UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Name of Registrant; State of Incorporation; Address of IRS Employer
Number Principal Executive Offices; and Telephone Number Identification Number
--------------------- ---------------------------------------------------------- ------------------------
1-16169 EXELON CORPORATION 23-2990190
(a Pennsylvania corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-7398
1-1839 COMMONWEALTH EDISON COMPANY 36-0938600
(an Illinois corporation)
10 South Dearborn Street - 37th Floor
P.O. Box 805379
Chicago, Illinois 60680-5379
(312) 394-4321
1-1401 PECO ENERGY COMPANY 23-0970240
(a Pennsylvania corporation)
P.O. Box 8699
2301 Market Street
Philadelphia, Pennsylvania 19101-8699
(215) 841-4000
333-85496 EXELON GENERATION COMPANY, LLC 23-3064219
(a Pennsylvania limited liability company)
300 Exelon Way
Kennett Square, Pennsylvania 19348
(610) 765-8200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_], except for Exelon
Generation Company, LLC which became an effective registrant on April 24, 2002.
The number of shares outstanding of each registrant's common stock as
of May 3, 2002 was as follows:
Exelon Corporation Common Stock, without par value 322,006,807
Commonwealth Edison Company Common Stock, $12.50 par value 127,016,382
PECO Energy Company Common Stock, without par value 170,478,507
Exelon Generation Company, LLC not applicable
1
TABLE OF CONTENTS
Page No.
Filing Format 3
Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Exelon Corporation
Condensed Consolidated Statements of Income and Comprehensive Income 5
Condensed Consolidated Balance Sheets 6
Condensed Consolidated Statements of Cash Flows 8
Commonwealth Edison Company
Condensed Consolidated Statements of Income and Comprehensive Income 9
Condensed Consolidated Balance Sheets 10
Condensed Consolidated Statements of Cash Flows 12
PECO Energy Company
Condensed Consolidated Statements of Income and Comprehensive Income 13
Condensed Consolidated Balance Sheets 14
Condensed Consolidated Statements of Cash Flows 16
Exelon Generation Company, LLC
Condensed Consolidated Statements of Income and Comprehensive Income 17
Condensed Consolidated Balance Sheets 18
Condensed Consolidated Statements of Cash Flows 20
Notes to Condensed Consolidated Financial Statements 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 40
Exelon Corporation 40
Commonwealth Edison Company 54
PECO Energy Company 61
Exelon Generation Company, LLC 69
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 74
PART II. OTHER INFORMATION 78
ITEM 1. LEGAL PROCEEDINGS 78
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 78
ITEM 5. OTHER INFORMATION 78
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 80
SIGNATURES 83
2
Filing Format
This combined Form 10-Q is being filed separately by Exelon
Corporation, Commonwealth Edison Company, PECO Energy Company and Exelon
Generation Company, LLC (Registrants). Information contained herein relating to
any individual registrant has been filed by such registrant on its own behalf.
No registrant makes any representation as to information relating to any other
registrant.
Forward-Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements that are subject
to risks and uncertainties. The factors that could cause actual results to
differ materially include those discussed herein as well as those listed in Note
7 of Notes to Condensed Consolidated Financial Statements, those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Outlook" in Exelon Corporation's 2001 Annual Report, and other
factors discussed in filings with the Securities and Exchange Commission by the
Registrants. Readers are cautioned not to place undue reliance on these
forward-looking statements, which apply only as of the date of this Report. The
Registrants undertake no obligation to publicly release any revision to
forward-looking statements to reflect events or circumstances after the date of
this Report.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
EXELON CORPORATION
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
(in millions, except per share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 3,870 $ 3,823
OPERATING EXPENSES
Fuel and Purchased Power 1,621 1,320
Purchase Power from Affiliate 56 10
Operating and Maintenance 1,067 1,058
Depreciation and Amortization 335 378
Taxes Other Than Income 186 168
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Expense 3,265 2,934
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 605 889
- ----------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (249) (292)
Distributions on Preferred Securities of Subsidiaries (11) (11)
Equity in Earnings of Unconsolidated Affiliates, net 13 18
Other, net 28 55
- ----------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (219) (230)
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES 386 659
INCOME TAXES 148 272
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 238 387
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (net of income taxes of
$90 and $8 for the three
months ended March 31, 2002 and 2001, respectively) (230) 12
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME 8 399
- ----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
SFAS 133 Transition Adjustment -- 44
Cash Flow Hedge Fair Value Adjustment (58) (21)
Unrealized Gain (Loss) on Marketable Securities, net (15) (124)
- ----------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (73) (101)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (65) $ 298
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Basic 321 320
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Diluted 323 324
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.74 $ 1.21
Cumulative Effect of Changes in Accounting Principles (0.72) 0.04
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 0.02 $ 1.25
- ----------------------------------------------------------------------------------------------------------------------
DILUTED:
Income Before Cumulative Effect of Changes in Accounting Principles $ 0.73 $ 1.19
Cumulative Effect of Changes in Accounting Principles (0.71) 0.04
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 0.02 $ 1.23
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ 0.44 $ 0.55
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
5
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 696 $ 485
Restricted Cash 237 372
Accounts Receivable, net 1,962 2,115
Receivable from Unconsolidated Affiliate 73 44
Inventories, at average cost 457 471
Other 482 295
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,907 3,782
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 14,059 13,781
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 6,338 6,423
Nuclear Decommissioning Trust Funds 3,161 3,165
Investments 1,782 1,666
Goodwill, net 4,971 5,335
Other 685 708
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 16,937 17,297
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 34,903 $ 34,860
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
6
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 438 $ 360
Long-Term Debt Due within One Year 1,613 1,406
Accounts Payable 1,078 964
Accrued Expenses 1,133 1,182
Other 499 505
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 4,761 4,417
- ----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 12,609 12,876
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 4,335 4,303
Unamortized Investment Tax Credits 312 316
Nuclear Decommissioning Liability for Retired Plants 1,367 1,353
Pension Obligation 318 334
Non-Pension Postretirement Benefits Obligation 860 847
Spent Nuclear Fuel Obligation 847 843
Other 830 728
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 8,869 8,724
- ----------------------------------------------------------------------------------------------------------------------
PREFERRED SECURITIES OF SUBSIDIARIES 613 613
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 6,950 6,930
Deferred Compensation (1) (2)
Retained Earnings 1,073 1,200
Accumulated Other Comprehensive Income 29 102
- ----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 8,051 8,230
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,903 $ 34,860
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
7
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8 $ 399
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 427 490
Cumulative Effect of a Change in Accounting Principle (net of income taxes) 230 (12)
Provision for Uncollectible Accounts 29 30
Deferred Income Taxes 67 65
Deferred Energy Costs 34 (29)
Equity in (Earnings) Losses of Unconsolidated Affiliates, net (13) (18)
Net Realized Losses on Nuclear Decommissioning Trust Funds 10 15
Other Operating Activities 111 (33)
Changes in Working Capital:
Accounts Receivable 58 57
Inventories 13 60
Accounts Payable, Accrued Expenses and Other Current Liabilities (7) (164)
Other Current Assets (134) (63)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 833 797
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (560) (447)
Acquisitions - Enterprises, net of cash acquired -- (38)
Proceeds from Nuclear Decommissioning Trust Funds 580 333
Investment in Nuclear Decommissioning Trust Funds (605) (354)
Note Receivable from Unconsolidated Affiliate (46) --
Other Investing Activities (6) (11)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (637) (517)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 408 827
Retirement of Long-Term Debt (471) (1,029)
Change in Short-Term Debt 78 257
Dividends on Common Stock (141) (176)
Change in Restricted Cash 135 104
Proceeds from Stock Option Exercises 18 36
Other Financing Activities (12) --
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Financing Activities 15 19
- -----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 211 299
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 485 526
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 696 $ 825
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash Investing and Financing Activities:
Regulatory Asset Fair Value Adjustment -- $ 347
See Notes to Condensed Consolidated Financial Statements
8
COMMONWEALTH EDISON COMPANY
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Operating Revenues $1,304 $ 1,404
Operating Revenues from Affiliates 11 42
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,315 1,446
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Purchased Power 6 1
Purchased Power from Affiliate 532 608
Operating and Maintenance 195 186
Operating and Maintenance from Affiliates 42 32
Depreciation and Amortization 135 167
Taxes Other Than Income 73 72
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expense 983 1,066
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 332 380
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (126) (141)
Distributions on Company-Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely the Company's
Subordinated Debt Securities (7) (7)
Interest Income from Affiliates 8 28
Other, net 6 9
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (119) (111)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 213 269
INCOME TAXES 84 123
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME ON COMMON STOCK $ 129 $ 146
- ---------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net Income $ 129 $ 146
Other Comprehensive Income (Loss) (net of income taxes):
Cash Flow Hedge Fair Value Adjustment (2) --
Unrealized Gain (Loss) on Marketable Securities -- (4)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (2) (4)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 127 $ 142
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
9
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 82 $ 23
Restricted Cash 61 41
Accounts Receivable, net 821 832
Receivables from Affiliates 159 95
Inventories, at average cost 46 56
Deferred Income Taxes 30 52
Other 15 15
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,214 1,114
- ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 7,433 7,351
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 646 667
Investments 56 64
Goodwill, net 4,895 4,902
Receivables from Affiliates 1,314 1,314
Other 290 304
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 7,201 7,251
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 15,848 $ 15,716
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
10
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-Term Debt Due within One Year $ 849 $ 849
Accounts Payable 194 144
Accrued Expenses 331 374
Payables to Affiliates 257 307
Other 205 212
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,836 1,886
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 5,954 5,850
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 1,710 1,671
Unamortized Investment Tax Credits 54 55
Pension Obligation 157 151
Non-Pension Postretirement Benefits Obligation 147 146
Payables to Affiliates 282 297
Other 248 248
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,598 2,568
- ---------------------------------------------------------------------------------------------------------------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY THE COMPANY'S
SUBORDINATED DEBT SECURITIES 329 329
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 2,048 2,048
Preference Stock 7 7
Other Paid-in Capital 5,065 5,057
Receivable from Parent (906) (937)
Retained Earnings 268 257
Treasury Stock, at cost (1,344) (1,344)
Accumulated Other Comprehensive Income (Loss) (7) (5)
- ---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 5,131 5,083
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,848 $ 15,716
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
11
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 129 $ 146
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 135 167
Provision for Uncollectible Accounts 11 7
Deferred Income Taxes 53 3
Other Operating Activities 36 19
Changes in Working Capital:
Accounts Receivable -- 38
Inventories 10 8
Accounts Payable, Accrued Expenses and Other Current Liabilities 1 70
Changes in Receivables and Payables to Affiliates, net (90) 33
Other Current Assets -- 1
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 285 492
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (182) (234)
Notes Receivable from Affiliate -- 48
Other Investing Activities -- (3)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (182) (189)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 400 --
Retirement of Long-Term Debt (297) (89)
Dividends on Common Stock (118) (63)
Change in Restricted Cash (20) (2)
Other Financing Activities (9) --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Financing Activities (44) (154)
- ----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 59 149
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23 141
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82 $ 290
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION Noncash Investing and Financing Activities:
Net Assets Transferred as a result of Restructuring, net of Note Payable $ -- $ 1,306
Receivable from Parent $ -- $ 1,062
Regulatory Asset Fair Value Adjustment $ -- $ 347
See Notes to Condensed Consolidated Financial Statements
12
PECO ENERGY COMPANY
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Operating Revenues $1,017 $ 1,048
Operating Revenues from Affiliates 3 3
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,020 1,051
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 183 244
Purchased Power from Affiliate 303 244
Operating and Maintenance 128 129
Operating and Maintenance from Affiliates 8 3
Depreciation and Amortization 112 101
Taxes Other Than Income 59 43
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Expense 793 764
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 227 287
- ----------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (95) (105)
Interest Expense - Affiliate -- (5)
Company-Obligated Mandatorily Redeemable Preferred
Securities of a Partnership, which holds Solely
Subordinated Debentures of the Company (2) (2)
Other, net 1 15
- ----------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (96) (97)
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 131 190
INCOME TAXES 42 68
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME 89 122
- ----------------------------------------------------------------------------------------------------------------------
Preferred Stock Dividends (2) (2)
NET INCOME ON COMMON STOCK $ 87 $ 120
- ----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Net Income 89 122
Other Comprehensive Income (Loss) (net of income taxes):
SFAS 133 Transition Adjustment -- 40
Cash Flow Hedge Fair Value Adjustment 2 (18)
- ----------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income 2 22
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 91 $ 144
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
13
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 31 $ 32
Restricted Cash 170 323
Accounts Receivable, net 303 319
Receivables from Affiliates 6 8
Inventories, at average cost 44 79
Prepaid Taxes 133 1
Other 26 58
- ----------------------------------------------------------------------------------------------------------------------
Total Current Assets 713 820
- ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,075 4,047
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 5,692 5,756
Investments 24 24
Pension Asset 34 13
Other 81 85
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 5,831 5,878
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,619 $ 10,745
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
14
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 159 $ 101
Payables to Affiliates 145 194
Long-Term Debt Due within One Year 752 548
Accounts Payable 50 54
Accrued Expenses 313 397
Deferred Income Taxes 27 27
Other 29 21
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,475 1,342
- ----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 5,074 5,438
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,985 2,938
Unamortized Investment Tax Credits 26 27
Non-Pension Postretirement Benefits Obligation 261 239
Payables to Affiliates 44 44
Other 114 110
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,430 3,358
- ----------------------------------------------------------------------------------------------------------------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP,
WHICH HOLDS SOLEY SUBORDINATED
DEBENTURES OF THE COMPANY 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 19 19
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 1,911 1,912
Receivable from Parent (1,848) (1,878)
Preferred Stock 137 137
Retained Earnings 272 270
Accumulated Other Comprehensive Income 21 19
- ----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 493 460
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,619 $ 10,745
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
15
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 89 $ 122
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 112 101
Provision for Uncollectible Accounts 19 18
Deferred Income Taxes 46 55
Deferred Energy Costs 34 (29)
Other Operating Activities 2 8
Changes in Working Capital:
Accounts Receivable (3) (53)
Changes in Receivables and Payables to Affiliates, net (17) (99)
Inventories 35 45
Accounts Payable, Accrued Expenses and Other Current Liabilities (83) (95)
Other Current Assets (134) (118)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Operating Activities 100 (45)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (62) (57)
Other Investing Activities (3) 11
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (65) (46)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of Long-Term Debt (160) (923)
Issuance of Long-Term Debt -- 805
Change in Short-Term Debt 58 173
Change in Payable to Affiliate -- (46)
Dividends on Preferred and Common Stock (87) (47)
Change in Restricted Cash 153 106
Settlement of Interest Rate Swap Agreements -- 31
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Financing Activities (36) 99
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) 8
Cash Transferred in Restructuring -- (31)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32 49
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31 $ 26
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION Noncash Investing and Financing Activities:
Net Assets Transferred as a result of Restructuring,
net of Receivable from Affiliates $ -- $ 1,608
Contribution of Receivable from Parent $ -- $ 1,983
See Notes to Condensed Consolidated Financial Statements
16
EXELON GENERATION COMPANY, LLC
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Operating Revenues $1,083 $ 914
Operating Revenues from Affiliates 892 714
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,975 1,628
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel and Purchased Power 1,270 800
Purchased Power from Affliates 72 18
Operating and Maintenance 428 397
Operating and Maintenance Expense from Affiliates 4 7
Depreciation and Amortization 63 92
Taxes Other Than Income 49 46
- ----------------------------------------------------------------------------------------------------------------------
Total Operating Expense 1,886 1,360
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 89 268
- ----------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (17) (18)
Interest Expense from Affiliates -- (15)
Equity in Earnings of Unconsolidated Affiliates 23 26
Other, net 16 4
- ----------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions 22 (3)
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 111 265
INCOME TAXES 45 107
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 66 158
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 13 12
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 79 $ 170
- ----------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
Other Comprehensive Income (Loss):
SFAS 133 Transition Adjustment -- 4
Unrealized Loss on Marketable Securities (9) (120)
Cash Flow Hedge Fair Value Adjustment (74) (1)
- ----------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (83) (117)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (4) $ 53
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
17
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 355 $ 224
Accounts Receivable, net 422 466
Receivables from Affiliates 241 339
Inventories, at average cost 343 307
Other 89 65
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,450 1,401
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 2,173 2,003
DEFERRED DEBITS AND OTHER ASSETS
Nuclear Decommissioning Trust Funds 3,161 3,165
Investments 904 859
Notes Receivable from Affiliates 277 291
Deferred Income Taxes 352 297
Other 188 223
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 4,882 4,835
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,505 $ 8,239
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
18
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Long-Term Debt Due within One Year $ 5 $ 4
Accounts Payable 675 585
Accrued Expenses 399 303
Deferred Income Taxes 7 7
Other 183 171
- ----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,269 1,070
- ----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 1,020 1,021
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 232 234
Nuclear Decommissioning Liability 1,367 1,353
Pension Obligation 104 118
Non-Pension Postretirement Benefits Obligation 385 384
Spent Nuclear Fuel Obligation 847 843
Other 349 280
- ----------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,284 3,212
- ----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
MEMBER'S EQUITY
Membership Interest 2,368 2,368
Undistributed Earnings 550 471
Accumulated Other Comprehensive Income 14 97
- ----------------------------------------------------------------------------------------------------------------------
Total Member's Equity 2,932 2,936
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 8,505 $ 8,239
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
19
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(in millions) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 79 $ 170
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 155 192
Cumulative Effect of a Change in Accounting Principle (net of income taxes) (13) (12)
Provision for Uncollectible Accounts 2 3
Deferred Income Taxes (2) (13)
Deferred Energy Costs -- --
Equity in (Earnings) Losses of Unconsolidated Affiliates (23) (26)
Net Realized Losses on Nuclear Decommissioning Trust Funds 10 15
Other Operating Activities 40 (38)
Changes in Working Capital:
Accounts Receivable 53 37
Changes in Receivables and Payables to Affiliates, net 144 12
Inventories (37) 4
Accounts Payable, Accrued Expenses and Other Current Liabilities 127 35
Other Current Assets (26) (17)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Operating Activities 509 362
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (288) (118)
Proceeds from Nuclear Decommissioning Trust Funds 580 333
Investment in Nuclear Decommissioning Trust Funds (605) (354)
Note Receivable from Affiliate (46) --
Other Investing Activities (20) --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (379) (139)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of Long-Term Debt 1 --
Distribution to Member -- (36)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Financing Activities 1 (36)
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 131 187
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 224 --
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 355 $ 187
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
20
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
1. BASIS OF PRESENTATION (Exelon, ComEd, PECO and Generation)
The accompanying condensed consolidated financial statements as of
March 31, 2002 and for the three months then ended are unaudited, but include
all adjustments that Exelon Corporation (Exelon), Commonwealth Edison Company
(ComEd), PECO Energy Company (PECO) and Exelon Generation Company, LLC
(Generation) consider necessary for a fair presentation of their respective
financial statements. All adjustments are of a normal, recurring nature, except
as otherwise disclosed. The year-end condensed consolidated balance sheet data
were derived from audited financial statements but do not include all
disclosures required by generally accepted accounting principles. Certain
prior-year amounts have been reclassified for comparative purposes. These
reclassifications had no effect on net income or shareholders' or member's
equity. These notes should be read in conjunction with the Notes to Consolidated
Financial Statements of Exelon, ComEd and PECO included in or incorporated by
reference in Item 8 of their Annual Report on Form 10-K for the year ended
December 31, 2001 and the Notes to Consolidated Financial Statements in
Generation's Form S-4 registration statement declared effective on April 24,
2002 by the Securities and Exchange Commission (SEC), (Generation's Form S-4).
See ITEM 8. Exhibits and Reports on Form 8-K.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Exelon, ComEd, PECO
and Generation)
In 2001, the Financial Accounting Standard Board (FASB) issued
Statement of Accounting Standard (SFAS) No. 141, "Business Combinations" (SFAS
No. 141), which requires that all business combinations be accounted for under
the purchase method of accounting and establishes criteria for the separate
recognition of intangible assets acquired in business combinations. SFAS No. 141
is effective for business combinations initiated after June 30, 2001. In
addition, SFAS No. 141 requires that unamortized negative goodwill related to
pre-July 1, 2001 purchases be recognized as a change in accounting principle
concurrent with the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142). At December 31, 2001, AmerGen Energy Company, LLC
(AmerGen), an equity-method investee of Generation, had $43 million of negative
goodwill, net of accumulated amortization, recorded on its balance sheet. Upon
AmerGen's adoption of SFAS No. 141 in January 2002, Generation recognized its
proportionate share of income of $22 million ($13 million, net of income taxes)
as a cumulative effect of a change in accounting principle.
Exelon, ComEd and Generation adopted SFAS No. 142 as of January 1,
2002. SFAS No. 142 establishes new accounting and reporting standards for
goodwill and intangible assets. Exelon does not have significant other
intangible assets recorded on its balance sheet. Under SFAS No. 142, goodwill is
no longer subject to amortization; however, goodwill is subject to an assessment
for impairment using a two-step fair value based test, the first step of which
must be performed at least annually, or more frequently if events or
21
circumstances indicate that goodwill might be impaired. The first step compares
the fair value of a reporting unit to its carrying amount, including goodwill.
If the carrying amount of the reporting unit exceeds its fair value, the second
step is performed. The second step compares the carrying amount of the goodwill
to the fair value of the goodwill. If the fair value of goodwill is less than
the carrying amount, an impairment loss is reported as a reduction to goodwill
and a charge to operating expense, except at the transition date, when the loss
is reflected as a cumulative effect of a change in accounting principle.
As of December 31, 2001, Exelon's Condensed Consolidated Balance Sheets
reflected approximately $5.3 billion in goodwill net of accumulated
amortization, including $4.9 billion of net goodwill related to the merger of
Unicom and PECO recorded on ComEd's Consolidated Balance Sheets, with the
remainder related acquisitions by Exelon Enterprises Company, LLC (Enterprises).
The first step of the transitional impairment analysis indicated that ComEd's
goodwill was not impaired but that an impairment did exist with respect to
goodwill recorded in Enterprises' reporting units. Exelon's infrastructure
services business (InfraSource), the energy services business (Exelon Services)
and the competitive retail energy sales business (Exelon Energy) were determined
to be those reporting units of Enterprises which had goodwill allocated to them.
The second step of the analysis, which compared the fair value of each of
Enterprises' reporting units' goodwill to the carrying value at December 31,
2001, indicated a total goodwill impairment of $357 million ($243 million, net
of income taxes and minority interest). The fair value of the Enterprises'
reporting units was determined using discounted cash flow models reflecting the
expected range of future cash flow outcomes related to each of the Enterprises
reporting units over the life of the model. These cash flows were discounted to
2002 using a risk-adjusted discount rate. The impairment was recorded as a
cumulative effect of a change in accounting principle in the first quarter of
2002.
The changes in the carrying amount of goodwill by reportable segment
for the three months ended March 31, 2002 are as follows:
Energy
Delivery Enterprises Total
- -----------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 $ 4,902 $ 433 $ 5,335
Impairment losses -- (357) (357)
Settlement of pre-merger income tax contingency (7) -- (7)
- -----------------------------------------------------------------------------------------------------
Balance as of March 31, 2002 $ 4,895 $ 76 $ 4,971
- -----------------------------------------------------------------------------------------------------
The March 31, 2002 Energy Delivery goodwill relates to ComEd and the
remaining Enterprises goodwill relates to the InfraSource and Exelon Energy
reporting units. Consistent with SFAS No. 142, the of remaining goodwill will be
reviewed for impairment on an annual basis or more frequently if significant
events occur that could indicate that an impairment exists.
22
The components of the net transitional impairment loss recognized in
the first quarter of 2002 as a cumulative effect of a change in accounting
principle are as follows:
Exelon
- -------------------------------------------------------------------------------------------------
Enterprises goodwill impairment (net of income taxes of $103 million) $ (254)
Minority interest (net of income taxes of $4 million) 11
Elimination of AmerGen negative goodwill (net of income taxes of $9 million) 13
- -------------------------------------------------------------------------------------------------
Total cumulative effect of a change in accounting principle $ (230)
- -------------------------------------------------------------------------------------------------
Generation
- -------------------------------------------------------------------------------------------------
Elimination of AmerGen negative goodwill (net of income taxes of $9 million)
recorded as cumulative effect of a change in accounting principle $ 13
- -------------------------------------------------------------------------------------------------
The following table sets forth Exelon's and ComEd's net income and
earnings per common share for the three months ended March 31, 2002 and 2001,
respectively, adjusted to exclude 2001 amortization expense related to goodwill
that is no longer being amortized.
Exelon
Three Months Ended March 31,
-----------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Reported income before cumulative effect
of changes in accounting principles $ 238 $ 387
Cumulative effect of changes in accounting principles (230) 12
- -----------------------------------------------------------------------------------------------------------------------
Reported net income 8 399
Goodwill amortization -- 39
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 8 $ 438
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Reported income before cumulative effect
of changes in accounting principles $ 0.74 $ 1.21
Cumulative effect of changes in accounting principles (0.72) 0.04
- -----------------------------------------------------------------------------------------------------------------------
Reported net income 0.02 1.25
Goodwill amortization -- 0.12
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.02 $ 1.37
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Reported income before cumulative effect of
changes in accounting principles $ 0.73 $ 1.19
Cumulative effect of changes in accounting principles (0.71) 0.04
- -----------------------------------------------------------------------------------------------------------------------
Reported net income 0.02 1.23
Goodwill amortization -- 0.12
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.02 $ 1.35
- -----------------------------------------------------------------------------------------------------------------------
23
ComEd
Three Months Ended March 31,
-----------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Reported income before cumulative effect
of a change in accounting principle $ 129 $ 146
Cumulative effect of change in a accounting principle -- --
- -----------------------------------------------------------------------------------------------------------------------
Reported net income 129 146
Goodwill amortization -- 32
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 129 $ 178
- -----------------------------------------------------------------------------------------------------------------------
Generation
The cessation of the amortization of negative goodwill of AmerGen on
January 1, 2002 did not have a material impact on Generation's reported net
income for the three months ended March 31, 2002.
Exelon, PECO and Generation
On January 1, 2001, Generation recognized a non-cash gain of $12
million, net of income taxes, in earnings and deferred a non-cash gain of $4
million, net of income taxes, in accumulated other comprehensive income and PECO
deferred a non-cash gain of $40 million, net of income taxes, in accumulated
other comprehensive income. SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133) applies to all derivative instruments and
requires that such instruments be recorded on the balance sheet either as an
asset or a liability measured at their fair value through earnings, with special
accounting permitted for certain qualifying hedges.
3. REGULATORY ISSUES (Exelon, ComEd and PECO)
On April 1, 2002, the Illinois Commerce Commission issued an interim
order in ComEd's Delivery Services Rate Case. The order sets new delivery rates
for residential customers choosing a new retail electric supplier or the
Purchase Power Option (PPO) which allows the purchase of electric energy from
ComEd at market-based rates. The new rates are effective May 1, 2002 when retail
choice for residential customers begins. Traditional bundled rates - rates paid
by residential customers that retain ComEd as their electricity supplier - are
not affected by this Order and will remain frozen through 2004. The rates for
business customers taking delivery services are not impacted by the order. The
potential revenue impact of the interim order is not expected to be material in
2002.
As permitted by the Pennsylvania Electric Competition Act, the
Pennsylvania Department of Revenue has calculated a 2002 Revenue Neutral
Reconciliation (RNR) adjustment to the gross receipts tax rate in order to
neutralize the impact of electric restructuring on its tax revenues. The 2002
RNR adjustment increases the gross receipts tax rate which will increase PECO's
annual revenues and tax obligations by approximately $50 million per year. In
January 2002, the Pennsylvania Public Utility Commission (PUC) approved the RNR
adjustment to the gross receipts tax rate collected from customers. Effective
January 1, 2002, PECO implemented the change in the gross receipts tax rate.
24
4. EARNINGS PER SHARE (Exelon)
Diluted earnings per share are calculated by dividing net income by the
weighted average shares of common stock outstanding, including shares issuable
upon exercise of stock options outstanding under Exelon's stock option plans
considered to be common stock equivalents. The following table shows the effect
of these stock options on the weighted average number of shares outstanding used
in calculating diluted earnings per share (in millions):
Three Months Ended March 31,
2002 2001
- ------------------------------------------------------------------------------
Average common shares outstanding 321 320
Assumed exercise of stock options 2 4
- ------------------------------------------------------------------------------
Average diluted common shares outstanding 323 324
- ------------------------------------------------------------------------------
5. SEGMENT INFORMATION (Exelon)
Exelon operates in three business segments: energy delivery, generation
and enterprises. Energy delivery consists of the operations of ComEd and PECO.
Beginning in 2002, Exelon evaluates the performance of its business segments on
the basis of net income. Exelon's segment information for the three months ended
March 31, 2002 as compared to the same period in 2001 and as of March 31, 2002
and December 31, 2001 is as follows:
Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
Revenues:
2002 $ 2,335 $ 1,975 $ 490 $ (930) $ 3,870
2001 2,497 1,628 667 (969) 3,823
Net Income:
2002 $ 215 $ 79 $ (271) $ (15) $ 8
2001 266 170 (25) (12) 399
Total Assets:
March 31, 2002 $ 26,467 $ 8,505 $ 1,373 $ (1,442) $ 34,903
December 31, 2001 26,448 8,239 1,699 (1,526) 34,860
- --------------------------------------------------------------------------------------------------------------------
25
6. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (Exelon, ComEd, PECO and
Generation)
During the three months ended March 31, 2002 and 2001, Exelon
recognized net losses in other comprehensive income relating to mark-to-market
(MTM) adjustments of contracts designated as cash flow hedges as follows:
ComEd PECO Generation Enterprises Exelon
- ----------------------------------------------------------------------------------------------------------------------
2002 7 6 (122) 17 (92)
2001 -- -- (1) -- (1)
- ----------------------------------------------------------------------------------------------------------------------
During the three months ended March 31, 2002 and 2001, Generation
recognized net gains of $2 million and $16 million, respectively, on power
purchase and sale contracts not designated as cash flow hedges, in Operating
Revenues and Fuel and Purchased Power Expense in the Condensed Consolidated
Statements of Income and Comprehensive Income. During the three months ended
March 31, 2002 and 2001, no amounts were reclassified from accumulated other
comprehensive income into earnings as a result of forecasted energy commodity
transactions or forecasted financing transactions no longer being probable.
During the three months ended March 31, 2002 and 2001, PECO reclassified no
amount and a net gain of $6 million, respectively, to other income in the
Condensed Consolidated Statements of Income and Comprehensive Income, as a
result of the discontinuance of cash flow hedges related to certain forecasted
transactions that were no longer probable of occurring.
As of March 31, 2002, deferred net gains and (losses) on derivative
instruments accumulated in other comprehensive income are expected to be
reclassified to earnings during the next twelve months are as follows:
ComEd PECO Generation Enterprises Exelon
- ----------------------------------------------------------------------------------------------------------------------
2002 1 15 (7) 3 12
- ----------------------------------------------------------------------------------------------------------------------
Amounts in accumulated other comprehensive income related to interest
rate cash flows are reclassified into earnings when the forecasted interest
payment occurs. Amounts in accumulated other comprehensive income related to
energy commodity cash flows are reclassified into earnings when the forecasted
purchase or sale of the energy commodity occurs.
Generation classifies investments in the trust accounts for
decommissioning nuclear plants as available-for-sale. The following tables show
the fair values, gross unrealized gains and losses and amortized costs bases for
the securities held in these trust accounts.
26
March 31, 2002
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------------
Equity securities $ 1,651 $ 150 $ (257) $ 1,544
Debt securities
Government obligations 975 20 (5) 990
Other debt securities 641 10 (24) 627
- ---------------------------------------------------------------------------------------------------------------------
Total debt securities 1,616 30 (29) 1,617
- ---------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 3,267 $ 180 $ (286) $ 3,161
- ---------------------------------------------------------------------------------------------------------------------
Unrealized gains and losses are recognized in Accumulated Depreciation,
Regulatory Assets and Accumulated Other Comprehensive Income in Generation's
Condensed Consolidated Balance Sheet.
For the three months ended March 31, 2002, proceeds from the sale of
decommissioning trust investments and gross realized gains and losses on those
sales were $580 million, $18 million and $32 million, respectively.
Net realized losses of $4 million were recognized in Accumulated
Depreciation in Generation's Consolidated Balance Sheets at March 31, 2002 and
$10 million of net realized losses were recognized in Other Income and
Deductions in Generation's Condensed Consolidated Statements of Income and
Comprehensive Income for the three month period ended March 31, 2002. The
available-for-sale securities held at March 31, 2002 have an average maturity of
eight to ten years. The cost of these securities was determined on the basis of
specific identification.
7. COMMITMENTS AND CONTINGENCIES (Exelon, ComEd, PECO and Generation)
For information regarding capital commitments and nuclear
decommissioning and spent fuel storage, see the Commitments and Contingencies
Note in the Consolidated Financial Statements of Exelon, ComEd and PECO for the
year ended December 31, 2001 and Generation's S-4.
Environmental Liabilities
Exelon has identified 72 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
March 31, 2002, Exelon had accrued $144 million for environmental investigation
and remediation costs that currently can be reasonably estimated, including $121
million for MGP investigation and remediation. Exelon, ComEd, PECO and
Generation cannot predict whether they will incur other significant liabilities
for additional investigation and remediation costs at these or additional sites
identified by environmental agencies or others, or whether such costs may be
recoverable from third parties.
ComEd had accrued $99 million (discounted) as of March 31, 2002, for
environmental investigation and remediation costs which currently can be
reasonably estimated. This reserve included $94 million for MGP investigation
and remediation.
27
PECO had accrued $35 million (undiscounted) as of March 31, 2002, for
environmental investigation and remediation costs which currently can be
reasonably estimated, including $27 million for MGP investigation and
remediation.
Generation had accrued $10 million (undiscounted) as of March 31, 2002,
for environmental investigation and remediation cost, none of which relates to
MGP investigation and remediation.
Energy Commitments
As of March 31, 2002, Exelon and Generation had long-term commitments
relating to the net purchase and sale of energy, capacity and transmission
rights from unaffiliated utilities and others, including Midwest Generation, LLC
and AmerGen, an unconsolidated affiliate of Generation, as expressed in the
following table:
Capacity Power Only Power Only Purchases from Transmission
Purchases Sales AmerGen Non-Affiliates Rights Purchases
- ----------------------------------------------------------------------------------------------------------------------------
2002 $ 840 $ 2,210 $ 201 $ 1,330 $ 91
2003 1,214 1,391 261 506 31
2004 1,222 809 315 144 15
2005 406 231 241 78 15
2006 406 122 241 63 5
Thereafter 3,657 22 2,171 252 --
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 7,745 $ 4,785 $ 3,430 $ 2,373 $ 157
- ----------------------------------------------------------------------------------------------------------------------------
In connection with the 2001 corporate restructuring, ComEd entered into
a purchase power agreement (PPA) with Generation. Under the terms of the PPA,
Generation has agreed to supply all of ComEd's load requirements through 2004.
Prices for this energy vary depending upon the time of day and month of
delivery. During 2005 and 2006, ComEd's PPA is a partial requirements agreement
under which ComEd will purchase all of its required energy and capacity from
Generation, up to the available capacity of the nuclear generating plants
formerly owned by ComEd and transferred to Generation. Under the terms of the
PPA, Generation is responsible for obtaining any required transmission service.
The PPA also specifies that prior to 2005, ComEd and Generation will jointly
determine and agree on a market-based price for energy delivered under the PPA
for 2005 and 2006. In the event that the parties cannot agree to market-based
prices for 2005 and 2006 prior to July 1, 2004, ComEd has the option of
terminating the PPA effective December 31, 2004. ComEd will 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.
In connection with the 2001 corporate restructuring, PECO entered into
a PPA with Generation. Under the terms of the PPA, PECO obtains the majority of
its electric supply from Generation through 2010. Also, under the restructuring,
PECO assigned its rights and obligations under various PPAs and fuel supply
agreements to Generation. Generation supplies power to PECO from the transferred
generation assets, assigned PPAs and other market sources.
28
Under terms of the 2001 corporate restructuring, ComEd will remit to
Generation any amounts collected from customers for decommissioning. Under an
agreement effective September 2001, PECO will remit to Generation any amounts
collected from customers for decommissioning.
Litigation
ComEd
Chicago Franchise. In March 1999, ComEd reached a settlement agreement
with the City of Chicago (Chicago) to end the arbitration proceeding between
ComEd and Chicago regarding the January 1, 1992 franchise agreement. As part of
the settlement agreement, ComEd and Chicago agreed to a revised combination of
ongoing work under the franchise agreement and new initiatives that will result
in defined transmission and distribution expenditures by ComEd to improve
electric services in Chicago. The settlement agreement provides that ComEd would
be subject to liquidated damages if the projects are not completed by various
dates, unless it was prevented from doing so by events beyond its reasonable
control. In addition, ComEd and Chicago established an Energy Reliability and
Capacity Account, into which ComEd deposited $25 million during each of the
years 1999 through 2001 and has conditionally agreed to deposit $25 million at
the end of 2002, to help ensure an adequate and reliable electric supply for
Chicago.
FERC Municipal Request for Refund. Three of ComEd's wholesale municipal
customers filed a complaint and request for refund with the Federal Energy
Regulatory Commission (FERC) alleging that ComEd failed to properly adjust its
rates, as provided for under the terms of the electric service contracts with
the municipal customers and to track certain refunds made to ComEd's retail
customers in the years 1992 through 1994. In the third quarter of 1998, FERC
granted the complaint and directed that refunds be made, with interest. ComEd
filed a request for rehearing. On April 30, 2001, FERC issued an order granting
rehearing in which it determined that its 1998 order had been erroneous and that
no refunds were due from ComEd to the municipal customers. On June 29, 2001,
FERC denied the customers' requests for rehearing of the order granting
rehearing. In August 2001, each of the three wholesale municipal customers
appealed the April 30, 2001 FERC order to the Federal circuit court, which
consolidated the appeals for the purposes of briefing and decision. In November
2001, the court suspended briefing pending court-initiated settlement
discussions.
Retail Rate Law. In 1996, several developers of non-utility generating
facilities filed litigation against various Illinois officials claiming that the
enforcement against those facilities of an amendment to Illinois law removing
the entitlement of those facilities to state-subsidized payments for electricity
sold to ComEd after March 15, 1996 violated their rights under the Federal and
state constitutions. The developers also filed suit against ComEd for a
declaratory judgment that their rights under their contracts with ComEd were not
affected by the amendment. On August 4, 1999, the Illinois Appellate Court held
that the developers' claims against the state were premature, and the Illinois
Supreme Court denied leave to appeal that ruling. Developers of both facilities
have since filed amended complaints repeating their allegations that ComEd
breached the contracts in question and requesting damages for such breach, in
the amount of the difference between the state-subsidized rate and the amount
ComEd was willing to pay for the electricity. ComEd is contesting this matter.
29
Service Interruptions. In August 1999, three class action lawsuits were
filed against ComEd, and subsequently consolidated, in the Circuit Court of Cook
County, Illinois seeking damages for personal injuries, property damage and
economic losses related to a series of service interruptions that occurred in
the summer of 1999. The combined effect of these interruptions resulted in over
168,000 customers losing service for more than four hours. Conditional class
certification was approved by the court for the sole purpose of exploring
settlement talks. ComEd filed a motion to dismiss the complaints. On April 24,
2001, the court dismissed four of the five counts of the consolidated complaint
without prejudice and the sole remaining count was dismissed in part. On June 1,
2001, the plaintiffs filed a second amended consolidated complaint and ComEd has
filed an answer. A portion of any settlement or verdict may be covered by
insurance; discussions with the carrier are ongoing. Exelon's management
believes adequate reserves have been established in connection with these cases.
Enron. As a result of Enron Corp.'s bankruptcy proceeding, ComEd has
potential monetary exposure for its 366 customer accounts that were served by
Enron Energy Services (EES) as a billing agent. EES has rejected its contracts
with these accounts, with the exception of approximately 100 accounts for which
EES retains its billing agency. ComEd is working to ensure that customers know
what amounts are owed to ComEd on accounts for which EES has been removed as
billing agent, and has obtained updated billing addresses for these accounts.
With regard to the accounts for which EES retains its billing agency, ComEd's
total amount outstanding is not material. Because that amount is owed to ComEd
by individual customers, it is not part of the bankrupt Enron's estate. The ICC
has rescinded EES's authority to act as an alternative retail energy supplier in
Illinois. However, EES never served as a supplier, as opposed to a billing
agent, to any of ComEd's retail accounts.
ComEd and Generation
Godley Park District Litigation. On April 18, 2001, the Godley Park
District filed suit in Will County Circuit Court against ComEd and Exelon
alleging that oil spills at Braidwood Station have contaminated the Park
District's water supply. The complaint sought actual damages, punitive damages
of $100 million and statutory penalties. The court dismissed all counts seeking
punitive damages and statutory penalties, and the plaintiff has filed an amended
complaint before the court. Exelon is contesting the liability and damages
sought by the plaintiff.
Generation
Cotter Corporation Litigation. During 1989 and 1991, actions were
brought in Federal and state courts in Colorado against ComEd and its
subsidiary, Cotter Corporation (Cotter), seeking unspecified damages and
injunctive relief based on allegations that Cotter permitted radioactive and
other hazardous material to be released from its mill into areas owned or
occupied by the plaintiffs, resulting in property damage and potential adverse
health effects. In 1994, a Federal jury returned nominal dollar verdicts against
Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld
on appeal. The remaining claims in the 1989 actions were settled or dismissed.
In 1998, a jury verdict was rendered against Cotter in favor of 14 of the
plaintiffs in the 1991 cases, totaling approximately $6 million in compensatory
and punitive damages, interest and medical monitoring. On appeal, the Tenth
Circuit Court of Appeals reversed the jury verdict, and remanded the case for
new trial. These plaintiffs' cases were consolidated with the remaining 26
plaintiffs' cases, which had not been tried. The consolidated trial was
30
completed on June 28, 2001. The jury returned a verdict against Cotter and
awarded $16.3 million in various damages. On November 20, 2001, the District
Court entered an amended final judgment which included an award of both
pre-judgment and post-judgment interests, costs, and medical monitoring expenses
which total $43.3 million. This matter is being appealed by Cotter in the Tenth
Circuit Court of Appeals. Cotter will vigorously contest the award.
In November 2000, another trial involving a separate sub-group of 13
plaintiffs, seeking $19 million in damages plus interest was completed in
federal district court in Denver. The jury awarded nominal damages of $42,500 to
11 of 13 plaintiffs, but awarded no damages for any personal injury or health
claims, other than requiring Cotter to perform periodic medical monitoring at
minimal cost. The plaintiffs appealed the verdict to the Tenth Circuit Court of
Appeals.
On February 18, 2000, ComEd sold Cotter to an unaffiliated third party.
As part of the sale, ComEd agreed to indemnify Cotter for any liability incurred
by Cotter as a result of these actions, as well as any liability arising in
connection with the West Lake Landfill discussed in the next paragraph. In
connection with Exelon's 2001 corporate restructuring, the responsibility to
indemnify Cotter for any liability related to these matters was transferred by
ComEd to Generation. Exelon's management believes adequate reserves have been
established in connection with these proceedings.
The United States Environmental Protection Agency (EPA) has advised
Cotter that it is potentially liable in connection with radiological
contamination at a site known as the West Lake Landfill in Missouri. Cotter is
alleged to have disposed of approximately 39,000 tons of soils mixed with 8,700
tons of leached barium sulfate at the site. Cotter, along with three other
companies identified by the EPA as potentially responsible parties (PRPs), is
reviewing a draft feasibility study that recommends capping the site. The PRPs
are also engaged in discussions with the State of Missouri and the EPA. The
estimated costs of remediation for the site are $10 to $15 million. Once a final
feasibility study is complete and a remedy selected, it is expected that the
PRPs will agree on an allocation of responsibility for the costs. Until an
agreement is reached, Exelon cannot predict its share of the costs.
Pennsylvania Real Estate Tax Appeals. Exelon is involved in tax appeals
regarding two of its nuclear facilities, Limerick Generating Station (Montgomery
County) and Peach Bottom Atomic Power Station (York County), and one of its
fossil facilities, Eddystone (Delaware County). Exelon is also involved in the
tax appeal for Three Mile Island (Dauphin County) through AmerGen. Exelon does
not believe the outcome of these matters will have a material adverse effect on
Exelon's results of operations or financial condition.
General
Exelon, ComEd, PECO and Generation are involved in various other
litigation matters. The ultimate outcome of such matters, as well as the matters
discussed above, while uncertain, are not expected to have a material adverse
effect on its respective financial condition or results of operations.
31
8. MERGER-RELATED COSTS (Exelon, ComEd, PECO and Generation)
In association with the October 20, 2000 merger of Unicom Corporation
(the former parent company of ComEd) and PECO (Merger), Exelon recorded certain
reserves for restructuring costs. The reserves associated with PECO were charged
to expense, while the reserves associated with Unicom were recorded as part of
the application of purchase accounting and did not affect results of operations.
Merger-related costs charged to expense in 2000 were $276 million,
consisting of $124 million for PECO employee costs and $152 million of direct
incremental costs. Direct incremental costs represent expenses directly
associated with completing the Merger, including professional fees, regulatory
approval and settlement costs, and settlement of compensation arrangements.
Employee costs represent estimated severance costs and pension and
postretirement benefits provided under Exelon's merger separation plans for
eligible employees who are expected to be involuntarily terminated before
December 2002 due to integration activities of the merged companies.
The purchase price allocation as of December 31, 2000 included a
liability of $307 million for Unicom employee costs and liabilities of
approximately $39 million for estimated costs of exiting various business
activities of former Unicom activities that were not compatible with the
strategic business direction of Exelon.
During 2001, Exelon finalized its plans for consolidation of functions,
including negotiation of an agreement with the union regarding severance
benefits to union employees and recorded adjustments to the purchase price
allocation as follows:
Original 2001 Adjusted
Estimate Adjustments Liabilities
- -------------------------------------------------------------------------------------------------------------------------
Employee severance payments $ 128 $ 33 $ 161 (a)
Actuarially determined pension and postretirement costs 158 (11) 147 (b)
Relocation and other severance 21 9 30 (a)
- -------------------------------------------------------------------------------------------------------------------------
Total Unicom - Employee Cost $ 307 $ 31 $ 338
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The increase is a result of the identification in 2001 of additional
positions to be eliminated.
(b) The reduction results from lower estimated pension and post retirement
welfare benefits reflecting revised actuarial estimates.
</FN>
Additional employee severance costs of $48 million primarily related to
PECO employees were charged to expense in 2001. Exelon anticipates that a total
of $281 million of employee costs will be funded from pension and postretirement
benefit plans.
32
The following table provides a reconciliation of the reserve for
employee severance and relocation costs associated with the merger:
- ------------------------------------------------------------------------------------------------
Employee severance and relocation reserve as of October 20, 2000 $ 149
Additional reserve 42
- ------------------------------------------------------------------------------------------------
Adjusted employee severance and relocation reserve 191
Payments to employees (October 2000-December 2001) (77)
Payments to employees (January 2002-March 2002) (15)
- ------------------------------------------------------------------------------------------------
Employee severance and relocation reserve as of March 31, 2002 $ 99
- ------------------------------------------------------------------------------------------------
As part of the January 2001 corporate restructuring, portions of the
employee severance and restructuring reserve were transferred from ComEd to
Generation, Enterprises and BSC. Approximately $62 million and $30 million of
the employee severance and relocation reserve as of March 31, 2002 relates to
ComEd and Generation, respectively, and is reflected on the Consolidated Balance
Sheets of those entities.
Approximately 3,300 Unicom and PECO positions have been identified to
be eliminated as a result of the merger. Exelon has terminated 1,745 employees
as of March 31, 2002 of which 284 were terminated in the first quarter of 2002.
The remaining positions are expected to be eliminated by the end of 2002.
9. LONG-TERM DEBT (Exelon and ComEd)
On March 13, 2002, ComEd issued $400 million of 6.15% First Mortgage
Bonds, due March 15, 2012. On March 21, 2002, ComEd redeemed $200 million of
8.625% First Mortgage Bonds at the redemption price of 103.84% of the principal
amount plus accrued interest. These bonds had a maturity date of February 1,
2022. The $400 million bond issuance was a replacement of the $200 million bonds
called on March 21, 2002 and the $196 million 9.875% First Mortgage Bonds which
were called in November 2001.
In connection with the issuance of $400 million of First Mortgage
Bonds, ComEd settled forward starting interest rate swaps in the aggregate
amount of $375 million resulting in a $9 million loss recorded in other
comprehensive income, which is being amortized over the expected remaining life
of the related debt.
10. SALE OF ACCOUNTS RECEIVABLE (Exelon and PECO)
PECO is party to an agreement, which expires in November 2005, 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. As of March 31, 2002, PECO had sold a $225 million interest
in accounts receivable, consisting of a $163 million interest in accounts
receivable that PECO accounted for as a sale under SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a Replacement of FASB Statement No. 125" and a $62 million interest in
special-agreement accounts receivable which were accounted for as a long-term
note payable. PECO retains the servicing responsibility for these receivables.
33
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
March 31, 2002, PECO met this requirement and was not required to make any cash
deposits.
11. RELATED-PARTY TRANSACTIONS (Exelon, ComEd, PECO and Generation)
Exelon and Generation
In February 2002, Generation entered into an agreement to loan AmerGen
up to $75 million at an interest rate equal to the 1-month London Interbank
Offering Rate plus 2.25%. As of March 31, 2002, $46 million had been loaned to
AmerGen. The loan is due November 30, 2002.
Generation has entered into PPAs dated December 18, 2001 and November
22, 1999 with AmerGen. Under the 2001 PPA, Generation has agreed to purchase
from AmerGen all the energy from Unit No. 1 at Three Mile Island Nuclear Station
from January 1, 2002 through December 31, 2014. Under the 1999 PPA, Generation
has agreed to purchase from AmerGen all of the residual energy from Clinton
Nuclear Power Station (Clinton), through December 31, 2002. Currently, the
residual output approximates 25% of the total output of Clinton. For the three
months ended March 31, 2002 and 2001, the amount of purchased power recorded in
Fuel and Purchased Power in the Condensed Consolidated Statements of Income and
Comprehensive Income is $56 million and $10 million, respectively. As of March
31, 2002 and December 31, 2001, Generation had a payable of $19 million and $3
million, respectively, resulting from these PPAs.
Under a service agreement dated March 1, 1999, Generation provides
AmerGen with certain operation and support services to the nuclear facilities
owned by AmerGen. This service agreement has an indefinite term and may be
terminated by Generation or AmerGen on 90 days notice. Generation is compensated
for these services in an amount agreed to in the work order, but not less than
the higher of fully allocated costs for performing the services or the market
price. For the three months ended March 31, 2002 and 2001, the amount charged to
AmerGen for these services was $14 million and $16 million, respectively. As of
March 31, 2002 and December 31, 2001, Generation had a receivable of $46 million
and $47 million, respectively, resulting from these services.
ComEd
ComEd had a note receivable from Unicom Investments Inc. of $1.3
billion at March 31, 2002 and December 31, 2001, relating to the December 1999
fossil plant sale, which is included in deferred debits and other assets in
ComEd's Condensed Consolidated Balance Sheets. Interest income earned on this
note receivable was $8 million and $23 million, respectively, for the three
months ended March 31, 2002 and 2001. Interest receivable due on this note was
$8 million and $24 million at March 31, 2002 and December 31, 2001,
respectively, and is included in Current Assets on ComEd's Condensed
Consolidated Balance Sheets.
Interest income earned on the $352 million outstanding receivable from
PECO as of March 31, 2001 was $5 million for the three months ended March 31,
2001. This receivable was repaid in the second quarter of 2001.
34
At March 31, 2002 and December 31, 2001, ComEd had a $906 million and
$937 million non-interest bearing receivable, respectively, from Exelon relating
to the 2001 Corporate restructuring. This receivable is reflected as a reduction
of Shareholders' Equity in ComEd's Condensed Consolidated Balance Sheets and is
expected to be settled over the years 2002 through 2008.
ComEd had a short-term payable of $59 million at March 31, 2002 and
December 31, 2001, and a long-term payable of $275 million and $291 million at
March 31, 2002 and December 31, 2001, respectively, to Generation primarily
representing ComEd's legal requirements to remit collections of nuclear
decommissioning costs from customers to Generation. These liabilities to
Generation were included in Current Liabilities and Deferred Credits and Other
Liabilities, respectively, on ComEd's Condensed Consolidated Balance Sheets.
ComEd paid common stock dividends to Exelon of $118 million and $63
million for the three months ended March 31, 2002 and March 31, 2001,
respectively.
Effective January 1, 2001, ComEd entered into a PPA with Generation.
Intercompany power purchases pursuant to the PPA for the three months ended
March 31, 2002 and March 31, 2001 were $532 million and $608 million,
respectively. At March 31, 2002 and December 31, 2001, there was a $166 million
and $183 million payable, respectively, to Generation for the PPA as well as
other services provided which is included in Current Liabilities on ComEd's
Condensed Consolidated Balance Sheets.
ComEd provided electric, transmission, and other ancillary services to
Generation and Enterprises. These services were recorded in revenues were $11
million and $42 million for the three months ended March 31, 2002 and March 31,
2001, respectively. At March 31, 2002 and December 31, 2001, there was a $4
million and $26 million receivable, respectively, for services provided, which
is included in Current Assets on ComEd's Condensed Consolidated Balance Sheets.
ComEd receives a variety of corporate support services from Exelon
Business Services Company (BSC), including legal, human resources, financial and
information technology services. Such services, provided at cost including
applicable overhead, were $40 million and $30 million for the three months ended
March 31, 2002 and March 31, 2001, respectively, of which $39 million and $28
million, respectively, was included in Operating and Maintenance (O&M) expense
on ComEd's Condensed Consolidated Statements of Income and Comprehensive Income
and $1 million and $2 million, respectively, was capitalized. At March 31, 2002
and December 31, 2001, there was a $21 million and $14 million payable,
respectively, to BSC for services provided which is included in Current
Liabilities on ComEd's Condensed Consolidated Balance Sheets.
ComEd receives transmission related services under contracts with
InfraSource, Inc., formerly Exelon Infrastructure Services, Inc. Such services
totaling $7 million and $9 million for the three months ended March 31, 2002 and
March 31, 2001, respectively, were capitalized.
35
In 2001, ComEd contracted with Exelon Services to provide energy
conservation services to ComEd customers. The costs were $3 million and $4
million for the three months ended March 31, 2002 and March 31, 2001,
respectively, and were included in O&M expense on ComEd's Condensed Consolidated
Statements of Income and Comprehensive Income.
In order to facilitate payment processing, ComEd processes certain
invoice payments on behalf of Generation and BSC. Receivables at March 31, 2002
and December 31, 2001 from Generation for such service totaled $119 million and
$21 million, respectively, and from BSC totaled $24 million and $19 million,
respectively, and were included in Current Assets on ComEd's Condensed
Consolidated Balance Sheets.
PECO
Effective January 1, 2001, Exelon contributed to PECO a $2.0 billion
non-interest bearing receivable from Exelon's related to the 2001 corporate
restructuring. This receivable is reflected as a reduction of Shareholders'
Equity in PECO's Condensed Consolidated Balance Sheets and is expected to be
settled over the years 2002 through 2010. As of March 31, 2002 and December 31,
2001, the balance of this receivable from Exelon was $1.8 billion and $1.9
billion, respectively.
PECO paid common stock dividends of $85 million and $45 million to
Exelon for the three months ended March 31, 2002 and 2001, respectively.
Effective January 1, 2001, PECO entered into a PPA with Generation.
Intercompany power purchases pursuant to the PPA for the three months ended
March 31, 2002 and 2001 were $303 million and $244 million, respectively. As of
March 31, 2002 and December 31, 2001, PECO's payable related to the PPA was $105
million and $90 million, respectively.
PECO receives a variety of corporate support services from BSC,
including legal, human resources, financial and information technology services.
Such services, provided at cost including applicable overhead, were $7 million
and $2 million for the three months ended March 31, 2002 and 2001, respectively.
At March 31, 2002 and December 31, 2001, PECO had a $31 million and $41 million
payable, respectively, to BSC.
PECO received services from Enterprises during the three months ended
March 31, 2002 and 2001 for deployment of automated meters and meter reading
services for $9 million and $5 million, respectively. At March 31, 2002 and
December 31, 2001, PECO had a $6 million and $8 million payable, respectively,
to Enterprises.
Interest expense related to the outstanding payable to ComEd of $352
million as of March 31, 2001 was $5 million for the three months ended March 31,
2001. This payable was repaid in the second quarter of 2001.
PECO provides energy to Generation for Generation's own use.
Intercompany sales for the three months ended March 31, 2002 and 2001 were $2
million in each period.
36
Generation
Generation had a short-term receivable of $59 million at March 31, 2002
and December 31, 2001, and a long-term receivable of $275 million and $291
million at March 31, 2002 and December 31, 2001, respectively, from ComEd
primarily representing ComEd's legal requirements to remit collections of
nuclear decommissioning costs from customers to Generation resulting from the
restructuring. These receivables from ComEd were included in Current Assets and
Deferred Debits and Other Liabilities, respectively, on Generation's Condensed
Consolidated Balance Sheets.
Effective January 1, 2001, Generation entered into PPAs with ComEd and
PECO. Intercompany power sales pursuant to the PPAs for the three months ended
March 31, 2002 and March 31, 2001 were $835 million, including decommissioning
reveue of $3 million, and $852 million, including decommissioning revenue of $3
million, respectively. At March 31, 2002 and December 31, 2001, there was a $271
million and $273 million receivable, respectively, for the PPAs as well as other
services provided which is included in Current Assets on Generation's Condensed
Consolidated Balance Sheets.
Generation sells power to Exelon Energy. Power sales for the three
months ended March 31, 2002 and 2001 were $57 million and $61 million,
respectively. At March 31, 2002 and December 31, 2001, there was a $19 million
and $15 million receivable, respectively.
Generation purchases power from AmerGen under PPAs as discussed in the
Exelon and Generation section of this note. Additionally, Generation purchases
power from PECO for Generation's own use, buys back excess power from Exelon
Energy and purchases transmission and ancillary services from ComEd. These
purchases, including AmerGen, for the three months ended March 31, 2002 and 2001
were $72 million and $18 million, respectively. At March 31, 2002 and December
31, 2001, Generation had payables for such services of $4 million and $26
million, respectively.
Generation receives a variety of corporate support services from BSC,
including legal, human resources, financial and information technology services.
Such services, provided at cost including applicable overhead, were $14 million
and $13 million for the three months ended March 31, 2002 and March 31, 2001,
respectively, and were included in Operating and Maintenance (O&M) expense on
Generation's Condensed Consolidated Statements of Income and Comprehensive
Income. At March 31, 2002 and December 31, 2001, there was an $8 million and an
$18 million payable, respectively, to BSC for services provided which is
included in Current Liabilities on Generation's Condensed Consolidated Balance
Sheets.
In order to facilitate payment processing, ComEd processes certain
invoice payments on behalf of Generation. Payables at March 31, 2002 and
December 31, 2001 to ComEd for such services totaled $119 million and $21
million, respectively, and were included in Current Liabilities on Generation's
Condensed Consolidated Balance Sheets.
In relation to the December 18, 2001 acquisition of 49.9% of Sithe
Energies, Inc. (Sithe) common stock, Generation had a $700 million payable to
Exelon, which was repaid in the second quarter of 2001. Interest expense related
to this payable for the three months ended March 31, 2001 was $15 million.
37
12. NEW ACCOUNTING PRONOUNCEMENTS (Exelon, ComEd, PECO and Generation)
In June 2001, the FASB issued SFAS No. 143, "Asset Retirement
Obligations" (SFAS No. 143). In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144).
In April 2002, the FASB issued SFAS No. 145, " Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145).
SFAS No. 143 provides accounting requirements for retirement
obligations associated with tangible long-lived assets. Exelon expects to adopt
SFAS No. 143 on January 1, 2003. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
there is a legal obligation to settle under existing or enacted law, statute,
written or oral contract or by legal construction under the doctrine of
promissory estoppel. Adoption of SFAS No. 143 will change the accounting for the
decommissioning of Exelon's nuclear generating plants. Currently, Generation
records the obligation for decommissioning ratably over the lives of the plants.
The January 1, 2003 adoption of SFAS No. 143 will require a cumulative effect
adjustment effective the date of adoption to adjust plant assets and
decommissioning liabilities to the values they would have been had this standard
been employed from the in-service dates of the plants.
The effect of this cumulative adjustment will be to increase the
decommissioning liability to reflect a full decommissioning obligation in
current year dollars. Additionally, the standard will require the accrual of an
asset related to the full amount of the decommissioning obligation, which will
be amortized over the remaining lives of the plants. The net difference between
the asset recognized and the liability recorded upon adoption of SFAS No. 143
will be charged to earnings and recognized as a cumulative effect, net of
expected regulatory recovery. The decommissioning liability to be recorded
represents an obligation for the future decommissioning of the plants, and as a
result interest expense will be accrued on this liability until such time as the
obligation is satisfied.
Exelon is in the process of evaluating the impact of SFAS No. 143 on
its financial statements, and cannot determine the ultimate impact of adoption
at this time, however the cumulative effect could be material to Exelon's
earnings. Additionally, although over the life of the plant the charges to
earnings for the depreciation of the asset and the interest on the liability
will be equal to the amounts currently recognized as decommissioning expense,
the timing of those charges will change and in the near-term period subsequent
to adoption, the depreciation of the asset and the interest on the liability
could result in an increase in expense.
Exelon, ComEd, PECO and Generation adopted SFAS No. 144 on January 1,
2002. SFAS No. 144 establishes accounting and reporting standards for both the
impairment and disposal of long-lived assets. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001 and its provisions are generally
applied prospectively. The adoption of this statement had no effect on Exelon's
reported financial positions, results of operations or cash flows.
38
SFAS No. 145 eliminates SFAS No. 4 "Reporting Gains and Losses from
Extinguishment of Debt" (SFAS No. 4) and thus allows for only those gains or
losses on the extinguishment of debt that meet the criteria of extraordinary
items to be treated as such in the financial statements. SFAS No. 145 also
amends Statement of Financial Accounting Standards No. 13, "Accounting for
Leases", (SFAS No. 13) to require sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This provisions of this statement relating to the rescission of
SFAS No. 4 are effective for fiscal years beginning after May 15, 2002, the
provisions of this statement relating to the amendment of SFAS No. 13 are
effective for transactions occurring after May 15, 2002, and all other
provisions of this Statement are effective for financial statements issued on or
after May 15, 2002. Exelon is in the process of evaluating the impact of SFAS
No. 145 on its financial statements, and does not expect the impact to be
material.
13. CHANGE IN ACCOUNTING ESTIMATE (Exelon and Generation)
Effective April 1, 2001, Generation changed its accounting estimates
related to the depreciation and decommissioning of certain generating stations.
The estimated service lives were extended by 20 years for three nuclear
stations, by periods of up to 20 years for certain fossil stations and by 50
years for a pumped storage station. Effective July 1, 2001, the estimated
service lives were extended by 20 years for the remainder of Exelon's operating
nuclear stations. These changes were based on engineering and economic
feasibility studies performed by Generation considering, among other things,
future capital and maintenance expenditures at these plants. As a result of the
change, net income for the three months ended March 31, 2002 increased $35
million ($20 million, net of income taxes).
14. SUBSEQUENT EVENTS (Exelon and Generation)
On April 25, 2002, Generation completed the purchase of two TXU Energy
power plants located in the Dallas and Fort Worth areas for $443 million. The
agreement was first announced in December 2001. The purchase includes the 893 MW
Mountain Creek Steam Electric Station in Dallas and the 1,441 MW Handley Steam
Electric Station in Fort Worth. The purchase was funded with available cash and
Exelon commercial paper.
On April 1, 2002, Exelon Enterprises completed the sale of its 49%
interest in AT&T Wireless PCS of Philadelphia, LLC to a subsidiary of AT&T
Wireless Services for $285 million in cash. The after-tax gain is estimated at
approximately $120 million with a resulting $0.37 earnings per share (diluted)
gain, which will be reported as part of second quarter earnings. Proceeds from
the transaction will be used for Exelon's general corporate purposes.
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXELON CORPORATION
GENERAL
Exelon Corporation (Exelon), through its subsidiaries, operates in three
business segments:
o Energy Delivery, consisting of the retail electricity distribution and
transmission businesses of Commonwealth Edison Company (ComEd) in
northern Illinois and PECO Energy Company (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 Exelon Generation Company, LLC's
(Generation) electric generating facilities, energy marketing
operations and equity interests in Sithe Energies, Inc. (Sithe) and
AmerGen Energy Company, LLC (AmerGen).
o Enterprises, consisting of Exelon Enterprises Company, LLC's
(Enterprises) competitive retail energy sales, energy and
infrastructure services, communications and other investments weighted
towards the communications, energy services and retail services
industries.
See Note 5 of the Combined Notes to Condensed Consolidated Financial
Statements for further segment information.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared To Three Months Ended March 31, 2001
Net Income and Earnings Per Share
Exelon's income before the cumulative effect of changes in accounting
principles decreased $149 million, or 39%, for the three months ended March 31,
2002. Diluted earnings per common share on the same basis decreased $0.46 per
share, or 39%. The decrease in income before the cumulative effect of changes in
accounting principles reflects lower earnings in Energy Delivery and Generation,
primarily related to a decrease in retail sales due to mild winter weather,
lower wholesale energy prices, increased nuclear refueling outage costs and
employee severance costs, partially offset by the discontinuation of goodwill
amortization required by the adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
Net income decreased $391 million, or 98%, for the three months ended
March 31, 2002. Diluted earnings per common share on the same basis decreased
$1.21 per share, or 98%. Net income for the three months ended March 31, 2002
includes a $230 million charge for the cumulative effect of changes in
accounting principles, reflecting goodwill impairment upon the adoption of SFAS
No. 142. Net income for the three months ended March 31, 2001 includes $12
million of income for the cumulative effect of adopting SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
40
See ITEM 1. Financial Statements - Note 2 - Cumulative Effect of Changes in
Accounting Principles.
Exelon evaluates its performance on a business segments basis. The
analysis below presents the operating results for each of its business segments
for the three months ended March 31, 2002 compared to the three months ended
March 31, 2001.
Corporate provides its business segments a variety of support services
including legal, human resources, financial and information technology services.
These costs are allocated to the business segments. Additionally, Corporate
costs reflect costs for strategic long-term planning, lobbying, and interest
costs and income from various investment and financing activities.
Income Before Cumulative Effect of Changes in Accounting Principles by Business Segment
Three Months Ended March 31,
2002 2001 Variance % Change
- -------------------------------------------------------------------------------------------------------------------
Energy Delivery 215 266 (51) (19.2%)
Generation 66 158 (92) (58.2%)
Enterprises (28) (25) (3) 12.0%
Corporate (15) (12) (3) 25.0%
- ----------------------------------------------------------------------------------------------------
Total 238 387 (149) (38.5%)
- ----------------------------------------------------------------------------------------------------
41
Results of Operations - Energy Delivery Business Segment
Three Months Ended March 31,
2002 2001 Variance % Change
- -----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 2,335 $2,497 $ (162) (6.5%)
OPERATING EXPENSES
Fuel and Purchased Power 1,024 1,097 (73) (6.7%)
Operating and Maintenance 373 350 23 6.6%
Depreciation and Amortization 247 268 (21) (7.8%)
Taxes Other Than Income 132 115 17 14.8%
- -------------------------------------------------------------------------------------------------------
Total Operating Expense 1,776 1,830 (54) (3.0%)
- -------------------------------------------------------------------------------------------------------
OPERATING INCOME 559 667 (108) (16.2%)
- -------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (221) (246) 25 (10.2%)
Distributions on Preferred Securities of Subsidiaries (11) (11) -- 0.0%
Other, net 14 47 (33) (70.2%)
- -------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (218) (210) (8) 3.8%
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 341 457 (116) (25.4%)
INCOME TAXES 126 191 (65) (34.0%)
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 215 $ 266 $ (51) (19.2%)
- -------------------------------------------------------------------------------------------------------
Energy Delivery's gross margin (revenue net of fuel and purchased
power) declined $89 million, $51 million of which was attributable to milder
winter weather which reduced retail electric and gas volumes, and a reduction in
wholesale sales volumes.
Higher operating and maintenance expense reflects an increase in
uncollectible accounts and claims expenses, costs associated with the deployment
of automatic meter reading technology, increased pension and postretirement
benefit costs and increased corporate allocations, including a portion of
executive severance charges.
Energy Delivery's $21 million decrease in depreciation and amortization
expense reflects $32 million for the discontinuation of goodwill amortization
due to the adoption of SFAS No. 142 as of January 1, 2002, partially offset by
$9 million of higher competitive transition charge (CTC) amortization.
Lower interest expense reflects reductions in debt outstanding and
lower interest rates due to debt refinancing. The reduction in Other - net,
primarily reflects lower intercompany interest income reflecting lower interest
rates.
42
Energy Delivery's effective income tax rate was 37.0% for the three
months ended March 31, 2002, compared to 41.8% for the three months ended March
31, 2001. The decrease in the effective tax rate was primarily attributable to
the discontinuation of goodwill amortization as of January 1, 2002, which was
not deductible for income tax purposes and tax benefits associated with the
implementation of state tax planning strategies and the reduced impact of
investment tax credit amortization.
Energy Delivery Operating Statistics and Revenue Detail
Energy Delivery's electric sales statistics and revenue detail are as
follows:
For the three months ended March 31,
Retail Deliveries - (in gigawatthours (GWh)) 2002 2001 % Change
- --------------------------------------------------------------------------------------------------------------------
Bundled Deliveries (1)
Residential 8,465 8,766 (3.4%)
Small Commercial & Industrial 7,207 6,876 4.8%
Large Commercial & Industrial 5,307 5,421 (2.1%)
Public Authorities & Electric Railroads 1,994 2,203 (9.5%)
- -----------------------------------------------------------------------------------------------------
22,973 23,266 (1.3%)
Unbundled Deliveries (2)
Alternative Energy Suppliers
Residential 792 527 50.3%
Small Commercial & Industrial - 1,100 1,354 (18.8%)
Large Commercial & Industrial - 1,489 2,352 (36.7%)
Public Authorities & Electric Railroads - 138 48 187.5%
- -----------------------------------------------------------------------------------------------------
3,519 4,281 (17.8%)
- -----------------------------------------------------------------------------------------------------
PPO (ComEd Only)
Small Commercial & Industrial 763 823 (7.3%)
Large Commercial & Industrial 1,311 1,359 (3.5%)
Public Authorities & Electric Railroads 242 258 (6.2%)
- -----------------------------------------------------------------------------------------------------
2,316 2,440 (5.1%)
- -----------------------------------------------------------------------------------------------------
Total Unbundled Deliveries 5,835 6,721 (13.2%)
- -----------------------------------------------------------------------------------------------------
Total Retail Deliveries 28,808 29,987 (3.9%)
- -----------------------------------------------------------------------------------------------------
<FN>
(1) Bundled service reflects deliveries to customers taking electric service
under tariffed rates, which include the cost of energy and the delivery
cost of the transmission and the distribution of the energy.
(2) Unbundled service reflects customers electing to receive electric
generation service from an alternative energy supplier or ComEd's Power
Purchase Option (PPO).
</FN>
43
For the three months ended March 31,
Electric Revenue (in millions) 2002 2001 Variance % Change
- --------------------------------------------------------------------------------------------------------------------
Bundled Revenues (1)
Residential $ 761 $ 815 $ (54) (6.6%)
Small Commercial & Industrial 580 520 60 11.5%
Large Commercial & Industrial 346 319 27 8.5%
Public Authorities & Electric Railroads 110 124 (14) (11.3%)
- -------------------------------------------------------------------------------------------------------
1,797 1,778 19 10.7%
- -------------------------------------------------------------------------------------------------------
Unbundled Revenues (2)
Alternative Energy Suppliers
Residential 54 36 18 50.0%
Small Commercial & Industrial 17 54 (37) (68.5%)
Large Commercial & Industrial 13 62 (49) (79.0%)
Public Authorities & Electric Railroads 2 1 1 100.0%
- -------------------------------------------------------------------------------------------------------
86 153 (67) (43.8%)
- -------------------------------------------------------------------------------------------------------
PPO (ComEd Only)
Small Commercial & Industrial 43 37 6 16.2%
Large Commercial & Industrial 64 61 3 4.9%
Public Authorities & Electric Railroads 13 12 1 8.3%
- -------------------------------------------------------------------------------------------------------
120 110 10 9.1%
- -------------------------------------------------------------------------------------------------------
Total Unbundled Revenues 206 263 (57) (21.7%)
- -------------------------------------------------------------------------------------------------------
Total Electric Retail Revenues 2,003 2,041 (38) (1.9%)
- -------------------------------------------------------------------------------------------------------
Wholesale and Miscellaneous Revenue (3) 123 162 (39) (2.4%)
- -------------------------------------------------------------------------------------------------------
Total Electric Revenue $ 2,126 $ 2,203 $ (77) (3.5%)
- -------------------------------------------------------------------------------------------------------
<FN>
(1) Bundled service reflects deliveries to customers taking electric service
under tariffed rates, which include the cost of energy and the delivery
cost of the transmission and the distribution of the energy.
(2) Unbundled service reflects customers electing to receive electric
generation service from an alternative energy supplier or ComEd's Power
Purchase Option (PPO). Revenue from customers choosing an alternative
energy supplier includes a distribution charge and a CTC. Revenues from
customers choosing ComEd's PPO includes an energy charge at market rates,
transmission, and distribution charges and a CTC. Transmission charges
received from alternative energy suppliers are included in wholesale and
miscellaneous revenue.
(3) Wholesale and miscellaneous revenues include sales to alternative energy
suppliers, transmission revenue, sales to municipalities and other
wholesale energy sales.
</FN>
The changes in electric retail revenues for the three months ended
March 31, 2002, as compared to the same period in 2001 are attributable to the
following:
(in millions) Variance
- -----------------------------------------------------------------------------
Rate Changes $ (1)
Customer Choice 41
Weather (72)
Other Effects (6)
- -----------------------------------------------------------------------------
Electric Retail Revenue $ (38)
- -----------------------------------------------------------------------------
o Rate Changes. The decrease in revenues attributable to rate changes
reflects the 5% ComEd residential rate reduction, effective October 1,
2001, required by the Illinois restructuring legislation and a $60 million
PECO rate reduction effective January 1, 2001 offset by an increase in
PECO's gross receipts tax rate of $13 million and the expiration of a 6%
44
reduction in PECO's rates during the first quarter of 2001. The change in
the gross receipts tax rate does not affect income.
o Customer Choice. ComEd non-residential customers and all PECO customers
have the choice to purchase energy from other suppliers. This choice
generally does not impact kWh deliveries, but affects revenue collected
from customers related to energy supplied by Energy Delivery. The favorable
customer choice effect is attributable to increased revenues of $80 million
from customers in Pennsylvania selecting or returning to PECO as their
electric generation supplier, partially offset by a decrease in revenues of
$39 million from customers in Illinois electing to purchase energy from an
Alternative Retail Electric Supplier (ARES) or the PPO, under which
customers can purchase power from ComEd at a market-based rate. Exelon
continues to collect delivery charges from these customers.
o Weather. The demand for electricity and gas services is impacted by weather
conditions. Very warm weather in summer months and very cold weather in
other months is referred to as "favorable weather conditions", because
these weather conditions result in increased sales of electricity and gas.
Conversely, mild weather reduces demand. The weather impact was unfavorable
compared to the prior year as a result of warmer winter weather in ComEd's
and PECO's service territories.
o Other Effects. Other items decreasing revenues were primarily related to an
$11 million settlement of CTCs by a large PECO customer in 2001 partially
offset by a net $8 million favorable volume variance other than weather,
due to the impact of a strong housing construction market in Chicago,
partially offset by the impact of a slower economy on large commercial and
industrial customers.
The reduction in Wholesale and Miscellaneous revenues in for the three
months ended March 31, 2002, as compared to 2001, reflects $28 million lower
off-system sales due to the expiration of wholesale contracts that were offered
by ComEd from June 2000 to May 2001 to support the open access program in
Illinois.
Energy Delivery's gas sales statistics and revenue detail are as
follows:
2002 2001 Variance
- --------------------------------------------------------------------------------
Deliveries in million cubic feet (mmcf) 31,357 34,230 (2,873)
Revenue (in millions) $209 $295 $(86)
- --------------------------------------------------------------------------------
The changes in gas revenue for the quarter ended March 31, 2002, as
compared to the same 2001 period, are as follows:
(in millions) Variance
- ------------------------------------------------------------------
Rate Changes $ (35)
Weather (30)
Volume (21)
- ------------------------------------------------------------------
Gas Revenue $ (86)
- ------------------------------------------------------------------
45
o Rate Changes. The unfavorable variance in rates is attributable to an
adjustment of the purchased gas cost recovery by the PUC effective in
December 2001. The average rate per million cubic feet for all customers
for the quarter ended March 31, 2002 was 23% lower than the same 2001
period. PECO's gas rates are subject to periodic adjustments by the PUC
designed to recover or refund the difference between 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.
o Weather. The unfavorable weather impact is attributable to warmer
temperatures during the quarter ended March 31, 2002 as compared to the
same 2001 period. Heating degree-days decreased 17% in the quarter ended
March 31, 2002 compared to the same 2001 period.
o Volume. Exclusive of weather impacts, lower delivery volume affected
revenue by $21 million in the quarter ended March 31, 2002 compared to the
same 2001 period. Total deliveries to retail customers decreased 8% in the
quarter ended March 31, 2002 compared to the same 2001 period, primarily as
a result of slower economic conditions in 2002 offset by increased customer
growth.
Results of Operations - Generation Business Segment
Three Months Ended March 31,
2002 2001 Variance % Change
- ---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,975 $1,628 $ 347 21.3%
OPERATING EXPENSES
Fuel and Purchased Power 1,342 818 524 64.1%
Operating and Maintenance 432 404 28 6.9%
Depreciation and Amortization 63 92 (29) (31.5%)
Taxes Other Than Income 49 46 3 6.5%
- -------------------------------------------------------------------------------------------------------
Total Operating Expense 1,886 1,360 526 38.7%
- -------------------------------------------------------------------------------------------------------
OPERATING INCOME 89 268 (179) (66.8%)
- -------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (17) (33) 16 (48.5%)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net 23 26 (3) (11.5%)
Other, net 16 4 12 300.0%
- -------------------------------------------------------------------------------------------------------
Total Other Income and Deductions 22 (3) 25 (833.3%)
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 111 265 (154) (58.1%)
INCOME TAXES 45 107 (62) (57.9%)
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 66 158 (92) (58.2%)
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
- -------------------------------------------------------------------------------------------------------
PRINCIPLES 13 12 1 8.3%
NET INCOME $ 79 $ 170 (91) (53.5%)
- -------------------------------------------------------------------------------------------------------
Generation's operating results reflect lower margins (revenues less
fuel and purchased power) on wholesale energy sales due to lower market prices
for energy, a lower supply of low cost nuclear generation and a reduction in
volumes sold to affiliates. Revenues for the first quarter of 2002 include $515
46
million related to the trading activities, which were initiated in April 2001.
Lower volumes sold to retail affiliates attributable to mild winter weather
reduced Generation's gross margins by $7 million, the effect of which was
partially offset by an increase in lower price wholesale sales. Additionally,
four additional nuclear generating station refueling outages reduced the amount
of low cost nuclear generation available for sale. Fuel and purchased power
expense includes $514 million related to the trading portfolio. Operating and
maintenance expense increased due to the additional refueling outages, partially
offset by employee reductions and other non-outage operating cost reductions.
The decline in depreciation expense reflects extension of the estimated service
lives of generating stations commencing in the second quarter of 2001. Operating
results for the three months ended March 31, 2002 include non-cash
mark-to-market gains on derivative contracts of $3 million. SFAS No. 141,
"Business Combinations" (SFAS No. 141) requires that unamortized negative
goodwill related to pre-July 1, 2001 purchases be recognized as a change in
accounting principle concurrent with the adoption of SFAS No. 142. At December
31, 2001, AmerGen, an equity-method investee of Generation, had $43 million of
negative goodwill, net of accumulated amortization, recorded on its balance
sheet. Upon AmerGen's adoption of SFAS No. 141 in January 2002, Generation
recognized its proportionate share of income of $22 million ($13 million, net of
income taxes) as a cumulative effect of a change in accounting principle. Exelon
adopted SFAS No. 133 on January 1, 2001, which resulted in after-tax income of
$12 million that is reflected as a cumulative effect of a change in accounting
principle. See ITEM 1. Financial Statements - Note 2 - Cumulative Effect of
Changes in Accounting Principles.
Generation Operating Statistics:
For the three months ended March 31, 2002 and 2001, Generation's sales
and the supply of these sales were as follows:
Three Months Ended March 31,
-----------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Energy Delivery 27,750 29,204
Exelon Energy 1,250 1,591
Market Sales 19,324 17,459
Trading Portfolio 14,239 --
- -----------------------------------------------------------------------------------------------------------------------
Total 62,563 48,254
- -----------------------------------------------------------------------------------------------------------------------
47
Three Months Ended March 31,
(in GWhs) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Nuclear Units 28,752 31,206
Purchases - non-trading portfolio 18,093 15,561
Purchases - trading portfolio 14,239 --
Fossil and Hydro Units 1,479 1,487
- -----------------------------------------------------------------------------------------------------------------------
Total 62,563 48,254
- -----------------------------------------------------------------------------------------------------------------------
Generation's average margin data for the three months ended March 31,
2002 and 2001 were as follows:
Three Months Ended March 31,
($/MWh) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Average Realized Revenue
Energy Delivery $ 29.98 $ 29.11
Exelon Energy 45.60 38.34
Market Sales 28.15 39.69
Trading Portfolio 36.17 n.a.
Total Sales - including the trading portfolio 31.14 n.a.
Total Sales - excluding the trading portfolio 29.63 33.24
Average Supply Cost - including the trading portfolio $ 21.15 n.a.
Average Supply Cost - excluding the trading portfolio 16.74 16.74
Average Margin - including the trading portfolio $ 9.99 n.a.
Average Margin - excluding the trading portfolio 12.89 16.50
- -----------------------------------------------------------------------------------------------------------------------
n.a. - not applicable as trading activities were initiated in April 2001.
Generation's nuclear fleet, including AmerGen, performed at a capacity
factor of 90.3% for the three months ended March 31, 2002 compared to 98.8% the
same period in 2001. Generation's nuclear units' production costs for the three
months ended March 31, 2002 were $14.26 per MWh compared to $11.68 per MWh for
the same period in 2001. The lower capacity factor and increased unit production
costs reflect the increased number of planned refueling outages in the three
months ended March 31, 2002 as compared to the same period in 2001.
48
Results of Operations - Enterprises Business Segment
Three Months Ended March 31,
2002 2001 Variance % Change
- -----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 490 $ 667 $ (177) (26.5%)
OPERATING EXPENSES
Fuel and Purchased Power 204 361 (157) (43.5%)
Operating and Maintenance 301 323 (22) (6.8%)
Depreciation and Amortization 17 15 2 13.3%
Taxes Other Than Income 2 4 (2) (50.0%)
- --------------------------------------------------------------------------------------------------------
Total Operating Expense 524 703 (179) (25.5%)
- --------------------------------------------------------------------------------------------------------
OPERATING INCOME (34) (36) 2 (5.6%)
- --------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (5) (13) 8 (61.5%)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net (7) (8) 1 (12.5%)
Other, net (1) 17 (18) (105.9%)
- --------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (13) (4) (9) 225.0%
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (47) (40) (7) 17.5%
INCOME TAXES (19) (15) (4) 26.7%
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (28) (25) (3) 12.0%
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (243) -- (243) n.m.
- --------------------------------------------------------------------------------------------------------
NET INCOME $ (271) $ (25) $ (246) 984.0%
- --------------------------------------------------------------------------------------------------------
n.m. - not meaningful
Enterprises' net loss increased $3 million for the three months ended
March 31, 2002 compared to the same period in 2001, excluding the cumulative
effect of a change in accounting principle. The net loss increased $246 million
after reflecting the cumulative effect of a change in accounting principle
resulting from the adoption of SFAS No. 142, which no longer allows amortization
of goodwill but requires testing goodwill for impairment on an annual basis. The
impairment booked during the first quarter, as a result of transitional
impairment testing, was $243 million net of income taxes and minority interest.
Operating revenues decreased $177 million for the three months ended
March 31, 2002, compared to the same period in 2001. The decrease in operating
revenues is attributable to lower gas sales of $108 million primarily resulting
from lower gas prices, reduced retail energy sales of $48 million from Exelon
Energy, Inc. (Exelon Energy) exiting the PJM interconnection, LLC (PJM) market,
lower revenues of $35 million from InfraSource, Inc. (InfraSource) from the
continued decline in the telecommunications industry and reduced construction
services in that industry and reduced construction project revenues of $ 29
million at Exelon Services, Inc. (Exelon Services). These decreases were
partially offset by increases in revenue of $26 million from operations in the
49
electric segment of InfraSource from continued strong performance of the
Independent Power Producer market and higher electric sales of $14 million
resulting from higher electric prices in Illinois for Exelon Energy.
Enterprises' operating and other expenses decreased $188 million for
the three months ended March 31, 2002 compared to the same period in 2001. The
decrease is primarily attributable to lower gas costs of $110 million primarily
resulting from lower gas prices, lower power and operating expenses of $65
million resulting from reduced operations of retail energy sales from Exelon
Energy exiting the PJM market, and reduced costs relating to construction
projects at Exelon Services of $18 million and a $10 million gain in 2001 on the
distribution of a communications company investment. These decreases were
partially offset by higher electric purchased power costs in Illinois of $15
million.
The effective income tax rate was 40.4% for the three months ended
March 31, 2002, compared to 37.5% for the three months ended March 31, 2001. The
decrease in the effective tax rate was primarily attributable to the
discontinuation of goodwill amortization as of January 1, 2002, that was not
deductible for income tax purposes.
Corporate Costs
Corporate costs for the three months ended March 31, 2002 increased
over the same period in 2001 primarily due to $20 million of executive severance
costs, which were allocated to Exelon's business segments.
LIQUIDITY AND CAPITAL RESOURCES
Exelon's capital resources are primarily provided by internally
generated cash flows from operations and, to the extent necessary, external
financing including the issuance of commercial paper. Exelon's access to
external financing at reasonable terms is dependent on the credit ratings of
Exelon and its subsidiaries and the general business condition of Exelon and the
utility industry. Exelon's businesses are capital intensive. Capital resources
are used primarily to fund Exelon's capital requirements, including
construction, investments in new and existing ventures, repayments of maturing
debt and preferred securities of subsidiaries and payment of common stock
dividends. Any potential future acquisitions could require external financing,
including the issuance by Exelon of common stock.
Cash Flows from Operating Activities
Cash flows provided by operations for the three months ended March 31,
2002 were $833 million compared to $797 million in the three months ended March
31, 2001. Approximately 40% of 2002 cash flows provided by operations were
provided by Energy Delivery and 60% was provided by Generation in the first
quarter of 2002. Enterprises' cash flows from operations were immaterial to
Exelon for the three months ended March 31, 2002. Energy Delivery's cash flow
from operating activities primarily results from sales of electricity and gas to
a stable and diverse base of retail customers at fixed prices and are weighted
towards the third quarter. Energy Delivery's future cash flows will depend upon
the ability to achieve cost savings in operations, and the impact of the
economy, weather and customer choice on its revenues. Generation's cash flows
from operating activities primarily result from the sale of electric energy to
wholesale customers, including Energy
50
Delivery and Enterprises. Generation's future cash flow from operating
activities will depend upon future demand and market prices for energy and the
ability to continue to produce and supply power at competitive costs. Although
the amounts may vary from period to period as a result of the uncertainties
inherent in business, Exelon expects that Energy Delivery and Generation will
continue to provide a reliable and steady source of internal cash flow from
operations for the foreseeable future.
Cash Flows from Investing Activities
Cash flows used in investing activities for the three months ended
March 31, 2002 were $637 million, compared to $517 million for the three months
ended March 31, 2001. The increase is primarily attributable to increased
capital expenditures. Capital expenditures by business segment for the three
months ended March 31, 2002 and 2001 are as follows:
Three Months Ended March 31,
(in millions) 2002 2001
- ------------------------------------------------------------------------------
Energy Delivery $ 244 $ 291
Generation 288 118
Enterprises 17 31
Corporate and Other 11 7
- ------------------------------------------------------------------------------
Total Capital Expenditures $ 560 $ 447
- ------------------------------------------------------------------------------
Energy Delivery's capital expenditures for 2002 reflect the
continuation of efforts to further improve the reliability of its distribution
system in the Chicago region. Exelon anticipates that Energy Delivery will
obtain financing, when necessary, through borrowings, the issuance of preferred
securities, or capital contributions from Exelon.
Generation's capital expenditures for 2002 are for additions to and
upgrades of existing facilities (including nuclear refueling outages), nuclear
fuel and increases in capacity at existing plants. Capital expenditures are
projected to increase in 2002 as compared to 2001 due to higher nuclear fuel
expenditures, growth and an increase in the number of planned refueling outages,
during which significant maintenance work is performed. Eleven nuclear refueling
outages, including AmerGen, are planned for 2002, compared to six during 2001.
Exelon has committed to provide AmerGen with capital contributions equivalent to
50% of the purchase price of any acquisitions AmerGen makes in 2002. In February
2002, Generation entered into an agreement to loan AmerGen up to $75 million at
an interest rate of one-month LIBOR plus 2.25%. As of March 31, 2002, AmerGen
had borrowed $46 million under this agreement. The loan is due November 1, 2002.
Exelon anticipates that Generation's capital expenditures will be funded by
internally generated funds, Generation borrowings or capital contributions from
Exelon. Generation closed the purchase of two natural-gas and oil-fired plants
from TXU Corp. (TXU) on April 25, 2002. The $443 million purchase was funded
with available cash and Exelon commercial paper. Exelon expects to redeem the
commercial paper utilizing Generation's internal cash flows.
Enterprises' capital expenditures for 2002 are primarily for additions
to or upgrades of existing facilities. All of Enterprises' investments are
expected to be funded by capital contributions or borrowings from Exelon. On
April 1, 2002, Exelon Enterprises closed on the sale of its 49% interest in AT&T
51
Wireless PCS of Philadelphia, LLC to a subsidiary of AT&T Wireless Services for
$285 million in cash. Proceeds from the transaction will be used for Exelon's
general corporate purposes.
Cash Flows from Financing Activities
Cash flows provided by financing activities were $15 million in the
first quarter 2002, primarily attributable to debt service and payments of
dividends on common stock. Debt financing activities during the three months
ended March 31, 2002 were as follows:
o ComEd issued $400 million in First Mortgage Bonds, retired $89 million of
transitional trust notes and called $200 million in First Mortgage Bonds
with available cash and
o PECO borrowed an additional $58 million of commercial paper and made
principal payments of $160 million on long -term debt with available cash.
Credit Issues
Exelon meets its short-term liquidity requirements primarily through
the issuance of commercial paper by Exelon, ComEd and PECO. Exelon, along with
ComEd, PECO and Generation, entered into a $1.5 billion unsecured revolving
credit facility with a group of banks. This credit facility is used principally
to support the commercial paper program of Exelon, ComEd and PECO.
At March 31, 2002, Exelon's capital structure consisted of 61% of
long-term debt, 35% common stock, 2% notes payable and 3% preferred securities
of subsidiaries. Total debt included $6.6 billion of securitization debt
constituting obligations of certain consolidated special purpose entities,
representing 28% of capitalization.
At March 31, 2002, Exelon had outstanding $438 million of notes payable
consisting principally of commercial paper. For the three months ended March 31,
2002, the average interest rate on notes payable was approximately 2.08%.
Certain of the credit agreements to which Exelon, ComEd, PECO and Generation are
a party require each of them to maintain a debt to total capitalization ratio of
65% or less (excluding securitization debt and for PECO, the receivable from
parent recorded in PECO's shareholders' equity). At March 31, 2002, the debt to
total capitalization ratios on that basis for Exelon, ComEd, PECO and Generation
were 48%, 46%, 39% and 26%, respectively.
Exelon and its subsidiaries' access to the capital markets, including
the commercial paper market, and their financing costs in those markets are
dependent on their respective securities ratings. None of Exelon's or its
subsidiaries' borrowings are subject to default or prepayment as a result of a
downgrading of securities ratings although such a downgrading could increase
interest charges under Exelon's bank credit facility. Exelon and its
subsidiaries from time to time enter into interest rate swap and other
derivatives that require the maintenance of investment grade ratings. Failure to
maintain investment grade ratings would allow the counterparty to terminate the
derivative and settle the transaction on a net present value basis.
Under the Public Utility Holding Company Act of 1935 (PUHCA) and the
Federal Power Act, Exelon, ComEd, PECO and Generation can pay dividends only
from retained, undistributed or current earnings. However, the SEC order granted
permission to Exelon and ComEd to pay up to $500 million in dividends out of
52
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 March 31, 2002, Exelon had retained earnings of
$1.1 billion, which includes ComEd retained earnings of $268 million, PECO
retained earnings of $272 million and Generation retained earnings of $550
million.
Contractual Obligations and Commercial Commitments
There were no material changes from December 31, 2001 as set forth in
the 10-K, other than in the normal course of business, to Exelon's contractual
obligations, representing cash obligations that are considered to be firm
commitments, and commercial commitments, representing commitments triggered by
future events, during the three months ended March 31, 2002 except for the
following:
o ComEd issued $400 million of First Mortgage Bonds due March 15, 2012 and
called $200 million of bonds due February 1, 2022; and
o Guarantees increased $410 million primarily related to an increase in the
amount of surety bonds required by Enterprises' and PECO's insurance
policies. Approximately one-half of these surety bonds expire in the
remainder of 2002 and the other half expire in the two-year period ending
December 2004.
53
COMMONWEALTH EDISON COMPANY
GENERAL
ComEd operates in a single business segment, Energy Delivery, and its
operations consist of its retail electricity distribution and transmission
business in northern Illinois.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Significant Operating Trends - ComEd
Three Months Ended March 31,
2002 2001 Variance % Change
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,315 $1,446 $ (131) (9.1%)
OPERATING EXPENSES
Purchased Power 538 609 (71) (11.7%)
Operating and Maintenance 237 218 19 8.7%
Depreciation and Amortization 135 167 (32) (19.2%)
Taxes Other Than Income 73 72 1 1.4%
- --------------------------------------------------------------------------------------------------------
Total Operating Expense 983 1,066 (83) (7.8%)
- --------------------------------------------------------------------------------------------------------
OPERATING INCOME 332 380 (48) (12.6%)
OTHER INCOME AND DEDUCTIONS
Interest Expense (126) (141) 15 (10.6%)
Distributions on Company-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely the Company's Subordinated Debt Securities (7) (7) -- 0.0%
Other, net 14 37 (23) (62.2%)
- --------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (119) (111) (8) 7.2%
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 213 269 (56) (20.8%)
INCOME TAXES 84 123 (39) (31.7%)
- --------------------------------------------------------------------------------------------------------
NET INCOME 129 146 (17) (11.6%)
Preferred and Preference Stock Dividends -- -- -- --
- --------------------------------------------------------------------------------------------------------
NET INCOME ON COMMON STOCK $ 129 $146 $ (17) (11.6%)
- --------------------------------------------------------------------------------------------------------
Net Income
Net income decreased $17 million, or 12% for the three months ended
March 31, 2002. Net income was impacted by $48 million decrease in operating
income offset in part by a lower effective income tax rate.
54
Operating Revenues
ComEd's electric sales statistics are as follows:
For the three months ended March 31,
Retail Deliveries - (in GWh) 2002 2001 % Change
- -----------------------------------------------------------------------------------------------------------------------
Bundled Deliveries (1)
Residential 6,409 6,307 1.6%
Small Commercial & Industrial 5,450 5,875 (7.2%)
Large Commercial & Industrial 1,956 2,890 (32.3%)
Public Authorities & Electric Railroads 1,801 2,010 (10.4%)
- ----------------------------------------------------------------------------------------------------
15,616 17,082 (8.6%)
- ----------------------------------------------------------------------------------------------------
Unbundled Deliveries (2)
ARES
Small Commercial & Industrial 1,004 462 117.3%
Large Commercial & Industrial 1,386 1,163 19.2%
Public Authorities & Electric Railroads 138 43 220.9%
- ----------------------------------------------------------------------------------------------------
2,528 1,668 51.6%
- ----------------------------------------------------------------------------------------------------
PPO
Small Commercial & Industrial 763 823 (7.3%)
Large Commercial & Industrial 1,311 1,359 (3.5%)
Public Authorities & Electric Railroads 242 258 (6.2%)
- ----------------------------------------------------------------------------------------------------
2,316 2,440 (5.1%)
- ----------------------------------------------------------------------------------------------------
Total Unbundled Deliveries 4,844 4,108 17.9%
- ----------------------------------------------------------------------------------------------------
Total Retail Deliveries 20,460 21,190 (3.4%)
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Bundled service reflects deliveries to customers taking electric service
under tariffed rates, which include the cost of energy and the delivery
cost of the transmission and the distribution of the energy.
(2) Unbundled service reflects customers electing to receive electric
generation service from an ARES or the PPO.
</FN>
55
For the three months ended March 31,
Electric Revenue (in millions) 2002 2001 Variance % Change
- ---------------------------------------------------------------------------------------------------------------------
Bundled Revenues (1)
Residential $ 518 $ 534 $ (16) (3.0%)
Small Commercial & Industrial 391 413 (22) (5.3%)
Large Commercial & Industrial 102 136 (34) (25.0%)
Public Authorities & Electric Railroads 92 106 (14) (13.2%)
- --------------------------------------------------------------------------------------------------------
1,103 1,189 (86) (7.2%)
- --------------------------------------------------------------------------------------------------------
Unbundled Revenues (2)
ARES
Small Commercial & Industrial 12 13 (1) (7.7%)
Large Commercial & Industrial 10 27 (17) (63.0%)
Public Authorities & Electric Railroads 2 1 1 100.0%
- --------------------------------------------------------------------------------------------------------
24 41 (17) (41.5%)
- --------------------------------------------------------------------------------------------------------
PPO
Small Commercial & Industrial 43 37 6 16.2%
Large Commercial & Industrial 64 61 3 4.9%
Public Authorities & Electric Railroads 13 12 1 8.3%
- --------------------------------------------------------------------------------------------------------
120 110 10 9.1%
- --------------------------------------------------------------------------------------------------------
Total Unbundled Revenues 144 151 (7) (4.6%)
- --------------------------------------------------------------------------------------------------------
Total Electric Retail Revenues 1,247 1,340 (93) (6.9%)
Wholesale and Miscellaneous Revenue (3) 68 106 (38) (35.8%)
- --------------------------------------------------------------------------------------------------------
Total Electric Revenue $ 1,315 $ 1,446 $ (131) (9.1%)
- --------------------------------------------------------------------------------------------------------
<FN>
(1) Bundled service reflects deliveries to customers taking electric service
under tariffed rates, which include the cost of energy and the delivery
cost of the transmission and the distribution of the energy.
(2) Revenue from customers choosing an ARES includes a distribution charge and
a CTC charge. Transmission charges received from ARES are included in
wholesale and miscellaneous revenue. Revenues from customers choosing the
PPO includes an energy charge at market rates, transmission, and
distribution charges and a CTC charge.
(3) Wholesale and miscellaneous revenues include sales to ARES, transmission
revenue, sales to municipalities and other wholesale energy sales.
</FN>
The changes in electric retail revenues for the three months ended
March 31, 2002, as compared to the three months ended March 31, 2001, are
attributable to the following:
(in millions) Variance
- ------------------------------------------------------------------------------
Weather $ (53)
Rate Changes (27)
Customer Choice (39)
Other Effects 26
- ------------------------------------------------------------------------------
Electric Retail Revenue (93)
- ------------------------------------------------------------------------------
o Weather. The weather impact for the three months ended March 31, 2002 was
unfavorable compared to the three months ended March 31, 2001 as a result
of warmer winter weather in 2002. Heating degree days decreased 13% in the
three months ended March 31, 2002 compared to the three months ended March
31, 2001.
o Rate Changes. The decrease attributable to rate changes reflects a 5%
residential rate reduction, effective October 1, 2001, required by the
Illinois restructuring legislation.
56
o Customer Choice. ComEd non-residential customers have the choice to
purchase energy from other suppliers. This choice generally does not impact
the volume of deliveries, but affects revenue collected from customers
related to energy supplied by ComEd. The decrease in revenues reflects
customers in Illinois electing to purchase energy from an ARES or the PPO.
As of March 31, 2002, approximately 21,200 retail customers had elected to
purchase energy from an ARES or the ComEd PPO. This represents an increase
in delivered MWhs to such customers from approximately 4.1 million for the
three months ended March 31, 2001 to 4.8 million for the three months ended
March 31, 2002, or from 19% to 24% of total quarterly retail deliveries.
o Other Effects. A strong housing construction market in Chicago contributed
to residential and small commercial and industrial customer volume growth,
partially offset by the unfavorable impact of a slower economy on large
commercial and industrial customers.
The reduction in Wholesale revenue for the three months ended March 31,
2002 as compared to the three months ended March 31, 2001 was due primarily to a
$28 million decrease in off-system sales due to the expiration of wholesale
contracts that were offered by ComEd from June 2000 to May 2001 to support the
open access program in Illinois.
Purchased Power Expense
Purchased power expense decreased $71 million, or 12% for the three
months ended March 31, 2002. The decrease in purchased power expense was
primarily attributable to a $20 million decrease due to unfavorable weather
conditions, a $33 million decrease as a result of customers choosing to purchase
energy from an ARES, and a $26 million decrease due to the expiration of the
wholesale contracts offered by ComEd to support the open access program in
Illinois.
Operating and Maintenance Expense
Operating and maintenance (O&M) expense increased $19 million, or 9%,
for the three months ended March 31, 2002. The increase in O&M expense was
primarily attributable to a $5 million increase in both bad debt expense and
claims expense due to revised estimates, and an increase in Corporate
allocations due to higher executive severance and increased pension and
post-retirement benefit costs.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $32 million, or 19%,
for the three months ended March 31, 2002. This decrease is primarily due to the
discontinuation of goodwill amortization effective January 1, 2002 upon the
adoption of SFAS No. 142.
Taxes Other Than Income
Taxes other than income remained consistent from period to period.
Interest Charges
Interest charges consist of interest expense and distributions on
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts. Interest charges decreased $15 million, or 10%, for the three months
ended March 31, 2002. The decrease in interest expense was primarily
attributable to the impact of lower interest rates for the three months ended
57
March 31, 2002 as compared to the three months ended March 31, 2001, the early
retirement of the $196 million of First Mortgage Bonds in November of 2001 and
the annual retirement of $340 million in Transitional Trust Notes.
Other Income and Deductions
Other income and deductions, excluding interest charges, decreased $23
million, for the three months ended March 31, 2002. The decrease was primarily
attributable to $5 million in intercompany interest income relating to the $352
million outstanding receivable from PECO at March 31, 2001, and a $15 million
reduction in intercompany interest income from Unicom Investment Inc.,
reflecting lower interest rates.
Income Taxes
The effective income tax rate was 39.4% for the three months ended
March 31, 2002, compared to 45.7% for the three months ended March 31, 2001. The
decrease in the effective tax rate was primarily attributable to the
discontinuation of goodwill amortization as of January 1, 2002, which was not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
ComEd's capital resources are primarily provided by internally
generated cash flows from operations and, to the extent necessary, external
financing including the issuance of commercial paper. ComEd's access to external
financing at reasonable terms is dependent on its credit ratings and the general
business condition of ComEd and the utility industry. ComEd's business is
capital intensive. Capital resources are used primarily to fund ComEd's capital
requirements, including construction, repayments of maturing debt, and the
payment of common stock dividends.
Cash Flows from Operating Activities
Cash flows provided by operations were $285 million for the three
months ended March 31, 2002 compared to $492 million for the three months ended
March 31, 2001. The decrease in cash flows in 2002 was primarily attributable to
a $229 million decrease in working capital as a result of the paydown of
intercompany payables to affiliates and other outstanding liabilities. ComEd's
future cash flows will depend upon the ability to achieve cost savings in
operations, and the impact of the economy, weather, and customer choice on its
revenues. Although the amounts may vary from period to period as a result of
uncertainties inherent in the business, ComEd expects to continue to provide a
reliable and steady source of internal cash flow from operations for the
foreseeable future.
Cash Flows from Investing Activities
Cash flows used in investing activities were $182 million for the three
months ended March 31, 2002 compared to $189 million for the three months ended
March 31, 2001. The decrease in cash flows used in investing activities in 2002
was primarily attributable to the $52 million decrease in capital expenditures
partially offset by a $48 million paydown of the $400 million outstanding
receivable with PECO in the first quarter of 2001.
ComEd estimated that it will spend approximately $781 million in total
capital expenditures for 2002. Approximately two thirds of the budgeted 2002
58
expenditures are for continuing efforts to further improve the reliability of
its transmission and distribution systems. The remaining one third is for
capital additions to support new business and customer growth. ComEd anticipates
that it will obtain financing, when necessary, through borrowings, the issuance
of preferred securities, or capital contributions from Exelon. ComEd's proposed
capital expenditures and other investments are subject to periodic review and
revision to reflect changes in economic conditions and other factors.
Cash Flows from Financing Activities
Cash flows used in financing activities were $44 million for the three
months ended March 31, 2002 as compared to $154 million for the three months
ended March 31, 2001. Cash flows used in financing activities were primarily
attributable to debt service and payments of dividends to Exelon. ComEd's debt
financing activities for the three months ended March 31, 2002 reflected the
issuance of $400 million in First Mortgage Bonds, the retirement of $89 million
of transitional trust notes and the early retirement of $200 million in First
Mortgage Bonds with available cash. For the three months ended March 31, 2001,
ComEd's debt financing activities reflected the retirement of $89 million of
transitional trust notes. ComEd paid a $118 million dividend to Exelon during
the three months ended March 31, 2002 compared to a $63 million dividend for the
three months ended March 31, 2001.
Credit Issues
ComEd meets its short-term liquidity requirements primarily through the
issuance of commercial paper, borrowings under bank credit facilities and
borrowings from the Exelon intercompany money pool. ComEd, along with Exelon,
PECO and Generation entered into a $1.5 billion unsecured 364-day revolving
credit facility on December 12, 2001 with a group of banks. ComEd has a $300
million sublimit under the credit facility and expects to use the credit
facility principally to support its $300 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 March 31, 2002, ComEd's
debt to total capitalization ratio on that basis was 46%. At March 31, 2002,
ComEd had no short-term borrowings.
ComEd's access to the capital markets, including the commercial paper
market, and its financing costs in those markets are dependent on its securities
ratings. None of ComEd's borrowings are subject to default or prepayment as a
result of a downgrading of securities ratings although such a downgrading could
increase interest charges under certain bank credit facilities. ComEd from time
to time enters into interest rate swaps and other derivatives that require the
maintenance of investment grade ratings. Failure to maintain investment grade
ratings would allow the counterparty to terminate the derivative and settle the
transaction on a net present value basis.
At March 31, 2002, ComEd's capital structure, excluding the deduction
from shareholders' equity of the $906 million receivable from Exelon, consisted
of 52% long-term debt, 46% of common stock, and 2% of preferred securities of
subsidiaries. Long-term debt included $2.2 billion of transitional trust notes
constituting obligations of certain consolidated special purpose entities
representing 17% of capitalization.
59
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 March 31, 2002, ComEd had retained earnings of
$268 million.
Contractual Obligations and Commercial Commitments
There were no material changes from December 31, 2001 as set forth in
the 10-K, other than in the normal course of business, to ComEd's contractual
obligations, representing cash obligations that are considered to be firm
commitments, and commercial commitments, representing commitments triggered by
future events, during the three months ended March 31, 2002 except the issuance
of $400 million of First Mortgage Bonds due March 15, 2012 and the call of $200
million of bonds due February 1, 2022.
60
PECO ENERGY COMPANY
GENERAL
PECO operates in a single business segment, Energy Delivery, and its
operations consist of its retail electricity distribution and transmission
business in southeastern Pennsylvania and its natural gas distribution business
in the Pennsylvania counties surrounding the City of Philadelphia.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Three Months Ended March 31,
2002 2001 Variance % Change
- -----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,020 $1,051 $ (31) (3.0%)
OPERATING EXPENSES
Fuel and Purchased Power 486 488 (2) (0.4%)
Operating and Maintenance 136 132 4 3.0%
Depreciation and Amortization 112 101 11 10.9%
Taxes Other Than Income 59 43 16 37.2%
- --------------------------------------------------------------------------------------------------------
Total Operating Expense 793 764 29 3.8%
- --------------------------------------------------------------------------------------------------------
OPERATING INCOME 227 287 (60) (20.9%)
- --------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (95) (110) 15 13.6%
Distributions on Company-Obligated Mandatorily
Redeemable Preferred Securities of a Partnership
which holds Solely Subordinated Debentures of
the Company (2) (2) -- 0.0%
Other, net 1 15 (14) (93.3%)
- --------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (96) (97) 1 (1.0%)
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 131 190 (59) (31.1%)
INCOME TAXES 42 68 (26) (38.2%)
- --------------------------------------------------------------------------------------------------------
NET INCOME 89 122 (33) (27.1%)
Preferred Stock Dividends (2) (2) -- 0.0%
- --------------------------------------------------------------------------------------------------------
NET INCOME ON COMMON STOCK $ 87 $ 120 $ (33) (27.5%)
- --------------------------------------------------------------------------------------------------------
Net income on common stock decreased $33 million, or 28% for the
quarter ended March 31, 2002 as compared to the same 2001 period. The decrease
was a result of lower margins due to the unplanned return of certain commercial
and industrial customers, milder weather, increased depreciation and
amortization expense and higher gross receipts taxes partially offset by
favorable rate adjustments.
61
PECO's electric sales statistics are as follows:
For the three months ended March 31,
Deliveries - (in GWh) 2002 2001 % Change
- --------------------------------------------------------------------------------------------------------------------
Bundled Deliveries (1)
Residential 2,056 2,459 (16.4%)
Small Commercial & Industrial 1,757 1,001 75.5%
Large Commercial & Industrial 3,351 2,531 32.4%
Public Authorities & Electric Railroads 193 193 0.0%
- ----------------------------------------------------------------------------------------------------
7,357 6,184 19.0%
- ----------------------------------------------------------------------------------------------------
Unbundled Deliveries (2)
Residential 792 527 50.3%
Small Commercial & Industrial 96 892 (89.2%)
Large Commercial & Industrial 103 1,189 (91.3%)
Public Authorities & Electric Railroads -- 5 (100.0%)
- ----------------------------------------------------------------------------------------------------
991 2,613 (62.1%)
- ----------------------------------------------------------------------------------------------------
Total Retail Deliveries 8,348 8,797 (5.1%)
- ----------------------------------------------------------------------------------------------------
<FN>
(1) Bundled service reflects deliveries to customers taking electric service
under tariffed rates, which include the cost of energy, the delivery cost
of the transmission and distribution of the energy and a CTC charge.
(2) Unbundled service reflects customers electing to receive electric
generation service from an alternative energy supplier.
</FN>
Three Months Ended March 31,
Electric Revenue (in millions) 2002 2001 Variance % Change
- -----------------------------------------------------------------------------------------------------------------------
Bundled Revenue (1)
Residential $ 243 $ 281 $ (38) (13.5%)
Small Commercial & Industrial 189 107 82 76.6%
Large Commercial & Industrial 244 183 61 33.3%
Public Authorities & Electric Railroads 18 17 1 5.9%
- --------------------------------------------------------------------------------------------------------
694 588 106 27.2%
- --------------------------------------------------------------------------------------------------------
Unbundled Revenue (2)
Residential 54 36 18 50.0%
Small Commercial & Industrial 5 40 (35) (8.8%)
Large Commercial & Industrial 3 35 (32) (91.4%)
Public Authorities & Electric Railroads -- 1 (1) (100.0%)
- --------------------------------------------------------------------------------------------------------
62 112 (50) (44.6%)
- --------------------------------------------------------------------------------------------------------
Total Electric Retail Revenues 756 700 56 8.0%
Wholesale and Miscellaneous Revenue (3) 55 56 (1) (1.8%)
- --------------------------------------------------------------------------------------------------------
Total Electric Revenue $ 811 $ 756 $ 55 7.3%
- --------------------------------------------------------------------------------------------------------
<FN>
(1) Bundled service reflects deliveries to customers taking electric service
under tariffed rates, which include the cost of energy, the delivery cost
of the transmission and distribution of the energy and a CTC charge.
(2) Revenue from customers receiving generation from an alternate supplier
includes a transmission and distribution charge and a CTC charge.
(3) Wholesale and miscellaneous revenues include sales, transmission revenue,
sales to municipalities and other wholesale energy sales.
</FN>
62
The changes in electric retail revenues for the quarter ended March 31,
2002, as compared to the same 2001 period, are as follows:
(in millions) Variance
- ------------------------------------------------------------------------------
Customer Choice $80
Rate Changes 26
Weather (19)
Other Effects (31)
- ------------------------------------------------------------------------------
Retail Revenue $56
- ------------------------------------------------------------------------------
o Customer Choice. All PECO customers have choice to purchase energy from
other suppliers. This choice generally does not impact kWh deliveries, but
reduces revenue collected from customers because they are not obtaining
generation supply from PECO. Customers who are served by an alternate
supplier continue to pay CTCs.
As of March 31, 2002, the customer load served by alternate
suppliers was 1,010 MW or 13.1% as compared to 2,535 MW or 33.1% for the
same period of the prior year. For the quarter ended March 31, 2002, the
percent of MWh sold by PECO increased by 17.8% to 88.2% of total retail
deliveries as compared to 70.4% in 2001. As of March 31, 2002, the number
of customers served by alternate suppliers was 357,789 or 23.4% as compared
to March 31, 2001 of 509,521 or 33.46%. This increase in the customer load,
the percentage of MWh served by PECO, and the decrease in the number of
customers served by alternative suppliers primarily resulted from customers
selecting or returning to PECO as their electric generation supplier.
o Rate Changes. The increase in revenues attributable to rate changes
primarily reflects the expiration of a 6% reduction in PECO's electric
rates during the first quarter of 2001 and a $13 million increase in the
gross receipts tax effective January 1, 2002. The change in the gross
receipts tax rate does not affect income. These increases are partially
offset by a $60 million rate reduction in effect for 2001 and 2002.
As permitted by the Pennsylvania Electric Competition Act, the
Pennsylvania Department of Revenue has calculated a 2002 Revenue Neutral
Reconciliation (RNR) adjustment to the gross receipts tax rate in order to
neutralize the impact of electric restructuring on its tax revenues. The
2002 RNR adjustment increases the gross receipts tax rate which will
increase PECO's annual revenues and tax obligations by approximately $50
million per year. In January 2002, the PUC approved the adjustment to the
gross receipts tax rate, which was implemented effective January 1, 2002.
o Weather. The weather impact was unfavorable compared to the prior year as a
result of warmer winter weather. Heating degree-days decreased 17% for the
quarter ending March 31, 2002 compared to the same 2001 period.
63
o Other Effects. Other items affecting revenue during the quarter ended March
31, 2002 include:
o Volume. Exclusive of weather impacts, lower delivery volume affected
PECO's revenue by $17 million compared to the same 2001 period.
o Other. An $11 million settlement of CTCs by a large customer in the
first quarter of 2001 and the payment of $7 million to Generation
related to nuclear decommissioning cost recovery under an agreement
effective September 2001 which reduced PECO's revenue compared to the
prior year.
PECO's gas sales statistics for the quarter ended March 31, 2002 as
compared to the same 2001 period are as follows:
2002 2001 Variance
- --------------------------------------------------------------------------------------------------------------------
Deliveries in million cubic feet (mmcf) 31,357 34,230 (2,873)
Revenue (in millions) $209 $295 $(86)
- --------------------------------------------------------------------------------------------------------------------
The changes in gas revenue for the quarter ended March 31, 2002, as
compared to the same 2001 period, are as follows:
(in millions) Variance
- -------------------------------------------------------------------------------
Rate Changes $ (35)
Weather (30)
Volume (21)
- -------------------------------------------------------------------------------
Gas Revenue $ (86)
- -------------------------------------------------------------------------------
o Rate Changes. The unfavorable variance in rates is attributable to an
adjustment of the purchased gas cost recovery by the PUC effective in
December 2001. The average rate per million cubic feet for all customers
for the quarter ended March 31, 2002 was 23% lower than the same 2001
period. PECO's gas rates are subject to periodic adjustments by the PUC
designed to recover or refund the difference between 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.
o Weather. The unfavorable weather impact is attributable to warmer
temperatures during the quarter ended March 31, 2002 as compared to the
same 2001 period. Heating degree-days decreased 17% in the quarter ended
March 31, 2002 compared to the same 2001 period.
o Volume. Exclusive of weather impacts, lower delivery volume affected
revenue by $21 million in the quarter ended March 31, 2002 compared to the
same 2001 period. Total deliveries to retail customers decreased 8% in the
quarter ended March 31, 2002 compared to the same 2001 period, primarily as
a result of slower economic conditions in 2002 offset by increased customer
growth.
64
Fuel and Purchased Power Expense
Fuel and purchased power expense for the quarter ended March 31, 2002
decreased $2 million as compared to the same 2001 period. The decrease in fuel
and purchased power expense was primarily attributable to $35 million from lower
prices related to gas, $31 million as a result of unfavorable weather conditions
and $29 million primarily attributable to lower delivery volume related to gas.
These decreases were partially offset by $77 million from customers in
Pennsylvania selecting or returning to PECO as their electric generation
supplier and lower PJM ancillary charges of $9 million.
Operating and Maintenance Expense
O&M expense for the quarter ended March 31, 2002 increased $4 million,
or 3%, as compared to the same 2001 period. The increase in O&M expense was
primarily attributable to $7 million related to the deployment of automated
meters and $6 million related to an increased allocation of corporate expense
partially offset by $6 million of incremental costs related to a storms in the
first quarter of 2001 and $4 million associated with the write-off of excess and
obsolete inventory during the first quarter of 2001.
Depreciation and Amortization Expense
Depreciation and amortization expense for the quarter ended March 31,
2002 increased $11 million, or 11%, as compared to the same 2001 period. The
increase was primarily attributable to $9 million of additional amortization of
PECO's CTC and an increase of $2 million related to depreciation expense
associated with additional plant in service. The additional amortization of the
CTC is in accordance with PECO's original settlement under the Pennsylvania
Competition Act.
Taxes Other Than Income
Taxes other than income for the quarter ended March 31, 2002 increased
$16 million, or 37%, as compared to the same 2001 period. The increase was
primarily attributable to a $13 million increase in the gross receipts tax on
electric sales effective January 1, 2002.
Interest Charges
Interest charges consist of interest expense and distributions on
Company-Obligated Mandatorily Redeemable Preferred Securities of a Partnership
(COMRPS). Interest charges decreased $15 million, or 14% in the quarter ended
March 31, 2002 as compared to the same 2001 period. The decrease was primarily
attributable to lower interest expense on long-term debt of $10 million as a
result of scheduled principal payments and lower interest rates and interest
expense related to a loan from an affiliate in 2001 of $5 million.
Other Income and Deductions
Other income and deductions excluding interest charges decreased $14
million, or 93% in the quarter ended March 31, 2002 as compared to the same 2001
period. The decrease in other income and deductions was primarily attributable
to a gain on the settlement of an interest rate swap of $6 million in 2001,
lower interest income of $4 million and the favorable settlement of a customer
contract of $3 million in 2001.
65
Income Taxes
The effective tax rate was 32.0% for the quarter ended March 31, 2002
as compared to 35.8% for the same 2001 period. The decrease in the effective tax
rate was primarily attributable to tax benefits associated with the
implementation of state tax planning strategies and the reduced impact of
investment tax credit amortization.
Preferred Stock Dividends
Preferred stock dividends for the quarter ended March 31, 2002 were
consistent as compared to the same 2001 period.
LIQUIDITY AND CAPITAL RESOURCES
PECO's capital resources are primarily provided by internally generated
cash flows from operations and, to the extent necessary, external financing
including the issuance of commercial paper. PECO's access to external financing
at reasonable terms is dependent on its credit ratings and the general business
condition of PECO and the utility industry. PECO's business is capital
intensive. Capital resources are used primarily to fund PECO's capital
requirements, including construction, repayments of maturing debt and preferred
securities and payment of common stock dividends to Exelon.
Cash Flows from Operating Activities
Cash flows provided by operations for the quarter ended March 31, 2002
were $100 million compared to cash flows used in operations of $45 million for
the quarter ended March 31, 2001. The increase in cash flows was primarily
attributable to an increase in working capital of $118 million as a result of
the repayment of intercompany receivables from affiliate and customer accounts
receivable. PECO's cash flow from operating activities primarily results from
sales of electricity and gas to a stable and diverse base of retail customers at
fixed prices. PECO's future cash flows will depend upon the ability to achieve
cost savings in operations, and the impact of the economy, weather and customer
choice on its revenues. Although the amounts may vary from period to period as a
result of the uncertainties inherent in its business, PECO expects that it will
continue to provide a reliable and steady source of internal cash flow from
operations for the foreseeable future.
Cash Flows from Investing Activities
Cash flows used in investing activities for the quarter ended March 31,
2002 were $65 million, compared to $46 million for the quarter ended March 31,
2001. The increase in cash flows used in investing activities was primarily
attributable to an increase in capital expenditures and an increase in other
investing activities. PECO's projected capital expenditures for 2002 are $279
million.
Approximately one half of the budgeted 2002 expenditures are for
capital additions to support customer and load growth and the remainder for
additions to or upgrades of existing facilities. PECO anticipates that it will
obtain financing, when necessary, through borrowings, the issuance of preferred
securities, or capital contributions from Exelon. PECO's proposed capital
66
expenditures and other investments are subject to periodic review and revision
to reflect changes in economic conditions and other factors.
Cash Flows from Financing Activities
Cash flows used in financing activities for the quarter ended March 31,
2002 were $36 million compared to cash flows provided by financing activities of
$99 million for the quarter ended March 31, 2001. Cash flows used in financing
activities are primarily attributable to debt service and payment of dividends
to Exelon. The change in cash flows used in financing activities is primarily
attributable to a lower level of commercial paper borrowing in the first quarter
of 2002 of $115 million, additional debt service of $42 million, additional
dividends paid to Exelon of $40 million and proceeds from the settlement of
increase rate swap agreements of $31 million in 2001. These changes in cash
flows used in financing activities were partially offset by an increase in
restricted cash of $47 million and payable to affiliate of $46 million. For the
quarter ended March 31, 2002, PECO paid Exelon $85 million in common stock
dividends compared to $45 million for the quarter ended March 31, 2001.
Credit Issues
At March 31, 2002, PECO had outstanding $159 million of notes payable
consisting principally of commercial paper. Certain of the credit agreements to
which PECO is a party requires PECO to maintain a debt to total capitalization
ratio of 65% or less, excluding securitization debt and excluding the receivable
from parent recorded in PECO's shareholders' equity. At March 31, 2002, the debt
to total capitalization ratios on that basis for PECO was 39%.
PECO's access to the capital markets, including the commercial paper
market, and its financing costs in those markets are dependent on its securities
ratings. None of PECO's borrowings are subject to default or prepayment as a
result of a downgrading of securities ratings although such a downgrading could
increase interest charges under PECO's bank credit facility. PECO from time to
time enters into interest rate swap and other derivatives that require the
maintenance of investment grade ratings. Failure to maintain investment grade
ratings would allow the counterparty to terminate the derivative and settle the
transaction on a net present value basis.
At March 31, 2002, PECO's capital structure, excluding the deduction
from shareholders' equity of the $1.8 billion receivable from Exelon, consisted
of 26% common equity, 3% preferred stock and COMRPS (which comprised 2% of
PECO's total capitalization structure), and 71% long-term debt including
transition bonds issued by PECO Energy Transition Trust (PETT). Long-term debt
included $4.4 billion of transition bonds representing 52% of capitalization.
Under PUHCA and the Federal Power Act, PECO can pay dividends only from
retained or current earnings. At March 31, 2002, PECO had retained earnings of
$272 million.
67
Contractual Obligations and Commercial Commitments
There were no material changes from December 31, 2001 as set forth in
the 10-K, other than in the normal course of business, to PECO's contractual
obligations, representing cash obligations that are considered to be firm
commitments, and commercial commitments, representing commitments triggered by
future events, during the three months ended March 31, 2002 except for an $85
million increase in the amount of surety bonds required by PECO's insurance
policies. Approximately one-fourth of the surety bonds expire in the remainder
of 2002 and the other three-fourths expire in the two-year period ending
December 2004.
68
EXELON GENERATION COMPANY, LLC
GENERAL
The operations of Generation consist of electric generating facilities,
energy marketing operations and equity interests in Sithe and AmerGen.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Significant Operating Trends - Generation
Three Months Ended March 31,
2002 2001 Variance % Change
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,975 $1,628 $ 347 21.3%
OPERATING EXPENSES
Fuel and Purchased Power 1,342 818 524 64.1%
Operating and Maintenance 432 404 28 6.9%
Depreciation and Decommissioning 63 92 (29) (31.5%)
Taxes Other Than Income 49 46 3 6.5%
- ---------------------------------------------------------------------------------------------------------
Total Operating Expense 1,886 1,360 526 38.7%
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME 89 268 (179) (66.8)%
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (17) (33) 16 (48.5%)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net 23 26 (3) (11.5%)
Other, net 16 4 12 300.0%
- ---------------------------------------------------------------------------------------------------------
Total Other Income and Deductions 22 (3) 25 (833.3%)
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 111 265 (154) (58.1%)
INCOME TAXES 45 107 (62) (57.9%)
- ---------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 66 158 (92) (58.2%)
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES, NET OF INCOME TAXES 13 12 1 8.3%
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 79 $ 170 (91) (53.5%)
- ---------------------------------------------------------------------------------------------------------
Net Income
Generation's net income decreased by $91 million, or 54%, for the three
months ended March 31, 2002 compared to the same period in the prior year. Net
income was impacted by lower margins on wholesale energy sales due to lower
market prices for energy, lower volumes sold to affiliates due to a
weather-driven reduction in Energy Delivery's demand and by higher operating and
maintenance expense. Operating and maintenance expense increased due to four
additional nuclear generating station refueling outages, partially offset by
employee reductions and other non-outage operating cost reductions. Depreciation
expense declined reflecting an extension of the estimated service lives of
certain generating stations.
69
Operating Revenues, Net of Fuel and Purchased Power
Operating revenues, net of fuel and purchased power were $633 million
for the three months ended March 31, 2002 compared to $810 million for the same
period in the prior year. This represents a $177 million decrease, or 22%. This
decrease resulted primarily from milder weather during the 2002 quarter relative
to the prior year, which decreased Generation's GWh deliveries to Exelon
Delivery by 5%. These volumes were then sold into the wholesale market where
prices were approximately 29% lower than in the prior year. These factors were
slightly offset by a 3% increase in realized prices from Exelon Delivery and the
commencement of trading operations in the second quarter of the prior year.
Revenues for the three months ended March 31, 2002 increased primarily due to
$515 million related to the trading portfolio, which was initiated in April
2001, offset by reduced sales volumes to retail affiliates. Fuel and purchased
power expense similarly includes $514 million related to this trading activity.
Realized trading margin was approximately $1 million in the three month period
ended March 31, 2002. Non-cash mark-to-market gains were approximately $3
million on the trading and non-trading portfolios.
For the three months ended March 31, 2002 and 2001, Generation's sales
and the supply of these sales were as follows:
Three Months Ended March 31,
-----------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Energy Delivery 27,750 29,204
Exelon Energy 1,250 1,591
Market Sales 19,324 17,459
Trading Portfolio 14,239 --
- -----------------------------------------------------------------------------------------------------------------------
Total 62,563 48,254
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(in GWHs) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Nuclear Units 28,752 31,206
Purchases - non-trading portfolio 18,093 15,561
Purchases - trading portfolio 14,239 --
Fossil and Hydro Units 1,479 1,487
- -----------------------------------------------------------------------------------------------------------------------
Total 62,563 48,254
- -----------------------------------------------------------------------------------------------------------------------
70
Generation's average margins on energy sales for the three months ended
March 31, 2002 and 2001 are as follows:
Three Months Ended March 31,
($/MWh) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Average Realized Revenue
Energy Delivery $ 29.98 $ 29.11
Exelon Energy 45.60 38.34
Market Sales 28.15 39.69
Trading Portfolio 36.17 n.a.
Total Sales - including the trading portfolio 31.14 n.a.
Total Sales - excluding the trading portfolio 29.63 33.24
Average Supply Cost - including the trading portfolio $ 21.15 n.a.
Average Supply Cost - excluding the trading portfolio 16.74 16.74
Average Margin - including the trading portfolio $ 9.99 n.a.
Average Margin - excluding the trading porfolio 12.89 16.50
- -----------------------------------------------------------------------------------------------------------------------
n.a. - not applicable as trading activities were initiated in April 2001.
Generation's nuclear fleet, including AmerGen, performed at a capacity
factor of 90.3% for the three months ended March 31, 2002 compared to 98.8% for
the same period in 2001. Generation's nuclear fleet's production costs,
including AmerGen, for the three months ended March 31, 2002 were $14.26 per MWh
compared to $11.68 per MWh for the same period in 2001. The lower capacity
factor and higher unit production costs reflect the increased number of planned
refueling outages in the current period. Generation's average purchased power
costs for wholesale operations were $34.39 per MWh for the first quarter of
2002, compared to $38.17 per MWh for the same period in 2001. The decrease in
purchase power costs resulted from the decrease in wholesale power market
prices.
Operating and Maintenance
Operating and maintenance expenses increased $28 million, or 7%, for
the three months ended March 31, 2002 compared to the same period in the prior
year. This was primarily due to the additional operating and maintenance costs
of $62 million arising from four planned nuclear plant outages during the three
months ended March 31, 2002 compared to zero outages in the same period in the
prior year and allocated corporate costs including executive severance. These
additional expenses were offset by other operating cost reductions realized from
Exelon's cost management initiative and a $10 million reduction in Generation's
severance accrual. The severance reduction represents a reversal of costs
previously charged to operating expense.
Depreciation and Decommissioning
Depreciation and decommissioning expenses decreased $29 million, or
32%, for the three months ended March 31, 2002 compared to the same period in
the prior year due to a $35 million reduction in depreciation expense arising
from the extension of the useful lives on certain generation facilities in the
second and third quarters of 2001, partially offset by additional depreciation
expense on capital additions placed in service subsequent to the first quarter
of 2001.
71
Taxes Other Than Income
Taxes other than income increased $3 million, or 7%, for the three
months ended March 31, 2002 compared to the same period in the prior year due
primarily to an increase in capital stock taxes of $2 million.
Interest Expense
Interest expense decreased $16 million, or 49%, for the three months
ended March 31, 2002, compared to the same period in the prior year. The
decrease is primarily due to $15 million of affiliated interest expense paid
during the three month period ended March 31, 2001 which was not incurred during
2002 as the related borrowing had been repaid.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates decreased $3 million,
or 12%, for the three months ended March 31, 2002 compared to the same period in
the prior year. This decrease was due to a $5 million reduction in AmerGen
equity earnings arising from a planned plant outage during the three months
ended March 31, 2002 partially offset by $2 million of additional equity
earnings from Sithe.
Other, net
Other, net increased $12 million, or 300%, for the three months ended
March 31, 2002 compared to the same period in the prior year. Other, net
includes an increase of $11 million of investment income from the nuclear
decommissioning trust funds for the three months ended March 31, 2002 compared
to the same period in the prior year. The nuclear decommissioning trust fund
results consist of realized gains and losses and dividend income net of
investment expenses.
Income Taxes
The effective income tax rate was substantially unchanged at 40.5% for
the three months ended March 31, 2002 compared to 40.4% for the same period in
the prior year.
Cumulative Effect of Changes in Accounting Principles
On January 1, 2002, Generation adopted SFAS No. 141 resulting in a
benefit of $13 million, net of income taxes of $9 million.
On January 1, 2001, Generation adopted SFAS No. 133, as amended,
resulting in a benefit of $12 million, net of income taxes of $7 million.
LIQUIDITY AND CAPITAL RESOURCES
Generation's capital resources are primarily provided by internally
generated cash flows from operations and, to the extent necessary, external
financings and borrowings or capital contributions from Exelon. Generation's
access to external financing at reasonable terms is dependent on Generation's
credit ratings and general business condition, as well as the general business
conditions of the industry. Generation's business is capital intensive. Capital
resources are used primarily to fund capital requirements, including
construction, investments in new and existing ventures, and repayments of
maturing debt. Any potential future acquisitions could require external
financing or borrowings or capital contributions for Exelon.
72
Cash Flows from Operating Activities
Cash flows provided by operations were $509 million for the three
months ended March 31, 2002, compared to $362 million for the same period in the
prior year. Generation's cash flows from operating activities primarily result
from the sale of electric energy to wholesale customers, including Generation's
affiliated companies, as well as settlements arising from Generation's trading
activities. Generation's future cash flow from operating activities will depend
upon future demand and market prices for energy and the ability to continue to
produce and supply power at competitive costs.
Cash Flows from Investing Activities
Cash flows used in investing activities were $379 million for the three
months ended March 31, 2002, compared to $139 million for the same period in the
prior year. Capital expenditures of $132 million, investment in nuclear fuel of
$156 million and the funding of a $46 million loan to AmerGen, an affiliate,
represented the majority of the cash used in investing activities in the three
month period ended March 31, 2002 compared to capital expenditures of $40
million and investment in nuclear fuel of $78 million in the same period in the
prior year. Generation's capital expenditures are projected to be approximately
$1.1 billion in 2002, approximately 80% of which is for additions to and
upgrades of existing facilities and nuclear fuel and 20% is for increases in
generating capacity and development. Eleven nuclear refueling outages, including
AmerGen, are planned for 2002, compared to six during 2001. Four refueling
outages occurred during the three months ended March 31, 2002 compared to no
outages in the same period in the prior year. Generation's proposed capital
expenditures and other investments are subject to periodic review and revision
to reflect changes in economic conditions and other factors.
In addition to the 2002 capital expenditures of $1.1 billion,
Generation closed the purchase of two natural-gas and oil-fired plants from TXU
Corp. (TXU) on April 25, 2002. The $443 million purchase was funded with
available cash and borrowings from Exelon.
Cash Flows from Financing Activities
Cash flows provided by financing activities were $1 million for the
three months ended March 31, 2002, compared to cash used of $36 million for the
same period in the prior year. The prior year amount represented net
distributions to Exelon which did not recur in the current period.
Credit Issues
Generation meets its short-term liquidity requirements primarily
through the issuance of commercial paper, borrowings under bank credit
facilities and borrowings from the Exelon intercompany money pool. Generation,
along with Exelon, ComEd and PECO entered into a $1.5 billion unsecured 364-day
revolving credit facility on December 12, 2001 with a group of banks. As of
March 31, 2002, no sublimit had been established for Generation under this
credit facility. This credit facility requires Generation to maintain a debt to
total capitalization ratio of 65% or less. At March 31, 2002, Generation's debt
to total capitalization ratio on that basis was 26%.
Generation's access to the capital markets, including the commercial
paper market, and its financing costs in those markets are dependent on its
73
securities ratings. None of Generation's borrowings are subject to default or
prepayment as a result of a downgrading of securities ratings although such a
downgrading could increase interest charges under certain bank credit
facilities.
From time to time Generation enters into interest rate swap and other
derivatives that require the maintenance of investment grade ratings. Failure to
maintain investment grade ratings would allow the counterparty to terminate the
derivative and settle the transaction on a net present value basis.
At March 31, 2002, Generation's capital structure consisted of 26%
long-term debt and 74% member's equity.
Under PUHCA and the Federal Power Act, Generation can only pay
dividends from undistributed or current earnings. At March 31, 2002, Generation
had undistributed earnings of $550 million.
Contractual Obligations and Commercial Commitments
There were no material changes from December 31, 2001 as set forth in
the 10-K, other than in the normal course of business, to Generation's
contractual obligations, representing cash obligations that are considered to be
firm commitments, and commercial commitments, representing commitments triggered
by future events, during the three months ended March 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Commodity Price Risk
Generation
Exelon's energy contracts are accounted for under SFAS No. 133. Most
non-trading contracts qualify for a normal purchases and normal sales exception.
Those that do not are recorded as assets or liabilities on the balance sheet at
fair value. Changes in the fair value of qualifying cash-flow hedge contracts
are recorded in accumulated other comprehensive income, and gains and losses are
recognized in earnings when the underlying transaction matures. Mark-to-market
gains and losses on other derivative contracts that do not meet hedge criteria
under SFAS No. 133 and the ineffective portion of hedge contracts are recognized
in earnings on a current basis. Amounts recognized in earnings related to energy
contracts for the three months ended March 31, 2002 include $48 million of
realized gains from cash-flow hedge contract settlements and $2 million in
non-cash mark-to market gains on other derivative contracts.
74
Outlined below is a summary of the changes in fair value for those
contracts included as assets and liabilities in the Consolidated Balance Sheet
for the three months ended March 31, 2002:
(in millions) Non-trading Trading
- ------------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding as of January 1, 2002 $ 78 $ 14
Change in fair value during the three months ended March 31, 2002:
Contracts settled during period (44) (4)
Mark-to-market gain/(loss) on contracts entered into during the period 11 (1)
Mark to market gain/(loss) on other contracts (83) 1
Changes in fair value attributable to changes in valuation techniques and
assumptions -- --
- ------------------------------------------------------------------------------------------------------------------------
Total change in fair value (116) (4)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at March 31, 2002 $ (38) $ 10
- ------------------------------------------------------------------------------------------------------------------------
The total change in fair value during the three months ended March 31,
2002 is reflected in the first quarter 2002 financial statements as follows:
Non-trading Trading
- ------------------------------------------------------------------------------------------------------------------------
Mark-to-market gain/(loss) on non-qualifying hedge contracts or
hedge ineffectiveness reflected in earnings $ 6 $ (4)
Mark-to-market gain/(loss) on cash-flow hedge contracts reflected in
Other Comprehensive Income (122) --
- ------------------------------------------------------------------------------------------------------------------------
Total change in fair value $ (116) $ (4)
- ------------------------------------------------------------------------------------------------------------------------
The majority of Exelon's contracts are non-exchange traded contracts
valued using prices provided by external sources, which primarily represent
price quotations available through brokers or over-the-counter, on-line
exchanges. Prices reflect the average of the bid-ask midpoint prices obtained
from all sources that Exelon believes provide the most liquid market for the
commodity. The terms for which such price information is available varies by
commodity, by region and by product. The remainder of the assets represent
contracts for which external valuations are not available, primarily option
contracts. These contracts are valued using the Black model, an industry
standard option valuation model, and other valuation techniques and are
discounted using a risk-free interest rate. The fair values in each category
reflect the level of forward prices and volatility factors as of March 31, 2002
and may change as a result of future changes in these factors.
75
Mark-to market gains and losses on qualifying cash-flow hedge contracts
are recorded in accumulated other comprehensive income, and will be reclassified
into earnings when the contract settles. Mark-to-market gains and losses on
derivative contracts that do not meet hedge criteria under SFAS No. 133 and the
ineffective portion of hedge contracts have been recognized in earnings on a
current basis. The maturities, or expected settlement dates, of the qualifying
cash flow hedge contracts recorded in accumulated other comprehensive income,
and the other non-trading and trading derivative contracts and sources of fair
value as of March 31, 2002 are as follows:
Maturities within
Total Fair
(in millions) 1 Year 2-3 Years 4-5 Years Value
- ------------------------------------------------------------------------------------------------------------------------
Non-trading, qualifying cash flow hedge contracts(1):
Prices provided by other external sources $ (7) $ (38) $ -- $ (45)
- ------------------------------------------------------------------------------------------------------------------------
Total $ (7) $ (38) $ -- $ (45)
- ------------------------------------------------------------------------------------------------------------------------
Non-trading,other derivative contracts(2):
Actively quoted prices 6 -- -- 6
Prices provided by other external sources 18 -- (7) 11
Prices based on model or other valuation methods (1) -- (9) (10)
- ------------------------------------------------------------------------------------------------------------------------
Total $ 23 $ -- $ (16) $ 7
- ------------------------------------------------------------------------------------------------------------------------
Trading, other derivative contracts(3):
Actively quoted prices $ (1) $ -- $ -- $ (1)
Prices provided by other external sources 6 1 -- 7
Prices based on model or other valuation methods 3 1 -- 4
- ------------------------------------------------------------------------------------------------------------------------
Total $ 8 $ 2 $ -- $ 10
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Mark-to-market gains and losses on contracts that qualify as cash-flow
hedges are recorded in other comprehensive income.
(2) Mark-to-market gains and losses on other non-trading derivative contracts
that do not qualify as cash-flow hedges are recorded in earnings.
(3) Mark-to-market gains and losses on trading contracts are recorded in
earnings.
</FN>
Interest Rate Risk
ComEd
ComEd has entered into fixed-to-floating interest rate swaps to manage
interest rate exposure associated with three fixed rate debt issuances in the
aggregate amount of $485 million. At March 31, 2002, these interest rate swaps,
designated as fair value hedges, had a fair market value exposure of $1 million
based on the present value difference between the contract and market rates at
March 31, 2002. In February 2002, ComEd entered into two forward starting
interest rate swaps in the aggregate amount of $175 million to lock in interest
rate levels in anticipation of future financing. At March 31, 2002, these
interest rate swaps, designated as cash flow hedges, had a fair market value of
$5 million.
The aggregate fair value exposure of the interest rate swaps that would
have resulted from a hypothetical 50 basis point decrease in the spot yield at
March 31, 2002 is estimated to be $8 million. If the derivative instruments had
been terminated at March 31, 2002, this estimated fair value represents the
amount to be paid by ComEd to the counterparties.
The aggregate fair value exposure of the interest rate swaps that would
have resulted from a hypothetical 50 basis point increase in the spot yield at
March 31, 2002 is estimated to be $0 million. If the derivative instruments had
been terminated at March 31, 2002, this estimated fair value represents the
amount to be paid by ComEd to the counterparties.
76
In connection with the issuance of $400 million of First Mortgage Bonds
in March of 2002, ComEd settled forward starting interest rate swaps in the
aggregate amount of $375 million resulting in a $9 million loss recorded in
other comprehensive income, which was deferred and is being amortized over the
expected remaining life of the related debt.
PECO
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 March 31, 2002, these interest rate swaps
had a fair market value exposure of $14 million based on the present value
difference between the contract and market rates at March 31, 2002.
The aggregate fair value exposure of the transition bond derivative
instruments that would have resulted from a hypothetical 50 basis point decrease
in the spot yield at March 31, 2002 is estimated to be $17 million. If the
derivative instruments had been terminated at March 31, 2002, this estimated
fair value represents the amount to be paid by PECO to the counterparties.
The aggregate fair value exposure of the transition bond derivative
instruments that would have resulted from a hypothetical 50 basis point increase
in the spot yield at March 31, 2002 is estimated to be $12 million. If the
derivative instruments had been terminated at March 31, 2002, this estimated
fair value represents the amount to be paid by PECO to the counterparties.
77
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2002, a class action lawsuit was filed against Exelon on
behalf of purchasers of Exelon securities between April 24, 2001 and Spetember
27, 2001 (Class Period). The lawsuit was filed in the United States District
Court for the Northern District of Illinois, Eastern Division. The complaint
alleges that Exelon violated Federal securities laws by issuing a series of
materially false and misleading statements relating to its 2001 earnings
expectations during the Class Period. Corbin A. McNeill, Jr., John Rowe and Ruth
Ann Gillis were also named as defendants. Exelon believes that the lawsuit is
without merit and will vigoroursly contest this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 2002, Exelon held its 2002 Annual Meeting of Shareholders.
Proposal 1 was the election of five Class II directors to serve three-year terms
expiring in 2005. The following directors were elected:
Votes For Votes Withheld
- --------------------------------------------------------------------------------
Edward A. Brennan 258,188,435 4,087,852
Bruce DeMars 258,425,840 3,850,447
Richard H. Glanton 257,786,906 4,489,381
John W. Rowe 258,478,505 3,797,782
Ronald Rubin 258,098,129 4,178,158
- --------------------------------------------------------------------------------
Proposal 2 was the ratification of PricewaterhouseCoopers LLP as independent
accountants for Exelon and its subsidiaries for 2002. The shareholders approved
the proposal with 250,309,286 votes cast for, 9,667,089 votes cast against and
2,299,912 votes abstaining.
Proposal 3 was the approval of the Exelon Corporation Employee Stock Purchase
Plan. The shareholders approved the Plan with 252,802,074 votes cast for,
6,216,999 votes cast against, 3,257,214 votes abstaining, and no non-votes.
Proposal 4 was the approval of amendments to the Exelon Corporation Long Term
Incentive Plan. The shareholders approved the amendments with 210,099,740 votes
for, 47,805,508 votes against, 4,371,039 votes abstaining, and no non-votes.
Proposal 5 was a shareholder proposal to recommend investment in clean energy.
The shareholders rejected the proposal with 14,767,776 votes for, 209,819,696
votes against, 9,376,947 votes abstaining, and 28,311,868 non-votes.
ITEM 5. OTHER INFORMATION
Exelon
As previously reported in Exelon's Form 8-K dated March 1, 2002,
Enterprises announced an agreement to sell its 49% interest in AT&T Wireless PCS
of Philadelphia, LLC to a subsidiary of AT&T Wireless Services for $285 million
in cash. On April 1, 2002, the transaction closed.
ComEd
As previously reported in the 2001 Form 10-K, in connection with the
transfer of ComEd's nuclear generating stations to Generation, ComEd asked the
Illinois Commerce Commission (ICC) to approve the transfer of the associated
78
nuclear decommissioning trust funds. On August 17, 2000, the ICC issued an order
allowing the transfer. The ICC's order was appealed to, and affirmed by, the
Illinois Appellate Court. Certain intervenors asked the Illinois Supreme Court
to review the Appellate Court's opinion. On April 3, 2002, the Illinois Supreme
Court denied the petition for leave to appeal. This decision does not relate to
the other appeal of the order allowing funds to be collected from customers
subsequent to the transfer to Generation or the appeal of the amount that may be
collected from customers.
As previously reported in the 2001 Form 10-K, on March 6, 2002, the
participants in Alliance Transmission Company, LLC (Alliance) and National Grid
submitted a petition to the FERC for a declaratory order with regard to their
participation in the Midwest Independent Transmission System Operator, Inc.
(MISO). On April 25, 2002, the FERC issued an order granting in part and denying
in part the Alliance companies' request for a declaratory order. The FERC
ordered the Alliance companies to make a filing within 30 days of the order
indicating which regional transmission organization (RTO) each would join and
whether they would do so individually or collectively as part of an independent
transmission company. The FERC did not rule on the return of the $60 million
withdrawal fee paid collectively by ComEd, Ameren Corporation and Illinois Power
Company, stating that this must be determined in conjunction with any return to
MISO by any of those companies. The Alliance companies and National Grid are
continuing to negotiate with both MISO and PJM with respect to RTO
participation.
PECO
As previously reported in the 2001 Form 10-K, the Pennsylvania
Electricity Generation Customer Choice and Competition Act provides for the
imposition and collection of non-bypassable CTCs on customers' bills as a
mechanism for utilities to recover their allowed stranded costs. In the 1998
settlement of its restructuring case, PECO agreed to negotiate with certain of
its large customers the payment of their stranded investment obligations in a
single lump sum. On January 11, 2002, a complaint was brought by a municipal
authority requesting that the PUC require PECO to adopt specific procedures for
such negotiations, including setting a specific discount rate. The complaint
alleges that PECO is using an inappropriate discount rate in its evaluations,
thus making the lump-sum payment of CTC financially unattractive to customers. A
procedural schedule for this matter has been set, and it will be litigated
through the fourth quarter of 2002.
Generation
Generation is a 12.5% stakeholder in Pebble Bed Modular Reactor (Pty)
Ltd., which is a consortium of investors (including British Nuclear Fuels, ESKOM
Enterprises and the Industrial Developmental Corporation of South Africa) that
is studying the feasibility of building a demonstration reactor in South Africa
and commercializing the Pebble Bed Modular Reactor (PBMR) design. On April 16,
2002, Generation announced that it would not be proceeding with the PBMR project
beyond the completion of the current feasibility study phase. Generation advised
PBMR (Pty) Ltd. that for the time being Generation would continue to devote
technical personnel and executive leadership to the project. As of June 30,
2002,Generation's support of the project will total approximately $20 million.
79
In April 2002, Generation purchased general and limited partnership
interests in Louisiana Energy Services, L.P. (LES) totaling 6.75% from Graystone
Corporation and Le Paz Incorporated, respectively. LES was formed in the early
1990s, by a consortium of companies, to design, build and operate a private
uranium enrichment facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 - Exelon Agreement with Corbin A. McNeill, Jr. *
99.1 - Managements Discussion and Analysis of Finacial Condition and
Results of Operations and Index to Financial Statements of
Exelon Generation Company, LLC, filed by Exelon Generation
Company, LLC with the Securities and Exchange Commission on
April 24, 2002 on Registration Statement Form S-4 (File No.
333-85496).
* Compensatory plan or arrangements in which directors or officers of the
applicable registrant participate and which are not available to all employees.
(b) Reports on Form 8-K:
Exelon filed Current Reports on Form 8-K during the three months ended March 31, 2002 regarding the following
items:
Date of Earliest
Event Reported Description of Item Reported
- ------------------------------------------------------------------------------------------------------------------------------------
January 25, 2002 "ITEM 5. OTHER EVENTS" regarding Exelon's restatement of third quarter earnings and reaffirming
2001 earnings guidance.
January 29, 2002 "ITEM 5. OTHER EVENTS" regarding the announcement of Exelon's consolidated earnings for the
year ended December 31, 2001 and "ITEM 9. REGULATION FD DISCLOSURE" regarding highlights of the
Exelon Fourth Quarter Earnings Conference Call.
February 12, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by Corbin A. McNeill, Jr., Chairman
and Co-CEO of Exelon at the UBS Warburg Energy and Utilities Conference. The exhibits include
the slides used and copies of the materials made available to investors attending the
conference.
February 18, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by Corbin A. McNeill, Jr., Chairman
and Co-CEO of Exelon at the EEI International Financial Conference, London. The exhibit
includes the slides used during the presentation.
February 28, 2002 "ITEM 5. OTHER EVENTS" regarding certain financial information of Exelon Corporation and
Subsidiary Companies. The exhibits under "ITEM 7. FINANCIAL STATEMENT AND EXHIBITS" include
the Consent of the Independent Public Accountants, Selected Financial Data, Market for
Registrant's Common Equity and Related Stockholder Matters, Management's Discussion and
80
Analysis of Financial Condition and Results of Operations, and Financial Statements and
Supplementary Data.
March 1, 2002 "ITEM 5. OTHER EVENTS" regarding issuance of a press release announcing the sale of Exelon's
interest in a joint venture with AT&T Wireless.
March 5, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by John W. Rowe, President and
Co-CEO of Exelon at the Morgan Stanley Global Electricity & Energy Conference in New York
City. The exhibits include the slides used during the presentation and materials made
available to investors attending the conference.
- ------------------------------------------------------------------------------------------------------------------------------------
ComEd filed Current Reports on Form 8-K during the three
months ended March 31, 2002 regarding the following items:
Date of Earliest
Event Reported Description of Item Reported
- ------------------------------------------------------------------------------------------------------------------------------------
January 29, 2002 "ITEM 5. OTHER EVENTS" regarding the announcement of Exelon's consolidated earnings for the
year ended December 31, 2001 and "ITEM 9. REGULATION FD DISCLOSURE" regarding highlights of the
Exelon Fourth Quarter Earnings Conference Call.
February 12, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by Corbin A. McNeill, Jr., Chairman
and Co-CEO of Exelon at the UBS Warburg Energy and Utilities Conference. The exhibits include
the slides used and copies of the materials made available to investors attending the
conference.
February 18, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by Corbin A. McNeill, Jr., Chairman
and Co-CEO of Exelon at the EEI International Financial Conference, London. The exhibit
includes the slides used during the presentation.
March 5, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by John W. Rowe, President and
Co-CEO of Exelon at the Morgan Stanley Global Electricity & Energy Conference in New York
City. The exhibits include the slides used during the presentation and materials made
available to investors attending the conference.
- ------------------------------------------------------------------------------------------------------------------------------------
PECO filed Current Reports on Form 8-K during the three months
ended March 31, 2002 regarding the following items:
81
Date of Earliest
Event Reported Description of Item Reported
- ------------------------------------------------------------------------------------------------------------------------------------
January 29, 2002 "ITEM 5. OTHER EVENTS" regarding the announcement of Exelon's consolidated earnings for the
year ended December 31, 2001 and "ITEM 9. REGULATION FD DISCLOSURE" regarding highlights of the
Exelon Fourth Quarter Earnings Conference Call.
February 12, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by Corbin A. McNeill, Jr., Chairman
and Co-CEO of Exelon at the UBS Warburg Energy and Utilities Conference. The exhibits include
the slides used and copies of the materials made available to investors attending the
conference.
February 18, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by Corbin A. McNeill, Jr., Chairman
and Co-CEO of Exelon at the EEI International Financial Conference, London. The exhibit
includes the slides used during the presentation.
March 5, 2002 "ITEM 9. REGULATION FD DISCLOSURE" regarding a presentation by John W. Rowe, President and
Co-CEO of Exelon at the Morgan Stanley Global Electricity & Energy Conference in New York
City. The exhibits include the slides used during the presentation and materials made
available to investors attending the conference.
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Generation did not file any Current Reports on Form 8-K during
the three months ended March 31, 2002.
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SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXELON CORPORATION
EXELON GENERATION COMPANY, LLC
/s/ Ruth Ann M. Gillis
--------------------------------
RUTH ANN M. GILLIS
Senior Vice President and Chief Financial Officer
Exelon Corporation
(Chief Accounting Officer)
COMMONWEALTH EDISON COMPANY
/s/ Robert E. Berdelle
--------------------------------
ROBERT E. BERDELLE
Vice President and Chief Financial Officer
(Chief Accounting Officer)
PECO ENERGY COMPANY
/s/ Frank F. Frankowski
--------------------------------
FRANK F. FRANKOWSKI
Vice President and Chief Financial Officer
(Chief Accounting Officer)
Date: May 10, 2002
83