commercial and industrial customers. PECO is a public utility under the Pennsylvania Public Utility Code. As a result, PECO is subject to regulation by the PUC as to electric distribution rates, retail gas rates, issuances of securities and certain other aspects of PECO's operations. PECO is also subject to regulation by FERC as to transmission rates and certain other aspects of its business, including interconnections and sales of transmission related assets.
Pursuant to the Pennsylvania Electricity Generation Customer Choice and Competition Act (Competition Act), the Commonwealth of Pennsylvania has required the unbundling of retail electric services in Pennsylvania into separate generation, transmission and distribution services with open retail competition for generation services. Since the commencement of deregulation in 1999, PECO serves as the local distribution company providing electric distribution services to all customers in its service territory and bundled electric service to customers who do not choose an alternate electric generation supplier. PECO delivers electricity to approximately 1.5 million customers and natural gas to approximately 425,000 customers.
PECO's traditional retail service territory covers 2,107 square miles in southeastern Pennsylvania. PECO provides electric delivery service in an area of 1,972 square miles, with a population of approximately 3.6 million, including 1.6 million in the City of Philadelphia. Natural gas service is supplied in a 1,475 square mile area in southeastern Pennsylvania adjacent to Philadelphia, with a population of 1.9 million.
PECO has the necessary franchise rights to furnish electric and gas service in the various municipalities or territories in which it now supplies such services. PECO's franchise rights, which are generally nonexclusive rights, consist of charter rights and certificates of public convenience issued by the PUC and/or "grandfather rights". Such franchise rights are generally unlimited as to time.
As a result of Exelon's restructuring to separate its regulated and competitive businesses, both ComEd and PECO transferred their assets and liabilities unrelated to energy delivery to other subsidiaries of Exelon. In the case of ComEd, the assets and liabilities transferred included nuclear generation and wholesale power marketing operations and some administrative functions. In the case of PECO, the assets and liabilities transferred related to nuclear, fossil and hydroelectric generation and wholesale power marketing; unregulated ventures and activities, including communications, infrastructure services and unregulated gas and electric sales activities; and administrative, information technology and other support for all other business activities of Exelon and its subsidiaries.
Energy Delivery's kilowatt-hour (kWh) sales and generation are generally higher, primarily during the summer periods but also during the winter periods, when temperature extremes create demand for either summer cooling or winter heating. ComEd's highest peak load experienced to date occurred on August 30, 1999 and was 21,243,000 kilowatts, and the highest peak load experienced to date during a winter season occurred on December 20, 1999 and was 14,484,000 kilowatts. PECO's highest peak load experienced to date occurred on July 6, 1999 and was 7,959,000 kilowatts; and the highest peak load experienced to date during a winter season occurred on January 17, 2000 and was 6,135,000 kilowatts.
Retail Electric Services
Electric utility restructuring legislation was adopted in Pennsylvania in December 1996 and in Illinois in December 1997. Both states, through their regulatory agencies, established a phased approach to competition, allowing customers to choose an alternative electric generation supplier; required rate reductions and imposed caps on rates during a transition period; and allowed the collection of competitive transition charges (CTCs) from customers to recover costs that might not otherwise be recovered in a competitive market (stranded costs). Under the restructuring initiatives adopted at the Federal and state levels, the role of electric utilities in the supply and delivery of energy is changing. ComEd and PECO continue to be obligated to provide a reliable delivery system under cost-based rates. During the transition period to a competitive supply marketplace, ComEd and PECO are also obligated to supply generation services to customers who do not or cannot choose an alternate supplier.
The rates for the generation service provided by ComEd and PECO are subject to rate caps during the transition periods. PECO has entered into a long-term power purchase agreement with Generation to obtain sufficient power at the rates it is allowed to charge to serve customers who do not choose an alternate generation supplier. ComEd has entered into a long-term power purchase agreement with Generation to obtain sufficient power at fixed rates.
ComEd. Under the Illinois legislation, as of December 31, 2000, all non-residential customers were eligible to choose a new electric generation supplier or elect the power purchase option. The power purchase option allows the purchase of electric energy from ComEd at market-based prices. ComEd's residential customers become eligible to choose a new electric supplier in May 2002. As of December 31, 2000, over 9,500 non-residential customers, representing approximately 27% of ComEd's retail kilowatt-hour sales for the twelve months prior to the introduction of retail competition, had elected to receive their electric energy from an alternative electric supplier or chose the power purchase option.
In addition to retail competition for generation services, the Illinois legislation provided for residential base rate reductions, a sharing with customers of any earnings over a defined threshold and a base rate freeze, reflecting the residential base rate reductions, through January 1, 2005. A 15% residential base rate reduction became effective on August 1, 1998 and a further 5% residential base rate reduction will become effective in October 2001. Under the earnings provision, one-half of any earnings over a defined threshold return on common equity during the period ending December 31, 2004 must be refunded to customers. The threshold rate of return on common equity is based on the 30-year treasury bond rate, plus 8.5% in the years 2000 through 2004. Earnings, for purposes of the earnings provision, include ComEd's net income calculated in accordance with generally accepted accounting principles and may include accelerated amortization of regulatory assets and the amortization of goodwill. At December 31, 2000, ComEd had a regulatory asset with an unamortized balance of $385 million as a result of the Illinois legislation. It expects to fully recover and amortize that regulatory asset by the end of 2003. ComEd does not currently expect to trigger the earnings sharing provisions in the years 2001 through 2004.
The Illinois legislation also provided for the collection of a CTC from customers who choose to purchase electric energy from an alternative supplier or elect the power purchase option during a transition period that extends through 2006. The CTC, which was established as of October 1, 1999 and is applied on a cents per kWh basis, considers the revenue that would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. The CTC allows ComEd to recover some of its costs that might otherwise be unrecoverable under market-based rates.
As part of a settlement agreement between ComEd and the City of Chicago relating to ComEd's Chicago franchise agreement, ComEd and Chicago agreed to a revised combination of ongoing work under the franchise agreement and new initiatives that will result in defined transmission and distribution expenditures by ComEd to improve electric service in Chicago. The Illinois legislation also committed ComEd to spend at least $2 billion during the period 1999 through 2004 on transmission and distribution facilities outside of Chicago. In addition, ComEd conducted an extensive evaluation of the reliability of its transmission and distribution systems in response to several outages in the summer of 1999. As a result of the evaluation, ComEd has increased its capital and operating and maintenance expenditures on its transmission and distribution facilities in order to improve their reliability.
As a result of ComEd's commitments to improve the reliability of its transmission and distribution system, ComEd expects its capital expenditures will exceed depreciation on its rate base assets through at least 2002. The base rate freeze will generally preclude rate recovery on and of such investments prior to January 1, 2005. Unless ComEd can offset the additional carrying costs against cost savings, its return on investment will be reduced during the period of the rate freeze and until rate increases are approved authorizing a return of and on this new investment.
In addition, the Illinois legislation provides that an electric utility, such as ComEd, will be liable for actual damages suffered by customers in the event of a continuous power outage of four hours or more affecting 30,000 or more customers and provides for reimbursement of governmental emergency and contingency expenses incurred in connection with any such outage. The legislation bars recovery of consequential damages. The legislation also allows an affected utility to seek relief from these provisions from the ICC where the utility can show that the cause of the outage was unpreventable damage due to weather events or conditions, customer tampering or third party causes.
The Illinois legislation also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a special purpose financing subsidiary. The proceeds, net of transaction costs, from such securities issuances must be used to refinance outstanding debt or equity or for certain other limited purposes. The total amount of such securities that may be issued is approximately $6.8 billion. In December 1998, special purpose financing subsidiaries of ComEd issued $3.4 billion of notes. For additional information, see Related Entities below and ITEM 8. Financial Statements and Supplementary Data - Exelon, Note 15 of Notes to Consolidated Financial Statements.
PECO. Retail competition for electric generation services began in Pennsylvania on January 1, 1999, and by January 1, 2000 all of PECO's retail electric customers had the right to choose their generation suppliers. At December 31, 2000, approximately 18% of PECO's residential load, 46% of its commercial load and 42% of its industrial load were purchasing generation service from alternative suppliers.
In addition to retail competition for generation services, PECO's settlement of its restructuring case mandated by the Competition Act required PECO to provide generation services to customers who do not or cannot choose an alternate supplier through December 31, 2010 and established caps on generation and distribution rates. The 1998 settlement also authorized PECO to recover $5.3 billion of stranded costs and to securitize up to $4.0 billion of its stranded cost recovery.
Under the 1998 settlement, PECO's distribution rates were capped through June 30, 2005 at the level in effect on December 31, 1996. Generation rates, consisting of the charge for stranded cost recovery and a shopping credit or capacity and energy charge, were capped through December 31, 2010. For 2001, the generation rate cap is $0.0681 per kWh, increasing to $0.0698 per kWh in 2002,
$0.0751 per kWh in 2006 and $0.0801 per kWh in 2007. The rate caps are subject to limited exceptions, including significant increases in Federal or state taxes or other significant changes in law or regulations that would not allow PECO to earn a fair rate of return.
In connection with its request for authorization to securitize an additional $1 billion of its stranded cost recovery, PECO agreed to provide its customers with additional rate reductions of $60 million in 2001. Under the settlement agreement entered into by PECO in 2000 relating to the PUC's approval of the merger with Unicom, PECO agreed to $200 million in aggregate rate reductions for all customers over the period January 1, 2002 through 2005 and extended the rate cap on distribution rates through December 31, 2006.
PECO has been authorized to recover stranded costs of $5.3 billion over a twelve-year period ending December 31, 2010 with a return on the unamortized balance of 10.75%. PECO's recovery of stranded costs is based on the level of transition charges established in the settlement of PECO's restructuring case and the projected annual retail sales in PECO's service territory. Recovery of transition charges for stranded costs and PECO's allowed return on its recovery of stranded costs are included in operating revenue.
As a mechanism for utilities to recover their allowed stranded costs, the Competition Act provides for the imposition and collection of non-bypassable CTCs on customers' bills. CTCs are assessed to and collected from all retail customers who have been assigned stranded cost responsibility and access the utilities' transmission and distribution systems. As the CTCs are based on access to the utility's transmission and distribution system, they will be assessed regardless of whether such customer purchases electricity from the utility or an alternate electric generation supplier. The Competition Act provides, however, that the utility's right to collect CTCs is contingent on the continued operation at reasonable availability levels of the assets for which the stranded costs were awarded, except where continued operation is no longer cost efficient because of the transition to a competitive market.
The following table shows the estimated average levels of stranded cost recovery and the amortization of the remaining portion of PECO's authorized stranded cost recovery ($5.2 billion at December 31, 2000) for the years 2001 through 2010, based on estimated 0.8% annual sales growth assumed in the 1998 settlement of PECO's restructuring case. Exelon's independent accountant's have neither examined nor compiled these projections.
Under the Competition Act, licensed entities, including alternate electric generation suppliers, may act as agents to provide a single bill and provide associated billing and collection services to retail customers located in PECO's retail electric service territory. In that event, the alternative supplier or other third party replaces the customer as the obligor with respect to the customer's bill and PECO generally has no right to collect such receivable from the customer. Third-party billing would change PECO's customer profile (and risk of non-payment by customers) by replacing multiple customers with the entity providing third-party billing for those customers. PUC-licensed entities may also finance, install, own, maintain, calibrate and remotely read advanced meters for service to retail customers in PECO's retail electric service territory. To date, no third parties are providing billing of PECO's charges to customers or advanced metering. Only PECO can physically disconnect or reconnect a customer's distribution service.
As permitted by the Competition Act and the 1998 settlement of its restructuring case, PECO securitized $4 billion of its stranded cost recovery in 1999 by the issuance of transition bonds through a special purpose financing entity. In 2000, PECO securitized an additional $1 billion of its stranded cost recovery, also through the issuance of transition bonds. As required by the Competition Act, the proceeds from the securitizations were applied to reduce stranded costs, including related capitalization of PECO. In March 2001, approximately $805 million of the first series of transition bonds were refinanced. For additional information, see Related Entities below and ITEM 8. Financial Statements and Supplementary Data - Exelon, Note 22 of Notes to Consolidated Financial Statements.
PECO's settlement of its restructuring case included a number of provisions designed to encourage competition for generation services. Shopping credits for generation service may provide an economic incentive for customers to choose an alternate supplier. Effective January 1, 2001, PECO agreed to assign 20% of its non-shopping residential customers to competitive default service
provided by one or more alternate suppliers. If on January 1, 2003, 50% of PECO's residential and commercial customers are not obtaining generation services from alternate generation suppliers, then non-shopping customers will be assigned to alternate generation suppliers to reach that level.
On November 29, 2000, the PUC approved PECO's bilateral contract with New Power Company (New Power) to move 22% of PECO's non-shopping residential customers to New Power for competitive default generation service. Under this contract, New Power has agreed that it will provide generation services through January 2004, at specified discounted rates, to nearly 300,000 residential customers of PECO who are currently taking their generation service from PECO. During this period, those customers will continue to have the right to switch to an alternate electric generation supplier other than New Power, as well as the right to return as customers of PECO, without penalty or charge. At the end of 2002, if the number of competitive default service customers then served by New Power has dropped below 20% of PECO's residential customer base, there will be an additional allocation of residential customers to New Power to bring its competitive default service levels back up to 20% of the residential customer base.
In addition to the New Power contract, PECO has also entered into a contract with Green Mountain Energy Company to assign 50,000 of PECO's non-shopping residential customers to Green Mountain for competitive default generation service, on the same terms and conditions as the New Power contract. On February 21, 2001, the PUC approved the Green Mountain contract.
Transmission Services
Energy Delivery provides wholesale transmission service under rates established by FERC. FERC Order No. 888 (Order 888) requires all public utilities that own, control or operate interstate transmission facilities have open-access transmission tariffs for wholesale transmission services in accordance with non-discriminatory terms and conditions established by FERC. In response to Order 888, both ComEd and PECO filed individual compliance tariffs with FERC.
FERC has used its regulation of transmission to encourage competition for wholesale generation services and the development of regional structures to facilitate regional wholesale markets. In December 1999, FERC issued Order No. 2000 requiring jurisdictional utilities to file a proposal to form a regional transmission organization (RTO) meeting certain governance, operational, and scope and scale requirements articulated in the order or, alternatively, to describe efforts to participate in or work toward participating in an RTO or explain why they were not participating in an RTO. Order 2000 is generally designed to separate the governance and operation of the transmission system from generation companies and other market participants. RTOs may be organized and may independently manage regional transmission systems in a variety of ways, including through independent for-profit or not-for-profit transmission companies, independent not-for-profit system operators or ISOs (such as the Midwest Independent Transmission System Operator (MISO)), as well as other structures. FERC has set December 15, 2001 as the deadline for transferring control over transmission facilities to approved RTOs.
ComEd. ComEd has been a transmission-owning member of MISO, a prospective RTO. On October 31, 2000, ComEd announced its intention to join the Alliance Regional Transmission Organization (Alliance), an RTO being established by utilities generally located to the east of ComEd. Participation options in the Alliance are being evaluated, including a transfer of the transmission assets for a passive equity interest, leasing or a management-type arrangement. On the same date, ComEd provided notice of its intention to withdraw from the MISO, which withdrawal is needed in order to participate in the Alliance. In March 2001, ComEd, the MISO and other market participants reached a proposed settlement regarding issues associated with ComEd's
withdrawal from the MISO, including related costs. The proposed settlement is subject to FERC approval, which has the power to accept, reject or make changes as a condition to its approval. If the settlement is approved, ComEd will be permitted to withdraw from the MISO and to join the Alliance. At present, ComEd believes it has established adequate reserves for its portion of costs related to its withdrawal from the MISO.
PECO. PECO provides regional transmission service pursuant to a regional open-access transmission tariff filed by it and the other transmission owners who are members of PJM Interconnection LLC (PJM). PJM is a power pool that integrates, through central dispatch, the generation and transmission operations of its member companies across a 50,000 square mile territory. Under the PJM tariff, transmission service is provided on a region-wide, open-access basis using the transmission facilities of the PJM members at rates based on the costs of transmission service. PJM's Office of Interconnection is the ISO for PJM and is responsible for operation of the PJM control area and administration of the PJM open-access transmission tariff. PECO and the other transmission owners in PJM have turned over control of their transmission facilities to the ISO. The PJM ISO and the transmission owners who are members of PJM, including PECO, have filed with FERC for approval of PJM as an RTO.
Gas
Historically, PECO's gas sales and gas transportation revenues were derived pursuant to rates regulated by the PUC. The PUC established, through regulated proceedings, the base rates that PECO may charge for gas service in Pennsylvania. PECO's gas rates are subject to quarterly adjustments designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates and to recover or refund increases or decreases in certain state taxes not recovered in base rates.
On July 1, 2000, PECO implemented the Pennsylvania Natural Gas Choice and Competition Act that was passed in 1999. The Act expands choice of gas suppliers to residential and small commercial customers and eliminates the 5% gross receipts tax on gas distribution companies' sales of gas. Large commercial and industrial customers have been able to choose their suppliers since 1984. Approximately one-third of PECO's current total yearly throughput is supplied by third parties. The Act permits gas distribution companies to continue to make regulated sales of gas, at cost, to their customers. The Act does not deregulate the transportation service provided by gas distribution companies, which remains subject to rate regulation. Gas distribution companies continue to provide billing, metering, installation, maintenance and emergency response services.
PECO's natural gas supply is provided by purchases from a number of suppliers for terms of up to five years. These purchases are delivered under several long-term firm transportation contracts. PECO's aggregate annual entitlement under these firm transportation contracts is 87.5 million dekatherms. Peak gas is provided by PECO's liquefied natural gas facility and propane-air plant. PECO also has under contract 21.7 million dekatherms of underground storage through service agreements. Natural gas from underground storage represents approximately 45% of PECO's 2000-2001 heating season supplies.
Construction Budget
The following table shows Exelon's most recent estimate of capital expenditures for plant additions and improvements for Energy Delivery for 2001:
ComEd PECO (Millions of $) ----------------------------------- Transmission and Distribution $745 $181 Gas -- 69 Other 155 10 ---- ---- Total $900 $260 ==== ====
Generation
General
Generation combines the generating resources and wholesale power marketing operations owned by PECO and ComEd prior to Exelon's restructuring. The generating resources of Generation consist of ownership interests in generating facilities and long-term contracts for capacity. Generation also owns a 50% interest in AmerGen, a joint venture with British Energy, Inc., a wholly owned subsidiary of British Energy plc (British Energy), which acquires and operates nuclear generating facilities. In 2000, Exelon acquired a 49.9% interest in Sithe, with an option to purchase the other 50.1% beginning in 2003. Sithe develops, owns and operates merchant generating facilities.
Generation's wholesale power marketing group, Power Team, is one of the largest wholesale power marketers in North America. Power Team manages the output of Generation's resources to meet the load requirements of ComEd and PECO and the supply commitments of Exelon Energy, Exelon's competitive retail energy supplier.
Generating Resources
The generating resources of Generation, AmerGen and Sithe consist of the following:
Type of Capacity MW % of Total - ---------------- ------ ----------- Generation 1 Nuclear 13,949 42.2% Fossil 3,721 11.3% Hydro 1,489 4.5% Long-term Contracts 2 13,900 42.0% ------ ------ Total 33,059 100.0% ====== ====== AmerGen 3 Nuclear 2,378 100.0% ====== ====== Sithe 4 Fossil 3,782 37.7% Under Development 3,715 37.0% Under Advanced Construction 2,535 25.3% ------ ------ Total 10,032 100.0% ====== ======
1 See "Fuel" for sources of fuels used in electric generation. 2 Contracts range from 4 to 29 years. 3 Generation owns a 50% interest in AmerGen. Capacity and the related energy from AmerGen's facilities not sold under long-term contracts to third parties are marketed by the Power Team. See "AmerGen" below. 4 Generation owns a 49.9% interest in Sithe. The capacity and related energy from Sithe's facilities are marketed by Sithe. Fossil includes Hydro of 80 MW or 0.79% of total Sithe capacity. See "Sithe" below.
The generating resources of Generation are located primarily in the Midwest (approximately 45% of capacity) and the Mid Atlantic regions (approximately 55% of capacity). AmerGen's generating resources are also in the Midwest and the Mid Atlantic regions. Sithe's generating resources are primarily in the New England region.
Nuclear Facilities
Generation has ownership interests in eight nuclear generating stations, consisting of 16 units with 13,949 MW of capacity (Exelon share). For additional information, see ITEM 2.
ITEM 2. PROPERTIES.
Energy Delivery
The electric substations and a portion of the transmission rights of way of ComEd and PECO are owned in fee. A significant portion of the electric transmission and distribution facilities is located over or under highways, streets, other public places or property owned by others, for which permits, grants, easements or licenses, deemed satisfactory by ComEd and PECO, respectively, but without examination of underlying land titles, have been obtained.
Transmission and Distribution
Exelon's higher voltage electric transmission and distribution lines owned and in service are as follows:
Voltage (Volts) Circuit Miles - -------------------------------- ---------------------- ComEd: 765,000 90 345,000 2,589 138,000 2,097
PECO: 500,000 891 220,000 1,634 132,000 15
ComEd's electric distribution system includes 40,605 pole-line miles of overhead lines and 38,517 cable miles of underground lines. PECO's electric distribution system includes 48,222 circuit miles, 21,009 pole-line miles of overhead lines and 21,002 cable miles of underground lines.
Gas
The following table sets forth PECO's gas pipeline miles at December 31, 2000:
Pipeline Miles Transmission 28 Distribution 6,099 Service piping 5,030 ------- Total 11,157 =======
PECO has a liquefied natural gas facility located in West Conshohocken, Pennsylvania which has a storage capacity of 1,200,000 million cubic feet (mcf) and a sendout capacity of 157,000 mcf/day and a propane-air plant located in Chester, Pennsylvania, with a tank storage capacity of 1,980,000 gallons and a peaking capability of 28,800 mcf/day. In addition, PECO owns 27 natural gas city gate stations at various locations throughout its gas service territory.
Mortgages
The principal plants and properties of ComEd are subject to the lien of ComEd's Mortgage dated July 1, 1923, as amended and supplemented, under which ComEd's first mortgage bonds are issued.
The principal plants and properties of PECO are subject to the lien of PECO's Mortgage dated May 1, 1923, as amended and supplemented, under which PECO's first mortgage bonds are issued.
Generation
The following table sets forth Generation's owned net electric generating capacity by station at January 1, 2001:
The net generating capability available for operation at any time may be less due to regulatory restrictions, fuel restrictions, efficiency of cooling facilities and generating units being temporarily out of service for inspection, maintenance, refueling, repairs or modifications required by regulatory authorities.
Exelon and its subsidiaries maintain property insurance against loss or damage to its principal plants and properties by fire or other perils, subject to certain exceptions. For information regarding nuclear insurance, see ITEM 1. Business - Generation. Exelon and its subsidiaries are self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on Exelon's consolidated financial condition and results of operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Exelon
None.
PECO
On May 27, 1998, the United States Department of Justice, on behalf of the Rural Utilities Service (RUS) and the Chapter 11 Trustee for the Cajun Electric Power Cooperative Inc. 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. In the complaint, RUS seeks the full purchase price of the 30% interest in the River Bend nuclear power plant,
that is, $50 million, plus interest and the Trustee seeks alleged consequential damages to Cajun's Chapter 11 estate as a result of the termination. On February 24, 2000, PECO and the plaintiffs filed cross-motions for summary judgment regarding the issue of liability. In addition, the court ordered counsel for PECO to file a supplemental motion for summary judgment on the issue of damages. On March 21, 2001, all of the pending motions and cross-motions for summary judgment were denied. While PECO cannot predict the outcome of this matter, PECO believes that it validly exercised its right of termination and did not breach the agreement.
Generation
Generation is involved in tax appeals regarding two of its nuclear facilities, Limerick Generating Station (Montgomery County, PA) and Peach Bottom (York County, PA). The Board of Assessment Appeals of Montgomery County has reduced the assessment of Limerick from $939 million to $912 million. Assessors in York County have valued Peach Bottom at $303 million. Primarily because of decommissioning costs inherent in the property and supported by comparable sales, Generation believes that the values for real property taxes for Limerick and Peach Bottom for 1998, 1999 and 2000 are negative. Generation is appealing the assessments in both counties. As of January 11, 2001, Generation and the Montgomery County taxing authorities entered into a stipulation and interim settlement agreement providing for partial payment of taxes pending the determination of the appeal. Generation and the York County taxing authorities are negotiating a stipulation and interim settlement agreement. Generation does not believe the outcome of these matters will have a material adverse effect on Generation's results of operations or financial condition.
ComEd
Three of ComEd's wholesale municipal customers filed a complaint and request for refund with FERC alleging that ComEd failed to properly adjust its rates, as provided for under the terms of the electric service contracts with the municipal customers and to track certain refunds made to ComEd's retail customers in the years 1992 through 1994. In the third quarter of 1998, the FERC granted the complaint and directed that refunds be made, with interest. ComEd filed a request for rehearing. On January 11, 2001, FERC issued its Order on Rehearing Requesting Submission of Additional Information. Responsive pleadings have been filed by all parties and final FERC action is still pending. ComEd's management believes an adequate reserve has been established in connection with the case.
In August 1999, three class action lawsuits were filed, and subsequently consolidated, in the Circuit Court of Cook County, Illinois seeking damages for personal injuries, property damage and economic losses from ComEd related to a series of service interruptions that occurred in the summer of 1999. The combined effect of these interruptions resulted in over 168,000 customers losing service for more than four hours. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. A hearing on a motion filed by ComEd to dismiss the complaints is scheduled for April 2001. A portion of any settlement or verdict may be covered by insurance and discussions with the carrier are ongoing. ComEd's management believes adequate reserves have been established in connection with these cases.
In 1999, the ICC opened an investigation regarding the design and reliability of ComEd's transmission and distribution system, which investigation was expanded during 2000 to include a circuit breaker fire that occurred in October 2000 at a ComEd substation. The ICC has issued several reports in that investigation covering the summer 1999 outages as well as the transmission and distribution system. These reports include recommendations and an implementation timetable. The recommendations are not legally binding on ComEd; however, the ICC may enforce them through litigation. Two more reports are anticipated in early 2001, and the investigation is expected to conclude by mid-2001. Since summer 1999, ComEd has devoted significant resources to improving the reliability of its transmission and distribution system. ComEd's management believes that the likelihood of a successful material claim resulting from the investigation is remote.
The Illinois Department of Revenue (Department) has issued Notices of Tax Liability to ComEd alleging deficiencies in Illinois invested capital tax for the years 1988 through 1997. The alleged deficiencies including interest and penalties totaled approximately $54 million as of December 31, 2000. The issue presented for each of the years in question is whether, for Illinois invested capital tax purposes, ComEd's liability under capital leases is to be included in long-term debt and thus form a part of ComEd's invested capital subject to the tax. ComEd's position is that the definition of invested capital for purposes of the tax is to be determined on the basis of ComEd's annual reports to the ICC, which, in accordance with ICC instructions, do not include capital leases in long-term debt. After December 31, 1997, the invested capital tax no longer applies as the result of legislation enacted in Illinois. ComEd has protested the notices, and the matter is currently pending before the Department's Office of Administrative Hearings. Interest will continue to accrue on the alleged tax deficiencies.
In 1996, several developers of non-utility generating facilities filed litigation against various Illinois officials claiming that the enforcement of an amendment to Illinois law removing the facilities' entitlement to state subsidized payments for electricity sold to ComEd after March 15, 1996 violated their rights under Federal and state constitutions, and against ComEd for a declaratory order that their rights under their contracts with ComEd were not affected by the amendment. On August 4, 1999, the Illinois Appellate Court held that the developers' claims against the State were premature, and the Illinois Supreme Court denied leave to appeal that ruling. Developers of both facilities have since filed amended complaints repeating their allegations that ComEd breached the contracts in question, and requesting damages for such breach, in the amount of the difference between the state-subsidized rate and the amount (such amount being referred to as the avoided cost) ComEd was willing to pay for the electricity. ComEd has contested the assertions by the developers that they are entitled to any payment in excess of avoided cost.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Exelon
The information required by this Item with respect to market information relating to Exelon's common stock is incorporated herein by reference to "Market for Registrant's Common Equity and Related Stockholder Matters" in Exhibit 99-1 to Exelon's Current Report on Form 8-K dated March 16, 2001.
PECO
As of March 1, 2001, there were outstanding 170,478,507 shares of common stock, without par value, of PECO, all of which were held by Exelon.
PECO's Articles of Incorporation prohibit payment of any dividend on, or other distribution to the holders of, common stock if, after giving effect thereto, the capital of PECO represented by its common stock together with its Other Paid-in Capital and Retained Earnings is, in the aggregate, less than the involuntary liquidating value of its then outstanding preferred stock. At December 31, 2000, such capital ($1.6 billion) amounted to about 9 times the liquidating value of the outstanding preferred stock ($174 million).
PECO may not declare dividends on any shares of its capital stock in the event that: (1) PECO exercises its right to extend the interest payment periods on the Subordinated Debentures which were issued to the Partnership; (2) PECO defaults on its guarantee of the payment of distributions on the Series C or Series D Preferred Securities of the Partnership; or (3) an event of default occurs under the Indenture under which the Subordinated Debentures are issued. See Item 1. Business-Related Entities.
ComEd
As of December 31, 2000, there were outstanding 163,805,020 shares of common stock, $12.50 par value, of ComEd, of which 163,796,961 shares were held by Exelon. In addition to Exelon, there were at December 31, 2000 approximately 268 additional holders of ComEd common stock. There is no established market for shares of the common stock of ComEd.
Dividends
Under PUHCA and the Federal Power Act, Exelon, PECO, ComEd and Generation can only pay dividends from retained or current earnings. Similar restrictions also apply to ComEd under the Illinois Public Utilities Act. An SEC order issued under PUHCA granted permission to Exelon and ComEd to pay up to $500 million in dividends out of additional paid-in capital, provided that Exelon agreed not to pay dividends out of paid-in capital after December 31, 2002 if its common equity is less than 30% of its total capitalization. At December 31, 2000, Exelon had retained earnings of $332 million, PECO had retained earnings of $197 million, ComEd had retained earnings of $133 million and Generation had no retained earnings.
The following table sets forth the quarterly cash dividends paid by PECO and ComEd during 2000 and 1999:
Exelon did not pay any cash dividends. The Board of Directors of Exelon has announced its intention, subject to approval and declaration by the Board of Directors each quarter, to declare annual dividends on its common stock of $1.69 per share.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Exelon
The information required by this Item is incorporated herein by reference to "Selected Financial Data" in Exhibit 99-1 to Exelon's Current Report on Form 8-K dated March 16, 2001.
PECO
The selected consolidated financial data presented below has been derived from the audited financial statements of PECO. This data is qualified in its entirety by reference to, and should be read in conjunction with PECO's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein.
ComEd
The selected consolidated financial data presented below has been derived from the audited financial statements of ComEd. This data is qualified in its entirety by reference to, and should be read in conjunction with ComEd's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein.
The information for the year ended 2000 is presented for the periods before and after the merger. For additional information, see ITEM 8. - Financial Statements and Supplementary Data - ComEd, Notes 1 and 2 of the Notes to Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Exelon
The information required by this Item is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Exhibit 99-2 to Exelon's Current Report on Form 8-K dated March 16, 2001.
PECO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On October 20, 2000, PECO became a wholly owned subsidiary of Exelon as a result of the transactions relating to the merger of PECO and Unicom.
During January 2001, Exelon undertook a restructuring to separate its generation and other competitive businesses from its regulated energy delivery business. As part of the restructuring, the non-regulated operations and related assets and liabilities of PECO, representing the Generation and Enterprises business segments were transferred to separate subsidiaries of Exelon. As a result, beginning January 2001, the operations of PECO consist of its retail electricity distribution and transmission business in southeastern Pennsylvania and itsnatural gas distribution business located in the Pennsylvania counties surrounding the City of Philadelphia.
As a result of retail competition in Pennsylvania, all of PECO's retail electric customers have the right to choose their generation suppliers. In addition to retail competition for generation services, PECO's 1998 settlement of its restructuring case mandated by the Competition Act requires PECO to provide generation services to customers who do not or cannot choose an alternate generation supplier through December 31, 2010 and established caps on generation and distribution rates. The settlement also authorized PECO to recover $5.3 billion of stranded costs and to securitize up a portion of its stranded cost recovery. For additional information, see Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Exelon.
Significant Operating Trends
Results of Operations
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Net Income
Net income increased $48 million, or 8% in 2000, before giving effect to extraordinary items, the cumulative effect of a change in accounting principle and non-recurring items. Net income, inclusive of a $4 million extraordinary charge, a $24 million benefit for the cumulative effect of a change in accounting principle and non-recurring items relating to merger-related costs of $159 million and a writedown of a communications investment of $21 million, decreased $75 million, or 13% in 2000.
Energy Delivery's results improved because of favorable rate adjustments partially offset by lower margins due to the unplanned return of certain commercial and industrial customers, milder weather, increased depreciation and amortization expense and higher interest expense. Generation's results improved as a result of higher margins on wholesale and unregulated retail energy sales. Enterprises' results were adversely impacted by lower margins on its infrastructure services businesses, increased amortization of goodwill and costs to integrate the businesses acquired in 1999 and 2000.
Operating Revenue 2000 1999 $ Variance % Variance ---- ---- ---------- ---------- (in millions, except percentage data) Energy Delivery $3,373 $3,265 $ 108 3.3% Generation 1,931 2,097 (166) (7.9)% Enterprises 646 116 530 456.9% ------ ------ ------
$5,950 $5,478 $ 472 8.6% ====== ====== ======
Energy Delivery The increase in Energy Delivery's operating revenue was attributable to higher electric revenue of $32 million and additional gas revenue of $76 million. The increase in electric revenue reflects $102 million from customers in Pennsylvania selecting PECO as their electric generation supplier and rate adjustments in Pennsylvania, partially offset by a decrease of $69 million as a result of lower summer volume. Regulated gas revenue reflected increases of $44 million related to higher prices, $29 million attributable to increased volume from new and existing customers and $24 million from increased winter volume. These increases were partially offset by $21 million of lower gross receipts tax collections as a result of the repeal of the gross receipts tax on gas sales in connection with gas restructuring in Pennsylvania.
Generation The decrease in Generation's operating revenue was a result of lower electric revenue of $180 million partially offset by higher gas revenue of $14 million. The decrease in electric revenue was principally attributable to lower sales of competitive retail electric generation services of $132 million, of which $196 million represented decreased volume that was partially offset by $64 million from higher prices. In addition, the termination of the management agreement for Clinton resulted in lower revenues of $99 million. As a result of the acquisition by AmerGen of Clinton in December 1999, the management agreement was terminated and, accordingly, the operations have been included in Equity in Earnings (Losses) of Unconsolidated Affiliates on PECO's Consolidated Statements of Income since that date. These decreases were partially offset by an increase of $50 million from higher wholesale revenue attributable to $199 million associated with higher prices partially offset by $149 million related to lower volume. Unregulated gas revenue increased primarily as a result of $11 million from wholesale sales of excess natural gas.
Enterprises The increase in Enterprises' operating revenue was attributable to $530 million from the acquisition of thirteen infrastructure services companies during 2000 and 1999.
Fuel and Purchased Power Expense
2000 1999 $ Variance % Variance ---- ---- ---------- ---------- (in millions, except percentage data) Energy Delivery $ 462 $ 370 $ 92 24.9% Generation 1,665 1,782 (117) (6.6)% ------- ------- ------- $ 2,127 $ 2,152 $ (25) (1.2)% ======= ======= =======
Energy Delivery Energy Delivery's increase in fuel and purchased power expense was primarily attributable to $73 million from additional volume and increased prices related to gas, $13 million as a result of favorable weather conditions and $4 million in additional PJM ancillary charges.
Generation Generation's decrease in fuel and purchased power expense was primarily attributable to $262 million principally related to reduced sales of competitive retail electric generation services partially offset by an increase of $120 million in the cost to supply Energy Delivery and an increase of $5 million from wholesale operations principally related to $97 million as a result of increased prices partially offset by $92 million as a result of decreased volume.
Operating and Maintenance Expense
2000 1999 $ Variance % Variance ---- ---- ---------- ---------- (in millions, except percentage data) Energy Delivery $ 491 $ 434 $ 57 13.1% Generation 616 721 (105) (14.6)% Enterprises 650 136 514 377.9% Corporate 34 163 (129) (79.1)% ------ ------ ------ $1,791 $1,454 $ 337 23.2% ====== ====== ======
Energy Delivery Energy Delivery's increase in Operating and Maintenance (O&M) expense was primarily attributable to the direct charging to the business segments of O&M expenses that were previously reported at PECO Corporate.
Generation Generation's decrease in O&M expense was primarily attributable to O&M expenses related to the management agreement for Clinton of $70 million in 1999 which has since been terminated, $15 million related to the abandonment of two information systems implementations in 1999, $17 million related to lower administrative and general expenses related to the unregulated retail sales of electricity and $15 million related to lower joint-owner expenses.
Enterprises Enterprises' O&M expense increased $505 million from the infrastructure services business as a result of acquisitions.
Corporate PECO Corporate's decrease in O&M expense was primarily attributable to expenses of $56 million related to lower Year 2000 remediation expenditures, lower pension and postretirement benefits expense of $31 million and the direct charging to business segments of O&M expenses that were previously recorded at Corporate.
Merger-Related Costs Merger-related costs charged to income in 2000 were $248 million consisting of $132 million of direct incremental costs and $116 million for employee costs. Direct incremental costs represent expenses associated with completing the merger, including professional fees, regulatory approval and settlement costs, and settlement of compensation arrangements. Employee costs represent estimated severance payments and pension and postretirement benefits provided under Exelon's Merger Separation Plan (MSP) for 642 eligible PECO employees who are expected to be involuntarily terminated before October 2002 upon completion of integration activities for the merged companies.
Depreciation and Amortization Expense Depreciation and amortization expense increased $88 million, or 37%, to $325 million in 2000. The increase was primarily attributable to $57 million of amortization of PECO's CTC which commenced in 2000 and $29 million related to depreciation and amortization expense associated with the infrastructure services business acquisitions.
Taxes Other Than Income Taxes other than income decreased $25 million, or 10%, to $237 million in 2000. The decrease was primarily attributable to lower real estate taxes of $18 million relating to a change in tax laws for utility property in Pennsylvania and $11 million as a result of the elimination of the gross receipts tax on natural gas sales net of an increase in gross receipts tax on electric sales. This decrease was partially offset by a non-recurring $22 million capital stock tax credit related to a 1999 adjustment associated with the impact of PECO's 1997 restructuring charge.
Interest Charges Interest charges consist of interest expense and distributions on Company-Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) . Interest charges increased $48 million, or 12%, to $465 million in 2000. The increase was primarily attributable to interest on the Transition Bonds issued to securitize PECO's stranded cost recovery of $104 million, partially offset by the reduction of PECO's long-term debt with the proceeds from Transition Bonds, which reduced interest charges by $77 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates Equity in earnings (losses) of unconsolidated affiliates decreased $3 million, or 8%, to losses of $41 million in 2000 as compared to losses of $38 million in 1999. The decrease was primarily attributable to $8 million of additional losses from communications joint ventures, partially offset by $4 million of earnings from AmerGen as a result of the acquisitions of Clinton and TMI in December 1999 and Oyster Creek in September 2000.
Other Income and Deductions Other income and deductions excluding interest charges and equity in earnings (losses) of unconsolidated affiliates decreased $18 million, or 31%, to $41 million in 2000 as compared to $59 million in 1999. The decrease in other income and deductions was primarily attributable to the writedown of a communications investment of $33 million, a $10 million gain on the disposal of assets in 1999 and a decrease in interest income of $2 million. These decreases were partially offset by a $15 million write-off in 1999 of the investment in a cogeneration facility in connection with the settlement of litigation and gains on sales of investments of $13 million.
Income Taxes The effective tax rate was 35.7% in 2000 as compared to 36.6% in 1999.
Extraordinary Items In 2000, PECO incurred extraordinary charges aggregating $6 million ($4 million, net of tax) related to prepayment premiums and the write-off of unamortized deferred financing costs associated with the early retirement of debt with a portion of the proceeds from the securitization of PECO's stranded cost recovery in May 2000.
In 1999, PECO incurred extraordinary charges aggregating $62 million ($37 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment and refinancing of debt.
Cumulative Effect of a Change in Accounting Principle In 2000, PECO recorded a benefit of $40 million ($24 million, net of tax) representing the cumulative effect of a change in accounting method for nuclear outage costs in conjunction with the synchronization of accounting policies in connection with the merger.
Preferred Stock Dividends Preferred stock dividends decreased $2 million, or 17%, to $10 million as compared 1999. The decrease was attributable to the redemption of $37 million of Mandatorily Redeemable Preferred Stock in August 1999 with a portion of the proceeds from the issuance of Transition Bonds. In addition, PECO redeemed $19 million of Mandatorily Redeemable Preferred Stock in August 2000.
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Net Income
Net income increased $69 million, or 13%, to $582 million in 1999. The increase in net income was primarily attributable to lower depreciation and amortization expense as a result of the full amortization in 1998 of a regulatory asset and the absence of charges associated with 1998's Early Retirement and Separation Program. These increases were partially offset by lower margins as a result of higher fuel prices, an increase in O&M expense associated with infrastructure service's business acquisitions during 1999 and increased interest expense related to the securitization of PECO's stranded costs.
Operating Revenues 1999 1998 $ Variance % Variance ---- ---- ---------- ---------- (in millions, except percentage data) Energy Delivery $3,265 $3,799 $ (534) (14.1)% Generation 2,097 1,513 584 38.6% Enterprises 116 13 103 792.3% ------ ------ ------
$5,478 $5,325 $ 153 2.9% ====== ====== ======
Energy Delivery The decrease in Energy Delivery's operating revenues was primarily attributable to lower volume associated with the effects of retail competition of $508 million and $278 million related to the 8% across-the-board rate reduction mandated by the settlement of PECO's restructuring case. These decreases were partially offset by $149 million of PJM network transmission service revenue and $59 million related to higher volume as a result of favorable weather conditions as compared to 1998. PJM network transmission service revenues and charges which commenced April 1, 1998 were recorded in Generation in 1998 but were recognized by Energy Delivery in 1999 as a result of FERC approval of the PJM regional transmission owners' rate case settlements. Stranded cost recovery was included in PECO's retail electric rates beginning January 1, 1999. In addition, gas revenues increased $50 million primarily attributable to increased volume as a result of favorable weather conditions of $27 million and from new and existing customers of $20 million.
Generation The increase in Generation's operating revenues was primarily attributable to $473 million from increased volume in Pennsylvania as a result of the sale of competitive retail electric generation services, increased wholesale revenues of $133 million from the marketing of excess generation capacity as a result of retail competition and revenues of $99 million from the sale of generation from Clinton to Illinois Power (IP), partially offset by the inclusion of $116 million of PJM network transmission service revenue in 1998.
Under the amended management agreement with IP, PECO was responsible for the payment of all direct O&M costs and direct capital costs incurred by IP and allocable to the operation of Clinton. These costs are reflected in O&M expenses. IP was responsible for fuel and indirect costs such as pension benefits, payroll taxes and property taxes. Following the restart of Clinton on June 2, 1999, and through December 15, 1999, PECO sold 80% of the output of Clinton to IP. The remaining output was sold by PECO in the wholesale market. Under a separate agreement with PECO, British Energy agreed to share 50% of the costs and revenues associated with the management agreement. Effective December 15, 1999, AmerGen acquired Clinton. Accordingly, the results of operations of Clinton have been accounted for under the equity method of accounting in PECO's Consolidated Statements of Income since the acquisition date.
Enterprises The increase in Enterprises' operating revenue was attributable to the effects of the infrastructure services company acquisitions made in 1999.
Fuel and Purchased Power Expense
1999 1998 $ Variance % Variance ---- ---- ---------- ---------- (in millions, except percentage data) Energy Delivery $ 370 $ 191 $ 179 93.7% Generation 1,782 1,620 162 10.0% ------ ------ ------
$2,152 $1,811 $ 341 18.8% ====== ====== ======
Energy Delivery Energy Delivery's increase in fuel and purchased power expense was attributable to $98 million of PJM network transmission service charges, $51 million of purchases in the spot market and $30 million of additional volume as a result of weather conditions.
Generation Generation's increase in fuel and purchased power expense was primarily attributable to $565 million related to increased volume from the sale of competitive electric generation services and a $36 million reserve related to a power supply contract in Massachusetts as a result of higher than anticipated cost of supply in the New England power pool. These increases were partially offset by $277 million of fuel savings from wholesale operations as a result of lower volume and efficient operation of generating assets, the inclusion of PJM network transmission service charges of $116 million in 1998, and the reversal of $27 million in reserves associated with a cogeneration facility in connection with the final settlement of litigation and expected prices of electricity over the remaining life of the power purchase agreements for the facility. In addition, the full return to service of Salem in April 1998 resulted in $19 million of fuel savings associated with a reduction in purchased power costs.
Operating and Maintenance Expense
1999 1998 $ Variance % Variance ---- ---- ---------- ---------- (in millions, except percentage data) Energy Delivery $ 434 $ 431 $ 3 0.7% Generation 721 543 178 32.8% Enterprises 136 38 98 257.9% Corporate 163 186 (23) (12.4)% ------ ------ ------
$1,454 $1,198 $ 256 21.4% ====== ====== ======
Energy Delivery Energy Delivery's O&M expenses included $11 million of additional expenses related to restoration activities as a result of Hurricane Floyd in 1999 which were offset by lower electric transmission and distribution expenses.
Generation Generation's increase in O&M expense was primarily a result of $70 million related to Clinton operations in connection with the management agreement, $24 million related to the growth of Exelon Energy, $15 million of charges related to the abandonment of two information systems implementations, $10 million associated with the Salem inventory write-off for excess and obsolete inventory, and $7 million related to the true-up of 1998 reimbursement of joint-owner expenses. These decreases were partially offset by $10 million of lower O&M expenses as a result of the full return to service of Salem in April 1998.
Enterprises Enterprises' increase in O&M expense was related to the infrastructure services business acquisitions made in 1999.
Corporate PECO Corporate costs decreased $17 million primarily as a result of lower pension and postretirement benefits expense attributable to the performance of the investments in PECO's pension plan.
Depreciation and Amortization Expense Depreciation and amortization expense decreased $406 million, or 63%, to $237 million in 1999. The decrease in depreciation and amortization expense was associated with the December 1997 restructuring charge through which PECO wrote down a significant portion of its generating plant and regulatory assets. In connection with this restructuring charge, PECO reduced generation-related assets by $8.4 billion, established a regulatory asset, Deferred Generation Costs Recoverable in Current Rates of $424 million, which was fully amortized in 1998, and established an additional regulatory asset, CTC, of $5.3 billion. CTC is being amortized over an eleven-year period ending December 31, 2010.
Taxes Other Than Income Taxes other than income decreased $18 million, or 6%, to $262 million in 1999. The decrease in taxes other than income was primarily attributable to a $34 million credit related to an adjustment of PECO's Pennsylvania capital stock tax base as a result of the 1997 restructuring charge, partially offset by an increase of $17 million in real estate taxes as a result of changes in tax laws for utility property in Pennsylvania.
Interest Charges Interest charges increased $55 million, or 15%, to $417 million in 1999. The increase in interest charges was primarily attributable to interest on the Transition Bonds issued to securitize PECO's stranded cost recovery of $179 million, partially offset by a $99 million reduction in interest charges resulting from the use of securitization proceeds to retire long-term debt and redeem COMRPS. In addition, PECO's ongoing program to reduce or refinance higher cost, long-term debt reduced interest charges by $26 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates Equity in earnings (losses) of unconsolidated affiliates increased $16 million or 30%, to losses of $38 million in 1999 as compared to losses of $54 million in 1998. The lower losses were primarily attributable to customer base growth for communications joint ventures.
Other Income and Deductions Other income and deductions, excluding interest charges and equity in earnings (losses) of unconsolidated affiliates, increased $58 million, to income of $59 million in 1999 as compared to income of $1 million in 1998. The increase in other income and deductions was primarily attributable to $28 million of interest income earned on the unused portion of stranded cost recovery prior to application, $14 million of gain on the sale of assets, a $10 million donation to a City of Philadelphia street lighting project in 1998 and a $7 million write-off of a non-regulated business venture in 1998. These increases were partially offset by a $15 million write-off of an investment in connection with the settlement of litigation.
Income Taxes The effective tax rate was 36.6% in 1999 as compared to 37.5% in 1998. The decrease in the effective tax rate was primarily attributable to an income tax benefit of approximately $11 million related to the favorable resolution of certain outstanding issues in connection with the settlement of an Internal Revenue Service audit and tax benefits associated with the implementation of state tax planning strategies, partially offset by the non-recognition for state income tax purposes of certain operating losses.
Extraordinary Items In 1999, PECO incurred extraordinary charges aggregating $62 million ($37 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment and refinancing of debt.
In 1998, PECO incurred extraordinary charges aggregating $34 million ($20 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment of debt.
Preferred Stock Dividends Preferred stock dividends decreased $1 million or 8%, to $12 million in 1999. The decrease was attributable to the redemption of $37 million of Mandatorily Redeemable Preferred Stock in August 1999 with a portion of the proceeds from the issuance of Transition Bonds.
Liquidity and Capital Resources
Cash flows from operations were $756 million in 2000 as compared to $895 million in 1999 and $1,499 million in 1998. The decrease in 2000 was principally attributable to changes in working capital of $343 million partially offset by an increase in cash generated by operations of $204 million.
Cash flows used in investing activities were $894 million in 2000 as compared to $886 million in 1999 and $521 million in 1998. The increase in 2000 was primarily attributable to increased capital expenditures of $58 million, additional other investing activities of $45 million and additional infrastructure service business acquisitions of $23 million, partially offset by $118 million of investments in and advances to joint ventures that occurred in 1999.
Cash flows provided by financing activities were $213 million and $171 million in 2000 and 1999, respectively and cash flows used by financing activities of $963 million in 1998. Cash flows from financing activities were 2000 primarily reflect PECO's additional securitization of stranded cost recovery and the use of related proceeds.
PECO's capital resources are primarily provided by internally generated cash flows from utility operations and, to the extent necessary, external financing. In connection with its request to securitize an additional $1 billion of its
stranded cost recovery, PECO agreed to provide its customers with additional rate reductions of $60 million in 2001. Under the settlement agreement entered into by PECO relating to the PUC's approval of the merger, PECO agreed to $200 million in aggregate rate reductions for all customers over the period January 1, 2002 through 2005 and extended the cap on PECO's transmission and distribution rates through December 31, 2006. These rate reductions will be more than offset by the discontinuance of the 6% across-the-board rate reduction in effect in 2000.
Capital resources are used primarily to fund PECO's capital requirements, including construction, repayments of maturing debt and preferred securities and payment of common and preferred stock dividends. PECO's estimated capital expenditures in 2001 are approximately $260 million. PECO's proposed capital expenditures are subject to periodic review and revision to reflect changes in economic conditions and other factors.
Under PUHCA and the Federal Power Act, PECO can only pay dividends from retained or current earnings. At December 31, 2000, PECO had retained earnings of $197 million.
On May 2, 2000, PETT issued an additional $1 billion aggregate principal amount of Transition Bonds to securitize a portion of PECO's authorized stranded cost recovery. As a result, PECO has securitized a total of $5 billion of its $5.26 billion of stranded cost recovery through the issuance by PETT of Transition Bonds. The Transition Bonds are solely obligations of PETT, secured by intangible transition property sold by PECO to PETT concurrently with the issuance of the Transition Bonds and certain other related collateral, but are included in the consolidated long-term debt of PECO. PECO has used the proceeds from the securitizations to reduce PECO's stranded costs and related capitalization. The proceeds of the Transition Bonds issued in May 2000 were used to repurchase 12 million shares of common stock, to retire $422 million principal amount of debt, to repurchase $50 million of accounts receivable and to pay transaction expenses.
As a result of the issuance of the Transition Bonds and the application of the proceeds thereof, at December 31, 2000, PECO's capital structure consisted of 23.9% common equity, 5.8% notes payable, 3.1% preferred stock and COMRPS (which comprised 1.8% of PECO's total capitalization structure), and 67.2% long-term debt including Transition Bonds issued by PETT (which comprised 73.8% of PECO's long-term debt).
PECO meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under bank credit facilities. PECO, along with Exelon and ComEd, entered into a $2 billion unsecured revolving credit facility on December 20, 2000 with a group of banks. PECO has an $800 million sublimit under this 364-day credit facility and expects to use the credit facility principally to support its $800 million commercial paper program. This credit facility requires PECO to maintain a debt to total capitalization ratio of less than 65% or less (excluding Transition Bonds). At December 31, 2000, PECO's debt to total capitalization ratio on that basis was 48%.
At December 31, 2000, PECO had outstanding $163 million of notes payable consisting principally of commercial paper. Also, PECO had a $400 million intercompany payable with ComEd bearing interest at an average annualized interest rate for the period it was outstanding of 6.5%. In addition, PECO had a $696 million note payable with Exelon, incurred in connection with the Sithe acquisition. The note is interest bearing with an average annualized interest rate for the period it was outstanding of 7.6%.
ComEd
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On October 20, 2000, ComEd became a 99.9% owned subsidiary of Exelon as a result of the transactions relating to the merger of PECO and Unicom. As a result of the merger, ComEd's consolidated financial information for the period after the merger has a different cost basis than that of previous periods. Management has based its discussion and analysis of results of operations for 2000 as compared to 1999 on the combined results of operations for the full year of 2000. Material variances caused by the different cost basis have been disclosed where applicable.
Through December 31, 2000, ComEd operated as one business segment, that of a vertically integrated electric utility. During January 2001, Exelon undertook a restructuring to separate its generation and other competitive businesses from its regulated energy delivery business. As part of the restructuring, the non-regulated operations and related assets and liabilities of ComEd were transferred to separate subsidiaries of Exelon. As a result, beginning January 2001, the operations of ComEd consist of its retail electricity distribution and transmission business in northern Illinois.
Under Illinois legislation, as of December 31, 2000, all non-residential customers were eligible to choose a new electric supplier or elect a power purchase option. The power purchase option allows the purchase of electric energy from ComEd at market-based prices. ComEd's residential customers become eligible to choose a new electric supplier in May 2002. As of December 31, 2000, over 9,500 non-residential customers, representing approximately 27% of ComEd's retail kilowatt-hour sales for the twelve months prior to the introduction of retail competition, elected to receive their electric energy from an alternative electric supplier or chose the power purchase option. For additional information, see ITEM 1. Business - Energy Delivery and ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Exelon.
Significant Operating Trends
N.M. - not meaningful
Results of Operations
Year Ended December 31, 2000 Compared To Year Ended December 31, 1999
Net Income
Net Income increased $128 million, or 20% in 2000, before giving effect to extraordinary items and non-recurring items. Net income, inclusive of the $4 million and $28 million extraordinary items for 2000 and 1999, respectively, and non-recurring items relating to merger-related costs of $43 million , increased $109 million, or 18% in 2000.
Operating Revenue
Operating revenue was $7,012 million in 2000, an increase of $219 million, or 3% from 1999. The increase in operating revenue was primarily attributable to a $467 million increase in sales for resale, partially offset by a $266 million reduction in sales to retail customers, reflecting, in both cases, the migration of non-residential customers to alternate electric suppliers who purchased a portion of their supply requirements from ComEd and also reflecting increased sales to other utilities due to the increased availability of nuclear generation. The decrease in retail revenues also reflects the further election of the power purchase option by non-residential customers. Kilowatt-hour sales increased 17% over 1999, reflecting an increase in kWh sales for resale of 77% and increased retail kWh sales of 3%.
Fuel and Purchased Power Expense
Fuel and purchased power expense was $1,977 million in 2000, an increase of $428 million, or 28% from 1999. The increase in fuel and purchased power expense was primarily attributable to the effects of the power purchase agreements (PPAs) that ComEd entered into upon the sale of its fleet of fossil stations in December 1999, which resulted in increased purchased power costs, but lower fuel costs.
Operating and Maintenance Expense
The decrease in operating and maintenance (O&M) expenses related to the generation stations was primarily attributable to a $220 million reduction in expenses as a result of the sale of the fossil generation stations in December 1999 and a $46 million reduction in expenses associated with shorter refueling outages and fewer forced outages at nuclear generation stations.
The increase in O&M expenses associated with the transmission and distribution system was primarily attributable to ComEd's increased efforts to improve the reliability of its transmission and distribution system.
The decrease in O&M expenses associated with customer-related activities was primarily attributable to non-recurring costs incurred in 1999 to address billing and collection problems encountered following the implementation of a new customer information and billing system in July 1998.
The decrease in other O&M expenses was primarily attributable to lower general and administrative costs.
Merger-Related Costs
Merger-related costs charged to expense in 2000 were $67 million consisting of $26 million of direct incremental costs and $41 million for employee costs. Direct incremental costs represent expenses directly associated with completing the merger, including professional fees, regulatory approval and other merger integration costs. Employee costs represent estimated severance payments provided under Exelon's Merger Separation Plan (MSP) for eligible employees whose positions were eliminated before October 20, 2000 due to integration activities of the merged companies.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $162 million, or 19%, to $998 million in 2000. The increase was primarily attributable to a $220 million increase in regulatory asset amortization in accordance with the earnings provisions of the Illinois legislation, goodwill amortization of $23 million associated with the merger, partially offset by an $81 million decrease in depreciation expense reflecting the fossil station sale and the fair value adjustment of ComEd's nuclear stations associated with the application of purchase accounting upon completion of the merger on October 20, 2000.
Taxes Other Than Income
Taxes other than income taxes for 2000 were consistent with 1999.
Interest Charges
Interest charges consist of interest expense and provisions for dividends on Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts. Interest charges for 2000 were essentially unchanged from 1999.
Other Income and Deductions
Other income and deductions, excluding interest charges, was $308 million for 2000, an increase of $248 million from 1999. The increase was primarily attributable to a $166 million increase in interest income on ComEd's notes receivables with affiliates related to the sale of ComEd's fossil stations. The increase also reflects the effects of a $113 million gain on the forward share repurchase that occurred in 2000, compared to a $44 million loss recorded in 1999 on the same agreement.
Income Taxes
The effective income tax rate was 31.1% in 2000 compared to 33.4% in 1999. The decrease in the effective tax rate was primarily attributable to the effects of the gain on the forward share repurchase agreement, compared to the loss that was recorded in 1999 on the same agreement both of which were not recognized for tax purposes. The decrease was partially offset by the investment tax credit amortization recorded in 1999 related to the fossil station sale.
Extraordinary Item
ComEd incurred extraordinary charges aggregating $6 million ($4 million, net of tax) and $46 million ($28 million, net of tax) in 2000 and 1999, respectively, consisting of prepayment premiums and the write-off of unamortized deferred financing costs associated with the early retirement of debt.
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Net Income
Net income increased $57 million, or 10% in 1999, before giving effect to the extraordinary item in 1999. Net income, inclusive of the $28 million extraordinary item, increased $29 million, or 5% in 1999.
Operating Revenue
Operating revenue was $6,793 million for 1999, a decrease of $357 million, or 5%, from 1998. The decrease in operating revenue was primarily attributable to the impact of the 15% residential base rate reduction, which took effect on August 1, 1998, of $226 million and $174 million associated with the change in presentation for certain state and municipal taxes from operating revenue and tax expense to collections recorded as liabilities. Kilowatt-hour sales increased 8% in 1999 compared to 1998 primarily due to a 59% increase in sales for resale which reflects increased availability of lower cost nuclear generation.
Fuel and Purchased Power Expense
Fuel and purchased power expense was $1,549 million for 1999, a decrease of $304 million, or 16%, from 1998. The decrease in fuel and purchased power expense was primarily attributable to improved nuclear and fossil operating performance, which reduced the need to purchase power from other parties.
Operating and Maintenance Expense
The decrease in O&M expenses associated with the generation stations was primarily attributable to a $42 million reduction in plant refurbishment and maintenance costs at the fossil generation stations and a $75 million reduction in expenses due to shorter refueling outages and fewer forced outages at the nuclear generation stations.
The increase in O&M expenses associated with ComEd's transmission and distribution system was primarily attributable to ComEd's system improvement initiatives in response to outages that occurred during the summer of 1999. The increase also reflects service restoration and other outage-related costs associated with the summer of 1999 heat wave.
The increase in O&M expenses associated with customer-related activities was primarily attributable to $35 million of costs incurred in 1999 to address billing and collection problems encountered following the implementation of a new customer information and billing system in July 1998.
The increase in other O&M expenses was primarily attributable to an increase of $68 million in ComEd's estimated environmental liability for the remediation of former manufactured gas plant sites, and a $25 million charge resulting from the settlement of issues associated with the franchise agreement between ComEd and the City of Chicago.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $102 million, or 11% to $836 million in 1999. The decrease was primarily attributable to the fossil station sale. Consistent with the provisions of Illinois legislation, the pre-tax gain on the fossil station sale of $2,587 million resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, net of $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2,544 million and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2,456 million are reflected in depreciation and amortization expense on ComEd's Consolidated Statements of Income and resulted in a net reduction to depreciation and amortization expense of $88 million.
Taxes Other Than Income
Taxes other than income taxes decreased by $191 million, or 27%, to $507 million in 1999. The decrease was primarily attributable to the change in presentation for certain state and municipal taxes in the amount of $174 million.
Interest Charges
Interest charges increased $100 million, or 19%, to $632 million in 1999. The increase in interest charges was primarily attributable to a full year's effect of the issuance of the transitional trust notes in 1998, partially offset by lower interest charges as a result of the retirement of long-term debt with a portion of the transitional trust note proceeds. For additional information, see ITEM 1. Business - Related Entities.
Other Income and Deductions
Other income and deductions, excluding interest charges, decreased $30 million, or 33%, to $60 million in 1999. The decrease was attributed to a $44 million loss associated with the forward share repurchase agreement in 1999, and a $34 million decrease in gains on the disposal of assets, partially offset by the $45 million increase in interest income from the investment of the $3.4 billion in proceeds from transitional trust notes issued in 1998 prior to application to reduce capitalization.
Income Taxes
The effective tax rate was 33.4% in 1999 compared to 37.1% in 1998. The decrease in the effective tax rate was primarily attibutable to the impact of property basis differences and increased amortization of the investment tax credits resulting from the fossil station sale, partially offset by the unrealized loss on the forward share repurchase agreement, which was not recognized for tax purposes.
Extraordinary Items
ComEd incurred extraordinary charges aggregating $46 million ($28 million, net of tax) in 1999 consisting of prepayment premiums and the write-off of unamortized deferred financing costs associated with the early retirement of debt.
Liquidity and Capital Resources
Cash flows provided by operations were $1,574 million, $1,245 million, and $1,552 million in 2000, 1999, and 1998 respectively. The increase in cash flows in 2000 was primarily attributable to an increase in cash generated from operations and a non-recurring $250 million contribution to an environmental trust in 1999.
Cash flows used in investing activities were $1,603 million in 2000 compared to cash flows provided by investing activities of $1,144 million in 1999 and cash flows used by investing activities of $1,135 million in 1998. The decrease in cash flows in 2000 was primarily attributable to proceeds received in connection with the sale of ComEd's fossil generation stations of $4,886 million in 1999, partially offset by $2,209 million of affiliate notes receivable in 1999.
Cash flows used in financing activities were $1,310 million and $3,939 million in 2000 and 1999, respectively, compared to cash flows provided by financing activities of $2,600 million in 1998. The decrease in cash flows used in financing activities in 2000 compared to 1999 reflects significant retirements of long-term debt, redemptions of preferred securities and common stock forward repurchases in 1999 utilizing the proceeds from the issuance of the transitional trust notes in 1998, partially offset by the issuance of $450 million of long-term debt in 2000.
ComEd's capital resources are primarily provided by internally generated cash flows from operations and, to the extent necessary, external financing. Capital resources are used primarily to fund ComEd's capital requirements, including construction, repayments of maturing debt and preferred securities and the payment of dividends.
For the year ended December 31, 2000, capital expenditures for ComEd were $1,406 million, including expenditures related to its nuclear generation facilities which were transferred to Generation, effective January 1, 2001. ComEd estimates that it will spend approximately $900 million in 2001, principally for intensive efforts to continue to improve the reliability of its transmission and distribution systems. ComEd's proposed capital expenditures are subject to periodic review and revision to reflect changes in economic conditions and other factors. ComEd anticipates that it will obtain external financing, when necessary, through borrowings or issuance of preferred securities or capital contributions from Exelon.
Under PUHCA and the Federal Power Act, ComEd can only pay dividends from retained or current earnings. However, the SEC has authorized ComEd to pay up to $500 million in dividends out of additional paid-in capital, provided ComEd may not pay dividends out of paid-in capital after December 31, 2002 if its common equity is less than 30% of its total capitalization (including transitional trust notes). At December 31, 2000, ComEd had retained earnings of $133 million.
At December 31, 2000, ComEd's capital structure consisted of 53% of long-term debt, 45% of common stock, and 2% of preferred securities of subsidiaries. Long-term debt includes $2,720 million of transitional trust notes constituting obligations of certain consolidated special purpose entities representing 20% of capitalization.
ComEd meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under bank credit facilities. ComEd, along with Exelon and PECO, entered into a $2 billion unsecured revolving credit facility with a group of banks. ComEd has a $200 million sublimit under this 364-day credit facility and expects to use the credit facility principally to support its $200 million commercial paper program. This credit facility requires ComEd to maintain a debt to total capitalization ratio of 65% or less (excluding transitional trust notes). At December 31, 2000, ComEd's debt to total capitalization ratio on that basis was 43%.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exelon
The information required by this Item is incorporated herein by reference to the information appearing under the subheading "Quantitative and Qualitative Disclosures About Market Risk" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Exhibit 99-2 to Exelon's Current Report on Form 8-K dated March 16, 2001.
PECO
PECO is exposed to market risks associated with commodity price, credit and interest rates.
Commodity Price Risk
As part of Exelon's corporate restructuring, PECO entered into a power purchase agreement with Generation to meet its retail customer obligations for generation services at prices consistent with prices amounts collected through customer rates. As a result, PECO's exposure to commodity price risk is not material.
Credit Risk
PECO is obligated to provide service to all customers within its franchised territory and, as a result, has a broad customer base. For the year ended December 31, 2000, PECO's ten largest customers represented approximately 10% of its retail electric revenues. PECO manages credit risk using credit and collection policies which are regulated by the PUC.
Interest Rate Risk
PECO uses a combination of fixed rate and variable rate debt to reduce interest rate exposure. Interest rate swaps may be used to adjust exposure when deemed appropriate, based upon market conditions. These strategies are employed to maintain the lowest cost of capital. As of December 31, 2000, a hypothetical 10% increase in the interest rates associated with variable rate debt would result in an $2 million decrease in pre-tax earnings for 2001.
PECO has entered into interest rate swaps to manage interest rate exposure associated with two classes of floating rate Transition Bonds issued to securitize stranded cost recovery. At December 31, 2000, these interest rate swaps had a fair market value of $21 million based on the present value difference between the contract and market rates at December 31, 2000.
The aggregate fair value of the Transition Bond derivative instruments that would have resulted from a hypothetical 50 basis point decrease in the spot yield at December 31, 2000 is estimated to be $17 million. If the derivative instruments had been terminated at December 31, 2000, this estimated fair value represents the amount to be paid by PECO to the counterparties.
The aggregate fair value of the Transition Bond derivative instruments that would have resulted from a hypothetical 50 basis point increase in the spot yield at December 31, 2000 is estimated to be $59 million. If the derivative instruments had been terminated at December 31, 2000, this estimated fair value represents the amount to be paid by the counterparties to PECO.
In February 2000, PECO entered into forward starting interest rate swaps for a notional amount of $1 billion in anticipation of the issuance of $1 billion of Transition Bonds in the second quarter of 2000. In May 2000, PECO settled these forward starting interest rate swaps and paid the counterparties $13 million which was deferred and is being amortized over the life of the Transition Bonds as an increase in interest expense.
ComEd
ComEd is exposed to market risks associated with commodity prices, credit and interest rates.
Commodity Price Risk
As part of Exelon's corporate restructuring, ComEd has entered into a power purchase agreement with Generation to meet its retail customer obligations at fixed prices. ComEd's principal exposure to commodity price risk is in relation to revenues collected from customers who elect the power purchase option at market-based prices, and CTC revenues which are calculated to provide the customer with a credit for the market price for electricity. ComEd has performed a sensitivity analysis to determine the net impact of a 10% decrease in the average around-the-clock market price of electricity. Because the decrease in revenues from customers electing the power purchase option is significantly offset by increased CTC revenues, ComEd does not believe that its exposure to such a market price decrease would be material.
Credit Risk
ComEd is obligated to provide service to all customers within its franchised territories and, as a result, has a broad customer base. For the year ended December 31, 2000, ComEd's ten largest customers represented approximately 3% of its retail electric revenues. ComEd manages credit risk using credit and collection policies which are regulated by the ICC.
Interest Rate Risk
ComEd uses a combination of fixed rate and variable rate debt to reduce interest rate exposure. As of December 31, 2000, a hypothetical 10% increase in the interest rates associated with variable rate debt would result in a decrease in pre-tax earnings for 2001 of less than $1 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Exelon
The information required by this Item is incorporated herein by reference to the Consolidated Statements of Income for the years 2000, 1999 and 1998; Consolidated Statements of Cash Flows for the years 2000, 1999 and 1998; Consolidated Balance Sheets as of December 31, 2000 and 1999; Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years 2000, 1999 and 1998; and Notes to Consolidated Financial Statements appearing in Exhibit 99-3 to Exelon's Current Report on Form 8-K dated March 16, 2001.
PECO
Report of Independent Accountants
To the Board of Directors and Shareholders of PECO Energy Company:
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(2)(i) present fairly, in all material respects, the financial position of PECO Energy Company and Subsidiary Companies (PECO) at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2)(ii) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of PECO's management; our responsibility is to express an opinion on these financial statements and financial statement schedule 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 4 to the consolidated financial statements, PECO changed its method of accounting for nuclear outage costs in 2000.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania January 30, 2001, except for Note 22 PETT Refinancing, for which the date is March 1, 2001
PECO Energy Company and Subsidiary Companies Consolidated Statements of Income
See Notes to Consolidated Financial Statements
PECO Energy Company and Subsidiary Companies Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements
PECO Energy Company and Subsidiary Companies Consolidated Balance Sheets
See Notes to Consolidated Financial Statements
See Notes to Consolidated Financial Statements
PECO Energy Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, unless otherwise noted)
1. Significant Accounting Policies
Description of Business Incorporated in Pennsylvania in 1929, PECO Energy Company (PECO), is engaged principally in the production, purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and the distribution and sale of natural gas to residential, commercial and industrial customers. Pursuant to the Pennsylvania Electricity Generation Customer Choice and Competition Act (Competition Act), the Commonwealth of Pennsylvania has required the unbundling of retail electric services in Pennsylvania into separate generation, transmission and distribution services with open retail competition for generation services. Since the commencement of deregulation in 1999, PECO serves as the local distribution company providing electric distribution services in its franchised service territory in southeastern Pennsylvania and bundled electric service to customers who do not choose an alternate electric generation supplier.
PECO also engages in the wholesale marketing of electricity on a national basis. Through its Exelon Energy division, PECO is a competitive generation supplier offering competitive energy supply to customers throughout Pennsylvania. PECO's infrastructure services subsidiary, Exelon Infrastructure Services, Inc. (EIS), provides utility infrastructure services to customers in several regions of the United States. PECO owns a 50% interest in AmerGen Energy Company, LLC (AmerGen), a joint venture with British Energy, Inc., a wholly-owned subsidiary of British Energy plc (British Energy), to acquire and operate nuclear generating facilities. PECO also participates in joint ventures which provide communications services in the Philadelphia metropolitan region. As a result of the corporate restructuring effective January 1, 2001, these operations were separated from the regulated energy delivery business. See Note 22 - Subsequent Events - Restructuring.
Basis of Presentation The consolidated financial statements of PECO include the accounts of its majority-owned subsidiaries after the elimination of intercompany transactions. PECO accounts for its 20% to 50% owned investments and joint ventures, in which it exerts significant influence, under the equity method of accounting. PECO consolidates its proportionate interest in its jointly owned electric utility plants. PECO accounts for its less than 20% owned investments under the cost method of accounting. Accounting policies for regulated operations are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Pennsylvania Public Utility Commission (PUC), the Federal Energy Regulatory Commission (FERC) and the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA).
Exelon Corporation (Exelon), formed as a wholly owned subsidiary of PECO in 1999, became the parent company of PECO when each share of outstanding common stock of PECO was exchanged for one share of Exelon common stock in connection with the merger. See Note 2 - Merger.
Accounting for the Effects of Regulation PECO accounts for all of its regulated electric and gas operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," requiring PECO to record the financial statement effects of the rate regulation to which such operations are currently subject. Use of SFAS No. 71 is applicable to the utility operations of PECO which meet the following criteria: (1) third-party regulation of rates; (2) cost-based rates; and (3) a reasonable assumption that all costs will be recoverable from customers through rates. PECO believes that it is probable that regulatory assets associated with these operations will be recovered. If a separable portion of PECO's business no longer meets the provisions of SFAS No. 71, PECO is required to eliminate the financial statement effects of regulation for that portion.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenues Operating revenues are recorded as service is rendered or energy is delivered to customers. At the end of each month, PECO accrues an estimate for the unbilled amount of energy delivered or services provided to its electric and gas customers. PECO recognizes contract revenue and profits on long-term, fixed-price contracts from its services businesses by the percentage-of-completion method of accounting based on costs incurred as a percentage of estimated total costs of individual contracts.
Purchased Gas Adjustment Clause PECO's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective quarterly adjustments to rates.
Nuclear Fuel The cost of nuclear fuel is capitalized and charged to fuel expense using the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed.
Depreciation, Amortization and Decommissioning Depreciation is provided over the estimated service lives of property, plant and equipment on a straight line basis. Annual depreciation provisions for financial reporting purposes, expressed as a percentage of average service life for each asset category are presented below:
Asset Category 2000 1999 1998 - -------------- ---- ---- ----
Electric -- Transmission and Distribution 1.82% 1.83% 1.96% Electric -- Generation 5.15% 5.12% 5.26% Gas 2.39% 2.36% 2.40% Common 2.10% 2.13% 4.54% Other Property and Equipment 7.82% 8.61% 2.80%
Amortization of regulatory assets is provided over the recovery period as specified in the related regulatory agreement. Goodwill associated with acquisitions is being amortized on a straight line basis over 20 years. Accumulated amortization of goodwill was $10 million and $1 million at December 31, 2000 and 1999, respectively.
PECO's estimate of the costs for decommissioning its nuclear generating stations is currently included in regulated rates. The amounts recovered from customers are deposited in trust accounts and invested for funding of future costs for current plants. PECO accounts for the current period's cost of decommissioning its operating nuclear units by recording a charge to depreciation expense and a corresponding liability in accumulated depreciation. PECO believes that the amounts being recovered from customers through electric rates along with the earnings on the trust funds will be sufficient to fully fund its decommissioning obligations.
Capitalized Interest PECO uses SFAS No. 34, "Capitalizing Interest Costs," to calculate the costs during construction of debt funds used to finance its non-regulated construction projects. PECO recorded capitalized interest of $2 million, $6 million and $7 million in 2000, 1999 and 1998, respectively.
Allowance for Funds Used During Construction (AFUDC) is the cost during the period of construction of debt and equity funds used to finance construction projects for regulated operations. AFUDC is recorded as a charge to Construction Work in Progress and as a non-cash credit to AFUDC which is included in Other Income and Deductions. The rates used for capitalizing AFUDC are computed under a method prescribed by regulatory authorities.
Income Taxes Deferred Federal and state income taxes are provided on all significant temporary differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different from book income and tax carryforwards. Investment tax credits previously utilized for income tax purposes have been deferred on PECO's Consolidated Balance Sheets and are recognized in book income over the life of the related property. PECO and its subsidiaries file a consolidated Federal income tax return with Exelon. Income taxes are allocated to PECO and each of its subsidiaries within the consolidated group based on the separate return method.
Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are being recognized in PECO's Consolidated Statements of Income as incurred. Gains and losses on reacquired debt related to regulated operations incurred prior to January 1, 1998, have been deferred and are being amortized to interest expense over the period approved for ratemaking purposes.
Comprehensive Income Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. Comprehensive income is reflected in PECO's Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income.
Cash and Cash Equivalents PECO 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. Unrealized gains and losses on marketable securities held in the nuclear decommissioning trust funds are reported in accumulated depreciation. At December 31, 2000 and 1999, PECO had no held-to-maturity or trading securities.
Property, Plant and Equipment Property, plant and equipment is recorded at cost. PECO evaluates the carrying value of property, plant and equipment and other long-term assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when it is probable that such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. The cost of maintenance, repairs and minor replacements of property are charged to maintenance expense as incurred.
Upon retirement, the cost of regulated property plus removal costs less salvage value are charged to accumulated depreciation in accordance with the provisions of SFAS No. 71. For unregulated property, the cost and accumulated depreciation of property, plant and equipment retired or otherwise disposed of are removed from the related accounts and included in the determination of the gain or loss on disposition.
Capitalized Software Costs Costs incurred during the application development stage of software projects for software which is developed or obtained for internal use are capitalized. At December 31, 2000 and 1999, capitalized software costs totaled $131 million and $105 million, respectively, net of $49 million and $32 million of accumulated amortization, respectively. Such capitalized amounts are amortized ratably over the expected lives of the projects when they become operational, not to exceed ten years.
Retail and Wholesale Energy Commitments In the normal course of business, PECO utilizes contracts for the forward sale and purchase of energy to manage the utilization of its available generating capability and provision of wholesale energy to its retail affiliates. PECO also utilizes energy option contracts and energy financial swap arrangements to limit the market price risk associated with the forward energy commodity contracts. Through December 31, 2000, PECO recognized any gains or losses on forward commodity contracts when the underlying transactions affect earnings. Revenues and expenses associated with market price risk management contracts are amortized over the terms of such contracts.
At December 31, 2000, PECO's retail and wholesale activities included short-term and long-term commitments, which are carried at the lower of cost or market, 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. Revenue and expense associated with energy commitments are reported at the time the underlying physical transaction affects earnings.
Hedge Accounting Hedge accounting is applied only if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge, with respect to the hedged item. If a derivative instrument ceased to meet the criteria for deferral, any gains or losses are recognized in income.
New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivatives. The new standard requires recognizing all derivatives as either assets or liabilities on the balance sheet at their fair value and specifies the accounting for changes in fair value depending upon the intended use of the derivative. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date for SFAS No. 133 until fiscal years beginning after June 15, 2000. The effect of adopting SFAS No. 133 in the first quarter of 2001 will result in a cumulative after-tax increase in net income of $17 million and other comprehensive income of $21 million. The adoption will also impact the assets and liabilities recorded on the Consolidated Balance Sheets of PECO and may result in future earnings volatility. See Note 22 - Subsequent Events - Restructuring. The determination of the impact of SFAS No. 133 is based on current interpretations of SFAS No. 133, including interpretations of the Derivatives Implementation Group of the FASB, related to the treatment of electricity capacity contracts. If final guidance, when issued, changes the treatment of electricity capacity contracts, the effects of the implementation of SFAS No. 133 may differ from the amounts disclosed above.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB Statement No, 125." This new standard revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and should be applied prospectively. At December 31, 2000, PECO did not anticipate entering into any transactions that would be subject to the provisions of SFAS No. 140 when it becomes effective.
Reclassifications Certain prior year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income.
2. Merger
On October 20, 2000, Exelon became the parent corporation for each of PECO and Commonwealth Edison Company (ComEd) as a result of the completion of the transactions contemplated by an Agreement and Plan of Exchange and Merger, as amended (Merger Agreement), among PECO, Unicom Corporation (Unicom) and Exelon. Pursuant to the Merger Agreement, (a) each share of outstanding common stock of PECO was exchanged for one share of common stock of Exelon (Share Exchange) and (b) Unicom merged with and into Exelon (Merger and together with the Share Exchange, Merger Transaction). In the Merger Transaction, each share of the outstanding common stock of Unicom was converted into 0.875 shares of common stock of Exelon plus $3.00 in cash. Also pursuant to the Merger Agreement, PECO and Unicom repurchased approximately $1.5 billion of common stock prior to the closing of the Merger Transaction, with Unicom repurchasing approximately $1.0 billion of its common stock, and PECO repurchasing approximately $500 million of its common stock. As a result of the Share Exchange, Exelon became the owner of all of the common stock of PECO. As a result of the Merger, Unicom ceased to exist and its subsidiaries, including ComEd, became subsidiaries of Exelon.
PECO's merger-related costs charged to expense in 2000 were $248 million consisting of $132 million of direct incremental costs and $116 million for employee costs. Direct incremental costs represent expenses directly associated with completing the Merger Transaction, including professional fees, regulatory approval and settlement costs, and settlement of compensation arrangements. Employee costs represent estimated severance payments and pension and postretirement benefits provided under Exelon's Merger Separation Plan (MSP) for eligible employees who are expected to be involuntarily terminated before October 2002 due to integration activities of the merged companies.
Approximately 642 positions have been identified to be eliminated as a result of the Merger Transaction. PECO anticipates that $116 million of employee costs will be funded from its pension and postretirement benefit plans.
3. Acquisitions
Sithe Energies, Inc. Acquisition On December 18, 2000, PECO acquired 49.9% of the outstanding common stock of Sithe Energies, Inc. (Sithe) through an intercompany transaction with Exelon for $696 million in cash and $8 million of acquisition costs. The transaction includes an option to purchase the remaining common stock outstanding exercisable between December 2002 and December 2005, at a price to be determined based on prevailing market conditions. See Note 20 - Related-Party Transactions.
Sithe is an independent power generator in North America utilizing primarily fossil and hydro generation. The purchase involves approximately 10,000 megawatts (MW) of generation consisting of 3,800 MW of existing merchant generation, 2,500 MW under construction, and another 3,700 MW of generation in various stages of development, as well as Sithe's domestic marketing and development businesses. The generation assets are located primarily in Massachusetts and New York, but also include plants in Pennsylvania, California, Colorado and Idaho, as well as Canada and Mexico.
Exelon Infrastructure Services Acquisitions In 2000, EIS, an unregulated majority owned subsidiary of PECO, acquired the stock or assets of seven utility service contracting companies for an aggregate purchase price of approximately $245 million, net of cash acquired of $9 million, including EIS common stock valued at $14 million. The acquisitions
were accounted for using the purchase method of accounting. The initial estimate of the excess of purchase price over the fair value of net assets acquired (goodwill) was approximately $216 million.
The allocation of purchase price to the fair value of assets acquired and liabilities assumed in these acquisitions is as follows:
Current Assets (net of cash acquired) $ 63 Property, Plant and Equipment 17 Goodwill 216 Current Liabilities (51) ----- Total $ 245 =====
Goodwill associated with these acquisitions is being amortized over 20 years.
At December 31, 2000 and 1999, Current Assets includes $70 million and $48 million, respectively, of Costs and Earnings in Excess of Billings on uncompleted contracts and Current Liabilities includes $23 million and $9 million, respectively, of Billings and Earnings in Excess of Costs on uncompleted contracts, related to EIS.
AmerGen Energy Company, LLC In August 2000, AmerGen completed the purchase of Oyster Creek Nuclear Generating Facility (Oyster Creek) from GPU, Inc. (GPU) for $10 million. Under the terms of the purchase agreement, GPU agreed to fund outage costs not to exceed $89 million, including the cost of fuel, for a refueling outage that occurred in 2000. AmerGen will repay these costs to GPU in nine equal annual installments beginning in August 2001. In addition, AmerGen assumed full responsibility for the ultimate decommissioning of Oyster Creek. At the closing of the sale, GPU provided funding for the decommissioning trust of $440 million. In conjunction with this acquisition, AmerGen has received a fully funded decommissioning trust fund which has been computed assuming the anticipated costs to appropriately decommission Oyster Creek discounted to net present value using the NRC's mandated rate of 2%. AmerGen believes that the amount of the trust fund and investment earnings thereon will be sufficient to meet its decommissioning obligation. GPU is purchasing the electricity generated by Oyster Creek pursuant to a three-year power purchase agreement.
4. Accounting Change
During the fourth quarter of 2000, as a result of the synchronization of accounting policies with Unicom in connection with the Merger Transaction, PECO changed its method of accounting for nuclear outage costs to record such costs as incurred. Previously, PECO accrued these costs over the operating cycle. As a result of the change in accounting method for nuclear outage costs, PECO recorded income of $24 million, net of income taxes of $16 million. The change is reported as a cumulative effect of a change in accounting principle on PECO's Consolidated Statements of Income as of December 31, 2000, representing the balance of the nuclear outage cost reserve at January 1, 2000. Exclusive of the cumulative effect of a change in accounting principle, the change in accounting method for nuclear outage costs did not have a material impact on PECO's financial position, results of operations or cash flows in 2000. On a pro forma basis, PECO reported net income for 1999 and 1998 would have been decreased by $6 million and increased by $11 million, respectively.
5. Regulatory Issues
In addition to retail competition for generation services, PECO's 1998 settlement of its restructuring case mandated by the Competition Act required PECO to provide generation services to customers who do not or cannot choose an alternate supplier through December 31, 2010 and established caps on generation and distribution rates. The settlement also authorized PECO to recover $5.3 billion of stranded costs and to securitize a portion of its stranded cost recovery.
Customer Choice The PUC's Final Restructuring Order provided for the phase-in of customer choice of electric generation supplier (EGS) for all customers: one-third of the peak load of each customer class on January 1, 1999; one-third on January 2, 1999; and the remaining one-third on January 1, 2000. The Final Restructuring Order also established market share thresholds to ensure that a minimum number of residential and commercial customers choose an EGS or a PECO affiliate. If less than 35% and 50% of residential and commercial customers have chosen an EGS, including residential customers assigned to an EGS as a provider of last resort default supplier, by January 1, 2001 and January 1, 2003, respectively, the number of customers sufficient to meet the necessary threshold levels shall be randomly selected and assigned to an EGS through a PUC-determined process. On January 1, 2001, the 35% threshold was met for all three customer classes as a result of agreements assigning customers to New Power Company and Green Mountain as providers of last resort default service. At December 31, 2000, approximately 18% of PECO's residential load, 46% of its commercial load and 42% of its industrial load were purchasing generation from an alternative generation supplier.
Rate Reductions and Caps Under the Final Restructuring Order, retail electric rates were capped at year-end 1996 levels (system-wide average of 9.96 cents/kilowatt-hour (kWh)) through June 2005. The Final Restructuring Order required PECO to reduce its retail electric rates by 8% from the 1996 system-wide average rate on January 1, 1999. This rate reduction decreased to 6% on January 1, 2000 until January 1, 2001. The transmission and distribution rate component was capped at a system-wide average rate of 2.98 cents/kWh through June 30, 2005. Additionally, generation rate caps, defined as the sum of the applicable transition charge and energy and capacity charge, will remain in effect through 2010.
On March 16, 2000, the PUC issued an order authorizing PECO to securitize up to an additional $1 billion of its authorized stranded costs recovery. In accordance with the terms of that order, PECO will provide its retail customers with rate reductions in the total amount of $60 million beginning on January 1, 2001. This rate reduction will be effective for calendar year 2001 only.
Under a comprehensive settlement agreement in connection with achieving regulatory approval of the Merger Transaction, PECO agreed to $200 million in rate reductions for all customers in Pennsylvania over the period January 1, 2002 through 2005 and extended the rate caps on PECO's retail electric distribution charges through December 31, 2006.
6. Supplemental Financial Information
Supplemental Income Statement Information
Taxes Other Than Income For the Years Ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- Gross receipts $144 $155 $156 Real estate 45 72 51 Payroll 27 28 30 Other 21 7 43 ------ ------ ------ Total $237 $262 $280 ====== ====== ======
Other, Net
For the years ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- Interest income $ 50 $ 52 $ 26 Gain (loss) on disposition of assets, net (20) (1) (5) Settlement of power purchase agreement 6 -- 14 AFUDC 2 4 4 Other 3 4 (38) ---- ---- ---- Total $ 41 $ 59 $ 1 ==== ==== ====
Supplemental Cash Flow Information For the years ended December 31, 2000 1999 1998 ---- ---- ---- Cash paid during the year: Interest (net of amount capitalized) $431 $350 $385 Income taxes (net of refunds) $261 $304 $347 Noncash investing and financing: Investment in Sithe $696 -- -- Issuance of EIS stock $ 14 $ 11 -- Capital lease obligations incurred -- -- $ 38
Depreciation and amortization: Property, plant and equipment $229 $207 $190 Nuclear fuel 112 104 62 Regulatory assets 57 -- 424 Decommissioning 29 29 29 Goodwill 10 1 -- Leased property -- 17 60 ---- ---- ---- $437 $358 $765 ==== ==== ====
Supplemental Balance Sheet Information
Investments December 31, 2000 1999 ---- ---- Investment in Sithe $704 $ -- Energy services and other ventures 64 57 Investment in AmerGen 44 40 Communications ventures 35 24 Marketable securities -- 9 ------- -------- Total $847 $130 ======= ========
Regulatory Assets December 31, 2000 1999 ---- ---- Competitive transition charge $ 5,218 $ 5,275 Recoverable deferred income taxes (see Note 12) 661 638 Loss on reacquired debt 64 71 Compensated absences 5 4 Non-pension postretirement benefits 78 84 ------- ------- Long-Term Regulatory Assets 6,026 6,072 Deferred energy costs (current asset) 86 7 ------- ------- Total $ 6,112 $ 6,079 ======= =======
At December 31, 2000 and 1999, the Competitive Transition Charge (CTC) includes the unamortized balance of $4.8 billion and $3.9 billion, respectively, of Intangible Transition Property (ITP) sold to PECO Energy Transition Trust (PETT) in connection with the securitization of PECO's stranded cost recovery. ITP represents the irrevocable right of PECO or its assignee to collect non-bypassable charges from customers to recover stranded costs. During 2000, PECO securitized an additional $1 billion of its authorized stranded cost recovery, and accordingly converted an additional $1 billion of CTC to ITP.
7. Accounts Receivable
Accounts receivable -- Customer at December 31, 2000 and 1999 included unbilled operating revenues of $180 million and $153 million, respectively. The allowance for uncollectible accounts at December 31, 2000 and 1999 was $131 million and $112 million, respectively.
Accounts receivable -- Other at December 31, 2000 and 1999 included notes receivable from a communications investment in the amount of $153 million. The average interest rate on the notes receivable was 6.22% and 5.66% at December 31, 2000 and 1999, respectively. Interest income related to the notes receivable was $10 million and $6 million in 2000 and 1999, respectively.
PECO is party to an agreement with a financial institution under which it can sell or finance with limited recourse an undivided interest, adjusted daily, in up to $225 million of designated accounts receivable until November 2005. At December 31, 2000, PECO had sold a $225 million interest in accounts receivable, consisting of a $185 million interest in accounts receivable which PECO accounted for as a sale under SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," and a $40 million interest in special-agreement accounts receivable which were accounted for as a long-term note payable. See Note 11 -- Long-Term Debt. PECO retains the servicing responsibility for these receivables. The agreement requires PECO to maintain the $225 million interest, which, if not met, requires PECO to deposit cash in order to satisfy such requirements. At December 31, 2000 and 1999, PECO met this requirement and was not required to make any cash deposits.
8. Property, Plant and Equipment
A summary of property, plant and equipment by classification as of December 31, 2000 and 1999 is as follows:
9. Jointly Owned Electric Utility Plant
PECO's ownership interests in jointly owned electric utility plant at December 31, 2000, were as follows:
PECO's undivided ownership interests are financed with PECO 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 and Delmarva Power & Light Company for $18 million. On December 24, 2000, PECO completed the purchase of Delmarva Power & Light Company's 3.755% interest in Peach Bottom for $9 million. The purchase of Atlantic City Electric Company's ownership interest is still pending regulatory approval which is expected in 2001.
10. Notes Payable - Banks
2000 1999 1998 ---- ---- ---- Average borrowings $186 $242 $209 Average interest rates, computed on daily basis 6.62% 5.62% 5.83% Maximum borrowings outstanding $500 $728 $525 Average interest rates, at December 31 7.18% 6.80% 6.17%
PECO, along with Exelon and ComEd, entered into a $2 billion unsecured revolving credit facility on December 20, 2000 with a group of banks. PECO has an $800 million sublimit under the 364-day facility and expects to use the credit facility principally to support its $800 million commercial paper program. At December 31, 2000 and 1999, the amount of commercial paper outstanding was $161 million and $142 million, respectively. At December 31, 1999, PECO had $21 million of borrowings on lines of credit.
11. Long-Term Debt
(a) The maturity date represents the expected final payment date which is the date when all principal and interest of the related class of transition bonds is expected to be paid in full in accordance with the expected amortization schedule for the applicable class. The date when all principal and interest must be paid in full for the PETT Series 1999-A Transition Bonds and 2000-A Transition Bonds are 2003 through 2009 and 2003 through 2010, respectively. The current portion of transition bonds is based upon the expected maturity date.
(b) Utility plant of PECO is subject to the lien of its mortgage indenture.
(c) Includes first mortgage bonds issued under the PECO mortgage indenture securing pollution control notes.
(d) Long-term debt maturities in the period 2001 through 2005 and thereafter are as follows:
2001 $ 553 2002 639 2003 920 2004 518 2005 617 Thereafter 3,316 -------- Total $6,563 ======
In 1999, PECO entered into treasury forwards associated with the anticipated issuance of Series 2000-A Transition Bonds. On May 2, 2000, these instruments were settled with net proceeds to the counterparties of $13 million which has been deferred and is being amortized over the life of the Series 2000-A Transition Bonds as an increase to interest expense consistent with PECO's hedge accounting policy. In 1998, PECO entered into treasury forwards and forward starting interest rate swaps to manage interest rate exposure associated with the anticipated issuance of Series 1999-A Transition Bonds. On March 18, 1999, these instruments were settled with net proceeds to PECO of $80 million which were deferred and are being amortized over the life of the Series 1999-A Transition Bonds as a reduction of interest expense consistent with PECO's hedge accounting policy. At December 31, 2000 and 1999, the unamortized net gain was $51 million and $71 million, respectively.
In 2000, 1999 and 1998, PECO incurred extraordinary charges aggregating $6 million ($4 million, net of tax), $62 million ($37 million, net of tax) and $34 million ($20 million, net of tax), respectively, consisting of prepayment premiums and the write-off of unamortized deferred financing costs associated with the early retirement of debt.
12. Income Taxes
Income tax expense (benefit) is comprised of the following components:
The total income tax provisions, excluding extraordinary items and cumulative effect of a change in accounting principle, differed from amounts computed by applying the federal statutory tax rate to pretax income as follows:
Provisions for deferred income taxes consist of the tax effects of the following temporary differences:
The tax effect of temporary differences giving rise to PECO's net deferred tax liability as of December 31, 2000 and 1999 is as follows:
In accordance with SFAS No. 71, PECO has recorded a recoverable deferred income tax asset of $661 million and $638 million at December 31, 2000 and 1999, respectively. These balances are applicable only to regulated assets, as a result of the discontinuance of SFAS No. 71 for PECO's electric generation operations. These recoverable deferred income taxes include the deferred tax effects associated principally with liberalized depreciation accounted for in accordance with the ratemaking policies of the PUC, as well as the revenue impacts thereon, and assume continued recovery of these costs in future rates.
The Internal Revenue Service is currently auditing PECO's Federal tax returns for 1996 through 1999. The current audits are not expected to have a material adverse effect on the financial condition or results of operations of PECO.
13. Retirement Benefits
PECO and its subsidiaries have a defined benefit pension plan and postretirement benefit plans applicable to essentially all employees. Benefits under these plans reflect each employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans.
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.
During 2000, costs were recognized for special termination benefits in connection with the enhanced retirement and severance benefits provided to employees expected to be terminated as a result of the Merger Transaction. Special termination benefits of $96 million represent PECO's accelerated separation and enhanced benefits under the MSP. In addition, PECO recognized settlement and curtailment credits of $28 million in connection with the MSP. During 1999, all retirees and beneficiaries who began receiving benefit payments prior to January 1, 1994 were granted a cost-of-living adjustment resulting in a $25 million increase in the projected benefit obligation. During 1998, costs were recognized for special termination benefits in connection with the retirement incentives and enhanced severance benefits provided under the Early Retirement and Separation Program.
PECO provides certain health care and life insurance benefits for retired employees. PECO employees become eligible for these benefits if they retire from PECO with ten years of service. Certain benefits for active employees are provided by several insurance companies whose premiums are based upon the benefits paid during the year.
PECO sponsors savings plans for the majority of its employees. The plans allow employees to contribute a portion of their pretax income in accordance with specified guidelines. PECO matches a percentage of the employee contribution up to certain limits. The cost of PECO's matching contribution to the savings plans totaled $11 million, $7 million, and $7 million in 2000, 1999, and 1998, respectively.
14. Preferred and Preference Stock
At December 31, 2000 and 1999, Series Preference Stock, no par value, consisted of 100,000,000 shares authorized, of which no shares were outstanding. At December 31, 2000 and 1999, cumulative Preferred Stock, no par value, consisted of 15,000,000 shares authorized and the amounts set forth below:
15. Company-Obligated Mandatorily Redeemable Preferred Securities of a Partnership
At December 31, 2000 and 1999, PECO Energy Capital, L.P. (Partnership), a Delaware limited partnership of which a wholly owned subsidiary of PECO is the sole general partner, had outstanding Company-Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) as set forth in the following table:
The securities issued by the PECO trusts represent COMRPS having a distribution rate and liquidation value equivalent to the trust securities. The COMRPS are the sole assets of these trusts and represent limited partnership interests of the Partnership. Each holder of a trust's securities is entitled to withdraw the corresponding number of COMRPS from the trust in exchange for the trust securities so held. Each series of COMRPS is supported by PECO's deferrable interest subordinated debentures, held by the Partnership, which bear interest at rates equal to the distribution rates on the related series of COMRPS.
The interest expense on the debentures is included in Other Income and Deductions in PECO's Consolidated Statements of Income and is deductible for tax purposes.
16. Common Stock
At December 31, 2000 and 1999, common stock without par value consisted of 500,000,000 shares authorized and 170,478,507 and 181,271,692 shares outstanding, respectively.
Stock Repurchase
In January 2000, in connection with the Merger Agreement, PECO entered into a forward purchase agreement to purchase $500 million of its common stock from time to time. Settlement of this forward purchase agreement was, at PECO's election, on a physical, net share or net cash basis. In May 2000, PECO utilized the proceeds from the securitization of a portion of its stranded cost recovery to physically settle this agreement, resulting in the repurchase of 12 million shares of common stock for $496 million. In connection with the settlement of this agreement, PECO received $1 million in accumulated dividends on the repurchased shares and paid $6 million of interest.
During 1997, PECO's Board of Directors authorized the repurchase of up to 25 million shares of its common stock from time to time through open-market, privately negotiated and/or other types of transactions in conformity with the rules of the SEC. Pursuant to these authorizations, PECO entered into forward purchase agreements to be settled from time to time, at PECO's election, on a physical, net share or net cash basis. PECO utilized the proceeds from the securitization of a portion of its stranded cost recovery in the first quarter of 1999 to physically settle these agreements, resulting in the purchase of 21 million shares of common stock for $696 million. In connection with the settlement of these agreements, PECO received $18 million in accumulated dividends on the repurchased shares and paid $6 million of interest.
17. Financial Instruments
Fair values of financial instruments, including liabilities, are estimated based on quoted market prices for the same or similar issues. The carrying amounts and fair values of PECO's financial instruments as of December 31, 2000 and 1999 were as follows:
Financial instruments which potentially subject PECO to concentrations of credit risk consist principally of cash equivalents and customer accounts receivable. PECO places its cash equivalents with high-credit quality financial institutions. Generally, such investments are in excess of the Federal Deposit
Insurance Corporation limit. Concentrations of credit risk with respect to customer accounts receivable are limited due to PECO's large number of customers and their dispersion across many industries.
The fair value of derivatives generally reflects the estimated amounts that PECO would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotes are available for all of PECO's derivatives.
PECO has entered into interest rate swaps relating to two classes of floating rate transition bonds in the aggregate notional amount of $1.1 billion with an average interest rate of 6.65%. PECO has also entered into forward starting interest rate swaps relating to two classes of floating rate transition bonds in the aggregate notional amount of $1.1 billion with an average interest rate of 6.01%. In anticipation of the refinancing of a portion of its two variable rate series of transition bonds in the first quarter of 2001, PECO settled $318 million of the forward starting interest rate swaps in December 2000. The notional amount of derivatives do not represent amounts that are exchanged by the parties and, thus, are not a measure of PECO's exposure. The amounts exchanged are calculated on the basis of the notional or contract amounts, as well as on the other terms of the derivatives, which relate to interest rates and the volatility of these rates.
PECO would be exposed to credit-related losses in the event of non-performance by the counterparties that issued the derivative instruments. PECO does not expect that counterparties to the interest rate swaps will fail to meet these obligations, given their high credit ratings. The credit exposure of derivatives contracts is represented by the fair value of contracts at the reporting date. PECO's interest rate swaps are documented under master agreements. Among other things, these agreements provide for a maximum credit exposure for both parties. Payments are required by the appropriate party when the maximum limit is reached.
18. Commitments and Contingencies
Capital Commitments PECO estimates that it will spend approximately $260 million for capital expenditures and other investments in 2001.
Nuclear Insurance The Price-Anderson Act limits the liability of nuclear reactor owners for claims that could arise from a single incident. The current limit is $9.5 billion and is subject to change to account for the effects of inflation and changes in the number of licensed reactors. Through its subsidiaries, PECO 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.
PECO 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 PECO is required by the Nuclear Regulatory Commission (NRC) to maintain, to provide for decommissioning the facility. PECO is unable to predict the timing of the availability of insurance proceeds to PECO and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, PECO could be assessed up to $20 million for losses incurred at any plant insured by the insurance companies. PECO 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 PECO's financial condition and results of operations.
Additionally, through its subsidiaries, PECO 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. PECO's maximum share of any assessment is $8 million per year.
In addition, PECO 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. PECO 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 $12 million could apply.
See Note 22 - Subsequent Events - Restructuring.
Nuclear Decommissioning and Spent Fuel Storage PECO's current estimate of its nuclear facilities' decommissioning cost is $1.7 billion. Decommissioning costs are recoverable through regulated rates. Under rates in effect through December 31, 2000, PECO collected and expensed approximately $29 million in 2000 from customers which was accounted for as a component of depreciation expense and accumulated depreciation. At December 31, 2000 and 1999, $412 million and $383 million, respectively, were included in accumulated depreciation. In order to fund future decommissioning costs, at December 31, 2000 and 1999, PECO held $440 million and $408 million, respectively, in trust accounts which are included as Investments in PECO's Consolidated Balance Sheets and include both net unrealized and realized gains. Net unrealized gains of $41 million and $45 million, respectively, were recognized in accumulated depreciation in PECO's Consolidated Balance Sheets at December 31, 2000 and 1999, respectively. Net realized gains of $10 million and $14 million were also recognized in accumulated depreciation in PECO's Consolidated Balance Sheets at December 31, 2000 and 1999, respectively. PECO believes that the amounts being recovered from customers through regulated rates and earnings on nuclear decommissioning trust funds will be sufficient to fully fund the unrecorded portion of its decommissioning obligation.
Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste (SNF). PECO, as required by the NWPA, signed a contract with the DOE (Standard Contract) to provide for disposal of SNF from their respective nuclear generating stations. In accordance with the NWPA and the Standard Contract, PECO pays the DOE one mill ($.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 PECO's consideration of additional dry storage alternatives.
In July 2000, PECO entered into an agreement with the DOE relating to the Peach Bottom nuclear generating station to address the DOE's failure to begin removal of SNF in January 1998 as required by the Standard Contract. Under that agreement, the DOE agrees to provide PECO with credits against PECO's future contributions to the nuclear waste fund over the next ten years to compensate PECO for SNF storage costs incurred as a result of the DOE's breach of the contract. The agreement also provides that, upon PECO's request, the DOE will take title to the SNF and the interim storage facility at Peach Bottom provided certain conditions are met. In November 2000, eight utilities with nuclear power plants filed a Joint Petition for Review against the DOE with the United States Court of Appeals for the Eleventh Circuit seeking to invalidate that portion of the agreement providing for credits to PECO against nuclear waste fund payments on the ground that such provision is a violation of the NWPA. PECO has intervened as a defendant in that case, which is ongoing.
See Note 22 - Subsequent Events - Restructuring.
Energy Commitments PECO's wholesale operations include the physical delivery and marketing of power obtained through its generation capacity, and long, intermediate and short-term contracts. PECO maintains a net positive supply of energy and capacity, through ownership of generation assets and power purchase and lease agreements, to protect it from the potential operational failure of one of its owned or contracted power generating units. PECO 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. PECO enters into power purchase agreements with the objective of obtaining low-cost energy supply sources to meet its physical delivery obligations to its customers. PECO 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 is to provide PECO with physical power supply to enable it to deliver energy to meet customer needs. Except for hedging purposes, PECO does not use financial contracts in its wholesale marketing activities. In 2001, PECO anticipates the use of financial contracts to manage the risk surrounding trading for profit activities.
PECO has entered into bilateral long-term contractual obligations for sales of energy to load-serving entities, including electric utilities, municipalities, electric cooperatives, and retail load aggregators. PECO also enters into contractual obligations to deliver energy to wholesale market participants who primarily focus on the resale of energy products for delivery. PECO provides delivery of its energy to these customers through access to its transmission assets or rights for firm transmission.
In addition, PECO has entered into long-term power purchase agreements with Independent Power Producers (IPP) under which PECO makes fixed capacity payments to the IPP in return for exclusive rights to the energy and capacity of the generating units for a fixed period. The terms of the long-term power purchase agreements enable PECO to supply the fuel and dispatch energy from the plants.
At December 31, 2000, PECO had long-term commitments, in millions of megawatt-hours (MWh) and dollars, relating to the purchase and sale of energy, capacity and transmission rights from unaffiliated utilities and others as expressed in the tables below:
Power Only ------------------------------------------- Purchases Sales --------- ----- MWh Dollars MWh Dollars --- ------- --- ------- 2001 16 $335 27 $ 705 2002 9 131 10 257 2003 7 94 9 228 2004 5 71 4 110 2005 4 61 4 109 Thereafter 5 81 3 72 ---- ------ Total $773 $1,481 ==== ======
Capacity Capacity Transmission Purchases Sales Rights Purchases in Dollars in Dollars in Dollars ---------- ---------- ---------- 2001 $ 167 $ 32 $ 100 2002 307 21 35 2003 334 16 32 2004 325 3 25 2005 297 3 25 Thereafter 4,399 8 79 ------ ---- ---- Total $5,829 $ 83 $296 ====== ==== ====
In 1997, PECO entered into a power supply contract in Massachusetts. In 1999, PECO determined that, based upon anticipated prices of energy in Massachusetts through the remaining life of the power supply contract, it had incurred a loss of approximately $36 million.
In 1999, PECO entered into a final settlement of litigation that resulted in a restructuring of power purchase agreements between PECO and a cogeneration facility. The settlement also required PECO to contribute its partnership interest in the cogeneration facility to the remaining partners. Accordingly, PECO recorded a charge to earnings of $15 million for the transfer of its partnership interest which is recorded in Other Income and Deductions on PECO's Consolidated Statements of Income. The settlement also resolved related litigation with Westinghouse Power Generation and the Chase Manhattan Bank. Subsequently, in 1999, PECO revised its estimate for losses associated with the cogeneration facility power purchase agreements and reversed approximately $26 million of reserves, which consisted principally of the remaining balance of a reserve previously recognized in 1997.
See Note 22 - Subsequent Events - Restructuring.
Environmental Issues PECO'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, PECO, through its subsidiaries, is generally liable for the costs of remediating environmental contamination of property now or formerly owned by PECO and of property contaminated by hazardous substances generated by PECO. PECO owns or leases a number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination by substances which are considered hazardous under environmental laws. PECO has identified 28 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. PECO is currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future.
As of December 31, 2000 and 1999, PECO had accrued $54 million and $57 million, respectively, for environmental investigation and remediation costs, including $30 million and $32 million, respectively, for MGP investigation and remediation, that currently can be reasonably estimated. PECO cannot reasonably estimate whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by PECO, environmental agencies or others, or whether such costs will be recoverable from third parties.
Leases Minimum future operating lease payments as of December 31, 2000 were:
2001 $ 49 2002 43 2003 43 2004 30 2005 33 Remaining years 543 ---
Total minimum future lease payments $741 ====
Rental expense under operating leases totaled $36 million, $54 million, and $69 million in 2000, 1999, and 1998, respectively.
See Note 22 - Subsequent Events - Restructuring.
Early Retirement and Separation Program At December 31, 1998, PECO incurred a charge of $125 million ($74 million, net of income taxes) for its Early Retirement and Separation Program relating to 1,157 employees. The estimated cost of separation benefits was
approximately $47 million. Retirement benefits of approximately $78 million are being paid to the retirees over their lives. All cash payments related to the Early Retirement and Separation Program were funded through the assets of PECO's Service Annuity Plan. The Early Retirement and Separation Program terminated on June 30, 2000.
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. This action seeks the full purchase price of the 30% interest in the River Bend nuclear plant, $50 million, plus interest and consequential damages. While PECO cannot predict the outcome of this matter, PECO believes that it validly exercised its right of termination and did not breach the agreement.
Pennsylvania Real Estate Tax Appeals PECO is involved in tax appeals regarding two of its nuclear facilities, Limerick (Montgomery County) and Peach Bottom (York County). PECO is also involved in the tax appeal for Three Mile Island Unit No. 1 Nuclear Generating Facility (Dauphin County) through AmerGen. PECO does not believe the outcome of these matters will have a material adverse effect on PECO's results of operations or financial condition.
General PECO 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 PECO's financial condition or results of operations.
19. Segment Information
PECO evaluates the performance of its business segments based on Earnings Before Interest Expense and Income Taxes (EBIT). PECO's general corporate expenses and certain non-recurring expenses are excluded from the internal evaluation of reportable segment performance. General corporate expenses include the cost of executive management, corporate accounting and finance, information technology, risk management, human resources and legal functions and employee benefits.
Energy Delivery consists of the retail electricity distribution and transmission business in southeastern Pennsylvania and the natural gas distribution business. Generation consists of electric generating facilities, power marketing operations, and PECO's interests in Sithe and AmerGen. Enterprises consists of competitive retail energy sales, energy and infrastructure services, communications and related investments. An analysis and reconciliation of PECO's business segment information to the respective information in the consolidated financial statements are as follows:
Equity in losses of communications investments of $45 million, $38 million, and $54 million for 2000, 1999, and 1998, respectively, are included in the Enterprises business unit's EBIT. Equity in earnings (losses) of AmerGen of $4 million and $(0.5) million for 2000 and 1999, respectively, are included in Generation's EBIT.
20. Related-Party Transactions
At December 31, 2000, PECO had a $696 million note payable maturing on or before June 30, 2001, with Exelon, which is reflected in current liabilities in PECO's Consolidated Balance Sheets. The average annual interest rate on this note for the period it was outstanding was 7.6%. At December 31, 2000, PECO had a $400 million intercompany payable with ComEd, which is also reflected in current liabilities in PECO's Consolidated Balance Sheets. The average annual interest rate on this note for the period was 6.5%.
PECO incurred $45 million of merger costs that were directly associated with the acquisition of Unicom on behalf of Exelon prior to the Share Exchange. These costs consisted principally of investment banker, legal and accounting fees. Immediately after the Share Exchange, PECO transferred these costs as a dividend to Exelon for inclusion in the application of purchase accounting to the Unicom assets acquired and liabilities assumed.
21. Quarterly Data (Unaudited)
The data shown below include all adjustments which PECO considers necessary for a fair presentation of such amounts:
22. Subsequent Event
Restructuring During January 2001, Exelon undertook a corporate restructuring to separate PECO's generation and other competitive businesses from its regulated energy delivery business. As part of the restructuring, the non-regulated operations and related assets and liabilities of PECO, representing the Generation and Enterprises business segments were transferred to separate subsidiaries of Exelon. As a result, beginning January 2001, the operations of PECO consist of its retail electricity distribution and transmission business in southeastern Pennsylvania and its natural gas distribution business located in the Pennsylvania counties surrounding the City of Philadelphia. In connection with the transfer, PECO entered into a power purchase agreement (PPA) with Generation. Under the terms of the PPA, PECO will obtain all of its supply from Generation through 2010. Also, under the terms of the transfer, PECO assigned its rights and obligations under various PPAs and fuel supply agreements to Generation. Generation will supply power to PECO from the transferred generation assets, assigned PPAs and other market sources.
As a result of the corporate restructuring, certain risks and commitments that have been disclosed in Note 18 - Commitments and Contingencies and the future financial condition and results of operations will change significantly. On a prospective basis, PECO will not be subject to the risks associated with nuclear insurance, decommissioning, spent fuel disposal and energy commitments, other than its purchase power agreement with Generation. See Note 19 - Segment Information for additional financial information.
PETT Refinancing On March 1, 2001, PECO refinanced $805 million of floating rate Series 1999-A Transition Bonds through the issuance by PETT of fixed-rate transition bonds.
ComEd
Report of Independent Accountants
To the Board of Directors and Shareholders of Commonwealth Edison Company:
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(3)(i) present fairly, in all material respects, the financial position of Commonwealth Edison Company and Subsidiary Companies (ComEd) at December 31, 2000, and the results of their operations and their cash flows for the periods from January 1, 2000 through October 19, 2000 and from October 20, 2000 through December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(3)(ii) for the year ended December 31, 2000, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of ComEd's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective October 20, 2000, Exelon Corporation acquired Unicom Corporation, the parent company of ComEd, in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the periods before the acquisition and therefore, is not comparable.
PricewaterhouseCoopers LLP
Chicago, Illinois January 30, 2001
Report Of Independent Public Accountants
To the Shareholders of Commonwealth Edison Company:
We have audited the accompanying consolidated balance sheet of Commonwealth Edison Company (an Illinois corporation) and Subsidiary Companies as of December 31, 1999, and the related consolidated statements of income, cash flows, and changes in shareholders' equity and comprehensive income for each of the two years in the period ended December 31, 1999. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Edison Company and Subsidiary Companies as of December 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)(3)(ii) for each of the two years in the period ended December 31, 1999, is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois January 31, 2000
Commonwealth Edison Company and Subsidiary Companies Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements
Commonwealth Edison Company and Subsidiary Companies Consolidated Balance Sheets
See Notes to Consolidated Financial Statements
Commonwealth Edison Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, unless otherwise noted)
1. Significant Accounting Policies
Description of Business Commonwealth Edison Company (ComEd) is engaged principally in the production, purchase, transmission, distribution and sale of electricity to 3.5 million retail customers. ComEd's retail electric service territories are located principally in northern Illinois including metropolitan Chicago, spanning an area of approximately 11,300 square miles. ComEd operates as one business segment, that of a vertically integrated electric utility. See Note 19 - - Subsequent Event, regarding Exelon Corporation's (Exelon's) corporate restructuring.
Basis of Presentation The consolidated financial statements of ComEd include the accounts of ComEd, Commonwealth Edison Company of Indiana, Inc. , Edison Development Canada Inc. , ComEd Financing I and ComEd Financing II , ComEd Funding LLC (ComEd Funding), and ComEd Transitional Funding Trust (ComEd Funding Trust). All significant intercompany transactions have been eliminated. Although the accounts of ComEd Funding and ComEd Funding Trust, which are Special Purpose Entities (SPEs), are included in the consolidated financial statements, as required by generally accepted accounting principles (GAAP), ComEd Funding and ComEd Funding Trust are separate legal entities from ComEd. The assets of the SPEs are not available to creditors of ComEd and the transitional property held by the SPEs are not assets of ComEd. Accounting policies for regulated operations are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Illinois Commerce Commission (ICC), the Federal Energy Regulatory Commission (FERC) and the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935 (PUHCA).
ComEd, a regulated electric utility, is a principal subsidiary of Exelon, which owns 99.9% of ComEd common stock. ComEd was the principal subsidiary of Unicom Corporation (Unicom) prior to the merger with Exelon. See Note 2 - Merger. The merger was accounted for using the purchase method of accounting in accordance with GAAP. The effects of the purchase method are reflected on the financial statements of ComEd as of the merger date. Accordingly, the financial statements presented for the period after the merger reflect a new basis of accounting. ComEd's financial statements for 2000, separated by a bold black line, are presented for periods prior to and subsequent to the merger.
Accounting for the Effects of Regulation ComEd accounts for its regulated electric operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," requiring ComEd to record in the financial statement the effects of the rate regulation to which these operations are currently subject. Use of SFAS No. 71 is applicable to the utility operations of ComEd that meet the following criteria: (1) third-party regulation of rates; (2) cost-based rates; and (3) a reasonable assumption that all costs will be recoverable from customers through rates. ComEd believes that it is probable that regulatory assets associated with these operations will be recovered. If a separable portion of ComEd's business no longer meets the provisions of SFAS No. 71, ComEd is required to eliminate the financial statement effects of regulation for that portion.
Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenues Operating revenues are generally recorded as service is rendered or energy is delivered to customers. At the end of each month, ComEd accrues an estimate for the unbilled amount of energy delivered or services provided to its customers.
Nuclear Fuel The cost of nuclear fuel is capitalized and charged to fuel expense using the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed.
Depreciation, Amortization and Decommissioning Depreciation is provided over the estimated service lives of property, plant, and equipment on a straight line basis. Annual depreciation provisions for financial reporting purposes, expressed as a percentage of average service life for each asset category are presented below:
Asset Category 2000 | 1999 1998 -------------- ---- | ---- ---- | Electric -- Transmission and Distribution 5.95% | 3.24% 3.23% Electric -- Generation 4.87% | 2.20% 2.79% Other Property and Equipment 8.51% | 5.71% 5.22%
Regulatory assets are amortized over a recovery period specified in the related legislation or regulatory agreement. Goodwill associated with the merger is being amortized on a straight line basis over 40 years. See Note 2 - Merger. Accumulated amortization of goodwill was $23 million at December 31, 2000.
ComEd's estimate of the costs for decommissioning its nuclear generating stations is currently included in regulated rates. The amounts recovered from customers are deposited in trust accounts and invested for funding of future costs for current and retired plants. ComEd accounts for the current period's cost of decommissioning by recording a charge to depreciation expense and a corresponding liability in accumulated depreciation for its operating nuclear units and a reduction to regulatory assets for its retired units. ComEd believes that the amounts being recovered from customers through electric rates along with the earnings on the trust funds will be sufficient to fully fund its decommissioning obligations.
Capitalized Interest ComEd uses SFAS No. 34, Capitalizing Interest Costs, to calculate the costs during construction of debt funds used to finance its non-regulated construction projects. ComEd recorded capitalized interest of $5 million, $22 million and $28 million in 2000, 1999 and 1998, respectively.
Allowance for Funds Used During Construction (AFUDC) is the cost, during the period of construction, of debt and equity funds used to finance construction projects for regulated operations. AFUDC is recorded as a charge to Construction Work in Progress and as a non-cash credit to AFUDC which is included in Other Income and Deductions. The rates used for capitalizing AFUDC are computed under a method prescribed by regulatory authorities.
Income Taxes Deferred Federal and state income taxes are provided on all significant temporary differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different from book income and tax carryforwards. Investment tax credits previously used for income tax purposes have been deferred on ComEd's Consolidated Balance Sheets and are recognized in book income over the life of the related property. ComEd files a consolidated Federal and state income tax returns with Exelon, and was previously included in Unicom's consolidated income tax returns. Current and deferred income taxes of the consolidated group are allocated to ComEd as if ComEd filed separate income tax returns.
Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are recognized in ComEd's Consolidated Statements of Income as incurred. Gains and losses on reacquired debt related to regulated operations incurred prior to January 1, 1998, have been deferred and are being amortized to interest expense over the period approved for ratemaking purposes.
Comprehensive Income Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. Comprehensive income is reflected in ComEd's Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income.
Cash and Cash Equivalents ComEd considers all temporary cash investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash Restricted cash reflects unused cash proceeds from the issuance of the transitional trust notes and escrowed cash to be applied to the principal and interest payment on the transitional trust notes.
Marketable Securities Marketable securities are classified as available-for-sale securities and are reported at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. Unrealized gains and losses on marketable securities held in the nuclear decommissioning trust funds are reported in accumulated depreciation for operating units and as a reduction of regulatory assets for retired units. At December 31, 2000 and 1999, ComEd had no held-to-maturity or trading securities.
Property, Plant and Equipment Property, plant and equipment is recorded at cost. ComEd evaluates the carrying value of property, plant and equipment and other long-term assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when it is probable that such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. The cost of maintenance, repairs and minor replacements of property are charged to maintenance expense as incurred.
Upon retirement, the cost of regulated property plus removal costs less salvage, are charged to accumulated depreciation in accordance with the provisions of SFAS No. 71. For unregulated property, the cost and accumulated depreciation of property, plant and equipment retired or otherwise disposed of are removed from the related accounts and included in the determination of the gain or loss on disposition.
Capitalized Software Costs Costs incurred during the application development stage of software projects which are developed or obtained for internal use are capitalized. At December 31, 2000 and 1999, capitalized software costs totaled $154 million and $112 million, respectively, net of $4 million and $12 million accumulated amortization, respectively. Such capitalized amounts are amortized ratably over the expected lives of the projects when they become operational, not to exceed 10 years. Certain capitalized software is being amortized over 15 years pursuant to regulatory approval.
Retail and Wholesale Energy Commitments In the normal course of business, ComEd utilizes contracts for the forward sale and purchase of energy to manage the utilization of its available generating capability and provision of wholesale energy to its retail affiliates. ComEd also utilizes energy option contracts and energy financial swap arrangements to limit the market price risk associated with the forward energy commodity contracts. Through December 31, 2000, ComEd generally recognized any gains or losses on forward commodity contracts when the underlying transactions affected earnings. Revenues and expenses associated with market price risk management contracts are amortized over the terms of such contracts.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivatives. The new standard requires recognizing all derivatives as either assets or liabilities on the balance sheet at their fair value and specifies the accounting for changes in fair value depending upon the intended use of the derivative. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date for SFAS No. 133 until fiscal years beginning after June 15, 2000. The effect of adopting SFAS No. 133 in the first quarter of 2001 is not expected to have a material effect on ComEd's financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB Statement No, 125." This new standard revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and should be applied prospectively. At December 31, 2000, ComEd did not anticipate entering into any significant transactions that would be subject to the provisions of SFAS No. 140 when it becomes effective.
Reclassifications Certain prior year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income.
2. Merger
On October 20, 2000, Exelon became the parent corporation of PECO Energy Company (PECO) and ComEd as a result of the completion of the transactions contemplated by an Agreement and Plan of Exchange and Merger, as amended (Merger Agreement), among PECO, Unicom Corporation (Unicom) and Exelon. Pursuant to the Merger Agreement, Unicom merged with and into Exelon (Merger). In the Merger, each share of the outstanding common stock of Unicom was converted into 0.875 shares of common stock of Exelon plus $3.00 in cash. As a result of the Merger, Unicom ceased to exist and its subsidiaries, including ComEd, became subsidiaries of Exelon.
The Merger was accounted for using the purchase method of accounting. Purchase transactions resulting in one entity becoming substantially wholly owned by the acquiror establish a new basis of accounting in the acquired entity's records for the purchased assets and liabilities. Thus, the purchase price has been allocated to the underlying assets purchased and liabilities assumed based on their estimated fair values at the acquisition date. As a result of the application of the purchase method of accounting, the following fair value adjustments, including the elimination of accumulated depreciation, retained earnings and other comprehensive income, were recorded in ComEd's Consolidated Balance Sheets on October 20, 2000:
Increase (Decrease) in Assets ----------------------------- Property, Plant and Equipment, net $(4,790) Goodwill 4,789 Other Assets 106
(Increase) Decrease in Liabilities ---------------------------------- and Shareholders' Equity ------------------------ Deferred Income Taxes 1,645 Unamortized Investment Tax Credits 401 Merger Severance Liability (307) Pension and Postretirement Benefit Obligations 459 Long-Term Debt and Preferred Securities 116 Other Liabilities (40) Other Paid in Capital (3,177) Retained Earnings 792 Accumulated Other Comprehensive Income 6
Reductions to the carrying value of property, plant and equipment balances primarily reflect the fair value of the nuclear generating assets based on discounted cash flow analyses and independent appraisals. Adjustments to deferred income taxes, long-term debt and preferred securities, and other assets and liabilities were recorded based on the estimate of fair market value.
Reductions to unamortized investment tax credits represents the adjustment of nuclear generating asset investment tax credits to fair value. Merger severance obligations relating to ComEd's employee exit costs were recorded in the purchase price allocation. Reductions to pension and postretirement benefit obligations primarily reflect elimination of unrecognized net actuarial gains, prior service costs and transition obligations.
Goodwill represents the purchase price allocation to ComEd of the cost in excess of net assets acquired in the Merger, which will be amortized over forty years.
Merger-Related Costs In connection with the Merger, ComEd recorded certain reserves for restructuring costs. Costs incurred prior to the Merger were charged to expense. Costs incurred subsequent to the Merger were reflected as part of the application of purchase accounting and did not affect results of operations.
ComEd's Merger-related costs charged to expense in 2000 were $67 million consisting of $26 million of direct incremental costs and $41 million for employee costs. Direct incremental costs represent expenses directly associated with completing the Merger, including professional fees, regulatory approval and other merger integration costs. Employee costs represent estimated severance payments provided under Exelon's Merger Separation Plan (MSP) for eligible employees whose positions were eliminated before October 20, 2000 due to integration activities of the merged companies.
Included in the purchase price allocation is a liability for exit costs of $307 million for additional employee costs and additional liabilities of approximately $32 million for estimated costs of exiting business activities that were not compatible with the strategic business direction of Exelon. The employee costs include employee severance, actuarially determined pension and postretirement costs, and relocation and other benefits of $128 million, $158 million and $21 million, respectively. The involuntary terminations are a result of merger integration and reengineering of processes, primarily in the areas of corporate support, generation, and energy delivery. The $307 million estimated liability is subject to a final determination of the level of benefits to be provided to a portion of the employees whose positions are expected to be eliminated as a result of the Merger but who are not eligible for the MSP. Adjustments to the liability to reflect final determination of benefit levels will be recorded as an adjustment to goodwill.
Approximately 2,300 positions have been identified to be eliminated as a result of the Merger. ComEd anticipates that $167 million of employee costs will be funded from its pension and postretirement benefit plans and $181 million will be funded from general corporate funds. At December 31, 2000, the reserve balance for employee severance, relocation and other benefits was $144 million, which is reflected in other current liabilities in ComEd's Consolidated Balance Sheets, and is expected to be expended by October 2002.
3. Fossil Plant Sale
In December 1999, ComEd completed the sale of its fossil generating assets to Edison Mission Energy, an Edison International subsidiary (EME), for a cash purchase price of $4.8 billion. The fossil generating assets represented an aggregate generating capacity of approximately 9,772 megawatts.
Just prior to the consummation of the fossil plant sale, ComEd transferred these assets to an affiliate, Unicom Investment, Inc. (Unicom Investment). In consideration for the transferred assets, Unicom Investment paid ComEd consideration totaling approximately $4.8 billion in the form of a demand note in the amount of approximately $2.4 billion and an interest-bearing note with a maturity of twelve
years. Unicom Investment immediately sold the fossil plant assets to EME, in consideration of which Unicom Investment received approximately $4.8 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment paid the demand note in full. Unicom Investment used the remainder of the cash received from EME to fund other business opportunities, including the share repurchases. Of the cash received by ComEd, $1.8 billion was used to pay the costs and taxes associated with the fossil plant sale, including ComEd's contribution of $250 million of the proceeds to an environmental trust as required by Illinois legislation. The remainder of the demand note proceeds was available to ComEd to fund, among other things, transmission and distribution projects, nuclear generation station projects, and environmental and other initiatives.
The sale produced an after-tax gain of approximately $1.6 billion, after recognizing commitments associated with certain coal contracts of $350 million, employee-related costs of $112 million and contributing to the environmental trust. The coal contract costs include the amortization of the remaining balance of ComEd's regulatory asset for unrecovered coal reserves of $178 million and the recognition of $172 million of settlement payments related to the above-market portion of coal purchase commitments ComEd assigned to EME at market value upon completion of the fossil plant sale. The severance costs included pension and postretirement welfare benefit curtailment and special termination benefit costs of $51 million and transition, separation and retention payments of $61 million. A total of 1,730 fossil station employee positions were eliminated upon completion of the fossil plant sale on December 15, 1999. The employees whose positions were eliminated have been terminated. Consistent with the provisions of Illinois legislation, the pre-tax gain on the sale of $2,587 million resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2,544 million and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2,456 million are reflected in depreciation and amortization expense on ComEd's Consolidated Statements of Income.
4. Regulatory Issues
In 2000, the phased process to implement competition into the electric industry continued as mandated by the requirements of Illinois legislation.
Customer Choice As of December 31, 2000, all non-residential customers were eligible to choose a new electric supplier or elect the power purchase option which allows the purchase of electric energy from ComEd at market-based prices. ComEd's residential customers become eligible to choose a new electric supplier in May 2002. As of December 31, 2000, over 9,500 non-residential customers, representing approximately 27% of ComEd's retail kilowatt-hour sales for the twelve months prior to the introduction of retail competition, had elected to receive their electric energy from an alternative electric supplier or had chosen the power purchase option. ComEd is unable to predict the long-term impact of customer choice on results of operations.
Rate Reductions and Caps The Illinois legislation also provided a 15% residential base rate reduction effective August 1, 1998 with an additional 5% residential base rate reduction to be implemented in October 2001. Notwithstanding the rate reductions and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. A utility may request a rate increase during the rate freeze period only when necessary to ensure the utility's financial viability. Under the Illinois legislation, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity is based on the 30-Year Treasury Bond rate plus 8.5% in the years 2000 through 2004. Earnings for purposes of ComEd's rate cap include ComEd's net income calculated in accordance with GAAP and may include accelerated amortization of regulatory assets and the amortization of goodwill. As a result of the Illinois legislation, at December 31, 2000, ComEd had a regulatory asset with an unamortized balance of $385 million that it expects to fully recover and
amortize by the end of 2003. The utility's earned return on common equity and the threshold return on common equity for ComEd are each calculated on a two-year average basis. The earnings sharing provision is applicable only to ComEd's earnings. ComEd did not trigger the earnings sharing provision in 2000 and does not currently expect to trigger the earnings sharing provisions in the years 2001 through 2004.
5. Supplemental Financial Information
Supplemental Income Statement Information
Supplemental Balance Sheet Information
Regulatory Assets December 31, 2000 | 1999 ---- | ---- Nuclear decommissioning costs $ 719 | $ 699 Recoverable transition costs 385 | 660 Loss on reacquired debt 35 | 39 Deferred taxes ( 29) | (72) ------- | ------- Total $ 1,110 | $ 1,326 ======= | =======
6. Accounts Receivable
Receivables from customers included $29 million and $103 million as of December 31, 2000 and 1999, respectively, in estimated unbilled revenue for service that has been provided to customers, but for which bill issuance was delayed beyond the normal date of issuance. The December 31, 1999 accounts receivable balance reflects temporary billing and collection delays experienced following the implementation of a new customer billing and information system in July 1998. ComEd recorded increased provisions for uncollectible accounts to recognize the estimated portion of the receivables that are not expected to be recoverable. Such provisions increased O&M expenses by $35 million in 1999 compared to normally expected levels. The allowance for uncollectible accounts at December 31, 2000 and 1999 was $60 million and $49 million, respectively. Receivables from customers as of December 31, 2000 and 1999 also included $318 million and $294 million, respectively, for estimated unbilled revenues for electric service that has been provided to customers subsequent to the normal billing date and prior to the end of the reporting period.
7. Property, Plant and Equipment
A summary of property, plant and equipment by classification as of December 31, 2000 and 1999 is as follows:
2000 | 1999 ---- | ---- Electric -- Transmission & Distribution $5,612 | $ 9,289 Electric -- Generation 1,957 | 13,826 Nuclear Fuel 677 | 2,030 Construction Work in Progress 683 | 654 Plant Held for Future Use 50 | 44 Other Property, Plant and Equipment 912 | 1,194 ------ | ------- Total Property, Plant and Equipment $9,891 | $27,037 Less Accumulated Depreciation 2,234 | 15,044 ------ | ------- Property, Plant and Equipment, net $7,657 | $11,993 ====== | =======
Accumulated depreciation includes accumulated amortization of nuclear fuel of $52 million and $1,315 million, respectively, as well as the decommissioning liability for operating units of $2.1 billion as of December 31, 2000 and 1999. See Note 2 - Merger.
8. Jointly Owned Electric Utility Plant
ComEd has a 75% undivided ownership interest in the Quad Cities nuclear generating station. ComEd's net plant investment of $120 million at December 31, 2000, reflects $38 million in construction in progress and $2 million in accumulated depreciation. ComEd's undivided ownership interest is financed with its funds, and is accounted for as if such participating interest was a wholly owned facility.
9. Notes Payable - Banks
2000 1999 1998 ---- ---- ---- Average borrowings $214 $7 $ 32 Average interest rates, computed on daily basis 6.56% 7.75% 7.82% Maximum borrowings outstanding $494 $8 $208 Average interest rates, at December 31 --% 8.33% 7.60%
Along with Exelon and PECO, ComEd entered into a $2 billion unsecured revolving credit facility on December 20, 2000 with a group of banks. ComEd has a $200 million sublimit under the 364-day facility and expects to use the credit facility principally to support its $200 million commercial paper program. There was no outstanding debt under this credit facility or commercial paper at December 31, 2000.
10. Long-Term Debt
(a) Utility plant of ComEd is subject to the liens of its mortgage indenture.
(b) Includes pollution control bonds secured by first mortgage bonds issued under ComEd's mortgage indenture.
(c) Long-term debt maturities in the period 2001 through 2005 and thereafter are as follows:
2001 $ 348 2002 845 2003 695 2004 578 2005 805 Thereafter 4,092 ------- Total $7,363 ======
In 2000 and 1999, ComEd incurred extraordinary charges aggregating $6 million ($4 million, net of tax), and $46 million ($28 million, net of tax), respectively, consisting of prepayment premiums and the write-offs of unamortized deferred financing costs associated with the early retirement of debt.
11. Income Taxes
Income tax expense (benefit) is comprised of the following components:
The total income tax provisions, excluding extraordinary items, differed from amounts computed by applying the Federal statutory tax rate to pre-tax income as follows:
Provisions for deferred income taxes consist of the tax effects of the following temporary differences:
The tax effect of temporary differences giving rise to ComEd's net deferred tax liability as of December 31, 2000 and 1999 is as follows:
The Internal Revenue Service is currently auditing ComEd's Federal tax returns for 1996 through 1999. The current audits are not expected to have an adverse impact on the financial condition or results of operations of ComEd.
12. Retirement Benefits
ComEd have defined benefit pension plans and postretirement benefit plans applicable to its regular employees. Benefits under these plans reflect each employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans.
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.
Pension and postretirement benefits expense for the periods January 1, 2000 to October 19, 2000, and October 20, 2000 to December 31, 2000 was $5 million and $4 million, respectively.
During 2000, costs were recognized for special termination benefits in connection with the enhanced retirement and severance benefits provided to employees expected to be terminated as a result of the Merger. Special termination benefits of $125 million represent ComEd's accelerated liability increase, including $25 million for plan enhancements, under the MSP. During 1999, $62 million of costs were recognized for special termination benefits related to the reduction in the number of employees resulting from the sale of the fossil stations.
ComEd provides certain health care and life insurance benefits for retired employees. Employees become eligible for these benefits if they retire no earlier than age 55 with ten years of service. Certain benefits for active employees are provided by several insurance companies whose premiums are based upon the benefits paid during the year.
Additionally, ComEd maintains a nonqualified supplemental retirement plan that covers any excess pension benefits that would be payable to management employees under the qualified plan but which are limited by the Internal Revenue Code. The fair value of plan assets excludes $24 million held in grantor trust as of December 31, 2000 for the payment of benefits under the supplemental plan and $9 million held in a grantor trust as of December 31, 2000 for the payment of postretirement medical benefits.
ComEd sponsors savings plans which allows employees to contribute a portion of their base pay in accordance with specified guidelines. ComEd matches a percentage of the employee contribution up to certain limits. The cost of ComEd's matching contribution to the savings plans totaled $31 million, $32 million, and $32 million in 2000, 1999, and 1998, respectively.
13. Preferred Securities
Preferred and Preference Stock
At December 31, 2000 and 1999, there were 51,773 and 56,291 authorized shares of $1.425 convertible preferred stock, respectively, 6,810,451 and 7,510,451 authorized shares of preference stock, respectively, and 850,000 and 850,000 authorized shares of prior preferred stock, respectively.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securities
At December 31, 2000 and 1999, subsidiary trusts of ComEd had outstanding the following securities:
ComEd Financing I and ComEd Financing II are wholly owned subsidiary trusts of ComEd. The sole assets of each ComEd trust are subordinated deferrable interest debt securities issued by ComEd bearing interest rates equivalent to the distribution rate of the related trust security.
The interest expense on the deferrable interest debt securities is included in Other Income and Deductions in ComEd's Consolidated Statements of Income and is deductible for tax purposes.
14. Common Stock
At December 31, 2000 and 1999, common stock with a $12.50 par value consisted of 250,000,000 and 250,000,000 shares authorized and 163,805,000 and 213,974,000 shares outstanding, respectively.
At December 31, 2000 and 1999, 74,988 and 75,692, respectively, of ComEd common stock purchase warrants were outstanding. The warrants entitle the holders to convert such warrants into common stock of ComEd at a conversion rate of one share of common stock for three warrants. At December 31, 2000, 24,996 shares of common stock were reserved for the conversion of warrants.
Forward Purchase Agreements In the fourth quarter of 1998, ComEd entered into a forward purchase arrangement with Unicom for the repurchase of $200 million of ComEd common stock. This contract, which was accounted for as an equity instrument as of December 31, 1999, was settled on a net cash basis in February 1999, resulting in a $16 million reduction to common stock equity on ComEd's Consolidated Balance Sheets.
In January 2000, ComEd physically settled the forward share repurchase arrangements it had with Unicom for the repurchase of 26.3 million ComEd common shares. Prior to settlement, the repurchase arrangements were recorded as a receivable on ComEd's Consolidated Balance Sheets based on the aggregate market value of the shares under the arrangements. In 1999, net unrealized losses of $44 million (after-tax) were recorded related to the arrangements. The settlement of the arrangements in January 2000 resulted in a gain of $113 million (after-tax), which was recorded in the first quarter of 2000. The settlement of the arrangements resulted in a reduction in ComEd's outstanding common shares and common stock equity, effective January 2000.
Stock Repurchases During the first quarter of 2000, ComEd repurchased four million of its common shares from Unicom for $153 million using proceeds from the 1998 issuance of transitional trust notes.
In the fourth quarter of 2000, ComEd repurchased 19.9 million of its common shares from Unicom in exchange for an $850 million note receivable ComEd held from Unicom Investment.
15. Financial Instruments
Fair values of financial instruments, including liabilities, are estimated based on quoted market prices for the same or similar issues. The carrying amounts and fair values of ComEd's financial instruments as of December 31, 2000 and 1999 were as follows:
Financial instruments which potentially subject ComEd to concentrations of credit risk consist principally of cash equivalents and customer accounts receivable. ComEd places its cash equivalents with high-credit quality financial institutions. Generally, such investments are in excess of the Federal Deposit Insurance Corporation limit. Concentrations of credit risk with respect to customer accounts receivable are limited due to ComEd's large number of customers and their dispersion across many industries.
16. Commitments and Contingencies
Capital Commitments ComEd estimates that it will spend approximately $900 million for capital expenditures in 2001.
Nuclear Insurance The Price-Anderson Act limits the liability of nuclear reactor owners for claims that could arise from a single incident. The current limit is $9.5 billion and is subject to change to account for the effects of inflation and changes in the number of licensed reactors. ComEd carried 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.
ComEd carried 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 ComEd was required by the Nuclear Regulatory Commission (NRC) to maintain, to provide for decommissioning the facility. Under the terms of the various insurance agreements, ComEd could have been assessed up to $49 million for losses incurred at any plant insured by the insurance companies. ComEd was self-insured to the extent that any losses might have
exceeded the amount of insurance maintained. Such losses could have had a material adverse effect on ComEd's financial condition and results of operations.
ComEd was a member of an industry 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. ComEd's maximum share of any assessment was $10 million per year.
In addition, ComEd participated in the American Nuclear Insurers Master Worker Program, which provides coverage for worker tort claims filed for bodily injury caused by the 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. ComEd 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 $38 million could apply. See Note 19 - Subsequent Events for information regarding a restructuring that Exelon effected in January 2001.
Nuclear Decommissioning and Spent Fuel Storage ComEd's current estimate of its nuclear facilities' decommissioning cost is $5.2 billion. Decommissioning costs are recoverable through regulated rates. Under rates in effect through December 31, 2000, ComEd expensed approximately $84 million in 2000 collected from customers which was accounted for as a component of depreciation expense and accumulated depreciation for operating units and regulatory assets for retired units. At December 31, 2000 and 1999, $2.1 billion was included in accumulated depreciation. In order to fund future decommissioning costs, at December 31, 2000 and 1999, ComEd held $2.7 billion and $2.5 billion, respectively, in trust accounts which are included in ComEd's Consolidated Balance Sheets and include both net unrealized and realized gains. Net unrealized gains of $499 million and $581 million, respectively, were recognized in accumulated depreciation in ComEd's Consolidated Balance Sheets at December 31, 2000 and 1999, respectively. Net realized gains of $608 million and $502 million were also recognized in accumulated depreciation in ComEd's Consolidated Balance Sheets at December 31, 2000 and 1999, respectively. ComEd believes that the amounts being recovered from customers through regulated rates and earnings on nuclear decommissioning trust funds will be sufficient to fully fund the unrecorded portion of its decommissioning obligation.
In connection with the transfer of ComEd's nuclear generating stations to Exelon Generation Company, LLC (Generation), ComEd asked the ICC to approve the continued recovery of decommissioning costs after the transfer. On December 20, 2000, the ICC issued an order finding that the ICC has the legal authority to permit ComEd to continue to recover decommissioning costs from customers for the six-year term of the power purchase agreements between ComEd and Generation. Under the ICC order, ComEd is permitted to recover $73 million per year from customers for decommissioning for the years 2001 through 2004. In 2005 and 2006, ComEd can recover up to $73 million annually, depending upon the portion of the output of the former ComEd nuclear stations that ComEd purchases from Generation. Subsequent to 2006, there will be no further recoveries of decommissioning costs from customers. The ICC order also provides that any surplus funds after the nuclear stations are decommissioned must be refunded to customers. The amount of recovery in the ICC order is less than the $84 million annual amount ComEd recovered in 2000. The ICC order is currently pending appeal in the Illinois Appellate Court.
Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste (SNF). ComEd, as required by the NWPA, signed a contract with the DOE (the Standard Contract) to provide for the disposal of SNF from its nuclear generating stations. In accordance with NWPA and the Standard Contract, ComEd pays the DOE one mill ($.001) per kilowatthour 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 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 such a facility is 2010. This extended delay in spent nuclear fuel acceptance by the DOE has led to ComEd's consideration of additional dry storage alternatives.
On July 30, 1998, ComEd filed a complaint against the United States Government (Government) in the United States Court of Federal Claims seeking to recover damages caused by the DOE's failure to honor its contractual obligation to begin disposing of SNF in January 1998. ComEd subsequently moved for partial summary judgment on liability on its breach of contract claim. In August, 2000, the United States Court of Appeals decided two other similar cases against the Government, rejecting the Government's jurisdictional defense and granting partial summary judgment on liability for the plaintiff utilities in one of those cases. The Court later denied the Government's request for rehearing. Following that ruling, ComEd and seven other utility plaintiffs filed motions in their respective cases in the Court of Federal Claims to set a coordinated discovery schedule on damages. On January 8, 2001, the Government filed a motion to reassign all of the SNF cases to one Court of Federal Claims judge for purposes of consolidating the cases to address certain damage issues. Those motions are all pending before the Court. ComEd has also requested that the Court grant its pending summary judgment motion on liability, particularly in light of the Court of Appeal's decision in August 2000.
The Standard Contract with the DOE also requires ComEd to pay the DOE a one-time fee applicable to nuclear generation through April 6, 1983. Pursuant to the Contract, ComEd has elected to pay the one-time fee of $277 million, with interest to the date of payment, just prior to the first delivery of SNF to the DOE. As of December 31, 2000, the liability for the one-time fee with related interest was $810 million.
Energy Commitments ComEd's wholesale operations include the physical delivery and marketing of power obtained through its generation capacity, and long, intermediate and short-term contracts. ComEd maintains a net positive supply of energy and capacity, through ownership of generation assets and power purchase agreements. These agreements are firm commitments related to power generation of specific generation plants and/or are dispatchable in nature. ComEd enters into power purchase agreements with the objective of obtaining low-cost energy supply sources to meet its physical delivery obligations to its customers. ComEd 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 is to provide ComEd with physical power supply to enable it to deliver energy to meet customer needs. Except for hedging purposes, ComEd does not use financial contracts in its wholesale marketing activities.
ComEd has entered into bilateral long-term contractual obligations for sales of energy to load-serving entities, including electric utilities, municipalities, and electric cooperatives. ComEd also enters into contractual obligations to deliver energy to wholesale market participants who primarily focus on the resale of energy products for delivery. ComEd provides delivery of its energy to these customers through access to its transmission assets or rights for firm transmission.
At December 31, 2000, ComEd had long-term commitments, in millions of megawatt hours (MWh) and dollars, relating to the purchase and sale of energy and capacity purchases and transmission rights from unaffiliated utilities and others as expressed in the following tables:
Power Only ------------------------------------------ Purchases Sales MWh Dollars MWh Dollars 2001 1 $ 27 9 $135 2002 2 36 8 114 2003 2 41 6 99 2004 --- --- 4 80 2005 --- --- 2 39 Thereafter --- --- 1 15 ---- ---- Total $104 $482 ==== ====
Capacity Transmission Purchases Purchases in Dollars in Dollars 2001 $ 689 $ 20 2002 575 -- 2003 452 -- 2004 453 -- 2005 117 -- Thereafter 800 -- ------- ----- Total $ 3,086 $ 20 ======= =====
Environmental Issues ComEd'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, ComEd is generally liable for the costs of remediating environmental contamination of property now or formerly owned by ComEd and of property contaminated by hazardous substances generated by ComEd. ComEd owns a number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination by substances which are considered hazardous under environmental laws. ComEd has identified 44 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. ComEd is currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future.
As of December 31, 2000 and 1999, ComEd had accrued $117 million and $100 million, respectively, (reflecting discount rates of 5.5% and 6.5%, respectively) for environmental investigation and remediation costs. These reserves included $110 million and $93 million, respectively, for MGP investigation and remediation. Such estimates, reflecting the effects of a 3% inflation rate before the effects of discounting were $170 million and $182 million at December 31, 2000 and 1999, respectively. ComEd cannot reasonably estimate whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by ComEd, environmental agencies or others, or whether such costs will be recoverable from third parties.
Leases Minimum future operating lease payments as of December 31, 2000 were:
2001 $ 29 2002 34 2003 32 2004 30 2005 26 Remaining years 77 ---- Total minimum future lease payments $228 ====
Rental expense under operating leases totaled $30 million, $45 million, and $60 million in 2000, 1999 and 1998, respectively.
Litigation
FERC Municipal Request for Refund. Three of ComEd's wholesale municipal customers filed a complaint and request for refund with FERC alleging that ComEd failed to properly adjust their rates, as provided for under the terms of their electric service contracts, and to track certain refunds made to ComEd's retail customers in the years 1992 through 1994. In the third quarter of 1998, the FERC granted the complaint and directed that refunds be made, with interest. ComEd filed a request for rehearing. On January 11, 2001, FERC issued its Order on Rehearing Requesting Submission of Additional Information. Responsive pleadings have been filed by all parties and final FERC action is still pending. ComEd's management believes an adequate reserve has been established in connection with the case.
Service Interruptions. In August 1999, three class action lawsuits were filed, and subsequently consolidated, in the Circuit Court of Cook County, Illinois, seeking damages for personal injuries, property damage and economic losses from ComEd related to a series of service interruptions that occurred in the summer 1999. The combined effect of these interruptions resulted in over 168,000 customers losing service for more than 4 hours. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. A hearing on a motion filed by ComEd to dismiss the complaints is expected in the second quarter of 2001. A portion of any settlement or verdict may be covered by insurance and discussions with the carrier are ongoing. ComEd's management believes adequate reserves have been established in connection with these cases.
Reliability Investigation. In 1999, the ICC opened an investigation regarding the design and reliability of ComEd's transmission and distribution system, which was expanded during 2000 to include a circuit breaker fire that occurred in October 2000 at a ComEd substation. The ICC has issued several reports in that investigation covering the summer 1999 outages as well as the transmission and distribution system. These reports include recommendations and an implementation timetable. The recommendations are not legally binding on ComEd, however, the ICC may enforce them through litigation. Two more reports are anticipated in early 2001, and the investigation is expected to conclude by mid-2001. Since summer 1999, ComEd has devoted significant resources to improving the reliability of its transmission and distribution system. ComEd's management believes that the likelihood of a successful material claim resulting from the investigation is remote.
Retail Rate Law. In 1996, several developers of non-utility generating facilities filed litigation against various Illinois officials claiming that the enforcement against those facilities of an amendment to Illinois law removing the entitlement of those facilities to state-subsidized payments for electricity sold to ComEd after March 15, 1996 violated their rights under the Federal and state constitutions, and against ComEd for a declaratory order that their rights under their contracts with ComEd were not affected by the amendment. On August 4, 1999, the Illinois Appellate Court held that the developers' claims against the State were premature, and the Illinois Supreme Court denied leave to appeal that ruling. Developers of both facilities have since filed amended complaints
repeating their allegations that ComEd breached the contracts in question, and requesting damages for such breach, in the amount of the difference between the state-subsidized rate and the amount ComEd was willing to pay for the electricity. ComEd intends to vigorously contest this matter.
Chicago Franchise. In March 1999, ComEd reached a settlement agreement with the City of Chicago to end the arbitration proceeding between ComEd and Chicago regarding the January 1, 1992 franchise agreement. As part of the settlement agreement, ComEd and Chicago agreed to a revised combination of ongoing work under the franchise agreement and new initiatives that will result in defined transmission and distribution expenditures by ComEd to improve electric services in Chicago. The settlement agreement provided that ComEd be subject to liquidation damages if the projects were not completed by various dates, unless it was prevented from doing so by events beyond its reasonable control. In addition, ComEd and Chicago established an Energy Reliability and Capacity Account, into which ComEd deposited $25 million during 1999 and 2000 and has conditionally agreed to deposit $25 million at the end of the years 2001 and 2002, to help ensure an adequate and reliable electric supply for Chicago.
Other Tax Issues. The Illinois Department of Revenue has issued notice of tax liability to ComEd alleging deficiencies in Illinois invested capital tax payments for the years 1988-1997. The alleged deficiencies, including interest and penalties, totaled approximately $54 million as of December 31, 2000. ComEd has protested the notices, and the matter is currently pending. Interest will continue to accumulate on the alleged tax deficiencies.
General. ComEd 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 ComEd's financial condition or results of operations.
17. Related-Party Transactions
ComEd has a $400 million intercompany receivable from PECO, which is reflected in current assets in ComEd's Consolidated Balance Sheets at December 31, 2000. ComEd also has notes receivable with affiliates of $1.3 billion and $2.5 billion respectively, at December 31, 2000 and 1999 primarily relating to the fossil plant sale, and included in deferred debits and other assets in ComEd's Consolidated Balance Sheets. Interest income earned on this note receivable was $176 million and $9 million for the years ended December 31, 2000 and 1999. Both receivables are under terms comparable to those that would be available from unaffiliated parties.
18. Quarterly Data (Unaudited)
The data shown below include all adjustments which ComEd considers necessary for a fair presentation of such amounts:
19. Subsequent Event
During January 2001, Exelon undertook a corporate restructuring to separate its generation and other competitive businesses from its regulated energy delivery business. As part of the restructuring, the generation related assets and liabilities of ComEd were transferred to a separate subsidiary of Exelon, Generation, in return for ComEd common stock. As a result, beginning January 2001, the operations of ComEd consist of its retail electricity distribution and transmission business in Northern Illinois.
In connection with the transfer, ComEd entered into a power purchase agreement (PPA) with Generation. Under the terms of the PPA, ComEd will obtain all of its power supply from Generation through 2004. In 2005 and 2006, ComEd will obtain all of its power supply from Generation, up to the capacity of ComEd's transferred nuclear generating plants. ComEd will obtain any additional supply required from market sources in 2005 and 2006, and subsequent to 2006,
will obtain all of its supply from market sources, which could include Generation. Also, under the terms of the transfer, ComEd assigned its rights and obligations under various PPAs and fuel supply agreements to Generation. Generation will supply power to ComEd from the transferred nuclear generating plants, assigned PPAs, and other market sources. The PPA sets forth energy prices for the full term of the agreement.
As a result of the corporate restructuring, certain risks and commitments that have been disclosed in Note 16 - Commitments and Contingencies, and the future financial condition and results of operations will change significantly. On a prospective basis, ComEd will not be subject to the risks associated with nuclear insurance, decommissioning, spent fuel disposal and energy commitments, other than its PPA with Generation. Total net assets of approximately $1.6 billion, subject to final determination, were transferred to Generation as of January 1, 2001 pursuant to the corporate restructuring.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Exelon and PECO
None.
ComEd
On November 28, 2000, the Board of Directors of Exelon selected PricewaterhouseCoopers LLP (PwC) as the independent accountant of Exelon and its subsidiaries, including ComEd. PwC was the independent accountant of PECO and its subsidiaries prior to the Unicom merger, and Arthur Andersen LLP (Arthur Andersen) was the certifying accountant for Unicom and ComEd. Arthur Andersen was dismissed by ComEd on November 28, 2000. The Exelon Audit Committee participated in and approved the decision to engage PwC.
The reports of Arthur Andersen on the financial statements of ComEd for the past two years ended December 31, 1999, and the interim periods ended September 30, 2000, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two most recent fiscal years and through November 27, 2000, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Arthur Andersen would have caused them to make reference thereto in their report on the financial statements for such years.
During the two most recent fiscal years and through November 28, 2000, ComEd consulted with PwC regarding the application of accounting principles to two related transactions that were completed in 2000. In June 2000, prior to the initiation of the auditor selection process that led to the accountant changes described above, ComEd received written advice from PwC, who was also the financial advisor regarding two like-kind exchange transactions involving one of ComEd's affiliates, Unicom Investment Inc. PwC was asked to report to ComEd pursuant to AICPA Statement of Auditing Standards No. 50 on the appropriate application of United States generally accepted accounting principles to the proposed like-kind exchange transactions. Concurrently, ComEd requested that Arthur Andersen review the proposed accounting for the proposed transactions, and Arthur Andersen concurred with the accounting conclusions proposed by PwC. PwC's reports providing accounting conclusions were presented in two separate letters dated June 9, 2000 and June 22, 2000, which were filed as Exhibits 99-1 and 99-2, respectively, to a Current Report on Form 8-K dated November 28, 2000 that ComEd filed, which exhibits are incorporated herein by this reference.
ComEd requested that Arthur Andersen furnish it with a letter addressed to the SEC stating whether or not it agreed with substantially similar statements as the foregoing contained in the Current Report on Form 8-K dated November 28, 2000. A copy of that letter, dated November 29, 2000 was filed as Exhibit 16 to that Form 8-K. PwC was also provided an opportunity to comment on the contents of the disclosures made in the Form 8-K, and no comments were made.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Exelon
The information required by Item 10 relating to directors and nominees for election as directors at Exelon's Annual Meeting of shareholders is incorporated herein by reference to the information under the heading "BOARD OF DIRECTORS" on pages 7-10 and "OTHER INFORMATION - Section 16(a) Beneficial Ownership Reporting Compliance" on page 32 in Exelon's definitive Proxy Statement (2001 Exelon Proxy Statement) filed with the SEC on March 23, 2001, pursuant to Regulation 14A under the Securities Exchange Act of 1934. The information required by Item 10 relating to executive officers is set forth above in ITEM 1. Business - Executive Officers of Exelon, ComEd and PECO.
PECO
The information required by Item 10 relating to directors and nominees for election as directors at PECO's annual meeting of shareholders is incorporated herein by reference to information under the subheadings "Nominees" and "Security Ownership of Certain Beneficial Owners and Management" under the heading "Item A: Election of Directors" in PECO's definitive Information Statement (2001 PECO Information Statement) to be filed with the SEC prior to April 30, 2001, pursuant to Regulation 14C under the Securities Exchange Act of 1934. The information required by Item 10 relating to executive officers is set forth above in ITEM 1. Business - Executive Officers of Exelon, ComEd and PECO.
ComEd
The information required by Item 10 relating to directors and nominees for election as directors at ComEd's annual meeting of shareholders is incorporated herein by reference to information under the subheadings "Nominees" and "Security Ownership of Certain Beneficial Owners and Management" under the heading "Item A: Election of Directors" in ComEd's definitive Information Statement (2001 ComEd Information Statement) to be filed with the SEC prior to April 30, 2001, pursuant to Regulation 14C under the Securities Exchange Act of 1934. The information required by Item 10 relating to executive officers is set forth above in ITEM 1. Business - Executive Officers of Exelon, ComEd and PECO.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Exelon
The information required by Item 11 is incorporated herein by reference to the information labeled "Board Compensation" and pages 20-30 in the 2001 Exelon Proxy Statement.
PECO
The information required by Item 11 is incorporated herein by reference to the paragraph labeled "Compensation of Directors" under the subheading "Additional Information Concerning Board of Directors" under the heading "Item A: Election of Directors" and the paragraphs under the heading "Executive Compensation" (other than the paragraphs under the subheading "Compensation Committee Report on Executive Compensation") in 2001 PECO Information Statement.
ComEd
The information required by Item 11 is incorporated herein by reference to the paragraph labeled "Compensation of Directors" under the subheading "Additional Information Concerning Board of Directors" under the heading "Item A: Election of Directors" and the paragraphs under the heading "Executive Compensation" (other than the paragraphs under the subheading "Compensation Committee Report on Executive Compensation") in the 2001 ComEd Information Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Exelon
The information required by Item 12 is incorporated herein by reference to the stock ownership information under the heading "BENEFICIAL OWNERSHIP" on page 6 in the 2001 Exelon Proxy Statement.
PECO
The information required by Item 12 is incorporated herein by reference to the stock ownership information under the subheading "Security Ownership of Certain Beneficial Owners and Management" under the heading "Item A: Election of Directors" in the 2001 PECO Information Statement.
ComEd
The information required by Item 12 is incorporated herein by reference to the stock ownership information under the subheading "Security Ownership of Certain Beneficial Owners and Management" under the heading "Item A: Election of Directors" in the 2001 ComEd Information Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Exelon
The information required by Item 13 is incorporated herein by reference to the information labeled "OTHER INFORMATION - Transactions with Management" in the 2001 Exelon Proxy Statement.
PECO and ComEd
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Shareholders of Exelon Corporation:
Our audits of the consolidated financial statements referred to in our report dated January 30, 2001, except for Note 21 PETT Refinancing for which the date is March 1, 2001, appearing in the 2000 Annual Report to Shareholders of Exelon Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(1)(ii) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois January 30, 2001
(a) Financial Statements and Financial Statement Schedules
(1) Exelon
(i) Financial Statements
Consolidated Statements of Income for the years 2000, 1999 and
Consolidated Statements of Cash Flows for the years 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedule
(2) PECO
(i) Financial Statements
Consolidated Statements of Income for the years 2000, 1999 and
Consolidated Statements of Cash Flows for the years 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedule
(3) ComEd
(i) Financial Statements
Consolidated Statements of Income for the years 2000, 1999 and
Consolidated Statements of Cash Flows for the years 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedule
The individual financial statements and schedules of Exelon's and ComEd's nonconsolidated wholly owned subsidiaries have been omitted from their respective Annual Reports on Form 10-K because the investments are not material in relation to their respective financial positions or results of operations. As of December 31, 2000, the assets of the nonconsolidated subsidiaries, in the aggregate, were less than 1% of Exelon's and ComEd's consolidated assets. The 2000 revenues of the nonconsolidated subsidiaries, in the aggregate, were less than 1% of Exelon's and ComEd's consolidated annual revenues.
(b) Reports on Form 8-K
(1) Exelon
Exelon filed Current Reports on Form 8-K during the fourth quarter of 2000 regarding the following items:
Date of Earliest Event Reported Description of Item Reported ---------------------------------------------------------------------- October 20, 2000 "ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS" regarding the completion of the merger among PECO and Unicom into Exelon.
October 20, 2000 "ITEM 7. FINANCIAL STATEMENT, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS" includes financial statements of businesses acquired.
October 30, 2000 "ITEM 5. OTHER EVENTS" regarding a presentation at the Edison Electric Institute Fall Financial Conference to explain the merger of PECO and Unicom to form Exelon.
November 15, 2000 "ITEM 5. OTHER EVENTS" regarding a presentation at Exelon's Investor Conference to explain the merger of PECO and Unicom to form Exelon and Exelon's strategy and earnings targets.
November 28, 2000 "ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT" regarding the selection of PwC as the independent accountant of Exelon and its subsidiaries, effective immediately. The exhibits under "ITEM 7. FINANCIAL STATEMENT AND EXHIBIT" include Arthur Andersen's letter to the SEC of changing accountants and PwC's Statement of Auditing Standard No. 50 dated June 9 and June 22, 2000.
December 11, 2000 "ITEM 5. OTHER EVENTS" regarding the announcement by Exelon Enterprises, a division of Exelon Corporation, and Exelon Infrastructure Services, Inc. (EIS), a business unit of Exelon Enterprises, that EIS acquired three utility and industrial infrastructure services companies and signed a definitive agreement to purchase a fourth company. The exhibits under "ITEM 7. FINANCIAL STATEMENT AND EXHIBITS" includes the press release dated December 11, 2000.
December 19, 2000 "ITEM 5. OTHER EVENTS" regarding Exelon's acquisition of 49.9% of the stock of Sithe.
December 20, 2000 "ITEM 5. OTHER EVENTS" regarding ICC issuing an order to permit ComEd to continue the recovery of decommissioning costs from customers for a six-year period.
(2) PECO
PECO filed Current Reports on Form 8-K during the fourth quarter of 2000 regarding the following items:
Date of Earliest Event Reported Description of Item Reported ----------------------------------------------------------------------
October 19, 2000 "ITEM 5. OTHER EVENTS" regarding the approval by the SEC of the merger between PECO and Unicom into Exelon.
October 20, 2000 "ITEM 5. OTHER EVENTS" regarding the completion of the merger between PECO and Unicom into Exelon.
October 24, 2000 "ITEM 5. OTHER EVENTS" regarding PECO's earnings release for the third quarter of 2000.
(3) ComEd
ComEd filed Current Reports on Form 8-K during the fourth quarter of 2000 regarding the following items:
Date of Earliest Event Reported Description of Item Reported ----------------------------------------------------------------------
October 19, 2000 "ITEM 5. OTHER EVENTS" regarding the approval by the SEC of the merger between PECO and Unicom into Exelon.
October 20, 2000 "ITEM 5. OTHER EVENTS" regarding the completion of the merger between PECO and Unicom into Exelon.
November 28, 2000 "ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT" regarding the selection of PwC as the independent accountant of Exelon and its subsidiaries, effective immediately. The exhibits under "ITEM 7. FINANCIAL STATEMENT AND EXHIBIT" include Arthur Andersen's letter to the SEC of changing accountants and PwC's Statement of Auditing Standard No. 50 dated June 9 and June 22, 2000.
December 20, 2000 "ITEM 5. OTHER EVENTS" regarding ComEd's proposal to transfer its nuclear generating stations to a new subsidiary of Exelon and the continual recovery of decommissioning costs after the proposed transfer.
(c) Exhibits
Certain of the following exhibits are incorporated herein by reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as amended. Certain other instruments which would otherwise be required to be listed below have not been so listed because such instruments do not authorize securities in an amount which exceeds 10% of the total assets of the applicable registrant and its subsidiaries on a consolidated basis and each of the registrants agree to furnish a copy of any such instrument to the Commission upon request.
Exhibit No. Description - --------------------------------------------------------------------------------
2-1 Amended and Restated Agreement and Plan of Merger dated as of October 20, 2000, among PECO Energy Company, Exelon Corporation and Unicom Corporation (File No. 1-01401, PECO Energy Company Form 10-Q for the quarter ended September 30, 2000, Exhibit 2-1).
3-1 Articles of Incorporation of Exelon Corporation (Registration Statement No. 333-37082, Form S-4, Exhibit 3-1).
3-2 Bylaws of Exelon Corporation (Registration Statement No. 333-37082, Form S-4, Exhibit 3-2).
3-3 Amended and Restated Articles of Incorporation of PECO Energy Company.
3-4 Bylaws of PECO Energy Company, adopted February 26, 1990 and amended January 26, 1998 (File No. 1-01401, 1997 Form 10-K, Exhibit 3-2).
3-5 Restated Articles of Incorporation of Commonwealth Edison Company effective February 20, 1985, including Statements of Resolution Establishing Series, relating to the establishment of three new series of Commonwealth Edison Company preference stock known as the "$9.00 Cumulative Preference Stock," the "$6.875 Cumulative Preference Stock" and the "$2.425 Cumulative Preference Stock" (File No. 1-1839, 1994 Form 10-K, Exhibit 3-2).
3-6 Bylaws of Commonwealth Edison Company, effective September 2, 1998, as amended through October 20, 2000.
4-1 364-day Credit Agreement, dated as of December 19, 2000, among Exelon Corporation, Commonwealth Edison Company and PECO Energy Company as Borrowers, certain banks named therein as Lenders, Bank One, N.A., as Administrative Agent, Credit Suisse First Boston and First Union National Bank, as Documentation Agents, Citibank, N.A., as Syndication Agent and Banc One Capital Markets, Inc., as Lead Arranger and Sole Book Runner.
4-2 Term Loan Agreement, dated as of October 13, 2000, among Exelon Corporation, as borrower, and certain banks named therein, Bank One, N.A., as Administrative Agent, Credit Suisse First Boston, as Documentation Agent, and Citibank, N.A., as Syndication Agent (File No. 1-16169, Report on Form 8-K dated October 20, 2000, Exhibit 99.2).
4-3 First and Refunding Mortgage dated May 1, 1923 between The Counties Gas and Electric Company (predecessor to PECO Energy Company) and Fidelity Trust Company, Trustee (First Union National Bank, successor), (Registration No. 2-2281, Exhibit B-1).
4-3-1 Supplemental Indentures to PECO Energy Company's First and Refunding Mortgage:
Dated as of File Reference Exhibit No. --------------------- ------------------------------ ----------- May 1, 1927 2-2881 B-1(c) March 1, 1937 2-2881 B-1(g) December 1, 1941 2-4863 B-1(h) November 1, 1944 2-5472 B-1(i) December 1, 1946 2-6821 7-1(j) September 1, 1957 2-13562 2(b)-17 May 1, 1958 2-14020 2(b)-18 March 1, 1968 2-34051 2(b)-24 March 1, 1981 2-72802 4-46 March 1, 1981 2-72802 4-47 December 1, 1984 1-01401, 1984 Form 10-K 4-2(b) April 1, 1991 1-01401, 1991 Form 10-K 4(e)-76 December 1, 1991 1-01401, 1991 Form 10-K 4(e)-77 April 1, 1992 1-01401, March 31, 1992 4(e)-79 Form 10-Q June 1, 1992 1-01401, June 30, 1992 4(e)-81 Form 10-Q July 15, 1992 1-01401, June 30, 1992 4(e)-83 Form 10-Q September 1, 1992 1-01401, 1992 Form 10-K 4(e)-85 March 1, 1993 1-01401, 1992 Form 10-K 4(e)-86 May 1, 1993 1-01401, March 31, 1993 4(e)-88 Form 10-Q May 1, 1993 1-01401, March 31, 1993 4(e)-89 Form 10-Q August 15, 1993 1-01401, Form 8-A dated 4(e)-92 August 19, 1993 November 1, 1993 1-01401, Form 8-A dated 4(e)-95 October 27, 1993 May 1, 1995 1-01401, Form 8-K dated 4(e)-96 May 24, 1995
4-4 Exelon Dividend Reinvestment and Stock Purchase Plan.
4-5 Mortgage of Commonwealth Edison Company to Illinois Merchants Trust Company, Trustee (Harris Trust and Savings Bank, as current successor Trustee), dated July 1, 1923, Supplemental Indenture thereto dated August 1, 1944, and amendments and supplements thereto dated, respectively, August 1, 1946, April 1, 1953, March 31, 1967, April 1,1967, July 1, 1968, October 1, 1968, February 28, 1969, May 29, 1970, June 1, 1971, May 31, 1972, June 15, 1973, May 31, 1974, June 13, 1975, May 28, 1976, and June 3, 1977. (File No. 2-60201, Form S-7, Exhibit 2-1).
4-5-1 Supplemental Indentures to aforementioned Commonwealth Edison Mortgage.
Dated as of File Reference Exhibit No. --------------------- ----------------------------- ------------- May 17, 1978 2-99665, Form S-3 4-3 August 31, 1978 2-99665, Form S-3 4-3 June 18, 1979 2-99665, Form S-3 4-3 June 20, 1980 2-99665, Form S-3 4-3 April 16, 1981 2-99665, Form S-3 4-3 April 30, 1982 2-99665, Form S-3 4-3 April 15, 1983 2-99665, Form S-3 4-3 April 13, 1984 2-99665, Form S-3 4-3 April 15, 1985 2-99665, Form S-3 4-3 April 15, 1986 33-6879, Form S-3 4-9 June 15, 1990 33-38232, Form S-3 4-12 June 1, 1991 33-40018, Form S-3 4-12 October 1, 1991 33-40018, Form S-3 4-13 October 15, 1991 33-40018, Form S-3 4-14 February 1, 1992 1-1839, 1991 Form 10-K 4-18 May 15, 1992 33-48542, Form S-3 4-14 July 15, 1992 33-53766, Form S-3 4-13 September 15, 1992 33-53766, Form S-3 4-14 February 1, 1993 1-1839, 1992 Form 10-K 4-14 April 1, 1993 33-64028, Form S-3 4-12 April 15, 1993 33-64028, Form S-3 4-13 June 15, 1993 1-1839, Form 8-K dated May 4-1 21, 1993
July 1, 1993 1-1839, Form 8-K dated May 4-2 21, 1993 July 15, 1993 1-1839, Form 10-Q for 4-1 quarter ended June 30, 1993. January 15, 1994 1-1839, 1993 Form 10-K 4-15 December 1, 1994 1-1839, 1994 Form 10-K 4-16 June 1, 1996 1-1839, 1996 Form 10-K 4-16
4-5-2 Instrument of Resignation, Appointment and Acceptance dated January 31, 1996, under the provisions of the Mortgage dated July 1, 1923, and Indentures Supplemental thereto (File No. 1-1839, 1995 Form 10-K, Exhibit 4-28).
4-5-3 Instrument dated as of January 31, 1996, for trustee under the Mortgage dated July 1, 1923 and Indentures Supplemental thereto (File No. 1-1839, 1995 Form 10-K, Exhibit 4-29).
4-6 Indentures of Commonwealth Edison Company to The First National Bank of Chicago, Trustee (Amalgamated Bank of Chicago, as current successor Trustee), dated April 1, 1949, October 1, 1949, October 1, 1950, October 1, 1954, January 1, 1958, January 1, 1959 and December 1, 1961 (File No. 1-1839, 1982 Form 10-K, Exhibit 4-20).
4-7 Indenture dated as of September 1, 1987 between Commonwealth Edison Company and Citibank, N.A., Trustee relating to Notes (File No. 1-1839, Form S-3, Exhibit 4-13).
4-7-1 Supplemental Indenture to Indenture dated September 1, 1987 dated July 14, 1989 (File No. 33-32929, Form S-3, Exhibit 4-16).
4-7-2 Supplemental Indenture to Indenture dated September 1, 1987, dated January 1, 1997 (File No. 1-1839, 1999 Form 10K, Exhibit 4-21).
4-7-3 Supplemental Indenture to Indenture dated September 20, 1987, dated September 1, 2000.
10-1 Stock Purchase Agreement among Exelon (Fossil) Holdings, Inc., as Buyer and The Stockholders of Sithe Energies, Inc., as Sellers, and Sithe Energies, Inc. (File No. 0-16844, PECO Energy Company Form 10-Q for the quarter ended September 30, 2000, Exhibit 10-1).
10-2 Amended and Restated Employment Agreement among Unicom Corporation, Commonwealth Edison Company and John W. Rowe (File No. 1-16169, Exelon Corporation Form 10-Q for the quarter ended September 30, 2000, Exhibit 10-2).
10-3 PECO Energy Company Deferred Compensation and Supplemental Pension Benefit Plan* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-2).
10-4 PECO Energy Company Management Group Deferred Compensation and Supplemental Pension Benefit Plan* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-3).
10-5 PECO Energy Company Unfunded Deferred Compensation Plan for Directors* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-4).
10-6 Exelon Corporation Long-Term Incentive Plan (Registration Statement No. 333-37082, Post-Effective Amendment No. 1 to Form S-4, Exhibit 4-2). *
10-6-1 First Amendment to Exelon Corporation Long Term Incentive Plan.*
10-7 PECO Energy Company Management Incentive Compensation Plan* (File No. 1-01401, 1997 Proxy Statement, Appendix A).
10-8 PECO Energy Company 1998 Stock Option Plan* (Registration Statement No. 333-37082, Post-Effective Amendment No. 1 to Form S-4, Exhibit 4-3).
10-9 PECO Energy Company Employee Savings Plan (Registration Statement No. 333-37082, Post-Effective Amendment No. 1 to Form S-4, Exhibit 4-4)
10-10 Second Amended and Restated Trust Agreement for PECO Energy Transition Trust (File No. 333-58055, PECO Energy Transition Trust Report on Form 8-K dated May 2, 2000, Exhibit 4.1).
10-11 Intangible Transition Property Sale Agreement dated as of March 25,1999, as amended and restated as of May 2, 2000, between PECO Energy Transition Trust and PECO Energy Company. (File No. 333-58055, PECO Energy Transition Trust Report on Form 8-K dated May 2, 2000, Exhibit 10.1).
10-11-1 Amendment No. 1 to Intangible Transition Property Sale Agreement dated as of March 25, 1999, as amended and restated as of May 2, 2000 (File No. 1-01401, PECO Energy Company and PECO Energy Transition Trust Report on Form 8-K dated March 1, 2001).
10-12 Master Servicing Agreement dated as of March 25, 1999, as amended and restated as of May 2, 2000, between PECO Energy Transition Trust and PECO Energy Company. (File No. 333-58055, PECO Energy Transition Trust Current Report on Form 8-K dated May 2, 2000, Exhibit 10.2).
10-12-1 Amendment No. 1 to Master Servicing Agreement dated as of March 25, 1999, as amended and restated as of May 2, 2000 (File No. 1-01401, PECO Energy Company and PECO Energy Transition Trust Report on Form 8-K dated March 1, 2001).
10-13 Joint Petition for Full Settlement of PECO Energy Company's Restructuring Plan and Related Appeals and Application for a Qualified Rate Order and Application for Transfer of Generation Assets dated April 29, 1998. (Registration Statement No. 333-58055, Exhibit 10.3).
10-14 Joint Petition for Full Settlement of PECO Energy Company's Application for Issuance of Qualified Rate Order Under Section 2812 of the Public Utility Code dated March 8, 2000 (Amendment No. 1 to Registration Statement No. 333-31646, Exhibit 10.4).
10-15 Unicom Corporation Amended and Restated Long-Term Incentive Plan* (File No. 1-11375, Unicom Proxy Statement dated April 7, 1999, Exhibit A).
10-15-1 First Amendment to Unicom Corporation Amended and Restated Long Term Incentive Plan* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-8).
10-15-2 Second Amendment to Unicom Corporation Amended and Restated Long Term Incentive Plan* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-9).
10-16 Unicom Corporation General Provisions Regarding 1996 Stock Option Awards Granted under the Unicom Corporation and Long-Term Incentive Plan* (File Nos. 1-11375 and 1-1839, 1996 Form 10-K, Exhibit 10-9).
10-17 Unicom Corporation General Provisions Regarding 1996B Stock Option Awards Granted under the Unicom Corporation Long-Term Incentive Plan* (File Nos. 1-11375 and 1-1839, 1996 Form 10-K, Exhibit 10-8).
10-18 Unicom Corporation General Provisions Regarding Stock Option Awards Granted under the Unicom Corporation Long-Term Incentive Plan* (Effective July 10, 1997).
10-19 Unicom Corporation Deferred Compensation Unit Plan, as amended* (File Nos. 1-11375 and 1-1839, 1995 Form 10-K, Exhibit 10-12).
10-20 Commonwealth Edison Deferred Compensation Plan* (included in Article Five of Exhibit 3-5 above).
10-21 Unicom Corporation Retirement Plan for Directors, as amended* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-12).
10-22 Commonwealth Edison Company Retirement Plan for Directors, as amended* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-13).
10-23 Unicom Corporation 1996 Directors' Fee Plan* (File No. 1-11375, Unicom Proxy Statement dated April 8, 1996, Appendix A).
10-23-1 Second Amendment to Unicom Corporation 1996 Directors Fee Plan* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-11).
10-24 Employment Agreement dated November 1, 1997 between Commonwealth Edison Company and Oliver D. Kingsley, Jr. (File Nos. 1-11375 and 1-1839, 1998 Form 10-K, Exhibit 10-22).
10-25 Change in Control Agreement between Unicom Corporation, Commonwealth Edison Company and certain senior executives (File Nos. 1-11375 and 1-1839, 1998 Form 10-K, Exhibit 10-24).
10-25-1 Forms of Change in Control Agreement Between PECO Energy Company and Certain Employees.
10-26 Commonwealth Edison Company Executive Group Life Insurance Plan* (File No. 1-1839, 1980 Form 10-K, Exhibit 10-3).
10-26-1 Amendment to the Commonwealth Edison Company Executive Group Life Insurance Plan* (File No. 1-1839, 1981 Form 10K, Exhibit 10-4).
10-26-2 Amendment to the Commonwealth Edison Company Executive Group Life Insurance Plan dated December 12, 1986* (File No. 1-1839, 1986 Form 10-K, Exhibit 10-6).
10-26-3 Amendment to the Commonwealth Edison Company Executive Group Life Insurance Plan to implement program of "split dollar life insurance" dated December 13, 1990* (File No. 1-1839, 1990 Form 10-K, Exhibit 10-10).
10-26-4 Amendment to Commonwealth Edison Company Executive Group Life Insurance Plan to stabilize the death benefit applicable to participants dated July 22, 1992* (File No. 1-1839, 1992 Form 10-K, Exhibit 10-13).
10-27 Commonwealth Edison Company Supplemental Management Retirement Plan* (File No. 1-1839, 1998 Form 10-K, Exhibit 10-29).
10-27-1 First Amendment to the Commonwealth Edison Company Supplemental Management Retirement Plan.*
10-28 Commonwealth Edison Company Excess Benefit Savings Plan* (File No. 1-1839, Form 10-Q for the quarter ended September 30, 1998, Exhibit 10-1).
10-28-1 Amendment No. 1 to Commonwealth Edison Company Excess Benefit Savings Plan dated May 24, 1995* (File No. 1-1839, 1995 Form 10-K, Exhibit 10-30).
10-28-2 Amendment No. 2 to Commonwealth Edison Company Excess Benefit Savings Plan effective as of September 1, 1997* (File No. 1-1839, 1997 Form 10-K, Exhibit 10-34).
10-29 Commonwealth Edison Company Savings and Investment Plan* (Registration Statement No. 333-10613, Form S-8, Exhibit 4-4).
10-29-1 Amendment Nos. 1 through 6 to Commonwealth Edison Employee Savings and Investment Plan* (Registration Statement No. 333-49780, Form S-8, Exhibit 4-15).
10-30 Unicom Corporation Stock Bonus Deferral Plan* (File Nos. 1-11375 and 1-1839, Form 10-Q for the quarter ended September 30, 1998, Exhibit 10-3).
10-30-1 First Amendment to the Unicom Corporation Stock Bonus Deferral Plan.*
10-30-2 Second Amendment to the Unicom Corporation Stock Bonus Deferral Plan.*
10-31 Form of Stock Award Agreement under the Unicom Corporation Long-Term Incentive Plan* (File Nos. 1-11375 and 1-1839, 1997 Form 10-K, Exhibit 10-37).
10-32 Amended and Restated Key Management Severance Plan for Unicom Corporation and Commonwealth Edison Company dated March 8, 1999* (File No. 1-1839, 1999 Form 10-K, Exhibit 10-38).
10-32-1 First Amendment to the Amended and Restated Key Management Severance Plan.*
16 Arthur Andersen Letter to Securities and Exchange Commission regarding the change in certifying accountant (File No. 1-01839, Exelon Corporation Report on Form 8-K dated November 28, 2000, Exhibit 16).
18-1 Letter from PricewaterhouseCoopers LLP addressed to Exelon Corporation concerning a change in accounting principles.
18-2 Letter from PricewaterhouseCoopers LLP addressed to PECO Energy Company concerning a change in accounting principles.
21 Subsidiaries
21-1 Exelon Corporation 21-2 PECO Energy Company 21-3 Commonwealth Edison Company
23 Consent of Independent Accountants
23-1 Exelon Corporation 23-2 PECO Energy Company 23-3-1 Commonwealth Edison Company 23-3-2 Commonwealth Edison Company
99 Exelon Corporation's Current Report on Form 8-K dated March 16, 2001, File No. 1-16169.
_________________
* Compensatory plan or arrangements in which directors or officers of the applicable registrant participate and which are not available to all employees.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago and State of Illinois on the 30 day of March, 2001.
EXELON CORPORATION
By: /s/ Corbin A. McNeill, Jr. -------------------------------------------- Name: Corbin A. McNeill, Jr. Title: Chairman and Co-Chief Executive Officer
By: /s/ John W. Rowe -------------------------------------------- Name: John W. Rowe Title: President and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 30 day of March, 2001.
Signature Title
/s/ Corbin A. McNeill, Jr. Chairman and Co-Chief Executive Officer and Director - ----------------------- (Co-Chief Executive Officer) Corbin A. McNeill, Jr.
/s/ John W. Rowe President and Co-Chief Executive Officer and Director - ----------------------- (Co-Chief Executive Officer) John W. Rowe
This annual report has also been signed below by Corbin A. McNeill, Jr. and John W. Rowe, Attorneys-in-Fact, on behalf of the following Directors on the date indicated:
EDWARD A. BRENNAN RICHARD H. GLANTON CARLOS H. CANTU ROSEMARIE B. GRECO DANIEL L. COOPER EDGAR D. JANNOTTA M. WALTER D'ALESSIO JOHN M. PALMS, PH.D. BRUCE DEMARS JOHN W. ROGERS, JR. G. FRED DIBONA, JR. RONALD RUBIN SUE L. GIN RICHARD L. THOMAS
By: /s/ Corbin A. McNeill, Jr. March 30, 2001 -------------------------- Name: Corbin A. McNeill, Jr. Title: Chairman and Co-Chief Executive Officer
By: /s/ John W. Rowe March 30, 2001 ----------------------- Name: John W. Rowe Title: President and Co-Chief Executive Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Philadelphia and Commonwealth of Pennsylvania on the 30th day of March, 2001.
PECO ENERGY COMPANY
By: /s/ Corbin A. McNeill, Jr. -------------------------- Name: Corbin A. McNeill, Jr. Title: President, Co-Chief Executive Officer and Chairman
By: /s/ John W. Rowe ----------------------- Name: John W. Rowe Title: Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 2001.
Signature Title
/s/ Corbin A. McNeill, Jr President, Co-Chief Executive Officer - ----------------------- and Chairman Corbin A. McNeill, Jr.
/s/ John W. Rowe Co-Chief Executive Officer - ----------------------- John W. Rowe
/s/ Pamela B. Strobel Director - --------------------------- Pamela B. Strobel
/s/ Ruth Ann M. Gillis Director - --------------------------- Ruth Ann M. Gillis
/s/ Kenneth G. Lawrence Director - --------------------------- Kenneth G. Lawrence
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Chicago and State of Illinois on the 30th day of March, 2001.
COMMONWEALTH EDISON COMPANY
By: /s/ John W. Rowe ----------------------- Name: John W. Rowe Title: President, Co-Chief Executive Officer and Chairman
By: /s/ Corbin A. McNeill, Jr. -------------------------- Name: Corbin A. McNeill, Jr. Title: Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 2001.
Signature Title
/s/ John W. Rowe President, Co-Chief Executive Officer - ----------------------- and Chairman John W. Rowe
/s/ Corbin A. McNeill, Jr Co-Chief Executive Officer - ----------------------- Corbin A. McNeill, Jr.
/s/ Pamela B. Strobel Director - --------------------------- Pamela B. Strobel
/s/ Ruth Ann M. Gillis Director - --------------------------- Ruth Ann M. Gillis
/s/ Kenneth G. Lawrence Director - --------------------------- Kenneth G. Lawrence