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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 [_].
The number of shares outstanding of each registrant's common stock as
of October 15, 2002 was as follows:
Exelon Corporation Common Stock, without par value 322,984,742
Commonwealth Edison Company Common Stock, $12.50 par value 127,016,409
PECO Energy Company Common Stock, without par value 170,478,507
Exelon Generation Company, LLC not applicable
TABLE OF CONTENTS
Page No.
Filing Format 3
Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Exelon Corporation
Consolidated Statements of Income and Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Consolidated Balance Sheets 7
Commonwealth Edison Company
Consolidated Statements of Income and Comprehensive Income 9
Consolidated Statements of Cash Flows 10
Consolidated Balance Sheets 11
PECO Energy Company
Consolidated Statements of Income and Comprehensive Income 13
Consolidated Statements of Cash Flows 14
Consolidated Balance Sheets 15
Exelon Generation Company, LLC
Consolidated Statements of Income and Comprehensive Income 17
Consolidated Statements of Cash Flows 18
Consolidated Balance Sheets 19
Combined Notes to Consolidated Financial Statements 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 51
Exelon Corporation 51
Commonwealth Edison Company 80
PECO Energy Company 94
Exelon Generation Company, LLC 108
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 121
ITEM 4. CONTROLS AND PROCEDURES 124
PART II. OTHER INFORMATION 126
ITEM 1. LEGAL PROCEEDINGS 126
ITEM 5. OTHER INFORMATION 126
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 128
SIGNATURES 131
CERTIFICATIONS 133
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 from the forward-looking statements made by a registrant
include those discussed herein as well as those listed in Note 8 of Notes to
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, those discussed in "Risk Factors" in
PECO Energy Company's Registration Statement on Form S-3, Reg. No. 333-99361,
those discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Exelon Generation Company,
LLC's Registration Statement on Form S-4, Reg. No. 333-85496, those discussed in
"Risk Factors" in Commonwealth Edison Company's Registration Statement of Form
S-3, Reg. No. 333-99363 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. None of the Registrants undertake any obligation to
publicly release any revision to its 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
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $4,370 $4,185 $ 11,245 $ 11,625
OPERATING EXPENSES
Purchased Power 1,233 1,249 2,543 2,634
Purchased Power from Unconsolidated Affiliate 104 26 220 48
Fuel 373 356 1,233 1,455
Operating and Maintenance 1,114 1,101 3,252 3,293
Depreciation and Amortization 345 369 1,012 1,109
Taxes Other Than Income 201 172 568 493
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expense 3,370 3,273 8,828 9,032
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,000 912 2,417 2,593
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (249) (283) (739) (864)
Distributions on Preferred Securities of Subsidiaries (11) (11) (34) (34)
Equity in Earnings of Unconsolidated Affiliates, net 92 52 114 77
Other, net 16 (51) 239 48
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (152) (293) (420) (773)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 848 619 1,997 1,820
INCOME TAXES 297 243 724 742
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 551 376 1,273 1,078
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES (net of income taxes of ($90) and $8 for the nine
months ended September 30, 2002 and 2001, respectively) -- -- (230) 12
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME 551 376 1,043 1,090
- ---------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
SFAS 133 Transition Adjustment -- -- -- 44
Cash Flow Hedge Fair Value Adjustment (28) 13 (109) (17)
Unrealized Gain (Loss) on Marketable Securities, net (73) (30) (158) (154)
Interest in Other Comprehensive Income of
Unconsolidated Affiliates (20) (3) (21) (1)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (121) (20) (288) (128)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 430 $ 356 $ 755 $ 962
=====================================================================================================================
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Basic 323 321 322 320
=====================================================================================================================
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Diluted 324 323 324 323
=====================================================================================================================
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Cumulative Effect of Changes in Accounting
Principles $ 1.71 $ 1.17 $ 3.95 $ 3.36
Cumulative Effect of Changes in Accounting Principles -- -- (0.71) 0.04
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 1.71 $ 1.17 $ 3.24 $ 3.40
=====================================================================================================================
DILUTED:
Income Before Cumulative Effect of Changes in Accounting
Principles $ 1.70 $ 1.16 $ 3.93 $ 3.33
Cumulative Effect of Changes in Accounting Principles -- -- (0.71) 0.04
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 1.70 $ 1.16 $ 3.22 $ 3.37
=====================================================================================================================
DIVIDENDS PER COMMON SHARE $ 0.44 $ 0.42 $ 1.32 $ 1.40
=====================================================================================================================
See Notes to Consolidated Financial Statements
5
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,043 $ 1,090
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization, including nuclear fuel 1,284 1,481
Cumulative Effect of a Change in Accounting Principle (net of income taxes) 230 (12)
Net Gain on Sale of Investments (net of income taxes) (199) --
Provision for Uncollectible Accounts 107 95
Deferred Income Taxes 293 (101)
Deferred Energy Costs 50 21
Equity in Earnings of Unconsolidated Affiliates, net (114) (77)
Net Realized Losses on Nuclear Decommissioning Trust Funds 32 90
Other Operating Activities 162 (76)
Changes in Working Capital:
Accounts Receivable (320) (163)
Inventories (31) 41
Accounts Payable, Accrued Expenses and Other Current Liabilities (6) 572
Changes in Receivables and Payables to Unconsolidated Affiliates, net 46 --
Other Current Assets 24 (4)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 2,601 2,957
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (1,534) (1,352)
Acquisition of Generating Plants (443) --
Enterprises Acquisitions, net of cash acquired -- (39)
Proceeds from the Sale of Investments 287 --
Proceeds from Nuclear Decommissioning Trust Funds 1,184 1,077
Investment in Nuclear Decommissioning Trust Funds (1,330) (1,128)
Note Receivable from Unconsolidated Affiliate (42) --
Other Investing Activities 81 (143)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (1,797) (1,585)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 956 2,126
Retirement of Long-Term Debt (1,946) (1,433)
Change in Short-Term Debt 428 (957)
Dividends on Common Stock (420) (448)
Change in Restricted Cash 81 125
Proceeds from Employee Stock Plans 64 52
Contribution from Minority Interest of Consolidated Subsidiary 43 --
Redemption of Preferred Securities of Subsidiaries (18) (18)
Other Financing Activities (16) 32
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Financing Activities (828) (521)
- ---------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS (24) 851
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 461 526
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 490 $ 1,377
=====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash Investing and Financing Activities:
Contribution of Land from Minority Interest of Consolidated Subsidiary $ 12 --
Regulatory Asset Fair Value Adjustment -- $ 347
Purchase Accounting Estimate Adjustments -- $ 63
See Notes to Consolidated Financial Statements
6
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 461 $ 485
Restricted Cash 291 372
Accounts Receivable, net
Customer 2,007 1,687
Other 210 428
Receivable from Unconsolidated Affiliate 40 44
Inventories, at average cost
Fossil Fuel 189 222
Materials and Supplies 312 249
Deferred Income Taxes 101 23
Other 300 272
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,911 3,782
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 14,926 13,781
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 6,111 6,423
Nuclear Decommissioning Trust Funds 2,997 3,165
Investments 1,665 1,623
Goodwill, net 4,964 5,335
Other 662 708
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 16,399 17,254
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 35,236 $ 34,817
=====================================================================================================================
See Notes to Consolidated Financial Statements
7
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 788 $ 360
Long-Term Debt Due within One Year 1,501 1,406
Accounts Payable 1,304 964
Accrued Expenses 942 1,182
Other 495 505
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 5,030 4,417
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 11,904 12,879
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 4,506 4,388
Unamortized Investment Tax Credits 305 316
Nuclear Decommissioning Liability for Retired Plants 1,389 1,353
Pension Obligation 315 334
Non-Pension Postretirement Benefits Obligation 893 847
Spent Nuclear Fuel Obligation 854 843
Other 859 694
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 9,121 8,775
- ---------------------------------------------------------------------------------------------------------------------
PREFERRED SECURITIES OF SUBSIDIARIES 595 613
MINORITY INTEREST OF CONSOLIDATED SUBSIDIARIES 75 31
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 6,995 6,930
Deferred Compensation (1) (2)
Retained Earnings 1,830 1,200
Accumulated Other Comprehensive Income (Loss) (313) (26)
- ---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 8,511 8,102
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 35,236 $ 34,817
=====================================================================================================================
See Notes to Consolidated Financial Statements
8
COMMONWEALTH EDISON COMPANY
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Operating Revenues $1,912 $1,905 $ 4,685 $ 4,826
Operating Revenues from Affiliates 26 14 49 69
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,938 1,919 4,734 4,895
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Purchased Power 8 6 20 8
Purchased Power from Affiliate 967 948 2,046 2,141
Operating and Maintenance 234 229 620 625
Operating and Maintenance from Affiliates 33 36 104 106
Depreciation and Amortization 129 178 397 512
Taxes Other Than Income 77 82 223 223
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expense 1,448 1,479 3,410 3,615
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 490 440 1,324 1,280
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (122) (137) (374) (423)
Interest Expense from Affiliate -- (10) -- (10)
Distributions on Company-Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely the Company's
Subordinated Debt Securities (7) (7) (22) (22)
Interest Income from Affiliates 8 24 23 70
Other, net (8) 9 6 24
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (129) (121) (367) (361)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 361 319 957 919
INCOME TAXES 146 141 381 412
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME 215 178 576 507
- ---------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes):
Cash Flow Hedge Fair Value Adjustment (15) -- (31) --
Unrealized Gain (Loss) on Marketable Securities (1) (1) (3) (5)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (16) (1) (34) (5)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 199 $ 177 $ 542 $ 502
=====================================================================================================================
See Notes to Consolidated Financial Statements
9
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 576 $ 507
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 397 512
Provision for Uncollectible Accounts 29 31
Deferred Income Taxes 92 26
Other Operating Activities 86 (27)
Changes in Working Capital:
Accounts Receivable (198) (80)
Inventories (4) 25
Accounts Payable, Accrued Expenses and Other Current Liabilities 64 324
Changes in Receivables and Payables to Affiliates, net 449 (279)
Other Current Assets (2) 4
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 1,489 1,043
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (549) (631)
Notes Receivable from Affiliate 14 400
Other Investing Activities 9 --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (526) (231)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-Term Borrowings 94 --
Issuance of Long-Term Debt 701 --
Retirement of Long-Term Debt (1,365) (260)
Dividends on Common Stock (353) (253)
Change in Restricted Cash (37) (5)
Other Financing Activities (10) --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Financing Activities (970) (518)
- ---------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7) 294
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23 141
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16 $ 435
=====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash Investing and Financing Activities:
Net Assets Transferred as a result of Restructuring, net of Note Payable -- $ 1,307
Receivable from Parent -- $ 1,062
Purchase Accounting Estimate Adjustment -- $ 63
Regulatory Asset Fair Value Adjustment -- $ 347
Retirement of Treasury Shares $ 1,344 $ 2,023
See Notes to Consolidated Financial Statements
10
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 16 $ 23
Restricted Cash 78 41
Accounts Receivable, net
Customer 914 745
Other 89 87
Receivables from Affiliates 8 6
Inventories, at average cost 60 56
Deferred Income Taxes 40 52
Other 17 15
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,222 1,025
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 7,610 7,351
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 583 667
Investments 54 64
Goodwill, net 4,888 4,902
Notes Receivable from Affiliates 1,300 1,314
Other 311 304
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 7,136 7,251
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 15,968 $ 15,627
=====================================================================================================================
See Notes to Consolidated Financial Statements
11
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-Term Borrowings $ 94 $ --
Long-Term Debt Due within One Year 798 849
Accounts Payable 200 144
Accrued Expenses 396 374
Payables to Affiliates 615 218
Other 183 212
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 2,286 1,797
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 5,295 5,850
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 1,749 1,671
Unamortized Investment Tax Credits 52 55
Pension Obligation 167 151
Non-Pension Postretirement Benefits Obligation 145 146
Payables to Affiliates 251 297
Other 322 248
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 2,686 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 1,588 2,048
Preference Stock 7 7
Other Paid-in Capital 4,181 5,057
Receivable from Parent (845) (937)
Retained Earnings 480 257
Treasury Stock, at cost -- (1,344)
Accumulated Other Comprehensive Income (Loss) (39) (5)
- ---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 5,372 5,083
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,968 $ 15,627
=====================================================================================================================
See Notes to Consolidated Financial Statements
12
PECO ENERGY COMPANY
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Operating Revenues $1,221 1,048 $ 3,230 $ 2,999
Operating Revenues from Affiliates 3 3 9 9
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 1,224 1,051 3,239 3,008
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Purchased Power 68 57 175 147
Purchased Power from Affiliate 441 363 1,090 872
Fuel 40 51 228 335
Operating and Maintenance 125 134 350 352
Operating and Maintenance from Affiliates 15 22 57 61
Depreciation and Amortization 127 115 348 315
Taxes Other Than Income 85 51 207 135
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expense 901 793 2,455 2,217
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 323 258 784 791
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (93) (105) (280) (324)
Interest Expense from Affiliate -- -- -- (8)
Company-Obligated Mandatorily Redeemable Preferred
Securities of a Partnership, which holds Solely
Subordinated Debentures of the Company (2) (2) (7) (7)
Interest Income from Affiliates -- 9 -- 10
Other, net 5 3 7 20
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions (90) (95) (280) (309)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 233 163 504 482
INCOME TAXES 76 59 166 171
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME 157 104 338 311
Preferred Stock Dividends (2) (2) (6) (7)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME ON COMMON STOCK $ 155 $ 102 $ 332 $ 304
=====================================================================================================================
OTHER COMPREHENSIVE INCOME
Net Income $ 157 $ 104 $ 338 $ 311
Other Comprehensive Income (Loss) (net of income taxes):
SFAS 133 Transition Adjustment -- -- -- 40
Cash Flow Hedge Fair Value Adjustment (5) (10) (10) (20)
Unrealized Gain (Loss) on Marketable Securities (1) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 151 $ 94 $ 328 $ 331
=====================================================================================================================
See Notes to Consolidated Financial Statements
13
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 338 $ 311
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 348 315
Provision for Uncollectible Accounts 48 50
Deferred Income Taxes (64) (49)
Deferred Energy Costs 50 14
Other Operating Activities 15 (23)
Changes in Working Capital:
Accounts Receivable (69) (64)
Changes in Receivables and Payables to Affiliates, net (27) 154
Inventories (8) (21)
Accounts Payable, Accrued Expenses and Other Current Liabilities (107) 92
Other Current Assets (51) (35)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 473 744
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (180) (153)
Other Investing Activities 3 (1)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (177) (154)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of Long-Term Debt (571) (1,167)
Issuance of Long-Term Debt 225 805
Contribution from Parent 30 121
Change in Short-Term Debt 274 (161)
Dividends on Preferred and Common Stock (261) (176)
Change in Restricted Cash 113 98
Change in Receivable and Payable to Affiliate, net -- (41)
Retirement of Mandatorily Redeemable Preferred Stock (19) (18)
Settlement of Interest Rate Swap Agreements (5) 31
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Financing Activities (214) (508)
- ---------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 82 82
Cash Transferred in Restructuring -- (31)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32 49
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 114 $ 100
=====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION Non-cash Investing and Financing Activities:
Net Assets Transferred as a result of Restructuring,
net of Receivable from Affiliates -- $ 1,577
Contribution of Receivable from Parent -- $ 1,983
See Notes to Consolidated Financial Statements
14
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 114 $ 32
Restricted Cash 210 323
Accounts Receivable, net
Customer 310 286
Other 30 33
Receivables from Affiliates 17 1
Inventories, at average cost
Fossil Fuel 79 72
Materials and Supplies 7 7
Prepaid Taxes 50 1
Other 10 58
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 827 813
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,121 4,047
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 5,527 5,756
Investments 21 24
Pension Asset 37 13
Other 83 85
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 5,668 5,878
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 10,616 $ 10,738
=====================================================================================================================
See Notes to Consolidated Financial Statements
15
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 375 $ 101
Payables to Affiliates 130 187
Long-Term Debt Due within One Year 689 548
Accounts Payable 61 54
Accrued Expenses 277 397
Deferred Income Taxes 27 27
Other 37 21
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,596 1,335
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 4,950 5,438
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,881 2,938
Unamortized Investment Tax Credits 25 27
Non-Pension Postretirement Benefits Obligation 271 239
Payable to Affiliate -- 44
Other 118 110
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,295 3,358
- ---------------------------------------------------------------------------------------------------------------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP,
WHICH HOLDS SOLELY SUBORDINATED
DEBENTURES OF THE COMPANY 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK -- 19
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 1,942 1,912
Receivable from Parent (1,788) (1,878)
Preferred Stock 137 137
Retained Earnings 347 270
Accumulated Other Comprehensive Income 9 19
- ---------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 647 460
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,616 $ 10,738
=====================================================================================================================
See Notes to Consolidated Financial Statements
16
EXELON GENERATION COMPANY, LLC
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Operating Revenues $ 750 $ 787 $1,924 $ 2,180
Operating Revenues from Affiliates 1,463 1,404 3,309 3,223
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 2,213 2,191 5,233 5,403
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Purchased Power 1,251 1,209 2,555 2,504
Purchased Power from Affiliates 6 59 26 85
Fuel 273 242 706 691
Operating and Maintenance 351 322 1,098 1,046
Operating and Maintenance Expense from Affiliates 40 42 136 127
Depreciation and Amortization 68 57 197 224
Taxes Other Than Income 37 36 126 121
- ---------------------------------------------------------------------------------------------------------------------
Total Operating Expense 2,026 1,967 4,844 4,798
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 187 224 389 605
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS
Interest Expense (22) (27) (48) (62)
Interest Expense from Affiliates (1) (14) (3) (38)
Equity in Earnings of Unconsolidated Affiliates 87 60 119 99
Interest Income from Affiliates -- 10 -- 10
Other, net 14 (35) 54 (17)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions 78 (6) 122 (8)
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES 265 218 511 597
INCOME TAXES 102 78 198 228
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 163 140 313 369
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES -- -- 13 12
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME 163 140 326 381
- ---------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
Unrealized Gain (Loss) on Marketable Securities (69) (54) (151) (134)
SFAS 133 Transition Adjustment -- -- -- 4
Cash Flow Hedge Fair Value Adjustment (11) 50 (79) 14
Interest in Other Comprehensive Income of Unconsolidated
Affiliates (20) (3) (21) (1)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (100) (7) (251) (117)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 63 $ 133 $ 75 $ 264
=====================================================================================================================
See Notes to Consolidated Financial Statements
17
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 326 $ 381
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization, including nuclear fuel 475 531
Cumulative Effect of a Change in Accounting Principle (net of income taxes) (13) (12)
Provision for Uncollectible Accounts 20 3
Deferred Income Taxes 246 (84)
Equity in (Earnings) Losses of Unconsolidated Affiliates (119) (99)
Net Realized Losses on Nuclear Decommissioning Trust Funds 32 90
Other Operating Activities 109 (162)
Changes in Working Capital:
Accounts Receivable (90) (4)
Changes in Receivables and Payables to Affiliates, net (325) 13
Inventories (22) (37)
Accounts Payable, Accrued Expenses and Other Current Liabilities 174 145
Other Current Assets (42) 17
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by Operating Activities 771 782
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (715) (497)
Acquisition of Generating Plants (443) --
Proceeds from Nuclear Decommissioning Trust Funds 1,184 1,077
Investment in Nuclear Decommissioning Trust Funds (1,330) (1,128)
Note Receivable from Affiliate (42) --
Other Investing Activities 3 6
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows used in Investing Activities (1,343) (542)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Note Payable, Affiliate 348 (696)
Contribution from Minority Interest in Consolidated Subsidiary 43 --
Issuance of Long-Term Debt 30 821
Retirement of Long-Term Debt (4) (3)
Distribution to Member (30) (156)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Flows provided by (used in) Financing Activities 387 (34)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (185) 206
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 224 4
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39 $ 210
=====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash Investing and Financing Activities:
Contribution of Land from Minority Interest of Consolidated Subsidiary $ 12 --
See Notes to Consolidated Financial Statements
18
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 39 $ 224
Accounts Receivable, net
Customer 443 316
Other 63 150
Receivables from Affiliates 783 373
Inventories, at average cost
Fossil Fuel 101 105
Materials and Supplies 228 202
Deferred Income Taxes 7 --
Other 113 65
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,777 1,435
- ---------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 2,796 2,003
DEFERRED DEBITS AND OTHER ASSETS
Nuclear Decommissioning Trust Funds 2,997 3,165
Investments 922 816
Note Receivable from Affiliate 246 291
Deferred Income Taxes 340 212
Other 202 223
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Debits and Other Assets 4,707 4,707
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,280 $ 8,145
=====================================================================================================================
See Notes to Consolidated Financial Statements
19
EXELON GENERATION COMPANY, LLC AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Long-Term Debt Due within One Year $ 6 $ 4
Accounts Payable 892 585
Payables to Affiliates 33 34
Note Payable to Affiliate 348 --
Accrued Expenses 257 303
Deferred Income Taxes -- 7
Other 194 171
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,730 1,104
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 1,096 1,021
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 247 --
Unamortized Investment Tax Credits 228 234
Nuclear Decommissioning Liability for Retired Plants 1,389 1,353
Pension Obligation 100 118
Non-Pension Postretirement Benefits Obligation 404 384
Spent Nuclear Fuel Obligation 854 843
Other 324 280
- ---------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 3,546 3,212
- ---------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST OF CONSOLIDATED SUBSIDIARY 55 --
COMMITMENTS AND CONTINGENCIES
MEMBER'S EQUITY
Membership Interest 2,286 2,316
Undistributed Earnings 850 523
Accumulated Other Comprehensive Income (Loss) (283) (31)
- ---------------------------------------------------------------------------------------------------------------------
Total Member's Equity 2,853 2,808
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 9,280 $ 8,145
=====================================================================================================================
See Notes to 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 CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
1. BASIS OF PRESENTATION (Exelon, ComEd, PECO and Generation)
The accompanying consolidated financial statements as of September 30,
2002 and for the three and nine 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 December 31, 2001 consolidated balance sheets were
derived from audited financial statements but do not include all disclosures
required by generally accepted accounting principles (GAAP). 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 No. 333-85496 declared effective on April 24, 2002 by the
Securities and Exchange Commission (SEC), (Generation's Form S-4). See ITEM 6.
Exhibits and Reports on Form 8-K.
The consolidated financial statements contained herein include the
accounts of majority-owned subsidiaries after the elimination of intercompany
transactions. Investments and joint ventures in which a 20% to 50% interest is
owned and a significant influence is exerted are accounted for under the equity
method of accounting. The proportionate interests in jointly owned electric
utility plants are consolidated. Investments in which less than a 20% interest
is owned are accounted for under the cost method of accounting. Exelon owns 100%
of all significant consolidated subsidiaries, either directly or indirectly,
except for ComEd of which Exelon owns 99%, InfraSource of which Exelon owns 95%
and Southeast Chicago Energy Project, LLC of which Exelon owns 70% through
Generation. Exelon and Generation have reflected the third-party interests in
the above majority owned investments as minority interests in their Consolidated
Statements of Cash Flows, Consolidated Balance Sheets and in Other, Net on the
Consolidated Statements of Income and Comprehensive Income.
2. ADOPTION OF NEW ACCOUNTING PRINCIPLES (Exelon, ComEd, PECO and Generation)
SFAS No. 141 and SFAS No. 142
In 2001, the Financial Accounting Standards 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
21
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, PECO 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. Other than goodwill, Exelon does not have
significant other intangible assets recorded on its consolidated balance sheets.
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 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 Consolidated Balance Sheets reflected
approximately $5.3 billion in goodwill net of accumulated amortization,
including $4.9 billion of net goodwill related to the October 20, 2000 merger of
Unicom Corporation (Unicom), the former parent company of ComEd, and PECO
(Merger) recorded on ComEd's Consolidated Balance Sheets, with the remainder
related to 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 that 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 investment. 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.
22
The changes in the carrying amount of goodwill by reportable segment
(see Note 6 for further discussion of reportable segments) for the nine months
ended September 30, 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 contingencies (7) -- (7)
Merger severance adjustment (7) -- (7)
- ---------------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2002 $ 4,888 $ 76 $ 4,964
=====================================================================================================================
The September 30, 2002, Energy Delivery goodwill relates to ComEd and
the remaining Enterprises goodwill relates to the InfraSource and Exelon
Services reporting units. Consistent with SFAS No. 142, the remaining goodwill
will be reviewed for impairment on an annual basis, or more frequently if
significant events occur that could indicate an impairment exists. ComEd and
Enterprises plan to perform an impairment review in the fourth quarter of 2002.
Such future review would be consistent with the review conducted related to the
implementation of SFAS No. 142 (implementation review), which required estimates
of numerous items with varying degrees of uncertainty, such as discount rates,
terminal value earnings multiples, future revenue levels and estimated future
expenditure levels for ComEd and Enterprises; load growth and the resolution of
future rate proceedings for ComEd; and customer base and construction back logs
for Enterprises. Significant changes from the assumptions used in the
implementation review could possibly result in a future impairment loss. The
Illinois legislation provides that reductions to ComEd's common equity resulting
from goodwill impairments will not impact ComEd's earnings through 2006 under
the earnings provisions of the legislation.
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
- ---------------------------------------------------------------------------------------------------------------------
23
The following tables set forth Exelon's net income and earnings per
common share and ComEd's net income for the three and nine months ended
September 30, 2002 and 2001, respectively, adjusted to exclude 2001 amortization
expense related to goodwill that is no longer being amortized.
Exelon
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Reported income before cumulative effect
of changes in accounting principles $ 551 $ 376 $ 1,273 $ 1,078
Cumulative effect of changes in
accounting principles -- -- (230) 12
- ---------------------------------------------------------------------------------------------------------------------
Reported net income 551 376 1,043 1,090
Goodwill amortization -- 37 -- 114
- ---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 551 $ 413 $ 1,043 $ 1,204
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Reported income before cumulative effect
of changes in accounting principles $ 1.71 $ 1.17 $ 3.95 $ 3.36
Cumulative effect of changes in
accounting principles -- -- (0.71) 0.04
- ---------------------------------------------------------------------------------------------------------------------
Reported net income 1.71 1.17 3.24 3.40
Goodwill amortization -- 0.12 -- 0.36
- ---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.71 $ 1.29 $ 3.24 $ 3.76
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Reported income before cumulative effect
of changes in accounting principles $ 1.70 $ 1.16 $ 3.93 $ 3.33
Cumulative effect of changes in
accounting principles -- -- (0.71) 0.04
- ---------------------------------------------------------------------------------------------------------------------
Reported net income 1.70 1.16 3.22 3.37
Goodwill amortization -- 0.11 -- 0.35
- ---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.70 $ 1.27 $ 3.22 $ 3.72
- ---------------------------------------------------------------------------------------------------------------------
ComEd
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Reported net income $ 215 $ 178 $ 576 $ 507
Goodwill amortization -- 32 -- 97
- ---------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 215 $ 210 $ 576 $ 604
- ---------------------------------------------------------------------------------------------------------------------
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 or nine months ended September 30, 2002.
24
EITF Issue 02-3
Exelon and Generation early adopted the provision of Emerging Issues
Task Force (EITF) Issue 02-3 "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities" (EITF 02-3) issued by the FASB EITF in
June 2002 that requires revenues and energy costs related to energy trading
contracts to be presented on a net basis in the income statement. Prior to the
second quarter of 2002, revenues from trading activity were presented in Revenue
and the energy costs related to energy trading were presented as either
Purchased Power or Fuel expense on Exelon and Generation's Consolidated
Statements of Income. For comparative purposes, energy costs related to energy
trading have been reclassified in prior periods to revenue to conform to the net
basis of presentation required by EITF 02-3. For the three and nine months ended
September 30, 2001, $93 million and $123 million of purchased power expense,
respectively, and $7 million and $12 million of fuel expense, respectively, was
reclassified and reflected as a reduction to revenue. The three months ended
March 31, 2002 included $504 million of purchased power expense and $9 million
of fuel expense that has been reclassified and reflected as a reduction to
revenue in the nine months ended September 30, 2002.
SFAS No. 144
In September 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). 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, ComEd, PECO or Generation's
reported financial positions, results of operations or cash flows.
SFAS No. 145
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. 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. The adoption of SFAS No. 145 had no effect on Exelon, ComEd, PECO
or Generation's reported financial positions, results of operations or cash
flows.
SFAS No. 133
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. On January 1, 2001, Exelon, ComEd,
PECO, and Generation adopted SFAS No. 133. 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
25
PECO deferred a non-cash gain of $40 million, net of income taxes, in
accumulated other comprehensive income.
3. ACQUISITIONS AND DISPOSITIONS (Exelon and Generation) Acquisition of
Generating Plants from TXU
On April 25, 2002, Generation acquired two natural-gas and oil-fired
plants from TXU Corp. (TXU) for an aggregate purchase price of $443 million. The
purchase included the 893-megawatt Mountain Creek Steam Electric Station in
Dallas and the 1,441-megawatt Handley Steam Electric Station in Fort Worth. The
transaction included a purchased power agreement for TXU to purchase power
during the months of May through September from 2002 through 2006. During the
periods covered by the purchased power agreement, TXU will make fixed capacity
payments, variable expense payments, and will provide fuel to Exelon in return
for exclusive rights to the energy and capacity of the generation plants.
Substantially all of the purchase price has been allocated to property, plant
and equipment.
Sale of AT&T Wireless
On April 1, 2002, Enterprises sold its 49% interest in AT&T Wireless
PCS of Philadelphia, LLC to a subsidiary of AT&T Wireless Services for $285
million in cash. Enterprises recorded an after-tax gain of $116 million in
other, net on the $84 million investment, which had been reflected in Deferred
Debits and Other Assets on Exelon's Consolidated Balance Sheets.
Sithe New England Holdings Acquisition
On June 26, 2002, Generation agreed to purchase Sithe New England
Holdings, LLC (Sithe New England), a subsidiary of Sithe Energies Inc. (Sithe),
and related power marketing operations in exchange for a $543 million note. In
addition, Generation will assume various Sithe guarantees related to an equity
contribution agreement between Sithe New England and Sithe Boston Generation
(Boston Generation), a project subsidiary of Sithe New England. The equity
contribution agreement requires, among other things, that Sithe New England,
upon the occurrence of certain events, contribute up to $38 million of equity
for the purpose of completing the construction of two generating facilities.
Boston Generation established a $1.2 billion credit facility in order to finance
the construction of these two generating facilities. The approximately $1.1
billion expected to be outstanding under the facility at the transaction closing
date, will be reflected on Exelon's Consolidated Balance Sheet. Sithe New
England has provided security interests in and has pledged the stock of its
other project subsidiaries to Boston Generation. If the closing conditions are
satisfied, the transaction could be completed in November 2002.
The purchase involves approximately 4,471 megawatts (MWs) of generation
capacity, consisting of 1,670 MWs in operation and 2,421 MWs under construction,
which would increase Generation's net assets by approximately $1.6 billion.
Sithe New England's generation facilities are located primarily in
Massachusetts.
Generation is a 49.9% owner of Sithe and accounts for the investment as
an unconsolidated equity investment. The Sithe New England purchase would not
affect the accounting for Sithe as an equity investment. Separate from the Sithe
New England transaction, Generation is subject to a Put and Call Agreement (PCA)
that gives Generation the right to purchase (Call) the remaining 50.1% of Sithe,
and gives the other Sithe shareholders the right to sell (Put) their interest to
26
Generation. If the Put option is exercised, Generation has the obligation to
complete the purchase. The PCA provides that the Put and Call options become
exercisable as of December 18, 2002 and expire in December 2005. The Sithe New
England purchase is a separate transaction from the PCA in that it is intended
to enable Generation to acquire only the Sithe assets that fit Generation's
strategy, accelerate the realization of synergies, and reduce the amount of debt
needed to finance the transaction.
See ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Exelon Corporation - for further discussion of the
PCA.
4. REGULATORY ISSUES (Exelon, ComEd and PECO)
On June 1, 2001, ComEd filed with the Illinois Commerce Commission (ICC)
to establish delivery service charges for residential customers in preparation
for residential customer choice, which began in May 2002. The filing also
updated delivery service charges for non-residential customers.
On April 1, 2002, the ICC issued an interim order in ComEd's Delivery
Services Rate Case. The interim order is subject to an audit of test year (2000)
expenditures, including capital plant expenditures, with a final order to be
issued in 2003. The order sets delivery rates for residential customers choosing
a new retail electric supplier. The new rates became effective May 1, 2002 when
residential customers became eligible to choose their supplier of electricity.
Traditional bundled rates paid by customers that retain ComEd as their
electricity supplier are not affected by this order. Bundled rates will remain
frozen through 2006, as a result of the June 6, 2002 amendments to the Illinois
Restructuring Act that extended the freeze on bundled rates for an additional
two years. Delivery service rates for non-residential customers are not affected
by the order. The potential revenue impact of the interim order is not expected
to be material in 2002.
On October 10, 2002, ComEd received the audit report on the audit of
test year expenditures by the Liberty Consulting Group (Liberty), a consulting
firm engaged by the ICC in conjunction with the audit of test year expenditures.
Using the interim order as a starting point, Liberty recommends certain
additional disallowances to test year expenditures and rate base levels, which,
if ultimately approved by the ICC would result in lower residential delivery
service charges and higher non-residential delivery service charges. The ICC
will hold hearings on the Liberty audit report and responses from ComEd and
other parties. A final decision is expected in the middle of 2003.
ComEd intends to contest the Liberty audit findings in the reopened
hearings and cannot currently determine what portion, if any, of the Liberty
audit recommendations the ICC will accept. If the ICC ultimately determines that
all or some portion of ComEd's distribution plant is not recoverable through
rates, ComEd may be required to write-off some or all of the amount of its
investment that the ICC determines is not recoverable. The estimated potential
write-off, before income taxes, could be up to approximately $100 million if the
Liberty audit recommendations were to be accepted by the ICC in their entirety.
ComEd recorded a charge to earnings, before income taxes, of $12 million in the
third quarter of 2002, representing the estimated minimum probable write-off
exposure resulting from the audit findings.
27
As permitted by the Pennsylvania Electric Competition Act, the
Pennsylvania Department of Revenue 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. 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. The
RNR adjustment increases the gross receipts tax rate, which will increase PECO's
annual revenues and tax obligations by approximately $50 million in 2002. The
RNR adjustment was under appeal. The case was remanded to the PUC and in August
2002, the PUC ruled that PECO is properly authorized to recover these costs.
5. EARNINGS PER SHARE (Exelon)
Diluted earnings per share are calculated by dividing net income by the
weighted average number of 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
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Average common shares outstanding 323 321 322 320
Assumed exercise of stock options 1 2 2 3
- ---------------------------------------------------------------------------------------------------------------------
Average diluted common shares outstanding 324 323 324 323
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