UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-16169
Exelon Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2990190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37th Floor, 10 South Dearborn
Post Office Box A-3005
Chicago, Illinois 60690-3005
(Address of principal executive offices) (Zip Code)
(312) 394-4321
(Registrant's telephone number, including area code)
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 No X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
The Company had 318,440,473 shares of common stock outstanding on
October 27, 2000.
<PAGE>
On October 20, 2000, pursuant to a Second Amended and Restated
Agreement and Plan of Exchange and Merger dated as of September 22, 1999 as
amended and restated as of October 10, 2000, among PECO Energy Company, a
Pennsylvania corporation (PECO Energy), Exelon Corporation, a Pennsylvania
corporation (Exelon) and Unicom Corporation, an Illinois corporation (Unicom),
PECO Energy, Exelon and Unicom consummated the merger and exchange.
Exelon had no substantive operations for the three and nine months
ended September 30, 2000. However, as a result of the timing of the consummation
of the merger, under the Securities Exchange Act of 1934, Exelon is required to
file a Form 10-Q for the period ending September 30, 2000. The merger
transaction has been accounted for under the purchase method of accounting with
PECO Energy as the acquiror and Unicom as the acquired company. This Exelon Form
10-Q consists of PECO Energy's Form 10-Q as of September 30, 2000 and Unicom's
Quarterly Report filed as an exhibit.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------- ------- -------
OPERATING REVENUES
<S> <C> <C> <C> <C>
Electric $ 1,370 $ 1,674 $ 3,540 $ 3,825
Gas 79 50 379 363
Infrastructure Services and Other 180 5 447 21
------- ------- ------- -------
TOTAL OPERATING REVENUES 1,629 1,729 4,366 4,209
------- ------- ------- -------
OPERATING EXPENSES
Fuel and Energy Interchange 576 786 1,515 1,746
Operating and Maintenance 454 339 1,305 1,015
Depreciation and Amortization 83 57 244 171
Taxes Other Than Income Taxes 67 76 197 196
------- ------- ------- -------
TOTAL OPERATING EXPENSES 1,180 1,258 3,261 3,128
------- ------- ------- -------
OPERATING INCOME 449 471 1,105 1,081
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (113) (108) (333) (296)
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (2) (4) (7) (19)
Allowance for Funds Used During Construction 1 -- 2 2
Equity in Earnings (Losses) of Unconsolidated Affiliates 23 (5) 26 (28)
Other, Net 22 14 50 31
------- ------- ------- -------
TOTAL OTHER INCOME AND DEDUCTIONS (69) (103) (262) (310)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 380 368 843 771
INCOME TAXES 142 137 316 287
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 238 231 527 484
EXTRAORDINARY ITEM - NET OF INCOME TAXES (1) -- (4) (27)
------- ------- ------- -------
NET INCOME 237 231 523 457
PREFERRED STOCK DIVIDENDS 3 3 8 9
------- ------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK $ 234 $ 228 $ 515 $ 448
======= ======= ======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 170 187 175 201
======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Extraordinary Item $ 1.38 $ 1.22 $ 2.96 $ 2.36
Extraordinary Item -- -- (0.02) (0.13)
------- ------- ------- -------
Net Income $ 1.38 $ 1.22 $ 2.94 $ 2.23
======= ======= ======= =======
DILUTED:
Income Before Extraordinary Item $ 1.36 $ 1.21 $ 2.94 $ 2.34
Extraordinary Income -- -- (0.02) (0.13)
------- ------- ------- -------
Net Income $ 1.36 $ 1.21 $ 2.92 $ 2.21
======= ======= ======= =======
DIVIDENDS PER AVERAGE COMMON SHARE $ 0.25 $ 0.25 $ 0.75 $ 0.75
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
3
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 169 $ 228
Accounts Receivable, Net 776 704
Inventories, at average cost 232 206
Other 180 87
------- -------
Total Current Assets 1,357 1,225
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 5,196 5,049
DEFERRED DEBITS AND OTHER ASSETS
Competitive Transition Charge 5,232 5,275
Recoverable Deferred Income Taxes 638 638
Deferred Non-Pension Postretirement Benefits Costs 80 84
Investments 722 538
Loss on Reacquired Debt 66 71
Goodwill 192 121
Other 184 131
------- -------
Total Deferred Debits and Other Assets 7,114 6,858
------- -------
TOTAL ASSETS $13,667 $13,132
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Notes Payable, Bank $ 284 $ 163
Long-Term Debt Due Within One Year 306 128
Accounts Payable 308 270
Accrued Expenses 489 616
Deferred Income Taxes 22 15
Other 121 94
-------- --------
Total Current Liabilities 1,530 1,286
-------- --------
LONG-TERM DEBT 6,252 5,969
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,444 2,411
Unamortized Investment Tax Credits 275 286
Pension Obligation 213 213
Non-Pension Postretirement Benefits Obligation 457 443
Other 467 430
-------- --------
Total Deferred Credits and Other Liabilities 3,856 3,783
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 37 56
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY
Common Stock (No Par) 3,576 3,576
Preferred Stock 137 137
Other Paid-In Capital 3 1
Retained Earnings (Accumulated Deficit) 301 (103)
Treasury Stock, at cost (2,179) (1,705)
Accumulated Other Comprehensive Income 26 4
-------- --------
Total Shareholders' Equity 1,864 1,910
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,667 $ 13,132
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 523 $ 457
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 335 246
Provision for Uncollectible Accounts 43 40
Extraordinary Item (net of income taxes) 4 27
Deferred Income Taxes 19 (15)
Amortization of Investment Tax Credits (11) (11)
Deferred Energy Costs 6 43
Equity in Earnings (Losses) of Unconsolidated Affiliates (26) 28
Other Items Affecting Operations (28) 86
Changes in Working Capital:
Accounts Receivable (20) (186)
Repurchase of Accounts Receivable (50) (150)
Inventories (26) (6)
Accounts Payable 19 15
Accrued Expenses (90) 156
Other Current Assets and Liabilities (93) (70)
------- -------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 605 660
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (435) (362)
Exelon Infrastructure Services Acquisitions, net of cash acquired (91) --
Investments in and Advances to Joint Ventures -- (60)
Increase in Other Investments (67) (68)
------- -------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (593) (490)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 1,017 3,997
Retirement of Long-Term Debt (545) (1,068)
Common Stock Repurchase (496) (1,507)
Change in Short-Term Debt 118 (403)
Dividends on Preferred and Common Stock (139) (160)
Retirement of Mandatorily Redeemable Preferred Stock (19) (37)
Proceeds from Exercise of Stock Options 17 14
Retirement of Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership -- (221)
Repayment of Capital Lease Obligations -- (139)
Other Items Affecting Financing (24) (30)
------- -------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (71) 446
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (59) 616
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 228 48
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 169 $ 664
======= =======
See Notes to Condensed Consolidated Financial Statements
</TABLE>
6
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of
September 30, 2000 and for the three and nine months then ended are unaudited,
but include all adjustments that PECO Energy Company (Company) considers
necessary for a fair presentation of such financial statements. All adjustments
are of a normal, recurring nature. 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 notes
should be read in conjunction with the Notes to Consolidated Financial
Statements in Item 8 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, as amended by Form 10-K/A filed on April 28, 2000.
2. MERGER WITH UNICOM CORPORATION
On September 22, 1999, the Company and Unicom Corporation (Unicom)
entered into an Agreement and Plan of Exchange and Merger providing for a merger
of equals. On October 10, 2000, the Agreement and Plan of Exchange and Merger
was amended and restated (Merger Agreement). On October 20, 2000, the merger was
completed and all of the shares of the Company were exchanged on a one-for-one
basis in accordance with the Merger Agreement. As a result of this share
exchange, the Company became a wholly owned subsidiary of Exelon Corporation.
The transaction is being accounted for as a purchase with the Company as
acquiror.
Under a comprehensive settlement agreement entered into by the Company
in connection with the approval by the Pennsylvania Public Utility Commission
(PUC) of the merger, the Company has agreed to $200 million in rate reductions
for all customers over the period January 1, 2002 through 2005 and extended rate
caps on the Company's retail electric distribution charges through December 31,
2006. The comprehensive settlement agreement also provides for electric
reliability and customer service standards, mechanisms to enhance competition
and customer choice, expanded assistance to low-income customers, extensive
funding for wind and solar energy and community education, nuclear safety
research funds, customer protection against nuclear costs outside of
Pennsylvania, and maintenance of charitable and civic contributions and
employment for the Company's headquarters in Philadelphia.
7
<PAGE>
3. SERIES 2000-A TRANSITION BONDS
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of transition bonds (Series 2000-A Transition Bonds) to securitize a
portion of the Company's authorized stranded cost recovery. As a result of this
transaction, the Company has securitized a total of $5 billion of its $5.26
billion of stranded cost recovery. The transition bonds issued by PETT,
including the Series 2000-A Transition Bonds, are solely obligations of PETT,
secured by intangible transition property sold by the Company to PETT
concurrently with the issuance of the transition bonds and certain other related
collateral.
The terms of the Series 2000-A Transition Bonds are as follows:
<TABLE>
<CAPTION>
Expected
Approximate Final
Series 2000-A Face Amount Interest Payment Termination
Class (millions) Rate Date Date
------------- ----------- -------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
A-1 $110 7.18% September 1, 2001 September 1, 2003
A-2 $140 7.30% September 1, 2002 September 1, 2004
A-3 $399 7.63% March 1, 2009 March 1, 2010
A-4 $351 7.65% September 1, 2009 September 1, 2010
</TABLE>
The Company has used the proceeds from the securitization to reduce
the Company's stranded costs and related capitalization. On May 3, 2000, $502
million of the proceeds were used to settle a forward purchase agreement that
was entered into in January 2000 resulting in the repurchase of 12 million
shares of common stock. During May and June 2000, the Company used $463 million
to purchase and/or redeem First and Refunding Mortgage Bonds, to reduce other
debt, to repurchase accounts receivable and to pay transaction expenses. The
remaining proceeds were used to redeem First and Refunding Mortgage Bonds on
August 1, 2000.
The Company incurred extraordinary charges aggregating $4 million,
net of tax, consisting of prepayment premiums and the write-off of unamortized
deferred financing costs associated with the early retirement of debt during the
nine months ended September 30, 2000.
In February 2000, the Company entered into forward starting interest
rate swaps for a notional amount of $1 billion in anticipation of the issuance
of the Series 2000-A Transition Bonds in the second quarter of 2000. On May 2,
2000, the Company settled these forward starting interest rate swaps and paid
the counterparties approximately $12 million which was deferred and is being
amortized over the life of the Series 2000-A Transition Bonds as an increase in
interest expense consistent with the Company's hedge accounting policy.
8
<PAGE>
4. SEGMENT INFORMATION
The Company's segment information as of and for the three and nine
months ended September 30, 2000 as compared to the same periods in 1999 is as
follows (in millions):
<TABLE>
<CAPTION>
Quarter Ended September 30, 2000 as compared to the Quarter Ended September 30, 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intersegment
Distribution Generation Ventures Corporate Revenues Consolidated
Revenues:
2000 $ 877 $ 901 $ 193 $ - $ (342) $ 1,629
1999 $ 882 $ 1,089 $ 7 $ - $ (249) $ 1,729
EBIT (a):
2000 $ 277 $ 267 $ (9) $ (41) $ 494
1999 $ 390 $ 140 $ (9) $ (41) $ 480
Nine Months Ended September 30, 2000 as compared to Nine Months Ended September 30, 1999
----------------------------------------------------------------------------------------
Revenues:
2000 $ 2,496 $ 2,125 $ 469 $ - $ (724) $ 4,366
1999 $ 2,535 $ 2,285 $ 16 $ - $ (627) $ 4,209
EBIT (a):
2000 $ 928 $ 412 $ (21) $ (138) $ 1,181
1999 $ 1,055 $ 197 $ (46) $ (122) $ 1,084
Total Assets:
September 30, 2000 $ 10,629 $ 1,837 $ 781 $ 420 $ 13,667
December 31, 1999 $ 10,294 $ 1,779 $ 640 $ 419 $ 13,132
</TABLE>
(a) EBIT - Earnings Before Interest and Income Taxes.
9
<PAGE>
5. EARNINGS PER SHARE
Diluted earnings per average common share is calculated by dividing
earnings applicable to common stock by the average number of shares of common
stock outstanding after giving effect to stock options issuable under the
Company's stock option plans which are considered to be dilutive common stock
equivalents. The following table shows the effect of the stock options issuable
under the Company's stock option plans on the average number of shares used in
calculating diluted earnings per average common share (in millions of shares):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Common Shares Outstanding 170 187 175 201
Assumed Exercise of Stock Options 2 1 1 1
------ ------ ------ -----
Potential Average Dilutive
Common Shares Outstanding 172 188 176 202
======= ======= ======= =======
</TABLE>
6. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution under
which it can sell or finance with limited recourse an undivided interest,
adjusted daily, in designated accounts receivable until November 2000. In May
2000, the Company used a portion of the proceeds from the Series 2000-A
Transition Bonds to repurchase $50 million of the interest in accounts
receivable, including $10 million of special agreement accounts receivable (See
Note 3 - Series 2000-A Transition Bonds). This repurchase reduced the amount of
accounts receivable the Company could sell or finance under the agreement from
$275 million to $225 million.
At September 30, 2000, the Company had sold a $225 million interest in
accounts receivable, consisting of a $187 million interest in accounts
receivable which the Company accounts for as a sale under Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," and a $38 million interest
in special agreement accounts receivable which are accounted for as a long-term
note payable. The Company retains the servicing responsibility for these
receivables. The agreement requires the maintenance of a minimum level of
eligible accounts receivable which, if not met, requires the Company to deposit
cash with the financial institution. At September 30, 2000, these requirements
were met.
10
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
For information regarding the Company's capital commitments, nuclear
insurance, nuclear decommissioning and spent fuel storage, energy commitments,
environmental issues and litigation, see Note 6 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999.
In July 2000, the Company signed an agreement with the Department of
Energy (DOE) under which the Company will be reimbursed for costs resulting from
the DOE's delay in accepting spent nuclear fuel. The agreement applies only to
the Peach Bottom Atomic Power Station (Peach Bottom). The Company's portion of
the reimbursement is approximately $16 million. The agreement allows the Company
to reduce the charges paid to the Nuclear Waste Fund to reflect costs reasonably
incurred by the Company due to the DOE's delay. In accordance with the Nuclear
Waste Policy Act of 1982 (NWPA), the Company pays the DOE one mil ($.001) per
kilowatthour of net nuclear generation for the cost of nuclear fuel disposal.
Past and future costs associated with Peach Bottom's recently completed on-site
dry storage facility are eligible for this reduction in future DOE fees.
Negotiations of settlements relating to the Company's other nuclear plants will
be conducted on a plant-by-plant basis.
The Company has identified 28 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
September 30, 2000, the Company's accrual for environmental investigation and
remediation costs was $55 million, including $30 million for MGP investigation
and remediation that currently can be reasonably estimated. The Company cannot
predict whether it will incur other significant liabilities for additional
investigation and remediation costs at these or additional sites identified by
the Company, environmental agencies or others, or whether all such costs will be
recoverable from third parties.
At December 31, 1998, the Company incurred a charge of $125 million
($74 million, net of income taxes) for its Early Retirement and Separation
Program relating to 1,157 employees. The estimated cost of separation benefits
was approximately $47 million. Retirement benefits of approximately $78 million
are being paid to the retirees over their lives. All cash payments related to
the Early Retirement and Separation Program were funded through the assets of
the Company's Service Annuity Plan. The Early Retirement and Separation Program
terminated on June 30, 2000.
11
<PAGE>
At September 30, 2000, the Company had long-term commitments, in
megawatt hours (MWhs) and dollars, relating to the purchase and sale of energy,
capacity and transmission rights from unaffiliated utilities and others as
expressed in the tables below (in millions):
Power Only
-----------------------------------------
Purchases Sales
----------------- -----------------
MWhs Dollars MWhs Dollars
---- ------- ---- -------
2000 4 $ 27 7 $ 207
2001 19 195 16 627
2002 27 131 10 460
2003 28 138 6 233
2004 27 116 3 107
Thereafter 135 82 5 167
----- -------
Total $ 689 $ 1,801
===== =======
Transmission
Capacity Capacity Rights
Purchases Sales Purchases
in Dollars in Dollars in Dollars
---------- ---------- ----------
2000 $ 10 $ 5 $ 24
2001 83 32 60
2002 149 21 63
2003 176 16 22
2004 167 3 21
Thereafter 1,833 10 79
------- ---- -----
Total $ 2,418 $ 87 $ 269
======= ==== =====
In the first quarter of 2000, the Company restructured an existing
power sales contract from a variable price with fixed capacity sales to a fixed
price power only contract which decreased the Company's commitments for capacity
sales and increased the Company's commitments for power only sales.
12
<PAGE>
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133) to establish
accounting and reporting standards for derivatives. The new standard requires
recognizing all derivatives as either assets or liabilities on the balance sheet
at their fair value and specifies the accounting for changes in fair value
depending upon the intended use of the derivative.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133. The Company expects to adopt SFAS No. 133
and SFAS No. 138 on January 1, 2001. The Company initiated a process to
implement SFAS No. 133 and SFAS No. 138 by evaluating all of the derivatives of
the Company for SFAS No. 133 and SFAS No. 138 implications. This phase of
implementation has been completed and the Company is in the process of
evaluating the impact of SFAS No. 133 and SFAS No. 138 on its financial
statements.
9. EXELON INFRASTRUCTURE SERVICES, INC. ACQUISITIONS
In the second quarter of 2000, Exelon Infrastructure Services, Inc.
(EIS), an unregulated subsidiary of the Company, acquired the stock or assets of
four utility service contracting companies for an aggregate purchase price of
approximately $91 million, net of cash acquired, including stock of EIS. The
acquisitions were accounted for using the purchase method of accounting. The
initial estimate of the excess of purchase price over the fair value of net
assets acquired was approximately $77 million which is being amortized over 20
years.
10. SITHE ENERGIES ACQUISITION
On August 14, 2000, the Company signed a definitive agreement to
purchase 49.9% of Sithe Energies North America's (Sithe) outstanding common
stock for $682 million, with an option to purchase the remaining common stock
outstanding exercisable between two and five years after the date of closing, at
a price to be determined based on prevailing market conditions.
Sithe is an independent power generator in North America utilizing
primarily fossil and hydro generation. The purchase involves approximately
10,000 megawatts (MW) of generation consisting of 3,800 MW of existing merchant
generation, 2,500 MW under construction, and another 3,700 MW of generation in
various stages of development, as well as Sithe's domestic marketing and
development businesses. The generation assets are located primarily in
Massachusetts and New York, but also include plants in Pennsylvania, California,
Colorado and Idaho, as well as Canada and Mexico.
13
<PAGE>
11. OYSTER CREEK ACQUISITION
In August 2000, AmerGen Energy Company, LLC (AmerGen), the joint
venture between the Company and British Energy, plc, completed the purchase of
Oyster Creek Nuclear Generating Facility (Oyster Creek) from GPU, Inc. (GPU) for
$10 million. Under the terms of the purchase agreement, GPU has agreed to fund
outage costs not to exceed $89 million, including the cost of fuel, for a
refueling outage scheduled for October 2000. AmerGen will repay these costs to
GPU in nine equal annual installments beginning in August 2001. In addition,
AmerGen assumed full responsibility for the ultimate decommissioning of Oyster
Creek. At the closing of the sale, GPU provided funding for the decommissioning
trust of $440 million. GPU is purchasing the electricity generated by Oyster
Creek pursuant to a power purchase agreement.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On September 22, 1999, the Company and Unicom Corporation (Unicom)
entered into an Agreement and Plan of Exchange and Merger providing for a merger
of equals. On October 10, 2000, the Agreement and Plan of Exchange and Merger
was amended and restated (Merger Agreement). For additional information, see
"PART II, ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - General," in the Company's 1999 Annual Report on
Form 10-K as amended by Form 10-K/A filed on April 28, 2000. On October 20,
2000, the merger was completed and all of the shares of the Company were
exchanged on a one-for-one basis in accordance with the Merger Agreement. As a
result of this share exchange, the Company became a wholly owned subsidiary of
Exelon Corporation (Exelon). The transaction is being accounted for as a
purchase with the Company as acquiror. In the fourth quarter of 2000, the
Company expects to incur certain charges, including severance costs, stock
compensation costs and settlement charges related to the merger. As of September
30, 2000, the Company is unable to estimate the aggregate financial statement
impact of these charges.
Under a comprehensive settlement agreement entered into by the Company
in connection with the approval by the Pennsylvania Public Utility Commission
(PUC) of the merger, the Company has agreed to $200 million in rate reductions
for all customers over the period January 1, 2002 through 2005 and extended rate
caps on the Company's retail electric distribution charges through December 31,
2006. The comprehensive settlement agreement also provides for electric
reliability and customer service standards, mechanisms to enhance competition
and customer choice, expanded assistance to low-income customers, extensive
funding for wind and solar energy and community education, nuclear safety
research funds, customer protection against nuclear costs outside of
Pennsylvania, and maintenance of charitable and civic contributions and
employment for the Company's headquarters in Philadelphia.
In connection with the regulatory approvals of the merger, Exelon
received authorization to restructure the operations of the Company and Unicom.
Exelon is currently contemplating restructuring the Company's generation and
ventures business units into newly formed subsidiaries of Exelon in 2001.
Accordingly, the operations of the Company after the contemplated restructuring
would essentially represent the Company's distribution business unit.
Retail competition for electric generation services began in
Pennsylvania on January 1, 1999. Effective January 1, 2000, all of the Company's
retail electric customers in its traditional service territory have the right to
choose their generation suppliers. At September 30, 2000, approximately 17% of
the Company's residential load, 46% of its commercial load and 41% of its
industrial load were purchasing generation service from an alternative electric
generation supplier. As of that date, Exelon Energy, the Company's alternative
energy supplier, was providing electric generation service to approximately
99,000 business and residential customers located throughout Pennsylvania.
15
<PAGE>
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of transition bonds (Series 2000-A Transition Bonds) to securitize a
portion of the Company's authorized stranded cost recovery. See Note 3 of Notes
to Condensed Consolidated Financial Statements.
In the second quarter of 2000, Exelon Infrastructure Services, Inc.
(EIS) acquired four additional infrastructure services companies. These
acquisitions combined with EIS' acquisitions in the fourth quarter of 1999
contributed to the growth in revenue, operating and maintenance (O&M) expenses
and depreciation and amortization expenses in the three and nine month periods
ended September 30, 2000 as compared to the same prior year periods.
In the third quarter of 2000, the Company reclassified the results of
operations for its non-utility businesses in its Condensed Consolidated
Statements of Income from other income and deductions to revenue and O&M expense
for the three and nine month periods ended September 30, 2000 and 1999.
16
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Revenue and Expense Items as a
Percentage of Total Operating
Revenues Percentage Dollar Changes
2000 vs. 1999
Quarter Nine Months Quarter Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
84% 97% 81% 91% Electric (18%) (7%)
5% 3% 9% 8% Gas 58% 4%
11% -- 10% 1% Infrastructure Services and Other 3,500% 2,029%
------ ------- ------ -------
100% 100% 100% 100% Total Operating Revenues (6%) 4%
---- ---- ---- ----
35% 46% 35% 41% Fuel and Energy Interchange (27%) (13%)
28% 20% 30% 24% Operating and Maintenance 34% 29%
5% 3% 6% 4% Depreciation and Amortization 46% 43%
4% 4% 4% 5% Taxes Other Than Income (12%) 1%
----- ----- ----- -----
72% 73% 75% 74% Total Operating Expenses (6%) 4%
---- ---- ---- ----
28% 27% 25% 26% Operating Income (5%) 2%
---- ---- ---- ----
(7%) (7%) (8%) (8%) Interest Charges 2% 8%
Equity in Earnings (Losses) of
1% -- 1% (1%) Unconsolidated Affiliates 560% 193%
1% 1% 1% 1% Other, Net 57% 61%
----- ------ ------ -------
Income Before Income Taxes and
23% 21% 19% 18% Extraordinary Item 3% 9%
9% 8% 7% 6% Income Taxes 4% 10%
----- ----- ----- -----
14% 13% 12% 12% Income Before Extraordinary Item 3% 9%
-- -- -- (1%) Extraordinary Items (100%) (85%)
-------------- ------- -------
14% 13% 12% 11% Net Income 3% 14%
==== ===== ===== =====
</TABLE>
Third Quarter 2000 Compared To Third Quarter 1999
Operating Revenues
Electric revenues decreased $304 million, or 18%, to $1,370 million for
the quarter ended September 30, 2000 compared to the same 1999 period. The
decrease was attributable to lower revenues from the generation business unit of
$280 million and lower revenues from the distribution business unit of $24
million.
The decrease in electric revenues from the generation business unit was
primarily attributable to lower wholesale revenues of $166 million as a result
of $128 million associated with lower volume and $38 million associated with
lower prices. The decrease was also attributable to reduced sales of competitive
electric generation services by Exelon Energy of $65
17
<PAGE>
million as a result of $74 million from decreased volume partially offset by $9
million as a result of increased prices. In addition, the termination of the
operating agreement for the Clinton Nuclear Power Station (Clinton) resulted in
lower revenues of $49 million. As a result of the acquisition by AmerGen Energy
Company, LLC (AmerGen) of Clinton in December 1999, the operating agreement was
terminated and, accordingly, the operations of Clinton have been included in
Equity in Earnings (Losses) of Unconsolidated Affiliates on the Company's
Statements of Income since that date. The decrease from the distribution
business unit was primarily attributable to $103 million as a result of lower
volume from the effects of weather conditions partially offset by an increase of
$79 million attributable to customers selecting the distribution business unit
as their electric generation supplier and rate adjustments.
Gas revenues increased $29 million, or 58%, to $79 million for the
quarter ended September 30, 2000 compared to the same 1999 period. The increase
in gas revenues was primarily attributable to $11 million resulting from
increased volume, $11 million from wholesale sales of natural gas and $7 million
as a result of higher prices.
Infrastructure services and other revenues increased $175 million, to
$180 million primarily as a result of the EIS acquisitions in the fourth quarter
of 1999 and the second quarter of 2000.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense decreased $210 million, or 27%, to
$576 million for the quarter ended September 30, 2000 compared to the same 1999
period. The decrease was attributable to lower fuel and energy interchange
expenses associated with the generation business unit of $228 million partially
offset by an increase in energy interchange expenses in the distribution
business unit of $18 million. As a percentage of revenue, fuel and energy
interchange expenses were 35% as compared to 46% in the comparable prior year
period.
The decrease in fuel and energy interchange expense from the generation
business unit was primarily attributable to $153 million from Exelon Energy
sales principally related to $162 million as a result of decreased volume
partially offset by $9 million as a result of increased prices. The decrease was
also attributable to $101 million from wholesale operations principally related
to $73 million as a result of decreased volume and $28 million as a result of
decreased prices. These decreases were partially offset by an increase of $32
million for the cost to supply the distribution business unit. The generation
business unit is the primary source of supply for the distribution business
unit. Accordingly, sales volume changes at the distribution business unit have a
direct impact on fuel and energy interchange expense of the generation business
unit. The increase from the distribution business unit was primarily
attributable to $8 million principally related to wholesale sales of natural gas
and $7 million in PJM Interconnection, LLC (PJM) ancillary charges.
18
<PAGE>
Operating and Maintenance Expense
O&M expense increased $115 million, or 34%, to $454 million for the
quarter ended September 30, 2000 compared to the same 1999 period. As a
percentage of revenue, O&M expenses were 28% as compared to 20% in the same 1999
period. The ventures business unit's O&M expenses increased $158 million related
to the infrastructure services business as a result of the EIS acquisitions. The
generation business unit's O&M expenses decreased $30 million primarily as a
result of O&M expenses related to the operating agreement for Clinton of $19
million in 1999, $8 million related to the abandonment of an information system
implementation in 1999, lower joint-owner expenses of $7 million and $5 million
of lower administrative and general expenses related to the unregulated retail
sales of electricity. These decreases were partially offset by higher
compensation expense of $6 million and higher non-utility operations expense of
$3 million. The distribution business unit's O&M expenses decreased $3 million
primarily as a result of $11 million of expenses related to restoration
activities as a result of Hurricane Floyd in 1999 partially offset by increases
in miscellaneous O&M expenses. In addition, the Company experienced a decrease
in general corporate expenses consisting of $12 million from lower pension
expense as a result of the performance of the investments in the Company's
pension plan and $5 million of lower Year 2000 (Y2K) remediation expenditures in
1999 partially offset by an increase of $7 million in incremental merger
expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $26 million, or 46%, to
$83 million for the quarter ended September 30, 2000 compared to the same 1999
period. As a percentage of revenue, depreciation and amortization expense was 5%
as compared to 3% in the comparable prior year period. The increase was
primarily attributable to $16 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000. The
increase also included $9 million related to EIS depreciation and amortization
expense and $1 million related to increased plant in service.
Taxes Other Than Income
Taxes other than income decreased $9 million, or 12%, to $67 million
for the quarter ended September 30, 2000 compared to the same 1999 period. The
decrease was primarily attributable to lower real estate taxes of $3 million
relating to a change in tax laws for utility property in Pennsylvania and $3
million as a result of the elimination of the gross receipts tax on gas sales
partially offset by a net increase in gross receipts tax on electric sales.
Interest Charges
Interest charges consist of interest expense, distributions on Company
Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS)
and Allowance for Funds Used During Construction (AFUDC). Interest charges
increased $2 million, or 2%, to $114 million for the quarter ended September 30,
2000 compared to the same 1999 period. The increase was primarily attributable
to interest on the Series 2000-A Transition Bonds of $18 million partially
offset by the Company's reduction of long-term debt with the proceeds of
transition bonds which reduced interest charges by $15 million.
19
<PAGE>
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $28
million to earnings of $23 million for the quarter ended September 30, 2000 as
compared to losses of $5 million in the same 1999 period. The increase was
primarily attributable to $42 million of earnings from the Company's equity
investment in AmerGen as a result of the acquisitions of Three Mile Island Unit
No. 1 Nuclear Generating Facility (TMI) and Clinton in December 1999 partially
offset by $12 million of increased losses from the Company's telecommunications
equity investments principally as a result of costs associated with customer
base growth.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates increased $8 million to income of
$22 million for the quarter ended September 30, 2000 as compared to $14 million
in the same 1999 period. The increase in other income and deductions was
primarily attributable to gains on sales of investments of $9 million partially
offset by a decrease in interest income of $2 million.
Income Taxes
The effective tax rate was 37.4% for the quarter ended September 30,
2000 as compared to 37.2% in the same 1999 period.
Extraordinary Items
During the third quarter of 2000, the Company incurred an extraordinary
charge of $1 million, net of tax, consisting of prepayment premiums and the
write-off of unamortized deferred financing costs associated with the early
retirement of debt with a portion of the proceeds from the issuance of Series
2000-A Transition Bonds in May 2000.
Preferred Stock Dividends
Preferred stock dividends for the quarter ended September 30, 2000 were
consistent with the comparable prior year. In August 2000, the Company redeemed
$19 million of Mandatorily Redeemable Preferred Stock.
Earnings
Earnings applicable to common stock increased $6 million, or 3%, to
$234 million in the third quarter of 2000. Earnings per average common share on
a fully diluted basis increased $0.15 per share or 12%, to $1.36 per share in
the third quarter of 2000, reflecting the increase in net income and a decrease
in the weighted average shares of common stock outstanding as a result of the
use of proceeds from the Company's April 1999 and May 2000 stranded cost
recovery securitizations.
20
<PAGE>
Nine Months Ended September 30, 2000 Compared To Nine Months Ended September 30,
1999
Operating Revenues
Electric revenues decreased $285 million, or 7%, to $3,540 million for
the nine months ended September 30, 2000 compared to the same 1999 period. The
decrease was attributable to lower revenues from the generation business unit of
$240 million and lower revenues from the distribution business unit of $45
million.
The decrease in electric revenues from the generation business unit was
primarily attributable to $100 million from lower wholesale revenues as a result
of $150 million associated with lower volume partially offset by $50 million
associated with higher prices. In addition, the sale of competitive electric
generation services by Exelon Energy decreased $72 million which was primarily
attributable to $97 million as a result of decreased volume partially offset by
$25 million from increased prices. In addition, the termination of the operating
agreement for Clinton resulted in lower revenues of $62 million. The decrease
from the distribution business unit was primarily attributable to a decrease of
$83 million as a result of lower volume from the effects of weather conditions
partially offset by an increase of $38 million attributable to customers
selecting the distribution business unit as their electric generation supplier
and rate adjustments.
Gas revenues increased $16 million, or 4%, to $379 million for the nine
months ended September 30, 2000 compared to the same 1999 period. The increase
in gas revenues was primarily attributable to $22 million resulting from
increased volume from new and existing customers, $11 million from wholesale
sales of natural gas and $4 million resulting from increased volume related to
weather conditions. These increases were partially offset by $15 million from
the elimination of the gross receipts tax in connection with gas restructuring
in Pennsylvania and $9 million as a result of lower prices.
Infrastructure services and other revenues increased $426 million to
$447 million primarily as a result of the EIS acquisitions in the fourth quarter
of 1999 and the second quarter of 2000.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense decreased $231 million, or 13%, to
$1,515 million for the nine months ended September 30, 2000 compared to the same
1999 period. The decrease was attributable to lower fuel and energy interchange
expenses associated with the generation business unit of $227 million and the
distribution business unit of $4 million. As a percentage of revenue, fuel and
energy interchange expenses were 35% as compared to 41% in the comparable prior
year period.
The decrease in fuel and energy interchange expense from the generation
business unit was primarily attributable to $207 million from Exelon Energy
sales principally related to $240 million as a result of decreased volume
partially offset by $33 million as a result of increased prices. The decrease
was also attributable to $93 million from wholesale operations principally
related to $92 million as a result of decreased volume and $1 million as a
result of decreased prices. These decreases were partially offset by an increase
of $70 in the cost to supply the
21
<PAGE>
distribution business unit. The decrease from the distribution business unit was
primarily attributable to $24 million in lower PJM Interconnection, LLC (PJM)
ancillary charges partially offset by an increase of $15 million principally
related to wholesale sales of natural gas.
Operating and Maintenance Expense
O&M expense increased $290 million, or 29%, to $1,305 million for the
nine months ended September 30, 2000 compared to the same 1999 period. As a
percentage of revenue, O&M expenses were 30% as compared to 24% in the same 1999
period. The ventures business unit's O&M expenses increased $416 million related
to the infrastructure services business as a result of the EIS acquisitions. The
generation business unit's O&M expenses decreased $94 million primarily as a
result of O&M expenses related to the operating agreement for Clinton of $44
million in 1999, lower non-utility operations expense of $21 million, $15
million related to the abandonment of two information systems implementations in
1999, $14 million related to lower administrative and general expenses related
to the unregulated retail sales of electricity, $11 million related to lower
joint-owner expenses and $8 million associated with the write-off of excess and
obsolete inventory in 1999. These decreases were partially offset by higher
compensation expense of $19 million in the comparable prior year period. The
distribution business unit's O&M expenses increased $1 million primarily as a
result of $7 million higher compensation expense partially offset by $11 million
of additional expenses related to restoration activities as a result of
Hurricane Floyd in 1999. In addition, the Company experienced a decrease in
general corporate expenses of $35 million from lower pension expense as a result
of the performance of the investments in the Company's pension plan and $23
million of lower Y2K remediation expenditures. These decreases were partially
offset by an increase of $28 million in incremental merger expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $73 million, or 43%, to
$244 million for the nine months ended September 30, 2000 compared to the same
1999 period. As a percentage of revenue, depreciation and amortization expense
was 6% as compared to 4% in the comparable prior year period. The increase was
primarily attributable to $43 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000. The
increase also included $23 million related to EIS depreciation and amortization
expense and $7 million related to increased plant in service.
22
<PAGE>
Taxes Other Than Income
Taxes other than income increased $1 million, or 1%, to $197 million
for the nine months ended September 30, 2000 compared to the same 1999 period.
As a percentage of revenue, taxes other than income were 4% as compared to 5% in
the comparable prior year period. The increase was primarily attributable to a
$22 million capital stock tax credit in 1999 related to an adjustment associated
with the impact of the 1997 restructuring charge on the Company's equity value.
This increase was partially offset by lower real estate taxes of $10 million
relating to a change in tax laws for utility property in Pennsylvania and $7
million as a result of the elimination of the gross receipts tax on gas sales
partially offset by a net increase in gross receipts tax on electric sales.
Interest Charges
Interest charges increased $25 million, or 8%, to $338 million for the
nine months ended September 30, 2000 compared to the same 1999 period. The
increase was primarily attributable to interest on the transition bonds of $86
million partially offset by the Company's reduction of long-term debt with the
proceeds of transition bonds, which reduced interest charges by $65 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $54
million to earnings of $26 million for the nine months ended September 30, 2000
as compared to losses of $28 million in the same 1999 period. The increase was
primarily attributable to $61 million of earnings from the Company's equity
investment in AmerGen as a result of the acquisitions of TMI and Clinton in
December 1999 partially offset by $7 million of increased losses from the
Company's telecommunications equity investments principally as a result of costs
associated with customer base growth.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates increased $19 million to income
of $50 million for the nine months ended September 30, 2000 as compared to $31
million in the same 1999 period. The increase in other income and deductions was
primarily attributable to a $15 million write-off in 1999 of the investment in
Grays Ferry Cogeneration Partnership in connection with the settlement of
litigation, gains on sales of investments of $8 million and $6 million from the
favorable settlement of litigation. These increases were partially offset by a
decrease in interest income of $9 million.
Income Taxes
The effective tax rate was 37.5% as compared to 37.2% in the comparable
prior year period.
23
<PAGE>
Extraordinary Items
The Company incurred extraordinary charges aggregating $4 million, net
of tax, consisting of prepayment premiums and the write-off of unamortized
deferred financing costs associated with the early retirement of debt with a
portion of the proceeds from the issuance of Series 2000-A Transition Bonds in
May 2000 during the nine months ended September 30, 2000.
During the second quarter of 1999, the Company incurred an
extraordinary charge of $27 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt with a portion of the proceeds from the
issuance of transition bonds in 1999.
Preferred Stock Dividends
Preferred stock dividends for the nine months ended September 30, 2000
decreased $1 million, or 11%, to $8 million as compared to the same 1999 period.
The decrease was attributable to the retirement of $37 million of Mandatorily
Redeemable Preferred Stock in August 1999 with a portion of the proceeds from
the issuance of transition bonds. In addition, the Company redeemed $19 million
of Mandatorily Redeemable Preferred Stock in August 2000.
Earnings
Earnings applicable to common stock increased $67 million, or 15%, to
$515 million for the nine months ended September 30, 2000. Earnings per average
common share on a fully diluted basis increased $0.71 per share or 32%, to $2.92
per share for the nine months ended September 30, 2000, reflecting the increase
in net income and a decrease in the weighted average shares of common stock
outstanding as a result of the use of proceeds from the Company's April 1999 and
May 2000 stranded cost recovery securitizations.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities decreased $55 million to
$605 million for the nine months ended September 30, 2000 as compared to $660
million in the same 1999 period. The decrease was primarily attributable to a
net decrease in changes in working capital of $19 million and less cash
generated by operations of $36 million. The decrease in changes in working
capital was principally related to improvement in cash collections of Exelon
Energy accounts receivable and lower repurchases of accounts receivable with
transition bond proceeds partially offset by the timing of cash payments for
accrued expenses.
Cash flows used by investing activities were $593 million for the nine
months ended September 30, 2000 as compared to $490 million in the same 1999
period. The increase was attributable to capital expenditures and ventures
business unit investments, including the acquisition by EIS of four
infrastructure services companies partially offset by investments in and
advances to joint ventures in 1999.
Cash flows used in financing activities were $71 million for the nine
months ended September 30, 2000, as compared to cash flows provided by financing
activities of $446 million
24
<PAGE>
in the same 1999 period. The decrease was primarily attributable to the
securitization of $4 billion of stranded cost recovery in March 1999 and the use
of a portion of the related proceeds partially offset by the securitization of
$1 billion of stranded cost recovery in May 2000 and the use of related
proceeds.
At September 30, 2000, the Company had outstanding $284 million of
notes payable which included $282 million of commercial paper and $2 million of
lines of credit. At September 30, 2000, the Company had available formal and
informal lines of bank credit aggregating $100 million and available revolving
credit facilities aggregating $900 million, which support its commercial paper
program. At September 30, 2000, the Company had $2 million in short-term
investments.
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of transition bonds (Series 2000-A Transition Bonds) to securitize a
portion of the Company's authorized stranded cost recovery. As a result, the
Company has securitized a total of $5 billion of its $5.26 billion of stranded
cost recovery through the issuance by PETT of transition bonds. The transition
bonds are solely obligations of PETT, secured by intangible transition property
sold by the Company to PETT concurrently with the issuance of the transition
bonds and certain other related collateral. The Company has used the proceeds
from the securitizations to reduce the Company's stranded costs and related
capitalization. The proceeds of the Series 2000-A Transition Bonds were used to
repurchase 12 million share of common stock, to retire $422 million principal
amount of debt, to repurchase $50 million of accounts receivable and to pay
transaction expenses. In connection with the PUC's approval of the issuance of
the Series 2000-A Transition Bonds, the Company, through its distribution
business unit, agreed to provide its retail customers with rate reductions in
the total amount of $60 million beginning on January 1, 2001. This rate
reduction will be effective for calendar year 2001 only.
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133. The Company expects to adopt SFAS No. 133
and SFAS No. 138 on January 1, 2001. The Company initiated a process to
implement SFAS No. 133 and SFAS No. 138 by evaluating all of the derivatives of
the Company for SFAS No. 133 and SFAS No. 138 implications. This phase of
implementation has been completed and the Company is in the process of
evaluating the impact of SFAS No. 133 and SFAS No. 138 on its financial
statements.
25
<PAGE>
YEAR 2000 READINESS DISCLOSURE
During 1999, the Company successfully addressed, through its Year 2000
Project (Y2K Project), the issue resulting from computer programs using two
digits rather than four to define the applicable year and other programming
techniques that constrain date calculations or assign special meanings to
certain dates.
The current estimated total cost of the Y2K Project is $61 million, the
majority of which is attributable to testing. This estimate includes the
Company's share of Y2K costs for jointly owned facilities. The total amount
expended on the Y2K Project through September 30, 2000 was $58 million. The
Company is funding the Y2K Project from operating cash flows.
The Company's systems experienced no Y2K difficulties on December 31,
1999 or since that date. The Company's operations have not, to date, been
adversely affected by any Y2K difficulties that suppliers or customers may have
experienced. The Company will continue to monitor its systems for potential Y2K
difficulties through the remainder of 2000.
For additional information regarding the Y2K Readiness Disclosure see
"PART II - ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Outlook" in the Company's Annual Report on Form 10-K
for the year 1999, as amended by Form 10-K/A filed on April 28, 2000.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements, including the
application of the proceeds of the Series 2000-A Transition Bonds and the 2001
rate reduction, and accordingly, 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 notes 7, 8 and 10 of Notes to
Condensed Consolidated Financial Statements and other factors discussed in the
Company's filings with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report. The Company undertakes no obligation
to publicly release any revision to these forward-looking statements to reflect
events or circumstances after the date of this Report.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses a combination of fixed rate and variable rate debt to
reduce interest rate exposure. Interest rate swaps are used to adjust exposure
when deemed appropriate, based upon market conditions. These strategies attempt
to provide and maintain the lowest cost of capital.
In February 2000, the Company entered into forward starting interest
rate swaps for a notional amount of $1 billion in anticipation of the issuance
of the Series 2000-A Transition Bonds in the second quarter of 2000. On May 2,
2000, the Company settled these forward starting interest rate swaps and paid
the counterparties approximately $12 million which was deferred and is being
amortized over the life of the Series 2000-A Transition Bonds as an increase in
interest expense consistent with the Company's hedge accounting policy.
At September 30, 2000, the Company's interest rate swaps had a fair
market value of $78 million which was based on the present value difference
between the contracted rate and the market rates at September 30, 2000.
The aggregate fair value of the interest rate swaps that would have
resulted from a hypothetical 50 basis point decrease in the spot yield at
September 30, 2000 is estimated to be $43 million. If the interest rate swaps
had been terminated at September 30, 2000, this estimated fair value represents
the amount to be paid by the counterparties to the Company.
The aggregate fair value of the interest rate swaps that would have
resulted from a hypothetical 50 basis point increase in the spot yield at
September 30, 2000 is estimated to be $112 million. If the interest rate swaps
had been terminated at September 30, 2000, this estimated fair value represents
the amount to be paid by the counterparties to the Company.
There were no material changes in the nine months ended September 30,
2000 in the Company's quantitative and qualitative disclosures about market risk
associated with commodity price risk, equity price risk and interest rate risk
associated with variable rate debt from December 31, 1999.
For information on Commodity Risk, Interest Rate Risk and Equity Price
Risk, see "PART II, ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK," in the Company's 1999 Annual Report on Form 10-K as amended by
Form 10-K/A filed on April 28, 2000.
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 18, 2000, the Company filed a Competitive Default Service
(CDS) Coordination Agreement with the PUC, pursuant to which the Company will
assign to NewPower Company (NewPower), 299,300 randomly selected residential
non-shopping customers. Customers who have been assigned may chose not to
participate in CDS or may, without charge or penalty, return to the Company's
provider of last resort service or switch to another electric generation
supplier (EGS). The Company and NewPower have filed a joint petition requesting
PUC approval by November 1, 2000. The joint petition also requests PUC
confirmation that all 299,300 customers assigned to CDS would be included in
calculating the 35% market share threshold requirement contained in the
Company's Final Restructuring Order. Under the market share threshold
requirement, if less than 35% of the Company's residential and commercial
customers have chosen an EGS by January 1, 2001, the number of customers
sufficient to meet the required threshold level will be randomly selected and
assigned to an EGS through a PUC-determined process. The Company does not expect
that the CDS Coordination Agreement will have a material adverse effect on the
Company's operations or financial condition.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2-1 - Amended and Restated Agreement and Plan of Merger dated as
of October 10, 2000, among PECO Energy Company, Exelon
Corporation and Unicom Corporation. (Incorporated by
reference from the September 30, 2000 PECO Energy Company
Form 10-Q.)
10-1 - Stock Purchase Agreement among Exelon (Fossil) Holdings,
Inc., as Buyer, and The Stockholders of Sithe Energies,
Inc., as Sellers, and Sithe Energies, Inc. (Incorporated by
reference from the September 30, 2000 PECO Energy Company
Form 10-Q.)
10-2 - Amended and Restated Employment Agreement among Unicom
Corporation, Commonwealth Edison Company and John W. Rowe.
27 - Financial Data Schedule.
99-1 - Unicom Corporation Quarterly Report as of September 30,
2000.
(b) During the quarter ended September 30, 2000, the Company filed the
following Current Reports on Form 8-K:
Exelon Corporation:
------------------
None
PECO Energy Company:
-------------------
Date of earliest event reported:
August 8, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the sale of GPU, Inc.'s Oyster Creek Nuclear
Generating Facility to AmerGen.
Date of earliest event reported:
August 14, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the purchase of 49.9% of Sithe Energies
North America's outstanding common stock.
Date of earliest event reported:
August 15, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding presentation/webcast to financial analysts
and other interested parties on the Sithe Energies Investment.
Subsequent to September 30, 2000, the Company filed the following
Current Reports on Form 8-K:
29
<PAGE>
Exelon Corporation:
------------------
Date of earliest event reported:
October 20, 2000 reporting information under "ITEM 2.
ACQUISITION OR DISPOSITION OF ASSETS" regarding the completion
of the merger among PECO Energy and Unicom into Exelon. The
financial information required by "ITEM 7. FINANCIAL
STATEMENT, PRO FORM FINANCIAL INFORMATION AND EXHIBITS" will
be filed by Amendment within 60 days of the date of this
filing.
Date of earliest event reported:
October 30, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding a presentation at the Edison Electric
Institute Fall Financial Conference to explain the merger of
PECO Energy and Unicom to form Exelon.
PECO Energy Company:
-------------------
Date of earliest event reported:
October 19, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the approval by the Securities and Exchange
Commission of the merger between the Company and Unicom into
Exelon Corporation.
Date of earliest event reported:
October 20, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the completion of the merger between the
Company and Unicom into Exelon Corporation.
Date of earliest event reported:
October 24, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the Company's earnings release for the third
quarter of 2000.
30
<PAGE>
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
/s/ Ruth Ann M. Gillis
--------------------------------
RUTH ANN M. GILLIS
Senior Vice President and
Chief Financial Officer
(Chief Accounting Officer)
Date: November 13, 2000
31
